Option replication and exotics journal

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Nikkei double barrier no touch -- 12,180 x 12,880
Premium: 4,600,000Y
Payout: 11,000,000Y [includes prem paid]
Expires: Aug 30, 2005
Negative edge: 424,000Y
Neutrality: 12,530 basis Nik cash

Vols have contracted into this bull run. Not as comfortable with the pricing, but it's the best offer I could find. Feel that the DAX vols will start to contract in line with Japan and US vols. Don't expect to be chasing hedges on this or the DAX double.
 
EUR/JPY Reverse KO call: EUR/JPY 7d 133.50C, KO 135.80 "Up and Out" Reverse KO.

Bought the 7day 133.50 Call, KO 135.80 for 26% of the payout. It's a small position and don't want to clutter the journal with the P&L as it wouldn't make a dent either way. Wanted to mention the Reverse KOs, since they are very odd, counterintuitive plays...

Standard KO calls are of the "down and out" variety and go null when deltas decrease -- they're path-dependent, but reverse KOs have chaotic, kinked curvatures before the outstrike is reached. IOW, the greeks are horrific, but allows you to gain some limited delta for very little expense.
 
Quote from riskarb:

Took this recent downtick to sell SP Sep 1200p for 11%vol[$14.00*3]. Sold Sep futures into exposure at 1220.75: 1x3 ratio
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At 14? How did you do it? I had placed a limit order (Interactive Brokers) on Sunday evening to sell the Sept 1215 puts at 13.75 limit and never got filled.
 
Quote from riskarb:

Took this recent downtick to sell SP Sep 1200p for 11%vol[$14.00*3]. Sold Sep futures into exposure at 1220.75: 1x3 ratio
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Typo edit: these are 1220 puts. Have flattened delta, ratio is straddled at 1:2.
 
Quote from riskarb:

Looking to be flat to long delta in EUR/USD due to tame-reaction to the blistering Retail data and CPI. The vol-skew is flat, so it was a toss-up whether to go long spot/risk-reversal or short spot/risk-conversion, but it more closely resembles a synthetic short straddle using exotics.

*** Long 100k EUR/USD at 1.2082
*** Short 200k EUR/USD touch exotic, struck at 1.2220, expiring July 22 at 10amEDT

***Long 70k EUR/USD touch exotic, struck below the recent lows at 1.2038

To limit the confusion... the position loses $600 at the 1.2220 strike and earns approx. $2,600 at the lower strike{at expiration].

I expect the lower[1.2038] strike to be hit resulting in a payout. With luck the EUR/USD will hit my long touch at 1.2038 and creep higher. In either case it resembles a bull synthetic short straddle with a long put. There is a lot of bleed in the greeks; too much so to break the position down any further.
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hello,
I'm struggling a bit with your notations. Could you let me know the price you paid for the 1.2038 one touch expressed as a % and in dollar terms and how much you got paid for selling the 1.2220 one touch.

I roughly came up with 65% for the 1.2220 on a notional of $4k and 85% for the 1.2038 on a notinal of $1.4k assuming a 16% vol.

At the 1.2038 barrier you have a $440 delta loss, earn $2600 from the short 1.2220 one touch and earn $210 from the 1.2038 for a rough total gain of $2370.

At the 1.2220 barrier you have a $1380 delta gain, a loss of $1400 on the 1.2220 one-touch and a loss of $1190 on the 1.2038 for a rough total loss of $1210.

That doesn't match your numbers, can you tell me where I am wrong.
thx
 
Quote from Alexandre:

hello,
I'm struggling a bit with your notations. Could you let me know the price you paid for the 1.2038 one touch expressed as a % and in dollar terms and how much you got paid for selling the 1.2220 one touch.

I roughly came up with 65% for the 1.2220 on a notional of $4k and 85% for the 1.2038 on a notinal of $1.4k assuming a 16% vol.

At the 1.2038 barrier you have a $440 delta loss, earn $2600 from the short 1.2220 one touch and earn $210 from the 1.2038 for a rough total gain of $2370.

At the 1.2220 barrier you have a $1380 delta gain, a loss of $1400 on the 1.2220 one-touch and a loss of $1190 on the 1.2038 for a rough total loss of $1210.

That doesn't match your numbers, can you tell me where I am wrong.
thx
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It was a very small trade. I should've broken in down into $payout/notional-size, but I wanted to show scale for those that trade spot fx.

I'm not inclined to go back over the run for this, but I posted the hit on the long touch, and then we traded higher.

Here are the journal posts that reference the events/offsets:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=52298&perpage=6&pagenumber=7

All exotics subsequent to the EUR have used $payout notation.
 
Quote from riskarb:

The AUM in the sub-account of the master feeder devoted to index/fx exotics is $5mil. 3.4% since inception of the journal.
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riskarb-

Great journal! Just curious if you have a target return in mind? Something like 3-5% per month without a lot of deviation. I know this is just a sub-acocunt of a larger fund, but some investors can get a little weary of big numbers.


Keep on rockin'!
 
Quote from Arb Under Par:

riskarb-

Great journal! Just curious if you have a target return in mind? Something like 3-5% per month without a lot of deviation. I know this is just a sub-acocunt of a larger fund, but some investors can get a little weary of big numbers.


Keep on rockin'!
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thanks Par. The risk is limited to 3% of AUM on the exotics. The risk lies in the futures hedging. I don't have any targets per se
 
Quote from Arb Under Par:

riskarb-

Great journal! Just curious if you have a target return in mind? Something like 3-5% per month without a lot of deviation. I know this is just a sub-acocunt of a larger fund, but some investors can get a little weary of big numbers.


Keep on rockin'!
More...

I have a Sharpe-target that I am trying to achieve, but for the most part the variance is low by keeping the exotic-debits to 3% or less. There are 6-8 investors in the master-feeder, so it becomes material if we lose someone. If corrs go to 1 we lose 3%, couldn't be simpler.
 
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