The Perfect Option position
- Thread starter Maverick74
- Start date
Is it possible to set up a "holeless risk" position without trading around it constantly? Further, it you tweak/readjust one side, aren't you also going to have to consider all sides? Isn't that implied in any non arbitrage trade?
That is why I do like these kinds of positions unless you have very good comissions either in the underlying, or in the options, or both. I believe that is what the entire Taleb book "Dynamic Hedging" is about.
I guess the real lesson of this post/thread is to be aware that in a "complicated" options position, "Risk Holes" may arise from not completely understanding a position.
nitro
This can be said about any option position. And aren't low commissions beneficial to all traders. What kind of trading strategy would want a high commission structure? LOL.
Trading options gives you the opportunity to choose the risk you are willing to live it. You cannot get rid of risk completely.
Although some guys will go broke trying.
Not really.
I trade multiple accounts, for myself or for a prop firm. In one account, since it is a swing trade type account, commissions are a very small part of the overall gain/loss and while it would be better if the commissions were lower, they have small first order effects on the viability of the strategy.
On the other hand, for the prop firm and for other strategies that I use, commission is the number one constraint that determines whether the strategy is viable or not.
nitro
Yeah but Nitro look, if you are actively trading an account every day, sure, commissions are important. But if you put on a position and hold it for 6 weeks, can you explain to me how commissions is going to hurt this trade. I mean, let's say you are looking to make 10k to 20k and you are paying $200 to $400 in commissions, how is this trade not viable. I can understand a scalping strategy where a dime here or there can brake you but come on man, if you holding something for a month at a time, commissions are a non event regardless of the size of your position. What am I missing here?
Maverick,
I am beginning to wonder if you are reading what I am writing. I have done that same thing in the past myself, so I cannot call the pot black.
Look at what I wrote above. I asked highfreq if it
You are answering my question as if I had made a statement of fact instead of a question. I have no idea what the answer is!
So, if these kind of positions have holes as highfreq suggests and you need "dynamic" rehedging, commissions _may_ play a large part. If not, then the answer is that commissions _may_ not play a large part. I don't know the answer!
If your position has the profile you suggest below, then $400 in commission would be nothing. If on the other hand you need to spend $50 a day everyday for six months in commissions to rehedge your position, well, I don't need to do the math. Hence my original statement to you about getting killer commissions to do this type of trading.
Again, these are questions, not statements of fact as I have never put on a position like this on or tried to manage the associated "hole" risk that highfreq sheds light on.
nitro
I am beginning to wonder if you are reading what I am writing. I have done that same thing in the past myself, so I cannot call the pot black.
Look at what I wrote above. I asked highfreq if it
I even make reference to
These two statements taken together I believe make it clear that I am inquiring whether "plugging holes" is a commission intensive operation, and if plugging holes is a dynamic process.
You are answering my question as if I had made a statement of fact instead of a question. I have no idea what the answer is!
So, if these kind of positions have holes as highfreq suggests and you need "dynamic" rehedging, commissions _may_ play a large part. If not, then the answer is that commissions _may_ not play a large part. I don't know the answer!
If your position has the profile you suggest below, then $400 in commission would be nothing. If on the other hand you need to spend $50 a day everyday for six months in commissions to rehedge your position, well, I don't need to do the math. Hence my original statement to you about getting killer commissions to do this type of trading.
Again, these are questions, not statements of fact as I have never put on a position like this on or tried to manage the associated "hole" risk that highfreq sheds light on.
nitro
Nitro,
This position doesn't require any gamma hedging; you won't know you're f^cked until expiration of the fly, therein lies the hole in the position. Commission isn't the issue; skew/smile and slippage are overriding concerns.
The problem lies in the arbitrary payoff of the fly and the term structure of gamma relating to the back month position. Neutral flys are expensive and there simply isn't enough back month gamma to compensate.
You would structure these in a stock in which you're expecting a lot of stat volatility, but then a simple backspread is preferable. Why trade a short gamma fly when you're expecting a large move?
Sometimes the best trade is to stand aside.