How much edge is economically significant?

[TheBigShort]

In today's world what is a significant vol spread for pm's managing 8-10 figures vs a trader managing 5 - 7? For example, SPX is trading at 20 Vol, you would initiate a 1 month long gamma/Vega spread when your forecast vol is...? I was reading some old posts on NP (2004) where they were talking about some pretty wide spreads. I am curious to know how large of a spread you guys are looking for in your trades and how it might differ between different levels of traders.

This also goes for cross asset spreads (any spread in general).

 

[tommcginnis]

For example, SPX is trading at 20 Vol, you would initiate a 1 month long gamma/Vega spread when your forecast vol is...? I was reading some old posts on NP (2004) where they were talking about some pretty wide spreads. I am curious to know how large of a spread...

The balance you're describing is a great one by which to measure the advisability of any given position. For selling verticals, I favored delta-differences {not gamma} against theta. "How much of a *slot* of risk am I covering, versus the time-burn on my {net} premium?"

Same concept, different BSM dimensions.

But the thing is, it would not be the *numbers* that would steer my judgment, but how those numbers compared to their neighbors (by strike) and their cousins (by expiry). Every strike, and every underlying, and every major geopolitical event, are going to cause fluctuations in the overall market -- a fixed guide would likely not help.


["Likely" == subjective; opinion; testable, but as-yet untested.[!]]

 

[sle]

In today's world what is a significant vol spread for pm's managing 8-10 figures vs a trader managing 5 - 7?

How is it different in your mind from any other trade (say delta-1)? You have the current level, the forecast, you know your transaction costs and have some ideas about risk. It boils down to the question of "how much do I make if it goes my way and how much do I lose if it goes against me?".

 

[TheBigShort]

How is it different in your mind from any other trade (say delta-1)? You have the current level, the forecast, you know your transaction costs and have some ideas about risk. It boils down to the question of "how much do I make if it goes my way and how much do I lose if it goes against me?".

What I am really trying to get at is, what do those numbers look like these days at different levels of status. For instance, you are most likely (I hope) looking for much thinner spreads than I am. I might be able to risk 10% and my forecast vol is 40% above market on a thinly traded security.

So when you put on a Relative value play, maybe a var swap on spx vs rut, what's the spread you are usually trying to capture?

When does the spread become economically significant

 

[sle]

What I am really trying to get at is, what do those numbers look like these days at different levels of status. For instance, you are most likely (I hope) looking for much thinner spreads than I am. I might be able to risk 10% and my forecast vol is 40% above market on a thinly traded security.

That's a truism. A smaller player should be able to get a much better return on risk/capital (I was walking from the subway today and saw a penny on the sidewalk - an arb!).

So when you put on a Relative value play, maybe a var swap on spx vs rut, what's the spread you are usually trying to capture?

There really is no hard rule for this. You are measuring a lot of things at the same time - the effort needed, the capacity, the risk/reward, the information content (e.g. i might do a trade I've never done in small size if I am likely to learn something).

 

[TheBigShort]

That's a truism. A smaller player should be able to get a much better return on risk/capital (I was walking from the subway today and saw a penny on the sidewalk - an arb!).


There really is no hard rule for this. You are measuring a lot of things at the same time - the effort needed, the capacity, the risk/reward, the information content (e.g. i might do a trade I've never done in small size if I am likely to learn something).

It's friday, do you feel like critiquing a thought process/trade?

I bought 11 straddles on SYNA yesterday @ 36 vol expiring April 18. Total vega position is 90 . Their was some company specific news released a few days ago + lower guidence for next quarter and the company plunged 15%. Realized vol and implied vol has dropped quite a bit since the news release but volume remains extremely high.
I'll be hedging the position every time the underlying moves 3% in one direction. I have a volume stop, so if the volume dries up to a certain threshold I'll exit otherwise I will continue to hold the position for as long as possible.
Current Historical Vol 10d is 95%
1 year Low Historical Vol 10d is 25% (this is my assumed worst case scenario)
Forecast realized Vol for life of option is 55% (this is forcasted using a simple regression with HV, IV, Volume and XLK Iv as the inputs)

So I am risking 11 vol points for a target of 19 points. My transaction Costs are $1 per hedge + minimal slippage on entering and exiting the trade.
What do you think about the process?
Also, should I be looking for thinner spreads and increase my number of trades? Or should I be looking for wider spreads and reduce the amount of times I trade. Here is a graph of the vols of SYNA.