PaulCao

IB fees varies due to various exchange liquidity rebate/taking fees; e.g., you'll always pay more if you submit a market order vs. limit order. See here: http://steadyoptions.com/forum/topic/1098-discussion-acn-april-2013-trade/?p=18573 I have IB account for actual trading and ToS for ThinkOnDemand. I believe Lightspeed is probably the cheapest for retail: 0.60/contract; http://www.lightspeed.com/pricing/commission/. Best, PC

Oops. Yeah, I was doing calculations for 450/410 July-August double calendar. So going to the official SO trade, suppose on the June 28 expiry, AAPL is at 425; doing calculations based off IV of 30 (Apple's current IV) and a dividend yield of 3% (Apple's current dividend yield), Short June 28 410 puts will expire worthless, Long July 5 410 puts will be worth $1.903, Short July 19 450 calls will be worth -$3.656, Long August 16 450 calls will be worth $8.665 So overall calendar spread will be $6.91 on that hypothetical scenario. Used the options calculator here: option-price.com. Best, PC

I believe if AAPL pops, then the put side of the calendar's delta's will also decrease as it gets further out of money. Suppose AAPL pops to the 425 range by July expiry, then the short July 410 put will expire worthless while the long July 410 put will be still be worth something; same goes for the July 450 and August 450 call pair. Using AAPL's last 30 day HV of 20% and option calculator, by July expiry, AAPL August put will be worth about $3.84; while AAPL August call will be about $2.21 while your short options will expire to 0; making the calendar profitable. Of course, this is close to the optimal price trajectory and also assuming that the IV of AAPL will hold during the time; but this is the thesis of the trade, that AAPL will not fluctuate too much while its IV will slowly increase as it approaches its earnings date.

Hi Marcos, If you are interested in more VIX related strategies, there's a bunch of other VIX related strategies with backtest results here: http://godotfinance.com/workingpapers/ One idea I'm exploring is trading VXX option against VIX option: VIX option on VIX future has an unusual nature that as the option approaches settlement date, IV spikes more and more. This is because VIX is an mathematical formula with lots of jump risks. So the forecasting spot isn't a smooth. However VXX option, as a constant rolling 30-day out VIX future behave as a normal option. Case in point the current expiring VIX ATM May future-option has an IV of 88.75 (compared to VIX ATM June future-option IV of 79.86) whereas the VXX ATM May option has an IV of 33. What's more interesting is that VIX future-option has an settlement date two days after the regular option settlement date, May 22nd vs. May 17th; giving the future-option 2 more days of time value. Given that VXX has a typical correlation ratio of 0.5 to the VIX spot price. I wonder how effective it'd be to sell VXX option against the equivalent dollar weight of VIX future-option to exploit the rising IV of VIX future-option in the waning week prior to settlement, with the delta being hedged with VXX. Best, PC

Hi Marco, Thanks for your reply. I'll let you know how it goes. Right now, I have 1 straddle of 5/17 SPY at 155 against -3 VXX 4/26 call at 20 and 40 VXX stock; that way I match 1 SPY straddle against 2.6 VXX. I'm also curious if I have the ratio of VXX correct. It's a little bit tricky as VXX is a rolling futures whose pricing takes into account the mean-reverting nature of VIX. At the moment, VIX spot falling 11.67% while VXX is down only 6.22%. So there'll definitely be gaps in tracking but I'm also betting over the long run, VXX will perform worse than VIX. The alternative is to sell VIX calls against my SPY straddle, but I like to try VXX first. Currently, my position is down $9 over a margin of 1.87K. Best, PC

Hi Guys, To revisit this topic, I still like the idea of replicating VIX and hedging it against a falling VXX. I was hoping the option experts here can tell me if there's anything wrong with my replicating strategy, So my plan is to re-create an imperfect but good enough VIX by buying a ATM SPY call, and making it delta-neutral by shorting the necessary underlying; and then hedging it in accordance to its vega in relations to VXX, Concrete example: I first figure out the percentage increase of my SPY call if volatility increases 1%; I use an option calculator and given today's ATM option for SPY, the vega is 0.174 (the change in option price if volatility rises by 1%) and using the current option price, the 1% increase in volatility leads to 5.3% increase in option pricing; provided that the underlying remains flat and theta decay is zero. I then figure out the percentage increase of VXX if volatility or VIX increases 1%; this is tricky as VXX is a synthetic 30 day future of VIX. But for the sake of simplicity, I'll assume that it moves in lock-step with VIX (when in fact VXX usually trails VIX). the 1% increase in volatility here implies $1 change in VIX, or converted to VXX dollar-weight would imply a 4.5% increase in VXX. So now I have my ratio: 1 SPY call to 1.17 VXX. So I'd buy SPY calls one month out (to correspond to VXX's 1 month rolling future), and then sell 1 VXX ATM call. Then keep my SPY call delta-neutral by shorting the delta amount of underlying or better yet, just roll with a straddle in which case, my ratio would be 1 ATM SPY straddle to 2.34 VXX and roll whenever the straddle is too far out of the tent. Obviously, there will be hedging cost as well as theta decay, but the straddle ratio would counter VXX spikes in case volatility suddenly spikes up. I'll try to execute this and report back with performance. Best, PC

Hi All, Thanks for everyone's sound advice. Marco, I see your point now about how difficult it is to replicate VIX spot price. I thought I could get away with this problem by buying a DITM VIX *option* call, but the lowest strike price bin I can buy at is 9.00 and even there, the call price reflect the carrying cost of VIX futures. This is kind of obvious now that I think about the zero-arbitrage opportunity that could exist between selling VIX cash-settled options and VIX futures. I looked into replicating VIX synthetically on my own; this is actually very difficult as SPX the underlying moves up and down, and there'll be tremendous dynamic hedging involved. And to be honest, I couldn't wrap my head around the math. (You have to keep a constant delta-neutral straddle and buy and sell VXX corresponding the vega of your straddle); and there's no free lunch, as you face theta decay. I've settled on an easier way and much inefficient way of doing this, pair trading VXX and VXZ. VXZ composes a rolling VIX futures three, four, five and five month out: http://www.ipathetn.com/us/product/VXZ/#/dollarweights Compared to VXX's rolling VIX futures one or two months, Using Marco's VIX term structure, we can see that the contango is less on VXZ's components vs. VXX, so it should perform better, as one can seen; select any long-term period, https://www.google.com/finance?q=vxx%2Cvxz&hl=en&ei=mqpdUYiCNqHL0AGpfg I have executed to buy 1 VXZ call and sell 1 VXX call for test trade, will report with performance, Best, PC

Hi, I was doing some research on VXX and if you pull up any charts for any long-term, it's obvious to casual observers that VXX does not track VIX at all, http://www.seeitmarket.com/exposing-the-vxx-understanding-volatility-contango-and-time-decay/ The issue is due to the fact that VXX doesn't track VIX, but rather tracks a 30-day rolling window of a near month VIX future and a back month VIX future, http://www.ipathetn.com/us/product/VXX/#/dollarweights In the case when VIX future's are trading in contango, e.g., the near month VIX future is less than back month VIX future, VXX fund manager everyday is selling his cheaper VIX future in exchange for more expensive VIX future for a loss, Right now VIX April futures is trading at 14.65 while VIX May futures is trading at 15.70, reflecting the market sentiment that VIX will always revert to mean of 15. In this scenario, given that VIX is in contango, VXX should be performing worse than VIX (and vice versa if VIX was trading in backwardation). I plan to make a test trade to trade out this idea: I'll sell VXX calls and buy VIX calls; because they are not perfectly-sized; VXX is trading at 20 while VIX is at 12 something. For the remaining unhedged delta on VXX, I'll hedge with VXX underlying, Has anyone done this before; or are knowledgable about VIX, please comment. I'll report back with performance, Best, PC

Hi, I used to take on the other side of the trade, writing biotech companies straddles or calendar spreads before their catalyst event, There's a few caveats: Catalyst events like FDA decisions are already priced-in. The straddles are very expensive as maketmakers generally expect a huge swing in price. I've seen IM in the range of 50-100% for ITM straddles. Small-cap biotechs sometimes unexpectedly offer new shares which causes the stock to swing downward dramatically, making the straddle very profitable. IV spikes very high as the stock goes into a FDA committee or PDUFA date (which is FDA's final decision after an public advisory committee convenes and decides on a decision). However, people pump up the stock on a general uptrend before catalyst; so rolling is very important. Sometimes companies pre-announcement parts of their clinical trial documents, which causes IV to collapse before expected date or cause the stock to upswing so much that the straddle becomes more profitable. Sometimes the company would announcement a significant strategic partnership or full-buy out by the BigPharma which causes the stock to go on a upswing. Liquidity is sometimes a huge problem as these tickers are not big traded stocks and are very volatile. Spreads are sometimes .10-.20 for a symbol trading at $1-$5. I used to look up catalyst events and then underwrite options with high premium that would expire before the catalyst event, worked pretty well for me. If you are going to do the reverse, I'd buy the straddle way before a catalyst event because unlike earnings event, the IV is already spiked pretty high 2 weeks before a drug decision. The best resource I've found for FDA events is on biorunup.com; they have a FDA calendar with upcoming ticker symbols; also IB option scanner is a pretty good bet too, basically all of the highest-rated IV are biotechs facing FDA decisions, Best, PC

Hi Schmu, Is it because in an event of a large direction move that's against your hedge (your stock position), whatever gain you realize in your straddle is canceled out by the hedge's loss? Trying to understand why gamma scalping limits your P&L, Best, PC

Hi Kim, I think your OVTI trade is about locking in gains and then re-entering a straddle/strangle that's delta neutral, I think when stocks move, instead of rolling with options, I'm going to get to delta neutral with a stock position; whether how it'll perform, I'm not sure. I've done it only the other way, delta neutral trading with a reverse straddle to collect option premium, I'll test it out with DECK and see how it goes, Best, PC

Hi All, I'm curious if gamma scalping the straddle when we enter into earnings is a viable strategy, Why: Straddle face theta decay as option premium erodes away and have sudden IV decline risk. Doing some gamma scalping could counter gamma scalping. How: By calculating the delta's of the initial option position we enter, typically it hovers around zero as the earning straddle trades are entered to be neutral on both call and put side. Keeping position delta neutral: But when a stock moves one way or the other, the delta will no longer be neutral. That's when a long or negative underlying position will be entered to set the position neutral. When the stock regresses to mean, that's when one close the underlying position for profit. A better visual explaination here: http://www.futuresmag.com/2010/01/01/options-gamma-scalping-strategy Anyone try this before? I might try this to see how it goes, Best, PC