The options are twice removed from any relevance to the strip vols on SPX. I wouldn't feel comfortable buying otm VBI options. ITM VBI calls are a relatively safe bet provided you isolate the convergence as time passes and allow for some contraction beyond greek-risks. I've seen wild premiums and discounts on the futures/cash, so any confidence in pricing is difficult to achieve. If trading VIX, buy ITM calls only. I am a huge fan of bear risk-reversals as Cat-insurance for these DOTM verticals -- scaling into the reversal-hedge as conditions dictate. Sell 20 SPX put verticals and sell one reversal in ES options [SPAN treatment]. Scale into further hedging on strength or as MtM gains allow. There are a million variations on the theme, but know that you can't hedge these w/o long gamma. The reversal is a direct gamma and vega hedge. Don't trade these unless paired with a hedge.
Riskarb: Interesting "foreign" world for me. What is your formal education and work background where you absorbed all these strategies? Are you self-employed? Fasinating high finance to a plain futures trader. I'm sure the majority have a million questions.
Just to be clear your saying not to trade the bull put vertical credit spreads without the risk reversal hedge, right?
riskarb, great journal you have going on here. I am a long time lurker in your journals. The exotic part goes over my head but great education nonetheless. I have a couple of questions about your delta bets if you get a chance to answer. In your last trade(SPX risk reversal), you position the strikes at about equal distance from the market. Do you have any set parameters that you follow in your delta bets(bull or bear) when choosing the +/- strike with regards to distance from market(credit/debit position) other than to be short downside gamma and long upside gamma or size at the +/- strike other than to take as lil net gamma risk as possible? What was the exit strategy if market moved down? Temporary lock with the ES or offset?
how best to trade high volatility betting on its revertion to lower levels? it is tempting to take advantage of high volatility that we are seeing today, but high volatility implies more risk. is there anything better than simply writing straddles/strangles? I would like to limit my risk. my broker won't let me trade Vix directly.
Westinghouse[40th], dual in bio and maths. Post-grad in another field. Dad was a cboe member and clued me into basic arbs and the like. Haven't read any texts/papers beyond Jarrows book on pricing and a few others that include Rubinstein's binomial and Neil Chriss' stuff while at Chicago. Also, Nelken on exotics at Chicago as well. Any interest in theory should be handled model-down. I ran a private fund with a buddy from Wilmette, IL at 18. He was an IT guy who built a link to DOT/superDOT for index arbs. Had a falling-out and went on to trade FOs, equity options, FX otc options, etc... did some non-industry ed from 88-95 as well. I've traded for 3 mid-market[100-800mil] funds over the last 5 years. My brother runs a vcap fund and a market-neutral fund for which I manage the sub-account.
Correct. You're paid for selling bear-stops... you can replicate the hedge as very little loss of edge via -delta bear reversals. I would always sell those verticals with a R/R.
The premium neutral, 25d risk-reversal is IMHO the best intraday reversal to trade, proven in simulation. It accumulates gammas very quickly if correct on direction. To be symmetrical requires selling cheap gamma/dgamma against the chosen direction, can't be avoided. The ES hedge against the r/r is used to get flat prior to covering the reversal. Often I will make a bet on the immediate direction and try to leg the offset. The last two were combo orders on open and close.