That is basically the stuff I look at now... though not every single opportunity since I have a full-time non-trading job. One other thing I would add to that list is under/over-reactions to news events. Problem is being wrong on delta in these cases makes being right on vol kinda worthless if you aren't hedging.
Question for all of you actually making a living trading options
- Thread starter monkeyjoe
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That is basically the stuff I look at now... though not every single opportunity since I have a full-time non-trading job. One other thing I would add to that list is under/over-reactions to news events. Problem is being wrong on delta in these cases makes being right on vol kinda worthless if you aren't hedging.
would imagine the key is not interpreting the govt released data but the reaction the market will take....then the opportunities from a long vol perspective is to target those times you think a move would be significant enough based on unexpected data. Obviously contingent on the implied not being too excessive.
For large bets against farmland, normally you would think the rural banks lending the money, however, it seems the land property bubble is propped up by the govt as well. what about the farm machinery guys (nah, the land still needs to be worked). Always hard to short something like that.
A friend of mine recently told me a funny story about sugar - he used to work in equities with me, and switched to commodities. His opinion was that if you think equity guys talk their books, ag guys are worse. (in that they all say one thing and are doing another)
not really - I am not US based, nor ever been and it was more a fee reduction as a benefit of being a MM than a rebate which was the era I worked in.
Your other idea is out of my expertise as well. I gave a lot of this stuff away as I did not want to participate in that race technology/HFT as an individual. Hindsight says I probably should have stuck with it if I got it right, but life has been good so no complaints.....plus if my heart was not in it then getting it right is even harder.
I still think your best efforts if you want to do this as a retail guy are as sle indicated maximising the flexibility you have. As a retail guy no one forces us to trade. We can have a real go at things, get in out etc. Its an advantage often overlooked....and then for the few times real opportunities arise you can be ready for them. Hard thing might be implementing the idea or getting access to certain options if you are too small, and keeping an income in the meantime if thats what you need a trading account for.
Actually, I think that by and large agriculture-related government data releases primarily act to limit opportunities in the markets by disseminating information. If you are willing to look there are highly regular reports on local spot prices, plantings, yield expectations, weather, etc. That said, I think corn prices probably jumped a little too much when USDA cut back the harvest estimate last month (though the prices are now back to that level, so maybe not).
The farmland issue is thus not about data releases so much as about farm policy (and subsidized risk management). The guys at the farm credit meetings mostly think we are in a farmland bubble a la the early 1970s. That means farmland elevated by higher ag prices and by subsidies that grew proportionally to ag prices due to "percent subsidy" requirements on crop insurance in the last two farm bills. We also see large-scale entry of new farmers that are all highly-leveraged/debt financed... so they will be double-screwed if commodity prices and land prices fall together.
This would have been an opportune year for things to go horribly wrong for them given how corn and soybean prices have come down from 2012 levels, but! Congress just passed a very generous farm bill that looks ready to lock in the record-high farm incomes for the next 3-5 years. I won't bore you with the details, but the bill might actually be too generous with subsidized insurance (taking on risk that the taxpayers don't really understand), so I wouldn't be surprised if we have a couple years with $20B hits to the treasury. If this happens, then the farm bill will likely get scrapped amid calls for farm policy reform, and that is the time to be short farmland. We shall see.
My guess is there are probably REIT's out there dedicated to Ag Land, I just haven't done the legwork to find them. I know John Hancock has a whole group dedicated to farmland investing. You could also short agricultural banks because they are much less able to diversify, but I think most are too small to be publicly traded.
I would stay away from anything infrastructure intensive or transaction-cost sensetive. You don't want to compete with institutional traders or high-tech HFT shops. Anyone with a smaller pot should be looking for opportunities that are either smaller in absolute terms or not avalible to larger investors for regulatory/systematic reasons. Which, in essense, means that you can either be a provider of risk premia to the institutional buyers (e.g. on crash protection) or provider of liquidity in capacity-constrained space (e.g the opportunity we discussed via PM or lets say by being a seller of smaller single stock vol). If you try to build systematic strategies via this approach, you would arrive at something that combines reasonable returns with reasonable quality of life.
I appreciate the advice. In the case of cash protection, I am gonna have to do a lot more research/data work to determine how much edge there really is once my terrible RegT margin is considered. From a distributional perspective (or a put-call-parity perspective, for that matter), that risk premium should be built into the stock price, too. Without portfolio margin, crash premium isn't always that much relative to the margin it uses up, and clearly you'd overpay even more at the low strike to turn it into a credit spread. In the case of crash risk, I guess I'm wondering if it's not better to just be slightly (like 1.5x) levered in the S&P.
Monkeyjoe,
I guess you should give a try to ag options. It is actually quite easy to find opportunities based on "midprice" or fair value on those markets. The tricky part is to find edges that would overcome B/A spread or find a way to enter the market passively with MMs. Ag space is one of the least modelable in terms of forward curve and volatility of expiries. Think about vol of new crop months vs old ones (and old crop/new crop calendar spread options volatility as well ), soy vs products vol, different kind of wheat...And there are a lot of times when just reading the news and understanding Fundamentals, you can say" well Mr MM, you should be wrong here, be glad you can offer a 20 tick spread for your service"
PS: I am mainly a futures trader and only a wannabee option trader. Take what I say with a grain of salt...
I guess you should give a try to ag options. It is actually quite easy to find opportunities based on "midprice" or fair value on those markets. The tricky part is to find edges that would overcome B/A spread or find a way to enter the market passively with MMs. Ag space is one of the least modelable in terms of forward curve and volatility of expiries. Think about vol of new crop months vs old ones (and old crop/new crop calendar spread options volatility as well ), soy vs products vol, different kind of wheat...And there are a lot of times when just reading the news and understanding Fundamentals, you can say" well Mr MM, you should be wrong here, be glad you can offer a 20 tick spread for your service"
PS: I am mainly a futures trader and only a wannabee option trader. Take what I say with a grain of salt...
I've found the same to be true with illiquid equity options. It's tough to harvest even a large edge when the bid/ask is massive and your execution tactics are rudimentary. I've tried a few things to manage this (e.g. VOL orders at IB) but seem to always end up getting picked off in quick delta moves or the like. Anyhow, I'm sure what sle is suggesting in the capacity constrained space is doable, but in my experience it will require a substantial amount of trial and error in live markets.
Monkeyjoe,
I guess you should give a try to ag options. It is actually quite easy to find opportunities based on "midprice" or fair value on those markets. The tricky part is to find edges that would overcome B/A spread or find a way to enter the market passively with MMs. Ag space is one of the least modelable in terms of forward curve and volatility of expiries. Think about vol of new crop months vs old ones (and old crop/new crop calendar spread options volatility as well ), soy vs products vol, different kind of wheat...And there are a lot of times when just reading the news and understanding Fundamentals, you can say" well Mr MM, you should be wrong here, be glad you can offer a 20 tick spread for your service"
PS: I am mainly a futures trader and only a wannabee option trader. Take what I say with a grain of salt...
I've thought of it, but it seems like the ag options are super thin/only traded for a very few strikes. I actually have some ideas about listing different ag futures that actually provide the right hedge for everyone who is not a grain processor.
If those options were liquid, it would really be something to see. The whole tension of correctly pricing vol vs correctly pricing terminal price distribution is a non-issue if you believe in Markov processes (a la Black Scholes). With ag futures, the prices are so obviously mean-reverting (and ratio reverting, e.g. corn/soy, soybean crush, cattle crush, wheat feeding, etc.) that pricing based on vol replication would way way way overstate terminal distribution. Actually, that itself might be the edge in the existing market -- I would bet most buyers of these thinly traded options are using it only as a static hedge against the terminal price...
I agree, and even more so without access to expensive data. It's exactly that costly trial and error that has kept me out thus far. I have a Python script scraping tick/order data from netfonds.nl... so am hoping over time that can accumulate into at least some more granular insight about moving spreads. Not sure I will ever be able to get my hands on that quality of data for options.
But... one can always play around with trial and error a little and try to mitigate the cost! Especially if you have some insight as to the nature of the market inefficiency and what drives it, you could probably optimize your experimentation towards the low risk/low cost side. That's sort of my current plan - try to find these type of opportunities, and then come up with ways to test them live with relatively limited risk. Obviously that doesn't work with selling crash risk at all.
As I am sure others have mentioned. You need to have an opinion on price/vol. It doesn't really matter what tools/methods you use. Often, it is better to keep it simple. As long as your strategy makes money, consistently, then who cares how elegant your model is.
I do not know the size of your account, but as a retail/market-taker focus on limited risk trade structures. Most importantly, keep transaction costs low.
I have had success for a few years now trading single stock options (I tend to stick with higher-dollar, more liquid names). My trades usually have a delta component, and lean on vol (typically short v/g, both long/short delta). Sometimes, I will go to index to neutralize, or take a directional position. Over time, I have simplified things, and trade less often.
I would say managing your bankroll properly, and keeping commissions low would be the most important aspects. Good luck.
I do not know the size of your account, but as a retail/market-taker focus on limited risk trade structures. Most importantly, keep transaction costs low.
I have had success for a few years now trading single stock options (I tend to stick with higher-dollar, more liquid names). My trades usually have a delta component, and lean on vol (typically short v/g, both long/short delta). Sometimes, I will go to index to neutralize, or take a directional position. Over time, I have simplified things, and trade less often.
I would say managing your bankroll properly, and keeping commissions low would be the most important aspects. Good luck.