Statistical edge with option spreads -none?

[good one]

Quote from optionsgirl:
There's a whole field of statistical arbitrage, but I think this is usually taking into account of analysis of extraneous factors like volatility, fundamentals, technicals, etc. I suppose you might be able to construct an option position to exploit pairs trading, but I'm not sure if that would be worthwhile either.

The only way I've ever found to do this is purely theoretical...once you bring in the transaction cost of retail commisions when you need to rebalance combined with the fact that when your talking less capital/fewer contracts, the spread because less granular and the difference in real world fills chews up the strategy along with the commision.
Maybe a more interesting idea would be to drop the arb part, since that is simply not realistic and look at something akin to "stat based directional positions with a semi hedge".

 

[good one]

Quote from heech:

I personally doubt there's much alpha left in trying to arb the volatility surface. Everyone has pretty much the same option pricing models, and everything tends to move in line.

true, to me the only real utility this stuff has for retail is to understand them enough to know when assumptions of the model go terribly wrong. Then just scalp order flow as people dive for the exit and let them out at a bad a price.

 

[donnap]

Just my two...don't know if it's been said.

Any statistical edge would be priced out of existence soon enough.

I suppose that there are some situations to look for - I have stumbled upon a few over the years.

But nothing that I could quantify into an edge.

 

[asiaprop]

Could it be you are mixing things up? I think I clearly pointed out that nobody on the retail side must have traded on the prop or institutional side, that most can be done even from home. But yes, I also mentioned one has to work hard to create the tools that assist in ones trading. I am not sure what else you expect. I dont believe you go to a shop and buy a backtest program, plug it into your data feed, and off you go to lie at the beach while your bank account is getting filled. So, yes, trading requires hard work, and that may even be to having to learn a programming language.

Quote from spindr0:

Everything that you say may be totally true but extensive programming and extensive development skills aren't usually within the purview of most of the retail world which has not spent their professional life in the pits, at prop desks or in related industry positions. Ergo, we end up doing things a bit differently.

 

[asiaprop]

are you kidding me? Up until last year I was sitting right next to a guy who made 40 million trading index options, and that was on the prop side, he made most by trading his own model of the implied vol surface. Maybe its hard to believe I, him, and others made sometimes hundreds of thousands on single transactions by arbing one MM against another.

Quote from heech:

I personally doubt there's much alpha left in trying to arb the volatility surface. Everyone has pretty much the same option pricing models, and everything tends to move in line.

 

[heech]

Quote from asiaprop:

are you kidding me? Up until last year I was sitting right next to a guy who made 40 million trading index options, and that was on the prop side, he made most by trading his own model of the implied vol surface. Maybe its hard to believe I, him, and others made sometimes hundreds of thousands on single transactions by arbing one MM against another.

I know it's pretty much standard operating procedure on ET to pass off anecdotes as "strategy"... but sorry, not an impressive story unless you can also give us specifics of what he was doing, and how backtesting was conducted, and especially how it performed last fall.

I know people who've won tens of millions of dollars playing craps, but I wouldn't count on a career looking for a statistical edge at the craps table either.

I don't pretend to know it all, but I do try to stay reasonably informed with the latest papers coming out of the quantitative finance journals. I'd love to hear what new frontiers the guy sitting next to you has contributed to the field.

I absolutely believe it's possible to make money in options, when the trade goes in your way. But I believe it's (end of the day) a directional bet, whether you're selling or buying volatility, rho, vega, or any of the other greeks. I still don't believe in the (sustained) existence of free money.

 

[heech]

Quote from jdeezero05:

Maybe a more interesting idea would be to drop the arb part, since that is simply not realistic and look at something akin to "stat based directional positions with a semi hedge".

Amen. Words of wisdom.

 

[xflat2186]

Quote from heech:

I know it's pretty much standard operating procedure on ET to pass off anecdotes as "strategy"... but sorry, not an impressive story unless you can also give us specifics of what he was doing, and how backtesting was conducted, and especially how it performed last fall.

I know people who've won tens of millions of dollars playing craps, but I wouldn't count on a career looking for a statistical edge at the craps table either.

I don't pretend to know it all, but I do try to stay reasonably informed with the latest papers coming out of the quantitative finance journals. I'd love to hear what new frontiers the guy sitting next to you has contributed to the field.

I absolutely believe it's possible to make money in options, when the trade goes in your way. But I believe it's (end of the day) a directional bet, whether you're selling or buying volatility, rho, vega, or any of the other greeks. I still don't believe in the (sustained) existence of free money.

Well said!

 

[asiaprop]

who claimed arb opportunities are sustainable? It often happened the head trader of GS or the like called to wine around how their trading desk made "pricing mistakes" or messed up on the trade begging to let them out when it fact it was far from a pricing mistake, they simply did not price their longer expiry options correctly at certain times.

On the other side with a working vol model it is indeed possible to persistently identify under or overvalued options. No need to take a directional bias, in fact I traded most of the time other options against such positions in order to mitigate any remaining vol, skew, or gamma exposure.

Please forgive I wont share such models with you nor here at ET why would I or anyone else? I never ventured to prove you anything about my p&l nor the money I made. Take it or leave it, I mentioned earlier story because you are simply wrong in claiming arb opportunities do not exist and options cannot be profitably traded without directional bias, simple as that...

Quote from heech:

I know it's pretty much standard operating procedure on ET to pass off anecdotes as "strategy"... but sorry, not an impressive story unless you can also give us specifics of what he was doing, and how backtesting was conducted, and especially how it performed last fall.

I know people who've won tens of millions of dollars playing craps, but I wouldn't count on a career looking for a statistical edge at the craps table either.

I don't pretend to know it all, but I do try to stay reasonably informed with the latest papers coming out of the quantitative finance journals. I'd love to hear what new frontiers the guy sitting next to you has contributed to the field.

I absolutely believe it's possible to make money in options, when the trade goes in your way. But I believe it's (end of the day) a directional bet, whether you're selling or buying volatility, rho, vega, or any of the other greeks. I still don't believe in the (sustained) existence of free money.

 

[donnap]

I read somewhere that in the early years of listed option trading - the 1970s - that options generally were overpriced.

If this is accurate, then there was an edge to selling options that was eventually eliminated.