Mental note: sell deep OTM calls

Discussion in 'Options' started by heech, May 10, 2010.

  1. heech

    heech

    Exactly right.

    And you can find this "correlation" in any instrument just by looking at the skew the vol surface. If price moves in a direction of pain and IV surges... sell OTM options in the direction of less pain.
     
    #11     May 11, 2010
  2. Ok, I misunderstood your initial view, really you were playing the downside.

    So essentially you were banking on the fact that a rally would cause vol to come off and the vega gains would help to mitigate your delta exposure?
     
    #12     May 11, 2010
  3. heech

    heech

    Correct.
     
    #13     May 11, 2010
  4. I don't think it's really that easy in general, as I have seen these correlation regimes change extremely quickly (in my world it's been happening quite a bit in recent years). However, maybe this works in stocks/indices...
     
    #14     May 11, 2010
  5. Definitely true.
     
    #15     May 11, 2010
  6. heech

    heech

    In equities, I believe the regime tends to be pretty stable over time. Vast majority of time, equity index options are being bought by long-only investors as a downside hedge. This leads to the skew mentioned before.

    But absolutely, you have to understand the underlying behavior at any given time, and for any given instrument. If the underlying is soaring because of rumors of a rate cut (remember those?), selling calls is probably not a good idea.
     
    #16     May 11, 2010
  7. Premium

    Premium

    A trade I like (and did last week), which is similar, is to do a reverse ratio diagonal on the call side. Make sure your long strike is much closer than the short strike. You're short vega, but gamma is positive in case there's a huge turn around.
     
    #17     May 12, 2010