Thread by @Ksidiii

This thread has some good value in it, so I wanted to add some of my own to it. Trading wings can be difficult, trying to find "value" in vol terms in the wings on a relative base is challenging. So here is one heuristic I personally use.

Lets be real....if you have two 5Δ puts .....1 is at an 80vol and the other 120vol...is the 80vol really cheaper? There are a ton of arguments that are all subjective. I personally run different lookback periods and compare the % of where this lies on a historical level..BUT

that is still not good enough. Here's the tricky part about playing wings....you want to look at things in a power law distribution. That means, when you are right, you are right huge, so just focus on gathering as much POTENTIAL value that you can get.

People would look at a 5Δ contract priced at .10 and another 5Δ priced at .15 and will say the one priced at .10 is better "value".....ehhh....so how do you know?

I personally uniformly line up a list of names staying time neutral + MNYness equivalent. This means get a basket of names, check the same expiration and the same MNYness and start comparing prices on screens based on your theta -> perceived delta notional.

Simply put, lets say we are playing 6/18 expiration, I want to check the 80%MNY on a bunch of names and see for the theta dollar I shell out, what will give me the highest delta notional. I shoot for 1000X....this means if I pay $100 in theta I want $100,000 Δ notional (if right)

Remember, this is subjective, every trader has their own approach....Jamie Mai actually embodies this heuristic in a similar fashion. But just keep in mind, when wing trading...its best to look at things in a power law distribution and just seek the greatest value.

because at the end of the day, if you are right on the trade and there was true kurtosis there is no difference between a 5Δ and a 2Δ. Except if you paid .02 for the 2Δ and .04 for the 5Δ...you would have doubled your P&L taking the 2Δ. When you are trading millions that matters.