ironchef,
I’m commenting you because I appreciate both the tone and the arguments you are using.
The bulk of Bobby’s strategy (Long PUT neat and short PUT forward) is not new, Chris Cole and Mark Spitznagel (among others) are trying to do the same, so we have some background from very clever traders. Just my guess, they all BUY protection NEAR and SELL FAR AWAY (of course, with different instruments and in different proportions at different strikes but the general rule still stands) to dampen the cost. The name of the game is not “how to get protection for free” but “how to get protection at the minimum possible cost”
Because a tail risk strategy, in an efficient marketplace, comes at a cost, not “free of charge”. Theta is the cost of being long Gamma (Taleb speaks of “gamma rent”). And the more Gamma you have, the more Theta you pay…. even if you’re not aware of this (I joint a description the daily P&L of an option positions, of course all these word have to be expressed by math, if someone likes it).
So, for not paying that cost, there are only two possibilities, not mutually esclusive:
1) one has identified a mispricing (unlikely but always possible), and will be able to use it as long as it will last (normally, it won’t last long)
2) one is not protected as he thinks, and the market – sooner or later, more often sooner than later – will find a way to let him know….
As a less time consuming alternative to your back test– one could look at EurekaHedge long tail index, and get an idea of the performance of the strategy. Very good in 2020 , but the years before….
Most certainly does. And B&S is unable to value “units” (option of very little value)
But there are “boundaries” that cannot be passed, to keep the market arbitrage-free.
Aside Derman, you could have a look at Taleb (I was told Dynamic hedging can be found as a PDF’s on the web), about shadows greeks” and see whether it’s useful to you.
As someone else already said, a greek measures a sensitivity, ALL ELSE BEING EQUAL. But in real time, there’s no “all else being equal”, all parts of the equation are moving together….. if it’s not enough, I will be glad to see a real example of “greek mismatch” (with real numbers, I mean), just to be sure I’ m not misunderstanding.
Bobby, I thank you for opening this thread, which is really interesting and informative.
I discovered some guys well worth following
We all know, sometimes in public forum things get harsh very quickly, and it’s normal to defend yourself from attacks of various type.
But it doesn’t help if
- you start saying you’re the greatest living option trader…. I have no problem with some bragging, but maybe someone else has;
- you introduce a “long tail strategy” and judge it based on what happened just in first months of 2020;
- closed in an angle about the theta you pay, you claim you do also some “income trades” along the way… which has no relation whatsover with the “first” strategy,
- then you introduce an “INDICATOR” of the future trend of the market…. when foresee the future has nothing to do with option trading…..
- and, last but not least, you now give a “very limited information” warning.
So, there is some reason if people reading here cast some doubts….. don’t you think?
