Option replication and exotics journal
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Certainly no real retrace so far. I was just looking at the financial calendar and noticing it is a busy week for data.
Nice trade,
It's going to take an act of God or a real meltdown over then next day for this one not to pay off...
Hedging losses of $12,300, $24,400 and $50,000 on the remaining 100-lot[not yet booked].
+$235,000 net after hedge loss at 124500 on Dec ES. Remaining short 100 ES into another barrier to be traded tomorrow.
Previous exotics blotter: +$1,208,900
Exotics blotter: +$1,443,900 -- 28.88% return on book for the 4 month period. Sharpe >5. Debit exposure never exceeded 12% of book.
Too complicated for me. Don't understand it.
I do have a question.
Who is taking the other side of these trades and why? How are they hedging and not losing money, if you are able to hedge so 'easily' and book so many wins.
The real question is , is there a an edge here, and if so , what is its nature, of is this a form of selling black swan events, which can be done for long periods without fail.
I do have a question.
Who is taking the other side of these trades and why? How are they hedging and not losing money, if you are able to hedge so 'easily' and book so many wins.
The real question is , is there a an edge here, and if so , what is its nature, of is this a form of selling black swan events, which can be done for long periods without fail.
It's an OTC transaction. I use 4 primary dealers; all of which happen to be in the EUR.
The longer term structures[vega bets] are hedged with vol and variance swaps, as well as replication with other dealers. Smaller terms/notionals are laid-off with other dealers or gamma traded in spot/futures markets, or with vanilla OTC and exchange options.
There is initially quite a substantial model-edge for the house. In most instances it equates to 10-15% of notional. Fortunately, the edge is bled due to the theta which marks down otm gamma. This is analogous to a contraction in stat volty.
Anyone with access to hoadley's free add-ins could've modeled any of the positions using isolated, strike vols. Someone PMed me and mentioned that on some of my trades that he'd been trading similar strikes/tenors on betonmarkets.com, and found that some of my dealer quotes were overpriced. He was getting better fills than me. A few of the indices aren't available on BOM.
I'll admit it's been tougher to get reasonable pricing recently. When starting out I paid 800-1000basis in edge to initiate, now it's twice that number. Unfortunately, with a dealer market you become "known"
ROFLOL...
Mister Arb. this is Risk Management (ours) we'd like to ask you to take your business elsewhere please.
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