Josh, before you blow a gasket, Stu is stating that you're forecasting (with confidence) the forward vol through an implicit +correlation on vol. As though you simply shift time and the payout is perfected.
Hi JJacks, Responding to your questions. You are absolutely correct, a move of the magnitude you describe would result in the loss of all, or most, of your capital. However a gain or loss of 20% in that short a period of time has only occured once, in October of 1987. Re your second remark, it would indeed be foolish to invest all, or a majority of your capital in this, or any other strategy. On your second point, if there is a substantial gain or loss in the week that moves the index to either edge of the 100 point range, the combination of the premium in the longs generates a substantail profit. The weeklys for the second week out are posted every Friday, except at the end of a quarter, such as we have now. Then the quarterlys substitute for the out weekly. Thanks for your questions, Im sure that they'll be helpful to readers. Good trading to all, Josh
What's "evaluate" mean -- have a predictive model for any or all of these exposures? It's clear he doesn't. If it means, "understand the risks," sure, that's fine, but it doesn't mean he has a positive (or negative, for that matter) expectation or will make money.
One of the strategies usually mentioned with monthly diagonals or calendars is that you can buy a few months out and roll the shorts several times to pay for the long legs. There should be the same opportunity here with the weeklys and monthly (and/or quarterly) combinations.
Some of you folks absolutely floor me. I'm not anti Greeks, not anti math or anti anything, despite your deprecating allusions. What I am is pro profit. And over analyzing anything as simple as a one week surround calendar technique is like trying to figure out what forces motivate Lindsey Lohan's bizarre activities. This is a KISS strategy, plain and simple. Many of you have had your say, knocking it from every conceivable angle, but you''ll have a lot of egg on your face, as time passes and it actually WORKS!!! BTW, as I noted in my opening post, it's not my idea, but originated from one of my clients. He's been trading it and, "miracle Dieu" making money. Good trading to all. Josh
Eliot and Rondey, Thanks for your rational posts. It's nice to know that there are people in the Elite Trader community that are using these posts to objectively comment on threads. Good trading to all. Josh
lol, you're comical. I didn't knock it at all. I said it's a valid method of going long the strangle at a discount. I really don't see how you interpret it as long decay, but perhaps in another 40 years you'll figure out what it's not.
Well, not sure if one can have a predictive model for anything. But you do have to at least evaluate how does forward implied looks vs historical levels of implied vol, how does front implied compare with recent realized vol and how do the strikes compare with recent ranges. A fairly simple analysis, could be done in Excel.