Let's say you had a premonition about Turkey and sold an ATM Aug/Sep calendar on Thursday last week (flat notional, i.e. root-time Vega neutral). How do you think it did yesterday and what do you think the management strategy was?
How the heck are you vega neutral? What is root time. I've been trading options since 1999 and never heard this before
Root-time Vega is Black Scholes Vega divided by the square root of time. It’s a form of risk normalization since the term structure generally moves proportional to the square root of time. It’s easy to see that an atm calendar is flat with respect to that metric.
Santa is more or less right about the root-time vega. IV moves less for longer dated compared to front months... so real vega would be kinda flat... but it would also depend on other circumstances. But, this is still a dickhead trade, since the delta's wouldn't be flat but long. They are not all at/around the ATM. And on big movers like AXON (any biotech really) the gamma wouldn't really help much because gamma is a local thing... it stops working after a while. In the end, this trade is long a 12.50/15 call spread and short a 5/12.50 put spread... That's what @Windlesham1 is pointing at. Both massive losers when going down... how much will depend on what the credit was.
Hmm, let me read this again. I decomposed it as 12.5 Aug/Dec calendar and a calendarized collar (4 legs, brokers wet dream). If anything, he's long gamma to the downside (12.5 and 5 strike in Aug) and gets progressively shorter both gamma and vega to the upside (as he is losing the 12.5 calendar gamma and the Dec 15 is the only remaining contribution to risk). The structure is really long delta day 1 (since the whole shit-show is ref 14.9 or something), do we assume that will be hedged away? If not, it's a coin toss and I'd agree with @Windlesham1. If he's short the stock against it and is rebalancing, he's subsidizing his long gamma habit by selling the upside which could be a valid trade.
Kinda funny trying to breakdown a shit-show like this I would assume this had a very high IV (since it's a biotech), so any gamma would be low... high IV's mean low gammas at the time of trading. Risk wise you want to look at what the deltas will be at given points. High expected moves would mean you want to look at, I don't know, double or nothing scenarios? Again, it's a biotech... so -80% is certainly on the cards. So... at spot of 30 or spot of 3... there's not much gamma left. You're looking at deltas of 100 or 0... that determines the risk IMO in this case. + 5 put Aug and - 12.50 put Dec = basically a short 5/12.50 put spread... (at 3 or 30) +12.50 call Aug and - 15 call Dec = basically a long 12.50/15 calls spread. Long delta at time of trade... is never going to be a good thing when we drop 80%+... or even 50% IMO... or less. How bad will depend on the credit received, acting as a buffer... Since the stupid article doesn't provide any details regarding prices traded, I could start guessing... but definitely risky. I doubt there would be any hedges in place either... shit like this should be hedged through soft deltas via options... and I guess writer, "Dr Singh, Phd Md Df" thought he would be totally hedged, since you know... risk free EDIT... actually, he "traded" this end of March, so the front leg still Aug had quite some time to go.... that probably changes my reasoning a bit.
What is amazing in this whole discussion is that people are still wasting their time on discussing a trade which is described as "risk-free strategy" To me, this is where I stop. I stopped looking for risk-free strategies and holly grail a long time ago. But I guess every trader should go through this stage.
For us amateur mom and pop retails, the explanations, analysis and discussions of why this is not risk free is quite educational and helpful. Thank you.