Optionvue Update

Agree Ron... It's a team work. You can explain the concept much better than I can.
:)
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You were spot on in explaining that shifting the long strike down is a better adjustment if market rallies and the IV skew steepens. I would like to share my thought about the choice between shifting the butterfly short strike up and shifting the right leg down. Both creates positive delta but they are suitable for different scenarios.

1. Shifting the right leg down usually adds negative theta and positive vega (depends on where the right leg is relative to ATM). In normal situation, that's not desirable. But after a sell off and when market is rebounding, the right side of the T+0 will drop and delta becomes negative much sooner than expected due to the steepening of the IV skew. As a result, the adjustment point will likely be well within the tent. If so, the position theta will likely be quite rich and vega quite negative. Therefore, adding some negative theta and positive vega isn't too big a deal. As you nicely explained in the video, the steepening of IV skew will benefit this adjustment.

2. However, in situations when the market has gone through a long rally, while IV will be low and IV skew relatively steep, ATM will likely be on the right side of the tent or even outside the tent. Delta/theta ratio will likely be high and vega approaching neutral to positive. Therefore, we can no longer shift in the right leg as we cannot afford to add any more negative theta nor positive vega to the position. In this scenario, shifting the short strike up is more appropriate because this adjustment will add positive theta and negative vega instead.

Thought I highlight the difference between these two adjustments.

Great summary Kevin.

One comment I have is that rolling the middle shorts forward introduces more downside risk than rolling upper longs in.

So, in the case where IV is very low and the market has been grinding up, the M3 T+0 is relatively more stable even over the upper sea of death because IV can't really go lower and skew can't steepen further. The one caveat of rolling shorts forward in this scenario is that (absent other adjustments) you are introducing more downside risk in the event of a sharp pullback (like we had earlier this September). If you do roll shorts forward, look to manage downside risk by also rolling in lower longs -- especially if that lower roll is super cheap.
 
But from a skew perspective, it would be advantageous to place the short strike above ATM and the long strike at or slightly below ATM.

View attachment 2518

I would like some clarification to above statement. Is the above statement referring positioning of the short & long strikes relative to the what is shown in Skew graph ?
Does this suggest that if the Market is as 1150 than place the shorts at 1140 & upper longs at around 1160 OR
Does this suggest that if the Market is as 1150 than place the upper longs at 1140 & shorts at around 1160 ?

Posted by Sanjeev B
 
I would like some clarification to above statement. Is the above statement referring positioning of the short & long strikes relative to the what is shown in Skew graph ?
Does this suggest that if the Market is as 1150 than place the shorts at 1140 & upper longs at around 1160 OR
Does this suggest that if the Market is as 1150 than place the upper longs at 1140 & shorts at around 1160 ?

Posted by Sanjeev B

Firstly, the context is the skew must be flat to begin with. That means, the expectation is for the skew to steepen once the market moves up and the IV drops. IV of strikes above ATM will drop relative more than IV of strikes below ATM. In that case, it's advantageous to place the short above market and long below market. So, using your example, if market is 1150, then place the long at 1140 and the short at 1160.
 
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