Naked Option versus a Spread

Quote from EliteTraderNYC:

Perhaps I should just buy puts on the vix to hedge out some of the vol risk? I may also consider writing some equations to assess option vol relative to recent real volatilty in the underlying? The point being I'm looking to get more % returns than I could get in the underlying itself by going long a call or in the case of a directional short, long puts.
More...

umm.. i would consider backtracking at this point.. haha there are nuances to every term structure and series skew from one underlying to the next.. vix is something different all together..
leveraging some techinical analysis i would just breakout trade with strangles or outright puts or outright calls.. trade consolidations with butterfly's.. and swing trade with debit spreads .ie long put spreads, long call spreads.. if you have an edge in direction.. focus on that.. then pace yourself with the options ideas.. haha i speak from experience.. learning about options is like jumping down the rabbit hole.. it just keeps going deeper and deeper.. when you can just use them for what they are.. you can take simple delta bets without being a derivatives quant.. knowing a little bit about pricing parameters is an absolute necessity though..
 
You are complicating things.

If you have a delta view you are best served buying stock. If you need the leverage options offer then you will have to take the extra risks (theta, gamma, etc).

If you take those risks, delta will still be your largest pnl component.

It's only complicating your book hedging out these other exposures. You can't get something for free. You will just be introducing all sorts of basis risk you don't understand and it's not going to matter much to your pnl anyway unless you really mess it up (and that's a real posibility).

If you can't sweat the theta, then you shouldn't buy the option in the first place. You should consider selling a put as a proxy for going long or just trade stock.

EDIT: I was responding to OP's post which he apparently deleted. I will keep this up anyway.
 
Quote from Epic:

Not sure I follow your argument that "spreads still lose when implieds decrease all else being equal." Why is it naturally assumed that spreads would be positioned at the higher levels where they lack convexity? The driver behind using a spread is to either profit from errant convexity, or simply remove it from the equation. Also, we've said nothing about what type of spreads. I would argue that it might be easier for a good vol trader to generate alpha than a good directional trader.

My basis for that claim is that my research suggests that there are more frequent pricing anomalies available to the retail trader in vol than there are in direction. Pricing anomalies arising from abnormal order flow aren't as frequent nor as dramatic in the underlying as they are in the options. Imagine a CFO selling calls against a substantial equity holding in the company. He does so with pretty much zero regard to whether the IV is high or low. He has no direct volatility motive. Also imagine a company prepping for stock buyback by selling puts. If large enough, these orders create inefficient options pricing, but the same isn't true of the underlying. In fact, absent new info, the market value of the underlying hasn't changed at all.

But I agree that if directional trading is his thing, then don't try to profit from vega. Just be aware of it and structure the trade so as to eliminate vega or at least not work against it.
More...

I agree with your assessment. Those who trade against the orderflow can do well in vol. However, it's been my experience (on the institutional and retail side) that this information flow is incredibly tough to find. How many ASR's are being quoted right now? If there's anything that will move the vol markets it's those as they are 100x the open interest.
 
Quote from newwurldmn:

I agree with your assessment. Those who trade against the orderflow can do well in vol. However, it's been my experience (on the institutional and retail side) that this information flow is incredibly tough to find. How many ASR's are being quoted right now? If there's anything that will move the vol markets it's those as they are 100x the open interest.
More...

Wasn't implying that the retail trader has the ability to know the cause of the inefficiency. Just that a vol trader can see it happening and trade it purely from a vol forecast perspective. You don't really have to know why vol is high in order to profit from it.
 
Quote from Epic:

Wasn't implying that the retail trader has the ability to know the cause of the inefficiency. Just that a vol trader can see it happening and trade it purely from a vol forecast perspective. You don't really have to know why vol is high in order to profit from it.
More...

But you do.

Vol can get bid for a variety of reasons of supply/demand reasons.
A buyer of vol could be an exotic book hedging a retail transaction (maybe a good one to fade).

It could be a smart long/short guy betting on a corporate event (take over, analyst day, etc) (a disaster to fade)

It could be a vol guy saying the vol is statistically cheap (probably a bad fade)

Or it could be irrational buying over headline fear (probably a great fade).
 
Quote from newwurldmn:

But you do.

Vol can get bid for a variety of reasons of supply/demand reasons.
A buyer of vol could be an exotic book hedging a retail transaction (maybe a good one to fade).

It could be a smart long/short guy betting on a corporate event (take over, analyst day, etc) (a disaster to fade)

It could be a vol guy saying the vol is statistically cheap (probably a bad fade)

Or it could be irrational buying over headline fear (probably a great fade).
More...

In all the above cases, a longer term volatility view will still likely result in some reversion. The same cannot be said about directionally trading the underlying. Just because a stock has doubled, it isn't necessarily implied that it will mean revert and a stock losing half its value has just as much chance of going to zero as it does of going back to highs.

Short term loses aren't going to kill anyone unless their sizing mechanism is broken. Forecasting is actually less than 50% of long term alpha generation. Don't try to pick absolute tops and bottoms, and don't over-commit on any single trade and every situation you mentioned is tradable.
 
Quote from newwurldmn:

You are complicating things.

If you have a delta view you are best served buying stock. If you need the leverage options offer then you will have to take the extra risks (theta, gamma, etc).

If you take those risks, delta will still be your largest pnl component.

It's only complicating your book hedging out these other exposures. You can't get something for free. You will just be introducing all sorts of basis risk you don't understand and it's not going to matter much to your pnl anyway unless you really mess it up (and that's a real posibility).

If you can't sweat the theta, then you shouldn't buy the option in the first place. You should consider selling a put as a proxy for going long or just trade stock.


EDIT: I was responding to OP's post which he apparently deleted. I will keep this up anyway.
More...


+1

Also, what about the original posters question. These threads gooff into never never land over and over ??
If he has a method that is only right maybe 33 percent of the time, just think if he just buys the underlying ( delta of 1), how much that hurts, and if there are 3 in a row which surly will be, that pales in comparison to a teenie theta vega gamma rho, whataver you want to thro into the bucket.

Most option traders are a big birds nest, in the end they end up with a wirey looking position that they sit in and hope is a safe place to drive alpha
 
Quote from EliteTraderNYC:

Its buy only, not selling anything.
More...

The term naked is used when you sell a call without without owning the underling security or selling a put when you are not short the security . Buying a call or put is not called naked buying. My preference is selling naked puts on stocks that have been oversold .
 
You must log in or register to reply here.
Back
Top