The Black Swan Swims

Quote from segv:
If he can afford to carry the trade, and if he sold the vols at a premium to stat vols, then he can delta hedge at 1/2/3 daily sigmas until theta catches up, implied volatility drops, or expiration.
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Yes, I agree. I would consider the (paper) loss due to increase in IV not a real loss, but rather a deposit. Look at what the position would be worth under 'normal' IV, eg. the IV before he started trading around the move.

The difference will tell you how much money is soaked in currently by the open position. I always look at it by dividing it by the Vega/Theta ratio: you can say how many days you are 'behind' on schedule :).

It's slightly counterintuitive but when IV is higher than expected it is best to hedge delta by shorting more theta. Of course riks-limits have to be respected here.

My 2c.

Ursa..
 
Quote from MajorUrsa:

Yes, I agree. I would consider the (paper) loss due to increase in IV not a real loss, but rather a deposit. Look at what the position would be worth under 'normal' IV, eg. the IV before he started trading around the move.

The difference will tell you how much money is soaked in currently by the open position. I always look at it by dividing it by the Vega/Theta ratio: you can say how many days you are 'behind' on schedule :).

It's slightly counterintuitive but when IV is higher than expected it is best to hedge delta by shorting more theta. Of course riks-limits have to be respected here.

My 2c.

Ursa..
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Major:

I have never considered the ratio you describe. To be candid, I have never even thought about the timing of theta in that way.

Because of this I asked the two largest vol. sellers I know about it. One said he didn't do it this way (though he was familiar with it) and the other was as ignorant as I was.

The more I read on this forum, the more I realize how much more technical off the floor trading is than what we do.

Back to Jim:
On Friday he bought a bunch of OTM calls and puts flattening his vega considerably. He paid up for the calls but got the puts at a pretty good price.

He then bid the straddles but didn't get any off. Since we settle volatility to the straddles he had to pull his bids at the close so volatility wouldn't go up again.

(Some pits settle vol. strike by strike - especially those with significant skews. Others, like our, settle to the bid and ask of the straddle).

He also flattened his delta position on the open. This worked out for him even though commercial paper came in offer towards the end of the day.

Overall the day probably cost him about 10k (my estimate only) and he lost a lot of his theta. I think he is in far better shape right now.
 
Quote from AAAintheBeltway:

It's all about living to trade another day. Shit happens and sometimes you have to pay up.
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One of the biggest differences I have noticed about locals vrs. off the floor guys is that locals seem to be far more sensitive to day-to-day fluctuations in their net liq.

When I get off the floor I do three things:
1) Calculate how much money I made or lost
2) Input my trades and calculate the next day's delta and gamma position
3) Determine, at the contract level, if I am going to bid or offer calls or puts the next day.

The guys that post in this forum seem to take a far longer view on their positions. Maybe this is because our transaction cost is lower or that we can buy the bid and sell the offer. Whatever the reason, I am amazed at the differences in our perspectives.
 
Quote from tower:

One of the biggest differences I have noticed about locals vrs. off the floor guys is that locals seem to be far more sensitive to day-to-day fluctuations in their net liq.

When I get off the floor I do three things:
1) Calculate how much money I made or lost
2) Input my trades and calculate the next day's delta and gamma position
3) Determine, at the contract level, if I am going to bid or offer calls or puts the next day.

The guys that post in this forum seem to take a far longer view on their positions. Maybe this is because our transaction cost is lower or that we can buy the bid and sell the offer. Whatever the reason, I am amazed at the differences in our perspectives.
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the difference is probably in trading "other ppl money vs your own" concept.
 
Quote from IV_Trader:

the difference is probably in trading "other ppl money vs your own" concept.
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I am not sure what you mean here. Locals almost exclusively trade their own money. Very few money managers work on the floor - at least in the Ag's.

Unless what you mean is that most of the guys on this forum trade for funds.
 
Quote from tower:

I am not sure what you mean here. Locals almost exclusively trade their own money. Very few money managers work on the floor - at least in the Ag's.

Unless what you mean is that most of the guys on this forum trade for funds.
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No, I think he meant your first interpretation.

It is interesting to see how both parties have a skewed view on the other side, in a sense completely opposite to reality. For me it IS new that the locals have a daily P&L accounting as their measuring stick, which also means that they're almost never in it for the theta.
From our side I must admit I never fully realized that you guys traded your own money. I always assumed you to be hired by some bank.

Ursa..
 
It rarely works out when you try to make a REMBRANDT out of a losing position.

It is always more profitable to move on after a position goes south. At the least you cut your size down or box it off to where you can trade the wings when things get back to normal.

Stay away from upgrading crap!
 
Quote from Quin:

It rarely works out when you try to make a REMBRANDT out of a losing position.

It is always more profitable to move on after a position goes south. At the least you cut your size down or box it off to where you can trade the wings when things get back to normal.

Stay away from upgrading crap!
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In general I agree, but a balanced short position is always prone to some IV damagae when the market moves. The position is not a losing one perse. Take these events into account and keep the position balanced and wait for IV to become acceptable again.

Ursa..
 
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