Short the 90p time spread Short the 100/110 call spread Not bad, but you're short vega on both wings, and net-short gamma. That position is weighted to the bear call spread, heavily weighted... arb.
Arb, Yea, the position seems to make a lot of sense both intuitively and theoretically. And with vol so low on so many names, potential candidates are not hard to find. In fact, I think I may test it out with some real money on one or two starting this week. But just a point of clarification, with regard to adding some long delta to the position, would you suggest structuring this so that its long delta from the outset or adding some shares in the underlying to the two combined spreads? Now get some sleep! HD
I had something like this in mind: XYZ at 100 Long 20 XYZ Jul 90p Short 20 XYZ Feb 90p Short 10 XYZ Jul 90c Long 20 XYZ Jul 110c
I'd go long delta at the outset -- initially adding shares seemed like a sound idea, but the stock adds a significant risk. arb.
If you add a Jul 80 or 85p to this position the graph really looks great. The ones I ran had a .75 to 1.15 debit and a risk of .5 to .7. Haven't found any to do for a credit.
Interesting modification. I like the idea od lifting the left wing to give the position homerun potential to either the up or downside. The trade-off will be a higher break-even to the upside given the higher overall debit. But it may enhance an already favorable Greek profile. I'll play around with the strikes and the ratios to see what would work best. Good idea! By the way, I initiated one of these on EBAY today to see how it would work in the real world. We'll see how it plays out. I'm still trying to decide whether the deltas should be kept somewhat in-line or whether I should simply adjust each side accordingly as I would a long calendar and backspread individually. Anyone have any thoughts on whether maintaining delta neutrality is advisable here and what the preferred adjustments would be?
The downside in these seems to be the differences between the breakevens. I am curious about the fact that mine showed total risk at about 70% of the original debit. That was a little unusual to me but the overall picture looks good.
While searching through many possible complex strategies loading my imagination to the limits I found in 2002 edition of "Futures" magazine the interview with Max Ansbacher I have to say that if it did not strike me, it definitely enlarged my point of view. He just simply sells S&P OTM naked options based on contrarian approach following Occam`s Razor Principle. For those who are not familiar - he developed his own index to indicate which options (calls/puts) should be sold which is quite simple idea - dividing OEX Call price about 40 pts. higher then market by OEX Put price about 40 pts. lower than market price. Just like this. Then after some time I found another CTA selling successfully S$P puts (only) with even better results, including last four years (which you gentlemen would probably agree, that were ones of the weirdest). While I still trade almost-zero-or-very-little-risk strategies, I have adapted this concept for my purposes and have to say that it works nicely, no matter I have implemented few modifications for defending such positions. I am not saying that this the pattern to follow for everybody but sometimes going through myriad of greeks data it is easy to miss something which might be quite simple, as long as you can do your math properly.
Chris, Interesting you should mention that. It's actually something I've been considering recently -- switching to simply selling OTM ES puts naked (or perhaps sell strangles) hedged by the futures from my long-standing XEO/SPX iron condors. It's certainly a lot easier to manage and adjust than the ICs. Plus, SPAN margin makes it possible to generate similar-sized credits without having to use closer to the money options. While obviously the position would underperform (likely dramatically) in a 9/11-type scenario, it should outperform consistently during the vast number of non-outlier months. It's good to know others have been successful with the strategy. By the way, while I am careful not to confuse brains with a bull market, and though I know the strategy to have a low probability of success over the long-run, the one long vega approach with which I have been having near universal success of late has been the simple buying of short to intermediate dated calls. I have to acknowledge that that's more a function of this unusually one-way market as opposed to any particular skills on my part. Nonetheless, I might as well keep rolling the dice while the going is good since, alas, this too must come to an end eventually. HD