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Granchio and other S&P options experts, could you shed some light on this:
Looks like a dec13 1300 put on S&P future is worth 180 and the 1000 put is worth 75. That would make the ratio put spread (buy 1x 1300 put, sell 2x 1000 puts) worth 30. Pretty cheap downside protection, no?
Is my understanding of the payoff correct:
By putting up $30, I can make up to $300 if the S&P closes at 1000 in dec13? And if at some point during the life of the options the S&P gets close to 1000, I can unwind the spread at a profit (less than $300 because of time value, but still...) to avoid the risk of losses if the index goes below 700. The chances of the index gaping from 1000 to 700 before I can unwind are, well, pretty small.
Am I missing something? Maybe what happens to the skew if the index gets to 1000 could wipe out the profit on the intrinsic value?
The other question is liquidity: is it possible to even put on such a trade in the first place? Open interest on the 1000 put is 4 lots, but I suppose there is a way to do this in the OTC market? What kind of bid/offer would you expect as a price taker? Is there a better way to do something like this? |
Inflatable trader |
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granchio
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| Total Posts: 1415 |
| Joined: Apr 2004 |
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this should be bread and butter stuff - spreads should be tight. am surprised at the open interest on the 1000. Am travelling at the moment, but i can put you in touch with brokers if necessary.
on the risk: yes indeed if you try to close it before expiry, you are exposed to the vagaries of the volsurface dynamics.
if you are sensitive to mark to market, that could be quite an issue - the closer to expiry, the lower that risk.
e.g. if you buy them today, and tomorrow SPX drops to 1000, it is quite likely that you will mark a loss (vol up, short vega, etc). if it does the same the day before expiry, you'll be quite happy instead.
you can do scenarios easily if you have a pricer with a parametric surface (email me offline in case) |
"Deserve got nothing to do with it" - Clint |
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filthy
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"e.g. if you buy them today, and tomorrow SPX drops to 1000, it is quite likely that you will mark a loss"
this.
it is really frustrating to have a position that will make money at expiry but you "got there too fast". a 1 by 2 really is profitable if you kind of groove down to your short strike. crashing there is really bad. |
"Game's the same, just got more fierce" |
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| So it is a case of smile dynamics eating my lunch then... I'd like to see a scenario with a parametric surface indeed. I suppose if the S&P dropped to 1000, the VIX would be around 70 or so? |
Inflatable trader |
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granchio
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| Total Posts: 1415 |
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if it went there quickly, quite likely VIX would shoot up towards those levels.
re scenarios: please remind me next week, i'll set you up with something
PS: looking in IB I see open interest on 1000 Z3 SPX put as 29000, more plausible |
"Deserve got nothing to do with it" - Clint |
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granchio
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| Total Posts: 1415 |
| Joined: Apr 2004 |
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| NT, sent you email |
"Deserve got nothing to do with it" - Clint |
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