Vol-trading for beginners
- Thread starter destriero
- Start date
8) Strike + call - put = X (forward). There is no stock input in the equation. The result reflects rates/divs/carry. All vol is priced basis the synthetic and NOT the listed shares. A non issue in most liquid names. Intuitively, it makes sense. Listed shares have no time/synthetic vol-component (vol/synthetic time). This is how to price stock "futures."
The vol-marks are based upon the forward price of the expiration you're pricing.
In stupid/meme/HTB stock all conversions look expensive and all reversals look cheap if looking at the price of the listed shares. That's an indication that you don't have a handle on vol.
The HTB fees are pro rata on size/holding period, etc. The synthetic is pricing market rates to expiration.
The vol-marks are based upon the forward price of the expiration you're pricing.
In stupid/meme/HTB stock all conversions look expensive and all reversals look cheap if looking at the price of the listed shares. That's an indication that you don't have a handle on vol.
The HTB fees are pro rata on size/holding period, etc. The synthetic is pricing market rates to expiration.
9) Synthetics.
"Puts are calls... calls are puts"
"What's the difference between calls and puts? Shares"
"How can you short the calls if you haven't bought the puts!?" Pink Floyd
Long put + stock = synthetic long call.
We're not concerned with value here, just the mechanics. You've just "converted" a put into a call.
Long call + short stock = synthetic long put.
If you have the price of the call and you can short shares freely... you have the price of the put. Would you buy the put via the synthetic? No, but it all comes back to arbitrage constraints.
Arbitrage.
The vol-line on the 100-strike for APR is 33-mid. Someone is bullish and leaning on the puts, outright. You're an OTC MMer in vol and they come to you with an order of 5K up and you know the guy isn't a put buyer so you adjust your market to 30x32 and he hits your bid. You're long 5K puts at 30-line and you short the calls at 32.5 and buy 500k shares. You're in the conversion at a vol-edge of 2.5 handles. Your risk is opportunity at this point (rho--a massive change in rates).
Tomorrow I'll post about split-strike relationships. Read about synthetics.
"Puts are calls... calls are puts"
"What's the difference between calls and puts? Shares"
"How can you short the calls if you haven't bought the puts!?" Pink Floyd
Long put + stock = synthetic long call.
We're not concerned with value here, just the mechanics. You've just "converted" a put into a call.
Long call + short stock = synthetic long put.
If you have the price of the call and you can short shares freely... you have the price of the put. Would you buy the put via the synthetic? No, but it all comes back to arbitrage constraints.
Arbitrage.
The vol-line on the 100-strike for APR is 33-mid. Someone is bullish and leaning on the puts, outright. You're an OTC MMer in vol and they come to you with an order of 5K up and you know the guy isn't a put buyer so you adjust your market to 30x32 and he hits your bid. You're long 5K puts at 30-line and you short the calls at 32.5 and buy 500k shares. You're in the conversion at a vol-edge of 2.5 handles. Your risk is opportunity at this point (rho--a massive change in rates).
Tomorrow I'll post about split-strike relationships. Read about synthetics.
The bolded above is where it becomes a serious game of cat 'n mouse I reckon' How do you KNOW the guy on the other end is not a buyer of puts? It's as if you have to have the mind of a pit trader, to KNOW the guy on the other end of a potential trade. How can you have a feel for that in an all-electronic market?
How do you think those guys were making 7-8 figures on the floor and blowing out upstairs? You can't (know). Hence my example was an OTC vox-transaction. There is more than one meaning to "know your customer."
Indeed. Will go back to lurking the thread. I am loving it.
P.S.
""How can you short the calls if you haven't bought the puts!?" Pink Floyd"
Hehe. I dig it and get it. It helps in a small way. I won't muddy up the thread with a vid on it. Good pool.
Hopefully another epic learning thread, thanks @destriero
interesting and makes me wonder why is IV ever even compared or measured in comparison to ambient vol, with IV having no relation to listed shares.