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how does volatility surface work in market practice
In practice, the SABR volatility model is often used in the interest rate derivatives market. (swaptions / caplets / floorlets) The SABR model is a stochastic volatility model that attempts to model the volatility surface and to capture the empirically observed dynamic behavior of the... -
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Do you input your desired trade/price or do you scour options chains for opportunity?
I agree with StarDust9182 that diversification is important. In fact, there are many ways to diversify when it comes with options. Simply layering your trades at different times and at different strikes is one form of diversification. Using different strategies that have respond to... -
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Advice on books
My personal favorite books on Options Trading are: <a href = "http://www.amazon.com/Options-Futures-Other-Derivatives-9th/dp/0133456315/ref=sr_1_1?s=books&ie=UTF8&qid=1395251198&sr=1-1"> Options, Futures, And Other Derivatives </a> - by John Hull <a href=... -
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Do you input your desired trade/price or do you scour options chains for opportunity?
Personally, I take an overall portfolio approach, rather than an individual trade approach. I look at the various risk parameters of my overall portfolio, such as Value At Risk (VaR), Greeks, Expectancy, etc.. When I enter a new trade, I examine how the new trade will impact the overall risk... -
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Synthetic vs. call or put
As retail traders, it would be difficult to exploit price differences between the synthetic calls / puts versus actual calls / puts. The bid / ask spread would generally wipe out any hope of arb'ing the differences profitably. However, there may be situations where it may be advantageous... -
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Option Spread (Filing Returns)
Option Straddles and "tax straddles" are two different things. A straddle (for tax purposes) is defined as an "offsetting position" where there is a "diminished risk of loss by holding one or more other positions with respect to substantially similar or related property"." Based on this... -
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Butterfly traders
Ultimately, the key to being consistently profitable trading butterflies, or any other trading strategy, is to apply the right strategy to the relevant market conditions. For instance, ATM butterflies are usually negative vega, so they work best when IV is currently high and expected to... -
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Butterfly traders
It all depends on how you construct and manage your butterflies. I often use butterflies as an opening strategy and adjust them as the underlying moves and/or as time passes. For instance, I may initiate two OTM butterflies, one above the market and one below the market. As the underlying...