At the great risk of not reading all 50 pages of this thread, I would say that: Naked short puts deep OTM = naked long underlying futures at the corresponding delta with the only additional advantage that the trade collects on theta, but is exposed to varying degrees of debits and credits for vega. So, if the intent is to collect theta, then just sell a deep OTM strangle and be done with it. Much more efficient use of capital. You would be margined for naked short puts just like a future, and exposing yourself to rapidly accelerating risk and increased margin requirements when the market comes off. Theta is incremental, Vega is a freaking freight train. No free money here. Please move on.
Got zits? a sign of teenage years in option learning. But, you got da the option speak, to defend against the hurt of your zits.
you can also hedge/protect portfolios (in addition to underlying and buying options) selling calls in case of stocks, and selling puts in case of short commodities. It can be done at same strike (or other) where premium is bought. main point: your logic assumes that buying volatility is the only way to hedge, and since it is not ((at least in theory) your explanation is..... Any comments?
Selling calls against spot results in a short synthetic put. Hardly a suitable hedge as you're limited to the credit received. If you overwrite your risk flips modality. Selling deep itm calls as a proxy for stock is only valuable if you're attempting to avoid a tax-sale on spot, otherwise you're better off covering or trading a suitable hedge. Short volatility is a shitty hedge, save for the risk-reversal, which is net long g/v into the risk.
If the S&P is at 1200, you can hedge your stock portfolio by buying 1100 puts, or by selling 1300 calls. Either way, it will contribute to the SPX skew looking as it always does - with the 1100 strike trading at a higher IV than the 1300 strike. Of course, you can buy 1300 puts, and you can sell 1100 calls, which would have the opposite effect on the skew. But such trades are a small minority. If you compare the volume at the strikes higher than 1200 (ATM in our example), at each strike more calls trade than puts - and the higher you go, the more lopsided that is. If you look at the strikes below 1200, more puts than calls trade at each strike - and again, the lower you go, the more lopsided that ratio is. In other words, DITM volume is small compared to OTM volume, and therefore is a small factor in shaping the skew.
I'm sorry Dmo, but you're still looking at short term options. The way you analyze datas is biased because you don't count roll overs and already closed positions. Be careful it's implied in you comment that people hold the positions to the maturity. It's wrong. Don't you think that skew can be related there will always be an additional interest by rolling over a short call, not true with puts? (same volatility, same rates...) Would you disagree that skew can be related to the fact that 12 points (your example) represent 1% ATM, will represent 1,1% at 1100 and 0,92% at 1300. So the market forestalled what "tomorrow" price is today worth? Skew can be related with demand and supply...doesn't mean for portfolio insurance, just as bets. Doesn't it?
Thanks for taking the time dmo. Yes, you would indeed be Delta & Gamma neutral with the futures at 104-16/32. But as the futures moved away from 104-16/32 that would no longer be the case. I had it in my mind that what you actually meant was that all moments (Delta / Gamma / 3rd moment / 4th moment and so on...) were neutral. I realise now that wasn't what you actually said so can only assume it must have been the $$ sign in my eyes that caused me misunderstand you. Agreed. But if the bonds drop you make a loss. Thanks again for working an example.
Well of COURSE the skew is related to supply and demand. That's ALL the skew is. It is a living, breathing indicator of the supply/demand for options at lower strikes vs. the supply/demand for options at higher strikes. Since the vast majority of options that trade at lower strikes are puts and the vast majority of options that trade at higher strikes are calls, the skew is a direct reflection of the supply/demand for puts vs the supply/demand for calls. That's it. It is nothing else. Let's look at the S&P500, since that skew is the most stable and consistent one. I've attached a screenshot showing the settlements of the September E-mini options as of yesterday. The futures settled at 1282. Look at the lowest strike on this screenshot - the 1235. It settled at an IV of 19.71%. The next higher put (the 1240) settled at an IV of 19.47%, the next higher at 19.37%, the next higher at 19.15%, and so on. The highest strike shown - the 1320 call - settled at an IV of 16.04%. The pattern is perfect. Without exception, every strike settled at an IV higher than the strike above, and lower than the strike below. What does that mean? It is beyond argument or discussion that there is more demand for the lower strikes than for the higher strikes. That's what this shows in black and white. So having established that basic fact, the next question is, "why? Why is there so much greater demand for options at the 1235 strike, than for options at the 1320 strike?" In his typically succinct fashion, Atticus says "portfolio insurance," and that's the bottom line. In my typically wordy fashion, I'll elaborate. At each strike, compare the volume of puts vs the volume of calls. You'll notice that below the money at almost every strike, more puts trade than calls. At the 1240 strike is 393/3, at the 1245 strike it's 158/13, at the 1250 strike it's 1483/151. Now look at the above-the-money strikes, where more calls trade than puts. At the 1315 strike, it's 262 calls/35 puts. At the 1310 strike, 1059/9. At the 1305 strike, 183/70 and at the 1300 strike, 1624 to 200. So the greater demand for options at the low strikes such as 1240 really reflects a greater demand for puts. The anemic demand for options at the 1315 strike really reflects low demand for calls. So why are option traders so much more anxious to buy puts than calls? Again, "portfolio insurance." I can't prove anything past this point, but it just seems obvious common sense that a huge majority of people are net long stocks - far more than are net short stocks - and that accounts for the greater demand for puts as protection. There's a little more to it than that but I have to take off for the day. Maybe later we can get into discussing a deeper reason for the skew. But it too is just an offshoot of the basic concept of options as portfolio insurance.
No, if the bonds drop you make money too. This is in no way a directional play. If I get a chance over the weekend I'll work up a detailed example.
Can you have a true directional neutral position (net delta=0 + net gamma=0 always)? meaning if tomorrow the underlying gaps up 200% or drops to 0, your only gain/loss will be due to theta and vega. Is that possible, i cant think of a way.