riskarb's trading journal

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SGX Nikkei 30d put vol is trading at 32% for July. Any insignificant rally will drop the vols to mid-20s -- 60 ticks on the 13750 puts.

The 13750 1x3 [synthetic pitchfork] is a b/e at the strike at static volty. The current atm[14500P] is 2x the premium.

Short 1 SGXNK Sep future at 14525 // Short 3 SGXNK July 3750P at 228

Futures gain at strike: 7.50
Options loss at strike: 7.50

Carrying -35 vegas. 9x30 short. I sold the 30 at a PF credit of 1450: subtract strike from spot and add put premium. Subtract spot from strike if trading calls.
 
Quote from riskarb:

SGX Nikkei 30d put vol is trading at 32% for July. Any insignificant rally will drop the vols to mid-20s -- 60 ticks on the 13750 puts.

The 13750 1x3 [synthetic pitchfork] is a b/e at the strike at static volty. The current atm[14500P] is 2x the premium.

Short 1 SGXNK Sep future at 14525 // Short 3 SGXNK July 3750P at 228

Futures gain at strike: 7.50
Options loss at strike: 7.50

Carrying -35 vegas. 9x30 short. I sold the 30 at a PF credit of 1450: subtract strike from spot and add put premium. Subtract spot from strike if trading calls.
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Hi, risk

In addition to the Nikkei, do you still trade the Hang Seng?

I considered it, but passed when I spent a week watching it. Too intense; moves all over the place; great trends, but chop, chop, chop at other times. Not enough liquidity.

Reminds me of those auto racing arcade games from the 80's. Fun to play, but you wouldn't want to drive that way in the real world.

Best,
ssynic
 
Quote from smilingsynic:

Hi, risk

In addition to the Nikkei, do you still trade the Hang Seng?

I considered it, but passed when I spent a week watching it. Too intense; moves all over the place; great trends, but chop, chop, chop at other times. Not enough liquidity.

Reminds me of those auto racing arcade games from the 80's. Fun to play, but you wouldn't want to drive that way in the real world.

Best,
ssynic
More...

Hey Synic -- I haven't traded HSI since late in '05. It was fun, but the slippage required a small trade. I think the contract is best played small with a mean-reverting strategy.
 
Momentary segue:

Random mumblings as a follow up on replicating a European binary with vanilla verticals.

Ramp payoff for vanilla versus discontinuous payoff for digital:

ex1_binary_option.gif


More from www.riskglossary.com

As can be seen the discontinuous payoff is not too dissimilar to a credit/debit spread:

bull_call_spread.gif


The closer the strikes in the vertical, the steeper the ramp becomes until it is virtually vertical and thus closer to the discontinous payoff of the binary.

A practical application of this useless information might be to hedge a European binary with an appropriate vanilla vertical?

Taleb says something about using a wide vanilla vertical but to gradually narrow the vertical over time so as not to be over hedged in the initial phases.

The above does not of course apply to American digitals.

Food for thought. Back to regular programming...

MoMoney.

Quote from momoneythansens:

Discontinuous payoff refers to the risk profile of the position - it is all or nothing and hence the profile is discontinuous. Contrast this with the "ramp" payoff for a vanilla call/put etc.

As it turns out, a narrow OTM credit spread has somewhat of a discontinuous looking payoff risk profile. Indeed, the narrower it becomes the closer it resembles a European binary/digital and hence the closest vanilla replication of a European binary is a credit/debit spread.
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Quote from momoneythansens:

The closer the strikes in the vertical, the steeper the ramp becomes until it is virtually vertical and thus closer to the discontinous payoff of the binary.

MoMoney.
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The steepness of the ramp, due to simple proximity, has little to do with the gamma-convexity unless you're trading in the final moments before expiration. They work great if you've survived 80% of the holding period and can reach 80% of the max-gain on the vertical, but they're not a viable hedge if there is significant time remaining. Also, the gamma is reduced as you tighten strike width. Ok as a vol hedge, but gamma is the primary risk.

I'll never understand the need to replicate 100%... trading is about accepting risk. Any replication will entail significant edge-loss, correlation and risk-holes.

There are some advantages to barrier options that are not accountable in any closed-form solution. Something that I am unlikely to elaborate on at this point.

To add to the discussion -- single and double barriers are +expectancy vanilla replications at fairval. Barrier-gamma is cheap, vanilla gamma is expensive.
 
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