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these spikes are called skewness of i.v. and the risk/reward is like
russian roulett.
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> From: Stewart Taylor <staylor@xxxxxxx>
> To: omega-list@xxxxxxxxxx
> Subject: Re: Delta neutral option strategies
> Date: 25 August 1998 18:32
>
> >Date: Tue, 25 Aug 1998 12:30:45 -0500
> >To: Scott Hoffman <trader20@xxxxxxxxxxxxxx>
> >From: Stewart Taylor <staylor@xxxxxxx>
> >Subject: Re: Delta neutral option strategies
> >
> >
> >>You commonly hear that short neutral spreads work about 80% of the
time,
> but you can get killed on the big unexpected move. (Case in point,
> Neiderhoffer) This is compounded by spikes in implied volatility as well
as
> the speed at which the position becomes unbalanced (gamma).
> >
> >I ran delta neutral positions (cross hedging MBS portfolios and mortgage
> banking pipelines against bond and note options). I always left a bunch
of
> short option positions sitting around but I always always always had a
plan
> in place to defend the position. I have never made very much money in
long
> delta neutral positions (except as a directional call against an
> underlying). To much time and vol. exposure.
> Stewart Taylor
> Taylor Fixed Income Outlook
> Voice: 501-219-9774
> Fax: 501-228-0963
> E-Mail: staylor@xxxxxxx
> Web Site: http://www.cei.net/~staylor/
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