The above scenario is not accurate. I'll try to find a moment over the weekend to work through a nuts-and-bolts example. In the meantime, assume that every time you buy or sell options, you offset your deltas with a trade in the underlying. This is a delta-neutral play.
Actually, once you have this play set up (long the 1100 puts, short the 1300 calls, delta neutral against the futures), you can play it with futures alone. No need to touch the options position. That makes it really simple. Each time the futures go up, volatility goes down, and you will get long deltas. Try it and you will see that's true. The more volatility goes down, the more money you will make and the more long deltas you will be. You sell futures to get delta neutral again and lock in your profit. If futures go up more, IV will go down again, and again you will have a profit and be long deltas. You sell futures again to even up your deltas and lock in your profit. If futures then drop, IV will go up and you will get short deltas. You buy futures to even up your deltas and again lock in your profits. This is easy to verify - try it for yourself. Keep in mind that the put and call volatilies remain equal - when the put goes from 20% to 21%, the call does too. That's the point of the exercise - to show how easy it would be to make money if the skew was flat.
The skew is relatively flat for long dated options. I've never delta neutral traded using LEAPS, maybe it's worth a look.
Well the question is - do the leap IV's have a marked, significant inverse relationship to the price of the stock - as the VIX does to the S&P500? And taking into account the bid-ask spread - will you still be buying the puts and selling the calls at approximately the same IV? You need both of those to be true.
dmo, I might be completely wrong here, but isn't the strategy you are describing commonly termed as gamma scalping or gamma trading? If not, what is the difference?
Gamma scalping is a little different, and is when you think volty is low. Buy a straddle and as the spot moves - you have to trade the underlying to remain delta neutral. The bonus is you buy at the low and sell at the high in your hedges, as a direct result of staying delta neutral.
No no, gamma scalping is different. It's when you're long gammas and delta neutral - so every time the underlying moves the delta moves in your favor. Every time you even up your deltas, you're locking in a profit. I posted an article explaining gamma scalping about a month ago - did you see it? There was a whole thread on the topic not long ago.
disregard my post I was trying to be funny. It didn't work. but if you don't play with futures and only use options then you have to maintain deltas thru options. On high vol stock i use a similar style to trade options.