SPX Credit Spread Trader

[riskarb]

Quote from optioncoach:

Japan market is usually dead around this time of year, except for that one January where Nick Leeson bankrupted Barings LOL. j/k

Yeah, come to think of it... Kobe quake was the final nail in the coffin. Nikkei was only a couple of thousand points higher.

 

[riskarb]

Quote from skdoyle1:

Since I'm on a roll here, could you explain "sold all the available gamma"? What constitutes selling gamma, shorting?

sd

Selling gamma preferential over vega. Selling near-term premium which is far more sensitive to gamma/vega.

 

[gatorplease]

Quote from riskarb:

Selling gamma preferential over vega. Selling near-term premium which is far more sensitive to gamma/vega.

What instrument are you using to trade the Nikkei. Futures? Only index stock I can find is NKZ/WS. I'm not familiar with it at all.

 

[riskarb]

Quote from gatorplease:

What instrument are you using to trade the Nikkei. Futures? Only index stock I can find is NKZ/WS. I'm not familiar with it at all.

SGX(SIMEX) futures/options. NKD on the cme is cross-margined as well.

 

[andysmith]

Anyone interested in a speculative DEC 1250/1265/1280 (or thereabouts) fly?

Quote from optioncoach:

Still looking for some mini-bounce in the S&P overnight/pre-market/morning. I am not as bearish as I am neutral, i.e. lot of sideways movement over the next week or so. 1250/1270 with perhaps a dip to that 1245 level.

 

[andysmith]

Coach,
Thanks for the translation. So in your example, 1220 to 1300 is the MM's expected distribution of pricing over the life of the straddle -- but is that 1 sd (68% of the time) or does sd not come into play here?

Thanks!

Quote from optioncoach:

I actually always glance at the ATM straddle and try to make sure my strikes are well outside of that range at a minimum.

If I can translate riskarb's comment into our English (and risk arb feel free to correct me), is that the ATM straddle is being priced by the market maker on current IV estimates to cover the potential range of index moves from that point to expiration. If the index is at 1260 and the 1260 JAN straddle is at $40.00 then the MM are pricing based on an expected distribution of 1300 and 1220 of the prices to expiration. Since they want to price the straddle so that they are covered on buy or sales, you assume that their straddle pricing is a their good estimate of the market range they see as of that moment over the life of the straddle. This changes daily with volatility and index changes but gives you the range distribution.

 

[El OchoCinco]

It is based solely on their volatility estimate in their pricing models really. Imagine on a less sophisticated level you were asked to price the straddle. You would use Black-Scholes and simply derive a volatility input from whatever models or guesstimates you had available and price the put and call.

Quote from andysmith:

Coach,
Thanks for the translation. So in your example, 1220 to 1300 is the MM's expected distribution of pricing over the life of the straddle -- but is that 1 sd (68% of the time) or does sd not come into play here?

Thanks!

 

[burrben]

Could you also state in plain english what a :
Standard Distribution is (I know its from stat, but how does it play into pricing the spx)
What a Handle is.


sd

Quote from andysmith:

Coach,
Thanks for the translation. So in your example, 1220 to 1300 is the MM's expected distribution of pricing over the life of the straddle -- but is that 1 sd (68% of the time) or does sd not come into play here?

Thanks!

 

[El OchoCinco]

Here is a link for the formal definition of a standard distribution:

http://en.wikipedia.org/wiki/Normal_distribution

Stock prices are assumed to have a lognormal distribution, which in non-mathematical english is a slightly different curve. The standard distribution is the good old bell curve you hear so much about. Distribution plays into pricing in that if you assume a certain volatility, that figure represents the standard deviation of the distribution of prices over time. If you have the standard deviation and a starting price, you can use statistics to derive an array of probable prices. The wider the standard deviation (volatility) the wider the range of prices. Black Scholes sort of does this using the lognormal distribution but takes it further using probabilities of the stock being at a certain price, then prices the option and discounts that value to the present yada yada yada. So the lognormal distribution estimate of prices is wider or narrower depending on the standard deviation/volatility input. Let the market makers worry about that really...

Handles I believe is slang for a point on the index. So 10 handles would be 10 points.

Quote from skdoyle1:

Could you also state in plain english what a :
Standard Distribution is (I know its from stat, but how does it play into pricing the spx)
What a Handle is.


sd

 

[RichardRimes]

when you sell gamma are you taking a directional rather than volatility risk? sorry for the elementary question...

Quote from riskarb:

Selling gamma preferential over vega. Selling near-term premium which is far more sensitive to gamma/vega.