Hi Murray, Love this VEGA play or Christmas tree as Mav calls it ! Superb Can't wait for vol spikes now you'll need to sell BACK month options. Im assuming you mean like selling your naked back month Dec 1175 PUT on the vol spike? You sure can with IB's ES futures options Well i recently opened an account with IB for the specific purpose of selling naked PUTs, inspired by Coach's recent PUT ratio spreads advice. eg. BTO 1 1200put STO 2 1175put (1:2 ratio) So the above combination has one naked 1175PUT. From what I understand I can't do this with SPX. But it can be done with ES futures options which uses span margin. That's what I'll be using to sell the DEC 1175 PUT for your VOL spike play. There a feature which tell you exactly how much margin is required when you sell any naked ES options. Have the facility but have not sold any nakeds yet Hope that helps.
Just for my own good feeling and due diligence I just want to reiterate that naked puts have severe risk due to sharp market crashes on major events and IV spikes so please do so at your own risk and not over your head. I only like to do put ratio spreads occasionally as the naked part gives me a little more heartburn than the credit spreads. So, do not get seduced by fat naked premium
Oh, baby, I like that big fat juicy premium you got. Slide that on over here and let my pour you some Covasier...
Your profit/return is not a fixed return because the determining factor is VEGA. Your assumptions are relatively correct. The wider or narrower the spread, the larger or smaller the profit range. But that doesn't necessary mean more or less profit, because it's really up to VEGA. Since VEGA is larger correlate with a falling market, we tend to play this position to where we 'think' the market will fall to... ie, support.... and maybe slightly outside that range. We also like to place an additional put diagonal in the middle of the range with half the contracts incase the market just doesn't move, of course this is personal preference. Paper trade a few... the market will be around much longer than us. M~
Murray, I got your idea and I did a simulation with different volatilities. It seems to me that I can establish a better 'reversion to mean' by postponing the position. Example: 1. Wait for the panic selling. 2. When it occurs, BTO Sep 1200 Put, STO Dec 1175. This position should have the same effect as your final position after your adjustment. In fact by postponing the position, I can change the strikes according to the 'panic' level. The benefit of this is that you don't predict. Instead you react. If you predict, and it doesn't happen, I think you might have a small loss (depending on the future price and future volatility). My attachment shows the final P&L at front month expiration.
Like coach and Mo have pointed out... it's the naked selling which you need to consider. Haircut margin is much less margin requirement for naked positions. This would imply selling BACK months against your front months... ie, the nice profit adjustment in the diagonal.
It depends on the future price and volatility. See my previous response to Murray. You can construct the P&L at Aug expiration.
That's correct.... but what if the panic selling doesn't happen. On a second note, if you have bullets left over (say a 50% cash reserve) you can place the position during the panic attack. But we traded the last two years.... there weren't many panic attacks... as the VIX fell to record lows. Placing the diagonal helps to bring in a steady 2-8% a month return while waiting. Now... if you're a full fledged Maverick Fan.... you'd send the Marines in first.... ie, buy cheap OTM puts and calls when they are cheap... mostly puts. You send them out knowing they will die.... but you wait for the enemy.... (panic selling or huge market run up) and then SELL your OTM back month positions. Now, you may have lots of casualties.. 'Marines', but over the long term... you have a very nice expected return... and roll into next month positions continueously. Your method waits for the panic... ie, the Puts you buy will be expensive, although you will be selling amore expensive back month Put. Mavericks marines were cheap... now you sell and profit larger... much. The strategy requires the willingness to send the Marines. There is a mutual fund which trades this way... just buys... cheap OTM options.... month after month... and waits for market moves... it's rated return over the past five years was 26%. What is interesting... is you are 'black swan' event proof. Studies have shown that the pricing model for options is skewed to positive expectancy 'way FOTM'..... problem is.. most people can't take 6 or 7 or 12 months of losers before hitting the big one. But think of the risk.... it's limited. (sorry... getting off subject... but it's very interesting as you read about option pricing models.... us math teachers get excited about this stuff) Back to your question.... you can wait.... but you may be waiting for a while.... so why not take advantage of being 'in' the market and still have the opportunity. M~
Hi Mav, Like to meet you again in the option thread. I don't know how the span margin is calculated. It seems that it is related to the probability of the loss, but it is MTM. With haircut, it seems that it uses a fixed % (15% up and down) and calculate the max loss within that range. Since span is MTM, I assume it only calculates the potential loss in one day. For low volatility index like ES, the potential loss in one day based on the probability that goes up or down 15% is very small. Can you give us some examples? Can you compare the span and haircut margin for these examples. 1. Say ES 1200 naked put 2. ES 1200/1175 Aug Credit spread 3. Long 1200 Aug, short 1175 Sep