Vol Skew

jamesbp · Oct 12, 2024

poopy said:
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I always find useful to dissect BWB/Asym Flies into component parts.

Helps to both understand how spread will perform and whether each component is worthwhile (as short OTM Verts/Flies can have terrible r/r).

I see 19700/20300/20400 Short BWB/ASYM Fly as combo of

Short 100 wide Balanced Fly for Credit : 20200/20300/20400
Long 500 wide Put Spread for Debit : 19700/20200

.sigma · Oct 12, 2024

I

poopy said:
You're setting up a backspread. If you're Vega neutral you'll need realized vol to increase. I don't see a backspread as a vol-trade as much as spot vol realizing gamma.

Backspreads work best as wing prot where you don't have the stomach to buy downside singles. On index, the "near puts" being bid are going to be trading under the vol of your 2X wings you're long, so it's always going to be -edge on the vol-line.

They are hard to trade. As prot they are fine as you're net long a single as long as you treat them as a sunk cost or you're trading them on a price spec... you want to be long or short into a predicted sizable move.

Call backspreads (up/out) are the revenue side so you're paying more (or receiving a smaller credit) and vol generally trades inverse to price (stocks up, vol down), so they are generally contraindicated over simply going long a single and hedging (buy 10-line upside, weak hedge) but then you've also got convergence risk (vol as synthetic time, drift, etc.) perhaps mitigated by sticky D.

They are unforgiving.

For someone that doesn't want to put a lot of effort in and trade passive long vol -> buy some 20D calendars or bear diagonals (in structure-> M2 stuck above M1 in puts) and short a single at 10D to approach rev-neutral. Long OTM flies (long g, all otm) with the distant wing in another duration, etc.
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poopy said:
You're setting up a backspread. If you're Vega neutral you'll need realized vol to increase. I don't see a backspread as a vol-trade as much as spot vol realizing gamma.

Backspreads work best as wing prot where you don't have the stomach to buy downside singles. On index, the "near puts" being bid are going to be trading under the vol of your 2X wings you're long, so it's always going to be -edge on the vol-line.

They are hard to trade. As prot they are fine as you're net long a single as long as you treat them as a sunk cost or you're trading them on a price spec... you want to be long or short into a predicted sizable move.

Call backspreads (up/out) are the revenue side so you're paying more (or receiving a smaller credit) and vol generally trades inverse to price (stocks up, vol down), so they are generally contraindicated over simply going long a single and hedging (buy 10-line upside, weak hedge) but then you've also got convergence risk (vol as synthetic time, drift, etc.) perhaps mitigated by sticky D.

They are unforgiving.

For someone that doesn't want to put a lot of effort in and trade passive long vol -> buy some 20D calendars or bear diagonals (in structure-> M2 stuck above M1 in puts) and short a single at 10D to approach rev-neutral. Long OTM flies (long g, all otm) with the distant wing in another duration, etc.
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it’ll take 13 years to decipher this boys

Art_Vandelay · Oct 25, 2024

poopy said:
Nothing beats a ps for high skew, low vol environment. The issue there is that I can build a skew lock with a credit left tail and trade gamma around it. Enough edge to pay for the backspread or combination of approaches (long bear back, bear asym fly, long ps) and have a flat (rtn) Vega figure that explodes in the left tail.
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what's a skew lock?

Real Money · Oct 25, 2024

Art_Vandelay said:
what's a skew lock?
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From what I gather, it's a spread of exotic varswaps.

poopy · Oct 25, 2024

Art_Vandelay said:
what's a skew lock?
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LVLD arbed.

soniadebaeke · Oct 29, 2024

I like it :
Theta: Positive overall, especially from the butterfly and ratio spread.
Gamma: Mixed but with high sensitivity near 20300.
Vega: Vega-neutral to slightly positive.

But this structure needs active management, especially as the price nears extremes (20400+ or below 19700).
And you pay a ton of brokerage fees. I commodities there's cheaper ways to arb the vol skew.

poopy · Oct 29, 2024

It's nowhere near flat vega. Adds buying power under VV/TIMS. the left tail is conservative as it's long vega and benefits from volcorr. Let tail cannot lose and can only appreesh. Neutral gamma throughout until last trading day.