NBBO in illiquid stuff can be 5-10 vols wide. What good is edge in the vol-line if you're buying 80vol and shorting 70vol in the name? We're entrained to open a position when it's calm. Microstructure is optimal. Yeah, FYITA edge loss to open but wait until you're wrong. I know a pro who lost a mil in AVGO on $3 in the shares. AVGO is top 10 liquidity. If you can't make money in NVDA, AAPL, MSFT, etc., then don't trade vol on SN.
Delta and vega commit. He lost a mil in 20 mins on $3 move lower in AVGO. It was around the holiday. It's not the size of the loss rather the relative insignificance of the move and basically going to mkt on the cover.
I could write a book about boneheaded noob trades. Not in my case (maybe some), but what I've seen over the years. If you're going to short a lot of vol then it's best to pairs-trade as your edge can be expressed as delta position with all areas above x ($0 PNL) and as such an arb (less) correlation. I have a short event vol thing that is ridiculous, but it does leave you exposed small into SN vol of vol upside (small net short upside calls). Generally that won't materialize into earnings and you can size appropriately or buy beta elsewhere. Butterflies suck for guts directional trades. Period. In index you're long a call fly looking for a body strike touch and the thing gaps at the open and now you're ITM on the body and the strike flips skew as well. Generally a small impact compared to you delta pos which is now short, but FUBAR. So you just flipped on delta and vol corr isn't helping bc you flipped skew and you were short sticky delta (short body was under ATM vol at inception) and your body strike is now under the market. A lot of directional guys don't understand how the smile moves, especially locally. Looking at a SK25 figure isn't going to help you. I'll do a fly journal (no trades, just informational).
Price a true ATM cfly/pfly in prem (neutral fwd-strike). Any width, in index. cfly/pfly >1. You're swapping vol corr for debit (spread debit). That's fine as long as vols come in and you don't flip delta position.
Took me a long time to realized. Thanks. I am going to stay with single leg directional bets for now.
After reviewing my trades in 2023/2024, you are right. It is very harder to make money on illiquid because of high vol and wide bid/ask. But not impossible because often the market was very wrong on illiquid.