Easy there HD, you are getting a little testy. Backspreads are one of my fav plays but you asked about long vega plays other then backspreads in your first post if I'm not mistaken so I tried to avoid talking about them. Backspreads are one of my bread and butters. And I will say this again, I'm not directing this at you OK? For people in general, you do not want to be short gamma and long vega, not you HD but everyone else on here. It's just not a very viable play. Can you make money doing that? Sure you can. Are there better ways to play long vega? Absolutely. I have mentioned so many on this site. Go back to my earlier posts way back and I talked about long vega spreads exclusively. If you don't want to just buy long leap straddles, which is a very low risk play BTW, you can put some sort of a backspread variation on. I gave the example of shorting the jan 50 straddle and buying the jun 50 straddle and the june 55 strangle. Now you have completely changed the risk profile here. This is much better then the long time spread you proposed. Want another one? Fine, How about the short christmas tree. Yup, I devoted a whole thread the to the long tree well how about the short tree. And again we can mix up the months and strikes so it would look like this, short jan 50 straddle, long jun 55 strangle and long june 60 strangle or you can use just calls or just puts or any combination thereafter. Want another one? How about this one. Sell the jan 50 straddle, sell the jan 55 strangle, buy the june 50 straddle, buy the june 55 strangle, and buy the june 60 strangle. BTW, when I say strangle it also includes the other strike opposite it. I could go on all day with this but you will notice a common theme among all my trades, short the premium on the front month and net long options on the back month or months and strikes in other words, I am long more options then I am short.
It seems to me that we might want to contemplate how to be long vega under two very different ways that implied volatility rises. 1) IV trends up (e.g. VIX 1994-97 when it doubled over 4 years). This can occur in a rising market. 2) IV explodes up (e.g., VIX summer 2002 when it doubled in less than two months). This typically occurs with sharp price drops. I'll state the obvious and see if others can add more sophisticated strategies. Under 1) I want to be long vega and long delta e.g., buy leap ATM calls and roll the strikes up as price rises. Under 2) I want to be long leap puts, and sell enough front-month premium against them to pay for rises in the underlying and the consequent erosion of value in the leap. Then when the market drops and vol explodes, the rise in vega increases the value of the leap.
Yeah those are both good ways to play both throw scenarios, the only problem is with individual equities, they tend to all behave differently. For example there are many stocks out there right now that are behaving like 1994 to 1997 and there are many stocks out there right now that are behaving like summer 2000. So you really can't apply one strategy for all stocks. you have to do it on a stock by stock basis. I get a little nervous about rolling up too much. If you vol hasn't upticked after a while you might be better off looking for another play rather then sinking more and more capital into a bad play. Kind of like averaging down into a bad stock. At what point do you walk away and say, I was wrong. Just a thought. But yes, you can and should tailor your vega strategies to the stock. For example biotechs and drug stocks tend to have huge spikes in vol so you might trade those differently then lets say rmbs or ibm.
but since we dont know whether we are in 1 or 2, doesn't that basically leave you with Mav's strategy of long further out straddle while selling near month premium.
I won't bore the board with empirical data when supposition will do! Seriously though, the long straddle is maligned for good reason -- it has the worst edge in terms of ve known, long or short, the veaga leverage is PROFOUND... This ve-leverage is expressed in terms of the implieds you pay, and the meter is running every second of every day. I can't speak for the rest of the board, but I can't stomach the razor-thin margin of error associated with a long straddle under any circumstances. A long call(or put) and spot hedge reduces the theta-raping by half. If you're prognosticating a dirty-nuke event, buy puts, but stay away from the straddle. Regarding long straddle in LEAPS -- I won't re-hash my disdain for trading the evil-LEAPS(too much, anyway) other than to say they are indeed nearly a pure-ve play, but I forsee a ton of -edge reflected in P&L on your rollover LEAPS transaction. I'd rather be out of the market, no componding in LEAPS, but that's a thread for another day. I will only add in clsing that yes, if vols go parabolic, nothing beats a long straddle, 'cept maybe canned food and shotgun futures. arb.
Yeah I agree, pure straddles carry a lot of risk like I mentioned. Backspreads take away a lot of that risk and still give you the unlimited upside. However to a trader who is using the straddle as a hedge against other short vega positions then that's a different story. You can't just leave short vega out there hanging on the curve. You want to have some long vega somewhere to protect that. I still think you need to go with a combination of selling various front month premium and putting on backspreads in the far months hence my entire thread dedicated to the perfect option position or my trademark name, the flying wrangle. The important thing here guys is not that you are long vega or short vega or long or short gamma, it's just that you understand what these things are. If you understand your risk, then it's easy to stay ahead of the curve.
I'm counting Greeks, but still can't seem to fall asleep. So I thought I'd submit for comment a long vega idea that I've been toying with: Long OTM put time spread combined with a call backspread (done for a credit or even money). The risk graphs for the candidates I've looked at are compelling and the risks among the Greeks (other than vega) seem managable. The only really adverse scenario for this would be a volatility crush, while a rise in vol would be extremely advantageous. Has anyone tried something like this and, if so, how did it turn out? Also, any suggestions on trade management issues? Other comments?
Hey HD, insomniacs of the World unite!(and take over!) This has to go on my list of *nearly* perfect option positions -- the call-back benefits from the (-)call skew, and the long put spread has home run potential due to the linear relationship between bear-delta and an increase in volty. I would look to take some long delta in this position as it would exhibit some asymmetry initially in terms of P&L, favoring the bear. Sweet! arb.
What would this mean in examples? Stock at 100; Long P Dec04 90 Short P Jan04 90 Short C Jan04 100 Long C Jan04 110 ?? Tiki
_______________________________________ Wouldn't it be Long 2 C 110? Maybe should be Dec 04 Cs for all Cs.