Carey's Journal

Quote from justrading:

I naturally question everything so I do question the math thing. Like you I never took calculus and we don't have community colleges and or an adult education culture of any sort here. I thought of hiring a college kid or international school teacher to teach me calculus but held back.

My thoughts are;

1) if calculus is the root of successful options trading, then those who are great at this would make a killing all the time. This does not happen.
2) the math wizards will always have the edge over me.
3) making money in options is something quite separate from the ability to understand esoteric concepts. Notice people like Natenberg, McMillian, Sinclair et al do not see the need to baffle you with bullshit in their books. Just clear simple explanations of how to trade stuff like volatility, ie. what really matter in practical terms.

Bottom line is options pricing ie the market does not adhere to models. Yes I do look at the Greeks every day, but I have zero expectation that my spreads will price as per the models, because volatility is constantly changing and the models assume fixed volatility. Hell I have spreads with +2 theta and I never get that on anything remotely close to a steady rate. Nothing happens for 3 days then the underlying lurches and I make 6 in 1 day.:)

So I am leaning towards focusing more on practical aspects of trading, eg what is historical IV, what percentile is current IV in that data set given that volatility is mean reverting in the long term. How is the skew now compared to typically?

For this stuff you don't need the high level math, just a great grasp of numbers and statistics, and I'm pretty comfortable in that terrain.

Sorry for the essay in your thread, just want to share my thoughts.
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i think these are similar feelings to what i have had in the past..(and still get sometimes)
but i think a little differently now.. reality is dirty messy.. but the deal with these equations are that you can relatively price things.. ... looking at how far away the price is from the theoretically price based upon the BSM model really doesn't create an edge.. and i really do swear by the fact that there is little to be found in a HV/IV study.. if you didn't have an equation how would you even guess how much an option is going to move, or how much the implieds of the otms cost to the atms.. its just a framework really..
i know i've read so many times that most guys tend to go back to the BSM model in some variation because They are familar with how it works and how it doesn't work.. you know the first books i picked up with pricing models in them were talebs and Espen Haugs... and yes Euan , and a few others give you a more practical understanding of volatility trading.. and some go into good depths.. but i do recommend picking up dynamic hedging and models on models... i literally would read a little.. and start researching... i never heard of what GARCH was before.. so you end up in books where they are discussing the pitfalls of Garch going into a event trade... and you have no clue what they are talking about... but i do now.. its funny because i shyed away from it over and over again.. thinking.. man i'll never understand any of this.. not even a small part of it.. and i've enjoyed the journey for sure... i haven't found such enjoyment in such a complex space... i really think its good for me.. time takes time... i don't know much i sit there and conceptualize what things mean.. i just sit there and think.. root vega. sticky strike, sticky delta. what does that really mean.. whats that look like.. and then it hits you after some reading and your like ahhhhhhh.... but of course in my case i lose it and have to go through several realization cycles before it becomes part of my knowing..
 
Quote from cdcaveman:

i think these are similar feelings to what i have had in the past..(and still get sometimes)
but i think a little differently now.. reality is dirty messy.. but the deal with these equations are that you can relatively price things.. ... looking at how far away the price is from the theoretically price based upon the BSM model really doesn't create an edge.. and i really do swear by the fact that there is little to be found in a HV/IV study.. if you didn't have an equation how would you even guess how much an option is going to move, or how much the implieds of the otms cost to the atms.. its just a framework really..
i know i've read so many times that most guys tend to go back to the BSM model in some variation because They are familar with how it works and how it doesn't work.. you know the first books i picked up with pricing models in them were talebs and Espen Haugs... and yes Euan , and a few others give you a more practical understanding of volatility trading.. and some go into good depths.. but i do recommend picking up dynamic hedging and models on models... i literally would read a little.. and start researching... i never heard of what GARCH was before.. so you end up in books where they are discussing the pitfalls of Garch going into a event trade... and you have no clue what they are talking about... but i do now.. its funny because i shyed away from it over and over again.. thinking.. man i'll never understand any of this.. not even a small part of it.. and i've enjoyed the journey for sure... i haven't found such enjoyment in such a complex space... i really think its good for me.. time takes time... i don't know much i sit there and conceptualize what things mean.. i just sit there and think.. root vega. sticky strike, sticky delta. what does that really mean.. whats that look like.. and then it hits you after some reading and your like ahhhhhhh.... but of course in my case i lose it and have to go through several realization cycles before it becomes part of my knowing..
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I think I did not express my thoughts too well. Mine is not a Luddites rejection of models and calculus. I am happy to use the output from those models in my trading. For example I do look at the IV and would not dream of putting on a trade without analysing it in Hoadley's OSET first. I want to know the probability distribution of price movement of the underlying. I recently read that using a Monte Carlo simulation incorporating a fat tail price distribution is probably the best way to project this, so that is something I want to investigate.

I came across a neat way to use IV and time to expiration to calculate where to place the wings of a 'fly. Of course IV tends to be higher than realised, so this needs some testing before I will accept it fully.

I find it useful to know that the BSM tends to underprice OTM options, and that in futures overcompensating for this tends to lead to overpriced OTM call options.

GARCH apparently is useful for short term projection, not so good for long term because of the higher probability of an event, which is what they choose to call the fat tail distribution of stock prices.

There are major limitations with IV to HV comparisons, in the same way that oversold and overbought indicators can leave you hanging out to dry. But if you believe that IV is mean reverting, then knowing that the IV is in the 10th percentile or 90th percentile can inform your trading decisions.

Knowing of the models and their limitations and how to trade using them and around their limitations is interesting to me. I do not believe that the best way to make money trading options is to know the models as well as I know my hand.

To give a simple analogy from my days as a biker. I knew for example my bike had a powerband or torque band from 4,000 - 5,500 rpm. If the tach said 3,500 rpm and I was hitting curves, I knew I had to down shift to get the revs up. I did not say oh, I need to know how they calculate the powerband and how they measure the revs before I can use this. I used the output.

That said, if someone feels they need to understand the models to trade options, I would not dream of discouraging them. You see, one of the big reasons I cannot day trade is I do not believe in the process. Watching price ebb and flow, looking for volume, inside bars, etc is just not me. I thrive on numbers and statistics and using those in my trading decisions, especially trade management, is something I really need to trade well.
 
Quote from justrading:

I think I did not express my thoughts too well. Mine is not a Luddites rejection of models and calculus. I am happy to use the output from those models in my trading. For example I do look at the IV and would not dream of putting on a trade without analysing it in Hoadley's OSET first. I want to know the probability distribution of price movement of the underlying. I recently read that using a Monte Carlo simulation incorporating a fat tail price distribution is probably the best way to project this, so that is something I want to investigate.

I came across a neat way to use IV and time to expiration to calculate where to place the wings of a 'fly. Of course IV tends to be higher than realised, so this needs some testing before I will accept it fully.

I find it useful to know that the BSM tends to underprice OTM options, and that in futures overcompensating for this tends to lead to overpriced OTM call options.

GARCH apparently is useful for short term projection, not so good for long term because of the higher probability of an event, which is what they choose to call the fat tail distribution of stock prices.

There are major limitations with IV to HV comparisons, in the same way that oversold and overbought indicators can leave you hanging out to dry. But if you believe that IV is mean reverting, then knowing that the IV is in the 10th percentile or 90th percentile can inform your trading decisions.

Knowing of the models and their limitations and how to trade using them and around their limitations is interesting to me. I do not believe that the best way to make money trading options is to know the models as well as I know my hand.

To give a simple analogy from my days as a biker. I knew for example my bike had a powerband or torque band from 4,000 - 5,500 rpm. If the tach said 3,500 rpm and I was hitting curves, I knew I had to down shift to get the revs up. I did not say oh, I need to know how they calculate the powerband and how they measure the revs before I can use this. I used the output.

That said, if someone feels they need to understand the models to trade options, I would not dream of discouraging them. You see, one of the big reasons I cannot day trade is I do not believe in the process. Watching price ebb and flow, looking for volume, inside bars, etc is just not me. I thrive on numbers and statistics and using those in my trading decisions, especially trade management, is something I really need to trade well.
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its the old expression.. the map is not the territory.. the math is just a describer of whats going on in reality.. it helps with relative pricing.. but its not the territory.. we obviously are arguing similar points.. haha i have no problem taking the time to dig and find out if some more calculus/statistics/programming will help my trading.. it interests me regardless.. i seriously doubt knowing more about them is really gonna hurt my trading at this point.. haha

playing future distribution with butterflys has strike risk.. your trying to sell the implied variance but you can't purely do so.. the variance might be low but trending up sending the underlying outside of the wings of the fly and into losses... of course if you delta hedged to extract the variance... this is the way you actually do it.. you have hedging frequency parameters that add more risk.. so at the end of the day .. when you make money delta hedging a butterfly.. what part of that profit do you alot to your expertise hedging or your implied/realized speculation.. you see it gets to be a bit ambiguous.. you can't purely extract what the implieds are implying out of the options to play them against the realized distrobution..
 
Quote from cdcaveman:

its the old expression.. the map is not the territory.. the math is just a describer of whats going on in reality.. it helps with relative pricing.. but its not the territory.. we obviously are arguing similar points.. haha i have no problem taking the time to dig and find out if some more calculus/statistics/programming will help my trading.. it interests me regardless.. i seriously doubt knowing more about them is really gonna hurt my trading at this point.. haha

playing future distribution with butterflys has strike risk.. your trying to sell the implied variance but you can't purely do so.. the variance might be low but trending up sending the underlying outside of the wings of the fly and into losses... of course if you delta hedged to extract the variance... this is the way you actually do it.. you have hedging frequency parameters that add more risk.. so at the end of the day .. when you make money delta hedging a butterfly.. what part of that profit do you alot to your expertise hedging or your implied/realized speculation.. you see it gets to be a bit ambiguous.. you can't purely extract what the implieds are implying out of the options to play them against the realized distrobution..
More...

What if you close out the trade before you go into losses, ie take profits before the underlying price hits the wings? This is just a thought I'm having and working on, have not done enough trades to say it's great, or not.

Yup, we can never be sure of how the underlying will behave, that's trading. I must confess I have not looked into hedging, as you say every hedge and adjustment eats into your profits, so for now I'm just looking at cutting the trades.
 
Quote from atticus:

None of this amounts to a hill of d*cks if you can't forecast price or vol with some degree of accuracy.
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Hill of di(is.,.... you know what that looks like I presume.... similar to bag of or bowl of but a much larger notional of Di(K's is a hill then on to a mountain range of...haha.

Attic us... considering skew and or term structure. With vanillas what's the best way to go long the euro ..... and as well go short GBP... otm fly's.. or near money flys...... semi terminal short term distro play with room for error....
 
Quote from atticus:

None of this amounts to a hill of d*cks if you can't forecast price or vol with some degree of accuracy.
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Price and Vol, options trading distilled.

Thanks, I'll always remember this.
 
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