The first step [for the pros only]

[babutime]

Quote from opt789:

What Spin said. There are a lot of different ways to use options, so no two of us are exactly the same. I don’t use scanners either, I like to know as much as I can about the underlying.

If you are going to be looking for a job, where you work is a lot more important than any questions asked here. I learned a lot by choosing jobs that would teach me the options business.

Yeah, I'm trying to get a feel for the markets (and make a buck while I'm at it) going into some of these interviews. I'll prolly have to start off as some kind of analyst calculating PnL for the big boys and stuff of that sort.

But I think it would help if I knew how to really understand the nonlinearities with higher order greeks if I incorporate them into my own (paper and/or real) trades.

Btw opt789, you worked at a big firm too before/currently? Like Spin said do most option traders specialize in a few securities?

Thanks for the response!

 

[IVtrader]

Quote from babutime:

I've spent over 16 hours today on this forum. I'm new and I read everything from a guy's credit spread strategy backfire on him late 2007 to someone make a mockery of himself asking admins to remove his posts... Along the way I also read some great posts by a lot of knowledgeable members

...anyways....

What is it that the first thing pros here do before they make any risk management decisions, before any greek tweaking, etc. Before any of that stuff, what do you do?

How do you find the stocks that you are going to be likely to trade given condtion 1, condition 2, etc?

I've noticed a lot of guys here trade with Interactive Brokers and/ or Thinkorswim. Could you walk us through what scanners you use to first find the stocks you want to trade?

I have an IB account and I love the implied volatility and option volume screeners they have. Is that your first destination? Do you write your own code and have scanners based on that? Do you download vast volumes of data every night and do some crazy MATLAB manipulation? I'm working on an API implementation of my own for IB using java if that's also what's required. Ive read Natenberg, Taleb (Dynamic Hedging), Hull (as part of school curriculum), etc etc and feel like an idiot. Basically I'm the junior ferrari engineer who just passed his learner's license. I wanna make that transition from engineer to a rally driver!

Bottom Line is this:

What first steps do you take towards screening stocks/ ETFs/ futures/ etc that form the basis of your view on the direction the market in that specific instrument takes?

I understand that risk management and knowing what the greeks mean are essential- but I have that covered to a large extent. I wanna know what that all important first step is (besides overall market sentiment, and direction course along with global macroeconomic picture).

I have been only mildly successful as I have only done long calls and puts, verticals, IC on earnings to benefit from vol collapse [butterflies probably are better for that?]. I also do the occasional double diagonal as I did with recent apple earnings. But I cannot seem to capture big movers!

So what is it?? A humble request from an eager undergrad who will be handing out resumes soon.

Note*: This request is for those who have been trading successfully for more than two years. I'm sure all of us have certain set-ups and I don't mean any disrespect to anyone. Its just that guys like atticus, maveric and others seem to know what the heck is going on.

Note**: If its not something you'd like to discuss openly, could you maybe IM me? I'll respect your wishes and will likewise not share it publicly

Thank you!

Every one in this forum,whether they know it or not, trades the level IV especially if they are a nondirectional trader(read:sideways markets)using calendars, flies, or IC's

your comments imply you have been primarily a d-i-r-e-c-t-i-o-n-a-l trader so i.e you trade based on whether you expect stock/ETF/Index to make a fairly large move up or down.

yet you are new at this, probably have never had to adjust a trade(staying on top of the deltas, amongst other things)so you probably don't know the greeks as well as you think you do. and probably have a lot more to learn about risk management than you think

finding stocks/Indexes to trade directionally is obviously a different filter than the ones going sideways

I personally used Finviz as one stock/ETF screener though there are certainly others.

you can of course learn to trade both directionally and nondirectionally but that may not be what your focus is right now

good luck

 

[opt789]

Quote from babutime:

Yeah, I'm trying to get a feel for the markets (and make a buck while I'm at it) going into some of these interviews. I'll prolly have to start off as some kind of analyst calculating PnL for the big boys and stuff of that sort.

But I think it would help if I knew how to really understand the nonlinearities with higher order greeks if I incorporate them into my own (paper and/or real) trades.

Btw opt789, you worked at a big firm too before/currently? Like Spin said do most option traders specialize in a few securities?

Thanks for the response!

I wouldn’t say “most” option traders do any one thing, but in my experience they like to have a feel for the underlying and the accompanying option market. ES options have little in common with wheat options, and SPY trades differently than AAPL. Guys tend to focus on an area, like highly liquid, deep markets or low liquidity and wide spreads, or indices vs. individual stocks, etc. It is hard to be an expert in everything. They also usually have either a slight bias or heavy bias as to whether they like being long gamma/vega, or short. There are guys who will never be net short options (whether or not they are short gamma/vega) and guys who are comfortable being naked short.

Another thing that applies to all traders everywhere, is that it is different just trading your own money vs. trading OPM. IVtrader mentioned it, but I don’t view trading options and trading implied volatility as two things, they are the same thing to me no matter what type of trade I am doing. Not that it matters, but I have been a broker, clerk, market maker, upstairs firm guy, and hedge fund guy but never with a big firm, I like the small firms.

 

[babutime]

Quote from IVtrader:


yet you are new at this, probably have never had to adjust a trade(staying on top of the deltas, amongst other things)so you probably don't know the greeks as well as you think you do. and probably have a lot more to learn about risk management than you think

Agreed!

Any resources other than the regular big books like Natenberg, Taleb, etc? Or do I actually need to work at a trading floor to learn these?

Thanks!

 

[IVtrader]

Quote from babutime:

Agreed!

Any resources other than the regular big books like Natenberg, Taleb, etc? Or do I actually need to work at a trading floor to learn these?

Thanks!

that's one way. quite a few people will also get also ex marketmakers to coach them. I can suggest two and no I don't get any financial incentives to do so.

contact me at jimr_77024@yahoo.com1234 if you want(note the munged address). put "deltahedge" in the subject line

 

[trader198]

I am not an all kind hats guy. I just focus on the simple strategy of buy option either call or put, all OTM options, not ITM options.

becuase I am a small account single handed trader, I need the leverage, the larger the better.

I switched to option trading from future, the main reason is the appealing leverage. it is awesome.

if used it wisely, easily double or triple even ten fold the account in one or two trades!

the first step toward successful trading is:
never listen to any opinion
do not be indulged in technical analysis
focus on inbalance between buyers and sellers
(what they try to do? they want to break through those price levels or stay there? what those major players are thinking? )

 

[Cren1]

Quote from babutime:
So you're basically looking to capture rise in volatility going forward by looking at the rates of change of lower order greeks (mainly vega and gamma) wrt volatility. What does verticle figure mean? And when you say if IV is next to cones, do you mean if the IV curve (or current level ?) is next to one of the HV levels?

I'm sorry, my mistake: the right word is "vertical", which I mean figures with the same maturity

It's very hard to predict IV and R(ealized)V better than the IV term structure does, but the vertical shift in IVTS during crysis means that the market is far away from being efficient.

«Next to cones» means just the current level, but in my opinion it's always better to log(IV) ~ log(HV) via OLS linear regression in order to see if IV has always been far above (or below, why not?) HV and how much.

Quote from babutime:What does a Vomma and Zomma boundary mean ?

I suggest to study the Greeks on E. Haug «The complete guide to option pricing formulas»; those are strikes which, ceteris paribus, DGammaDVol and DVegaDVol are good to you out of.

Quote from babutime:As for the slope of the term structure- estimating parameters of Ornstein-Uhlenbeck process could also help. But I guess ARMA and O-U are pretty damn close as both serve the same purpose to this end...

Ornstein-Uhlenbeck process is just mean reverting with parameters estimated on data; you said right: it could be seen like ARMA process, in my opinion there are no strong differences... you just need an estimate of the mean reverting speed of the IVTS's slope, no need to be so "quant"

Quote from babutime:As for mean reversion itself, what if the regime changes and now it takes much longer to mean revert? Is that inherently your biggest risk?

Correct, because of autocorrelation of volatility you will always start losing some money but that's your bet: changes in volatility and IVTS slope as it's always been in the past.

 

[babutime]

Quote from Cren1:


I suggest to study the Greeks on E. Haug «The complete guide to option pricing formulas»; those are strikes which, ceteris paribus, DGammaDVol and DVegaDVol are good to you out of.

I think you may have missed a few words there but did you mean those are strikes which, ceteris paribus, DGammaDVol and DVegaDVol are good to you out of the rest of the strikes? So basically strikes which dont have Vomma and Zomma priced into them as much compared to the rest of the strikes?

SICK! That sinks in.

E.G Haug's book has always been one I've wanted to read. Haven't really gotten around to it. I guess my biggest learning will have to center around how to wrap my head around the non-linear effects of all these greeks.

Question though:

How does one go about obtaining data for the term structure? IB surely doesnt have that feature (even its skew-analytics suck compared to ThinkOrSwim). Before I knew about TOS, I had to manually scrap data from sites like yahoo finance and such. Took 10-20 seconds to generate a skew curve that was 15 minutes delayed (I know I have zero patience).

Or maybe you just use some brokerage software that I simply cannot afford at the moment? There's a bloomberg terminal at school which has it all. But then I realized that it's almost an hour delayed....

Thanks Cren1!

Babu

 

[babutime]

Quote from trader198:


do not be indulged in technical analysis

Couldn't agree more!

But there are academic studies delving into some of it's merits. For example Support and Resistance could be seen as a momentary regime change with prices exhibiting high mean reversion. Andrew Lo- the MIT professor has a rather lengthy paper on Technical Analysis.

But yes- chart patterns are usually a lazy endeavour.

I did try it out in my late teens early 20s.

Now I've decided to enter the age of reason...lol... wish me luck!

 

[IVtrader]

Quote from babutime:

Couldn't agree more!

But there are academic studies delving into some of it's merits. For example Support and Resistance could be seen as a momentary regime change with prices exhibiting high mean reversion. Andrew Lo- the MIT professor has a rather lengthy paper on Technical Analysis.

But yes- chart patterns are usually a lazy endeavour.

I did try it out in my late teens early 20s.

Now I've decided to enter the age of reason...lol... wish me luck!

3 of the more profitable options traders I know of ne has 100 million under management and one trades $500,000 in his individual account both use technical analysis alot. its not everything but it certainly has utility