Flies and ICs are primarily a play on vol, kurtosis and skew delta, NOT on theta. Ther're marketed as "income trades" which is a completely wrong reason to trade them.
why not theta? They earn theta and are generally short gamma at inception. In fact they generally have very little Vega at inception so they aren’t great implied vol bets. Trading Kurtosis takes millions of dollars to make thousands and that assumes you can trade on the mid.
Sticking to the example above, I personally would not risk -11 vega, short gamma plus a mess of kurtosis and skew delta risk for a lousy 6 theta. Gamma/Vega flip up and down helps you burning your cash on commissions for "adjustments", too IMO the only reason retail should trade flies is for skew delta and delta exposure aka directional plays: market dumps-> buy fly with body above market and profit from being long delta, long skew delta to the short strike touch and vol crush. Selling cheap ATM vol and buying expensive wings just to sit there and hope the market doesn't move is a sucker play unless you have insanely high vols, a flat skew and bet on a vol collapse. Kurtosis plays require deep pockets and more than 3 strikes to play with, I give you that. Unless you trade markets where you have tons of movement in wing vols...which isn't there in the indices
I disagree. I used to think like you but changed my mind last year. Flies and whatever are atm vol bets where you burn some vig buying tail protection (which I agree is generally expensive). But that extra Vega or so you give up allows you to trade bigger size in general to maximize your dollar profits for a given amount of risk. And in my opinion retail shouldn’t really be trading skew through flies. I think retail shouldn’t be trading skew as a primary risk factor at all though.
Just different styles I guess. I generally don't trade for decay and if I really want to bet on a quiet or slow market, I use ratio spreads with protection to the risk side or risk reversals. My reason for a trade always comes out of the vol surface so I naturally don't understand why retail is always slapping on the same position regardless of skew and term structure dynamics and hopes to make a profit. A butterfly is a position I trade into, but never put on as a whole. And an IC...I don't see any reason to put that on unless you get a favourable price on a single strike which allows you to turn around and hedge with the next strike for vol edge.
how much of your pnl actually comes from anything other than Vega, theta/gamma, or delta? Because my experience (before covid) was that implied vol moves weren’t that big to produce enough pnl volatility to earn. And other risk factors were even smaller. Since covid it’s been a different story but by December I figure the world will be normal again.
I'd say about 50% are pure skew plays, the rest is a mix of skew, skew delta and vega. Theta/gamma and pure delta are rather nuanced. To be fair, I only trade illiquid shit so I'm forced to carry positions a little longer. My book contains 50+ strikes and terms per product because I can't get a clean hedge without giving up huge edge, so I need to hedge with what I can get for a good price. In exchange I get crazy edge, vol of vol and skew moves. I trade everything but equities and indices, exotic markets for the most part. For the SPY, QQQ, AAPL and the likes it's a totally different story, although I think there is a user who uses skew/vega effects to trade index flies. Destiero, I think
Not an institutional book but very diverse. Most of it is OTC vs. vanilla and liquidity transfer via synthetic replication. I used to focus on futures/forwards/swaps but added options last year which was a steep learning curve but I'm getting there
Thank you, finally someone is saying what I was wandering. Why are people so hung up on them? Is it low margin requirement, low risk, and high win rate? Anyone? Could you plz give a hypothetical example of this and what you try to accomplish by doing that?