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ongoing option newb questions
- Thread starter TGpop
- Start date
Quote from froluis:
Hi Jerkstore,
Thanks for your post. I am currently learning options trading. Could you please explain why it is more interesting to buy 10/12 delta calls delta hedged compared to buying a straddle to profit from the raise in volatility.
Thanks
This is a good question, and I didn't fully explain myself.
As the market moves higher, and vol collapses, typically the vol suface will show more skewness. That means that the ratio of implied vols of the downside compared to the upside will increase. At least some of this is pure supply and demad, as market makers buy calls, sell puts, and sell stock on the way up. Therefore they would be willing to sell the calls (upside) and buy the puts (downside) a little more aggressively. However, at some point the small moves becomes a scary directional trend, in which case everyone will come back and buy the upside (10 to 12 delta calls). In the case where the market goes back down before the upside scare happens, the vol surface, or skew, will tilt back in the opposite direction AND the vol will get bid up. Either way, the 10 to 12 delta calls, hedged delta neutral become a great risk/reward bet.
Please recall that is coming from a VERY specific situation in which the vol has collapsed more than the market in general, and the stock has had many small upmoves in a row.
Quote from Jerkstore:
You have a great gut feel for the markets. I was just discussing yesterday with a colleague that the next options modeling frontier is the vol path. There was a while in the early 80's when basic vol wasn't understood. Then people lacked a framework for delta neutral trading, then skew modeling, then calendar vols, and now...vol path.
As the market moves down, the vol goes up, and conversely it drops as the market moves up. However, both the velocity and continuation of the move seem to matter. For instance, as the market makes a less than one st. dev. move up vol collapses. Another inside move and vol is down again, etc., THEN if the market follows through with a more than one st. dev. move up the vol will EXPLODE.
IV's have to do with 1)historical vols, 2)stock price compared to historical IV's around the same price and 3) how the stock made its way to that price. ##'s 1) and 2) are well understood in the business, whereas noone seems to have been able to create a model for #3), nor have they been able to adjust their vol path modeling to define how the vol might move from that spot.
I was explaining a few months back that one of my favorite speculative bets is to wait for a 2 to 3 day slow move upwards, with a collapsed vol. I then buy in the 10 to 12 delta calls, delta neutral. If the market continiues up, the vol will explode, AND if the market turns around and goes down, the vol will explode.
I'm confused. If you're only buying calls and not hedging with stock how can you be delta neutral?
Quote from traderlux:
jerkstore,
i would also like to know what you mean "buying calls, delta neutral"
tnx
By "delta neutral" I am suggesting to buy calls AND sell stock to cover the deltas.
A little tip, if you are using BS deltas, you may want to underhedge your call delta by a bit. This is due to the fact that the vol does tend to come in as stock goes up while vol goes up as stock drops. Thus, selling a few less shares of stock against your long calls would help to mitigate this effect.
Jerkstore
There are a couple of Market Profile systems, I have ran across a long time ago. The one I use is simply the open, high, low, close. Does not cover volume at all.
It simply tells you if the market is going to go in which direction the next day, or if the market is undecided and meandering, or if it is a pause before continuing a trend, or a reversal. The combinations give ideas of what to expect the next day.
A very good signal for reversals is another golden trade method. Even today they use it in SWING SYSTEMS.
The Auxillou Reversal, or Mitchel Reversal, or many different names.
This is a very good one. Takes three bars. Daily or any other time frame. You take three bars, say going down with lower lows. The lower low and the higher close than the day before is basically it. Or the higher high and lower close of the day before. It should be a protruding bar. The next day confirms this signal, when it is followed by either a lower low, or a higher high. This is a trend signal change. You can also get this signal during a trend, but unless it is confirmed by the next bar, you will get caught out and the trend will continue.
The position of the close is also a signal or volume indicator, to say whether the new change will be short or long. It can indicate pressure of buying or selling. You can make trades with this signal indicator alone, using daily, or weekly bar charts. Does not occur on every trend, but often enough.
There are a couple of Market Profile systems, I have ran across a long time ago. The one I use is simply the open, high, low, close. Does not cover volume at all.
It simply tells you if the market is going to go in which direction the next day, or if the market is undecided and meandering, or if it is a pause before continuing a trend, or a reversal. The combinations give ideas of what to expect the next day.
A very good signal for reversals is another golden trade method. Even today they use it in SWING SYSTEMS.
The Auxillou Reversal, or Mitchel Reversal, or many different names.
This is a very good one. Takes three bars. Daily or any other time frame. You take three bars, say going down with lower lows. The lower low and the higher close than the day before is basically it. Or the higher high and lower close of the day before. It should be a protruding bar. The next day confirms this signal, when it is followed by either a lower low, or a higher high. This is a trend signal change. You can also get this signal during a trend, but unless it is confirmed by the next bar, you will get caught out and the trend will continue.
The position of the close is also a signal or volume indicator, to say whether the new change will be short or long. It can indicate pressure of buying or selling. You can make trades with this signal indicator alone, using daily, or weekly bar charts. Does not occur on every trend, but often enough.
Quote from Jerkstore:
By "delta neutral" I am suggesting to buy calls AND sell stock to cover the deltas.
A little tip, if you are using BS deltas, you may want to underhedge your call delta by a bit. This is due to the fact that the vol does tend to come in as stock goes up while vol goes up as stock drops. Thus, selling a few less shares of stock against your long calls would help to mitigate this effect.
Thanks for clearing that up.