Vol of Vol = VVIX or Steepness of the Smile? Application to Fly Selection?

Discussion in 'Options' started by zghorner, Sep 15, 2021 at 2:21 PM.

  1. zghorner

    zghorner

    reading through the butterfly threads lately and vol of vol gets tossed around a lot. to me it makes more sense to use that term in reference to steepness of the volatility smile but it is usually in reference to volatility of the VIX. So how are you guys using the phrase?

    Application for a fly spread:
    So in relation to the smile, one would want a low vol of vol (stochastics vol model version)/flatter smile as that would equate to cheaper wings...yes? I would assume that is is a pretty important criteria to selecting an underlying for the fly...seek expensive body in relation to the wings sounds like common sense...I just hate to assume anything as I really don't know shit.
     
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  2. newwurldmn

    newwurldmn

    vol of vol means the how much the implied volatlity is changing. The skew/smile attempts to price for this. What matters if what you think the vol of your three legs will be at different spot price points and how much vega you will have. A wide fly in a meme stock might do ok on a gap to the upper strike if the vol resets up A LOT. on a non-meme stock it might do a lot worse if the vol resets down.

    If your flies won't have a lot of net vega then the price of the skew will probably mean a few pennies and won't be the driving factor in your profitability.
     
  3. So assuming an ATM/OTM call-side fly in an SN without a whole lot of skew and the body somewhere around 15-20D, you're going to end up slightly short vomma (since your body strike is going to be somewhere near its peak, and the wings are going to be long but a little less than the body) - right? Since you're likely to be more or less neutral on the 2nd order greeks, it sounds like vomma is going to be your main driver on price/vol movement... or am I missing something?
     
    zghorner likes this.
  4. Err. First-order greeks, that is. Don't know what I was thinking.
     
    zghorner likes this.
  5. newwurldmn

    newwurldmn

    Perhaps. But you would have to trade some serious size to make that a driving force of your Pnl I would think.
     
    BlueWaterSailor and zghorner like this.
  6. zghorner

    zghorner

    Some helpful replies guys thank you.
     
  7. True. I don't yet have enough experience in trading flys (doing a bunch of them now to build some intuition about how they move), but what you're saying dovetails with what I'm seeing. Thanks!
     
  8. newwurldmn

    newwurldmn

    I trade them for carry. So I treat them as straddles with some wing protection. The vol component sometimes becomes relevant but it’s always very much a secondary factor.

    other people might trade them differently.
     
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