Implied Volatility in plain English
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Sure, give me an example of a listed derivative that is "marked to fantasy"? Also, please tell me why aren't you arbing that mark with all of your tragic net worth?
So what? when I have to make a price on a quarter-yard of single stock collar, I don't go into philosophy, but rather look at it's realized volatility etc etc. In Black-Sholes world the stock is just an underlying asset, an abstraction in a risk-neutral world. It could be any other underlying, a CDS index, an interest-rate future or a bond futures, a commodity futures etc. The "deep thoughts" on the nature of the asset do not really enter into the option pricing.
Very well - if IV is the measure of percieved risk, what is the generic measure of risk?
Look pretty good, especially considering the liquidity constraints in the option space.
Free? No, there are no free lunches, but there are cheap lunches
PS. StarDust9182, trilogic et al - this is actually turning up some interesting points/thoughts, so let's continue
Quote from sle:
Sure, give me an example of a listed derivative that is "marked to fantasy"? Also, please tell me why aren't you arbing that mark with all of your tragic net worth?
So what? when I have to make a price on a quarter-yard of single stock collar, I don't go into philosophy, but rather look at it's realized volatility etc etc. In Black-Sholes world the stock is just an underlying asset, an abstraction in a risk-neutral world. It could be any other underlying, a CDS index, an interest-rate future or a bond futures, a commodity futures etc. The "deep thoughts" on the nature of the asset do not really enter into the option pricing.
Very well - if IV is the measure of percieved risk, what is the generic measure of risk?
Look pretty good, especially considering the liquidity constraints in the option space.
Free? No, there are no free lunches, but there are cheap lunches
PS. StarDust9182, trilogic et al - this is actually turning up some interesting points/thoughts, so let's continue
Great.
Why am I always frustrated when asking about options specifics. If I said to you are you bullish gold, you may say no and actually have a bearish outlook for several good reason and be short the underlying or a cal. spread or something.
But when it comes to options there seems to be a lot of subterfuge ? Why is this ?
Some people might benefit from reading the following:
http://www.volcube.com/resources/options-articles/delta-neutral-trading-strategies/
(I am not promoting volcube it's just a good explanation of Market Making and delta neutral strategies.)
Also:
http://en.wikipedia.org/wiki/Delta_neutral
It might make help make sense of what sle says. I believe sle is a volatility trader and simply hedges the underlying.
http://www.volcube.com/resources/options-articles/delta-neutral-trading-strategies/
(I am not promoting volcube it's just a good explanation of Market Making and delta neutral strategies.)
Also:
http://en.wikipedia.org/wiki/Delta_neutral
It might make help make sense of what sle says. I believe sle is a volatility trader and simply hedges the underlying.
"Sure, give me an example of a listed derivative that is "marked to fantasy"? Also, please tell me why aren't you arbing that mark with all of your tragic net worth?"
SLE - as my example I present the london whale derivatives.
See: http://www.zerohedge.com/news/crimi...cing-hundreds-billions-cds-dimon-next-diamond
and see: http://socioecohistory.wordpress.com/2009/04/03/fasb-here-comes-mark-to-fantasy-accounting/
My net worth actually climbed slightly today even though I have only one open American option position currently. Thanks for your concern though.
As for the word arb, my understanding is different. An arbitrage example for me is a crossed bid ask or a three way (Sorry, it's not what most of you guys think) currency hedge and one stock in two currencies for example. I follow the adage "Markets can remain irrational longer than one can remain solvent." Money can make mark to fantasy appear real for a long time. A true arb requires a fixed date where the mispricing must be expressed at a guaranteed profit. So what kind of "arb" are you talking about?
I am not going up against the london whale in my trading.
SLE - as my example I present the london whale derivatives.
See: http://www.zerohedge.com/news/crimi...cing-hundreds-billions-cds-dimon-next-diamond
and see: http://socioecohistory.wordpress.com/2009/04/03/fasb-here-comes-mark-to-fantasy-accounting/
My net worth actually climbed slightly today even though I have only one open American option position currently. Thanks for your concern though.
As for the word arb, my understanding is different. An arbitrage example for me is a crossed bid ask or a three way (Sorry, it's not what most of you guys think) currency hedge and one stock in two currencies for example. I follow the adage "Markets can remain irrational longer than one can remain solvent." Money can make mark to fantasy appear real for a long time. A true arb requires a fixed date where the mispricing must be expressed at a guaranteed profit. So what kind of "arb" are you talking about?
I am not going up against the london whale in my trading.
"So what? when I have to make a price on a quarter-yard of single stock collar, I don't go into philosophy, but rather look at it's realized volatility etc etc. In Black-Sholes world the stock is just an underlying asset, an abstraction in a risk-neutral world. It could be any other underlying, a CDS index, an interest-rate future or a bond futures, a commodity futures etc. The "deep thoughts" on the nature of the asset do not really enter into the option pricing."
I offered my comment to the questioner. I see we disagree. No problem. I respect your opinion. As to philosophy, an edge can occur when one knows something that the general market does not. Philosophy is useful for me. Some book learners (meaning newbies and not you) find it a threat. I don't. Again my net worth will likely climb on two canadian short option positions this Friday. I guess I am just lucky this week.
BY the way, I trade my own capital not other people's so I express my opinion in the market and the market tells me my result. I am still here so some of my philosophy must be working.
I offered my comment to the questioner. I see we disagree. No problem. I respect your opinion. As to philosophy, an edge can occur when one knows something that the general market does not. Philosophy is useful for me. Some book learners (meaning newbies and not you) find it a threat. I don't. Again my net worth will likely climb on two canadian short option positions this Friday. I guess I am just lucky this week.
BY the way, I trade my own capital not other people's so I express my opinion in the market and the market tells me my result. I am still here so some of my philosophy must be working.
"Very well - if IV is the measure of percieved risk, what is the generic measure of risk?"
Sorry, I am not sure I understand what you are asking. Risk is not an objective thing. Risk is trader specific isn't it? Is this a philosophy question?
Sorry, I am not sure I understand what you are asking. Risk is not an objective thing. Risk is trader specific isn't it? Is this a philosophy question?
You definitely gave an example of mark-to-fantasy when it comes to OTC derivatives (CDSâs in this case) so I canât fault you on that. As a retail trader though, do I even have access to OTC derivatives? If not, then all retail derivatives that I have access to are mark-to-market throughout the day and at market close. Because of this, I would conclude that there isnât any mark-to-fantasy type shenanigans going on in the realm/domain I have access to. Correct me if Iâm completely jumping the shark here because I would like to know if this is not the case.
Sorry, I was under impression that we are talking about listed markets. However, even in the OTC markets, a mismarked book is mismarked - even the trader himself knew he's lying and was trying to hide it.
A true example of a fantasy mark would be correlaton/spread marks in the early 2006, but if you look at the levels they were consistent with other visible risk metrics (e.g. VIX at 9.5 is pretty consistent with OTC markets at the time). It is very easy to argue post-factum that it was mispriced all around, but at the time, from RV perspective, it was not clear at all.
Definition of a true arb is a bit washy; let's take convertible arb as an example - while you can decompose the asset into vanilla corporate + option and lock in the mispricing, you might live through some MtM pains along the way. Yet it's a true arb in an official sense of that word, since you can trade every sub-component of the bond to lock in the value.
From my perspective, if you know/believe that something is significantly mispriced in the relative sense, you should be able to structure some trade to lock in that statistical advantage. That's what I mean when I say "arb" something as a verb.
True, risk as a concept is not objective, that's the problem. However, option price once translated into the implied volatility is a pretty objective, quantifiable thing. From the market-makers (or any volatility trader perspective) it's the expectation of volatility for a given stock along some path. While imperfect, every volatility trader is fully aware of the models imperfections and knows how to correct for them.
I appreciate the presense of intelligent people on this board, I really do (otherwise, I'd not post here). Hopefully we are arguing here in "pursuit of truth and happiness", not to prove to the world that we are right and other are wrong.