The ACD Method

[Maverick74]

And why one might perhaps prefer soft deltas to hard deltas?

I recall you saying you prefer DITM options, but FOTM will give better returns for a significant favourable move in the UL because of the convexity, correct?

\

Yes that was for equities, not for gas. For gas the optionality is priced into the actual spreads. I'm not even referring to nat gas options but you can trade options on the actual spreads themselves. In this case with gas we are not even dealing with soft or hard deltas, we are dealing with "real options". Real options are similar but different to financial ones. For example, gas storage is a "real option". The March 5.00 calls in Henry Hub are financial options.

 

[KIRtrader]

Well, ideally you don't want to be short a peak month unless prices are favorable to do so. The example I gave was for simplicity purposes. Contangos are hard to sustain in gas because you give the incentive for a physical player to just come in and buy Jan, store the gas and sell it in Feb for example and get the free money. Most physical shops will jump all over that, that's free money. The squeezes happen on the delivery month not on the deferreds because of the economics of the situation. Also, as I said before, the idea is to capture these spreads at price points where the producer has the incentive to deliver the forward gas. There are a lot of moving parts here. This is not a red light/green light move to Maui trade. LOL. I'm just trying to go over the basic principles. At the end of the day,this is not a market where people are "investing" in something. Gas is being produced, stored, delivered and ultimately used. The producer is setting the price when he has supply. When he does not have supply, the end user (in most cases the LDC 'utility') sets the price and they are usually price takers in that situation.

Thanks Mav. I really wanted to know what those real options were. Your posts were really helpful.

 

[Maverick74]

Thanks Mav. I really wanted to know what those real options were. Your posts were really helpful.

You can read more about them here:

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

http://www.investopedia.com/terms/r/realoption.asp

 

[justrading]

\

Yes that was for equities, not for gas. For gas the optionality is priced into the actual spreads. I'm not even referring to nat gas options but you can trade options on the actual spreads themselves. In this case with gas we are not even dealing with soft or hard deltas, we are dealing with "real options". Real options are similar but different to financial ones. For example, gas storage is a "real option". The March 5.00 calls in Henry Hub are financial options.

Thanks, I was having financial options in mind. I'll leave the embedded options to the pros like you (for now), have enough on my plate right now for a month of Sundays. Still, it is interesting to learn something new.

Your explanation and example of convexity is really good. If I knew you'd make a bundle doing it, I'd suggest you write a book on trading, putting together all the material you've shared over the years. Unfortunately, there isn't money in it nowadays.

 

[ammo]

think he's already making a bundle with that rock sitting above of his shoulders

 

[justrading]

think he's already making a bundle with that rock sitting above of his shoulders

LOL, I'm sure he's doing OK for himself.

I've just been thinking what a pity it is things are evolving the way they are nowadays. Books have been a big part of my life, for enjoyment and learning. I was just reading an article on how even established writers are facing difficult times. Harder to get books published, smaller advances, smaller print runs etc.

From a trading education perspective, the direct impact is we don't get to see what would potentially be great material in print. Well structured and edited, sharing a wealth of real knowledge and experience like Mav has.

Bugger, I'm going to get depressed if I carry on.

 

[ammo]

LOL, I'm sure he's doing OK for himself.

I've just been thinking what a pity it is things are evolving the way they are nowadays. Books have been a big part of my life, for enjoyment and learning. I was just reading an article on how even established writers are facing difficult times. Harder to get books published, smaller advances, smaller print runs etc.

From a trading education perspective, the direct impact is we don't get to see what would potentially be great material in print. Well structured and edited, sharing a wealth of real knowledge and experience like Mav has.

Bugger, I'm going to get depressed if I carry on.

the demise of writing seems directly correlated with the demise in morals and ethics ,or the religion of money worship reaching new all time memberships,look at the tv they put out now compared to the old classics

 

[Maverick74]

Thanks, I was having financial options in mind. I'll leave the embedded options to the pros like you (for now), have enough on my plate right now for a month of Sundays. Still, it is interesting to learn something new.

Your explanation and example of convexity is really good. If I knew you'd make a bundle doing it, I'd suggest you write a book on trading, putting together all the material you've shared over the years. Unfortunately, there isn't money in it nowadays.

Well, we do have 1400 pages of content here and growing. I guess you can blame Baron in part for this problem right. Books were how ideas were shared before we had blogs, message boards, twitter, facebook and all other interactive media. It's hard for a book to compete with that today. I still like books over most of that stuff. But think about it. All you guys who are here are reading ET and not reading books. Why? Because you want "real time" information. It's why people rather get their news from blogs or twitter because what happened two hours ago is history. That's why nightly newscasts can't hold viewers.

Of course the irony is this, there is far more information and value in the past then in the here and now. The information from the past has been filtered to some extent. It has survived over time and stood up to scrutiny and review. It also allows one to gain perspective. Info that comes at you at the speed of light in real time is unfiltered and may contain little to no value yet this is what most people crave. Go figure. What's nice about this thread is that it contains both. It has your real time junk food that you like to consume. But it also has a lot of buried treasures over the last 5 years. Things you can read and gain perspective on. So I guess Baron wins either way.

 

[justrading]

Insights into Nat Gas

http://seekingalpha.com/article/2070193

 

[justrading]

Well, we do have 1400 pages of content here and growing. I guess you can blame Baron in part for this problem right. Books were how ideas were shared before we had blogs, message boards, twitter, facebook and all other interactive media. It's hard for a book to compete with that today. I still like books over most of that stuff. But think about it. All you guys who are here are reading ET and not reading books. Why? Because you want "real time" information. It's why people rather get their news from blogs or twitter because what happened two hours ago is history. That's why nightly newscasts can't hold viewers.

Of course the irony is this, there is far more information and value in the past then in the here and now. The information from the past has been filtered to some extent. It has survived over time and stood up to scrutiny and review. It also allows one to gain perspective. Info that comes at you at the speed of light in real time is unfiltered and may contain little to no value yet this is what most people crave. Go figure. What's nice about this thread is that it contains both. It has your real time junk food that you like to consume. But it also has a lot of buried treasures over the last 5 years. Things you can read and gain perspective on. So I guess Baron wins either way.

I can't disagree with the immediacy of this medium and the fact that comment, for example on Nat Gas, has been of immediate relevance, something even a weekly magazine cannot match. Why do you think Futures Magazine has daily updates out, they're trying to compete and stay relevant.

But books have something that this medium doesn't, and before I expand, let me say that when Wiley rushes out a poorly edited book, and there have been more than a few, they undermine the reason for their existence.

I read the first 1,000 pages or so, copied and pasted about 36 Word pages worth, then pared that down to about 15 pages and gave it some structure. Now it's time for the 2nd edition, updated to encompass the next 400 pages with additional focus on application of ACD.

Working on this, a couple of shortcomings become apparent.

1) I don't know the extent of your knowledge, since it comes out in dribs and drabs.
2) Ergo, I cannot structure the material appropriately once and for all, nor can I tap you for more knowledge based on a collaboratively agreed structure.

Imagine working with a great, experienced editor who understands trading and finance from a writers perspective. He would first of all discuss and agree with you on subject matter, then agree on a structure. This would evolve as you produced the material. He would ask you to expand on certain sections, pare down others, add new sections based on what he sees. The end result would be nothing at all like what I can come up with from the 1,400 pages.

I do have ideas about the best of both worlds, but Baron would have to agree terms before I disclose. No, not percentages, payment in kind with a case of champagne to begin with would suffice.