23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
A Good Ex-Skews
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It’s important to take skew into consideration. Because the January calls
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have a higher strike price than the February calls, it’s logical for them to
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trade at a lower implied volatility. Is this enough to justify the possibility of
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selling the lower volatility? Consider first that there is some margin for
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error. The bid-ask spreads of each of the options has a volatility disparity. In
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this case, both the January and February calls are 10 cents wide. That means
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with a January vega of 0.34 the bid-ask is about 0.29 vol points wide. The
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Februarys have a 0.57 vega. They are about 0.18 vol points wide. That
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accounts for some of the disparity. Natural vertical skew accounts for the
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rest of the difference, which is acceptable as long as the skew is not
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abnormally pronounced.
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As for other volatility considerations, this diagonal has the rather
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unorthodox juxtaposition of positive vega and negative gamma seen with
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other time spreads. The trader is looking for a move upward, but not a big
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one. As the stock rises and Apple moves closer to the 420 strike, the
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positive delta will shrink and the negative gamma will increase. In order to
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continue to enjoy profits as the stock rises, John may have to buy shares of
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Apple to keep his positive delta. The risk here is that if he buys stock and
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Apple retraces, he may end up negative scalping stock. In other words, he
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may sell it back at a lower price than he bought it. Using stock to adjust the
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delta in a negative-gamma play can be risky business. Gamma scalping is
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addressed further in Chapter 13. |