Time to go vega positive?

[TempusFugit]

Quote from NUTSNEAL:

In answer to your comments about the MARKET, I must say if you can not figure out how to take some SERIOUS money out of something this pretty (see attachment), I suggest you practice and practice and practice the phrase, "Would you like fries with that?"

Good Luck

Actually I have been taking out serious (for me) money from the options market using a strategy that I've honed over the past few years and believe to be sound. In spite of this -- or maybe because of it -- I wonder if I haven't just been on an incredible roll of luck. Hence my musings above.

Congratulations for getting into KLAC at the bottom. By the way did you see this morning's press release from them postponing their earnings conference because they are under investigation from the SEC for accounting fraud?

:eek:

No? Neither did I becuase it didn't happen...but it could.



Good luck bearing firm-specific risk, because you'll need it.

 

[Cutten]

Quote from TempusFugit:



Here's my two cents on volatility:

First, I don't buy that "volatility is basically a directional punt on the underlying" at least with respect to indices.

My counter-example: S&P 500 and VIX for the three years 1995-97.

12/30/94 SPX=459.27; VIX=13.2

12/31/97 SPX=970.84; VIX=24.01

A graphical view clearly shows sustained uptrends for both measures during this period.

Similarly one can find periods (albeit shorter ones) where SPX falls while VIX is flat or erodes.

Instead, I prefer to view volatility as a measure of uncertainty (which translates into the emotions of fear on the downside and greed on the upside). So while most of the time vol will indeed move inversely to the underlying, sometimes it won't. I.e., it is possible that share prices rise, investors don't understand why, but in any case don't want to be left behind, AKA "irrational exuberance."

Second, I do not believe that the market is efficient with respect to volatility. I do believe that it is efficient with respect to equity prices for those of us without inside information. That is, TA and FA is bunk. This is not to say that the market is always right; it can be efficiently wrong. It's just to say that with respect to equity price levels, one cannot legally find abnormally positive risk-adjusted returns over a sustained period. Or said another way, trading stocks to beat the market is a zero-sum game.

Not so with volatility or price uncertainty. Investors buy options for insurance -- against real downside costs or upside opportunity costs. This creates a positive sum game and enables options sellers to earn returns that indeed can and do exceed market-average returns.

If you look at the 94-97 period, you'll see that although vol shifted higher over those years, it still oscillated around its short-term mean with an inverse correlation to short-term price movements. Just look at the corrections in the first half of 96, or the 97 puke in October.

As you say, clearly the short-term correlation is down to stock falls and vol increases both being reflections of increased uncertainty. And therefore, rallies on uncertainty such as short squeezes can see positive correlation. But I view these as exceptions to a rule (admittedly a rule of thumb), rather than refutations of it. The day investors start getting less risk-averse as stocks fall is the day I'll accept that the correlation has broken down

As for vol being inefficiently priced - I agree but not for the reasons you do. You liken it to insurance, without explaining why insurance should be priced inefficiently. Yes, people will pay a premium for insurance's ability to reduce risk. But equally, people will supply insurance if they can earn excess returns from it. So from a finance theory perspective, there is no reason to assume that will insurance will make any excess returns above the risk-free interest rate + the market risk premium for the volatility of the option writers portfolio. In the same way, stocks will earn the risk-free interest rate + the market risk premium for the volatility of the stock portfolio. Why should one be higher than the other on a risk-adjusted basis?

As for "with respect to equity price levels, one cannot legally find abnormally positive risk-adjusted returns over a sustained period", how do you know?

 

[NUTSNEAL]

Quote from TempusFugit:



Actually I have been taking out serious (for me) money from the options market using a strategy that I've honed over the past few years and believe to be sound. In spite of this -- or maybe because of it -- I wonder if I haven't just been on an incredible roll of luck. Hence my musings above.

Congratulations for getting into KLAC at the bottom. By the way did you see this morning's press release from them postponing their earnings conference because they are under investigation from the SEC for accounting fraud?

:eek:

No? Neither did I becuase it didn't happen...but it could.



Good luck bearing firm-specific risk, because you'll need it.

I am amazed that looking at the KLAC chart you came to the conclusion I bought at the bottom. You missed my point. From
4-15-03 the 72nd equity trading day of the year to 11-12-03 the 219th equity trading day of the year there are 12 very high probability trades in KLAC, if you know what to look for.

I often trade options and indexes, but yes at times I do trade the underlying equity and take on firm-specific risk.

My main point is that over time consistently making money trading is not a matter of luck. There are many ways to do it and some traders are making much more than anyone would believe.

I hope you are able to find a method which gives you enough success you can realize your success is not luck.

 

[TempusFugit]

Quote from Cutten:



If you look at the 94-97 period, you'll see that although vol shifted higher over those years, it still oscillated around its short-term mean with an inverse correlation to short-term price movements. Just look at the corrections in the first half of 96, or the 97 puke in October.

As you say, clearly the short-term correlation is down to stock falls and vol increases both being reflections of increased uncertainty. And therefore, rallies on uncertainty such as short squeezes can see positive correlation. But I view these as exceptions to a rule (admittedly a rule of thumb), rather than refutations of it. The day investors start getting less risk-averse as stocks fall is the day I'll accept that the correlation has broken down

As for vol being inefficiently priced - I agree but not for the reasons you do. You liken it to insurance, without explaining why insurance should be priced inefficiently. Yes, people will pay a premium for insurance's ability to reduce risk. But equally, people will supply insurance if they can earn excess returns from it. So from a finance theory perspective, there is no reason to assume that will insurance will make any excess returns above the risk-free interest rate + the market risk premium for the volatility of the option writers portfolio. In the same way, stocks will earn the risk-free interest rate + the market risk premium for the volatility of the stock portfolio. Why should one be higher than the other on a risk-adjusted basis?

As for "with respect to equity price levels, one cannot legally find abnormally positive risk-adjusted returns over a sustained period", how do you know?

Mea culpa on the sloppy "vol is inefficently priced" comment. I withdraw the comment and in doing so would beg another chance. Here goes:

Insurance companies can pool individual risks and diversify away some of it. Providing this service gives them the opportunity to make an economic profit. Similarly for the options market. This is what I meant by saying that there is a "positive sum" for options traders to share. Beyond this "expected market return" options volatility is efficiently priced.

My point of view now is that this is analogous to the positive sum of aggregate profits that equity investors share in the stock market's portfolio return. Beyond this expected market return, stocks are efficiently priced.

(How do I know? I don't really...I just believe that in open capitalist systems that markets become ever more efficient as arbitrageurs take out inefficiencies.)

So here's where I'm at: in the equities market there are lots of investors who soak up the expected market return and thus leave less for traders to share.

But are there options "investors"? If not, then there is more of the expected options market return for options traders to share. This leads to a conclusion that options traders on average, and on a risk adjusted basis, should out-perform equities traders.

 

[TempusFugit]

Quote from NUTSNEAL:



I am amazed that looking at the KLAC chart you came to the conclusion I bought at the bottom. You missed my point. From
4-15-03 the 72nd equity trading day of the year to 11-12-03 the 219th equity trading day of the year there are 12 very high probability trades in KLAC, if you know what to look for.

I often trade options and indexes, but yes at times I do trade the underlying equity and take on firm-specific risk.

My main point is that over time consistently making money trading is not a matter of luck. There are many ways to do it and some traders are making much more than anyone would believe.

I hope you are able to find a method which gives you enough success you can realize your success is not luck.

Sorry, should have said "bottoms" ...from your comments I trust that you did get in at least near the bottoms.

I take encouragement from your other comments. I've only been doing this full time for a couple of years and have paid some expensive tuition at the school of hard knocks. But it seems to have been worth it as I'm beginning to believe that it's not been luck after all which has allowed me to pay the bills and then some.

Thanks for taking the time to read my posts and comment.

 

[murray t turtle]

Good time to buy selected index calls past 2 or 3 days;

lots of good plans that dont try to catch exact bottoms.