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Statistical edge with option spreads -none?
- Thread starter optionsgirl
- Start date
well this makes for some good bedtime reading....or not.
i think the edge is to properly apply the right strategy at the right price. Not sure if choosing the right strategy can be considered "statistical" rather than experience/knowledge of the option trader, but it is an edge none the less.
Execute at the right price, which basically means correctly predict over/under IV can definitely be a statistical edge.
Option strategy themselves are just tools, nothing more than a net set of greeks. Has nothing to do with having edge or not, it's like saying going long is an edge over going short... they are nothing more than executor functions your edge calls.
i think the edge is to properly apply the right strategy at the right price. Not sure if choosing the right strategy can be considered "statistical" rather than experience/knowledge of the option trader, but it is an edge none the less.
Execute at the right price, which basically means correctly predict over/under IV can definitely be a statistical edge.
Option strategy themselves are just tools, nothing more than a net set of greeks. Has nothing to do with having edge or not, it's like saying going long is an edge over going short... they are nothing more than executor functions your edge calls.
that is absolute bollocks. You are advocating that the only way a retail guy can make money is by expressing directional view. Especially in options space (and yes, even in the liquid listed index options space) there are plenty of ways to make consistent money with models that, for instance, price the skew and with trading against mispriced skews. Another way is, as described earlier, to trade under/over priced options in particular strikes/expiries and hedge the arising risk with other options. That, I mentioned, needs to be done in size to capitalize on the temporary supply/demand imbalance.
Sure you can always claim that whenever I buy/sell I express a directional view, even on skew, but I am talking about strategies that make money without having to express a directional vol or delta view.
How can you say it does not pay to employ models that identify skew and under/over priced options when in fact a number of traders make their living (even from home) with such strategies? Such ignorance sometimes eludes me. Just because you are not capable of doing such does not mean nobody else can (you surely have other strengths and should probably focus on those).
Sure you can always claim that whenever I buy/sell I express a directional view, even on skew, but I am talking about strategies that make money without having to express a directional vol or delta view.
How can you say it does not pay to employ models that identify skew and under/over priced options when in fact a number of traders make their living (even from home) with such strategies? Such ignorance sometimes eludes me. Just because you are not capable of doing such does not mean nobody else can (you surely have other strengths and should probably focus on those).
Quote from dmo:
Again optiongirl, coherent thoughts well expressed. All any model can do is provide a starting point, a tool, for evaluating and comparing one option with another. From that point on it's up to you. BS and the like (Whaley, CRR, etc.) do the job. I'll concede that for a firm doing large-scale automated trading, part of the algorithm could be incorporated into a proprietary model. But for someone trading their own account, the search for a perfect model is as pointless as the search for a perfect option strategy.
Quote from asiaprop:
that is absolute bollocks. You are advocating that the only way a retail guy can make money is by expressing directional view. Especially in options space (and yes, even in the liquid listed index options space) there are plenty of ways to make consistent money with models that, for instance, price the skew and with trading against mispriced skews. Another way is, as described earlier, to trade under/over priced options in particular strikes/expiries and hedge the arising risk with other options. That, I mentioned, needs to be done in size to capitalize on the temporary supply/demand imbalance.
Sure you can always claim that whenever I buy/sell I express a directional view, even on skew, but I am talking about strategies that make money without having to express a directional vol or delta view.
How can you say it does not pay to employ models that identify skew and under/over priced options when in fact a number of traders make their living (even from home) with such strategies? Such ignorance sometimes eludes me. Just because you are not capable of doing such does not mean nobody else can (you surely have other strengths and should probably focus on those).
Me? Advocating that options are best used to trade the direction of the underlying? Perish the thought!
I don't know how you managed to so thoroughly misread my comments. Identifying over/underpriced options, trading the skew and working every other aspect of pure volatility trading are at the very core of my little soul, and I've been doing it for 25 years. You will not find an options trader with a more purely skew-playing, volatility-spreading approach than moi. If you read some of my past comments on ET, it's all I ever talk about.
But I do it using readily-available, off-the-shelf, public-domain pricing models such as my personal favorite, Whaley. If you want to do the same by tinkering with proprietary pricing models, that doesn't offend me a bit. But I can't understand why you think that's necessary. It's not.
In fact, the professional software I know of also uses public-domain pricing models. Yes, they also include separate models or methods for evaluating skews such as cubic spline, etc. But they do it based on IV numbers rendered by standard, public-domain option pricing models.
I think this thread is getting a bit muddled by miscommunication, but I think to ease friction in a technical discussion such as this is to clear up and lay out each other's terminology and conception of things. When we talk about skews and mispricings, does one necessarily have to conceptualize it in terms of models? Clearly, the underlying instrument such as stocks can also be mispriced, but isn't a stock trade mostly based on two differing opinions about it's pricing anyways? Stocks are a paradox in that it is always priced correctly and mispriced. Would this not apply to options as well (other than real arbitrage situations)? I doubt volatility is the only way to gauge the pricing of something. Plus, volatility itself is conceptualized differently e.g. Bollinger Bands. Should we not break out of the box of model mispricing and just say options are plainly mispriced like stocks are or should we be hyper-specific and further develop the arcane language of options?
Well, I would like it that authors distinguish between the mispricing of the underlying and the option, but I am not sure if people should be tazed for talking about mispricings in a colloquial way.
Well, I would like it that authors distinguish between the mispricing of the underlying and the option, but I am not sure if people should be tazed for talking about mispricings in a colloquial way.
Quote from newguy05:
i think the edge is to properly apply the right strategy at the right price. Not sure if choosing the right strategy can be considered "statistical" rather than experience/knowledge of the option trader, but it is an edge none the less.
Execute at the right price, which basically means correctly predict over/under IV can definitely be a statistical edge.
Option strategy themselves are just tools, nothing more than a net set of greeks. Has nothing to do with having edge or not, it's like saying going long is an edge over going short... they are nothing more than executor functions your edge calls.
Utter nonsense. When asiaprop said 'bollocks' he should have been quoting your post.
You contradict yourself. First paragraph you refer to 'right strategy.' In last paragraph you correctly state that strategy is immaterial.
Mark
Quote from dagnyt:
Utter nonsense. When asiaprop said 'bollocks' he should have been quoting your post.
You contradict yourself. First paragraph you refer to 'right strategy.' In last paragraph you correctly state that strategy is immaterial.
Mark
Every quarter after Dagnyt Co's earning are released, the stock moves drastically. Week before this quarter's earning, the IV on the stock actually dropped.
1) Determine the IV is underpriced (whichever method - knowledge of the past earning price action, systematic scan on historical IV data from previous earnings, etc..).
This is the right price part i am talking about.
2) Once determine the IV is underpriced. What long vega strategy do you use? for example both straddle and calendar spread are long vega. In this particular case straddle is clearly the better strategy, but how do you correctly determine that? That's the edge of picking the right strategy. Clearly in this case it's easy to see, but my point remains the same for complex trades that involve more than deploying a cookie cutter combo.
this is the picking right strategy part
3) Straddle and calendar spread by themselves, dont have statistical edge over each other. They are simply 2 tools. That was my final point.
I dont think i contradicted myself, thought it was very clear what i said.
please take no offense but let me ask you then, how does your off-the-shelf program price far out of the money options as well as options couple months out on, lets say, Nikkei or Kospi index options that are only actively traded between the 90-110 strikes as well as first 2 front months? The further out ones and farther away from the money ones are the ones that are most often mispriced and even large sell-side desks often misprice them. I myself could not find a single off-the-shelf program that could remotely do the job. In the end it came down to our desk taking a very successful model that was traded by a guy in NY after a lot of tweaking and adjusting to make it fit to our hedging style as well as peculiarities of NKxx and KMxx options
Please enlighten me, maybe I re-invented the wheel ;-)
Please enlighten me, maybe I re-invented the wheel ;-)
Quote from dmo:
Me? Advocating that options are best used to trade the direction of the underlying? Perish the thought!
I don't know how you managed to so thoroughly misread my comments. Identifying over/underpriced options, trading the skew and working every other aspect of pure volatility trading are at the very core of my little soul, and I've been doing it for 25 years. You will not find an options trader with a more purely skew-playing, volatility-spreading approach than moi. If you read some of my past comments on ET, it's all I ever talk about.
But I do it using readily-available, off-the-shelf, public-domain pricing models such as my personal favorite, Whaley. If you want to do the same by tinkering with proprietary pricing models, that doesn't offend me a bit. But I can't understand why you think that's necessary. It's not.
In fact, the professional software I know of also uses public-domain pricing models. Yes, they also include separate models or methods for evaluating skews such as cubic spline, etc. But they do it based on IV numbers rendered by standard, public-domain option pricing models.
Quote from asiaprop:
please take no offense but let me ask you then, how does your off-the-shelf program price far out of the money options as well as options couple months out on, lets say, Nikkei or Kospi index options that are only actively traded between the 90-110 strikes as well as first 2 front months? The further out ones and farther away from the money ones are the ones that are most often mispriced and even large sell-side desks often misprice them. I myself could not find a single off-the-shelf program that could remotely do the job. In the end it came down to our desk taking a very successful model that was traded by a guy in NY after a lot of tweaking and adjusting to make it fit to our hedging style as well as peculiarities of NKxx and KMxx options
Please enlighten me, maybe I re-invented the wheel ;-)
Since you talk about your "hedging style," I assume that you are talking about relative mispricings rather than absolute mispricings, and that you are spreading one option against another.
If that is correct and the "mispricing" is relative, it really only has meaning in the context of whatever strategy you are using to exploit the "mispricing."
Far be it from me to suggest you change something that's working. But how could you do it using standard pricing models? You can assign an IV to every strike. That IV is the "price" of the option. You can plot those IV's and massage them any number of ways to identify a "mispricing." You can utilize curve-fitting packages and functions to evaluate each point (IV) in the curve.
But there is no "mispricing" without a strategy to exploit it. Unless you're a directional trader, success trading options is a two-step process, identifying a mispricing and exploiting it.
If you have a model that identifies mispricings and a strategy to exploit them, then bravo. But your model is useless without the strategy. And that's the point I was trying to make in my post to optiongirl - that it's not one model or another that makes you successful, it's what you do with the information it generates.