Complex option strategy with superior risk-reward profile?

Discussion in 'Options' started by samer1, Jul 15, 2012.

  1. samer1

    samer1

    I agree with you that there is vol risk, because the trade has a slightly negative vega.

    However, I am not sure that I understood the second part. Even if there is no strong move, the structure will not suffer any loss because the pnl is above the zero line.
     
    #11     Jul 15, 2012
  2. ben111

    ben111

    The big problem with this kindo of payoff is vega and vol risk. Usally in low vol / IV environment that payoff looks good but as vol of longer term maturity (should be short in yout example) rises, the payoff no more looks so good :-(
     
    #12     Jul 15, 2012
  3. samer1

    samer1

    you are right... but one has to consider this: IV is negatively correlated with the underlying (in case of equities). so if the IV moves, it is likely that the trade will move into the lower or upper profit zone...
     
    #13     Jul 15, 2012
  4. newwurldmn

    newwurldmn

    Your real pnl comes from a huge (and extremely unlikely move up or down). You are long teenie strangles.

    Within the real likely part of the distribution you have some kind of vol risk which you do not seem to understand. You need to check into the assumptions TOS makes and compare that to the expected vol slide to understand your pnl. Secondly, you will need to understand what your exit costs will be. If you are trading to break even but have to roll 5 out of your eight legs - that will probably cost you 10 cents per unit.

    If you want, we can talk about it over PM in more detail. Otherwise, you aren't going to get much help here.
     
    #14     Jul 15, 2012
  5. Reminds me of a similar post from a couple of years ago, that Maverick74 posted, and had a dozen comments, and turned out to just be sort of a joke or sorts.

    And you said the you're working on the setup over a few weeks? This is dedication to something, maybe a white paper, but for making money? Kind of hard to figure, if you account for your time.

    And, won't you have to have all the "stars align" for it to work (vol, interest rates, open interest etc.).?

    Anyway, I'll look back to see the actual trades, and good luck.

    Don
     
    #15     Jul 15, 2012
  6. quatron

    quatron

    I would suggest to drop that put backspread. You probably thought that the credit you are taking will offset the loss of the strangle/straddle swap if underlying stays still. But it adds more risk than you are thinking there is as this backspread is very sensitive to vol/skew.
    Start with strangle/straddle swap and look at the pnl if front month vol drops -1% and back month vol rises +1%. As it was noted by others you probably don't understand your vol risk. Do not just sum your front and back month vegas, they are different risks.
     
    #16     Jul 15, 2012
  7. Long backspreads with some calendar/diag component. I don't have the trades, not that it's necessary, but you're long upside vol and there is a static vol assumption which simply won't hold if we rally to those strikes. The only hope is that you gain a bit from sticky delta. My guess is that you're using a flat vol across the strip and tenor.
     
    #17     Jul 15, 2012
  8. the way that graph looks to me makes me think of how decieving constant vol assumptions can be.. Wrangles/diagonal ratios seem like a great idea to me to get long vol.. but there something suspicious about that graph.. like it looks to good! haha i'm long quite a few backspreads right now..
    i would think if your going to be talking about a trade your doing and want to get theoretically about it on a forum.. i would just delete any signs of the actual instriment your trading and talk directly about the combinations you have put on.. That way we can all brainstorm it alittle better.. plus just a thought of mine.. do you really think you have a trade that you should keep proprietary? do you think that your trade being known will really ruin its return as you do it again and again and people find out.. i'm just curious that all. I just wonder about that stuff.
    I've thought i've had some pretty good complex ideas before.. i put the spreads on and my assumptions were all way off and i didn't know how to adjust at that point either . This as well reminds me of another thread about the holy grail options trade combing a butterfly with a wrangle.. but i do like hearing about this stuff
     
    #18     Jul 15, 2012
  9. samer1

    samer1

    Many thanks for your inputs! I see this strategy has gained some interest.

    Let me just tell you that the difference in maturities is only one month. Hence, the structure consists of options expiring in the coming month and options expiring in the month afterwards. The vega is slightly negative. However, this might change...

    But given the fact that the difference in maturities is limited, the concept of weighted vega is not striking in my opinion...
     
    #19     Jul 16, 2012
  10. the concept of weighted vega is not striking in my opinion...


    well you should weight it and see its influence.. thats what i would do.. just even for practice
     
    #20     Jul 16, 2012