Delta hedging long gamma - using queuing to your advantage.

Rationalize · Jul 10, 2016

Thinking out loud -

If i'm running a dynamic delta hedge against long gamma

Then for each hedge, the market is 'coming to me'

So if I choose a stock with a wide bid ask, or a low price

And stack my hedges in the queue, on various price levels

Presumably, I get a more efficiently executed hedge

Than the poor bastard who may be short gamma on the other end

And is paying the spread to me.

*Discussion invited from informed options guys / market makers*

cvds16 · Jul 10, 2016

if the underlying has a wide bid ask the option will have wide bid ask too ... implying less liquidity in options, so it will be hard to get into your options at a good price ... so you have a problem on that side ...

Martinghoul · Jul 10, 2016

It's not that easy... If the mkt in the underlying is wide, the likelihood of your orders being filled is also going to be lower, all else being equal. So yes, being long gamma means that you benefit if the "mkt comes to you", but you need to consider the probability of this occurring.

sle · Jul 11, 2016

Let me translate this for you: "A long gamma player is a natural market maker. He's getting longer as the market rallies and getting shorter as the markets sells off".

If you don't squash the vol yourself or get ticked by HFTs, it's a winning strategy. Unfortunately, you will capture the mean reversion while missing out on monster moves (it's that moment "oops this was a nice gap, but I already covered my delta two handles ago").

trilogic · Jul 11, 2016

what does "work" with options ? Just seems that its a nice tool to utilize free leverage when you have information or hedge yourself if you have an "investment"

or

your a market maker to the gods and they "allow" you to make money of them because"they" have the information.....

sle · Jul 12, 2016

trilogic said:
what does "work" with options ? Just seems that its a nice tool to utilize free leverage when you have information or hedge yourself if you have an "investment"

The fact that you lost money trading options does not mean everyone does and it does not mean that an educated trader can't come up with a working strategy.

Rationalize · Jul 12, 2016

sle said:
The fact that you lost money trading options does not mean everyone does and it does not mean that an educated trader can't come up with a working strategy.

I think "educated" is a bit of an understatement. As a (currently unemployed) delta 1 guy, while my book was -the biggest-, and had a lot of moving parts, the options guys, esp otc exotics, were definitely the smartest guys in the room. "Book smart" at least

trilogic · Jul 14, 2016

sle said:
The fact that you lost money trading options does not mean everyone does and it does not mean that an educated trader can't come up with a working strategy.

no no, got that wrong

where talking about options, not you or me, just options. See how things move to "personal" stuff when I talk about what I have seen... first hand, long run they lose..... who is the warren buffet of options and what is his or her returns ?

They are a tool to be utlized in conjuction with a investment OR market maker to thos that need to use them in portfolio.... when I meet a guy girst that says im a "option trader" and start asking questions, well enough said

sle · Jul 14, 2016

trilogic said:
where talking about options, not you or me, just options. See how things move to "personal" stuff when I talk about what I have seen... first hand, long run they lose..... who is the warren buffet of options and what is his or her returns ?

Sure, we are talking about options (or any vol products) but you seem to be asking question that have little to do with options. It is much more about the philosophy of the financial markets and the roles of various players in it. So, a few points:

(a) Options, like any other derivative can be either used to hedge something or to make leveraged directional bets. Also, like with ANYTHING that can be bought and sold, you can be finding little arbitrages, statistical aberrations and relative value plays. Other people do HFT, trade stat arb strategies or run yield curve relative value.

(b) You can think of most "arb" (real or risky) strategies as a form of market making - we provide liquidity or other form of risk premium for a fee. Unlike simple investing or hedging, this is a knowledge business - before I landed in a fund I have been a structured products book-runner (essentially a market maker) for years. I read, code and research new ideas all the time. It's hard work, especially considering the uncertainty of the future income.

(c) I don't know who is a warren buffer of options, but I do know that I managed to save up a few dollars, probably enough to retire right now (not in Manhattan, mind you, but in cheaper parts of the country). So did everyone I know who did this more or less seriously.

(d) As I said before, the societal value of arbitrageurs is null and if all instances of myself disappear tomorrow the markets would probably keep chugging along happily, albeit with somewhat lower liquidity. It's a bit of a shame that I am trading instead of finding a cure to cancer, but that's capitalism for you.

trilogic · Jul 14, 2016

sle said:
Sure, we are talking about options (or any vol products) but you seem to be asking question that have little to do with options. It is much more about the philosophy of the financial markets and the roles of various players in it. So, a few points:

(a) Options, like any other derivative can be either used to hedge something or to make leveraged directional bets. Also, like with ANYTHING that can be bought and sold, you can be finding little arbitrages, statistical aberrations and relative value plays. Other people do HFT, trade stat arb strategies or run yield curve relative value.

(b) You can think of most "arb" (real or risky) strategies as a form of market making - we provide liquidity or other form of risk premium for a fee. Unlike simple investing or hedging, this is a knowledge business - before I landed in a fund I have been a structured products book-runner (essentially a market maker) for years. I read, code and research new ideas all the time. It's hard work, especially considering the uncertainty of the future income.

(c) I don't know who is a warren buffer of options, but I do know that I managed to save up a few dollars, probably enough to retire right now (not in Manhattan, mind you, but in cheaper parts of the country). So did everyone I know who did this more or less seriously.

(d) As I said before, the societal value of arbitrageurs is null and if all instances of myself disappear tomorrow the markets would probably keep chugging along happily, albeit with somewhat lower liquidity. It's a bit of a shame that I am trading instead of finding a cure to cancer, but that's capitalism for you.

Thanks for the reply.

reading natenburg options of fut's ... helpful to extent....