My approach to selling puts.

[daytonabeach83]

Including div,conversion looks in line to me,give or take pennies..

perhaps this is a confusion about directional vs arbitrage trading?

on conversion/reversal for locking up the arb's, yes, you're 100% correct.. that's exactly what i meant above when i said it would offset the ATM synthetic long.. you have to short the shares to complete the conversion, yes, but i figured we were on the same page there lol

but when MMs price the options to account for the carry costs, the skewed pricing structure it creates as a side effect enables the creation of positive expectancy directional trades.. at least that's how i understand the root cause of vol skew's existence..

the skew is irrelevant to the conversion arb because it's essentially just the market's way of negating the arb..

but trading directionally, you definitely see it.. in a perfectly efficient market, the percentage you pay for any spread will be equal to your probability of profit.. using skew to enhance directionality, you can pay less than your probability, hence, positive expectancy..

essentially, you're pocketing the pricing difference in options necessary to lock up conversion arb's and taking on a directional risk in exchange for that.. or such is my understanding of what's happening when you use skew dynamics to accentuate directionality..

 

[tonyf]

...and hence why I do not care about option mechanics

 

[daytonabeach83]

...and hence why I do not care about option mechanics

hahaha fair point.. sorry again for the thread jacking lol

 

[traider]

Why not put on a big risk reversal position and after you have sweated enough delta hedging it come back and discuss if skew is easy money

 

[daytonabeach83]

Why not put on a big risk reversal position and after you have sweated enough delta hedging it come back and discuss if skew is easy money

not saying it's easy money, not at all, not even close.. the increase in tail risk alone from trading skew is enough to make most people who trade it lose epically.. statistical mechanics says something like 1/3 of people will go bankrupt playing a game with a 2:1 profit-loss ratio and a 50% chance of winning..

what i'm saying is that it's something you gotta be aware of when you trade, so you're working with it instead of fighting against it.. also, i don't trade skew directly.. i use skew to enhance the efficiency of directional trades (i.e., ratio spreads instead of risk-reversals)

 

[tonyf]

To bring this conversation back to earth, I will start posting monthly performance charts to reflect (to a certain extend) portfolio volatility/leverage, risk and return.

I appreciate that value investing using options instead of the underlying is not common. I will keep running this live experiment and report here for your benefit and critique (don't hold back but keep it civil).

First chart out in 6 days.

 

[taowave]

You are clearly the smartest guy in the room

...and hence why I do not care about option mechanics

 

[tonyf]

You are clearly the smartest guy in the room

I was thinking about you when reading this earlier:

"The bad news is that if it's not exercised, your fierceness will turn to bitterness, and you will become an intellectual playground bully: the grumpy sysadmin, the forum troll, the hater, the shooter down of new ideas."

source: http://www.paulgraham.com/fn.html

 

[qlai]

I appreciate that value investing using options instead of the underlying is not common.

I subscribe to a service that uses similar approach to yours but he is very keen on rolling, which seems not to be in favor here.

 

[tonyf]

I subscribe to a service that uses similar approach to yours but he is very keen on rolling, which seems not to be in favor here.

Happy to have a look.