From novice to riskarb...

Quote from nitro:

I live this everyday, and I always find it funny when people use this "argument." If you can "read" the underlying and you are trading options in the very short term (not MarketMaking,) then the greeks mean almost zero and the only reason to trade options in this case as opposed to the underlying is to use leverage and/or because you have some other edge, e.g., execution edge or perhaps better comissions per leverage than on the underlying.

In short, being able to read the underlying better than other traders would remove the need for the extra decision dimesions that options trading forces on you (given the exceptions noted above.) Why not just trade the underlying? If you are trading options in anything other than intraday time frame, then moving the time horizon to a "swing time frame" means the greeks become _even_more_ important.

nitro
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Well, the way I look at it Nitro is that first you need to be able to trade the underlying. Then options gives you an extra edge that reduces your risk variance. See look, I use to trade the underlying intraday right and I did pretty well. I've also done a little bit of longer term trading on the underlying, but I had no margin for error. I was either right or I was wrong. Kind of like flipping a coin right. You bet heads or tails, heads you win, tails you lose. There is no in between.

But with options, you can get a heads and win, you can get a tails and win and you can even have an equal number of heads and tails and win. That is the edge my friend. It's not leverage. Hell, if you want leverage you can go to single stock futures. Options increase your risk variance and that is huge for a trader. Even a slight increase in your risk variance can make the difference between a trader that is flat for the year vs making a million dollars.

But here is the catch 22. If you can't trade the underlying and you are trading options and lets say you have tons of edge. What does that edge really amount to? A nickel? A dime? I mean seriously quantify it. Now if you are a bad trader, a nickel or a dime is not going to save you. In fact it could kill you. That's the difference. It takes some guys so long to figure this out. I kind of figured it out intuitively.

Now if your Metooxx and you are doing 500 trades a day. Then a nickel here and a dime there add up to something. But in those cases you are only risking a nickel or dime. OK, I've rambled long enough. That's my two cents.
 
Quote from nitro:

I live this everyday, and I always find it funny when people use this "argument." If you can "read" the underlying and you are trading options in the very short term (not MarketMaking,) then the greeks mean almost zero and the only reason to trade options in this case as opposed to the underlying is to use leverage and/or because you have some other edge, e.g., execution edge or perhaps better comissions per leverage than on the underlying.

In short, being able to read the underlying better than other traders would remove the need for the extra decision dimesions that options trading forces on you (given the exceptions noted above.) Why not just trade the underlying? If you are trading options in anything other than intraday time frame, then moving the time horizon to a "swing time frame" means the greeks become _even_more_ important.

nitro
More...

Absolutely... and I think the majority would agree with your view. For a pure directional bet, nothing beats simply trading the underlying.

It's counterproductive to add additional decision-modalities; as well as adding nonlinear parms, convexity(concavity) of long(short)gamma... Multi-leg positions which often invert greek values(bi/trimodailty) which adds an order of mag. in complexity when a simple long/short position in the underlying is in order.

For the most part, options should be limited to:

1) speculating on volatility(non-directional)
2) trading a +expectation
3) gamma-trading

None of which can be done with the underlying.
 
I agree 100%, unless you scalp them of course, but that is beyond 99% of the people on this planet.

nitro
Quote from riskarb:

Absolutely... and I think the majority would agree with your view. For a pure directional bet, nothing beats simply trading the underlying.

It's counterproductive to add additional decision-modalities; as well as adding nonlinear parms, convexity(concavity) of long(short)gamma... Multi-leg positions which often invert greek values(bi/trimodailty) which adds an order of mag. in complexity when a simple long/short position in the underlying is in order.

For the most part, options should be limited to:

1) speculating on volatility(non-directional)
2) trading a +expectation
3) gamma-trading

None of which can be done with the underlying.
More...
 
Quote from riskarb:


additional decision-modalities--- nonlinear parms--- convexity(concavity) of long(short)gamma--- which often invert greek values(bi/trimodailty)
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Damn...I'm impressed riskarb...lol
 
Quote from Maverick74:

He pulled all that out of page 6 in Baird's book. No big deal. LOL. :D
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HAHAHAHAHA (thumbing thru my dog-eared copy of Baird)... gotcha, it's page 1156.
 
Quote from Maverick74:



But here is the catch 22. If you can't trade the underlying and you are trading options and lets say you have tons of edge. What does that edge really amount to? A nickel? A dime? I mean seriously quantify it. Now if you are a bad trader, a nickel or a dime is not going to save you. In fact it could kill you. That's the difference. It takes some guys so long to figure this out. I kind of figured it out intuitively.

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Exactly why MMs shouldn't be sheet-monkeys, the model-output only serves to hasten their demise. Buy 50%vol all day long, fire-sale! The model stated Fv is a whopping 54%vol, woo-hoo! Comes next week and your combo is 55%vol bid and you're STILL staring at a loss -- unless you're flat gamma.

If the MMs don't go home flat(gamma) it's simply a Texas Hedge.
 
Well, said riskarb...

Quote from riskarb:

Absolutely... and I think the majority would agree with your view. For a pure directional bet, nothing beats simply trading the underlying.

It's counterproductive to add additional decision-modalities; as well as adding nonlinear parms, convexity(concavity) of long(short)gamma... Multi-leg positions which often invert greek values(bi/trimodailty) which adds an order of mag. in complexity when a simple long/short position in the underlying is in order.

For the most part, options should be limited to:

1) speculating on volatility(non-directional)
2) trading a +expectation
3) gamma-trading

None of which can be done with the underlying.
More...
 
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