You are correct in your ass-umption. I offset that short spread the next day. In this case, the value of the fly was in both the direct hedge as well as the convergence gains. I've only seen that trade as good twice over the past couple years. But yes, I did really trade it... this was me legging out of it earlier today. Admittedly I jumped the gun a bit on the Mar/Apr this morning. I could've gotten closer to $4.70 without much risk. But overall I'd already made almost $1.00 on the fly so I thought it best just to take profits. Could still probably juice a bit more from that fly, but there is much higher risk at this price.
FYI, I have nothing in the front 3 switches as of now. I am long JUN/JUL from $105 this morning, looking for 125. And short JUL/SEP from $160 a week or so ago, looking for 140.
Thanks. I'll be looking to buy the A/M/J fly if it nears $1.00 over the next couple days. Otherwise I will likely just start scaling into a short May/Jun position once it reaches $1.50
Sorry I didn't say anything. Actually, it would've been hard to give a heads up on Friday because I didn't open the position until the last few minutes of trading when the MAR/APR overextended on the EOD convergence move. By this morning's open it had already printed $0.50 of what I assumed was around $1.00 potential profit, so not sure it would've done much good. I won't hold a position like that any closer to expiry.
There is haircut to your 25 calendar. Next time you should do the diagonal to account for the basis in the switch. IOW the 22/24 calendar which would also reduce your haircut.
Nice trade but I wouldn't call it 'almost no risk'. I ve been burnt many many times trying to pick a top in the front fly this close to expiry. Pull up 3 or 4 year data and you ll see what I mean. It's a crap shoot IMO unless u ratio it. Don't forget to let us know when u short it next cycle
Under most conditions I agree, which is why I usually don't trade it within two weeks of expiry. But go ahead and go back 3-4 years and show me a single instance where the front month switch was trading at $5.60 two days before expiry. August 2010 came close, and as expected also crashed intraday heading into expiry. The probability of it holding above $5.00 intraday was extremely low (<5%). Then, as others pointed out, there was significant edge in the long APR/MAY. So if both trades have significant edge alone, and together they help to hedge against the unexpected move, you end up with a position that provides significant profit potential and extremely low prob of loss. But you've gotta be on it all day, because it is very much a crap shoot EOD. You gotta set a profit target and when it hits on an intraday move, you gotta take it.
Missed the party... The S&P opts are at 14.7% vol for May 2012. The VIX Apr (which is priced off the May S&P options) is priced at 20% right now. Recommended methods of getting exposure to long vol without the time decay on May 2012 and maintain a clean hedge to the short VIX apr ? (must do it through S&P future options and some combo of delta hedging and dynamic option portfolio to capture the premium I imagine... is there a good easy lazy way? I see the vix opts are at parity with the futures, so no trade there.) Any link to a reference paper would be great...