I understand what you are saying about adding longs as you enter the final days/weeks to expiration, but the way I do it is to close shorts or close spreads, I think its the same idea in keeping the ratios with excess longs. The shorts are my focus, not adding to the trade with so little time. I'm not concerned with the small money give back. The RUT SEPT puts 680/660 (4.20 and 2.87) on 08/01 was a decent size, I closed most of these down as the market ran up and vols came wayyy down for small money. RUT was trading at around 780. So, I am closing not just the whole thing but I chop it down piece by piece. This is part of a larger trade which includes another back ratio call spread at 860/880 (1.28 and .49), which was nearing an adjustment so I added an additional put back ratio at 710/690 to finance a potential trade to protect the call side. This is like an iron condor but much safer. Since the OP opening post was about the dangers of way of the money credit spreads, I had mentioned an alternative of back ratios. It kind of got out of control because some traders are curious and want to make safer bets. This is just one way. As you say, all traders develop their own style but this is one of my favorite trades and has been good to me. Just remember, this DOES take on the same characteristics as an iron condor as you get close to expiration, you will have gamma risk, this means the options further out of the money will be almost worthless and the shorts closer to the money will still have value, so if you have big moves, its going to hurt. This is where we have disagreement but I understand your point, to collect all the premium and ride it into expiration is fine, its very popular. No trade is perfect but I always focus on what potential losses could look like and if I want to trade size, I can, confidently.
Well it does only if you don't adjust the ratio (by closing shorts or buying longs or both). If you do adjust then it's a completely different trade with completely different risk profile.
shorter strikes on backspreads.. seem more intuitive .. if your trading strickly for credits i can kinda see why widening would increase the credit.. but that gives the "randomness" of the market a bigger range to hurt you in before your longs start punching back... a bigger range seems to me like a way to hedge complete blow out through both strikes.. IE a 15 wide strike on apple compared to a 5 wide strike.. rather then putting three 5 wide's you put on one 15 wide.. and the underlying has to travel alot longer to get ya real good.. that being said.. i get lost when you talk about slope.. i look at the smile as like a fucking skateboard half pipe and it seems more fun to me! haha but seriously the flatter the smile.. the faster the options prices fall off dollar wise as you go otm.. such that ratios are easier to put on at closer strikes.. (correct me if i'm wrong) every options chain i look at i see different Implied vols up and down the chain no matter where i'm at.. (say 20 strikes on aapl) so i still don't understand.. and your graph only confused me more.. maybe i'm just a total noob.. idk
Exactly. There are other reasons why someone would trade wider spreads but in the context of this discussion it's just more credit in exchange for more risk. I attached a picture of STOXX50 index options, the strikes in the circle have same IV (almost, the difference is too small)
i get it.. almost the same.. i like ratios.. perfect volatility trade.. check this out.. <a target='_blank' title='ImageShack - Image And Video Hosting' href='http://imageshack.us/photo/my-images/444/gldbackspread.png/'><img src='http://img444.imageshack.us/img444/5530/gldbackspread.png' border='0'/></a><br>Uploaded with <a target='_blank' href='http://imageshack.us'>ImageShack.us</a> <a target='_blank' title='ImageShack - Image And Video Hosting' href='http://imageshack.us/photo/my-images/842/gldbackspread6daystillo.png/'><img src='http://img842.imageshack.us/img842/6596/gldbackspread6daystillo.png' border='0'/></a><br>Uploaded with <a target='_blank' href='http://imageshack.us'>ImageShack.us</a>
I am interested in a few points: Back Ratios: do you take into consideration the IV level for your position sizing at the moment of entry of the trade? I mean, for example, that if the IV is at a particular point, you wait before opening the trade or start with a reduced position size or somehing like that, or do you enter each month with the same position sizing whatever is the IV? Unbalanced Put butterfly: Could you please give same details/example on how you build this? How long have you been trading back ratios ?