Doesn't the white line drop substantially on a vola rise? That is, below breakeven. I don't mean drop linearly, I mean it will 'deflate'. Vola would be relatively high at 120 SPY as opposed to 162.
Then you certainly will not need anyone to repeat the suggestions above regarding alternate strategies. Good luck! ââ¬ÅExperience: that most brutal of teachers. But you learn, my God do you learn.ââ¬Â - C.S. Lewis
Yesterday, I have created another option strategy with a very nice pay-off profile. Once, my OTM puts on TLT expire, I will trade this one.
samer, not sure if you saw my earlier reply, but I'm pretty sure the white line will 'deflate' dramatically on a vola rise, and thus the protection you thought you had on the downside will evaporate. Just look at a simple OTM put backratio, a similar thing will happen. If you held all the way through to expiration and there wasn't much market volatility, then sure, you'd make out okay, but the big bear days don't happen when we want them to. That said, I'd like to be proven wrong on my analysis if you could explain why my theory is incorrect.
Hi Kroponer, Thanks a lot for your input. I read it and I think you might be correct. I have to set up the trade first and see how it behaves under different market conditions. I agree with you that the white line will go down in case of a vol spike. I even think that the red line will go down in case of a vol spike. However, my opinion is that this trade is safer than the usual premium trades (iron condor, etc...). The trade also has a negative delta component, which offers some protection. In the end, it is important to implement the trade and watch it closely. Many thanks again, Kroponer.
I have again created another option structure that I will put on after Friday's close, when a short TLT OTM put position will expire. I will be interested to see how this thing behaves. It has some vol risk and there are also some shifting vol smile effects.