Short SPX Vol, post Election

[blackice 5]

Hi Everyone,

Now SPX Vol is around 22% (much higher than usual 10%-13%), which is because the Presidential Election is coming and people are buying a lot of options to bet the result. I think it's reasonable assumption that after Election results comes out, the Vol will decrease. Based on this, here's a net credit calendar plan (suppose I build this position next Monday 11/7):

 

The strategy has small Delta but huge positive Vega. The blue line is PnL 10 days later (T+10), even if price does not move, there's around 30% profit, supposing Vol drops back to normal at 13%.

Please share your thoughts and let's discuss. Thank you!

 

 

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Thanks to Kim of reminding me using Butterfly! I have another idea, which is combining Butterfly with Calendar. Since the theta and delta of these two can be neutral out, we can then focus on waiting for vol to decease, without disturbed by other factors. Here is the position:

 

 

Please notice that, the blue line is 14 days later (with Vol not changed), it's very flat, indicating the Theta and Delta are pretty neutral. But let's see if Vol back to 12% (still T+20):

 

 

The profit is very good. This means we can just wait for Vol to drop and safe from other factor changes.

Thoughts?

 

Edited November 5, 2016 by blackice

[Kim 7,513]

Since you are short longer expiration options, the margin for this trade is HUGE. Your potential gain as return on margin is around 2%.

 

I think a fly might be a better option.

[blackice 5]

19 minutes ago, Kim said:

Since you are short longer expiration options, the margin for this trade is HUGE. Your potential gain as return on margin is around 2%.

 

I think a fly might be a better option.

Kim, thank you a lot for your fast response! I'm so glad my first post here was replied by you so quickly.

I just adjust my strategy based on your suggestion, but changed it combine Butterfly and Calendar, which results in Theta/Delta neutral. Please see the edited post.

Thank you.

[Kim 7,513]

Yes, but leaving the calendar still doesn't remove the margin requirement. I would consider fly only. Will need to backtest it to see how similar trades reacted in the past to huge rally combined with IV collapse. 

[blackice 5]

2 hours ago, Kim said:

Yes, but leaving the calendar still doesn't remove the margin requirement. I would consider fly only. Will need to backtest it to see how similar trades reacted in the past to huge rally combined with IV collapse. 

Thanks for the comment, Kim, you're right.

And where to get historical IV (or price) to back test?

Thank you!

 

 

[Kim 7,513]

I'm using ONE software.

[cuegis 683]

I think it is wrong to look at the pieces surrounding the upcoming election as anything similar to an upcoming earnings.

Even though all earnings ultimately are known/unknowns.....the "unknown" piece still is more "known" than what could be the fallout from an election.

We are going to have a president-elect on Tuesday night (hopefully) which is hated by more than 70% of the  population.No matter who wins.

It is a VERY different election than ANY in our history.

It is very unlikely that the "shape"of the fallout will come close to resembling the result of any kind of earnings results we have seen.

It is a TOTALLY different animal altogether. I certainly do not claim to have any idea what will but, even in an extreme earnings reaction (ex. stock down 20%), they are all typically short lived.

We are making a major change in our entire government, to a greater,or lesser degree..

This is MASSIVE, and definitely the opposite of "short-lived".

The potential does exist for a VERY long term fallout.

It is not unreasonable to see something that would more resemble the last time we changed Administrations, than the kind of reaction you see, even from the most extreme earnings surprises.

It is historically a totally different ballgame....at least it very much has the potential to be!

A long term,extended, crash is not far fetched. I'm  talking about something that lasts many months and is VERY extreme in volatility.Basically something that is very unexpected all around.

I'm not saying that I am expecting this to happen.I am just pointing out that this is a very different kind of "known/unknown".

Nothing is off the table here.......especially if there is a "surprise" result!

 

 

[cuegis 683]

One more point. If there is ever a time to expect the unexpected,this would be one of those times.

The "expected" would be that IV rises in the days/weeks leading up to the event and then falls after it is over.

The "unexpected" would be for IV to start to rise going into the event , and then REALLY begin a long term continuation of that IV rise lasting a long time,and going much much higher AFTER the event has occurred.

Having the VIX move up into a new, higher, trading range of 30%-60%, for example, and lasting 3-6 months is only realistic because of how UN realistic it seems.

[blackice 5]

On 11/6/2016 at 6:00 AM, Kim said:

I'm using ONE software.

Thank you, Kim. I will explore.

[blackice 5]

On 11/6/2016 at 9:45 AM, cuegis said:

One more point. If there is ever a time to expect the unexpected,this would be one of those times.

The "expected" would be that IV rises in the days/weeks leading up to the event and then falls after it is over.

The "unexpected" would be for IV to start to rise going into the event , and then REALLY begin a long term continuation of that IV rise lasting a long time,and going much much higher AFTER the event has occurred.

Having the VIX move up into a new, higher, trading range of 30%-60%, for example, and lasting 3-6 months is only realistic because of how UN realistic it seems.

This is reasonable.. election is so rare and we don't know their patterns well enough. Anything can happen. It's wise not to touch its vol now.

[shinigamizeb 2]

On 11/5/2016 at 6:41 PM, Kim said:

Yes, but leaving the calendar still doesn't remove the margin requirement. I would consider fly only. Will need to backtest it to see how similar trades reacted in the past to huge rally combined with IV collapse. 

Assuming that SPX gains $50 after election. To profit from such a move up, should this ButterFly be a PUT or CALL and should it be a Short or Long?  SPX is trading @ 2135 at the moment. I do not plan to do either of these trades but I am not sure which one will profit if SPX gains tomorrow. Educate me please.

Example 1. Long PUT BFly

Buy 1 PUT 2080 for 12/23

Sell 2 PUT 2130 for 12/23

Buy 1 PUT 2180 for 12/23

Or Example 2: Long CALL BFly

Buy 1 CALL 2085 for 12/23

SELL 2 CALL 2135 for 12/23

Buy 1 CALL 2185 for 12/23

[Kim 7,513]

First, calls or puts should not make a difference. But if you believe there will be a $50 move, you should not sell strikes that are almost ATM. You should go directional. Of course if there is a move higher, then IV collapse might compensate for gamma losses, but I doubt IV collapse can compensate for a $50 move.

 

There are just too many moving parts, this is why I'm staying away.