I thought I would start an Option replication journal, including some exotic option trades in FX and equity vol. Trades will focus on replicating intramarket-gamma in equity index and street volatility, as well as trading exotics in FX wtih truncated-payoff conventions. Only replication trades with the following conditions will be posted: *** Net +gamma[dgamma+] *** Net +vega *** Net +shadow-theta[convergence gains] RISKS: *** Correlation risk -- large in street vol, small in index vol. Will try to maintain -- +gamma/+vega position > position-correlation risk. The exotics will consist of truncated payoff position[TPP]; knockin/out combos, touches/no touches[combos/singles].
Thanks Trajan. ER2 dramatically underperformed the narrow-index markets. Corrs between the YM and ER2 were negative today, but leaves a potential opportunity for the August series; if/when the corrs return to the mid-80%s. Buying 2 Aug YM 10600 puts at 9.50% vol [105] Selling 1 Aug ER2 950 puts at 17.00% vol [7.90] Net position debit: $260 Potential edge(s): Long vega Long gamma Short delta +dgamma position Long convergence -- from favorable ratio and delta position. +dgamma -- cheap vol equates to cheap gamma in otm options. YM vol at 750basis under ER2 provides for a +gamma curvature and gearing[significant +slope]. Risks: Correlation was negative on the day. Such is the concern when trading narrow index markets like YM vs. a broad index like the ER2/RUT. Expect gains from favorable ratio and delta position to overwhelm correlation risks. Unlikely we'll see another opportunity to trade this spread at such favorable terms. Hope to see a double over the net debit paid by expiration. Will follow up as need be.
Looking to be flat to long delta in EUR/USD due to tame-reaction to the blistering Retail data and CPI. The vol-skew is flat, so it was a toss-up whether to go long spot/risk-reversal or short spot/risk-conversion, but it more closely resembles a synthetic short straddle using exotics. *** Long 100k EUR/USD at 1.2082 *** Short 200k EUR/USD touch exotic, struck at 1.2220, expiring July 22 at 10amEDT ***Long 70k EUR/USD touch exotic, struck below the recent lows at 1.2038 To limit the confusion... the position loses $600 at the 1.2220 strike and earns approx. $2,600 at the lower strike{at expiration]. I expect the lower[1.2038] strike to be hit resulting in a payout. With luck the EUR/USD will hit my long touch at 1.2038 and creep higher. In either case it resembles a bull synthetic short straddle with a long put. There is a lot of bleed in the greeks; too much so to break the position down any further.
Mr. Ignorance back again, What's an ER2 950 put. Aren't we around 660 right now? What are the bracketed numbers in your examples? I tried looking up the IV on IB's option trader and got radically different numbers. I could only get IWM on Ivolatility.com and they were around 15% IV right now. Rather than bother you with a ton of obvious questions -- from your point of view -- can you recommend somewhere I can read up on this type of trade? Thanks, Sam
I was thinking of the YM vols when I wrote the ER2 strike typo; it is indeed a 650put. Nelken's book is pretty thorough from what I hear: http://www.amazon.com/exec/obidos/tg/detail/-/007047236X/102-4672327-7006553?v=glance The vols were taken at the close between 4pm and 4:15pm EDT. The vols stated are close and were taken at the bid for the ER2 and the ask for the YM. The bracketed #s are the premiums-paid in the respective contracts.
I'll be the first to admit that I only understand what you are doing generally, but... Can you define the risk/reward on this one for me. That ER2 position would make me a bit nervous.