In the last few weeks a few themes have been hitting me:
- "passive bubble" - noticing a resurgence in discussions on the indexing % of market- tweets, realvision, other youtube
- TSLA, AAPL , others ripping- specifically having crazy skew numbers in the options, ie TSLA weekly strikes going to 2x spot
- Other constant discussions on tail risk/ general portfolio construction- ie bonds having no place in a 'retirement' portfolio
In the journey to constantly be reevaluating, I'm meditating on how to approach this market, and create option structures that make sense. As I've said before, I'm not a 'long stock' person, as there is no way to model annualized roi or risk, and no adjustments to make. On top of that, as I'll get into, I don't think 'long stock' as a structure makes sense in the current index controlled market.
In addition to "no long stock," I'm increasingly getting away from short puts in the big liquid underlyings, as I don't think the risk structure matches how index controlled markets work.
As almost any passive/index mechanics video will go into, Vanguard/Fidelity et al. are forced buyers or sellers at any price, meaning the characteristics of the large liquid underlyings (FANG) are "grinding/shooting up" or "crashing down".
The passive flow dynamic doesn't really allow for a "grinding down" in the FANG/ large caps as there is a constant wave of forced buyers, and sudden liquidity events. As many will lament a lack of "price discovery," i'm looking at if from a purely mechanical angle: I don't think the current large caps structural movement matches short strangles/condors or even short puts. Short puts have to be constantly rolled up into decreasing vol premium, and keep the same downside risk. Strangles have the same downside, and almost more often are burned to the upside gamma.
Yes, there are other ETFs like non US EWW EWZ EEW, etc that are potentially better structures for pure short strangles, given the passive flows, but those are not a main focus of mine. Those don't have the same upside call buying/ gamma squeezing, and overall have way less tail skew making certain spread structures unavailable. In a correlations =1 Feb/March scenario, those strangles wouldn't help.
Given the "grinding up/crashing down" structure mentioned above, the main structures I'm looking at are call ratio/ calendars. Depending on the underlying/skew, I'm looking at either long verticals and a short call further out to finance it, or a longer dated long call vertical, with shorter term short calls against it.
For example a recent $TSLA position:
Trade on Aug 17th
+2 Aug 21 1990 call ~12.27
-2 Aug 21 2000 call ~11.48
-1 Aug 21 2300 call ~2.59
for a total credit 1.01, with no downside risk.
(I ended up taking it off for another ~1cr, so basically doubled the credit in 2 days as it moved up. Little did I know this could have hit the max profit by that friday...)
The point of this structure is to flatten out the damage as these crazy skew stocks move against you, and actually add on the chance of a higher win in specific cases. Selling a normal single call and taking the higher credit would be a bloodbath all the way up to expiration.
In many cases when the 2 or 3rd day is way against you on a short single, this version would let you get out at a profit at that point, and potentially roll the strikes up to keep going safely.
As a final aside on this structure, I've been wrestling with the pursuit of convexity since Feb/March, when I took off some long vol hedges very early for a few hundred profit, which would have later gone up to ~20k. When the option structure is pure short 1 option, with no ratio component, there is no chance to have outside good events, only crazy damage against you. This $TSLA spread kept properties of the single short option, while giving multiple paths including a crazy max profit which my psychology wouldn't even allow to materialize, but nevertheless is there in the background. I plan for annualized ROI based on the minimum credit only, but still have a chance to wake up to a bigger win.
This structure only works in the high skew and specifically high notional price stocks, a space which curiously enough is shrinking this week with the TSLA and AAPL splits. When the notional price is lower, the spread section of the trade is about the same, with the single leg credit being much smaller, and not able to compensate the spread. I'll have to look at these chains post split, but after that we probably only have AMZN and GOOG to look at.
A trade from the 2nd structure in MSFT:
on Aug 10
+1 Sep 18 215c ~5.84
-1 Sep 18 220c ~4.24
for total debit ~ 1.60
then
-1 Aug 14 220c ~.34
giving the whole trade a potential $5 spread for 1.26
Then as each week went on, i'm selling close to the 220 strike for the week, or hopefully a little higher, to lower the cost of the $5 spread to almost 0 or a credit.
This trade has more downside, but is possible in the lower skew/ lower notional price stocks.
The core idea is the same though, I'm getting potential to access the "grinding up" characteristic of the large cap/ passive stocks, while lowering or eliminating the "crashing down" liquidity events.
On a day to day PnL level, this eliminates the large moves from short options going against you, even if the total spread will be a loser, the long vertical flatten out the damage.
These are 2 samples that I really think harness the structure of dealing with passive right now, more than boomer 'long stock + long puts', or a blend of several long "uncorrelated" underlyings.
These structures are meant to harvest the current market structure, up until the next major shift or liquidity event, at which point we are not blasted by that downside move, and can re access at our leisure as the data comes in.
I am just constantly blasting my blood pressure seeing "professional" market idiots with the "well I certainly wouldn't long OR short X here, it could definitely still go up a ways, but will obviously crash at anytime... I think there are much better opportunities in Y (which has non existent options and has been flat with long deltas only)"
That is what markets are, making an assumption and picking a structure, trading profitability for probability.
