I currently own off center short index strangles. (Short puts and call skewed to the downside. This makes me short Vega and short delta). These do well if the market stays the same or goes down slowly. In the recent correction IV has spiked and remained high. My short delta has offset the short Vega, but I’m missing out on the ‘bang for the buck’.
How do I get short delta and long Vega without buying puts that decay and lose quickly if the market goes back up and in return IV drops?
One way is if I offset the long puts’ negative theta and make Vega work in my favor by trading a COMBO, long put, short call. Picking the strikes is the hard part here. I usually look for support and resistance above and below the market.
Note: I’m not recommending COMBO’s as a stand alone trade, but rather a way to achieve the above goals when managing a portfolio of option greeks.
In this case I have a significantly large inventory of short OEX puts and calls. Today I chose the following trade: long Jun $475 puts, and short Jun $560 calls.
The P&L looks like this below (click any picture to enlarge):
The white line is today and you see it behaves like a synthetic short but the strikes are different. For this to profit you want the market to move down and do so right away if possible.
Where this trade gets much more interesting (at least if you’re big geek like me) is when you look at the curve of Vega vs. underlying price:
As you know, when the underlying goes up IV drops, and when the market goes down, IV increases. Look at that beautiful curve above. As the underlying moves up from the current price Vega is negative, and conversely as the underlying moves down from the current price Vega is positive.
In summary, adding this combo to my current position allows me to benefit on the way down and hurt less on the way up.