Volatility trading
- Thread starter poopie
- Start date
no shame in that. i have an MBA, worked on wall street, spent several years trading on my own account, and a lot of that is flat fucking jibberish to me.
that's not to say its nonsense -- i know enough to know it is actually real jargon -- but surely he knows it'd baffle this audience, and its hard to imagine that wasn't the intent.
if it wasn't his intent and he's really that fucking tone deaf, he's got absolutely zero future as a marketer.
I have some questions if you're game to answer them.
1. What underlyings you trading? AMZN and the ilk?
2. Your split strike conversion example. That was expanatory of what some (defunct) firm was claiming ? And not what you are trading or this is how you structure yours as well?
3. What type of weather events ? Storms and what not? DId you trade around the BP spill a few years ago?
I am spending a lot of time trading a proprietary system that I have developed that is showing promise but requires some fine turning and I am game to watch a professional making some hay.
1. What underlyings you trading? AMZN and the ilk?
2. Your split strike conversion example. That was expanatory of what some (defunct) firm was claiming ? And not what you are trading or this is how you structure yours as well?
3. What type of weather events ? Storms and what not? DId you trade around the BP spill a few years ago?
I am spending a lot of time trading a proprietary system that I have developed that is showing promise but requires some fine turning and I am game to watch a professional making some hay.
1) I will be posting equity index and single name (SN) tickers. AMZN, sure, but primarily SPX, NDX.
2) No, the split-strike was in reference to someone posting a pic of the Madoff whistleblower. I was summarizing what Madoff stated he was trading. In reality, he wasn't trading anything. The post was attempting to dissect a SS-conversion; which is simply a synthetic bull vertical spread. I was dissecting the SS to show how it was untenable into bear market. Showing 12% gains was impossible with that strategy.
3) A common weather trade is to sell vola into mid-Atlantic snowstorms, but I also take positions into hurricanes, etc. (going long or short insurers, Re). I did buy BP in the low 40s IIRC, but I covered far too soon. I was long some HAL. Obviously weather trades don't occur very often--falls into the macro-category.
How about pointing us new guys in the right direction on where to start to understand as you do?
Start with Natenberg's Option Volatility; Allen Baird's "Option Market Making" and Euan Sinclair (Filthy's (his nick on the boards)) "Volatility trading." Nelken's book on exotics is decent, but well beyond the content in this thread.
Technically it is work IP, even though it was developed by me. I can run you through it some time.
Here is an asymmetric fly for next week's expiration. I don't use this front-end, but it shows the stress-test on the position. Long 10% of account in the fly from 67.80 (67.60 mid).
Long the Feb20 2175P
Short three Feb20 2075P
Long two Feb20 2025P
1/3/2 ratio paying 67.80. 10% allocation. Peak of the curve (max PNL) on Tuesday is 2084 (peak of white-line in image). Stops at 2107 (corresponds to expiration break-even). Last trading day is Feb19 with a "SET" cash settlement on the open of Feb20.
Long the Feb20 2175P
Short three Feb20 2075P
Long two Feb20 2025P
1/3/2 ratio paying 67.80. 10% allocation. Peak of the curve (max PNL) on Tuesday is 2084 (peak of white-line in image). Stops at 2107 (corresponds to expiration break-even). Last trading day is Feb19 with a "SET" cash settlement on the open of Feb20.
Volatility has not been marked down significantly for the 3-day weekend. I'd expect VIX to drop 30 cents into the close and actually trade flat to higher on Tuesday's open. The street typically shorts too much vol into the long weekend and is forced to cover at the open when vol doesn't get crushed.
Volatility is synthetic time. A 20% annual vol-figure today must rise to 21% in a week to maintain the premium on say an ATM straddle.
One month straddle is trading at 58.
In a week the straddle volatility must rise 100bp (from 20.00 to 21.00) to maintain that $58 premium, assuming that price is unchanged. So that is what is meant by volatility as synthetic time (or time as synthetic volatility).
So why not simply sell the ATM straddle if vol must rise to maintain the premium? We measure the gamma of the position to represent the risk of the underlying (spot) trading away from the strike. A large move away from the strike is the risk of short volatility. That risk to gamma is not stationary. The risk increases the farther that spot trades from your short strike. Gamma actually decreases as you "trade away" but delta is the first-order risk. Your delta position makes you "longer" as the mkt falls.
One month straddle is trading at 58.
In a week the straddle volatility must rise 100bp (from 20.00 to 21.00) to maintain that $58 premium, assuming that price is unchanged. So that is what is meant by volatility as synthetic time (or time as synthetic volatility).
So why not simply sell the ATM straddle if vol must rise to maintain the premium? We measure the gamma of the position to represent the risk of the underlying (spot) trading away from the strike. A large move away from the strike is the risk of short volatility. That risk to gamma is not stationary. The risk increases the farther that spot trades from your short strike. Gamma actually decreases as you "trade away" but delta is the first-order risk. Your delta position makes you "longer" as the mkt falls.
Here is an asymmetric fly for next week's expiration. I don't use this front-end, but it shows the stress-test on the position. Long 10% of account in the fly from 67.80 (67.60 mid).
Long the Feb20 2175P
Short three Feb20 2075P
Long two Feb20 2025P
1/3/2 ratio paying 67.80. 10% allocation. Peak of the curve (max PNL) on Tuesday is 2084 (peak of white-line in image). Stops at 2107 (corresponds to expiration break-even). Last trading day is Feb19 with a "SET" cash settlement on the open of Feb20.
Bought 2% in a SPX Feb20 2095/2105 bear put spread from 6.60 (6.30 mid). Hedge on asym fly.
In all seriousness, I literally don't know a single thing about trading but I've always been beyond curious about it. I seen where you posted some recommended books to read, I'll give them a look but I have a feeling even those might be a little over my head.
Anything else for a complete novice that's wanting to get into this?
Anything else for a complete novice that's wanting to get into this?
[ame="http://www.amazon.com/Options-Strategic-Investment-Lawrence-McMillan/dp/0735204659"]Options as a Strategic Investment: Lawrence G. McMillan: 9780735204652: Amazon.com: Books[/ame]