I actually listened in on the chat and he (Tom Sosnoff) was in general advocating selling premium esp call premium to take advantage of the "reversion to mean" in volatility and if we sold up front it would decline more than back month. All examples given however were Sept/Sept 4/ and Oct...no Aug. We can all read the transcript when it comes out. I'll be interested in his clarification as well.
I was rereading McMillan On Options. One of his examples on selling volatility was to do a "reverse" diagonal, i.e. buy front month strangle, sell back month.
That's what IV-Trader was doing on a very short term basis...with his RC's on certain equities...however he has stated in the extremly high vols there was no edge as the back month wasn't coming down as fast as it needed to to make a profit. perhaps a diagonal rather than a straight calendar might?
I should have said reverse double diagonal. He starts with selling a strangle two months out, then hedges by buying a farther OTM strangle one month out. BTW, I was going to start a thread asking if anyone was selling volatility at this time. What about selling condors or butterflies? If vols do come down then shouldn't they tend to stay relatively stable?
That makes sense prior to earnings announcement, but back month should pretty much run parallel to front month in this situation. Fri pm, still no response. What really bothers me is that he made a big deal on how knowledgeable he was in high volty situations. The basic message was "I really know what I am talking about, and have alot of experience that others do not have." Anyway, don't believe everything you hear, even from self-described experts. Yes, I am doing the IC at the present, although I really do not like them. My preference is the calendar but that would be insane in this market.
Giving some thought, on a strangle straddle swap, is it possible that the short straddle loses volty faster than the back month long wings.
I'm not quite sure what you're asking but vega is higher for back month than front month options. Your straddle/strangle swap (aka double diagonal) is a long volatility play and if vol comes down your position will lose money. Yes, front month vol will come down 'faster' but back month vol will come down more. db
yea dollar for dollar on front vs rear months the 'come down' is the same. vega is higher rear months, but theta decay is higher front months. it all balances out and is priced in these very efficient markets. rev. calendars are better as directional plays.
This is correct, pricing in the short term durations is extremely efficient. The QQQQ Sept/Sept04 Double Diagonal could be viewed as slightly short to neutral vega, even though the sign of the net vega is positive. The best way to speculate on the direction of implied volatility is to use a single-duration volatility spread, ratio a multi-month spread appropriately, or use a pure volatility contract like the VBI/VIX. Having dispensed with that, why consider the Double Diagonal mentioned in the TOS chat, given that it is neutral to slightly short volatility? If you were very certain that realized volatility would be much less than current market implied volatility over the duration, any short gamma trade spread would have a theoretical positive expectancy! The Double Diagonal also provides one rolling opportunity at or just before Sept expiration.