more interesting discussion:
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 12:49 AM
Quote from nitro:
Although I agree with the spirit of what you are saying, I think it goes too far. IMO, the reason most quantitative models are meaningless to a certain extent is that most (all ?) models require that the statistical properties of whatever you are modeling evolve slowly over time so that estimates using past data can be indicative of the future. Obviously, as traders this is not what we observe, but that does not mean that greeks are _always_ meaningless, but _when_.
nitro
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
I never said that greeks were meaningless. In fact, quite the opposite. I make a very good living trading off the greeks. I just think that if one focuses all of one's attention on the greeks as the key to making money you are doing yourself a disservice. If you can't trade the underlying, you won't make shit trading options. And if you are not a damn good trader overall, i.e. good discipline, patient, and willing to take risk then you are going to find options to be very challenging.
As far as quantitative models go, I think most of them are worthless. I'm sure most people would disagree with me on this but I stand my ground on this topic. Every option is worth what someone is willing to buy or sell it for regardless of what the model says. Also, stocks do not trade in a vacuum. They jump around way too much. The key is to be able to calculate the value of the jump so to speak. I do this by pricing the ATM straddle vs the ability of the stock to jump and the magnitude of the jump. Then calculate what the skew should be based on those calculations. From there you can start to derive fair values. Anyway I digress, greeks are very important, but more important is one's ability to trade. I'll take a good trader over a great pricing model any day of the week.
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
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
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
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.
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 12:49 AM
Quote from nitro:
Although I agree with the spirit of what you are saying, I think it goes too far. IMO, the reason most quantitative models are meaningless to a certain extent is that most (all ?) models require that the statistical properties of whatever you are modeling evolve slowly over time so that estimates using past data can be indicative of the future. Obviously, as traders this is not what we observe, but that does not mean that greeks are _always_ meaningless, but _when_.
nitro
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
I never said that greeks were meaningless. In fact, quite the opposite. I make a very good living trading off the greeks. I just think that if one focuses all of one's attention on the greeks as the key to making money you are doing yourself a disservice. If you can't trade the underlying, you won't make shit trading options. And if you are not a damn good trader overall, i.e. good discipline, patient, and willing to take risk then you are going to find options to be very challenging.
As far as quantitative models go, I think most of them are worthless. I'm sure most people would disagree with me on this but I stand my ground on this topic. Every option is worth what someone is willing to buy or sell it for regardless of what the model says. Also, stocks do not trade in a vacuum. They jump around way too much. The key is to be able to calculate the value of the jump so to speak. I do this by pricing the ATM straddle vs the ability of the stock to jump and the magnitude of the jump. Then calculate what the skew should be based on those calculations. From there you can start to derive fair values. Anyway I digress, greeks are very important, but more important is one's ability to trade. I'll take a good trader over a great pricing model any day of the week.
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
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
Maverick74
Registered: Mar 2002
Posts: 3896
04-14-04 10:51 PM
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.
