Option- Different Strategy pt

How to Long gamma, short vega (capture Implied volatitiy)

Method 1)

1. Purchase a 1 – 3 month put at-the-money which has a high gamma and low vega
2. Sell a 1 year put 10% or further out of the money which exhibits a high negative vega and low gamma
3. Delta hedge the overall position with the SPY ETF so that the delta is neutral at the end of each trading day (can skip this but will have directional explosure)

Method 2)

• E/S time spread

Iron condor

* Always enter a position at least 4-10 weeks prior to expiration. If you’re wrong, the negative gamma risk outweighs positive theta risk at less than 4 weeks out.

* a probability of success around 50-70%

* Dont trade non index. stock will have big movement (takeover, bk)

*spend 10% of the premium collected on insurance. esepcially when vol is below 25%.  Dont need to buy protection when Vol is high....because when IV is high, one gets very little protection for that cash. I just don't buy protection when IV is as high as it is.

* Mark at optionpit said when VIX above mean, it is good time to start thinking Iron condor. because traders should understand that the VIX has MANY more occurrences below 20 than above 20. It just turns out that once VIX breaks 25, it has a good chance to move over 40. That is what holds the VIX's mean higher. In this case, do something 2 month out (In Apr, sell June). If do it right, possible to make 30-50% under in a week.

* option hedge fund: 

1) selling iron condor does not have to do it when IM is high.  We just need IM higher than the average true range (ATR).  In other words, you think implied vol is too high.  Thus, Iron condor can be done in any type of vol.

2) stable or decling mkt vol are key to success for IC

3) 10% out of money, the option loses more value from day 60 to day 30 than 30 to 1.  IT is the ATM that loses fast in 30 days to 1.  Therefore, sell right around 60 days is the best.

4) sell 1 10-11 delta and buy next strike

5) risk and Reward Vs chance of success.  If collect $2 on 10 pt spread.  it is 25% return ($2 Vs $8).  85% success rate will be favroable where 70% is not.

6) out of IC when it hits 55% of the value or before 30 days.  However, if pick up 25% of the value in a few days, should sell it because we catch the edge of vol drop.

7) best environment for IC eg is: on 10/19, sell Jan.  IM is higher than realized vol, IV is trending lower, skew is not super high, , RR matches

Butterfly

• 1) Make Sure to Pay Attention to the IV of the Butterfly Believe it or not, the trader does not want enter the fly when implied volatility is sky high. When IV's are sky high, there is likely to be a snapback rally. If IV's are too low, that is bad too, because the trade is likely to have IV pop. I find that middle-of-the-road implied volatility is actually the best place to enter butterflies. If the IV's are in between 25%-75% of the 90-day mean implied volatility, feel free to check number one off. If too high or too low, no check box.
• 2) Make Sure the Inter-Month Skew Isn’t Too Wide If inter-month skew is too wide, this is another warning sign of a breakout. If this sounds similar to a guide I use for butterflies, it’s because it is. When inter-month skew is too negative, it can mean that in relative terms, the front month is too high. Butterflies are a front-month trade, thus we want to avoid this problem. If the skew is too positive, that likely means the market is moving around a lot in relative terms. Considering butterflies are a gamma trade, this is also bad news. There are some really great ways to track this skew; one quick way is to compare VIX to VXV. This can give a pretty good idea of how 30-day volatility is behaving relative to 90-day volatility. If the term spread is not too high or too low, put a check in the box; otherwise, we are a no go. While 90-day volume is usually higher than 30-day volume, I think traders can see where how points of widening coincide with major moves:
• 3) Watch Intra-Month Skew When skew is high, butterflies are a very tough trade (see May, June, and July for details). When skew is low, butterflies are an easy trade and cheap to ensure (see August).
• When trade Butterfly, see if the IV's are in between 25%-75% of the 90-day mean implied volatility
• If inter-month skew is too wide, this is another warning sign of a breakout.

Cal spread

• Pay attention to 1) The first is the tendency for the implied to trade above both the short- and long-term historical realized vols. It’s sort of a front spreaders dream. 2) Skew and term structure of intra-month
• Optionpit said the following 3 pts is the key to Time spread : 1) Buying relatively low back month volatility 2) A relatively low realized volatility 3) Time to make it happen