riskarb's trading journal

Status
Not open for further replies.
Quote from momoneythansens:

Thanks Riskarb,



OK.



Do you normally model in some skew when you're pricing say by taking cues from the skew in vanilla?

Sure, I use the vanilla strike vols and look for relative value and kinks or flattening of the implied slope.

Yes, not good. Forget round-trips. Seems par for the course as far as single listed CBOE products go....



Hehe. Still, the main benefit I saw with gamma-replication with futures is that you are very light on the initial hedge and therefore, if things move in the opposite direction the damage is minimal.

Discontinuity. The dgamma is such that you can gain 1000g on a few handles in spot. The art is in the hedge. Any fool can buy/sell a single or double binary and wait it out. Gammas don't decline otm significantly as they do with vanilla, but the upside is that the curvature is limited. IOW, a static hedge will always perform better under 1 sigma.

Yeah, I was thinking FLEX options might be useful from the hedging side of things of you are playing SPX exotics. I believe Euronext.Liffe licence FLEX for options on the FTSE100 too.

Perhaps if you do any of your hybrid flies (double barrier, vanilla straddle) - FLEX options vs. vanilla might be an "option". Have no idea of how good the auction process is or edge loss involved. Not likely to be trading size enough to try them myself any time soon!

OK, think I've reached my leech quota for the week. BTW, when are you going to start charging for my education?

Starting now... the clock is ticking!
 
Quote from stereo70:

riskarb,

thanks for the education. do these strategies require prime brokerage accounts (exotics in general) since it's all OTC?
More...

Yes, the PB relationship is necessary when dealing with multiple banks. There is no variation haircut, but the PB allows for instantaneous dealing and the end user is vetted with each bank.
 
Quote from hufra0706:
Riskarb, what do you mean, with negative edge?
Do you calculate it or is ist just a guesstimate?
If calculated, how do you do it?
More...

The bank quotes a market on the barrier. I take the midpoint of the quote and compare it to the strike vol price from my model.
 
I have a question B:

How much of trading exotics profitably is related to superior modelling/pricing than say from a "game theory" point of view (edge from dealer, potential "gunning" of barriers etc)? Naturally having both skills is optimal but which is more crucial to you?
 
Quote from TGM:

Risk,

Good to see you are back in the Journal Business!

Do you ever do anything in Crude Oil or Natural Gas?
More...

CL on NYMEX, but trading NatGas is like getting mugged.
 
Quote from Aardvark:

holy cow:eek: are these things a) legal and more importantly b) legit?
More...

BoM has good pricing, but "table limits" are small. It's a secure platform, but counterparty risk could be an issue, who knows. They've been around quite a few years.

Clickoptions is a sub of SocGen... horrific pricing, however. No credit risk, which they use to their advantage by offering ridiculous markets; 6% x 18% vol markets on DAX barriers? Not worth pursuing.
 
Hey Risk great stuff,
I would like to hear your opinion of writing options vs. directional buying of options. which is better, can you be successful just buying. also which do you recommend futures or options and why? you sir are a credit to ET, they should pay you for this, as well as a couple of others here.

Caddyshack
 
Quote from mahras2:

I have a question B:

How much of trading exotics profitably is related to superior modelling/pricing than say from a "game theory" point of view (edge from dealer, potential "gunning" of barriers etc)? Naturally having both skills is optimal but which is more crucial to you?
More...


The modeling of simple barriers [equity] is such that all models converge fairly rapidly, so profitability is really model-independent. I am sure using Hoadley's app pricing is all anyone would need to price equity barriers.

Edge is path dependent -- anyone who writes the bank's models will disagree, but I'm not terribly concerned with initial edge loss. A decent directional trader can earn more in exotics than any other asset class. I can cite dozens of scenarios; dirt-cheap "contaminated" short barriers into a reversal; trading into the skew, etc.

I will trade aggressively if the mid of the exotic quote is in-line with my strike-vol model-FV and the edge loss is < one day's theta.

You're short a stop when defending a short [no touch] barrier. The dealer really isn't an issue... either he'll lay-off the bet at edge or keep it on the books and hedge. Neither the dealer or end-user has any interest in sitting on their hands, but it's illogical to devote resources in spot to defend the size I am trading [dealer's view]. Defending an exotic is primarily done by buy-siders trading huge bets.
 
Quote from caddyshack2006:

Hey Risk great stuff,
I would like to hear your opinion of writing options vs. directional buying of options. which is better, can you be successful just buying. also which do you recommend futures or options and why? you sir are a credit to ET, they should pay you for this, as well as a couple of others here.

Caddyshack
More...

Thanks. =)

In my previous post to Mahras I mention how successful one can be trading single and double barriers directionally:

1) Contamination -- selling the peak of the gamma curve into a local-barrier; i.e., SPX at 1292 and selling a touch barrier at 1280. The barrier trades inverse to vol/gamma/expectancy so that these short gamma bets can be purchased for pennies on the dollar. The dealer cannot replicate the position w/o tremendous difficulty, which will be evident in the wide-market. If you're correct on moment and direction, nothing else carries the leverage. I've witnessed $100,000 debits rally to $400,000 in a single day on a 5-handle move in SPX away from the short barrier.

2) Skew -- Difficult to get a fair price on the bull risk reversal barrier combo, but huge potential nonetheless. To quote apples to apples: Buying a +30d no touch[short put] paired to a +30d touch[long call] in any equity index market. Skew edge can approach gamma in magnitude. I will look to trade an exotic bull R/R as soon as I get a long index signal.

Futures vs. options: Intraday -- futures. Swng-trading is a toss-up, but you can't trade vol or gamma[isolated] with futures.
 
Hi risk,

Glad to see the exotic journal is back, I missed it. :)

I wanted to react to what you were saying about barriers being defended.

I trade currencies (FX), mainly swing trading but I sometimes make a few intraday trades. One thing I noticed was that there were barriers being defended all over the place (my broker gives me info about them). Apparently, an increasing number of options on FX are exotic.

So, based on that kind of info (or the rumour), it really becomes easy to anticipate these intraday swings, that generally take out the barriers-I've seen it happen a number of times. A good strategy would be to place a no touch just beyond the barrier being defended, because they are often hit, hedge strongly into them and offload the hedge as the barrier is hit. If you are lucky your own option will not be hit, so that you make money on your hedge and your no touch. Haven't tried this, just an idea based on observation.

In your former exotic journal you did a few FX trades with exotics; it seems to me that that is the kind of market you're looking for if you want to cash in on barrier defending.
 
Status
Not open for further replies.
Back
Top