Synaptic, Best thing to do is examine how the PnL behaves for the position using a suitable position analysis tool of which there are many to choose from. When between the wing strikes, the fly is short vega and short gamma i.e. the fly wants the underlying to sit still in order to make money. As time progresses and expiration gets closer, we know what happens to gamma - it becomes peakier i.e. kurtosis. The fly position can be thought of as a play on this kurtosis. In line with the gamma curve exhibiting kurtosis - so does the PnL of the position when at the body strike i.e. as time goes by, PnL increases. Looking at gamma for the fly position you will notice that it goes from positive to negative to positive depending where it is in relation to the body and the wing strikes. You may wish to take advantage of this fact by gamma scalping when/where appropriate if you have an appropriate instrument to do so. The fly you looked at is an iron fly that you put on for a credit. This is no different to a put or call debit fly with the same strikes 580/585/595. The higher the volatility and further out in time you are, the cheaper the fly. This is obvious when you think of volatility as synthetic time i.e. time passing has the same effect on a position as volatility decreasing and vice versa. An increase in volatility can turn back time so to speak - this can be witnessed on the likes of the gamma curve. When volatility increases it can undo some kurtosis but I digress... So to answer your question, if IV collapses before expiration you might be able to take some significant profits before expiration. However, in general, profit taking on a fly is only worthwhile in the last 5 days or so - at least as far as OEX flies are concerned. You still need the underlying to be relatively close to the body strikes for this to work though. The fly you outlined is lopsided, not sure if that was intended but it is helpful to understand what other positions are "embedded" in that lopsided fly so that you can take advantage if possible. Recommend Cottle's Option Trading: The hidden reality for position dissection and discussion on flies. I should start getting commissions the amount of times I've linked to his book [EDIT: earlier discussion on flies in the last week] Enjoy.
For the most part I agree, but technically speaking you can calculate the IV distibution at the close. I assume that with a large enough sample you would find a normal distribution and could therefore try to position yourself 1sigma OTM as well as 1sigma above/below mean IV (or HV). Personally I agree with damon in that this is one of the things that separates a good options trader from a bad. IV is one of the most critical factors in options valuation and forecasting it correctly is a necessary skill. Some say that price fluctuation is random, which may or may not be true. I don't believe that it is true for IV. At the most it is only true to the extent that there is a correlation between 'random' price fluctuation and IV. In the end I don't think it is worth the effort to calculate the IV distribution. Much can be gained from a simple review of IV v. HV over a given period.
Scienter That is a good question. I had copied that formula from some URL, I donât remember where I got it. I possibly made a mistake when I copied IV instead of just plain Volatility. I have been using the volatility of the underlying and it checks out fairly well. The underlying doesnât have IV and I think options donât have Sigma or at least it is not used for anything that I know of. How do I put a copy of the post that I am replying to?
Both are applicable depending on what you want to know. You can use statistical volatility for calcluating standard deviations for past price action. OR you can use IV for calculating standard deviations for forecasted price action. OR you can use your own guess or model output e.g. GARCH for future volatility as the basis for the calculations. Your favorite charting software probably has an indicator for statistical volatility. [EDIT: or of course you can use Bollinger Bands as a substitute] In reference to earlier posts, depending on what level you want to take it to, it might be important to know that delta is not the same as probability. A separate value for probability is normaly calculated from the model. Using the delta as a probability substitute can certainly be very different to any probabilities calcluated from ATM IV values. If you think about where the delta for your option comes from, it should be clear why this is so Scienter, It might be helpful not to think about sigmas in terms of credit spreads and short strikes. Rather, think about it in terms of where the underyling might be at a certain date in the future. Click on the "Quote" link for the post you want to "Quote". For more help on using the forums and posting see here MoMoney.
Well how about that. Up 14-points at the close. There are buyers afterall. Must've been rallymode with all his memorial day rally speeches. Another one of those and I'm all about the bear put spreads.
I don't know how everyone trades SPX options. I find it next to impossible to get fills - and I always offer to trade at prices that are less than the midpoints. When I was a market maker (primarily HPQ) such wide markets were against the rules. Must I trade 100-lots to get the attention of the MMs?? (I don't want such large positions.) Mark
Getting close to the 1280-1285 level you said you liked. Rallymode was right on with the Memorial Day rally. Will have to see how well it carries after all the data tomorrow morning.
I started trading in January 06 and all my put and call credit spreads and IC's have expired worthless. No adjustments needed which is a good thing because I have never done one before. I am using retirement assets so my net credits are small and FOTM strikes conservative. I usually sell all my credit spreads 45-30 days out. These are my June Positions: SPX 1180/1190 Put .50 SPX 1210/1230 Put .30 SPX 1380/1400 Call .60 RUT 620/630 Put .40 RUT 770/780 Call .40 I am so pleased that I have discovered an option trading strategy that earns 3% -5% month month after month. This is so much better than selling covered calls which I have done in the past with little success.
I don't think it would make a difference. Sometimes the MMs are just stingy, while other times I get filled at the mid relatively easily. I have my theories about this, but I'd rather not share them here.
When you were a mm for HPQ you were jockeying for inventory with 5 or 6 other exchanges forcing you to narrow your spreads(but, as a mm, you already knew that, right?). SPX is only traded at the CBOE. If you were the only bank in town would you keep your spreads as wide as possible? you betcha! Check out other products that are located at one exchange like the phila gold/silver $xau. Spreads are wide because they have a monopoly on the product.