Exotic options: Single- and Double-Barrier Options

[dumpdapump]

I need to disagree, but then I have been schooled and educated on the job mostly by French traders. Hardly anyone ever traded options directionally. And I have worked with guys that pulled in many tens of millions year in year out, buy side and bank prop.

You mean sell-side, right? Most options traders on the buy side are directional traders in one or another way. It's very difficult to generate meaningful amounts of alpha by trading delta-neutral vol, since vol is usually pretty efficiently priced (aside from pure risk premium harvesting). It's especially true in light exotics where the client such as myself is willing to pay whatever vig the exo desk will charge me to get the right risk profile. The idea is almost always that the exo desk will be looking at it from delta-neutral perspective, while I put it on as a directional trade.

 

[hhiusa]

I need to disagree, but then I have been schooled and educated on the job mostly by French traders. Hardly anyone ever traded options directionally. And I have worked with guys that pulled in many tens of millions year in year out, buy side and bank prop.

Yes, yes. How proud of yourself you are. I trade vanilla options directionally. It is your choice not to. The amount of traders who place algorithmic trades has gone from 10% to 60%. This excludes the HFT boys who do the churn and burn. These are algorithmic, directional trades.

p.s. I trade my vanilla like I would barrier. I have a window around the strike, but instead of getting knocked out, I increase the position to decrease the avg. price.

 

[hhiusa]

You mean 1 in 100 or 200 derivatives traders? Nobody to my knowledge ever traded even vanillas directionally. At least not in professional space.

Yes, because you know absolutely everybody, don't you?

 

[hhiusa]

You mean sell-side, right? Most options traders on the buy side are directional traders in one or another way. It's very difficult to generate meaningful amounts of alpha by trading delta-neutral vol, since vol is usually pretty efficiently priced (aside from pure risk premium harvesting). It's especially true in light exotics where the client such as myself is willing to pay whatever vig the exo desk will charge me to get the right risk profile. The idea is almost always that the exo desk will be looking at it from delta-neutral perspective, while I put it on as a directional trade.

Agreed. If I am bullish, why not agree upon a floor knock-out to save on the premium. I actually didn't think that anybody outside of a huge firm did the delta-neutral thing.

Thanks for the info earlier.

 

[Martinghoul]

I recall seeing some simpler exotics on a couple of platforms, but those are the exception, rather than the rule.

In general, these things have their uses and the mkt has developed a lot. In the past, IMHO, as a client looking for the right risk profile (as sle has described it), the exo bandits would have made sure that I pay way too much for it. It would have then been a total waste of money.

 

[water7]

Does anybody here trade any form of exotic options? I wanted to trade some knock-out options like double-barrier. When I trade an option, I usually have about what price it is going to, what range, and in a specified period of time. With vanilla options, I can't capitalize upon this knowledge. Barriers make the option even cheaper.

Can I trade these through IB? Who else?

conditional bracket order with limit price?

*) if you know how to price your options, have a decent volatility modelling, vanilla options is good enough to do the job

 

[dumpdapump]

still the case today, the few boxes or barriers I have seen at Saxo or elsewhere were priced so wide it was impossible to even consider for anything. OTC still rules and will continue to do so.

I recall seeing some simpler exotics on a couple of platforms, but those are the exception, rather than the rule.

In general, these things have their uses and the mkt has developed a lot. In the past, IMHO, as a client looking for the right risk profile (as sle has described it), the exo bandits would have made sure that I pay way too much for it. It would have then been a total waste of money.

 

[Martinghoul]

still the case today, the few boxes or barriers I have seen at Saxo or elsewhere were priced so wide it was impossible to even consider for anything. OTC still rules and will continue to do so.

I was actually referring to the OTC mkt in my post. In the past, it used to be a vehicle for the smarter dealers to extract their pound of flesh from their more clueless buyside clients. Things have gotten better, though.

 

[dumpdapump]

sorry, I misunderstood. Yes, I see tons of firms that nowadays auto quote straight into BBG IB or Symphony. On the other side the quotes are "scraped" off the chat, why IDBs not use APIs in the first place is a mystery to me.

I was actually referring to the OTC mkt in my post. In the past, it used to be a vehicle for the smarter dealers to extract their pound of flesh from their more clueless buyside clients. Things have gotten better, though.

 

[hhiusa]

still the case today, the few boxes or barriers I have seen at Saxo or elsewhere were priced so wide it was impossible to even consider for anything. OTC still rules and will continue to do so.

Saxo is terrible. Why on Earth would anyone do CFDs? Or at least I don't like them.

p.s. directional vanilla option