Agreed. But I thought we were just talking about the OTM calls in this thread. Of course the OTM puts, no matter how steep the skew is, are a much better buy than even the cheapest IV OTM calls when the market crashes and the VIX goes from 20 to 80+. But the 1X2 (1 ATM, 2 OTM calls DN) backspread always makes money when the market moves away (goes lower) from it and the curve flattens. If you do enough of them, especially on longer-dated expirations, you can get both the Ferrarri Stradale and the Porsche 911 Turbo S as your everyday "beater".
LOL!!! My apologies,i misinterpreted what you wrote.. My issue is,in a world where the market goes down for a nanosecond and then rebounds every F-ing time,I never make the money I anticipated on ATM backspreads..With that said,maybe i should start expanding my horizons and look at the longer dated options.... I recently moved from Sag Harbor to Vermont..Im thinking the Ferrrari Stradale may be a bit much for the everyday beater
Sideways trading will destroy the IV of those calls, especially if the market is rangebound post-Fed meeting. Big violent rallies, like the 10% up days we saw back in March will keep those calls bid, but as soon as the SPX settles in a range after a big rally, they will destroy those calls, as well as any other option IV on the smile. You'll need a disappointing Fed meeting with a bearish market reversal for those calls to catch a bid. Any talk of the Fed eventually undoing its aggressive rate cuts in March, or limiting its credit market QE program, will help change the persistent positive market sentiment and make the IV of those OTM calls explode on an unexpected break in the stock market.
It's interesting that both of us (you're an an EQD trader too, I recall) dismissed the idea, for similar reasons and off the top of our heads. I did so when I was walking the dog last night and I was VERY baked, so that's my excuse This morning, I actually priced Dec 50d/25d c1x2 as of Feb 20 and Mar 20 - it would have done quite well. Not Ferrari well, but it would have been a solid Lexus trade. This said, the attribution is primarily due to long vega and gamma on the 25d - it was not really a skew trade, as it was long both vega and gamma at inception. The long leg dominates, so I can say I had the "same" trade on by being long tied Sep 3450 calls (paid 12.2 vol for them in Jan).
Hum, you don´t work for the vol desk of Gold-man´s, do you? Wait, you are too clever for that desk...Susqehanna? IMC? Flow Trader?
Nah. I could never work for someone or be an employee of a big firm or corporation. I like to control my own destiny, and be fully responsible for all my winners and losers.
And you want to have the exact opposite (Long 1 ATM / Short 2 25d Calls) on the way back up....like how we've been slowly rallying the past few weeks with VIX getting crushed. Probably an even bigger winner when market slowly rallies to your 2 shorts.