Picking up pennies in front of a steamroller: a short tale
- Thread starter bbt80
- Start date
I really enjoyed Mandelbrots Fractals And Scaling In Finance. I wrote some papers on Hawkes processes, they were originally used to model earthquakes and nerve pulses and shit like that. One of them is at https://vixra.org/abs/1211.0094Changing the subject to a related one:
Maybe I'm wrong, but I think the magnitude of the eruptions of a volcano follows a power-law distribution (a power-law!). And time intervals between eruptions maybe (again, I really don't know) follow some kind of exponential distribution.
Nonetheless, the area around Mount Vesuvius is densely populated. I think it has something to do with soil fertility and agriculture = years of stable income vs. everyone dies₢.
Of course people are not stupid (right?), and scientists closely monitor the volcano activity. But a power-law distribution against me... I'm out of it!
Not really...
If I was given the chance to move to Italy, with this nice view of Mediterranean Sea, I would readily say goodbye to my developing country and "spin the wheel".
- Fanc*lo la legge di potenza, giusto?
The month I discovered I was a "natural born trader" (like the turkey being fed until Christmas Eve):
- I started deciding between ES and CL
- CL it is
- After that month I fixed my target at $5k/day
- Between 3-4AM and 6AM (GMT -3) I was already done with it
- But I was missing the cake time (aka US Session)
- So I made it $10k/day
- The number of contracts started to grow disproportionately
- The commissions in the next month were almost $20k!
- High variance of daily results = shortness of breath, headaches, loss of appetite, fatigue (symptoms of "you're gonna blow your account")
- I felt I was trying to milk a rock (we say that in Brazil)
- Even before the big loss came, I didn't enjoy trading anymore
- "F*ck it! I already have a pretty nice job, a beautiful wife a tiny angry dog"
Welcome to ET, enjoy.
Your story is familiar, but remember this: its a never ending cycle. Thus your strategy/viewpoint/philsophy/alchemy/ways of analyzing the markets change and adapt with the times.
I started out -gamma/+theta as well. But thats because you eventually find out you arent the only person shorting volatility.
In fact, the entire WORLD is short vol. This is the
most asymmetric risk ever, but we all know a heavy
skew of lopsidedness leads to the equilibrium 101.
You dig deeper and $tudy the historicity of optionality.
You start reading books like:
"The Put-And-Call" by Leonard Higgins (1906)
"The ABC's of Options And Arbitrage" by S. A. Nelson (1904)
"The Theory of Options In Stocks And Shares" by Charles Castelli (1887)
might even dig deeper and pick up
"Confusions de Confusiones" by Joseph de la Vega (1688)
"The Financial Revolution in England" by PGM Dickson (1688)
Etc etc.. So as you go deeper back into time you realize options have been already trading for hundreds of years.
You then ask, how did they price these premiums if they didn't have the almighty Black-Scholes pricing model? How could these peasants price such options without the Nobel Price award winning formula that forever changed optionality as we know it?
Well, you realize the BS Model really might be the BS model and the bull could smell its shit.
Traders were pricing options efficiently way before Mr. Black, Mr. Scholes., and Mr Merton were even born.
Nassim has a quote that comes to mind: "History is written by the losers who have a protected position in academia" something like that.
Then you question the Efficient Market Hypothesis, and all these other academic theories that really seem more like NOISE, than SIGNAL. And I always remind myself, these academic dudes bleed just like me, they breathe the same air (well not really, I'm breathing Hawaiian air) but, these guys are just some geeks who did shrooms and lost some doe on DOTM puts and decided to use their academic hustle to publish some theory... but in reality for us mortals these theories don't do us any good.
The more years you're in the game you start buying as much gamma as you sell. You start seeing opportunities that you were unaware of just last year. A continuous struggle to try and understand and more importantly PROFIT off of the most amazing puzzle, organic mechanism we call the financial markets.
Remember this: 327 years ago, in November of 1693, a man named John Haddon transacted:
$CC (Copper Company) -5 SOLD APRIL 94 $10 CALL @ 2 guineas/per share
Haddon was shorting gamma while Isaac Newton was calculating the movements of the heavens.
2020 we are still selling calls. Nothing has changed, yet everything has changed.
Keep pushin my friends!
p.s Merry Christmas, Happy Holidays to my ET family. Lets build off the foundation from this year into 2021 and keep learning.
Your story is familiar, but remember this: its a never ending cycle. Thus your strategy/viewpoint/philsophy/alchemy/ways of analyzing the markets change and adapt with the times.
I started out -gamma/+theta as well. But thats because you eventually find out you arent the only person shorting volatility.
In fact, the entire WORLD is short vol. This is the
most asymmetric risk ever, but we all know a heavy
skew of lopsidedness leads to the equilibrium 101.
You dig deeper and $tudy the historicity of optionality.
You start reading books like:
"The Put-And-Call" by Leonard Higgins (1906)
"The ABC's of Options And Arbitrage" by S. A. Nelson (1904)
"The Theory of Options In Stocks And Shares" by Charles Castelli (1887)
might even dig deeper and pick up
"Confusions de Confusiones" by Joseph de la Vega (1688)
"The Financial Revolution in England" by PGM Dickson (1688)
Etc etc.. So as you go deeper back into time you realize options have been already trading for hundreds of years.
You then ask, how did they price these premiums if they didn't have the almighty Black-Scholes pricing model? How could these peasants price such options without the Nobel Price award winning formula that forever changed optionality as we know it?
Well, you realize the BS Model really might be the BS model and the bull could smell its shit.
Traders were pricing options efficiently way before Mr. Black, Mr. Scholes., and Mr Merton were even born.
Nassim has a quote that comes to mind: "History is written by the losers who have a protected position in academia" something like that.
Then you question the Efficient Market Hypothesis, and all these other academic theories that really seem more like NOISE, than SIGNAL. And I always remind myself, these academic dudes bleed just like me, they breathe the same air (well not really, I'm breathing Hawaiian air) but, these guys are just some geeks who did shrooms and lost some doe on DOTM puts and decided to use their academic hustle to publish some theory... but in reality for us mortals these theories don't do us any good.
The more years you're in the game you start buying as much gamma as you sell. You start seeing opportunities that you were unaware of just last year. A continuous struggle to try and understand and more importantly PROFIT off of the most amazing puzzle, organic mechanism we call the financial markets.
Remember this: 327 years ago, in November of 1693, a man named John Haddon transacted:
$CC (Copper Company) -5 SOLD APRIL 94 $10 CALL @ 2 guineas/per share
Haddon was shorting gamma while Isaac Newton was calculating the movements of the heavens.
2020 we are still selling calls. Nothing has changed, yet everything has changed.
Keep pushin my friends!
p.s Merry Christmas, Happy Holidays to my ET family. Lets build off the foundation from this year into 2021 and keep learning.
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Tony Saliba is a big proponent of pricing options based on relationships as well and does believe in the usage of BS but as a guide not the Bible.
You write a lot about the interrelationships of options and using them to fairly price each other. What did you read and what do you look at in order to do that?
About your answer: That was great and insightful! I had no clue about those books and facts you mentioned (I'll certainly give a look). The information per character is off the charts!
And it's about to decline:
About academia (sort of): My daughter will be born in 6 months and I intend to teach her pure math concepts as soon as possible ("Feel this fabric... it's smooth, right? Smoothness is good!" - while my wife looks at me incredulously). After a while I'll tell her that the fabric looks soft to the touch, but if we look closer (while I draw a digital microscope from the drawer) things change ("look at the ends of the fabric threads!"). "But is it smooth or not 'in reality'?". I still have to find a way to tell her that this question per se is meaningless (and explain why). My point is (besides making it clear that I will be a weird dad) similar to Box's statement about models.
About a bad analogy (that tells more about myself that I'd like to admit to a therapist): I usually play videopoker using a "suboptimal" strategy. But the "optimal" one is boring and harder to memorize. Damn it! I could even try to make a profit from the game! Some people won a lot of money playing 2 carefully chosen machines at the same time as a 9 to 5 job in the past, urgh!. But I just want to stay at Bellagio's lounges feeding me dopamine for half an hour. My strategy is impeccable.
I’ve met Tony several times. No way he’d be able to earn in today’s options markets.
You could say that though about anyone who traded products over the counter which then got heavily automated. My father was an equities block trader and ran the merger arb book for a fairly prominent firm which back in the 80’s to early 2000’s was a key source of 3rd market liquidity. Like all equities functions, upstairs equities have been almost entirely relegated to providing flow to the banking desk and pretty much nothing else.
In my travels a couple of years ago, I met the head of the sellside desk of a prominent HFT fund and he was absolutely the scum bag you would expect him to be, mid 30’s, degree from a top tech school and about as modest as a Lucifer. In a brash Freudian moment I asked him about his work in front running retail flow, which went over like the Hindenburg. He said some shit back about manual block trading being obsolete.
Robinhood just got spanked by the SEC and it’s just beginning. Buy side and sellside firms alike have joined a new exchange which puts a speed bump so that naturals can find each other.
Moral of the story, nothing is obsolete. Amazon is running a business model that the milk man ran 100 years ago. It’s not all chocolate and vanilla. There is room for Tony and there is room for Citadel.
no. The world is different. Computers have taken away so much opportunity. I have seen it in my own 20 year career.
algorithm access when I started was only for about 10 firms. Now there are dozens of retail people on here doing it well.
I personally saw the block business change. It went from meting a service of providing liquidity to being a conduit for paybacks for research and corporate access (except when the goal was to stuff the bank).
Your Dad definitely saw it first hand. How much were his risk arb clients making in the 80s, 90s, 2000s? How much are those guys making now?
many option guys from the floors couldn’t adapt. What worked on the floors in the 80s won’t work today. Just like what worked on the internet when Amazon was born won’t work today with Amazon being a 2 trillion company. Tony struck me as one of those guys.