Calendar Spread Basic Setup Question

TheDawn said:
Look I already told you, you believe what you will and I will explore my own theory, OK?
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Sure, fine, go ahead! Explore your own theory, which you just closed out as being impossible to prove, based on your own science.

It's SCIENCE!

 
MissDawn is r******d.

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I think the dawn means infinite gamma pnl. Ie infinite loss on a short option. This is true but it’s not strictly gamma pnl (it’s a bunch of partial derivatives) and the market makers don’t force it to happen (it happens because a stock moves to practically infinity) and theoretical option pricing accounts for this just fine.
 
Most of the times someone comes in with their own fantasy theory on options, I get to to learn something new from the traders correcting them, while having a giggle.
Thank you!
 
Overnight said:
You have just logically argued yourself out of your own theory. Since gamma cannot be infinite because of circuit breakers and market closures, your theory is dead. But you continue on with theoretically WHAT IF?

There is no more WHAT IF! There are breakers, so you cannot have infinite gamma! You just defeated your entire argument/theory!

What if I had infinite money, and just longed some e-mini futures and rolled them? Since indices only go up over time, I also have infinite profits forever! My delta beats the theta! But that is not how it works in IRL, because futures have expiry, like options do.

Oi!
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Gamma being finite has nothing to do with circuit breakers. MissDawn doesn’t understand gamma, thinks models suck, but is constantly quoting model output (gamma).
 
TheDawn said:
Another question is do prices really follow a theoretical pricing model irl trading? I mean that's a question I guess for MM's like @taowave, when he's making a market for options, does he really plug in all the inputs into a pricing model to arrive at a price to quote to his trading counterparty or does he look at how much of a spread that he can from his hedging from either futures or from the individual asset market and quote based on that? If he's not taking prices from a pricing model which dictates gamma to be zero, then how do we know that gamma is really finite irl? Now irl there is circuit breakers and market closing which essentially puts a stop on how far the price can go so that really renders gamma to be finite. So maybe we are essentially paying for the options based on gamma being infinite due to the existence of the circuit breakers and market closing but theoretically, what if there is no circuit breakers and market never closes and we can trade forever non-stop, what value could gamma take?

My math is not strong enough to prove it or demonstrate an infinite gamma that can happen irl but this is something that I just cannot reconcile; it's how prices behave differently irl vs. being given by a pricing model.
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you price according to the market and use the model as a crutch.
You don't trade gamma and vega, you trade an option that is 2$. You need a model to guestimate how much the next up/down strike is as well as the near/far maturity of the same strike.

How do you callibrate the model? Well, you look at the most liquid instrument and price every other instrument off of that. In other words, when you look at an FX forward that is quoted 1 pip wide, on the bid is Deutsche and UBS is the offer, you know that the fair price is right in the middle. You plug that price into your model and quote all other forwards accordingly.

There is no such thing as a theoretical model that tells you how an option should be priced.
You know the ATM vol, you know the 25d calls and puts of the most liquid maturity, you know your forward rate and your interest rate. So if the 25d call is 2$ and the ATM is 8$ how much should the 40 delta trade for?

If the 3 month risky trades at 3 vols to the put side, how should you quote the 6 month risky? -> plug it into your model and you have a rough guesstimate.

Let's say you quote according to model and you only have one way flow on your quote, then you readjust your quote until you have two way flow...and that is the new price. Adjust all other quotes according to your model
 
cesfx said:
Most of the times someone comes in with their own fantasy theory on options, I get to to learn something new from the traders correcting them, while having a giggle.
Thank you!
More...

Since you contributed nothing while others were "correcting" me except chiming in with pathetic jokes every once a while, it's time that I block a joke like you so my ET gets better. I am glad I came up with my "fantasy theory" on options, I get a chance to find out who are the real gems on ET and who are just a waste of texts for me to finetune my Ignore/Block list.
 
MrMuppet said:
you price according to the market and use the model as a crutch.
You don't trade gamma and vega, you trade an option that is 2$. You need a model to guestimate how much the next up/down strike is as well as the near/far maturity of the same strike.

How do you callibrate the model? Well, you look at the most liquid instrument and price every other instrument off of that. In other words, when you look at an FX forward that is quoted 1 pip wide, on the bid is Deutsche and UBS is the offer, you know that the fair price is right in the middle. You plug that price into your model and quote all other forwards accordingly.

There is no such thing as a theoretical model that tells you how an option should be priced.
You know the ATM vol, you know the 25d calls and puts of the most liquid maturity, you know your forward rate and your interest rate. So if the 25d call is 2$ and the ATM is 8$ how much should the 40 delta trade for?

If the 3 month risky trades at 3 vols to the put side, how should you quote the 6 month risky? -> plug it into your model and you have a rough guesstimate.

Let's say you quote according to model and you only have one way flow on your quote, then you readjust your quote until you have two way flow...and that is the new price. Adjust all other quotes according to your model
More...

So what happens after you get the new price? Does the new price gets fed back into the model to get a new delta, gamma and etc.? Using your example with the 40 delta, after the new price is calculated, doesn't that change the delta of that previous option?
 
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