Options and Greeks

IV_Trader · Oct 21, 2006

Quote from rallymode:

So short of any supply/demand shocks at some strikes or market disturbances fairly easy to model?? Still probably not very practical for the average ET options guy

but what are you trying to model , RM ? If skew is already exists , its pretty clear what future per strike vols to use if price of spot moves up(or down) , no ?

rallymode · Oct 21, 2006

Quote from IV_Trader:

but what are you trying to model , RM ?

Who? Me? Model skew? Nah, i have enough hard time trying to make eggs for breakfast.

riskarb · Oct 21, 2006

Quote from rallymode:

So short of any supply/demand shocks at some strikes or market disturbances fairly easy to model?? Still probably not very practical for the average ET options guy

No, the vol-strip isn't easy to model. However, the smile is "model friendly"

Profitaker · Oct 22, 2006

What exactly is the purpose in calculating a âSkew Deltaâ ?

Where the Delta is the hedge ratio to be used in continuous time, calculating a delta using a different IV than the actual option strike IV seems to be a contradiction in terms. In any event, the vol surface itself is dynamic.

What practical use is a Delta value calculated using anything other than the âhere and now" IV ?

IV_Trader · Oct 22, 2006

Quote from Profitaker:

What practical use is a Delta value calculated using anything other than the âhere and now" IV ?

If skew exists , hedging intervals (to adjust deltas) are different when stock moves up vs down. IOW , I will short the spot ( for long gamma position) more often when stock moving up than on the way down . I personally like to know that fact BEFORE taking position.

Also , if skew is event related , one can model after event scenario based on skew become a non existed. Check out AMZN , every 2.5 points strike has a 400bp vols skew diff. I am pretty sure that vols will be the same across the strikes after report day.

Profitaker · Oct 22, 2006

Quote from IV_Trader:
If skew exists , hedging intervals (to adjust deltas) are different when stock moves up vs down. IOW , I will short the spot ( for long gamma position) more often when stock moving up than on the way down . I personally like to know that fact BEFORE taking position.

I agree that knowing what the option delta will be if the stock moves up/down X is useful, but what I asked was....what practical use is it ? From your post I gather you wouldn't dynamically hedge using a false IV plucked from somewhere along the skew, and neither would I.

Yet our ever so helpful and polite friend says...

Quote from tower:
very few traders I know use Delta and Gamma. There are other measures (very cleverly) called skew delta and skew gamma that takes the skew into account...

Now either he doesn't know many traders, or I'm missing something.

Bitstream · Oct 22, 2006

Quote from IV_Trader:

If skew exists , hedging intervals (to adjust deltas) are different when stock moves up vs down. IOW , I will short the spot ( for long gamma position) more often when stock moving up than on the way down . I personally like to know that fact BEFORE taking position.

Also , if skew is event related , one can model after event scenario based on skew become a non existed. Check out AMZN , every 2.5 points strike has a 400bp vols skew diff. I am pretty sure that vols will be the same across the strikes after report day.

earnings in a couple of days on amzn, u goin' to buy strangle/straddle on this?
given what happend last qt, seems like a good play innit.

IV_Trader · Oct 22, 2006

Quote from Bitstream:

earnings in a couple of days on amzn, u goin' to buy strangle/straddle on this?
given what happend last qt, seems like a good play innit.

already did that and got out with huge profit on vols ramp. Now I am looking how (if at all) to put an overnight trade into report. The ATM premium is at 13% of nominal , so if you belive AMZN will move more at least 10% , go for it , I will pass ; multo periculoso for me after considering a huge vols crash in case it won't move.
I want to see where new (DEC) vols will opens on Monday , maybe I can put some NOV/DEC calendar trade.

EquityGuy4321 · Oct 22, 2006

How about this to help people out.

1. To understand the relationship between volatility and price, get yourself an Excel spreadsheet and create some fake data series that have combinations of the following characteristics (high vol, low vol, quickly rising or falling market, slowly rising or falling market). It will become clear to you how prices can go up or down but volatility falls and, hence, your option become less valuable.

2. Options are a wasting asset (theta). The time value of the option becomes less each day, with the effect accelerating when options have about two weeks left on them (in general).

3. If you have a far o-t-m option close to expiration, you need a larger movement of the underlying to make it worth something compared to an option that has more time to maturity. This is apparent if you look at the graph of an option's delta over the life of the option.

Any (or all) of these effects could make your p&l seem "off" even though the market moves your way, or stands still.

BTW, you can get all this from B-S. Principles apply to all options, no matter what fancy model is used.

daniel5198 · Oct 23, 2006

Quote from IV_Trader:

already did that and got out with huge profit on vols ramp. Now I am looking how (if at all) to put an overnight trade into report. The ATM premium is at 13% of nominal , so if you belive AMZN will move more at least 10% , go for it , I will pass ; multo periculoso for me after considering a huge vols crash in case it won't move.
I want to see where new (DEC) vols will opens on Monday , maybe I can put some NOV/DEC calendar trade.

AMZN IV went from 40 to 60, brill 4 a straddle. do u mind giving us the details of that beautiful trade (expiration, entry and exit price, and the strike for that strad?)
thanks