Option replication and exotics journal

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Quote from ssternlight:

I'll be the first to admit that I only understand what you are doing generally, but...:)

Can you define the risk/reward on this one for me. That ER2 position would make me a bit nervous.
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I can model @ static volatility... but that would overstate the risks on the downside. The 17 vol-line on the ER2 will be reduced as vol-modality inverts as ER2 approaches the 650 strike.

You can make an assumption that the current atm call or put is representative of what the 650P vols will be if ER2 trades to the 650 strike. Yes, strip vols could increase[increase in VIX as an analogue], but it's likely that 15-16% vol is a good guess for where the 650p will be trading if/when it goes atm. The 665p closed at 13.20, so we use $13.20 as a likely price for the 650p when trading atm[50d].

The skew inverts as the ER2 trades below the strike, but not significantly. I reduce my vol-assumptions very little. Although it can be important to do so with a large position as variance will begin to play a role.

In summary, it's a poorly correlated index pair replication... the edge from long gamma curvature and slope drives the position. YM vol is cheap, as well as it's gamma characteristics. The edge in YM vol + gamma + delta position is hoped to exceed the poor-correlation. Will it? I dunno, that's the bet, as it is. There isn't any adjustments or hedging to be made. I trade directionally as signals arise, offering a fairly passive hedge; i.e., I was short ER2 today.

I don't have to see the corr mean-revert, but that would add value to the trade. Take a look at a chart of the YM/ER2 spread from today's action.
 
Quote from Prevail:

Thanks Risk.
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Appreesh Ozzy and Prevail... Not much of a journal-writer, and I've only started trading exotics during the past 12 months. I am always long portfolio gamma in vanilla and limit my port. short gamma to the exotics-side.
 
Hey 'Arb - did you know your neck of the woods has all judgements online and searchable? You've got nowhere left to hide, mate.

I see you're on to exotics now. This should be fun. After watching you lose your ass shorting the piss out of GOOG and Crude volty, I can't wait to see how you screw this up. I can still hear the echo of you pounding the table for "$35 oil in February!" right before your latest disappearance.

Heads up to those who don't know 'arb: he is trolling for "mentoring" clients. His standard MO is to invite marks...er, special "friends"...to private chatrooms or discussion boards. Caveat Emptor etc etc etc. If you feel you must try the services, feel free to drop me a PM: I know precisely how cheaply he'll pimp himself out, and believe me, this is not the kind of service you want to overpay for. ;)
 
Quote from riskarb:



In summary, it's a poorly correlated index pair replication... the edge from long gamma curvature and slope drives the position. YM vol is cheap, as well as it's gamma characteristics. The edge in YM vol + gamma + delta position is hoped to exceed the poor-correlation. Will it? I dunno, that's the bet, as it is. There isn't any adjustments or hedging to be made. I trade directionally as signals arise, offering a fairly passive hedge; i.e., I was short ER2 today.

I don't have to see the corr mean-revert, but that would add value to the trade. Take a look at a chart of the YM/ER2 spread from today's action.
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Ah, I was wondering whether the correlation for these two was high or low for this type of trade. So, it's low, but you have nice edge. Have you looked at how much edge you need to overcome the poor correlation? I'm trying to think how that would be done. I guess you could just do a monte carlo simulation and replicate each portfolio until you get a number.

Also, Do get this right that you scalp against this using some sort of system? Do try and maintain some sort of delta neutrality?
 
I've never solicited a client from this board. There are others from this board that visited the chat that Specul8r was running on IRC. Not once did I solicit nor trade for any of these individuals. Nor did I offer advice for a fee. I never offered Random any advice, for a fee or otherwise.

*** I've NEVER run a chat room of any kind. I visited ONE room, on IRC, for a few months after being invitied to said room by vulture from this board. Specul8r ran the board and paid the IRC admin fee, from what I recall. NOT ONCE had I solicited nor accepted a dime from anyone on that IRC room, any other for that matter

*** ONE individual from ET paid for instruction. It amounted to a few thousand dollars. He approached me for mentoring.
*** I've mentored a few friends from this board and never charged a dime. I am not offering anything here, nor would I accept private accounts nor mentoring arrangements in which a fee was paid to me.

*** I traded for a mid-market fund[100-200mil USD AUM] in 2004. I am no longer trading for that fund.

*** One individual approached me for an LPOA account which I still trade to this day.

*** I currently trade a sub-account for one mid-market hedge fund[250 - 300mil USD AUM] that contacted me through PM on this board. That is the only financial arrangement I have with any person or entity who frequents this board. .





Random, you still phoning in threats from across the border? I've still got your Vancouver phone number on my caller ID. So do others.

You never answered my question; do you still have that shiny blue soccer jersey stuffed-full with your UGLY mug??
 
Quote from Trajan:

Ah, I was wondering whether the correlation for these two was high or low for this type of trade. So, it's low, but you have nice edge. Have you looked at how much edge you need to overcome the poor correlation? I'm trying to think how that would be done. I guess you could just do a monte carlo simulation and replicate each portfolio until you get a number.

Also, Do get this right that you scalp against this using some sort of system? Do try and maintain some sort of delta neutrality?
More...

I run a VaR on the pairs.

I wouldn't actively hedge this pair as it's long gamma. The risk is spot vols and corrs. I feel it's "long" enough to compensate for the poor recent correlation. It can be perceived as a long ER2/YM futures spread.
 
Quote from Prevail:

Risk, can you comment on your directional trade signals? Are they good enough to buy options with?
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Probably not. I wouldn't recommend trading gamma from system signals.
 
Quote from Random.Capital:

Hey 'Arb - did you know your neck of the woods has all judgements online and searchable? You've got nowhere left to hide, mate.
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Yeah man... check out L-N as well. You may find a couple from GEC, one for 600k and another for 20k or so. Don't forget AMEX... that was in a doosie, high 6-figures as well. They got a hitman looking for me.

If I were hiding I wouldn't post under this handle. I've got 7-figures USD in debt. My in-laws offered to cover it, but it would be throwing good money after bad. I for one am not pimping some LAME-ASS "Random Capital Management" gig... You're not only the founder but the only client, eh? As has been stated previously; I've never solicited a client. If you can prove I have, then by all means feel free to post it here.

You mentioned in a previous post that you used your Opium profits to score a NYSE seat? Whassup with that? Oh wait, here is the link: http://www.elitetrader.com/vb/showthread.php?s=&postid=570240&highlight=nyse#post570240 How tough is the Croatian prison system?

I didn't know RM or Random Capital Mgmt. owned a NYSE seat?
 
If RM wants a pissing match then we can take it to Chit-Chat here on ET. I will only post relevant info related to the aforementioned journal subject.

If the consensus is that I should piss-off, then I shall. :D
 
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