they are probably basing the 78% on delta.. which is a extremely bad measure of risk.. if implieds go up.. that strike isn't going to be nearly as far away... I think you need to get a little deeper into this before you start punting vol trades.... not trying to be a jerk.. just trying to keep you from making the mistakes i've made and alot of other people
Ya I'm pretty sure they are. I see what you're talking about in McMillan's book and I'll read up on it. Thanks for pointing me in the right direction. I'm not punting any trades anytime soon haha.
just as a note.. when you sell a put spread you are not only taking a position on direction(delta) but you are taking a position on the future implied volatility ... if you wanna be long implieds or if you wanna be short implieds... your short volatility selling put spreads... so when you vol doubles your 10 delta put spread increases in delta significantly even if the underlying doesn't move.. so delta is a poor measure of risk.. because your assuming volatiltiy doesn't change... this is a mistake in the interpretation of the the black scholes model.. it is telling you instantaneous implied volatility.. This isn't a world of continuous calculus .. its a world of fat tails and jumps.. .. Keep reading and you'll get on the right track.. with options you really have to know what your doing or you will derive profit and loss from factors your unaware of... In this case that would be changing implied volatility .... read this site.. http://www.optionseducation.org/str...epts/advanced_concepts/volatility_greeks.html P.S. don't get lost in complication.. in reality all of it is describing market demand for options... the only reason implieds go up is the demand goes up for them in relation to the supply... sometimes the market is right... just because implieds in relation to historical implieds does not mean they are over priced