I am currently having trouble putting together an option/futures position whose P&L outcome matches the desired position traits. I am looking to have an overall position that initially is positive theta, delta negative, with increasing positive vega as price declines and ideally decreasing vega as price increases. For example. On 7/12/07 the ESU07 at 16:15 was 1555.50. I felt that es would decline or remain at about the same level in the coming days. I wanted to put on a trade that would capture theta if es remained still and overall was net delta short and was either vega positive or had minimal vega exposure if price did decline and IV spiked. In real life I sold 2 august 1540 puts, sold 1 august 1565 call and shorted 1 es contract (or multiples therof). I was delta negative, theta positive and very negative delta. Price actually did what I wanted, but because of the small spike in IV on 7/18/07 my position didn't capture near the profit I would have liked. This strategy has worked well in the past when expecting price to rise or remain still as this is usually associated with a drop in IV. I usually hold these trades for a day to a few weeks. I would appreciate any ideas or constructive criticism on my trade objective and/or the above trade construction. Thanks, Jeff.
Your initial position dissects to a short straddle, short call, short future. The dV/dS is greater on spot declines than the smile would suggest, but only outside of ~2 deviations. IOW, it's a wash under nominal volatility. Your vega can't flip modality, but you decrease sensitivity as you diverge from neutrality. Your g/t/v will decrease, but you're still accumulating deltas, albeit more slowly. The problem being that you're converging to +/- 100 deltas. Go long the bear-delta time spread. It satisfies all your conditions on major/minor greeks.
In my original post I meant to say I was very short vega. Mr. Finch, would you elaborate on your suggestion to go long the bear-delta time spread? I want to make sure I have the jargon correct. When you say my trade converged into a short strangle are talking towards expiration(30+ days) or within the next week? Thanks. I appreciate the ideas.
The convergence refers to delta as a 100-bound oscillator. Convergence of deltas to 100 as spot diverges from the delta neutrality. A 90-delta position carries less greek exposure than a 30-delta position [beyond delta] per point on spot. Long the bear-delta time spread is a long volatility spread [long back month, short front month] which achieves delta neutrality on a decline. Same strike call and put calendars are equivalent.