Been too long…

Sorry for my absence, my real job as a physician gets very busy and it’s hard to find time to write…

My last post was done the morning of 6-May-2010 right before the big crash. 

Boy was I right when I said, “I need more + Vega”.

My OEX combo really did well when IV spiked as the market tanked.

Well, today we’re back down at VIX of 25 and I’m getting more long vega and short delta… Again, this is not a stand alone trade but rather managing an existing inventory for short gamma, long theta index options.

This time I used a “ratio diagonal” in the OEX and NDX.  I’ll show you the NDX trade:

Prior to putting on this trade I’m short delta, short gamma, long theta and very short vega. 

The trade is as follows:  Long 10 Jul $1950 puts, Short 7 Jun $1975 puts for a net debit of $295 ($29,500). This produces short delta, slightly negative gamma, short theta (short now but gets long as time goes on), long vega.  It looks like this in the Thinkorswim analyze tab: (click any picture to enlarge)

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The two vertical lines at the extremes are the high on 26-Apr-2010 and the low on 6-May-2010.

Below is the change of Vega vs. underlying price.

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You can see Vega is positive throughout the entire chart.  This is because we’re long Jul options and short Jun and because we’re long more contracts than short.

The below LiveVol Pro skew tab shows that I’m buying and selling at the low end of the IV smile.  This benefits me by buying more Jul options than shorting Jun options in that not only is the ratio in my favor selling higher IV than buying, but also the Jul options have much greater Vega than the Jun.

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So, you can see I’m acheiving my goal of long Vega, short Delta with a bit of upside ‘cushion’ if I’m wrong although if Jul IV drops more than the Jun decay, I’ll lose a bit on the way up.

If you’re interested in analyzing the other OEX trade I put on, here it is: +25 Jul $520 puts,  -20 Jun 525 puts for a net debit of $30 ($15,000)

NOTE: I wrote this entry this AM and just got around to publishing it.  Needless to say, I was again timely in my trade as the market tanked and VIX went up late this afternoon.  Both of these trades did well today.

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