Well, you did do a disclosure early on in this thread saying "FWIW, it serves my interest to report the trade here -- hopefully some of you will jump on board and we can lower the implied volty in this dog..." So if you don't mind, what are your trade management strategies? In particular, have you set stops?
Well SAID!!! James Stock gets bitchslapped by riskarb ( see Jame's "The S&P looks very toppy" thread moved to chitchat), he then comes back under the Maverick74 handle continuously bs criticizing riskarb What a joke JamesStock, Romeo, Maverick74, et all. get a grip dude!!!:eek:
$5.85 x $6.00 on the straddle, marked. That's the offer on individuals and the ISE spread quote, size on both. Feel free to check it... So much for being lucky to clear $10large... $16k at the offer. arb.
Hey Tempus, I am replying since you've brought up a valid point -- I had no biz posting this, esp. w/o any risk parms. I will offset it prior to earnings if we go ITM on either leg = to 50% of the credit rec'd, plus a bit extra -- so offset if EBAY hits $62.20 or $68.80 before earnings are released. I will get back to the position mgmt. after earnings if applicable. I wouldn't hedge with spot unless we're trading on the release. arb.
Riskarb, Just a question, not meant in a negative way, but isn't this type of trade that is the proverbial stepping in front of freight trains to pick up nickels? Everything I've read and studied on options trading (just finished Baird's Option Market Making) plus my own LIMITED experience suggest positions with unlimited risk should always be avoided. This would seem to be the type of trade where you make decent money 8-9 times out of 10 and the 1 time the stock gaps up or down big on the earnings number it wipes out the 8-9 times you made money and even some more possibly. I guess I am just not seeing the overall positive expectancy here or a compelling risk/reward although I could be missing something. If the the trade thesis is primarily that EBAY will remain rangebound after earnings and also to pick up some time decay then it seems to me that hedging the short straddle with a long strangle would be superior because it eliminates the unlimited risk aspect. Now from your original post, I recall the thesis is primarily that IV will come in a few points. Are there not much better plays to isolate being purely short vega then short straddles or am I missing something here? Although you mentioned avoiding it, I do not understand why a short calendar would not be much better or even some type of delta neutral ratio spread. Just asking questions to try and learn.
MDCigan, Not to step in front of riskarb's answer to this, but in the meantime check out my thread on christmas trees. I believe that is the optimal strategy to sell vega.
There's no better method of isolating "pure vega" as you put it, conversely, the short straddle is the one option position most maligned for it's razor-thin margin of error. IOW, no opsition will earn as much in vega per 100bp on the volty-line. If you're long a straddle, your risk is truly limited, although can be catastrophic if traded too large in contract-terms. Your small margin of error is expressed in decay, which marks-down your volty-line daily. You can attempt to neutralize your bleeding by gamma-trading your position in stock. A short straddle has a large prob. of profit, as 777 pointed out, but lacks in the "margin of error" dept. due to the asymmetry of returns under the entire P&L distribution. So the (short straddle) position is a pure tradeoff, prob. of profit for risk. My practical risk relates to a gap before earnings, below/above my pre-release stops($61.20 - $68.80) or a gap related to earnings, in which it would be unlikely I would have the opportunity to offset or gamma hedge my delta position after the release. It's essentially a bet that spot-volty will stay within a $7.60 range -- centered on the strike price, $65.00 In answer to your question -- it is akin to picking up $.05 in front of a bulldozer. Best, arb.
Yeah, XMAS trees are certainly better in terms of risk, net vega/gamma, but nowhere near the absolute-vega sensitivity. All in all, I love to trade XMAS trees, a lower-exposure frontspread. arb.
I missed your short time spread comment... I'm not looking for that greek exposure. Regarding the position I do have, it is small enough delta that I feel comfortable, my gamma is what gives me the willies. But I am content knowing that my risk is +/- 40,000 shares -- there is a certain relaxation that washes over you when you know you're truly screwed -- in this case, I've made my peace with the 40k share net exposure. arb.