Thread by @LilyWrites4

Okay, so I want to talk about some vol f**kery in the meme stocks, and how to play for fun and profit. That said, not investment advice and in the interest of not upsetting compliance, I'll leave off the actual stock names too.
So lately, things have been odd.
1/x

There's this large company that we all know about that rallied like 50% in a month and pissed off a lot of people. This came at the same time as a larger sector trend rally, so it wasn't too unexpected. CEO might've merked it though.
But anyway, lots of people tried shorting.

In general, shorting these things is a bad idea directly, because of course everyone is buying puts thinking they're righteously clever, and of course the puts tend to be overpriced. In {insert company}'s case, calls were also generally broken, but I digress. So how do I short?

What's very interesting when vol is high is vol of vol tends to be high too. This has been talked about by me before, and others like @Ksidiii. In this case, I didn't do the exact analysis, but due to the non-stop trend rally, it was safe to assume the spot-vol correlation here

was pretty janked up to the upside. As we could see on a few halcyon days, vol seemed to increase as the stock went up. This tends to be sensitive to how fast it goes up -- on the days where it went up a lot really fast, implied vols also go up a lot.

As I've mentioned with Gamestop and others in the past, what this tends to do is flatten out the deltas really hard across the chain. When vol is really, really, really high, it leads the whole chain initially to be treated as 50 delta options. So if you buy let's say

20% out of the money and sell 25% out of the money, often times in super high vol (good luck getting filled on both legs at once), your broker might show you a negative or otherwise nonsensical spread price. There's some fancy math here, but I'm lazy and want to talk about trades

So, for {stock that will not be named}, if I try to short it directly, I'll get my face ripped off repeatedly (good luck d1 traders!). If I buy puts, I'll bleed premium badly (although less than you'd think, due to vol going up as the ramping continues). So what do I do exactly?

We can take a bias here. For {stock}, I can guesstimate on a selloff what I think realistically it will trickle down to. Let's say, -25% in 5 trading days. This stock does it a lot, so that's like an average Wednesday. I know I can't really fill properly a regular vertical spread

because the vol is so high that I'll make a pittance *if* it goes down (and remember, vol will also likely be high on the way down too - so good luck collecting until expiry!).
So I don't wanna bleed premium or get my face ripped off, but I really hate Beelon Tusk.

Let's talk about ratio spreads. Ratio spreads are a fun combination of buying a closer to ATM call/put, and selling some ratio of farther OTM options. If I take a simple directional view (aka only considering it at expiry), here's what a normal PnL chart looks like:

Ignoring the fancy options maths here, I'm saying "in exchange for a lot less premium outlay here, I'm capping my max gain at {some strike} with potential loss at {some strike + distance between strikes*ratio} or thereabouts. So a 1x2 long ratio, let's say buy 30C, sell 2x 39C -

Basically means that I make the most money if the stock ends up at expiry at $39, I lose a bit of money if it's below $30, and I start to lose a lot above $48. This is why it's magical for memes. Vol is very high. The deltas across the chain get skewed, and OTM options are -

usually more pricy (our beloved volatility smile and skew). In a ratio (my fav combo tends to be 1x2), you can often end up long theta (so you get paid as time goes on), long gamma, and short or flat vega. It's a nice option! Let's go back to our stock example.

This is not an option for everyone, there's risk, yadda, lots of portfolio margin. On the stock that shall not be named, instead of shorting like a patrician, I instead bought 1x2 ratios, with my point of loss around 30% from the latest stock price. In this case, I'm taking a -

pure directional view here. There's vega risk and all sorts of fancy stuff - I don't care. It's a simple binary bet (unless something *really weird happens* like stock goes from 1000 to 600 to 950 at expiry) that the stock price will be X at Y time.
Because vol was so high, my --

ratio was literally free. As in, I structured my bet weekly that the 2 puts I sold farther OTM exactly cancelled out my purchased closer-to-ATM put. In a dramatic selloff, you'd expect vega to shoot up initially, and potentially show mark to market loss. But we don't care here.

So I had a weekly put ratio spread which again, zero premium, that expired worthlessly (harmlessly) as Chesla continued to rally. Whatever. Doesn't matter for us.
And then this week, thanks to some tweeting, that "free" put option? Went from $.15 debit outlay to... $20.50.
Fin.