OK, I'll bite. I'm the noobie so couple of questions: Two week play is the easy part. You want the SPX to be between 1277-1297 by May 29th, right(???) What type of bad news happens if the 1277 barrier is hit (or is it good?) ? Is this sorta a similar play, or not even close: Sell 10 June 1285 Calls/Buy 10 June 1325 calls and Sell 10 June 1285 Puts/Buy 10 June 1245 puts for a credit of 27?
Yes, a close between my futures-entry and the strike is preferred. The hedge is light by 80 ES futures... I will suffer a loss of $70k at 1277.00 SPX. Trade will b/e at 1277.00 if short 300 ES futures. Barrier exotics are "cash or nothing" and cease to exist if "touched". The fly carries some similarities; both positions are limited-risk into the bear-strikes. My position resembles a fly w/o the bull-wing purchase, but vanilla and barrier exotics are not fungible and don't share arbitrage/synthetic structures.
Vanilla index overwrite: RUT/ER2 Sold 100 RUT June 720p at 10.60 at 21% vols Sold 30 June ER2 futures at 739.50 Position delta: -500 Neutral delta: RUT 736.00 Bought VBI futures switches. June06 and into 07 as well.
It's not hypothetical; it was executed in size larger than posted. I am scaling to $1mm for the purpose of the journal. It's opm funds. I hear noise about various defenses, but take it with a grain of salt. Some months ago I piggybacked a large DB-client barrier which was aggressively defended, and it worked. I had expected to lose the barrier and dumped my futures hedge within 0.1% of the upside barrier and spot reversed lower. The daly bar showed a large bear-reversal. First time I've seen an exotic-defense actually coincide with a reversal in the market. A prop trader at a large Swiss bank made $30mil last quarter trading barrier exotics on Nikkei. Huge notionals. His take was $30mm, not the banks.
Yeah B, insane. I knew of a guy at Lehman that made a huge sum a few years back in index barrier-exotics, but 30mm in a quarter! Looking to sell a risk-reversal tomorrow in SPX -- long a reversal in NDX.
Yeah, must be cool to bring home 30 big ones in three months That looks like an interesting position. If you get some later on it would be great if you could explain the rationale for that trade. Is that a paired position (SPX vs. NDX) or separate?
Yeah, it's a pairs-trade, long NDX/SPX, short skew and vol, long gammas, long correlation. I'll go over the position if/when I get it off.
You know , much of this is over my head, but I do wonder if a good deal of the 'perverseness'/gaming I see in the day to day charts is defense of these types of positions. Must be billions worth of this 'gambling' going on weekly, so it would certainly be enough to move markets around, poking at levels, high and low, just to blow up many of these trades. If they pin at options expire, this may even be a bigger magnet. What say you arb?