(Thread) One of my more important posts from a trading point of view (hardly any quanty stuff in this one). Might be relevant now hence posting.
Just so it's clear for anyone wanting to trade call ratio spreads in the future in a bear market:
Just so it's clear for anyone wanting to trade call ratio spreads in the future in a bear market:
https://twitter.com/AnandableAnand/status/1472863972537737218?s=20
(this is my approach anyway..)
Best time to enter zero-cost call ratios or a ladder (shorts at multiple strikes) is when IVs are shooting up combined with mkt going down. Today was a classic example.
If we see the kind of fall we saw today in Nifty keep long leg 100pt OTM and
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Best time to enter zero-cost call ratios or a ladder (shorts at multiple strikes) is when IVs are shooting up combined with mkt going down. Today was a classic example.
If we see the kind of fall we saw today in Nifty keep long leg 100pt OTM and
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short leg atleast 300pts further away and you can increase the ratio higher than 1:3 (you'll have to, to keep it zero-cost). You can make it credit depending on your risk-appetitie and your skill in adjusting these.
So when you enter this you will be net short vega.
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So when you enter this you will be net short vega.
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With IVs further shooting up (like it happened today in the afternoon) most likely you'll see a loss on your position due to loss on long leg not compensated by fall in short legs. In fact sometimes your short OTM calls can literally freeze. This is due to the fact
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call-side skew (i.e. call OTM IV minus ATM IV) increases plus your short call's vega hardly comes down(high vol-gamma). Hence a delta profit on these OTMs will be lesser than the vega loss (vega * change in IV and latter has increased).
But given the overall position is
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But given the overall position is
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zero-cost this is just temporary pain and you can adjust by keeping on adding more call-ratio spreads at lower strikes (new ones are shifted lower and without exiting the earlier call-ratios OR just add on to the previous CR but this time make it credit...
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assuming ofcourse you've enough capital!).
Later when market makes a recovery, IVs will drop and short OTMs will result in a fairly large vega profit. Delta of these calls will hurt very little (assuming there isn't a huge pullback) as delta of OTMs goes down with IV
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Later when market makes a recovery, IVs will drop and short OTMs will result in a fairly large vega profit. Delta of these calls will hurt very little (assuming there isn't a huge pullback) as delta of OTMs goes down with IV
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(i.e. vanna). The OTM calls that may have frozen earlier during the fall will melt, specially on weekly options and if it's a Tuesday/Wednesday, like an ice-cream kept outside mid-day in a Dubai summer! (check how 17200 and 17100ce behaved today).
Just make sure you keep the
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Just make sure you keep the
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range wider as during high IV periods pull-backs can be quite big as well!
One might think "Oh why not buy put spreads or nakes OTM puts etc" with the huge profit potential they provide BUT how much can you scale such stratgies?
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One might think "Oh why not buy put spreads or nakes OTM puts etc" with the huge profit potential they provide BUT how much can you scale such stratgies?
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Can you buy 100lots of those instead of 10lots? In case of call-ratios, in the above scenarios atleast, they can be scaled big in my opinion.
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