Thanks for taking us through this journey--it was educative and I certainly added a powerful weapon to my hedging arsenal.
I noticed that as VX futures dropped, implied volatility for puts dropped while that of calls remained elevated. For example, the 15 strike put's IV is 1/7th (21.7%) that of the corresponding call (146.57%) expiring on July 19th 2023.
This skew means that were I to extend the trade to July, I would collect a lot less premium from selling the put spread, therefore requiring a much further out of the money call to establish a costless (or small credit) combination. What accounts for the skew, and how would you adjust your trade structure to deal with diminished IV and therefore credit from selling the put spread?
I stink as I missed this comment (they are so rare here...)
The put spread is almost always going to be closer to where the market is when a trade like this is initiated and they skew is typically what you describe above. One of the benefits of this structure is the call tends to hold some value up to the roll date (what you highlighted in the IV differences.
An initial consideration is buying a farther out of the money put on the put spread part of the trade or not purchase a put at all, but maybe sell only an OTM call. This makes sense if you are combining the position with long equities since lower vol will likely accompany higher stock prices.
Thanks for taking us through this journey--it was educative and I certainly added a powerful weapon to my hedging arsenal.
I noticed that as VX futures dropped, implied volatility for puts dropped while that of calls remained elevated. For example, the 15 strike put's IV is 1/7th (21.7%) that of the corresponding call (146.57%) expiring on July 19th 2023.
This skew means that were I to extend the trade to July, I would collect a lot less premium from selling the put spread, therefore requiring a much further out of the money call to establish a costless (or small credit) combination. What accounts for the skew, and how would you adjust your trade structure to deal with diminished IV and therefore credit from selling the put spread?
I stink as I missed this comment (they are so rare here...)
The put spread is almost always going to be closer to where the market is when a trade like this is initiated and they skew is typically what you describe above. One of the benefits of this structure is the call tends to hold some value up to the roll date (what you highlighted in the IV differences.
An initial consideration is buying a farther out of the money put on the put spread part of the trade or not purchase a put at all, but maybe sell only an OTM call. This makes sense if you are combining the position with long equities since lower vol will likely accompany higher stock prices.