Fooled by randomness by Nassim

[VolSkewTrader]

Accord

Yes but not all OTM options are mispriced the big question is: which one is too cheap? and how do you measure that?

According to the Professor Taleb the 6+ standard deviation puts are priced too low. But who wants bleed money being long them for 10+ years before you realize your 10,000 to 1 winner?

 

[VolSkewTrader]

What if I quit while I am ahead? After nine years and $12M+ a year, I retire and move to Monte Carlo?

Kidding aside, with that type of profit, perhaps one can do some deep tail hedging to avoid wipeout?

You would think if you're going to sell every option on the board year-in and year-out, you would at least be long thousands of "teenie" puts to hedge against a crash. Maybe they did have some downside protection along with their short deltas, but obviously it wasn't enough. They are probably back selling option premium, knowing that they don't have to worry about blowing up for another 10+ years.

 

[JCDST1979]

Accord


According to the Professor Taleb the 6+ standard deviation puts are priced too low. But who wants bleed money being long them for 10+ years before you realize your 10,000 to 1 winner?

How do you buy 6+ standard deviation puts?

 

[JCDST1979]

IMO, 0 profit. You can't hedge passive short vol with anything and expect to earn. Unless you get lucky and quit while you are ahead you will eventually give it all up. Overconfidence is usually the culprit. Here are my two rules that have kept me in the short vol game for 15 years now through multiple "volmageddon" events.

1) sell vol at the trough and cut losses at the first sign of a storm, do NOT try to time the vol peak.
2) wire out annual profits, do NOT increase size and try to compound

What is the trough?
How do you measure a "sign of a storm"?

 

[rallymode]

What is the trough?
How do you measure a "sign of a storm"?

Near the bottom on a 10-year chart? It's not an absolute number but a significant divergence between implieds and stat what you want. The market feels dead and all the pundits on TV are telling you to hedge because of how cheap the vix is. That's when you should be selling vol.

I'd say 2-3SD is a good place to put your stops but obv that's very model dependent.

 

[VolSkewTrader]

How do you buy 6+ standard deviation puts?

For run-of-the-mill stocks and equity indexes with lognormal prices use ln(K/S)/σ√t = 6 and solve for K (strike) to get your desired put option.

 

[JCDST1979]

Near the bottom on a 10-year chart? It's not an absolute number but a significant divergence between implieds and stat what you want. The market feels dead and all the pundits on TV are telling you to hedge because of how cheap the vix is. That's when you should be selling vol.

I'd say 2-3SD is a good place to put your stops but obv that's very model dependent.

Like selling an Iron Condor with the long options on the 2-3SD?

 

[JCDST1979]

For run-of-the-mill stocks and equity indexes with lognormal prices use ln(K/S)/σ√t = 6 and solve for K (strike) to get your desired put option.

Can you give me an example?

 

[ironchef]

IMO, 0 profit. You can't hedge passive short vol with anything and expect to earn. Unless you get lucky and quit while you are ahead you will eventually give it all up. Overconfidence is usually the culprit. Here are my two rules that have kept me in the short vol game for 15 years now through multiple "volmageddon" events.

1) sell vol at the trough and cut losses at the first sign of a storm, do NOT try to time the vol peak.
2) wire out annual profits, do NOT increase size and try to compound

Thank you. I appreciate your comments.

There seemed to be another approach:

https://www.elitetrader.com/et/thre...ons-portfolio-insurance-at-a-discount.346405/

I appreciate it if you can also comment on the above thread.

 

[panzerman]

Have a look at the attached file for example calculations. Of course they are wrong because it assumes a normal distribution and no skew or kurtosis, but you get the basics.