Option Question about Delta

[sle]

Quote from MasterAtWork:
What an approximation !

An approximation is an approximation and if you know where it starts breaking, it's good enough. For example, I would frequently use spot swap rates weighted by duration to find the forward swap rate - I know it's an approximation that might be off by huge amounts on a steep curve, but in most non-trading cases (e.g. talking to the management) it's good enough. Using delta as probability (and there are a lot of cases where you need an idea of risk neutral probabilities, e.g. in skew analysis) is about as good.

Anyhoo, last question and I will drop the subject.

When you look at the skew, do you think it's "reasonable" to use X-delta risk reversals as a measure (or, my favorite, 25d RR/50d)?

 

[Martinghoul]

Quote from MasterAtWork:

The marvellous point was done by sle : " as an experienced exotics book runner" ha ha ha. That's the joke ! My man, you don't even understand BS and basic math and you're trying to tell people you're an experienced exotic options trader. ROTFMAO, ha ha ha. You made our week end. Thank you !
Please, copy and past your post about probabilities on NP, I bet you're gonna be famous !

MAW, with all due respect:
a) the various points you make are all reasonably well-known;
b) their validity doesn't change the fact that we're discussing an imperfect heuristic, rather than a mathematical proposition;
c) since I know sle quite well, I know he IS in fact an extremely experienced exotics bookrunner (rates, as well as equities), so you are barking up a completely wrong tree here;
d) you're in very poor company.

My point here is that you're not really arguing with the statement made. I don't think anyone ever disputed the fact that delta is NOT everywhere and always the same as probability. The reasons and the math behind this are all reasonably well-known.

 

[MasterAtWork]

Quote from Martinghoul:

MAW, with all due respect:
a) the various points you make are all reasonably well-known;
b) their validity doesn't change the fact that we're discussing an imperfect heuristic, rather than a mathematical proposition;
c) since I know sle quite well, I know he IS in fact an extremely experienced exotics bookrunner (rates, as well as equities), so you are barking up a completely wrong tree here;
d) you're in very poor company.

My point here is that you're not really arguing with the statement made. I don't think anyone ever disputed the fact that delta is NOT everywhere and always the same as probability. The reasons and the math behind this are all reasonably well-known.

You may be right Martin.
Of course those various points are all well-known, that's what makes me get started.
Anyway, My bad.

 

[MasterAtWork]

Quote from sle:

Anyhoo, last question and I will drop the subject.

When you look at the skew, do you think it's "reasonable" to use X-delta risk reversals as a measure (or, my favorite, 25d RR/50d)?

To get a ‘pure’ linear exposure to the skew, a simple ( var swap – gamma swap ) spread would be « reasonable » enough.
You then just need to be focused on the relative replicating portfolio values. It’s straighforward to price.

 

[sle]

Quote from MasterAtWork:
To get a ‘pure’ linear exposure to the skew, a simple ( var swap – gamma swap ) spread would be « reasonable » enough.

Hmm. Actually, I would say that a fixed strike risk reversal is a cleaner skew position for a variety of reasons (to start, a vs-atm or vs-gs would actually start gaining vol exposure if the market moves upward enough). Anyway, THIS is an interesting question that I'd be happy to argue about.

 

[Martinghoul]

Quote from MasterAtWork:
You may be right Martin.
Of course those various points are all well-known, that's what makes me get started.
Anyway, My bad.

No worries... It's just that I think the heuristic/rule of thumb, imperfect as it may be, IS a lot more worthy of a discussion than the various mathematical facts, which are all, as you have stated yourself, neither here nor there. And I mean discussing the rule of thumb, as well as its various imperfections and flaws.

 

[MasterAtWork]

Quote from sle:

Hmm. Actually, I would say that a fixed strike risk reversal is a cleaner skew position for a variety of reasons

This is a "reasonable" measure.

 

[StarDust9182]

This forum has the most interesting discussions.

BTW - which Starbucks are we meeting at this week?

 

[atticus]

Quote from StarDust9182:

This forum has the most interesting discussions.

BTW - which Starbucks are we meeting at this week?

Let's try Peet's this week.

 

[bc1]

Quote from atticus:

Let's try Peet's this week.

Us guys with little accounts still use McDonalds. They do have wifi. Set the date and time.