elitethink 12:29 pm on Tuesday, July 17, 2018

Positive Vega Put Spread

18% of Allocation:

STO SPX 9/14/18 2640 puts

BTO SPX 9/14/18 2620 puts

BTO SPX 9/14/18 1300 puts

1.15 credit

jsd501 12:34 pm on Tuesday, July 17, 2018

Why buy the 1300 puts? It is over 50% from where it is trading?
- elitethink 12:39 pm on Tuesday, July 17, 2018
  
  It is to invert vega, taking it positive, which eliminates risk in a crash scenario. thanks.
  - Jeff 12:42 pm on Tuesday, July 17, 2018
    
    Eliminates risk? That would require a stop point, correct?
    - elitethink 12:52 pm on Tuesday, July 17, 2018
      
      actually the structure is designed so an exit may not be necessary, or at least not require an exit at an inopportune time. When IV hits 50+ the t+0 goes flat to positive as secondary vega greeks become key.
      - Jeff 1:00 pm on Tuesday, July 17, 2018
        
        Yes, but in a true crash, you could expire anywhere between 1300 and 2620 and have a 40.00 loss. So you have to have an exit strategy of some sort.
        
        elitethink 1:04 pm on Tuesday, July 17, 2018
        
        so to your point an early exit would be required. exits are 4x the credit or if the short strike is hit.
        
        a 10% crash would take the spread ITM, and likely profitable if closed immediately.
smasty 5:28 pm on Tuesday, July 17, 2018

Hi Elite! First of all, I was in a class this week with a new guy at Theo named Matt…I really like him. He buys massive amounts of SPX 1100/1200/1300 long puts in Nov/Dec when vol is at these levels. He showed us, using “ThinkBack” on TOS that on Feb 5th…the vol spike caused the price to quadruple on SPX 1100 puts (140DTE). And there was trading in that strike.

But, I modeled your trade and it is not vega positive, it has -177 vega. I don’t see how your trade becomes risk free in a crash. If I give you a 40 point vol increase, yes your T+1 line rises nicely and vega is greatly increased, but still does not avoid significant losses.

I’d appreciate seeing a pic of your risk graph with a vol event, thanks!

The swing high to low on the Feb 5 crash was about $325 points on SPX, that would yield a $4200 loss on your trade, even with a 50 vol (10-lots).
- smasty 5:17 am on Wednesday, July 18, 2018
  
  Elite….I get your trade now. On a big vol event you basically have about a 200 point zone for exit before losses kick in. Nice design. So once the expiration break even is breached, you have a zone for exit with none/little loss.
- elitethink 4:39 pm on Wednesday, July 18, 2018
  
  glad you like it. I have screen shots of vol spikes where the 1200 puts went from .20 to trading at 18 points. That’s 9000%. My max risk is 19 points, my goal is to +vega at the short strike since vega curvature grows exponentally in a crash. small vega change, big effect. stay long and strong.
  - elitethink 8:44 am on Thursday, July 26, 2018
    
    bought my 7/27 2850×70 calls yesterday at 5.00. have 8/31 2890×10 on still, likely roll them higher.

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