Long Vega Strategies

[BlueHorseshoe]

Quote from ChrisM:

While searching through many possible complex strategies loading my imagination to the limits I found in 2002 edition of "Futures" magazine the interview with Max Ansbacher I have to say that if it did not strike me, it definitely enlarged my point of view.
He just simply sells S&P OTM naked options based on contrarian approach ...

Take it one step further than Ansbacher and look beyond simply the ES. At any given time I will be short premium on Hang Seng, Nikkei, Eurobond ... any number of instruments. It is just a matter of where the opportunity is. Perhaps w/ EurexUS some of the Eurex options will be made available to US residents. I've found GBL, ESTX50, and DAX options quite tradeable. If I lived in the US I might even mix it up w/ credit spreads on some of the commodities. Doing so would require devoloping NEW skills beyond equity indices ... but the better traders are always stretching themselves.

One huge risk w/ SPAN margining on naked ES options is the margin expansion on an adverse move - can be nasty if one is not adequately capitalized. Thus, now I only 'flavor' my portfolio from time to time w/ naked shorts.

Uhhh, If I wasn't clear, Ansbacher is for real. However, he was pursuing ES option selling for several years as a broker before he set up on his own. And he typically only gets ~20% per year... probably a mediocre return for an independent, full-time trader.

Seller beware!

 

[ChrisM]

Quote from Hello_Dollars:

Chris,

Interesting you should mention that. It's actually something I've been considering recently -- switching to simply selling OTM ES puts naked (or perhaps sell strangles) hedged by the futures from my long-standing XEO/SPX iron condors. It's certainly a lot easier to manage and adjust than the ICs. Plus, SPAN margin makes it possible to generate similar-sized credits without having to use closer to the money options. While obviously the position would underperform (likely dramatically) in a 9/11-type scenario, it should outperform consistently during the vast number of non-outlier months. It's good to know others have been successful with the strategy.

By the way, while I am careful not to confuse brains with a bull market, and though I know the strategy to have a low probability of success over the long-run, the one long vega approach with which I have been having near universal success of late has been the simple buying of short to intermediate dated calls. I have to acknowledge that that's more a function of this unusually one-way market as opposed to any particular skills on my part. Nonetheless, I might as well keep rolling the dice while the going is good since, alas, this too must come to an end eventually.

HD

HD,

I have checked his idea much further and here what I have found:
9/11 was not actually the worst period for this concept, regardless the fact it was losing. But the market did not open low enough after disaster ( I was in the area of disaster on 9/11 by the way) to hurt this strategy badly. The worst year was 2000 because it was the end of bullish market. And it was so far the worst year for Ansbacher CTA (-5.9%) and the worst drawdown time (April 2000 - about 20%).
However his results range between 14% to 95% otherwise, which I find quite impressive for such simple strategy regarding 10 years period of time and managing more than 10 millions $. Following simplicity - he just places simple stop orders and buys shorts back if market comes too close.
But I believe that if you apply your strategy of defending short position by converting them into bfly or any others you may get even better results, because if the market goes deeply against you in first 2-3 weeks after short selling, your defensive positions will keep good reward/risk ratio due to high value of ITMs, and if it happens later, then OTMs will be cheaper, so again reward/risk will stay in good level. Combined with statistics showing that big moves occur rarely, you just need some discipline to follow this and the rest should be just the matter of time.

 

[BlueHorseshoe]

Quote from ChrisM:


However his results range between 14% to 95% otherwise, which I find quite impressive for such simple strategy regarding 10 years period of time and managing more than 10 millions $ ...

I believe you inadvertently may be misrepresenting his returns. If I'm not mistaken, the 95% was earned during his first year of operation, when he likely was managing a much smaller portfolio. The 95% may also refer to a non-standard year, i.e. perhaps he started his fund in June and then annualized his return for those first six months to get the 95%. Otherwise, given that the 95% is such a huge outlier with the rest of his performance, it raises the question as to whether he took more risk that first year as part of getting established and building name recognition for his new venture.

It has been awhile since I looked at Ansbacher's record, but I recall throwing out the 95% year and reaching the conclusion that his long-run return is on the order of 20% p.a. Consistent yes, but not terribly exciting.

 

[ChrisM]

Quote from BlueHorseshoe:

I believe you inadvertently may be misrepresenting his returns. If I'm not mistaken, the 95% was earned during his first year of operation, when he likely was managing a much smaller portfolio. The 95% may also refer to a non-standard year, i.e. perhaps he started his fund in June and then annualized his return for those first six months to get the 95%. Otherwise, given that the 95% is such a huge outlier with the rest of his performance, it raises the question as to whether he took more risk that first year as part of getting established and building name recognition for his new venture.

It has been awhile since I looked at Ansbacher's record, but I recall throwing out the 95% year and reaching the conclusion that his long-run return is on the order of 20% p.a. Consistent yes, but not terribly exciting.

BH,

yes, you are probably right, while I have not checked all details of his performance.
But my point is that simple things as long as they are well prepared, can work as well as very complicated ones.
Also - as I said, I found another CTA doing similar thing with much better results and I believe it is because of more complex adjustments applied during life of options.
Also - for CTA consistent profitability is something which can have much higher value than impressive performance. Marketing of Money Management is as important as impressive results unless you are rich enough and you don`t want to bother with searching for Other People`s Money nad you can trade whatever you want using your own capital only.
But for all others Buffet`s philosophy, saying that collecting capital is as much important as high returns is the way to follow.
As I said, I use similar technique to diversify my program but I would not stay with only this strategy, but - I don`t manage 10 million

 

[riskreward]

Don't know if anybody's mentioned this or not but I found a study showing a statistically significant increase in IV before earnings reports. This also occurs on a fairly regular basis. Intuitively, it makes sense to me. I was thinking of going long vega by buying a bullish put spread and a bullish call spread in the back month or further out. Any comments on this?

 

[ChrisM]

Quote from BlueHorseshoe:

I believe you inadvertently may be misrepresenting his returns. If I'm not mistaken, the 95% was earned during his first year of operation, when he likely was managing a much smaller portfolio. The 95% may also refer to a non-standard year, i.e. perhaps he started his fund in June and then annualized his return for those first six months to get the 95%. Otherwise, given that the 95% is such a huge outlier with the rest of his performance, it raises the question as to whether he took more risk that first year as part of getting established and building name recognition for his new venture.

It has been awhile since I looked at Ansbacher's record, but I recall throwing out the 95% year and reaching the conclusion that his long-run return is on the order of 20% p.a. Consistent yes, but not terribly exciting.

I just have checked Ansbacher`s performance record and while it really is around 20%/year however the best year for him was 1997 - 94.93 %.