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yep, she is long gamma in the right places.

I think it is you who has a lot to learn. Why would distributional assumption have anything to do with convergence? Imagine this - if there is no reason why options are priced unfairly, i.e the advantage is on the seller side, then everyone would become a seller, thus decreasing this...

Dude, I used to date a figure skater, and she'd always talk about landing on this edge, using this edge. Dddly enough, never wanted to slap her for it...

I don't trade equity derivatives, I have some equity vol sitting in my private account as part of some macro bets, but I do not trade it. So it is more of a fee. As a "system" approach person, why not sit down and make a simple OLS regression on realized vs implied volatility? Then look at a...

Well, a large (i.e 10% move) is a pure curtosis play. Personally, I feel that i equity/index world ATM vol is overpriced more then OTM vol, especially on PUT side (mainly because of jumps). Now, if you are good at playing distributional games, you might try doing something about it. You might...

I finally realized that there are two separate discussions going on here - there is a crowd of people like Mav and riskarb talking about advantages and disadvantages of short gamma/vega strategies, while a separate group of people does not really understand and keeps asking "so, do you sell or buy".

Interesting - at what deltas do you write 'em? 1 delta? Let's do a back-of-envelope calculation. Say you sell them at like 5 delta (2 stdevs). S&P dropped some 120 from 1090 in the course of two weeks (10bd), 11% move. Vols at time time were like 20%, so if you have sold puts for october...

Simple. You sold puts far OTM puts on September 10, 2001. You sold puts on Enron two days before the restatement announcement. You have heard of "gap risk", right? I have seen desks that posted tens of millions of losses on days like these.

Stupid question - if you are doing trades premium-neutral, are you a net buyer or a net seller? :D In rates-gamma world (board/merk + OTC treasuries and MBS options), I'd say up untill recently most desks were net buyers of gamma. Mortgage services sometimes throw out enormous amounts of...

I think what people are trying to say is that implieds are in general trading at some risk premium over the realized. What they forget is that there is a good reason for this risk premium. Traders who do not think of these things, would eventually realize it the painful way. Now, when...

returning back to the topic - it's worth looking at SABR: http://www.princeton.edu/~sircar/sabrall.pdf it is a bit tricky to implement, but it's worth it.

you do mean R. Merton, don't you? :D You know, JP Morgan has been dead for a while, way before the era of correlation trading

Why would you say that? The real trick to getting the skew problem right is getting the hedges to be 'skew compliant'. A vol model would have to fit the current skew and replicate the dynamics of the skew as both the ATM vols and forwards move around. There is a class of vol models that do that...

that means you'd have to pay to short a bond. pretty usual stuff in JPY world

Could you go through the calculations for the graph? Let me give you some simple calcs (data was taken of BBG, HP 12C calculator used): For 1/1/1960, CPI = 29.3, Dow = 679.36 For 1/1/2005, CPI = 190.7, Dow = 10783 Divider = 190.7/29/3 = 6.51 Adjusted Dow Jones = 10783 / Divider =...

actually, they can be hedged statically in options and dynamically in underlying. in essense, you are creating a inverse log-like payoff profile using a collection of options (easy for a market-maker these days, as everyone wants to sell wings) and you hedge the delta exposure. i'll send you a...

I'm still trying to understand what's the point of the whole discussion. Probability of the option being in the money is your delta (in forward measure), that would be calculated as p(ITM, +/-) = N(+/-d) where d= ln(F/K)/vol*sqrt(t) - vol/2*sqrt(t) and +/- would be call/put...

easy as pi, though there are a few ways to do it. first you need to realized that it's and imperfect hedge because of convexity premium. The real right way would be to build a yield curve out of EIBOR futures, price the swap note and bump each futures price. Given lack of desire to do...

it's a year-turn, nothing usual - the companies are doing window-dressing over the new years eve, so the money is tighter. 1.5bps actually aggregates into a 50bp or so pad over libor on that weekend.

You mean to say that it's ok to disregard volatility premium of the basis? I still remember days when the basis was worth a large bit over the actual CTD price. I'd say it's ok to look at CTD Price/Conv. Factor (which is the "adjsuted price"), but looking at futures cum basis is not right.