On Mon, 3 May 2010 21:02:39 -0500, "mcatolico"
<mcatolico@mindsprin
>The easiest way to see how gamma works is to just look at the prices of the
>same ladder (or backspread) setup if the underlying were to move down a
>strike.
>
>For instance with GS at 150 or so on the close today the -150/+145/+140 put
>ladder is trading about $0.70 debit on the b/a. the -155/+150/+145 put
>ladder is bid at $1.50. so, in theory, if GS moved down $5 tomorrow (to the
>145 area) the -150/+145/+140 ladder would about double in value and, if
>implied volatility also rose on the selloff, it would be worth even more. It
>doesn't matter that if GS were to expire at 145 that the -150/+145/+140
>ladder would expire at the max loss point, the play is a short term bet on
>volatility and directional gamma.
>
>
I've been looking at what it would take, at the closing prices today,
GS at 142, to close out the increasingly ITM translates of the130p
+135p -145p ladder that was added to the position on 4/30 for a .83
credit. Can anybody explain why the effect described above doesn't
seem to be happening?
130p + 135p - 145p, -2.56 (a 2.56 debit is needed);
135p + 140p - 150p, -2.95;
140p + 145p - 155p, -2.75;
145p + 150p - 160p, -1.35;
150p + 155p - 165p, +.90 (finally!)
When the ladder has adjacent strikes, the desired behavior seems to
happen, as with the 140p + 145p - 150p that was put on for .75db on
4/26 with GS closing around 152:
130p + 135p - 140p, -.06
135p + 140p - 145p, +.35
140p + 145p - 150p, +1.25
145p + 150p - 155p, +2.85
150p + 155p - 160p, +5.50
I wonder if ladders are still feasible when theta starts to kick in
strongly, like starting next week. I am thinking of paper trading
double ladders for the same kind of volatile stocks that I have been
paper trading reverse iron condors. I'll would start for June this
coming Monday and close out all positions two Fridays before
expiration. I think I will simply roll the successful ladder in the
market direction once the underlying is between the two long strikes
and perhaps close down the unsuccessful side. It might do as well or
better than the reverse ICs.
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