How prevalent is quant knowledge among the option traders here?

[tommcginnis]

You are not alone The good news is you do not need to understand it to make money trading.

Except that when vol takes an extended holiday, and you've still got a mortgage to meet......

((Translation: when vol camps out below the historic average for a year or two or four, and you end up by being a bullfrog's fart away from the hot flame of the market for week after week after week, it's papers like there that lend the ideas, hope, *inspiration*, to develop trade patterns to survive. Holy crap. Holy cow. O.M.G........))

 

[GRULSTMRNN]

Unrelated to this thread topic, but I found it interesting you mentioned Steven Shreve. His books were the intro books to my grad school program and he taught them himself. Good old times.

>> "By the way, anyone calling themselves a quant should know this."

It's not an acusation, it's an observation. Most option traders here haven't studied the theory to the level, like ajensen put it, of Shreve's "Stochastic Calculus for Finance". And if they make money regardless, perhaps it's not necessary. But quants need to go over Shreve and beyond and if they do, they should have an intuitive grasp over things such as gambling ("physical measure"), arbitrage ("risk neutral measure") or how HFT applies to options.

But then again, traders were making money with options long before quant theory was developed. Question is, can they still do today, now that quants and big finance have taken over?

 

[GRULSTMRNN]

Correct, stocks are not zero sum but your example is horrible (or perhaps poorly worded) . The buyer and seller in the same trade definitely don't both make money on a stock trade. Name one single example where that is the case. As long as the same buyer and seller are in one and the same trade there can only be one winner and one loser. In case you refer to one of the two exiting before the other and being replaced by a different operator then this applies to every other asset class too.

Stocks aren't zero sum, a seller can sell at profit, that buyer too can make a profit after selling and so on.

 

[gaussian]

>> "By the way, anyone calling themselves a quant should know this."

It's not an acusation, it's an observation. Most option traders here haven't studied the theory to the level, like ajensen put it, of Shreve's "Stochastic Calculus for Finance". And if they make money regardless, perhaps it's not necessary. But quants need to go over Shreve and beyond and if they do, they should have an intuitive grasp over things such as gambling ("physical measure"), arbitrage ("risk neutral measure") or how HFT applies to options.

But then again, traders were making money with options long before quant theory was developed. Question is, can they still do today, now that quants and big finance have taken over?

I think "quant" applies to more than just stochastic calculus. It's nice cocktail party stuff, but there are other ways of modeling the universe. Monte-Carlo methods for option pricing (https://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricing) are useful and don't require a PhD in statistics. Is "physical measure" something you're making up? I've never heard of gambling being referred to as a physical measure. I've never heard of a measure theoretic use of the term "physical" in any math or finance class I have taken. The existence of arbitrage indicates a failure of the Risk-Neutral Measure. In fact, the existence of arbitrage implies the non-existence of risk neutrality by definition.

Quants are working on developing more sophisticated models for pricing. A better pricing model means a market maker has a better chance of keeping the spread. They are by no means competing with the retail person. Im not sure why people are so obsessed with this apocalyptic navel gazing about "big finance" when the average trader doesn't command more than 4 figures and couldn't move the market a penny with all their margin power.

 

[Aquarians]

Is "physical measure" something you're making up? I've never heard of gambling being referred to as a physical measure. I've never heard of a measure theoretic use of the term "physical" in any math or finance class I have taken.

Look for "physical measure" on the Wikipedia page for https://en.wikipedia.org/wiki/Risk-neutral_measure

Other than that Monte Carlo methods are definitely useful and as stated N times before, you don't need a PhD in math to make money with options. Not that not having a PhD in math is a sure way to making money with options

 

[GRULSTMRNN]

No, but you need a very keen understanding of probability theory and the concepts of expected value. Without it, one should never touch options. There are way too many newbees who have no clue and simply imitate some option writers or guys who promote spread trading or so called "risk limited" strategies. That almost always ends in tears when the law of large numbers catches up.

Look for "physical measure" on the Wikipedia page for https://en.wikipedia.org/wiki/Risk-neutral_measure

Other than that Monte Carlo methods are definitely useful and as stated N times before, you don't need a PhD in math to make money with options. Not that not having a PhD in math is a sure way to making money with options

 

[ironchef]

Correct, stocks are not zero sum but your example is horrible (or perhaps poorly worded) . The buyer and seller in the same trade definitely don't both make money on a stock trade. Name one single example where that is the case. As long as the same buyer and seller are in one and the same trade there can only be one winner and one loser. In case you refer to one of the two exiting before the other and being replaced by a different operator then this applies to every other asset class too.

Both of you are essentially saying the same. Here is an example:

I bought an SPY call from the market maker, he/she immediately hedged using future/underlying. He/she would for sure collected a profit ~ (the risk free rate + bid/ask spread). If the underlying SPY goes up at expiration, I make a profit equal to SPY - strike - call premium. So, we both win?

So as long as SPY has an up trend in the long run, both retails that bought SPY calls and the counter parties that sold SPY calls would profit.

 

[ironchef]

You are not alone The good news is you do not need to understand it to make money trading.

I am not so sure we can make money trading options without at least some understanding of how they are priced, what drives the prices, Gaussian, fat tails, ....

After looking over the paper a few more times, the math is still way too complicated for me but at least I can understand what he was trying to do: Using option prices and underlying prices to assess the future. I don't think he was successful in finding the "holy grail", (if he was successful, he would not have published the paper).

In that regard, one of the elite traders among us is using a combination of options and underlying to establish entry and exit for day trading options and has been very successful trading this way for 20+ years.

 

[fan27]

I am not so sure we can make money trading options without at least some understanding of how they are priced, what drives the prices, Gaussian, fat tails, ....

After looking over the paper a few more times, the math is still way too complicated for me but at least I can understand what he was trying to do: Using option prices and underlying prices to assess the future. I don't think he was successful in finding the "holy grail", (if he was successful, he would not have published the paper).

In that regard, one of the elite traders among us is using a combination of options and underlying to establish entry and exit for day trading options and has been very successful trading this way for 20+ years.

Yeah....my comment was regarding trading in general. Fewer moving parts with stocks and futures. I honestly don't know the level of knowledge needed to trade options as I do not trade them. Seems though like a couple times of month lately some poor sap is posting on this site asking for advice on how to get out of an options position gone horribly wrong. Perhaps all options traders should watch this video first.

 

[gaussian]

Yeah....my comment was regarding trading in general. Fewer moving parts with stocks and futures. I honestly don't know the level of knowledge needed to trade options as I do not trade them. Seems though like a couple times of month lately some poor sap is posting on this site asking for advice on how to get out of an options position gone horribly wrong. Perhaps all options traders should watch this video first.

IMO it depends on how you want to trade them. There is a lot of meme-tier hype in this thread over pure quantitative strategies but you can use options as directional leverage as well (with some caveats - namely time decay, etc).

There is more than one way to skin a cat. Take a trip through the options recommended list on amazon sometime to get an idea of how people are trading options. There is a certain level of romanticism with quantitative trading - it sure sounds good to the ladies when you tell them you're a "quant" and it'd be "too hard to explain but I do math and make money".

Truth be told - give a listen to "Market Wizards" and the follow up "The New Market Wizards" and you'll realize nearly no one is a quant and yet they continue to make money hand over fist. I feel like mathematically gifted people (myself included sometimes) get off on making our jobs sound more complicated than they are. All things should be weighed with a grain of salt - especially when big words are being thrown around.