ah, got you now Basis is futures vs. spot, yes Fence is just a RR with another option added...sell call/buy put/sell put. Similar risk profile. For me a risk arb is everything that includes trading two instruments against each other that have the same cash flow but have different higher order risks under the hood. For example an OTC EURUSD forward rates vs 6E futures spreads. Zero risk on paper but substantial risk in reality. Or perhaps less opaque for some: Spreading a BTC carry trade vs treasuries The most tricky shit though are two products with different settlement processes like physically settled products vs stuff that settles in cash on a different day. There are a lot of plays around this but you better don't fuck up
i see. So the skew delta is actually a big deal as that’s going to be a significant part of your pnl (since you are exploiting the “under the hood”).
yeah, exactly. Don't get me wrong, I'm not looking for a rule of thumb to evaluate my position. That's done with analysis software since I've sometimes so many positions on that it would be impossible to analyse them by hand. But I'm a bit paranoid when it comes to software outages that I always carry my current position around with me that I print on a piece of paper each day before I shut down my computer...and it would be nice to be able to look at it and somehow eyeball the risk that is coming out of skew without using software...just in case
“That’s the danger of buying vol here, especially in the VIX, where you have an artificial curve based on absolute levels of volatility. Lots of times you see manipulation on the curve on settlement day. I look at ATM vol I look at twenty delta risk reversal, which would be the twenty delta put over the twenty delta call, and I also try to determine what the skew is. Right now I don’t think it pays to be long vol into the summer months. Cyclicality says we’re going to be slow here. If I had to be long vol I would love to be long vol in China, Singapore as a proxy for China, the Nikkei, and definitely in the in through some kind of synthetic calendar, long back spread/short delta.” - riskarbdownprufconvexxatticusdestriero Excerpt From Traders of the New Era Fernando Oliveira
They occurred, but I'm always neutral so they did not cost a lot. Nevertheless it's always good to be prepared
Do you know any software that calculates vanna exposure, lets say and updates it using shadow delta assumptions?