Betting on unflattening of the ATM IV curve

Discussion in 'Options' started by morganpbrown, Nov 2, 2021.

  1. I saw what I think is an opportunity and I made a trade (SPY). (It was a calendar and I know I'm only allowed to trade verticals, but hey...). Maybe this belongs in a trade journal, but I figure that many of you would enjoy telling me how my premise was flawed, and thus benefit the common good.

    Below is a plot of SPY ATM IV for the last 20 days or so. DTE on the Y axis, date on the x axis. red=high, blue=low. "Typically" there is some decent slope in the line. In other words, 100 DTE = red, 1 DTE = blue. In the last couple days, however, the curve is very flat (one color across all DTE).

    So I went long a Jan 21 2022 ATM call (80 DTE, vega 0.86), and short a Nov 19 2021 ATM call (17 DTE, vega 0.40) for a $7.30 debit. In the next week or so, I'm betting that the curve will steepen. If the IV curve stays flat but spikes up, I am covered because I'm (heavily) long vega. It's got good theta decay if IV does nothing.

    upload_2021-11-2_10-8-49.png

    Looks pretty safe to a +/-1 SD move over the life of the short call.

    upload_2021-11-2_10-21-16.png
     
    Zwaen likes this.
  2. ikdaro123

    ikdaro123

    great
     
  3. destriero

    destriero

    Yeah, the only real risk here is gamma. Upside you drop on strips but gain on strike vol (strike is skewed). Downside you lose on skews (up and out strike skew) but gain on strips which is reflected in the PNL asymmetry.
     
    ITM_Latino and morganpbrown like this.
  4. newwurldmn

    newwurldmn

    If we rally the jan vol might come in while his nov Vega vanishes.

    if we sell off he loses on gamma and might earn on Vega but he’s rt flat at 1x1 so that might not happen unless we are really close to expiry.
     
  5. destriero

    destriero


    I am not a big fan of ATM calendars. LVLD!
     
    Adam777, newwurldmn and morganpbrown like this.
  6. destriero

    destriero

    Risk, descending; gamma, vols, smile. Nobody is ever really satisfied with their gains on a calendar unless you're taking a delta position.
     
  7. newwurldmn

    newwurldmn

    i agree, especially in index where the surface is pretty efficiently priced.
     
  8. newwurldmn

    newwurldmn

    SVLD!!!!! (and short some VIX as well!)
     
  9. destriero

    destriero

    I am there!
     
    newwurldmn likes this.
  10. thecoder

    thecoder

    Too bad I can't decipher the contents of the embedded table (got only a 27" monitor here).
    Maybe a repost of the table as an attachment would be better (ie. via the button "Upload a File").
     
    #10     Nov 2, 2021