I am relatively new to this forum and realize that most here believe that trading short vol. is the most reliable way to profit in options. I think that trading short vol. requires far more skill than most traders have (or even realize they need).
I am a floor trader at the CME. Our contract went up 50 points this morning (75 point limit). Tics have a $20 value so a fifty point rally is worth $1,000 per car.
I would like to share an object lesson on how difficult it can be to contain the beast. Then I would like to ask for some help.
I spent the better part of this afternoon working with a colleague that has been a moderately successful trader. He came in short vol. and short 29 cars. His gamma started at -.57 and was -.89 fifty points higher. We had a strong rally and at settlement he was short about 59 cars.
He was able to buy some expensive calls - I had 'em and sold them to him and sell some put packs. Buy and large he missed most of the move and lost about $50,000 in price action.
Vol went up .5 in one month and 1% the nine other months he trades. The only months he is long vol. are Nov and Dec. This helped him a lot. Still he lost just over $13, 000 in Vega.
On the upside he will be pulling in $1,224 in theta tomorrow.
Of course, he faces they same problem tomorrow he had today. He is still short a lot of futures and is paying really high prices to get out of his options.
Fortunately, he is trading under our "1-month rule" so this loss will not take him out of the game. But I would like to pose a question to you folks.
1) How would you recommend he exit this situation? Keep in mind, we can test these solutions against real markets.
2) How would you trade around a situation like this?
incidentally, I recommended he flatten out his delta on the open and buy every call or put within 2 points of settlement vol until he is flat gamma. This will probably cost him another $20,000 and he is not to keen on this idea.
I am hoping you can come up with something more palatable.
I am a floor trader at the CME. Our contract went up 50 points this morning (75 point limit). Tics have a $20 value so a fifty point rally is worth $1,000 per car.
I would like to share an object lesson on how difficult it can be to contain the beast. Then I would like to ask for some help.
I spent the better part of this afternoon working with a colleague that has been a moderately successful trader. He came in short vol. and short 29 cars. His gamma started at -.57 and was -.89 fifty points higher. We had a strong rally and at settlement he was short about 59 cars.
He was able to buy some expensive calls - I had 'em and sold them to him and sell some put packs. Buy and large he missed most of the move and lost about $50,000 in price action.
Vol went up .5 in one month and 1% the nine other months he trades. The only months he is long vol. are Nov and Dec. This helped him a lot. Still he lost just over $13, 000 in Vega.
On the upside he will be pulling in $1,224 in theta tomorrow.
Of course, he faces they same problem tomorrow he had today. He is still short a lot of futures and is paying really high prices to get out of his options.
Fortunately, he is trading under our "1-month rule" so this loss will not take him out of the game. But I would like to pose a question to you folks.
1) How would you recommend he exit this situation? Keep in mind, we can test these solutions against real markets.
2) How would you trade around a situation like this?
incidentally, I recommended he flatten out his delta on the open and buy every call or put within 2 points of settlement vol until he is flat gamma. This will probably cost him another $20,000 and he is not to keen on this idea.
I am hoping you can come up with something more palatable.