IV Smile and Firm Fundamentals

[Atikon]

I use a version of the expected move formula, probably similar to the ToS MMM formula. At first I did not use wings, then I did, now I don't 80% of the time. It is counter intuitive but backtesting reveal that wings=higher SD, no wings= lower SD. Losses are technically unlimited without wings, but the losses are much higher with wings than without over time. I chose reliability of returns and lower SD over higher expected value, but thats a personal choice.

Do you use stops? How is defined risk coming out worse than unlimited? Also what about Reduction in buying power? Garbage Wings lets me put on 4 instead of 1 trade/s in most underlyings (gw=5% from ATM vs naked 20% underlying+risk of getting blown to pieces when IV explodes).

 

[ironchef]

I use a version of the expected move formula, probably similar to the ToS MMM formula. At first I did not use wings, then I did, now I don't 80% of the time. It is counter intuitive but backtesting reveal that wings=higher SD, no wings= lower SD. Losses are technically unlimited without wings, but the losses are much higher with wings than without over time. I chose reliability of returns and lower SD over higher expected value, but thats a personal choice.

Thanks. Over time protection costs money so I am not surprised on average, in the long run, wings cost money.

But isn't the "expected move" already priced in?

@.sigma, I need your help. Power law distribution, fundamental distribution... ?

 

[lightfightercap]

Do you use stops? How is defined risk coming out worse than unlimited? Also what about Reduction in buying power? Garbage Wings lets me put 4 instead of 1 trades in most underlyings (gw=5% from ATM vs naked 20% underlying+risk of getting blown to pieces when IV explodes).

I use rules based on time not price action.

Wings lose more than sans wings because when selling, the BRP is many times lower than the naked margin, so % loss is higher.

Guess which stack of returns is with and without wings? Average is bolded at the bottom...

Which do you prefer?

 

[lightfightercap]

Thanks. Over time protection costs money so I am not surprised on average, in the long run, wings cost money.

But isn't the "expected move" already priced in?

@.sigma, I need your help. Power law distribution, fundamental distribution... ?

The expected move can be calculated a lot of different ways, depending on confidence, HV or IV, and a lot of assumptions. I include variables that aren't necessarily directly relevant or derived from the options, good for some stuff, not really that good for other stuff

 

[Atikon]

I use rules based on time not price action.

Wings lose more than sans wings because when selling, the BRP is many times lower than the naked margin, so % loss is higher.

Guess which stack of returns is with and without wings? Average is bolded at the bottom...

Which do you prefer?

are you comparing 1 trade naked vs 1 trade with wings or ROI naked trades 1 vs how many trades you could put on with wings, ROI will deviated drastically. In the real world your ROI should almost always be higher with wings unless you are an Institution/billionaire and your trades move the market

 

[lightfightercap]

are you comparing 1 trade naked vs 1 trade with wings or ROI naked trades 1 vs how many trades you could put on with wings, ROI will deviated drastically. In the real world your ROI should almost always be higher with wings unless you are an Institution/billionaire and your trades move the market

These are the same trades in every way, except one has wings $2.00 out on both sides and the other doesn't. thazzit

 

[Atikon]

These are the same trades in every way, except one has wings $2.00 out on both sides and the other doesn't. thazzit

Maybe if the wings are wide enough to enclose historical and robustness test losses (Still shit bc of black swan events imo). From a ROI perspective making 4x the premium vs making it 1x with e.g. 60k BPR makes a big difference. The only situation where this doesn't matter is if you have unlimited buying power and there are no Investment Opportunities that are greater the IRR of premium/naked Option BPR

 

[lightfightercap]

Maybe if the wings are wide enough to enclose historical and robustness test losses (Still shit bc of black swan events imo). From a ROI perspective making 4x the premium vs making it 1x with e.g. 60k BPR makes a big difference. The only situation where this doesn't matter is if you have unlimited buying power and there are no Investment Opportunities that are greater the IRR of premium/naked Option BPR

60k BPR with more capital risk, though. It's easy to plan for the upside...