isn't this exactly the problem with the strategy mav is proposing ? i agree with what he says, but to implement this and turning this into a strategy wich produces a meaningfull source of income one would need imo a huge capital to diversify and make a profit. Has anybody any idea about what amount of capital we are speaking here?
Time to go vega positive?
- Thread starter Hello_Dollars
- Start date
Lot of things here, first I have been in the position of not being to pay rent, both in the options market and for my apartment(the two events happened to coincide). In fact, my blowing out, which happened twice(I've trade for four people), was the result of being long premium. Both times, the stock subsequently acted in what would have been my favor, in other words, I would have made a shit load of money. But do to my own stupidity, arrogance or whatever you want to call it, I held on to a crap position for a long time or even put it on to begin with. I've had my ass handed to me because of persistence. However, I have said this before in a journal thread, my frame of mind was, to put it bluntly, not rational while I was a floor trader.
Second, I was saying eight months ago, it wasn't worth it to buy options for direction on stock. Premiums were too high with not a lot of movement. There are positions that have been historically been very good with respect to being short gamma/premium. The major one is the short otm calls that always worked out for me. Even with the downward skew, it always worked. Our recent upside sloward crawl would have benefitted this type of position, if it was delta neutral. However, the premium levels in a lot of stock don't justify being short it right now. You simply aren't compensated enough for taking on risk(we don't disagree on this and it will be different for myself with MM leverage).
The point of option trading should be no different than in stock trading, what is the risk/reward? I can get huge reward with little risk. I often ignored this as a MM which came back to haunt me. I pushed my haircut to the limit all the time. I don't do that now. Many times my positions have a haircut of a few thousand dollars while profits can be multiples of that. The best thing I look for is cheap options with one, two or more weeks out that are trading for a low premium, .25 or around there, that are only a strike away. No risk but a lot of profit it blows through the strike.
Third, a lot of people made their living on the floor from being short premium sellers. As it happens, they were the one who stuck around for a while. It is, imo, more difficult to be a long premium trader.
That may be true. One disadvantage of selling premium is the margin requirements. Also, a lot of brokers have strict requirement for writing uncovered calls(eg. minimum account value $50 to $100 k). Trading spreads can help, but doubling the commissions and slippage can really eat into the profits.
Steve,
You're one cynical guy. Myself, I don't ascribe to the conspiracy theory of trading seemingly espoused by you and certain others on the Board. Rather, I believe that, with the right plan consistent with one's personality, the right mix of dicipline and flexibility, and sufficient capital, there are myriad opportunities to make money in virtually any market without having some ultra sophisticated black box designed by Nobel Laureates in mathematics or some such silliness. And if I have to take a loss, I do and allocate my capital to the next opportunity without blaming Them for rigging the gig.
Perhaps, it's a fluke, but I for one have been able to make pretty consistent profits for a few years now trading options virtually exclusively as a simple retail guy. At the same time, I know full well that there's still much for me to learn from the likes of Mav and others here who've been doing this for a lot longer and have a lot of hard earned wisdom to share. That, inter alia, is why I find options trading so interesting -- opportunities to learn present themselves every day.
So with that said, let's continue this very worthwhile and substantive discussion.
HD
You're one cynical guy. Myself, I don't ascribe to the conspiracy theory of trading seemingly espoused by you and certain others on the Board. Rather, I believe that, with the right plan consistent with one's personality, the right mix of dicipline and flexibility, and sufficient capital, there are myriad opportunities to make money in virtually any market without having some ultra sophisticated black box designed by Nobel Laureates in mathematics or some such silliness. And if I have to take a loss, I do and allocate my capital to the next opportunity without blaming Them for rigging the gig.
Perhaps, it's a fluke, but I for one have been able to make pretty consistent profits for a few years now trading options virtually exclusively as a simple retail guy. At the same time, I know full well that there's still much for me to learn from the likes of Mav and others here who've been doing this for a lot longer and have a lot of hard earned wisdom to share. That, inter alia, is why I find options trading so interesting -- opportunities to learn present themselves every day.
So with that said, let's continue this very worthwhile and substantive discussion.
HD
I was re-reading my long post I wrote and I am embarrassed to say the spell checker did a number on me. That is why vol is spelled viol and vega was spelled vegan. LOL. Sorry about that. I must have accepted all the changes.
Anyway, let me make a few statements about the quant guys upstairs. As a guy who worked with some of the brightest guys in the business both on the floor and upstairs I can tell you that this mystical world of upstairs trading where everyone on this board thinks they have some kind of group of quants from MIT creating complex models is all a bunch of BS. I know it because I've watched them. OK? The only edge they have is doing very arcane and esoteric arbitrage strategies where they can exploit synthetic relationships of options quicker and more effectively then you or I can. I don't think anyone on this board is trying to execute the trades they are trying to put on.
As far as everything else. Look, they have no idea where the underlying is going to go. And if you don't know where the underlying is going to go then your driving around blind just like the rest of us. Most volatility models are crap because in the last 2000 years no mathematician has ever found a way to predict jump risk in stocks. It just can't be done. If the ceo of XYZ is caught cooking the books and stock XYZ opens down 30 pts, there simply is no model that can account for that. And because jump risk in options is so prevalent, it simply cannot be modeled. This is why Taleb mentions over and over again that OTM options are almost always underpriced. Because they never can correctly estimate the black swan event.
There is plenty of money to be made trading options. I see vol moving all over the place on individual equities. I see 50 to 100 tick moves in vol. If you position yourself correctly, you can make a killing.
Oh and you want to know how well the good old quant guys are doing upstairs. A friend of mine told me that in 2002 the boys at Susquehanna (they probably epitomize the word quant) lost one billion dollars trading. That's right, a billion. Where did that money go? To all the non quant guys on this forum probably. Don't put these quant guys on too high a pedestal. You are grossly overestimating their worth.
Anyway, let me make a few statements about the quant guys upstairs. As a guy who worked with some of the brightest guys in the business both on the floor and upstairs I can tell you that this mystical world of upstairs trading where everyone on this board thinks they have some kind of group of quants from MIT creating complex models is all a bunch of BS. I know it because I've watched them. OK? The only edge they have is doing very arcane and esoteric arbitrage strategies where they can exploit synthetic relationships of options quicker and more effectively then you or I can. I don't think anyone on this board is trying to execute the trades they are trying to put on.
As far as everything else. Look, they have no idea where the underlying is going to go. And if you don't know where the underlying is going to go then your driving around blind just like the rest of us. Most volatility models are crap because in the last 2000 years no mathematician has ever found a way to predict jump risk in stocks. It just can't be done. If the ceo of XYZ is caught cooking the books and stock XYZ opens down 30 pts, there simply is no model that can account for that. And because jump risk in options is so prevalent, it simply cannot be modeled. This is why Taleb mentions over and over again that OTM options are almost always underpriced. Because they never can correctly estimate the black swan event.
There is plenty of money to be made trading options. I see vol moving all over the place on individual equities. I see 50 to 100 tick moves in vol. If you position yourself correctly, you can make a killing.
Oh and you want to know how well the good old quant guys are doing upstairs. A friend of mine told me that in 2002 the boys at Susquehanna (they probably epitomize the word quant) lost one billion dollars trading. That's right, a billion. Where did that money go? To all the non quant guys on this forum probably. Don't put these quant guys on too high a pedestal. You are grossly overestimating their worth.
Hello Dollars:
This isn't my first day in the game. MOST of the time, when I lose it IS my fault, or it is just random chance, but there are folks who do have an edge and they take advantage of it. Have you been keeping track of all the fund guys who are being charged for crossing the line? There is a "F@#k You" attitude on the part of institutions and it is very real. If you read some of the interviews with these guys the arrogance is incredible. "well if I have to resign, I guess I will" attributed to one of the traders found guilty of after hours trading mutual funds.
Mav:
I think it is ironic, and very true that some of the quants have screwed up big time. I believe this happens because they become complacent and figure they have it figured out. In my experience, a good quant trader with a well thought out program or even just running a book on his own will beat just about anybody posting here most of the time. Its like going out on the court with Andy Roddick (find a good pro tennis player and try this). On any one serve basis, you have about a 30-40% chance to return serve. But as the game goes on, man you are out of luck. Mathematically this is called " drift", and there is no escaping it. I think you can find opportunity, and I hope you do. I found some success selling otm premium above and below markets until vol got crushed for instance. Try to find that now. LOL.
I appreciate the interesting comments from all posters by the way, and hope you all find success with your methods. Best to all Steve46
This isn't my first day in the game. MOST of the time, when I lose it IS my fault, or it is just random chance, but there are folks who do have an edge and they take advantage of it. Have you been keeping track of all the fund guys who are being charged for crossing the line? There is a "F@#k You" attitude on the part of institutions and it is very real. If you read some of the interviews with these guys the arrogance is incredible. "well if I have to resign, I guess I will" attributed to one of the traders found guilty of after hours trading mutual funds.
Mav:
I think it is ironic, and very true that some of the quants have screwed up big time. I believe this happens because they become complacent and figure they have it figured out. In my experience, a good quant trader with a well thought out program or even just running a book on his own will beat just about anybody posting here most of the time. Its like going out on the court with Andy Roddick (find a good pro tennis player and try this). On any one serve basis, you have about a 30-40% chance to return serve. But as the game goes on, man you are out of luck. Mathematically this is called " drift", and there is no escaping it. I think you can find opportunity, and I hope you do. I found some success selling otm premium above and below markets until vol got crushed for instance. Try to find that now. LOL.
I appreciate the interesting comments from all posters by the way, and hope you all find success with your methods. Best to all Steve46
Couple of thoughts here because I think this is potentially a dangerous line of thinking because it has the potential to make one give up on the idea of trading options or the opportunities that exist.
I really see this as analogous to the line of thinking in equity world which says the market is perfectly efficient, you've got tons of professional analysts covering stocks, all FA and TA is bunk, so why bother trying to trade equities.
1. PhDs and their models. Frankly, I've never been impressed by this argument when applied to anything. IMHO, having a PhD doesn't imbue one with some sort of God-like quality that makes non-PhDs unable to compete. And all those ultra-sophisticated models are just that, models. There is no trader's intuition of just plain trading common sense or experience behind those models. I've got 4 letters as far as PhDs and their models. <b>**LTCM**.</b> Right there, you supposedly have some of the most brilliant PhDs period and some of the best constructed models. What happened? They blew out pure and simple. Bottom line, IMHO, having a PhD and a model doesn't mean you have the trading intuition and experience that is just as important for long-term profitability.
2. Regarding Upstairs Traders. Maverick, GA (other former MMs), correct me if I am wrong, but my understanding is the upstairs guys are playing an <i>entirely different game</i> then what we are talking about. My understanding is they are trying to exploit ultra short-term price discrepancies, looking to do reversals, conversions, any kind of short-term riskless arbitrage, and/or make profits from very short-term order flow effects. What we are discussing here are position trades that are longer term in nature, at least compared to what they are doing, and that rely on correctly forecasting future price, future volatility, or profiting from the passage of time, nothing related to any kind of pure arbitrage. I don't see how anything they do even remotely impacts the sort of trading opportunities we are talking about.
I do concur with everything you just said. It is a very different game. And we could expand on the list of names beyond LTCM and Susquehanna. Ever heard of BAM? Beacon Asset Management. THese guys had the smartest quants in the world doing mortgage back securities arbitrage and did very well for ten years until last fall when they lost 700 million in one month!!!!!!!. After making 15% to 20% for 10 years they lost 50% in one single month and to make matters worse they lied to their investors saying they were only down about 20%. Needless to say, they shut down and have massive lawsuits filed against them. Real smart guys. Ever heard of D.E. Shaw? He is a former market wizard. Runs a huge and highly secretive quant shop in NY. He did well for many years but then damn near blew out the firm in 98 when bond losses got out of control. The list goes on and on.
What I have noticed is this. These guys have the technical expertise to exploit and extract nickels out of the market on an intra-day basis not so much because of how smart they are but the technology they have and their ability to execute. But whenever they try to speculate on longer time horizons they get killed. Why? Because math doesn't mean f*cking squat over time. In fact, one could argue that you could graph math prowess over time with a p&l line and you would discover that as you go out in time, the element of luck and chance increases while the mathematical certainty decreases. So as all these guys take on bigger and bigger positions that have longer duration reducing the mathematical edge they have and exposing themselves to luck and chance at a higher frequency. This is why there is a pattern that when they quant guys start out small and make money and then they have more money to put into the mkt so they increase the duration of their trades and then blow up. Very predictable pattern.
So I think what most guys do on this forum has no relevance to these quant guys and thank god, with their longevity record, I'm not sure I would want to have anything in common with any of them. The bottom line is this, with options, you need to have a very good feel for what you are doing. You need to manage your risk and create positions that will allow you to profit under the most scenarios. This is why I believe and continue to believe that options are better then stocks and futures. Because you can place so many bets in so many different directions that any number of things can happen to make you money. The key is controlling your risk.
I think if there is a so-called edge that upstairs guys have its called connections. For example you give me a call 10 minutes before the close telling me that your top analyst is going to downgrade stock XYZ to a sell and then we load up on puts. Don't think that happens. Ha. I use to take the calls! That's the edge my friend. Inside info will make you 100 times as much money as any group of quants creating computer models that just took a nickel out of the market. Of course like anything else you have to weigh the legality of it. Some of the guys will never see the fortunes they made because they will be getting to know bubba who sleeps on the bunk above them and likes to take long walks and likes to cuddle after sex. LOL.
Therefore, I think by playing the game straight up, we don't run that risk. There is more then enough opportunity out there for us to put on positions. There must be over 10,000 equities and with retail options trading breaking new records every day, the little investor is going after options with a vengeance. Add the emergence of more electronic exchanges and you have yourself a recipe for a beautiful money making stew.
It's funny, I have met many of these so-called quants and they don't even know what a support and resistance level is. They have no idea what buying the rumor and selling the news means. They use to ask me why stock XYZ was down 5 pts after hours when they just blew out their earnings report. I use to laugh and then think, wait a minute, am I smarter then these guys?
If you really want to get some good insight into the validity of quants and the true return on their money they really get, read Taleb's "Fooled By Randomness". He has a great chapter that says, "If your So Smart, Why Aren't You Rich?" He completely debunks the use of quants in finance and trading, and he is a Quant!!!!
Well, that is my latest rant. I should get credit for multiple postings when my posts are this long! I'll never catch Metoox at this rate. LOL.
Great posts Maverick, thanks.