Quote from Don Bright:
Yes, absolutely, yes, the position that I would prefer.
To Mr. Maverick:
I brought in the big gun to review our string of posts, just to see if I was missing something...(my brother, who has obviously made millions trading options on the floor (much more than I), and since we both traded belly to belly with Blair Hull and other super - pros, I figured that I maybe these guys and you were thinking alike)....well, that is not necessarily the case.
FOR CONTINUED DISCUSSION ONLY, NOT BEING ARGUMENTATIVE, PLEASE UNDERSTAND ME WHEN I SAY THIS...
So, Bob and I discussed this thread, and he said that "I would never want to be long gamma" "short far term, and long short term is certainly something I would never do"....he also said " I would never be long gamma (vertical) over the weekend. To be fair, I am sure that you were simply commenting on being "safe" for the weekend, not saying that it makes any sense to do, right?
My point is that we like to have the clock tick in our favor, and that we don't worry about stock movement nearly as much as time decay.
If the implied volatility is higher than the historical volatility then you want to be short gammas. If the implied is at or lower than the historical volatility, then long gamma would make sense.
Since implied volatility is higher than historical (actual) volatility over 90% of the time, it rarely if ever makes sense to be long gamma.
We may both understand what we are talking about, and simply disagree on the approach to making money with options.
(Dead horse still cringing).....LOL
Don
OK, let me continue the discussion. Not being argumentative of course.
Let me make a very simple statement about implied volatility here and how it relates to statistical volatility. And if a newbie reads this and saves a few bucks from it then I have done my job. One of the biggest fallacies and I mean we are talking huge fallacy here is the relationship between implied and statistical volatility. If you trade with the idea that if implied is over stat and you sell the options because of that and vice versa buy options when the implied is less then the stat, mark my words, you will have a financial lesson that will be devastating. And please Don, I hope you guys are not teaching your traders this. Now, I am not saying this is the case 100% of the time, but in my experience implied leads stat about 90% of the time.
Example, say the stat vol on IBM is 45 and the implied vol is 55. Well, these options are overpriced right? WRONG! The implied is telling you that the marketplace believes that the stat vol is actually going to increase that is why everyone is buying paper. Now say that stat vol is 55 on IBM and the implied vol is 45, well options are too cheap right? WRONG! Paper is getting sold and they are selling it because they believe that the stock is going to settle down and not move as much.
Please, whatever you do, do not trade options by comparing the stat vol to the implied vol except to buy the options when they are over their stat and sell them when they are under their stat. Don it really surprises me to hear you say that. If you trade on the floor, you must know this. Every MM on the floor knows this.
As far as being short gamma Don, there are many ways to earn the premium on options without trying to steal the theta. Why not sell the vega? You will profit from eroding premiums without exposing yourself to a stock halt pre-open that could put you and your entire firm out of business. I love long gamma because those gaps can make your entire year, and when a stock breaks out and runs, you can have a money printing machine on your hands. However like I said before, I would sell overpriced back month premium and maybe even sell index premium to reduce my theta exposure.
And if your still not happy, add a ratio spread on Friday to hold over the weekend on your front month premium. Then take it off on Monday. At least you reduce your gamma exposure 4 out of 5 days a week and can collect the weekend premium.
Most floor guys if they want to earn the theta will put on backspreads. This way, they can capture that front month premium around the strike and if the market takes off or the stock gaps, their position will become a long gamma position and they won't get hurt. So they essentially are short gamma short premium around the ATM strike and if the stock runs or gaps, the position becomes a long gamma long premium position. This is how guys avoid blowing up on the floor.
Don, if you traded on the floor you have to know this stuff. Maybe you just forgot over the years. But this stuff is absolutely critical to understanding options. There really is not much room for error.
I still disagree with your original post about adjusting the back month options on long calendars. That is just way too much risk to accept. Sooner or later you will get clipped. And when you do your clearing firm will come down to the floor and have you escorted out with security guards. And believe me, that does happen.
Don, that $1000 course I keep hearing about that offer your new traders, perhaps I should come in and teach the options part? What do you think? I'll give a group discount.
