We recently added multi-leg support to our Attribution Visualizer, our tool for allowing you to track an option contract’s p/l assuming you hedged the delta daily. The tool breaks out the p/l according to gamma + theta (which sum to realized p/l) and to implied vol (vega p/l).
With multi-leg support, you can now entertain yourself with countless questions. Like “how would a masochistic skew trade work out if I trade a risk reversal and hedge daily?”
I ran a few risk reversals through the attribution tool.
USO: Buy call/sell put after the Iran war started
Date: March 13
Expiry: June 18, 2026 (~ 3 months)
Spot: $119.92
Risk reversal: 140c / 100p (equidistant strikes ~ each 17% OTM)
Initial hedge: Short 73 shares per risk reversal (the RR had .73 delta)
The war had already flipped the skew hard toward upside strikes. The $140 call traded 94% vol against the $100 put’s 83% IV. It cost $5.83 in option premium.
At expiration, the stock expired at $114.87
So how did it work out to buy the premium IV?
Not good. The cumulative delta-hedged p/l was a loss of over $4.50 as you lost to both realized vol and vega. At the initiation of the trade, paying the premium vol meant you were flattish gamma but paying theta.
You were also long vega because, despite the options being equidistant, at a generally elevated vol level the lognormality of the underlying distribution and its associated positive skew pumps up the delta of calls. In fact, the 140 call was ~.47 while the 100 put, which is closer in dollar space, was only .27d. The higher call delta says the 140 strike is much “closer in vol space”. That’s why the equidistant risk reversal cost so much premium to buy the call. You are buying at OTM that has a delta that we usually associate with near ATM options!
Let’s adjust the strikes so that our call and put are both ~.25d
To equalize deltas against the $100 put you have to buy…drum roll please…
The $190 call! 58% OTM for 101% IV. Now you collect a $2.17 credit to own the call and short the 100 put. Your initial Greeks mostly vanish.
The trade still loses, but it fares much better as the loss is only $1.29.
It’s tempting to conclude paying a premium vol doesn’t work. But if you bought the much cheaper call and shorted the put on a hedged riskie in SPY before the war started, then you got smoked if you chose April 30th expiry (SPY bottomed the last day of Q1), recovered once the market started rallying, only to lose again as the market…continued rallying! SPY riskie:
I’ve said it repeatedly over the years in different ways, but riskies are the whips and leather of the option world. If you bought the call on the SPY Feb 720/650 risk reversal on the first trading day of the year and hedged daily until expiration, you actually would have lost $.25 despite the following:
- the trade collected about $2.75 in premium at the outset
- the stock’s closing prices stayed inside the range of $675-$700
- the call you bought was 10.2% IV and the put you sold was 16.8% IV
In Financial Hacking, Philip Maymin invents an optimistic junior trading assistant who sits down his bosses at the bank to explain that he has found an infinite money machine. Selling the high IVs in SPY puts and buying the cheap IV in SPY calls. Maymin asks the reader to figure out why this logic doesn’t work.
Our tool provides the day-by-day audit which feeds the charts. Armed with that, Claude does an admirable job of not only answering Maymin’s prompt to the reader but also pinpointing exactly which days carry the biggest weight in the answer.