The last page looks scary, but I am too lazy to read it from my last post (some 20 pages back) - can someone summarize the cause of penis fencing?
TrendFader, This gets kind of complicated and there is not a single answer that applies to all situations. Generally speaking, you are correct that volty drops as stocks go up and volty increases as stocks go down. But this is not enough. We have to look at the volty skew and factor in not only the skew itself but whether or not the skew is going to flatten or steepen. To make things simple, let's assume a static volty. If you buy OTM options, whether they be calls or puts, and there is a volty skew that is present, if those options go ATM, your options volty will flatten all other things being constant. What this means in general, is that there is a neg volty slope going into the ATM's. If you want to mitigate the risk of the volty smile and the consequences of flatter vols, you would want to purchase ATM options and sell OTM options. However, this is being very general because one, it's assuming a static vol when in reality, volty is not static. And two, it's assuming the slope of the skew will not change. It's very possible it could flatten on rallies and steepen sharply on selloffs. This is where it really comes in handy to be able to model volty skew and its effects on your position over a range of prices, time and volty settings. Of course keep in mind if you are holding positions till exp, this may not be a deep concern for you. However, if you are trading further out, this could be more problematic in pricing back month options.
Anseld: Why don't you give us a detailed example of a recent trade of yours with the concommitant logic included. Riskarb frequently posts his trades and includes updates and adjustments. In the past, Maverick has also gone into great detail in discussing specific strategies, adjustments, etc, etc... So if you are going to continue your campaign against whom you perceive as the "evil crusaders of options disinformation" then throw your positions onto the table for everyone else's "constructive criticism"
We almost have enough for a "West Side Story" with a score of house/trance music. I don't think we can persuade Mav to wear assless-chaps, however. Anseld? j/k
well said.... If one was going to put a message in a bottle... in hopes it reached a group of beginnning options traders on some Gilligans Island... this post would have to be included therein. Ice