Not a bad way to swing with options

[jvanelli]

I'm not saying it's impossible, but the odds are stacked against you in most option markets. Typically with futures options there's next to no action inside the spread, which will often be two or more ticks even in the most liquid markets. So it's usually not a case of the MM pairing you up with another retail trader. More often, it's just a case of you waiting til the market moves the ask (or bid) into your buy (or sell) order. It can be done, watching the PA and catching little swings to offset transaction costs (I've done this many times) but frankly, the juice ain't worth the squeeze (my opinion). May as well just be scalping the futures.

I do think it is possible to get better odds with some single name stock options, but there you can get crushed by commissions, which seem to me to be excessively high relative to notional value traded -- and with exception of a few heavily traded names, the slippage will be even worse than with index futures.

That said, if you want to give it a go, I suggest you study up on the gamma trade, develop a firm understanding how option greeks and price move in relation to changes in the underlying sentiment, then wait and hope to get in when historical volatility is not too much less than implied volatility. It is possible to profit from moves in either direction with this trade, and to offset time decay by scalping the underlying, but you must avoid entries that put you at high vega risk, you must know how to scalp the underlying, and you must try to minimize the number of option trades relative to underlying trades maintaining delta neutrality. You will find people on the internet who will try to convince you this is easy. It is not.

 

[TheBigShort]

2- Let me bother you more. I will go so far as to say that if you are attempting to use options for scalping inside or outside of daily channels, that if you are playing from the short side, expect that your volatility will at best match the volatility for the days range. You will do everything wrong at every moment and all your hedges attempting to control negative gamma will suck. On a super choppy, high vol day, you will rip yourself to pieces.

Now if you are playing from the long side, I promise you that at absolute best you will match close to close vol, which is much lower than range vol. You will miss the tops, miss the bottoms, hedge to often when the market breaks out, and you will be lucky to match the results of if you just did nothing and hedged at the end of every day at the close.

I find your posts a little misleading.

1. sure a choppy market will hurt you when you delta hedge short vol but if you sold vol at a high enough premium (accounted for the choppiness), you will still come out on top.

2. You can most definitely come up with a long vol strategy where the hedges realize more than close-close vol.

It sounds like you were unprofitable at trading vol. That does not mean people like @qlai and @ironchef "will do everything wrong at every moment".

@ironchef @qlai if you guys can keep your transaction costs low, gamma scalping can be profitable (long and short side). With that said, it'll be hard to get more than a few vol points of edge. With a retail account, it may not be worth doing.

For example, SPY is trading @ ~283
You sell a 3 week ATM Straddle for $7.5 which is about 15% vol. If you only realize 13% from delta hedging, on average you will make about $.80 - transaction costs and slippage. You also have a lot of capital tied up due to the long/short equity positions. Is that really the best bang for your buck?
These types of trades are more suited for players that have portfolio margin and can automate the hedges. I am not saying you shouldn't take a shot at it. You should.

 

[Wheezooo]

1. sure a choppy market will hurt you when you delta hedge short vol but if you sold vol at a high enough premium (accounted for the choppiness), you will still come out on top.

Ah yes, this magical premium over value that is so easy to find and known in advance is priced greater than it should be. Because people that trade one lots have such keen insight to what is going on in the marketplace.

2. You can most definitely come up with a long vol strategy where the hedges realize more than close-close vol.

Oh please, enlighten me with this strategy, that in a sentence, with no proof provided, shits all over efficient market pricing theories and the distributions that underlie option pricing models.


Telling an undercapitalized retail trader to trade gamma is absolutely moronic. Gives me the shudders. I can only imagine the first time that short straddle seller hedges their negative gamma when equities are down 500 points only to watch it close unchanged on that day. I am sure they would love to talk to you after that. And that would be no theoretical, it would eventually occur.

 

[TheBigShort]

Ah yes, this magical premium over value that is so easy to find and known in advance is priced greater than it should be. Because people that trade one lots have such keen insight to what is going on in the marketplace.

Oh please, enlighten me with this strategy, that in a sentence, with no proof provided, shits all over efficient market pricing theories and the distributions that underlie option pricing models.

No one ever said to systematically sell premium. There is no doubt times when vol is richer than it should be. Of course there will be times you are wrong but on average, if you have a better model than the market, you will be a net winner. There are also structural reasons for why certain assets/events have rich vol.

A simple example is if a stock is range bound, hedging more frequently will give you a realized vol higher than close to close.

Telling an undercapitalized retail trader to trade gamma is absolutely moronic. Gives me the shudders. I can only imagine the first time that short straddle seller hedges their negative gamma when equities are down 500 points only to watch it close unchanged on that day. I am sure they would love to talk to you after that. And that would be no theoretical, it would eventually occur.

.... Yes they should try it. They would learn quite a bit by buying a 1 lot straddle and trying different hedges. How much would they lose on a position like that? According to your belief in EMH they would lose a large sum of $0! - commission.

I don't think you get the point of vol trading. If the implied vol was 35% on the Dow, they would break even on the day even after hedging at 500 below the close. Besides trading a 1 lot will not hurt them. I am not saying trade a 1 lot on an index that is 25k (like the Dow). Rather trade a 1 lot on something like XLF or XLE etc...

gamma scalping is a form of vol trading. You are trading the difference between implied and realized spread....

 

[destriero]

Hedging at -edge seems pretty dumb. There are infinitely better ways to short the spread (implied/stat) than to dynamically hedge short vol. Why involve the haircut on shares when you can trade short vol with defined risk? Fun?

This assumes that your book inevitably dissects to a (weak) synthetic short straddle. Why?

And you can blow up when gamma-trading long vol as well. Ask my CL MMer buddy who missed a few hedge levels during the week before expiration and was pinned to his straddle strike on LTD while holding a few thousand (long).

 

[Wheezooo]

"A simple example is if a stock is range bound, hedging more frequently will give you a realized vol higher than close to close."

The worst thing you can do is overhedge positive gamma. The argument surrounding gamma shouldn't and can't really be done discussing such small volumes as it is not feasible to hedge in such small quantities. But if you extrapolate out to more significant volumes and look at capturing your theta vs. gamma you would see the extraordinary amount of gamma trades one would have to do if they did them in too narrow a range. You are conversationally cutting off any potential for exponential growth outpacing linear change.

"if you have a better model than the market, you will be a net winner"

There you go again. They don't.

"I don't think you get the point of vol trading."

I do. Every day for almost two decades, at a scale that is borderline incomprehensible.

 

[Wheezooo]

Hedging at -edge seems pretty dumb. There are infinitely better ways to short the spread (implied/stat) than to dynamically hedge short vol. Why involve the haircut on shares when you can trade short vol with defined risk? Fun?

This assumes that your book inevitably dissects to a (weak) synthetic short straddle. Why?

And you can blow up when gamma-trading long vol as well. Ask my CL MMer buddy who missed a few hedge levels during the week before expiration and was pinned to his straddle strike on LTD while holding a few thousand (long).

I've had my derriere handed to me several times being long vol, and I swear by being a long vol trader. Now if your friend had several thousand crude options on, ask him the last place in the world he wants to see the market move on expiration, and he will tell you to his long strike, for exactly what happened to him. You lose on your hedge and lose on your premium. Now, ask someone here where they want it to go, and they will probably tell you they think going to their long strike is good. This is why your friend can trade and people here shouldn't.

 

[TheBigShort]

I've had my derriere handed to me several times being long vol, and I swear by being a long vol trader. Now if your friend had several thousand crude options on, ask him the last place in the world he wants to see the market move on expiration, and he will tell you to his long strike, for exactly what happened to him. You lose on your hedge and lose on your premium. Now, ask someone here where they want it to go, and they will probably tell you they think going to their long strike is good. This is why your friend can trade and people here shouldn't.

Are you for real? Anyone who has access to a PnL graph can see that they don't want to get pinned on expiration.

There are infinitely better ways to short the spread (implied/stat) than to dynamically hedge short vol.

Hey des, would you consider trading the implied distro to the terminal distro trading the implied/realized spread (trading a 1 month straddle without hedging)? Let's say we wanted to reduce the PnL swings, how would you trade it? Usually I would hedge out my deltas but like you said, it is very capital intensive.

 

[Magic]

Hey des, would you consider trading the implied distro to the terminal distro trading the implied/realized spread (trading a 1 month straddle without hedging)? Let's say we wanted to reduce the PnL swings, how would you trade it? Usually I would hedge out my deltas but like you said, it is very capital intensive.

This is what I started doing a while back.. sure it isn’t a Homeric trade but the expectancy is often decent enough compared to the other things I know how to do. I view it as just another risk exposure to collect premium for holding.

I have a wider delta band and trade/lean against other positions I have on by approximating correlation and vol vs. index. Rough model to at least get me an estimate when I expect IV to be less rich vs. RV. Depending on how skew looks you can run strangles instead of straddles and even ones asymmetric in strikes and expiration. Been having a pretty good time of it so far. Interested to hear other opinions.

 

[destriero]

Are you for real? Anyone who has access to a PnL graph can see that they don't want to get pinned on expiration.



Hey des, would you consider trading the implied distro to the terminal distro trading the implied/realized spread (trading a 1 month straddle without hedging)? Let's say we wanted to reduce the PnL swings, how would you trade it? Usually I would hedge out my deltas but like you said, it is very capital intensive.

A straddle proxy (fly) with garbage wings, but only to prove a point. There is more money in (local) dynamics than IV/SV. The wide fly simply to negate the variation margin.