Thanks for the reply! All this is great info for me. I am really just trying to find the most efficient way to "sell insurance" as part of my portfolio. If I come across as trying to find the holy grail of option trades, I am not. I believe markets are extremely efficient, but with that comes reward for taking risk. So again, thanks for all advice. In my example, the 1/17 310 puts each have a vega of .17. So wouldn't the "total edge" be 4x the 0.85 you put above? And given vega changes, (typically falls) as vol drops, can you just multiply the difference in impled vs realized by the options vega? For example, if the 310s IV dropped to 10%, its price would not fall by (5 x .17).
You're a heavy hitter! If my question does not intrude on your edge, do you hedge at discrete time intervals or based on market movement? I'm under the assumption that effective dynamic hedging in today's market requires an automated system. But if you're doing it manually, that's interesting.
Yes,I ballparked the "theoretical edge"...Its not linear on a vol drop Yes you are correct,i screwed up..Your apx edge should be the 5 vol handles x 4,assuming you continuously delta hedged and realized 10 vol..Good catch.. FYI,the trade you are bringing up was 60% of "our" business,except we didnt buy the long put..Sold futures as a hedge...It was great ...until it wasnt Not sure 15 vol is where I would load up
They're 1:2, not 1:4 (the OP initially mentioned 1:2). Mine are around 20%+ wide, OTM and I alternate between ratio spreads and back ratio spreads, hedging each other. I end up with various other combinations.
So institutions don't hit bids far OTM to take advantage of the IV skew because the gap risk is simply too high?
When I buy a 1:-2 ratio spread and then a -1:2 back ratio spread, I sometimes end up with 1:3:2 flies, so I trade the same setups you do, just by accident (and mine are so far OTM it doesn't matter what they are)
I can only speak for when I traded on desks. It was a while ago,and typically the order flow left us short vol up the wazoo.Not many smart guys pound the wings..Those that did went the way of the dinosaur... It seems like a very tempting trade,but not at these levels..Short gamma in size down 4 percent??