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riskarb's trading journal
- Thread starter riskarb
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Quote from riskarb:
Right, PB is mandatory, so the positions that are fungible are offseting, but I usually get the best offset from the dealer with the best opening-market. Classic-VaR is used by most for netting.
I am curious, do you use one of your three main dealers as your PB or an entirely different entity as PB. Do you therefore have credit lines with each dealer and then give-up trades to the PB. I'm just trying to get a handle on the operational intricacies behind exotic options trading.
Thx so much!
Quote from CPTrader:
I am curious, do you use one of your three main dealers as your PB or an entirely different entity as PB. Do you therefore have credit lines with each dealer and then give-up trades to the PB. I'm just trying to get a handle on the operational intricacies behind exotic options trading.
Thx so much!
No, the PB is US-based. The PB is essentially an OTC clearer. You're utilizing the PBs investment credit rating for a fee... there is more to the PB-role, of course.
Risk,
You mentioned in a previous post how any idiot can trade barriers; while I'm your idiot!
I've been purchasing no-touch (miss) and touch(hit) options on currency pairs, hedging with the spot. You were absolutely right when you say the trick is in the hedge.
I've noticed that the miss options tend to be very much underpriced to the hit options, meaning the payouts on the 'hit' options seem to be higher then the 'miss' options. Is there a reason for this? Is there a model I can check to evaluate the box prices from my broker?? The only reason I can think of is that the miss options are easier to hedge...
You mentioned in a previous post how any idiot can trade barriers; while I'm your idiot!
I've been purchasing no-touch (miss) and touch(hit) options on currency pairs, hedging with the spot. You were absolutely right when you say the trick is in the hedge.
I've noticed that the miss options tend to be very much underpriced to the hit options, meaning the payouts on the 'hit' options seem to be higher then the 'miss' options. Is there a reason for this? Is there a model I can check to evaluate the box prices from my broker?? The only reason I can think of is that the miss options are easier to hedge...
Quote from knocks420:
Risk,
You mentioned in a previous post how any idiot can trade barriers; while I'm your idiot!
I've been purchasing no-touch (miss) and touch(hit) options on currency pairs, hedging with the spot. You were absolutely right when you say the trick is in the hedge.
I've noticed that the miss options tend to be very much underpriced to the hit options, meaning the payouts on the 'hit' options seem to be higher then the 'miss' options. Is there a reason for this? Is there a model I can check to evaluate the box prices from my broker?? The only reason I can think of is that the miss options are easier to hedge...
Hits trade inverse to misses. They are opposing sides of the same coin, priced in probability-units. For illustration, a deep otm miss may have an 80% likelihood of missing the barrier and be priced at 80/100. The indentical miss would be priced at 20/100. The pricing model expressed as debit/payout assumes equivalence on vega/gamma/vega and strike vol. So miss + hit = par at fair value. Probability carries convexity as well, or these would be as simple to price as the aforementioned.
Get an exotic add-in that prices native double barriers, singles, etc... mbrm.com and fincad.com are good.
I'll add one more comment regarding Oanda and their box options. There is added "dimensionality" embedded in the 2d box... the area of the box reduces miss and increases hit-payouts which is difficult to model. I don't think too many participants have modeled the dimensionality, but you can bet Oanda has it down.
Nikkei no touch // short synthetic straddle [weak]:
Nik bull no touch: 15,270
Premium: $306,400
Payout: $500,000 [includes prem paid]
Expires: June 2, 2006
Negative edge: a lot
Strike/barrier volatility: 23%
Symmetrical hedge: 110
Initial hedge: Short 80 June SGXNK from 15940
A slight dv-skew-premium to trading the put, but it's negligible when trading weekly barriers. I expect to earn on exotic and spot by expiration. Hedge is reduced to 80 due to modeling a static-gamma decline based upon my forward stat-volty estimate. I expect strip vols to trade to 21% and stat to trade to 17% in short-order.
Nik bull no touch: 15,270
Premium: $306,400
Payout: $500,000 [includes prem paid]
Expires: June 2, 2006
Negative edge: a lot
Strike/barrier volatility: 23%
Symmetrical hedge: 110
Initial hedge: Short 80 June SGXNK from 15940
A slight dv-skew-premium to trading the put, but it's negligible when trading weekly barriers. I expect to earn on exotic and spot by expiration. Hedge is reduced to 80 due to modeling a static-gamma decline based upon my forward stat-volty estimate. I expect strip vols to trade to 21% and stat to trade to 17% in short-order.
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