my divine commedia to optionality

[gaussian]

I've been long $UVXY put verticals all last week. (just one lots, as I don't really understand vol-etf's/etn's like I should... but I know somehow the cost of carry each month mathematically decays the instrument? Or something like that lol)

These have to be rolled (they are backed by futures), and rolling down causes decay. The triple leveraged ETFs do this at a much faster pace. It's really simple, you just dont want to hold them for long, or through rolling.

This is a very simplified view of it. If you want a better view, plot the term structure of VIX and follow the roll policy of UVXY.

 

[.sigma]

These have to be rolled (they are backed by futures), and rolling down causes decay. The triple leveraged ETFs do this at a much faster pace. It's really simple, you just dont want to hold them for long, or through rolling.

This is a very simplified view of it. If you want a better view, plot the term structure of VIX and follow the roll policy of UVXY.

That's the thing.. I know somehow vol(var) is the truth. Trading vol is the now and forseeable future and IMO its a solid way to extract alpha. In the myriad of methods I have a hunch forcasting implied.vol with historical is one of those ways.

I'm fascinated with the distribution curves of the markets. Theres tiny bits of profits within intervals and even more on the tails. The tails... YES the tails! Skewness and kurtosis are your best friends.

A textbook definition of "tails" is the volatility of OTM relative to those ATM. This is where kurtosis comes into play.. as you all know the "peakedness" of the distro, but evenmoreso its the volofvol(VVOL)(VVIX). Its a fourth moment statistic.

"In the old days, however, traders used to disbelieve in the phenomenon and attribute the inflated prices OTM to the "lottery effect", which meant that investors were ready to spend small sums to get a large payoff and that such attraction of the large payoff would blind them to real value. The lottery effect, in the long run, seemed to have favored in the investors owing to the convexity for which they paid so little." - Taleb

 

[.sigma]

If anyone is interested, Dr. Data from tastytrade has a link to a monte carlo type simulation of market returns.

check it out. Heres an example of how a short ATM put performed in a theoretical $100k account v.s long spot S&P. You can choose between a few other strategies and choices but its limited. I think he said he will be adding other option strategies in updates.

http://bit.ly/2Rd2HwC

 

[.sigma]

These have to be rolled (they are backed by futures), and rolling down causes decay. The triple leveraged ETFs do this at a much faster pace. It's really simple, you just dont want to hold them for long, or through rolling.

This is a very simplified view of it. If you want a better view, plot the term structure of VIX and follow the roll policy of UVXY.

Hey @gaussian I saw your post in another thread of some guy who lost $3k. You mentioned something like how you read theory for awhile but thought that was a mistake? Can you please explain what you mean by that? Thanks man!

 

[.sigma]

Looking to get long $BAS sharez and some $BYND OTM long callz

 

[.sigma]

Btw, I love buying sh!t that goes down. The demise of an asset is littered with alpha!

The more it goes down the more opportunity, its simple math.

Sadly, this market has been a dog, drifting like pure geo-metric Brownian motion--like for a decade, with a few corrections. But man, once another bear market comes and we drift down that's when I make my killings. That's when we eat.

 

[.sigma]

$FTSI
$LBRT
$PK
$DCP

 

[.sigma]

"The year is 2022, and Spooz still oscillating like a true Brownian motion particulate = randomness +drift. Yet the drift was driftless… spyderz and Russell started to become the pair-trade of the time because of the -corr between them. The smaller caps told the story.

I'm looking at my ultrabook, at some charts.. cause you know, I like charts. Yeah, I started with the technicals but rest assured I know what its worth. Alpha isn't extracted from doji's, but maybe for some body. So these charts I'm glaring at aren't your 2019 chart: still, blank one dimensional shot of green and red price bars, boring, and dead. 2022 we have motional charts, visional charts that show you multi-dimensions of price action moving like a living organism (which it is, anyway , breathing in and out oscillating around a central proportional mean. Rinse and repeat, the market (although a forever evolving mechanism) has stayed the same in terms of movement, price action. So these cool charts show price moving in space, time, and THE CONTINUUM..."

- Kurt Osis

#entry999

 

[gaussian]

"In the old days, however, traders used to disbelieve in the phenomenon and attribute the inflated prices OTM to the "lottery effect", which meant that investors were ready to spend small sums to get a large payoff and that such attraction of the large payoff would blind them to real value. The lottery effect, in the long run, seemed to have favored in the investors owing to the convexity for which they paid so little." - Taleb

I'd be careful following anything Taleb wrote after Dynamic Hedging, the seminal text on trading like a market maker.

The options "in the wings" are useful insurance policies for an active trader. Viewed differently, the lottery tickets protect you from black swans.

Hey @gaussian I saw your post in another thread of some guy who lost $3k. You mentioned something like how you read theory for awhile but thought that was a mistake? Can you please explain what you mean by that? Thanks man!

I spent the first two years of my options trading career reading theory. While useful, I have used very little of it in retail options trading. Spreads are so tight on most options model pricing is almost useless (unless you have a better model - I don't). The only two things I've been able to use with any success is volatility skew and term structure. Term structure is useful for trading calendars, but retails generally should avoid calendars and ratios because of how wacky they can get in the presence of a sudden change in gamma. Iron condors are the same way - significant over exposure to gamma and vega which can cause a good IC to blow up quickly because short gamma will blow out your long theta.

The theory is a fun journey if you like math - and I do. I have used far more math though in futures trading making directional bets than I have in retail options trading. For me, it's mostly finding places to drop a vertical and squeezing a few cents more out of it by understanding the volatility skew.

I have been trading futures recently because MES and MNQ are a lot of fun. I like options on futures as well as a sort of "insurance policy". I tend to stay away from equities. I don't trade full time so 24 hour access to a market is a critical instrument choice rule for me.

 

[.sigma]

I'd be careful following anything Taleb wrote after Dynamic Hedging, the seminal text on trading like a market maker.
.

Can you elaborate a lil more on why? Why should I be careful following Taleb POST-Dynamic-Hedging?
In my opinion Taleb is one of the goats.
He's really one of the first "derivative philosophers" in a sense.
The only difference is he actually has skin-in-the-game!

Dynamic Hedging is almost biblical. I stash it next to my Bible lol.

But Black Swan, Fooled By Randomness, Anti-Fragile, Skin In The Game should all be read by any trader in any arena!

Also download his newer paper titled "Silent Risk"