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Rick Rose crude trade

Discussion in 'Round Table Presentations' started by DavidF, Feb 9, 2017.

  1. DavidF

    DavidF Well-Known Member

    If you backtest CL iron condors what you immediately realise (if you´re used to indexes) is that it´s much more of a two-sided trade. Due to IV skew on with indexes the call side is a struggle, you need to come in much closer to the money, and collect half the premium. This adds both upside risk and provides less protection for the put spread. With CL the OTM calls & put premiums are very similar and a delta 10 call is about the same distance from ATM as the put (varies with vol but roughly).

    Here´s a 51 DTE IC on CL versus SPX. To make things as even as possible I´ve collected about $6000 in premium with shorts at delta 10. The implied move on SPX (straddle price) is about 3% and 8% for SPX and CL respectively. I´ve set the P/L date at 38 days into trade. The CL is obviously much more user friendly on the upside. Question is whether "black swan" upside risk is more likely on oil than SPX and thus the risk premium on calls is priced in? Or are SPX/RUT actually inferior for "neutral" trades such as IC due to the call skew? Food for thought and thanks a lot to Rick for sharing.

    Screen Shot 2017-02-09 at 10.49.12.png Screen Shot 2017-02-09 at 10.47.50.png
    Last edited: Feb 10, 2017
  2. ACS

    ACS Well-Known Member

    You can make the argument that overpriced puts provide an edge in index options but the question is if either side gives an edge in oil or other commodities.
  3. DavidF

    DavidF Well-Known Member

    I´ll put it another way, a 10 delta call on crude on the trade I showed is about 4 points away from an expected move of 5 points (straddle cost). On the SPX the 10 delta call is about 15 points away from an 85 point expected move. If IC is a probabilty trade I see less risk with CL. However, the risk of being blown out on CL might be reason so no advantage over the long run.

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