Not a bad way to swing with options
- Thread starter qlai
- Start date
Your right, my apologize @Wheezooo I was reading some of @riskarb over the weekend.
No it does not suggest to be long gamma. It suggests to find an area you can get a decent return in but always be on the look out for statistical/true arbs. This could be as simple as have your money in a balanced portfolio until you notice AAPL Ivol go below SPY Ivol. Once you see this, lever up on a short SPY Ivol, long AAPL Ivol pairs trade.
I'm actually surprised that you do. The 300% wins come at such low rates that you can't expect it to be meaningful. The fact that win rate is low prevents one to put on size(relatively speaking). Buying at .01 and selling at .03 doesn't count.
I like what @TheBigShort is saying, but both his and @Stockolio examples simply use options for leverage. I was hoping to use them to create structures that result in a good risk to reward set ups.
What @Wheezooo said about anything you get with options you are paying for, is good to keep in mind I think. And I think he's right about concentrating on finding an edge before figuring out how to optimize it. Options, they are just so freaking deceptively attractive.
Options turn water into wine...
Why not? You are making 200%. If you bought 100,000 contracts, it adds up.
Because if you can't put any size on, what's the point!? As @TheBigShort said, when a rare opportunity is spotted, you need to be able to make it count. To do that, and keep the risk in check, requires liquidity.
In one of the posts, @MarkBrown said something very insightful ... that he tries to get into a position at the point of uncertainty(but not randomly), before things become obvious to the rest of the participants. I think doing this and keeping risk in check is the Holy Grail I am looking for
My sense is that success or failure trading options invariably depends upon your judgement of direction and volatility of the underlying, and generally speaking, in order to succeed you will find yourself "trading" the latter more than the former. I never had any sustained success until I got that fact firmly programmed into my mind.I really appreciate your post. This is turning out to be an excellent thread. Thank you @qlai.
I do want to repeat a couple of comments I posted several times prior:
1. Long run I think @Wheezooo is correct, if I mechanically trade volatility, theta, gamma... the market is too efficient, I will not come out ahead. I sold covered calls, cash secured puts for six months in 2013 (trade small, trade often, hundreds of trades) and had no profits to show. Perhaps time period was too short or sample size too small?
2. I was able to make money trading options only when I had a correct opinion of the underlying direction, or market. I thought butterfly trades could be different. So far, no cigar.
However, you have given me some food for thought and some homework to do. I thank you for the suggestion.
Best regards,
Does your statement apply to hedging with options as well? In other words, if your edge doesn't come from options, can you effectively use options without trying to predict volatility?
Or put another way - should people who have no edge trading options by themselves use them at all for any purpose?
I don't use options to hedge, but then am not a long term trader of the underlyings (by anyone's standard). Thus for me, to hedge with options makes no sense. It's way too expensive and the time frame is all wrong. If I don't like my underlying position then I just close it.
An exception, if I were a longer term trader, might be to sell puts as a way of opening a long position in the underlying, but I doubt there's any real advantage to it. What it does is facilitate the buying decision. The plain fact is that the options MM's price models are at least as good as ours and we aren't going to gain any edge with with any purely mechanical scheme, period.
That said, there are still some circumstances when I will run a relatively large option portfolio (by my standards, at least). These are typically situations where I don't have much of an opinion regarding underlying price direction, but sense that the IVols are "stretched" (in either direction), relative to the statistical volatility. I don't mind paying some time premium if I can get into significant positive gamma positions without a lot of contrary vega risk (i.e. contrary to my expectations regarding IVol going forward). I don't like to let delta get overly large in any case, and so I will be trading the underlying to manage that. This is why I like the strong positive gamma situation. Makes the delta management much easier. I suppose you could call this gamma scalping, but that may be an overstatement. Might better be described as vega trading (i.e. price/volatility).
A final note here is that while it is true that IVol is mean reverting over the long term, it may not be mean-reverting in all windows of time, and can even be extreme seeking at times. Be careful with that.
An exception, if I were a longer term trader, might be to sell puts as a way of opening a long position in the underlying, but I doubt there's any real advantage to it. What it does is facilitate the buying decision. The plain fact is that the options MM's price models are at least as good as ours and we aren't going to gain any edge with with any purely mechanical scheme, period.
That said, there are still some circumstances when I will run a relatively large option portfolio (by my standards, at least). These are typically situations where I don't have much of an opinion regarding underlying price direction, but sense that the IVols are "stretched" (in either direction), relative to the statistical volatility. I don't mind paying some time premium if I can get into significant positive gamma positions without a lot of contrary vega risk (i.e. contrary to my expectations regarding IVol going forward). I don't like to let delta get overly large in any case, and so I will be trading the underlying to manage that. This is why I like the strong positive gamma situation. Makes the delta management much easier. I suppose you could call this gamma scalping, but that may be an overstatement. Might better be described as vega trading (i.e. price/volatility).
A final note here is that while it is true that IVol is mean reverting over the long term, it may not be mean-reverting in all windows of time, and can even be extreme seeking at times. Be careful with that.