Correction here on LJM. I know the fund well. Their peak to trough was -67% in 2008!!!! And outside of that debacle they have had over four 50% + drawdowns. In other words, they have gotten slaughtered. Yes, the manager has done well for himself on the fees. But that is some massive volatility. I'll return later with a little story on option selling you guys might find educational. Stay tuned!
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Premium Sellers vs. Option Buyers
- Thread starter Squilly_D
- Start date
Correction here on LJM. I know the fund well. Their peak to trough was -67% in 2008!!!! And outside of that debacle they have had over four 50% + drawdowns. In other words, they have gotten slaughtered. Yes, the manager has done well for himself on the fees. But that is some massive volatility. I'll return later with a little story on option selling you guys might find educational. Stay tuned!
Quote from newwurldmn:This means that selling options should produce lower returns than the equity portfolios they are hedging. Any returns realized greater than a long only equity portfolio is a function of leverage instead of "edge."
I seem to remember that risk-adjusted return selling atm options or even OTM options outperform that of a long only equity portfolio. Both the PUT, BXM and CLL indices have lower volatility than S&P500, but I'm not exactly sure how they are calculated so i may be wrong.
Quote from Maverick74:
Correction here on LJM. I know the fund well. Their peak to trough was -67% in 2008!!!! And outside of that debacle they have had over four 50% + drawdowns. In other words, they have gotten slaughtered. Yes, the manager has done well for himself on the fees. But that is some massive volatility. I'll return later with a little story on option selling you guys might find educational. Stay tuned!
You're right. Their aggressive fund was worse than the S&P 500 in 2008, down 48.5% on the year and a really awful peak to trough. All three funds are having a rotten 2013.
http://www.ljmpartners.com/performance-history
Quote from Maverick74:
Correction here on LJM. I know the fund well. Their peak to trough was -67% in 2008!!!! And outside of that debacle they have had over four 50% + drawdowns. In other words, they have gotten slaughtered. Yes, the manager has done well for himself on the fees. But that is some massive volatility. I'll return later with a little story on option selling you guys might find educational. Stay tuned!
This is from their most aggressive strategy though, which also returned some 1200% since 1998. For their moderately aggressive strategy they had a DD of 42% vs 37% for S&P in 2008. Considering their return is nearly 5x that of S&P I think those numbers are quite impressive.
Lousy 2013 though.
Quote from Maverick74:
Correction here on LJM. I know the fund well. Their peak to trough was -67% in 2008!!!! And outside of that debacle they have had over four 50% + drawdowns. In other words, they have gotten slaughtered. Yes, the manager has done well for himself on the fees. But that is some massive volatility. I'll return later with a little story on option selling you guys might find educational. Stay tuned!
Isn't most of the money the owners? He founded spyglass, sold it to apple, and decided to learn about options. His quality of capital is very high.
Ok since there are some savy option guys on this thread, I thought I would post a greenie question as we wait for Mav's story. I know it's off the topic, but not to hedging or trading around a core with positive carry.
Since I'm not an options trader, I wanted to know what the correct label or nickname is for a horizontal/calendar Reverse Conversion? Obviously, can't hedge the puts and calls unless shares are available for short. An example would be to go long Nov calls, short Sept. puts on large mark down and hedge with short stock or short underlying on close. Just curious, what this is nick named?
Since I'm not an options trader, I wanted to know what the correct label or nickname is for a horizontal/calendar Reverse Conversion? Obviously, can't hedge the puts and calls unless shares are available for short. An example would be to go long Nov calls, short Sept. puts on large mark down and hedge with short stock or short underlying on close. Just curious, what this is nick named?
Red, unfortunately, I don't have an initial position. I carry a perpetual inventory, so it's impossible to report any particular trade. However, you can do this on your own. I'd start with a big index or its etf equivalent and skip the event trades for the moment. The essence of what you're doing is taking advantage of the empiric observation that price changes accumulate around spot price, except for occasional large moves outside 2 sigma. You will simply have to experiment with this notion for awhile. The advantage of finance is that there is lots of archived data to use, but that's also its disadvantage, from a statistician's point of view. Don't tinker for a few hours, end up with a positive p/l and then think you've got this trading thing licked. You have to run through things real-time to verify you've got a workable approach. And you have to live and trade through numerous market regimes. It will take patience and persistence. But it can be done.Quote from RedDuke:
Do you mind posting an example of your initial entry position. Obviously, posting all changes is too much.
Guys, while you said much about sharp moves that can wipe out premium sellers, why you didn't say the timeframe it could happen in? Any examples of really sharp (more than 1 SD at least) moves in commodities? Do I have any statistical edge while trying to short strikes that are close to 2SD (i.e. 95% of success)?
A very straight example - crude oil chart, two cones of 1SD and 2SD, two horizontals of strikes, 1 vertical of expiring. Crossovers are marked in circle, the put side is still close to 90% of success.
A very straight example - crude oil chart, two cones of 1SD and 2SD, two horizontals of strikes, 1 vertical of expiring. Crossovers are marked in circle, the put side is still close to 90% of success.
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Quote from TskTsk:
This is from their most aggressive strategy though, which also returned some 1200% since 1998. For their moderately aggressive strategy they had a DD of 42% vs 37% for S&P in 2008. Considering their return is nearly 5x that of S&P I think those numbers are quite impressive.
Lousy 2013 though.
Alright, let's review the numbers.
In 1998 they had a 38% draw down.
In 1999 they had a 18% draw down.
In 2000 they had a 41% draw down.
In 2001 24% draw down.
In 2002 46% draw down.
From 2003 to 2006 during the smooth bull market with no down days they had great returns as there were almost ZERO corrections and the VIX printed a reading of 8.91 or 9, or whatever it was.
Then in 2008 they got hit for 63% (not the 67% I posted earlier).
They got hit for 41% in 2011.
Yes, they soundly beat the S&P over 15 years. That assumes you were long from day one. You need to generate a monte carlo simulation and see what your returns looked like over a random sampling of many years and then calculate the avg. You will find it is far less. Also, that stretch from 2003 to 2007 was historical in that vol was absolutely non existent. I doubt we will ever see a sub 9 print ever again in the VIX. So the data is polluted by a 4 year stretch that I believe is NOT representative of normal vol.
Another thing to consider, after their worst draw down it took 4 years for them just to get back to even. Seriously, how many of you guys would actually wait around 4 years just to be made whole again.
Next point, yes these are the numbers from their "aggressive" strategy. But I assure you their definition of aggressive is no where near the the type of leverage the avg ETers employs with this strategy. I suspect the avg guy here would probably trade at twice the leverage of even their aggressive fund.
Last but not least, and I'm sure this point will be debated and that is fine, I'm not saying this is gospel, but the 00's to the present was the most orchestrated, manipulated and controlled market in our nations history in terms of risk. We had a federal reserve state openly that they were working to reduce volatility in risk assets by supporting risk assets during every downturn. I personally believe this will NOT be the case going forward. So this last 10 to 15 years which will go down as one of the most bizarre economic experiments, is likely not going to repeat itself although I'm sure an echo will appear from time to time.
The bottom line is, I doubt any ETer would have survived any of these draw downs. On a side note, I do firmly believe the market will reward you for taking FU risk. I have always believed that. I've seen it first hand at the various prop firms I've been with. Guys who take this kind of risk will produce one of two outcomes. Either they will bank serious cash or die broke. There seems to be no middle ground. And the outcome is largely determined by luck. Not the way I would go about my career but hey, that's what makes a market right.
My story will have to wait for tomorrow. Sorry guys....
Personally I think there is no telling wheter we'll see sub 9 prints in VIX again, just like there is no way in telling wheter we'll see VIX at 90 again. However as the dataset increases, the probabilities of either occuring again also increases. When analysing data like this, I think it's best to just include everything instead of making subjective evaluations on what to include/exclude, because there is simply no way of telling the future, including possible future fed policies.Quote from Maverick74:
Alright, let's review the numbers.
In 1998 they had a 38% draw down.
In 1999 they had a 18% draw down.
In 2000 they had a 41% draw down.
In 2001 24% draw down.
In 2002 46% draw down.
From 2003 to 2006 during the smooth bull market with no down days they had great returns as there were almost ZERO corrections and the VIX printed a reading of 8.91 or 9, or whatever it was.
Then in 2008 they got hit for 63% (not the 67% I posted earlier).
They got hit for 41% in 2011.
Yes, they soundly beat the S&P over 15 years. That assumes you were long from day one. You need to generate a monte carlo simulation and see what your returns looked like over a random sampling of many years and then calculate the avg. You will find it is far less. Also, that stretch from 2003 to 2007 was historical in that vol was absolutely non existent. I doubt we will ever see a sub 9 print ever again in the VIX. So the data is polluted by a 4 year stretch that I believe is NOT representative of normal vol.
To be fair, recovery in equity markets have been just as painful and long of a process, if not even worse.Quote from Maverick74:
Another thing to consider, after their worst draw down it took 4 years for them just to get back to even. Seriously, how many of you guys would actually wait around 4 years just to be made whole again.
I think it's true that the average ETer would probably overleverage themselves, but that certainly is not exclusive to option sellers. Is there a anyone these days who isn't overleveraged, including institutions?Quote from Maverick74:
Next point, yes these are the numbers from their "aggressive" strategy. But I assure you their definition of aggressive is no where near the the type of leverage the avg ETers employs with this strategy. I suspect the avg guy here would probably trade at twice the leverage of even their aggressive fund.
To be fair, the fed have been manipulating markets since they were born, it's not just the 00's. And I'm sure it will be debated, but my personal opinion is the fed's policies since '08 have been pretty successful at backstopping deflation and fear, and will probably not stop anytime soon. There is little evidence that they have not worked as intended, from looking at most quantifiable macroeconomic figures. Some argue the recovery would have been the same, but you don't need a t-test when observing data between deflation/fed policies going back to '08 to see it's obvious effect. And before you say it, no, "oil prices" or "food prices" are not a measure of inflation despit what Zerohedge might claim. That crowd has been looking for that killer correction the past 5 years (actually 90 yrs) and have nothing to show for it but pain. Yes, we all know the Taleb argument, we're all morons and historical data sucks, we all underestimate the probability of black swans because if you find one, who cares? We should all be buying earthquake insurance and 3-delta put options. Nevermind that long tail is exposure to something completely unquantifiable, so all arguments based outside of historical data are merely assertions. Hey, I too prefer future data. But it's hardly a practical alternative.Quote from Maverick74:
Last but not least, and I'm sure this point will be debated and that is fine, I'm not saying this is gospel, but the 00's to the present was the most orchestrated, manipulated and controlled market in our nations history in terms of risk. We had a federal reserve state openly that they were working to reduce volatility in risk assets by supporting risk assets during every downturn. I personally believe this will NOT be the case going forward. So this last 10 to 15 years which will go down as one of the most bizarre economic experiments, is likely not going to repeat itself although I'm sure an echo will appear from time to time.