This is why it gets tricky to quantify since long puts is long vega and +Vomma so if SP drops, you don't get hurt to much in paying up in the skew since IV rises BUT that strike all of a sudden become the ATM which means it then becomes the cheapest strike in the skew. So there are like 3 moving parts? - aghh.. my head hurts.
I was just talking about paying the skew over and over for years without a Black swan, but you're right, you have to think about that too!
Excellent Point !!! I guess further hedging at that point is out of the question since everything would be so elevated (i.e. high IV) because of Vega, Delta (it being the new ATM and having the most Extrinsic Value) and like you said, Vomma and who knows how many other higher order greeks. By the way, question for anyone well versed in skew... is the concept of sticky delta/sticky strike valid? Would the vertical/strike skew shape remain when plotting IV against the delta of the options? what about against the strikes?
I would say it would be an underlying + buying an option or a straddle if you don't want to take a position in the underlying. So that way either way it moves, you can profit.
I assume it's a vega play? In that case, you care about the relationship between your dVega/dSpot vs expected increase in strike vol - does that expectation compensate you for the decay.
It was more of a Grey Goose event. I have long maintained that volatility around any peg out there is a good buy. To answer the OP - it's very hard. The only real way to do it cheaply is to identify some sort of "crisis alpha" - i.e. some form of relative value that will blow out in a crisis. Alternatively, you might be willing to sell some milder form of risk premium to pay for EoW type of protection.
You think that would work in the modern world? There are a few similar relationships (far less known) like that in the equity markets, but you always wonder if this particular crisis will be the one when it does not work.
Yes. There is severe over crowding in the short end of yield curve trade (2/10)s and even 3mo/2yr, these players are holding that front end down and will get destroyed if and when the Libor/OIS spread blows out. When you look back in 2008 when the spread went from 50 bps to over 400 you didn't have near this amount of activity short the front end of the curve. I think funds got too aggressive on the trump reflation trade and now they are stuck holding size in these things. It's probably still a good trade but they are affording one the opportunity to put this on very cheap. Sure beats the hell out of owning downside index protection.
I assume you are referring to the decision of the Swiss central bank made on Jan. 15, 2015 no longer pegging its CHF to EUR? If yes, I would DEFINITELY categorize it as a Black Swan event, as black as it can be, to EUR at least and it was VERY unexpected and sudden as majority of the people didn't even think that would be an announcement to be made on that day.