I was under the impression that his diagonals were 1:1. Those are different plays in my book. Even so, i am still not sure i'd want to trade off all that short gamma to make it a vega play. I, honestly, cannot see the benefit for the life of me, especially on the call side where my vega is pointed against the direction of gamma risk. Perhaps some can make it work, i never found it worthwhile.
Rally: if the market moves higher the vols do decrease but you are short more than you are long. Even if you add mroe calls, I am not looking at it as a vol play which is better reserved for the puts. It is selling a spread at resistance or overbought but doing it as a ratio diagonal so that if you are wrong and the market moves higher you can still make money on the position. For example, if I think we are overbougt at 1323 on the DEC ES, I would look into a 1330/1350 ratio diagonal using SEP EW and OCT ES or OCT EW. Right now SEP 1330 EW is at 8.75 and OCT ES iat a 6.75. So I would look into some sort of ratio or even diagonal at this overbought level. I think I might paper trade this when the market opens.
Over the last 15 years, the average absolute difference between Thu's close and Fri's settlement value has been 0.46% or about 6 points with SPX at 1,300, with a standard deviation of 0.53%, which translates into a 1 standard deviation range of 1% or about 13 points. The largest difference during this 15-year period was after 911 when SPX settled 44.97 points or 4.57% below Thu's close. You do the math.
I also think that the credits 1 hour before close must be miniscule.. would like to hear some examples.
About a 18 months ago, I tried "day trading" these credit spreads on the last day and then getting out in the last hour. I was successful every time, but the stress was high. Typically, I was getting $0.20 to $0.25 credit on Thursday morning for a spread that was 10 points OTM and then I would buy back the short for a nickel in the last hour.
That's my point, coach. I'm just guessing, but I'd say 15 points OTM the credit is prolly 0.05, maybe 0.10 on a 5 point vertical. So the risk is 4.90-4.95. So, with such risk:reward ratio you need to win 98% of the time or 49 out of 50 trades to just breakeven and that's not including commissions. So, that means 49 profitable months (just over 4 years) only to get all of your profits wiped out by one outsized expiration move.
I've had good luck on fills with the RUT, Rich. Those wide b/a on SPX have frustrated me in the past. I keep thinking I should go the SPX route as there is more collective experience out there to take advantage of. Playing the RUT on this particular diagonal had nothing to do with my @#$%^&ing it up. Bob
Anybody looking at put diagonals on the SPX? I'm considering the Oct 1250/Nov 1225 which currently has a midpoint debit of $1.50.
OK, it's actually my friend did the virtual trading. I have saw he did this. Most of the time he only managed to get 0.05 credit, and maximum 0.5 credit. He was tought by a beginner options teacher which actually never knew that the options will see the settlement by the next friday. So I can say for these 12 moths he is lucky enough not to have a "wild" settlement more than 10 points from thursday closing.