OT, but I don't have an exotics/KO thread going... Long the fwd-start touch struck at 1.2636 x 1.2647; running 6/20 to the 28th. $2,000/$2,595 on a touch.
Yeah. We always found skew would "flatten" as maturity shrank. I think it was because 90percent implies different things at different tenors. You should figure out a way to arb this. The method is still being used. Didn't like using delta strikes because I felt they were model dependent (then again so is the other calculation) and I was probably being too obtuse.
Someone wiser (and substantially wealthier) than I said "being short gamma isn't inherently bad if you are appropriately compensated for it." There are times when you are very much compensated for being short skew. And the total anhiliation risk runs in every trade. We learned in 2008, even hedged positions that were fundamentally long convexity (long converts and short stock) can lead to total anhiliation.
Root-time adjusted it's self consistent with respect to the terminal distributions. Of course, the skew at the short end is a very different position then long-end skew (i think i've shared some of my relative skew ideas with you over bbg). Usually root-time adjusted sk10 is actually upward sloping, implying that there is a risk premium term structure.
That problem has been solved long time ago - you can trade down-and-out puts if you have access to OTC markets. Or, if you do not, you can trade skew flies - i trade these a lot. Or you can trade one skew against another. Or you can trade gamma against long-dated skew as a vega reset trade. PS. Or you can not pretend that you understand what we are talking just so you can start posturing.
Actually, it's a good question if converts are always long convexity. I think the best way is to think of them as riskless bond + call - put where the put comes from the credit risk. Once you think about it this way, you realize that it's a skew position too
Yeah. I was referring to the term structure of skew, but attributed the slope to a model limitation. It doesn't intuitively make sense as gap protection should be the primary reason for skew and that should be the most pronounced in the front and maybe in the long dated (5year, etc). I have a lot less time (much less than I had anticipated) to look this type of stuff these days.
This is a bull-strategy. I do far more overwrites (short spot/short puts) than I do the pitchforks. I stated from the outset that you should trade these cash-secured. You're not going broke selling the two lot PF on SPX with $400k. This is not a thread on tail-risk. As new stated, all trades have the potential for blow-up, unless you're (overly) long tails. We've talked about exotics a bit on this thread and KO markets don't distinguish long from short in notional risk -- the risk is bounded by the debit paid. A 40/100 short american KO is a 60/100 long american KO (touch mkts). There are many naked-risk exotics (think short lookbacks) that are incredibly risky, but you can risk a one-lot pitchfork in vanilla or go to 100% of your account in a long DNT. You can go broke long tails, but you can't go debit. Not really much of a distinction. Many guys thought they were bearish in '87 and blew-out their JBO accounts in short calls. There were guys so loded with arbs that the persistant var in microstructure blew them out. Nobody talks about the long futures scalp on Monday morning at 5am in Globex ES (9/11). Shit man, that'a 15x in ES! I was long delta in flies (vertically and in tenor) to short the vol-line and got beat up, but limited my debits to 20% of portfolio. Yeah, I lost 15% in Sept on those positions. IOW, it's always best to trade bounded-risk, and that's not really possible in delta1. Nobody trades equities in a cash account, and if you're that one guy you're a hobbyist or the dilettante with so much cash that the loss is meaningless (see hobbyist). A PF is a "hobbyist" trade, but 95% of the looks aren't traded. I use it as a line-item in my spreadsheet. It's a look at skew priced in premium. I am not a quant; I have an undergrad in phys and mole-bio, so I look for arithmetic approximations, something I can wrap my head-around. It's why I only look at $ risks in a portfolio (primarily theta). I couldn't tell you the significance of my gamma as the number is abstract (2nd moment, convex and not priced in $), so I only look at my thetas. There are tails to theta. A zero-theta can mean I am all or none on risk.
For example, I'd rather be in the 5:1 Jul20 overwrite than in the PF right now. Short Sep ES from 51.00; short 5x the Jul20 1275P from 7.75. I have a 3x15 on at a bit better than that mark. Short 3 ESU2 from 1351.00 Short 15 Jul20 1275P from 8.00 (mid) 17D per, hedged at 20D initial. Of course the initial delta is meaningless.