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Option replication and exotics journal
- Thread starter riskarb
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Quote from riskarb:
It will be interesting to see how they open; I expect gammas to be fattened a bit due to the uncertainty of a new contract, but they're no more difficult to value than anything else.
I wish they were full-size contracts, but I am sure I'll be trading the convexity against the exotics. Don't know if I will trade them outright/hedge, although to hedge the exotics will require a ton of volume to get anything done due to the nominal contract value.
Hello Riskarb
Good to see the journal is still going on, great stuff.
A thought I'd like to share : you are mentioning trading the convexity against the exotic double barrier options. In a previous trade I saw you buy a straddle against a double no-touch, but have you ever considered trading choose options to do so?
They're cheaper than straddles and basically the only thing you're giving up with them (once the choosing date has passed) when compared to the straddle is the fact that you are hedged only in one direction-but you would be hedged in the right direction, closest to the barrier.
So basically it sounds like a good compromise between an expensive straddle and a somewhat directionnal bet with only one vanilla option.
What do you think???
Kalash'
Quote from kalashnicac:
Hello Riskarb
Good to see the journal is still going on, great stuff.
A thought I'd like to share : you are mentioning trading the convexity against the exotic double barrier options. In a previous trade I saw you buy a straddle against a double no-touch, but have you ever considered trading choose options to do so?
They're cheaper than straddles and basically the only thing you're giving up with them (once the choosing date has passed) when compared to the straddle is the fact that you are hedged only in one direction-but you would be hedged in the right direction, closest to the barrier.
So basically it sounds like a good compromise between an expensive straddle and a somewhat directionnal bet with only one vanilla option.
What do you think???
Kalash'
Yeah, they're significantly cheaper in terms of debit, but the edge loss is substantial and doesn't hedge well into wide barriers due to mean reversion. I prefer to limit my exotics to the initial position and use futures or vanilla straddles to hedge the wing-gamma. It's a good product for sure, but they aren't as cheap as they seem in volatile, range markets. For very short-term gamma plays[<7d] they're useful, but the gamma paid into the trend is pricey if delta inverts on the primary position.
Exotic trade date/ PnL:
10/20 Dax touch ($62,800)
10/20 Nik double barrier no touch +$94,000
10/21 SPX double barrier no touch +$49,200 {expired today}
Hedges:
Dax futures +$32,300
ES futures +$17,200
Outrights:
RIMM +$6,700
Week's gains: +136,600
Previous exotic blotter print: +$824,000
Exotic blotter tally: +$960,600
10/20 Dax touch ($62,800)
10/20 Nik double barrier no touch +$94,000
10/21 SPX double barrier no touch +$49,200 {expired today}
Hedges:
Dax futures +$32,300
ES futures +$17,200
Outrights:
RIMM +$6,700
Week's gains: +136,600
Previous exotic blotter print: +$824,000
Exotic blotter tally: +$960,600
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