High Probability Options Trading Journal

[ET180]

I did a little reading and found this:

http://www.columbia.edu/~mh2078/ContinuousFE/BlackScholesCtsTime.pdf

Specifically, page 5 talks about the butterfly example that I mentioned above.

 

[guru]

Thanks for the response. I can't really get the calendar trade to make sense. Say SPY 10% higher, long the 2 year LEAP call, sort the 3 month call. 10% higher than 460 is around 505. Shorting March 22 505 call is around 1.45. Long Jan 24 505 call is around 32. So if SPY drops, there's too much risk on the long call and the short call doesn't really decrease the premium enough. Right now the Jun 23 505 call is around 24. That's 6 months instead of 3, but assuming that the decay for 3 months is about half that, then the LEAP will lose about $4 over those three months, but we'd only collect around 1.45 from the short call. I diagonal might work a little better, but I'd want to sell further away than 10% for the long call. Maybe do 20% long call, 10% short call. If SPY goes a little higher then it makes sense, but that's more of a directional bet than a volatility bet and I'd probably resort to doing a +1x-2 ratio which is what I usually do for index exposure.

I didn't intend that trade idea for SPY itself, just any large cap stock that may be beaten up and yes, it would be a directional bet.
And such calendars should benefit from increased call IV on the way up, when calls can get quite expensive when a stock is shooting up. Occasionally I'm even trading single LEAP calls and you'd have to buy them when call prices drop on the way down, while hoping to benefit from high IV on the way up. Selling a short call against that may not look like much so it's a small alpha (if any), but its' better than not selling anything. And I'd prefer to sell a higher strike call if doing a diagonal, because the chance of getting there quickly is very small. Otherwise you're within basic odds.
At higher IV I'd prefer bullish LEAP butterflies.

Though these are ape type discussions that don't have an edge, except discussing some ideas for regular trading and hoping to beat the market. I just like calendars and butterflies but can't make a strong enough case for them.

 

[guru]

I did a little reading and found this:

http://www.columbia.edu/~mh2078/ContinuousFE/BlackScholesCtsTime.pdf

Specifically, page 5 talks about the butterfly example that I mentioned above.

I took a quick look, and that's fine, but that's just one approach out of many. Most published methods may no longer work, or may not provide sufficient opportunities in liquid markets where everyone is trying to do the same thing. And I've also seen papers on arbing the skew using things like single hedged option, unhedged spreads, hedged spreads, etc. Those may work in some cases, or more often in less liquid instruments and markets.
I usually look for multiple things to arb against each other and have variety of combo templates to apply, so the specific combo/structure doesn't matter as much.

 

[ET180]

I took a quick look, and that's fine, but that's just one approach out of many. Most published methods may no longer work, or may not provide sufficient opportunities in liquid markets where everyone is trying to do the same thing. And I've also seen papers on arbing the skew using things like single hedged option, unhedged spreads, hedged spreads, etc. Those may work in some cases, or more often in less liquid instruments and markets.
I usually look for multiple things to arb against each other and have variety of combo templates to apply, so the specific combo/structure doesn't matter as much.

How long do you find that these arb opportunities exist? When you recognize a trade setup, how much time do you have to place the trade? I would expect that the margin on any given trade is extremely small and you're using a ton of leverage in order to capture some gain and the leverage is the reason why your hedging is so important.

 

[guru]

How long do you find that these arb opportunities exist? When you recognize a trade setup, how much time do you have to place the trade? I would expect that the margin on any given trade is extremely small and you're using a ton of leverage in order to capture some gain and the leverage is the reason why your hedging is so important.

Usually hours, throughout a day, as I see hedging activity that creates certain skews. It may even last for days when, for example, some fund may be heavily buying or selling shares and options at the same time. I can get a feel for this from the volume and pricing of both shares and options, as well as the shape of IV smile. Maybe this can be derived from 2nd order greeks, but I just have more intuitive understanding of what's going on and how the IV may be shaped during and after the fact, including if the stock crashes.

 

[guru]

Just my end-of-year balance. Last couple weeks were little rocky as I wasn't finding too many opportunities to trade, also rewriting parts of my options scanner, as well as being busy with other projects.
Currently up 30% since starting trading PM on September 13.

 

[morganpbrown]

Fascinating. If you dont mind disclosing, what is your general background?

 

[guru]

Fascinating. If you dont mind disclosing, what is your general background?

Being dissatisfied.
Whether as quants, scientists, engineers or artists, it’s our job to be dissatisfied. We question, we analyze, we have that itch constantly gnawing at us that says 'we can do better.' We want that dissatisfaction etched into the foundation of everything we do so that we perpetually push ourselves toward bigger and better things. We strive to do more. We strive to do better. We stay dissatisfied.

 

[morganpbrown]

Being dissatisfied.
Whether as quants, scientists, engineers or artists, it’s our job to be dissatisfied. We question, we analyze, we have that itch constantly gnawing at us that says 'we can do better.' We want that dissatisfaction etched into the foundation of everything we do so that we perpetually push ourselves toward bigger and better things. We strive to do more. We strive to do better. We stay dissatisfied.

I have the feature/bug of not believing something unless I implement it myself. Never got paid to learn this stuff, and have a day job, so progress is very slow. Still interesting

 

[guru]

Being dissatisfied.
Whether as quants, scientists, engineers or artists, it’s our job to be dissatisfied. We question, we analyze, we have that itch constantly gnawing at us that says 'we can do better.' We want that dissatisfaction etched into the foundation of everything we do so that we perpetually push ourselves toward bigger and better things. We strive to do more. We strive to do better. We stay dissatisfied.

(that was borrowed from somewhere else but also adapted as my former company's motto)
On a more serious note, my background is mostly tech, as I've co-managed couple offshore dev teams and had to come up with projects/tasks and solutions to problems. So 90% of the time it was research and analysis, then 10% of the time coding, whether by myself or someone else. Though I've also ran a film & photo studio in the past, producing stock footage & stock photos (we've shot over 200K of them), so I was spending countless hours learning about color, contrast, video compression, web design, design & marketing, etc. I guess with options I ended up finding more challenging stuff, though I don't want to be a trader, so I'm looking beyond this and may end up doing more tech. At least now I understand what problems I need to solve as a potential trader.