ES Journal Archive (2006 - 2008)

[El OchoCinco]

Quote from wareco:

I hope I'm not the only one here who doesn't fully understand this trade. Risk, if you find the time can you go over it piece by piece. I assume the SPX can't touch either 1430 or 1580 prior to 8/24. Is the premium 130K, and the payout 250K?

You should not sell yourself short, that is pretty much it. But I think payout is $250k minus your debit of $130k

 

[Spectre2007]

apples earnings won't save the market for the next 48 hrs. market will close friday on the lows.

 

[atticus]

Quote from wareco:

I hope I'm not the only one here who doesn't fully understand this trade. Risk, if you find the time can you go over it piece by piece. I assume the SPX can't touch either 1430 or 1580 prior to 8/24. Is the premium 130K, and the payout 250K?

Exactly, 100% accurate.

I told Apex I would outline the next exotic. It's a distribution trade // direction. Touch markets can be priced using BSM or any PDE or brute-force model. DNTs are more difficult to price, as it's a proximity calc on the >delta wing. A [very] dirty touch-market valuation would involve the (delta *2) on the proximal strike to arrive at the touch probability. There is a lot more to it than that, but that will get you within 1000 basis of fairval on payouts under 1:1. Sorry if it's confusing, but it's not easy to dissect in vanilla-terms. The closest analog is a otm vertical spread [touch] or albatross [DNT] in listed options.

 

[wareco]

Quote from optioncoach:

You should not sell yourself short, that is pretty much it. But I think payout is $250k minus your debit of $130k

Got it. Thanks Coach. How is the size defined? Is it by contracts? ie., 100 DNT SPX 1430/1580? Also, what is the minimum size, and roughly what would the premium be on that trade?

 

[atticus]

Quote from wareco:

Got it. Thanks Coach. How is the size defined? Is it by contracts? ie., 100 DNT SPX 1430/1580? Also, what is the minimum size, and roughly what would the premium be on that trade?

They're priced in notional terms, not contracts. I scale to units of 100 for the journal. Minimum size on OTC is six-figures for some, seven for others. You ask for a market by defining the exp, strike and payout. The dealer will solve for the risk-premium.

 

[Jaxon]

I don't see how a notional amount is relevant. You either make $120,000 or you lose $130,000. The underlying notional amount (if there is any) is irrelevant, right?


otoh.... you would translate it into a notional amount if you were say, long a straddle against it. The option pays you if the market does not move and you lose on the straddle. If the market does move (and touches) you lose on the double nt but you make on the straddle.

 

[atticus]

Quote from Jaxon:

I don't see how a notional amount is relevant. You either make $120,000 or you lose $130,000. The underlying notional amount (if there is any) is irrelevant, right?

Referring to the $ at risk as notional. Simply to distinguish between contracts vs notional risk in listed markets. Req = notional in OTC.

 

[JSSPMK]

Quote from spike500:

I had a colleague that traded the same way you do. He was stubborn, not afraid of risk, and stops were not necessary according to him. In 1994 he made more than 1 million $ net profit. All his bad trades reversed and finally ended with profit or small losses. But in 1995 he went short the S&P at 495 with a position of 210 contracts (of 500$ each at that time). Each point profit would make him 105,000$. Just watch the chart of the S&P from 1995 till now.
He collected constantly margin calls, but as he was sure the market would reverse, he added money each time to be able to hold his position. At a certain point his loss was so big that he couldn’t take the decision to liquidate his position. At the end his position was closed by the bank with a loss exceeding 10 million dollars.
I only want to give you some personal advice, I don’t want to interfere in your trading, talk to other professional traders and ask what they think. And if you are sure you can continue the way you trade, just print out this posting and archive it. I hope you will never have to reread this posting again due to certain circumstances.

I thought I was invincible too when I started trading. I learned my lesson, but it costed me 50,000$ within 24 hours of trading.

thanks for posting that story.

 

[atticus]

Quote from Jaxon:

I don't see how a notional amount is relevant. You either make $120,000 or you lose $130,000. The underlying notional amount (if there is any) is irrelevant, right?


otoh.... you would translate it into a notional amount if you were say, long a straddle against it. The option pays you if the market does not move and you lose on the straddle. If the market does move (and touches) you lose on the double nt but you make on the straddle.

Notional becomes relevant in lookbacks and other hybrids with analog features. Lookbacks are "hindsight" options that are quoted with tick values which define the notional risk.

 

[2006]

WTF -- the book is going wild pre-open.