Best Thread The Options edge (Writing Vs Buying)
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Profitaker
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How about you clearing off and never ever posting again on any T2W thread so long as you live ?CYOF said:
zupcon
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CYOF said:
Hi CYOF
If your a happy customer, thats great, I'm pleased if youve found something that resonates with you. I think its even appropriate to state that your working with John, and that you reccommend his service from time to time. Were all grown up's, we can all conduct our own due dilligence, and reach our own conclusions (which may or may nor be correct).
I think the major issue, is the frequency and to perhaps a lesser extent the style in which a reccommendation is made.
Why would I call a link a bananna
?, I assure you, the monkeys in the cage that John so kindly provided can definately spot a banana when we see one . Joking aside, I think that the link posted by Profittaker was on topic, he's simply pointing our attention to an aledgedly independant study regarding the topic that were supposed to be debating. Some of us may benefit from reading this material, and our understanding of a difficult concept, may be improved, or the waters may be muddied further. T2W are trapped between a rock and a hard place regarding vendors, and its a subject thats been discussed at length previously, and I have nothing really to add to that debate, other than its a fine balancing act, and theyve got it about right.
Regarding censorship, you might just be surprised to hear that my thinking is probably very similar to yours, but there's always a way around the censors, and presentation plays a very great part, you really can get away with murder if you really want to.
In the final analysis you either accept the rules or you move on, if enough people complain, and this has consequences that are detrimental to T2W business interests Im quite sure that the rules will be reconsidered, but I guess most here will be comfortable with the status quo.
Thats just one of the downsides of chosing to participate in a demorcacy.
I am glad to have been of some assistance in this matter, do let me know if I may be of further assistance.
regards
zu
Profitaker
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zupcon said:
Any option which expires ITM is automatically exercised so I assume you’re referring to early exercise of an American style option. Early exercise really is rare and I believe is overdone by brokers that have a vested interest in you closing / rolling / legging your ITM position. The fact is that the option holder will almost always do better by selling the option rather than exercising it early and will have handed you a gift if there is any time value remaining in the option.
The only exception to this is a front month ITM call option when a dividend is due as the only way to prevent your call option losing significant value is to exercise it and capture the div. But, you should be able to see this coming !
et al
Just to reiterate some of Profitakers comments on Volatility.
Volatility is the major component within the pricing models [theoretical].
Implied Volatility is the price that you pay today for the "markets vote" on what future volatility is implied.
Different securities, based on any number of factors will have variable volatilities, on a historical basis, and volatility priced today [in the Option] may be higher, or lower than this historical volatility.
As volatility cones, the Option may be "overpriced, or underpriced" based on IV/HV
If overpriced, a "rational" strategy would be to sell volatility.
If underpriced, to buy volatility.
Once a volatility judgement is reached, then other risks can be theoretically calculated via the various greeks, to ascertain if, in point of fact, the volatility represents a trade that based on "probability calculations" is worth taking.
If you take a purely "directional" viewpoint, ignoring volatility, then Options can be profitable still should you be correct in your directional call, however, at certain times you can be right about direction, yet still lose, or break-even, as the volatility was grossly overpaid for, and theta bleed has further eroded your profits.........................etc.
jog on
d998
Just to reiterate some of Profitakers comments on Volatility.
Volatility is the major component within the pricing models [theoretical].
Implied Volatility is the price that you pay today for the "markets vote" on what future volatility is implied.
Different securities, based on any number of factors will have variable volatilities, on a historical basis, and volatility priced today [in the Option] may be higher, or lower than this historical volatility.
As volatility cones, the Option may be "overpriced, or underpriced" based on IV/HV
If overpriced, a "rational" strategy would be to sell volatility.
If underpriced, to buy volatility.
Once a volatility judgement is reached, then other risks can be theoretically calculated via the various greeks, to ascertain if, in point of fact, the volatility represents a trade that based on "probability calculations" is worth taking.
If you take a purely "directional" viewpoint, ignoring volatility, then Options can be profitable still should you be correct in your directional call, however, at certain times you can be right about direction, yet still lose, or break-even, as the volatility was grossly overpaid for, and theta bleed has further eroded your profits.........................etc.
jog on
d998
zupcon
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Profitaker said:
Yes, correct I was (at the time I was thinking this through I was trying to understand what effect early exercise would have on the 80% expire worthless statistic, and trying to find some stats to shine some light on the problem)
Im still very much trying to get my ducks in a row, and thats why Im continually asking CYOF and co to specify if were talking about American or European style, it would at least give me a bit more focus.
Thanks for the earlier response too, Im still working through it, and will probably get back to you
kind regards
zupcon
Profitaker
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Ducati - a breath of fresh air !
Zup - American or European doesn't make any difference to the writer / buyer debate as the value of early exercise is priced in. You could actually go long one style and short the other, known as an atlantic spread.
Zup - American or European doesn't make any difference to the writer / buyer debate as the value of early exercise is priced in. You could actually go long one style and short the other, known as an atlantic spread.
Penrithem,
If you are correct, then long (calls) will give you the edge. Simultaneously, short puts will give you the edge. So which is it? Long, short, neutral, synthetic?
Your example of the general direction over 100 years assumes one will have the cash to continually re-finance new positions owing to losses on bad trades. Few of us have.
Profitaker,
Re your book reference: “shortcomings of current theoretical pricing formulae…how one of the world's largest hedge funds foundered through its misapplication of the Black-Scholes formula”.
Being a cynic with a distrust of what, superficially, appears to be maverick, could you give a brief outline of what Gallacher regards as shortcomings in B-S?
The hedge fund reference. Don’t tell me this refers to LTCM?
Separately, I think you mentioned FTSE implied in another post, and I assume this is what you trade. A long time ago I kept a daily record of FTSE implieds for over two-three years and there was a fair degree of predictability, I reckon 80-85%. I did paper trades (long vol vs short vol) and the results were brilliant (if only I had the cash) with a good profit within a max of three days, ie positions did not need to be held beyond three days.
For the last few months I’ve been recording implieds for DAX and STOXX. Initially, this was derived from bid/ask but not all quotes are continually or even regularly updated. This produces erratic, and therefore worthless, data (and fcuks up anything re skews). I now concentrate on implieds from Last Trade.
Obviously, I need considerably more data before I can extrapolate. However, the limited data shows a distinct lack of ‘vol of vol’, hence little opportunity. However, upper and lower levels of implied are relatively easy to determine. The problem is they take a long time to play out . Maybe the markets have changed.
Could you give an indication of the vol shifts and time periods re the FTSE (my thinking is FTSE may be potentially more appropriate)?
Thank you in anticipation.
Grant.
If you are correct, then long (calls) will give you the edge. Simultaneously, short puts will give you the edge. So which is it? Long, short, neutral, synthetic?
Your example of the general direction over 100 years assumes one will have the cash to continually re-finance new positions owing to losses on bad trades. Few of us have.
Profitaker,
Re your book reference: “shortcomings of current theoretical pricing formulae…how one of the world's largest hedge funds foundered through its misapplication of the Black-Scholes formula”.
Being a cynic with a distrust of what, superficially, appears to be maverick, could you give a brief outline of what Gallacher regards as shortcomings in B-S?
The hedge fund reference. Don’t tell me this refers to LTCM?
Separately, I think you mentioned FTSE implied in another post, and I assume this is what you trade. A long time ago I kept a daily record of FTSE implieds for over two-three years and there was a fair degree of predictability, I reckon 80-85%. I did paper trades (long vol vs short vol) and the results were brilliant (if only I had the cash) with a good profit within a max of three days, ie positions did not need to be held beyond three days.
For the last few months I’ve been recording implieds for DAX and STOXX. Initially, this was derived from bid/ask but not all quotes are continually or even regularly updated. This produces erratic, and therefore worthless, data (and fcuks up anything re skews). I now concentrate on implieds from Last Trade.
Obviously, I need considerably more data before I can extrapolate. However, the limited data shows a distinct lack of ‘vol of vol’, hence little opportunity. However, upper and lower levels of implied are relatively easy to determine. The problem is they take a long time to play out . Maybe the markets have changed.
Could you give an indication of the vol shifts and time periods re the FTSE (my thinking is FTSE may be potentially more appropriate)?
Thank you in anticipation.
Grant.
Profitaker
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Grant
The book is out of print, was lent to me, and I don't have it now. It is an interesting read, not least because he didn't just look at one options market, but virtually all markets in which options are traded.
Can't remember specifically what he refers to as the BS shortcomings, but I would imagine the usual - that it assumes volatility is constant, that it assumes continuous time etc. That said, nobody has come up with (IMHO) a more robust model, all things considered.
I do remember that he advocated a strategy along the lines of selling short straddles and dynamically hedging them. Can't remember the specifics, but I do remember thinking it was rather subjective.
Well worth a read if you can get hold of a copy.
The book is out of print, was lent to me, and I don't have it now. It is an interesting read, not least because he didn't just look at one options market, but virtually all markets in which options are traded.
Can't remember specifically what he refers to as the BS shortcomings, but I would imagine the usual - that it assumes volatility is constant, that it assumes continuous time etc. That said, nobody has come up with (IMHO) a more robust model, all things considered.
I do remember that he advocated a strategy along the lines of selling short straddles and dynamically hedging them. Can't remember the specifics, but I do remember thinking it was rather subjective.
Well worth a read if you can get hold of a copy.
et al
*Continuous & Efficient pricing [continuous time]
*Liquidity available at "efficient" prices
Of course these variables are not always present during market "dislocations" hence the Black Swan events that crop up with alarming regularity within financial markets.
jog on
d998
*Continuous & Efficient pricing [continuous time]
*Liquidity available at "efficient" prices
Of course these variables are not always present during market "dislocations" hence the Black Swan events that crop up with alarming regularity within financial markets.
jog on
d998
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Posts intended to derail this or any other thread will be removed. The number of messages that have had to be deleted on this thread by myself and Barjon recently is unacceptable and is a waste of our time and the original posters. If you have grievances then these can be sent to us by pm - or debated in the feedback forum. Please do not litter discussion threads with off topic remarks.
Profitaker
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Grant
"Could you give an indication of the vol shifts and time periods re the FTSE (my thinking is FTSE may be potentially more appropriate)?"
Do you mean the the volatility of the volatility (v.vol) ? Or vol skew ? or what ?
"Could you give an indication of the vol shifts and time periods re the FTSE (my thinking is FTSE may be potentially more appropriate)?"
Do you mean the the volatility of the volatility (v.vol) ? Or vol skew ? or what ?
Future Volatility must be estimated, guessed, by the trader.
As volatility cones, and there are GARCH & ARCH studies that demonstrate this mathematically, historical volatility is a good place to start.
If the current price of the Option [Inplied volatility] is far above or below the historical, this is the starting place for a strategy.
Credit spreads are hugely effected by volatility [as are all Option trades]
Selling low IV is fundamentally the wrong position to assume.
You buy low, sell high........the mantra of the market.
Should you wish to exit prior to expiration, you may have the direction correct, but still make a loss if you were to exit, as IV has exploded in "anticipation" of an event in the future.
On yesterdays pricing, your trade carried;
*IV of 12%
*HV = 11.06
*Volatility margin = 0.94%
As a premium for selling, this is quite slim.
As your trade is *seemingly* directional, you are willing to risk circa $1500.00, then;
Buy 10 Puts Strike $125 Expiry March 2007 @ $1700 and this equals your maximum loss.
Profit potential is greater than $610 [substantially]
Probabilities;
Target #1 = $123..........Target #2 =$120
IV = 12%
HV = 11.06%
Fair Value = $1.90
European expiry
ITM = 45.5%
Worthless = 54.5%
Probability Price > $123.00 = 68.2%
Probability Price between $123 & $120 = 16.5%
Probability Price < $120.00 = 15.3%
If, we have a correction, IV could jump to circa 16%+ [the higher range of DIA IV]
This would positively affect the value of your PUT in addition to any *directional* influence
Say on 20 February IV jumps, your theoretical value might be circa $1.96, with ZERO change in Price, simply a jump in IV, add in a drop in price of say $1.00 and the value jumps to $2.45
You can show a profit in two separate scenario's.
jog on
d998
Profitaker
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Anyone here use (G)ARCH ? Never ran any trials, but my first thoughts are that it cannot take into account upcoming events like earnings releases / trading statements / important economic or political events. Maybe that's why I've never really looked at it.
My two penneth worth on the bull put spread by Frugi.....
It is generally either a good time to buy vol or a good time to sell it, but it can never be both at the same time. If I was bullish and thought vol was cheap I'd buy calls, bullish and thought vol was expensive I'd sell puts.
My two penneth worth on the bull put spread by Frugi.....
It is generally either a good time to buy vol or a good time to sell it, but it can never be both at the same time. If I was bullish and thought vol was cheap I'd buy calls, bullish and thought vol was expensive I'd sell puts.
Well, how else would you evaluate probabilities ? Candlesticks ? Bollinger bands ? Moving averages ? Flip a coin ?Frugi said:
Profitaker
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Ducati
What's a "Volatility margin = 0.94%" please ?
What's a "Volatility margin = 0.94%" please ?
Profitaker said:
Simply the margin between the IV & HV
If there is a larger margin, it just suggests the prudent strategy to first consider.
In Frugi's example, I have the HV @ 11.06% and IV is priced @ 12%
This isn't a higher enough volatility spread to recommend a selling strategy for myself.
jog on
d998
Profitaker
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Ducati
Gotcha, thanks.
I would never short any options unless IV > 20 day HV, though I have to admit the actual value I'm looking for is more gut feel.
Have a good weekend.
Gotcha, thanks.
I would never short any options unless IV > 20 day HV, though I have to admit the actual value I'm looking for is more gut feel.
Have a good weekend.
