100% agree to the fact that two options traders on the opposite side of the trade can win when the trader in the underlying loses to both of them. However, I don't quite agree to the fair value part since market makers have inventory limits which are the dominant forces in the pricing process. Every MM fits his model to market not to a theoretical statistic made up by using historical data. That's true for Heston, Vanna-Volga, SABR and what not. Because it's absolutely impossible to know the return distribution and the path of the underlying during an options lifetime you can only compare two or more instruments with similar payouts to figure out what's expensive. The risk/reward of a structure determines supply and demand, because if for example the model is telling you to price the 50/25 delta vertical at -20vols some dude might immediately buy that thing for all your size because in strike space it costs 5 cts for a 4.95$ payoff You are happy because you sold ATM vols that are probably expensive compared to realized and hedged with cheap wings. The other guy is happy because he could hop on a 100 lot vertical plus an extra short call to finance the structure and perhaps even get a credit. So in options space there are two different definitions of fair value while the sucker is the guy who keeps selling shares to the MM as he hedges his deltas on the way up
There was put skew on the GME run to 400+? I was shorting bull synthetic straddles knowing the vol would drop with shares. I recall the 20D RR was something like 40bp C/P, but maybe I am remembering it wrong. My concern was modality so I'd rather accumulate deltas than vols. Synthetic at 350, natural at 375, neutral combo was at 400 (px). It's tough to trade the thing naked but you can't afford to buy upside wings. I had a share fly on for a couple cycles (long spot, short 2x calls, long 1x wing).
Des ... a "share fly" ( +1 stock / -2 calls / +1 call ) or similar is one of my preferred trades for covering upside delta's ... synthetically the equivalent of Selling Puts / to finance / Buying Call Flies ... I see as part of a series of similar trades that I usually look at #1 RiskReversal ... sell OTM put / buy OTM call #2 Seagull ............ sell OTM put / Buy OTM call vertical #3 Share Fly ....... sell OTM Put / Buy OTM call fly
I would mention that selling too much wings is dangerous, market too panic in hiking IV on topping of NG prices, so vega component loss is dramatic. And it's hard to guess a price top, and when it come down (it feels that other traders margin calls dragging price higher and higher, so timing is not predictable) A lot of deposit should be free for "experiments" with NG. In opposite crude oil energy market haven't so much panic rising IV even on record price surge.
LVLD in these names is tough as you're looking for vomma only after the thing has hit the social media meth heads/reddit. I typically buy wide/deep LVLD verts as a source of vomma into skew. Derman is usually the driver.
And a share fly is a short natural straddle + upside call wing (syn-share fly). I prefer to do the natural shares in lieu of the natural straddle (synthetic share fly) as I can overwrite and hedge discretely.
Not really, if you know the terminology. Just google all the keywords you come across here. Once you learn them, you can easily follow these guys. It's like an illiterate suddenly being able to read. Your mind will light up.
It is not just the terminology, but also the action underlying the greeks. For example, this... "...Option skew exists because asset prices have fat tails, we all know that. Indices fall faster than they go up, vice versa for NatGas..." That is a quote from Mr. Muppet, and I can see that in my head. Yes, NG and indices are kinda' inverted in their immediate actions. Indices tend to drop fast and take time to rise back up, yet NG tends to rise fast and take time to drop back down. *waves to James Cordier* How that all translates into profitable options plays does not come down to a simple understanding of "options terminology". There is so much more to it.
Whoa, hold it right there! I never said anything about that. I was just saying about understanding their greek language. In your example, learning about "skew" and "fat tails" will certainly put you ahead in understanding their greek language. That's all I meant, not taking anything away from anyone.