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Ok first of all you're taking a lot of liberties here. You're calling me out and you have no idea who I am or what I know or don't know. I am in fact very familiar with the mathematical derivation of black-scholes. I agree with you that BS is still very useful in practice -- it's what I use...

Agreed. To each their own...it's what makes a market. Although I will say that I've never encountered a formula quite like Black-Scholes. You're right. It's all wrong. But the best part is that you can plug a bunch of incorrect numbers in it and get the right result -- $!

In this instance, assuming you bought/sold 1:1 I would not worry too much about vega. The point is to try and earn the spread between the two options. Assume actual vol will be somewhere between the two -- i.e. 20.75%. It doesn't need to be but for the sake of simplicity assume it is. By...

"When the stock price is $67, it's less than the $70 strike price, so the option is worthless. But don't forget that you've paid $315 for the option, so you are currently down by this amount." This is misleading and wrong. The option is not worthless. If so, why would he ever have paid $315...

Yes, on the blackboard vega hedging is highly questionable. You're hedging a parameter from a model that's wrong. But hedging options with other options helps take the model out of the equation. Say the 110 puts are trading at 20% and the 111 puts are trading at 21.5%. The options are close...

Just for "fun" (me at least), here's a little toy I've been playing around with. It basically amounts to "back-of-the-envelope" analysis of empirical vol/skew. I say back-of-the-envelope because yes, it uses simple black-scholes and assumes discrete delta hedging at market close each day. The...

One thing to remember from a risk management perspective is that by utilizing said vertical spread, you are expressing a view on vol whether you like it or not. While verticals are seemingly straightforward spreads, they're actually a little tricky since you're exposed to an embedded risk...

Not sure if this is the problem, but my platform sometimes resets to defaults. Right click on the column title bar and click customize. Then select the greeks you want.

You're using a model to calculate vega. That model is wrong. Don't think for a second that simply putting on position with an initial vega of 0 means that vol won't affect your P&L. Yes, vega hedging is useful, but you have to be careful with it. For instance, you cannot add raw vegas of...

I think you have to be careful with vega. At least adjust by root-time (if trading calendars), then add.

I'm sure a lot of you are familiar with this piece, but I'll post it anyway. Some good stuff on this topic. http://www.math.ku.dk/~rolf/Wilmott_WhichFreeLunch.pdf

I tend to almost always hedge with other options to cut down on model risk. Moreover, hedging with a linear instrument can get nasty in certain situations. Say you have on an ATM butterfly. The stock is creeping higher and you need to hedge your short gamma. So you buy stock. The next day...

Thanks. So a quick follow-up question then....as you rehedged, did you update implied vol as the market moved? Or did you lock-in the original IV you bought/sold at and calculate hedge ratios off of that static value for the duration of the trade?

I often trade SPX options. Lately, I've been trading skew and having decent results. However, in an effort to continue improving my trading, I'd love to hear any thoughts on peoples' preferred choice of volatility to plug into their model in order to delta hedge. I hedge with...

So.....based on the parameters you described (2% 4-day drift rate and 6% sigma), a sample path of your strategy (assuming the full-account is invested) looks something like this over 1 year.... This is what you describe as a "small edge?"

Why? The underlying is priced at $0.60. There's only 0.40 of intrinsic value.

You've gotten greedy here. Yes, TSLA et al have some pretty juicy premium just begging to be sold. But always wonder if perhaps the market is pricing those OTM options at a high price for good reason. What's the key? Kurtosis. High vol-of-vol. Means the stock can go from treading water in...

All they're doing is plugging in options from stock-based comp into Black-Scholes in order to come up with a value to put in their financial statements. This has nothing to do with the "fair value" of the options. The market gives you the "fair value." There is no strategy here.

It is exceedingly difficult to try and replace income from a steady job with option trading income. Trust me I've tried it. Options are volatile. Hence your P&L will be volatile. I would implore you as an intelligent person not to fall too much in love with statistical models and hedging...

Thanks. Yeah Baird's book was the only place I've seen the actual term "wrangle" used. Although Taleb devotes a couple of pages to two different forms of "fourth moment bets" in Dynamic Hedging. Obviously both those books were written before weekly options came about, so I'm basically...