nope , me and Rally were modeling a double RC , but its was short 200bp on NOV vols to guarantee b/e in case GOOG stays flat. 8$ paper profit , lol
IV, I've been playing with diagonal backspreads and reverse calendars for IV moves. On several RC's I've tested, I'v found that the tenor skew change compensates for the 'time vega' to borrow Mo's term. I end up +- break even on trades structured with the earnings dates in the front expiration. I've been experimenting with standard and ratio calendars (long back,short front) in high vol situations. Very dangerous if you use a near term long options but here I'm using much longer-term long options (6 mo's) - something that isn't showing inflated vols. One indicator is using the lowest average vol month in the chain - often 4-6 months out. Higher debit, certainly, but attempts to sidestep the vol crush after the event. In fact, I'd appreciate any thoughts...
IV, I had a question about an earlier post of yours. If you don't mind.... When you talked about doing an RC with earnings in the back month and exiting at front month expiry, I don't get how that works. If you exit before earnings, you don't get the benefit of a vol drop or the stock price move of your long gamma. I understand your first scenario where you buy near term straddles and hedge vega by selling longer term straddles. You exit right after the release, banking on a large stock move. What am I missing? .... and thanks for sharing!
you need to find an almost vega neutral trade. IOW , front month and back month premium loss should be the same ( in $ and cents) after report.
Thanks IV. I was talking about your second scenario: exit before report. In that case, your long gamma is nice but you don't get the profit potential of a dramatic post-report move. And you don't get the decline in vols post report. That's the part that has me scratching my head.... Is it that you aim to get in early to benefit from the IV ramp in the back month but hedge theta with short front month? If so, do you ratio them for theta neutral or just do 1:1? Also, when trying to structure vega neutral trade, you need to make separate assumptions for the declines in volatility - one for each series. For instance, in DNA, the front month declined some 13-14% post-report compared to a 3-ish% decline for the third (Mar) month. I'm inclined to simply assume that the tenor skew will be eliminated and you'd end up at near pre-ramp lows for both series. I'm really intrigued by these strategies!
correct , pre ramp levels for both series. Reread my previous message , I was referring to $ and cents loss. Sometimes loss of 13% in front month vols can be equal to 4% vols decline in back month on the DOLLAR and CENTS bases.
IV, Would you please explain this - I am still a newbie and trying to understand this. You said that RC should be vega neutral. But wouldn't it benefit from IV crash for earnings plays if it had a bigger negative vega? Thank you!
IV can answer for himself, but he's putting on these trades in expectation of a large move in the underlying. His reverse calendar is only to hedge against the vol decline.
This is exactly what I don't understand: wouldn't RC actually benefit from vol decline because it has negative vega?
Because at the end-points, either move up or move down, both options will trade at about the same value. All theta has gone out of them and your long option will suffuce to buy back the short one. You received a credit at open so that's a profit . Ursa..