OK, from your confusion I see my stupid mistake. I was referring to the same PFs you guys were discussing. I assumed that when you say "b/e outcome on a strike-touch" you didn't refer only to the lower strike (the PF strike) , but also to a calculated one on the upside, to pre-define the bail out if the underlying shoots up (being in a short-delta bet). Knowing your attitude (adjustments are death) , I figured PF dealt with the upside risk in advance (besides risk being merely capped by size).

I haven't modeled one in awhile, but the ones that model well are usually fairly symmetrical/neutral. Normally, I am not too concerned with upside B/E as it's the un-leveraged outcome.

I have been modelling and backtesting PF , and I need a clarification on a certain issue: I cannot get b/e outcome on a strike-touch on the upside, only works on the downside strike-touch. I always get the upper strike too close to the spot (3-5%), market gets there quite quickly (in the majority of 2009), and when it does, the PF is underwater. Am I calculating the upper strike erroneously (P strike + cr from PF)?
help much appreciated

I am confused here, are you talking about up-strike PFs? SPX at 1100 and PF strike >1100?

ES 1100
ES 1100 straddle 60 (90)
ES 1040 1x2 PF 82

I'll solve for the $400 per contract under on the PF credit and choose a strike that results in something approaching 20-deltas short. Obviously there is convexity, so this is a generalization.

I had a close look at the PF´s and also simulated some across various instruments.
One thing that was conspicious, was the fact, that almost all 1x2 PF´s at or outside the atm - straddle range met or exceeded the benchmark of atm*1.5 but almost all 1x3 PF´s were below the benchmark at the same strike, even when the VIX was at it´s highs during the crash. The only instruments, that feature enough skew to trade 1x3 PF´s above atm*2 benchmark are 3xleveraged ETF´s like FAZ and the VIX - options.
What do you guys do about it when you want to trade the index or stocks?? only trade 1x2´s, don´t trade PF´s at all or select different strikes??

the next thing that I´m mulling over is delta. I tested a 1x3 PF in FAZ (above atm, because skew is to the upside currently) which was market above atm*2 and this thing was delta neutral/sligtly negative, however all the 1x2 PF´s that I tested in the SPX, had neg delta´s already. To settle this once and for all: A PF is meant to be slapped on at delta neutrality, right? Whenever there are negative delta´s involved (in the index), the skew/IV is just not big enough to neutralize deltas outside atm - straddle range. To arive at neutrality, you would have to move the position closer to atm, but then you won´t have enough cushion at strike touch. I ask this, because I thought in the beginning, that some -deltas are actually wanted to give some room to the downside, but now I guess, thats wrong.

With the FAZ PF, I was able to go even further OTM to be neutral, because the skew was so large, so this one would be ideal.
To come to an end, PF´s are actualy designed to be traded like straddles (completly delta neutral in the beginning), but they take advantage of skew and survive a strike touch better, them an atm - straddle, when conditions are right.

If you say yes to all, I think I fully understood the concept behind it

Thanks for reading

It was definetly not my intention to critisize you or your trading, it´s was more or less meant to be a question how you overcome the problem with skew concerning a ratio spread or if you trade them for a special reason (e.g. capping downside deltas).

No offence taken; it is always interesting to have fresh eyes questioning logic [if there is any].
I am not trading the ratio per se or suggesting it has an edge; it just happens to be the current resting point for my trade; could easily be a Fly tomorrow...
If the market starts heading south whilst I have the put ratio on; I could and have [in no particular order] flatten the ratio; roll the risk down with put verticals; sell calls/call spreads; buy OTM put wings [front or current month] ...  take your pick ..

I don't necessarily see an edge in the position itself; just aim to manage in a disciplined defensive manner ...

Cheers
James

James, thank you for your example. Nice adjustment, although I wouldn´t be comfortable about the frontspread.

Trademark, as I said you have to adapt the trade to your own style, I see the PF as a good defensive starting point for a position and I have developed a reasonably straightforward framework of adjustments ... maybe too simple for you hedge fund guys  .... cheers, James

Loss of $1,200 or so based upon strike touch. ATM straddle loses $500 per lot on a touch of 1035. I wouldn't trade the ES PF here. Straddle is a better bet here.

risk, here is an actual example for clarification. Options are all APR exp.
SPX: 1084
ATM straddle: 74.00
so benchmark for the 1x2 is 111.00 and for the 1x3 = 148.00

the first 1x2PF that crosses my way and meets the benchmark of 111.00 is the 1080 strike, but I think it´s pretty obious, that this one should not be traded. The cheapest 1x2PF can be found at 1060 with a mark of 108.65, also a little to close to ATM for my taste.
so I check the strikes out of the atm straddle range --> below 1010 and take the 1x2 at 1000 for a credit of 124.90

atm volty is 21% and IV at 1000 is round about 25.30%, which means that I will have round about 400bp IV - cushion to the upside for a same day trade to 1000. Additionally, I have delta neutrality at 1040, -480vega at striketouch and 1125 as upside breakeven.

When I´m looking at this position right now, I wouldn´t want to slap it on. 400bp skew is just not enough to protect against a tanking SPX, with the VIX down to 22 from the highs at 29. Also I would need a drop in volty of >200bp in strip vol to come out B/E at a rally of 20pts.  At least, I would want to have >700bp skew and a top in the VIX. However, compared to a plain short straddle, it looks much more robust.

Guys, just look over it and decide, if my comments are sound or if it´s just BS and I made a mistake here and there.

Again, that you very much.

Details of my current PF for you to mull over; sized as a 1 lot; FTSE trades at £10 pp;

* March PF on FTSE [-2 5100p/-1 5100c] sold for 522p credit with 56 DTE.
* Adjusted using -2c 5100c / +3 5300c sold for 110p credit with 51 DTE
* Leaving -2p 5100 / -3c 5100 / +3 5300c for 632p credit [= synthetic -5 5100p / +3 5300p ratio]
* Current unrealised pnl = 180p with 31 DTE
* Planning to close March / Open April this week as I don't run overlappong positions.

Suggest you trade PF in relatively small size to get a feel for whether you like the concept.
Cheers
James

I am long GOOG shares for a quick-flip.

Do you write options?

The reason I ask is because I crunched out, for fun, some fund calls that had a lot of interest and volume. When I crossed referenced their delta's to their underlying indexes, it became apparent there was no way, short of a "second coming", that those strikes would ever be breeched.

The guys (or gals) that wrote those things had to have known that too, yet the board couldn't get enough of them! Sheer genius.

It took a lot of effort to come to that understanding. Had it been more than curiosity (eg a play) a load would've been lost, or the market would have passed before the advantage was seized. Desperately seeking a shortcut!:)