With what is going on with Worldco. I am a little leery of joining any prop firm nowadays. All of the prop firms mentioned in these threads require at least 25 to 50K to trade options. Why not just get memebership in an exchange , lease a seat and get the haircuts w/o putting your capital at risk in a jbo?
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Calendar spreads
- Thread starter ChrisM
- Start date
Wow, I thought that was another one of those Worldco bashing threads and didn't bother to check if it was really all over. One thing about Echo that is interesting is their affiliation with Pax, but then again that is only really important for options. Also, I just talked to a friend, as I was writing this, to have a very knowledgable person(used to cover financial services for a major bank) look over their financial information. I guess there are some differences with their balance sheets.
Quote from Maverick74:
With short calendars you want the stock to explode. I want the stock to be as volatile as possible so I can trade the front month gamma. I will do this leading up to the event that will cause the VOL to implode. Let me give you an example. This was a while ago. I think last December. MEDI had an FDA meeting and the stock was around 25 or so and trading all over the place. I was long the dec straddles at 25 and short the July's or maybe even Oct. Can't remember. Anyway the VOL ran up to 130 to 150 from about the 60 area. I was scalping the gamma like crazy. This stock was up and down every day on speculation that they would get their approval or not. The day of the meeting they got the approval, the stock moved up maybe a dollar or two and the VOL came in from 150 to 65 in one day in which I was short a shitload of Vega.
Your risk in this strategy is obviously being short Vega so VOL could keep going up which is why I would rather scale into rather then just put on the position. Also, I would choose plays that I could identify the reason for the VOL run up, such as FDA meetings or earnings reports. That way you have a target date. If the stock stops moving, you will lose on your theta since you won't be able to scalp the gamma however the Vol should come in if it stays quiet for too long. I mean obviously you have to do a lot of these and not put your whole account in one play. If you did 20 to 30 and even then still used a small percentage of your capital then I think your risk to reward would be outstanding.
Yeah, I had similar experience with IGEN. It was going up and down nicely, but after Roche`s decision went up to about 56 , so while I was long Dec and short front, my entire loss was my entire risk i.e. (dec-front difference). It happens.
From this point of view indices might be more attractive while they give more often gamma scalping opportunity, but on other hand vola in most cases do not look attractive.
Thank you for the idea of diversification. Since I trade index related products, I had no much chance to do this, but it might be good idea.
Quote from ChrisM:
Yeah, I had similar experience with IGEN. It was going up and down nicely, but after Roche`s decision went up to about 56 , so while I was long Dec and short front, my entire loss was my entire risk i.e. (dec-front difference). It happens.
From this point of view indices might be more attractive while they give more often gamma scalping opportunity, but on other hand vola in most cases do not look attractive.
Thank you for the idea of diversification. Since I trade index related products, I had no much chance to do this, but it might be good idea.
Also something to add about looking for short calendar candidates, look for strong stocks and stocks near their 52 week highs. Those definitely provide the best risk/reward scenarios. Since Vol is a function of price, as the price of a stock increases, the stat vol also has to increase at the same rate or the Vol will actually decrease. Same goes for stocks that are going down. As stocks get cheaper, the stat vol will go up as the stock is falling if it continues trading at the same rate. This is why any pop in Vol levels on high priced stocks are such good candidates. The Vol never stays that high for very long. Quite the opposite is true for cheap stocks. The Vol on those tend to keep going up and will tend to keep increasing. So when you look for short calendars, look for stocks that have had huge VOL runnups going into meetings or eps dates, and look for strong stocks near their highs and preferably high priced. And make sure they are moving.
Quote from Maverick74:
Also something to add about looking for short calendar candidates, look for strong stocks and stocks near their 52 week highs. Those definitely provide the best risk/reward scenarios. Since Vol is a function of price, as the price of a stock increases, the stat vol also has to increase at the same rate or the Vol will actually decrease. Same goes for stocks that are going down. As stocks get cheaper, the stat vol will go up as the stock is falling if it continues trading at the same rate. This is why any pop in Vol levels on high priced stocks are such good candidates. The Vol never stays that high for very long. Quite the opposite is true for cheap stocks. The Vol on those tend to keep going up and will tend to keep increasing. So when you look for short calendars, look for stocks that have had huge VOL runnups going into meetings or eps dates, and look for strong stocks near their highs and preferably high priced. And make sure they are moving.
Few more questions:
1. Would you say that gamma scalping brings significant part of profits for this strategy ?
2. If so, do you rather scalp often or wait for bigger moves ?
Thanks,
Quote from ChrisM:
Few more questions:
1. Would you say that gamma scalping brings significant part of profits for this strategy ?
2. If so, do you rather scalp often or wait for bigger moves ?
Thanks,
No, I would say that the gamma scalping offsets the decay from the front month options. Now I do believe you can even make a small profit if the stock is volatile enough on the gamma. But the purpose of the spread is to capture the short vega. After eps and FDA meetings and other big news events, the VOL tends to come in very hard and I mean implode. So I would scalp the gamma purely to be able to rent the short vega for free.
How often? I have tried scalping small increments and large increments and here is what I have discovered. I much rather actively trade a shorter range where at least I know I will capture most if not all of the theta rather then take a chance and be long or short a lot of deltas only to watch it vanish when the stock gaps the wrong way against you. I always try to play it safe. After all, I am making a pure vega bet here, not a delta bet.
In fact the one thing I would be really interested in here is if someone has written a program that will automatically trade the gamma for you based on statistical ranges. That way you can put these spreads on and not have to watch them all day because you have a program that is auto-trading them. Here is what my idea could be. The first hour of the day, it would be set to scalp the gamma of the average range the last 5 trading days. Take the range from the last 5 days and divide it by 2, that is the increment it will use the first hour of trading, then after the first hour, take a running count of the last 60 minutes range and divide by 2 and that way it will adjust to when the market is volatile, it will allow a greater range to scalp in and when the mkt is quiet it will tighten the scalping range. This way you could put on many spreads and be able to trade them all continuously at the same time or even not be at your computer at all. Let me know if you find such a program. I may have to create it myself.
Maverick,
you could probably lease one of these packages like neoticker, investor rt which has alarms. You can program criteria and have it set when the indicator gets tripped. From your macrocode, it sounds like you can gamma scalp using boll bands since the bands expand when the avg true range expands which is usually what happens during overnight gaps. For instance, I can program Inv RT to alarm when Last < LowBollBand. There are other products there you might want to research such as the plug ins offered with IB or Sterling's predator used mainly by Echotraders. I am sure there are plenty more. Search on ninja trader, bracketrader,etc
you could probably lease one of these packages like neoticker, investor rt which has alarms. You can program criteria and have it set when the indicator gets tripped. From your macrocode, it sounds like you can gamma scalp using boll bands since the bands expand when the avg true range expands which is usually what happens during overnight gaps. For instance, I can program Inv RT to alarm when Last < LowBollBand. There are other products there you might want to research such as the plug ins offered with IB or Sterling's predator used mainly by Echotraders. I am sure there are plenty more. Search on ninja trader, bracketrader,etc
Quote from GATrader:
Maverick,
you could probably lease one of these packages like neoticker, investor rt which has alarms. You can program criteria and have it set when the indicator gets tripped. From your macrocode, it sounds like you can gamma scalp using boll bands since the bands expand when the avg true range expands which is usually what happens during overnight gaps. For instance, I can program Inv RT to alarm when Last < LowBollBand. There are other products there you might want to research such as the plug ins offered with IB or Sterling's predator used mainly by Echotraders. I am sure there are plenty more. Search on ninja trader, bracketrader,etc
Can you believe I never even thought about using bollinger bands. That probably would work really well and easy to work into various software programs. Interesting, I'll have to think about that.
Quote from Maverick74:
No, I would say that the gamma scalping offsets the decay from the front month options. Now I do believe you can even make a small profit if the stock is volatile enough on the gamma. But the purpose of the spread is to capture the short vega. After eps and FDA meetings and other big news events, the VOL tends to come in very hard and I mean implode. So I would scalp the gamma purely to be able to rent the short vega for free.
How often? I have tried scalping small increments and large increments and here is what I have discovered. I much rather actively trade a shorter range where at least I know I will capture most if not all of the theta rather then take a chance and be long or short a lot of deltas only to watch it vanish when the stock gaps the wrong way against you. I always try to play it safe. After all, I am making a pure vega bet here, not a delta bet.
In fact the one thing I would be really interested in here is if someone has written a program that will automatically trade the gamma for you based on statistical ranges. That way you can put these spreads on and not have to watch them all day because you have a program that is auto-trading them. Here is what my idea could be. The first hour of the day, it would be set to scalp the gamma of the average range the last 5 trading days. Take the range from the last 5 days and divide it by 2, that is the increment it will use the first hour of trading, then after the first hour, take a running count of the last 60 minutes range and divide by 2 and that way it will adjust to when the market is volatile, it will allow a greater range to scalp in and when the mkt is quiet it will tighten the scalping range. This way you could put on many spreads and be able to trade them all continuously at the same time or even not be at your computer at all. Let me know if you find such a program. I may have to create it myself.
Maverick,
first of all thank you very much for valuable insights. However about the program I have forwarded your message to my programmer to get professional opinion. I know this is possible, just interested how he handle this.
I`ll get back to you when I get response from him.