Atticus please destroy this strategy and suggest alternatives.

Discussion in 'Options' started by eudaemon, Mar 30, 2011.

  1. Say that I want to play bearish direction and not be hurt too much waiting or when being wrong, and say that the position is initiated near the "sweet spot" marked. Let's just say the market rarely stays at the sweet spot for long time and the high probability forecast is a sharp drop, but sometimes the market does not oblige and rallies hard instead.

    1-How would you optimize play of this strategy?. Maybe long in the far month and short the spot month?.

    2-Would you play a different strategy instead?.

    3-What's a good equivalent play for a bullish outlook?. (I looked at the equivalent call backspread, but I don't like it.)

    The underlying are ES, or SPY. Timeframe 3-4 days, sometimes up to 2 weeks. Plenty of opportunities to adjust intraday, interday usually before "THE MOVE" happens.
  2. Of course I want to be heaviest just before "THE MOVE" happens, easier said than done though.:confused:
  3. Long backspreads (puts in this case) are difficult to earn from in that time frame. I'd go with the otm long calendar. The gamma won't hurt you if you're right on direction.

    The call backspread benefits from skew, so I would think you would like it. You benefit from skew and will gain from contamination/Derman delta if the index continues to rally. (OTM calls gain more from surface than is lost on the deep ITM short call)

    You're long a lot of gamma mid-strike, and will be marked down on synthetic vol(theta), so you're always the weak hand if it creeps lower. I despise short backspreads, so I should love these, but I think it's a difficult proposition in index. Even if you're right I think you'll be disappointed with the return.

    I like very cheap ~atm long flies:

    SPX 1330
    Long 1280/1310/1340 from 5.75 mid, APR monthly expiration. You're actually long gamma atm and become short as you approach neutrality. It's all the curvature you want from the outset. The gamma sensitivity is very close (in slope) to the PNL at flat vol. Of course, vols will rise a bit as we drop.

    I also like to team it up with a long calendar at the neutral strike. You're not shorting any appreciable gamma in the calendar, but it will increase net-gammas as it trades your way. It's a means of minimizing vegas as you trade to your neutral strike. It's somewhat self-regulating. You will begin to get uncomfortable with your gamma position right about the time it's optimal to get out. If it touches the center strike you're looking at a double.

    Sure, you lose on the upside, unlike the backspread, but I'd rather be wrong and see it in my position than lose opportunity in a backspread creeping to the neutral strike and lose on time/synthetic vol.
  4. Thanks. Let me digest all that for a few days.:cool:
  5. I haven't digested your full post yet, but regarding the put backspreads:

    When I put it on, the market either starts a 30-40 points correction inmediately (within 1-2 days) or the thing keeps rallying. In the case it keeps rallying my objective is just to get out even, and if so, maybe re-establish the backspread 10-20 points higher (if my forecast is still bearish).

    It rarely stays on the sweet spot or drifts lower. So from the management point of view it is simple: Either I get the forecast and score, or I get out even, losing little, and maybe try higher.

    I see what you say about that if the thing just drifts to my long strike I lose big on time decay, but that happens less frequently than a continued rally and failed forecast.

  6. Dear Atty,

    I want to own S&P puts because I read on Zerohedge that the market is being artificially supported and will collapse soon. However I don't want to pay anything for the puts. What would you recommend?

    Confused in California
  7. fwiw: I'm currently looking for 1340+ and/or first week of April for a short, and not right now.

    I'm also looking for marketsurfer to get smoked out of his shorts x 3 today.:D :cool:

    Inebriated somewhere.
  8. Yeah, it will work just fine provided you have a time-stop.

    lol to Mr. King.

  9. Today's the day. :D :D
  10. Indeed. You mean you haven't covered yet?.:eek:
    #10     Mar 30, 2011