How much money do you put in option?
- Thread starter kaihui
- Start date
They both have $10,000 maximum at risk so they both have the same risk. A gap overnight does not change anything. The delta and vega nuetral is only for the initial movement and it is only in theory. Remember that greeks come from Black Scholes which is derived from several assumptions which are not true in real trading. A delta and vega neutral portfolio, is theoretically hedged for a $1 move in the underlying, but only in theory. A huge gap overnight could be $5.00 and thus the nuetrality of the portfolio goes right out the window. If there is a big gap down overnight, IV will increase and delta will increase and both positions will have a loss.
There is no way to say with any certainty that a delta and vega neutral portfolio will decrease in value less since we are talking about theoretical values. Moreover, any slight difference merely reflects a reaction to that gap overnight but does not change the fact that $10,000 is still your maximum risk.
I am sorry but it is not correct to tell someone that risk has nothing to do with capital at risk.
Phil
There is no way to say with any certainty that a delta and vega neutral portfolio will decrease in value less since we are talking about theoretical values. Moreover, any slight difference merely reflects a reaction to that gap overnight but does not change the fact that $10,000 is still your maximum risk.
I am sorry but it is not correct to tell someone that risk has nothing to do with capital at risk.
Phil
Anseld,
I think you're getting of track here. The guy gambles with options as 20-25% daily swings cannot be characterized in any other way.
No matter how you measure your exposure, if each day you're "fighting for survival" as the initial poster suggested then you're not doing it right. Every day the guy has market crash-type events, either making lots of money or losing all of it.
Other posters including myself have pointed out that when we trade options we do not put more than, say, 2% of capital at risk on any one trade. That is, if there trade goes against you then as soon as the loss reaches 2% of your capital you get out. Obviously, to achieve that you need to properly size the position. Now, I'm not saying that if there's a significant adverse overnight gap against my position that I would lose only 2%. In some cases it is, for example, when I buy a call option and I'm willing to lose the full premium. However to achieve that I size the position so that my maximum loss is equal to 2%. In other cases, my maximum potential loss (worst case scenario) is more than 2%, but I still never have 25% daily swings.
I think you're getting of track here. The guy gambles with options as 20-25% daily swings cannot be characterized in any other way.
No matter how you measure your exposure, if each day you're "fighting for survival" as the initial poster suggested then you're not doing it right. Every day the guy has market crash-type events, either making lots of money or losing all of it.
Other posters including myself have pointed out that when we trade options we do not put more than, say, 2% of capital at risk on any one trade. That is, if there trade goes against you then as soon as the loss reaches 2% of your capital you get out. Obviously, to achieve that you need to properly size the position. Now, I'm not saying that if there's a significant adverse overnight gap against my position that I would lose only 2%. In some cases it is, for example, when I buy a call option and I'm willing to lose the full premium. However to achieve that I size the position so that my maximum loss is equal to 2%. In other cases, my maximum potential loss (worst case scenario) is more than 2%, but I still never have 25% daily swings.
Not exposed to overnight risk at nearly the same levels? Sorry but the "hedge" you bank on is theoretical only and goes right out the window as soon as the stock makes even the slightest move. As soon as the stock makes any move, delta and gamma change and your hedge is gone.
Greeks are based on B-S formula which is based on some assumptions, such as:
Short-selling of securities with the full use of proceeds is permitted
There are not transaction costs or taxes
Security trading is continuous
Volatility is constant
These assumptions are false in the real world and therefore the greek values have a bias or error factor. Moreover, the greeks were meant to provide an instantaneous snapshot measure. As soon as the stock moves even $0.01 the measures are all off.
You could write a ten page paper rehashing Black-Scholes and theoretical greek values, but it would have to be based on the same assumptions and theoretical values. In the end, risk is defined as capital at risk.
I do not trade in the theoretical world, I trade in the real world. $10,000 at risk is $10,000 at risk. The only way you can try and differentiate between the two in defining risk and making a sound investment decision is probabilities of success. If one portfolio has a 90% chance of loss then it is riskier than the other with a 10% chance of loss.
We simply disagree. Greeks are great for understanding how options work but they are, admittedly theoretical values. Institutions with large value at risk use them because they can re-adjust theor portfolios daily with minimal tansaction costs and most times they are trying to lock in small gains.
If you want to make this a personal attack, then by all means resort to it, but I would much rather have an intelligent discussion.
Regards and out
Phil
P.S. If you want to know what I mean by real trading as opposed to theoretical, read my Journal under SPX credit spread trader.
Greeks are based on B-S formula which is based on some assumptions, such as:
Short-selling of securities with the full use of proceeds is permitted
There are not transaction costs or taxes
Security trading is continuous
Volatility is constant
These assumptions are false in the real world and therefore the greek values have a bias or error factor. Moreover, the greeks were meant to provide an instantaneous snapshot measure. As soon as the stock moves even $0.01 the measures are all off.
You could write a ten page paper rehashing Black-Scholes and theoretical greek values, but it would have to be based on the same assumptions and theoretical values. In the end, risk is defined as capital at risk.
I do not trade in the theoretical world, I trade in the real world. $10,000 at risk is $10,000 at risk. The only way you can try and differentiate between the two in defining risk and making a sound investment decision is probabilities of success. If one portfolio has a 90% chance of loss then it is riskier than the other with a 10% chance of loss.
We simply disagree. Greeks are great for understanding how options work but they are, admittedly theoretical values. Institutions with large value at risk use them because they can re-adjust theor portfolios daily with minimal tansaction costs and most times they are trying to lock in small gains.
If you want to make this a personal attack, then by all means resort to it, but I would much rather have an intelligent discussion.
Regards and out
Phil
P.S. If you want to know what I mean by real trading as opposed to theoretical, read my Journal under SPX credit spread trader.
mte,
first of all, no one is encouraging anyone to trade where he will experience 20-25% daily swings. kai is carrying excessive deltas for an account of his size.
and as for this topic, i know you're looking at risk at the extreme level, when time goes to zero or vol goes to zero.
but before those things fully decay or expire, there are many elements that make their risk levels different.
a pure naked option is just risker than a hedged position when analyzing all the days that are in between.
if you put 2% of your capital in a call, and the underlying plummets, you could potentially lose everything overnight, save whatever otm premium is left.
but a rightfully hedged position would not experience that overnight. i guess the keyword is overnight.
if everything expire worthless, sure, the max loss is the same, but that's why there's time in between.
anyway, this is so basic stuff, and i'm sure you and optioncoach understand it, but we're just looking at it from different viewpoints and timepoints.
first of all, no one is encouraging anyone to trade where he will experience 20-25% daily swings. kai is carrying excessive deltas for an account of his size.
and as for this topic, i know you're looking at risk at the extreme level, when time goes to zero or vol goes to zero.
but before those things fully decay or expire, there are many elements that make their risk levels different.
a pure naked option is just risker than a hedged position when analyzing all the days that are in between.
if you put 2% of your capital in a call, and the underlying plummets, you could potentially lose everything overnight, save whatever otm premium is left.
but a rightfully hedged position would not experience that overnight. i guess the keyword is overnight.
if everything expire worthless, sure, the max loss is the same, but that's why there's time in between.
anyway, this is so basic stuff, and i'm sure you and optioncoach understand it, but we're just looking at it from different viewpoints and timepoints.
coach,
your approach is that you are looking at everything at expiration.
but there is no rule that you have to hold every position till expiration.
values change wrt to time (and other things), and you can capitalize anytime when those values change.
so look at option values from all the days in between, and then you'll see what i'm talking about.
and btw, greeks are good to follow if you ever look at option values during its entire existence. evidently, i look at options very differently from you. i look at how it might dynamically change tomorrow if vols changed or where values would be after a holiday weekend, etc, whereas you just focus on the absolute final day. my risk graphs are curvey. yours are angular. i like to see how everything evolves as it morphs from day to day.
your approach is that you are looking at everything at expiration.
but there is no rule that you have to hold every position till expiration.
values change wrt to time (and other things), and you can capitalize anytime when those values change.
so look at option values from all the days in between, and then you'll see what i'm talking about.
and btw, greeks are good to follow if you ever look at option values during its entire existence. evidently, i look at options very differently from you. i look at how it might dynamically change tomorrow if vols changed or where values would be after a holiday weekend, etc, whereas you just focus on the absolute final day. my risk graphs are curvey. yours are angular. i like to see how everything evolves as it morphs from day to day.
Anseld,
I went over the discussion and it seems to me that the difference in our views in this particular discussion lies in the fact that you look at it from a total portfolio point of view and I (we) look at it from a single trade point of view. Both are correct and important, they're just on a different level of risk management.
The conclusion is still the same - the guy gambles and has no idea what trading and risk/money management is all about.
Cheers.
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Kai;
a]Another thing I like to do, when risking prudent amounts;
cut back to one [1] contract
or actually papertrade,
when I have several losing trades in a row, that may mean the underlying trend has changed .
z]Like GE has some great, high liquid options , and still record prices on it, but had several losses in a row early 2005, because
its in a sideways trend [ or range] on monthly/daily charts since Jan -05.
Havent risked 10% or 2% or 1% or .5% on GE options since i cut several losses on it, early 2005,and probably will miss first month or more when it really trends perhaps.
