Very first post, so please go easy on me. Suppose you are fairly certain of an intraday vola drop of, let's say, 20 pts. What's the best way (defined as maximum % return while minimixing % risk) to capitalize on this expected fall in IV? The goal would be to isolate volatility and not have to make much of a directional prediction (who needs that headache, right?) Flies would normally be the go-to, right? But the goal is to close the position the same day it's opened (intraday vol drop), and the ATM options seem not to drop much more than the wings (given it's only held a few hours), resulting in slight profit, if any, at least from my testing. Correct me if I'm wrong here, I won't take offense. A short straddle would be the most obvious and most direct to me, but a sharp move in either direction and you're toast (plus high margin requirements). You can write a covered call, but you lose on the stock if the price falls. You can write a delta-neutral call, offset by long stock (and the need to re-hedge if the stock moves too much) The last two methods require more capital. None of those methods seem great. How would you play this? I realize I am an amateur compared to many of you, but I have a basic knowledge of all the greeks and what influences them and would like to start a constructive discussion. Apologies if a similar topic has been started in the past, but it doesn't hurt to have another discussion IMO. Thanks for your time
1) Yep, an iron fly would be the first thing to come to mind. Even if the body volatility drops the same as wings volatility then the trade should be profitable simply because the $ value of the shorts (body) is much larger than the $ value of the longs (wings), so the vola has a greater impact on the shorts. 2) Try an iron condor. For both, use the shortest possible expiry. 3) If you know that the volatility will drop for the front 'month' but remain largely un-affected for the back months, then you could open a calendar. But watch out for the stock moving too much. 4) Welcome and no need to apologise. I wish someone had given me the following tip when I joined here - if anyone disrespects you in any way, give it back! (PS. I suspect you are looking at the post-earnings volatility crush??) Good luck
Hey ffs1001 thanks for the response, and for the formal welcoming. No, this isn't an earnings play. This would be specifically for those moments when there's a high probability of IV falling the same day anywhere from 5-25% (open trade in morning when IV is 80, close in afternoon when IV is 60). Commission and bid/ask spread alone could eat up much if not all of the profit with a lot of legs added on. I guess I was just wondering how seasoned traders might play such a scenario, if they knew with a high level of certainty that IV would fall.
Ignoring Gamma,assuming you are delta neutral,I would keep it simple and look at the Vega ratios between the strategies you are thinking about.. From there it will be pretty obvious that you cant really compare the Vega of one short straddle with one Fly..You would obviously need multiple flys vs one straddle One way or the other,if you are playing an IV crush,its a directional bet as well as Vol. It appears that your biggest decision is how wide the wings should be and if you want to skew your bet
While not simple (and I have no idea what the underlying is, so it could be very costly) he can build up a forward vol position that would be roughly delta and gamma neutral. If he really has a strong view on fixed strike vol across the full surface, that would be the way to go, IMHO.
Im with you,and didn't see his last post..I thought he was playing earnings and didnt realise this was more a. Best way to " catch the 20 vol drop day".
SLE/Taowave, can one of you guys elaborate a bit on what that is? I took a gander at the Wikipedia entry: https://en.wikipedia.org/wiki/Forward_volatility which has the formulas I recall Big Short mentioning in his calendar thread (the t0=0 case in the wiki). Is this just a metric to measure the "effective" iv between the two (assuming the simplest case of only two expirations). Thx