Vol-trading for beginners

@destriero how relevant/important do you think it is for a trader (more so neophyte) to understand at least the basics of exotics?

I guess what I’m trying to say is, does a knowledge of how exotics are priced/work help a speculator using vanilla?

Reason for asking is, I’ve read posts where you predict a touch of a strike BEFORE the touch of another strike. Spot at $100, you’ll predict it’ll touch $120 before it touches $80. Is this based off any exotic metrics/knowledge?

I’ve seen @samelazyelement and yourself speak about butterflies being similar to a double barrier.

Every option book I get my hands on I automatically go to the index and look for fly material, and I did this with Dynamic hedging, and sadly there’s only a few sentences dedicated to the fly, but Taleb instead compares butterflies to the “bet spread”, never heard of a bet spread but its payout is similar to flies.
 
.sigma said:
@destriero how relevant/important do you think it is for a trader (more so neophyte) to understand at least the basics of exotics?

I guess what I’m trying to say is, does a knowledge of how exotics are priced/work help a speculator using vanilla?

Reason for asking is, I’ve read posts where you predict a touch of a strike BEFORE the touch of another strike. Spot at $100, you’ll predict it’ll touch $120 before it touches $80. Is this based off any exotic metrics/knowledge?

I’ve seen @samelazyelement and yourself speak about butterflies being similar to a double barrier.

Every option book I get my hands on I automatically go to the index and look for fly material, and I did this with Dynamic hedging, and sadly there’s only a few sentences dedicated to the fly, but Taleb instead compares butterflies to the “bet spread”, never heard of a bet spread but its payout is similar to flies.
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Don't get me started. He'll start stalking again (past Paloma comments).

Binaries are simply discrete verticals. There is no benefit to pricing exotics or any color added unless you want to visualize skew as a delimited touch payout (vanna volga priced 20D up/down touches (not packaged as DNTs)).
 
@destriero intra day or even one day to the next, how can we know if volatility is high enough to short it. Is this based on experience on SN or index? Do we create a database and try to guess based on previous ups and downs? I am thinking daily IV may be below or above HV but may still have intra day changes to take advantages. How do we effectively predict this change?
 
it365 said:
@destriero intra day or even one day to the next, how can we know if volatility is high enough to short it. Is this based on experience on SN or index? Do we create a database and try to guess based on previous ups and downs? I am thinking daily IV may be below or above HV but may still have intra day changes to take advantages. How do we effectively predict this change?
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You'll know when your PNL exceeds your vol-figure. :)

The majority of novices short vol indiscriminately; short gamma when they want to short vol (weeklies); short neutral deltas at inception.

I can't tell you what level to short vols. You'll either never hit that decile or you'll be short everything. Stress positions using weekly options. IOW, if you're short vol in a 6W position--price the 5W position to arrive at your 1W hold. Obv this won't hold if the 6W is within an earnings release (and the 5W isn't).

Structurally, it's best to be short delta at inception when shorting vol. Note the prevailing skews by strike forward vol on a strike touch. The ATM line is 18 and the 30D down and out is 22... price 22 vol at time on a strike touch.

There is no edge loss to vega when buying upside vol on index. Anyone who tells you that simply doesn't know what they are doing in the space.

Don't short upside strikes unless it's a de facto delta position or net-long vols. Stickiness is a thing and you will get ravaged selling calls/cs.
 
destriero said:
Structurally, it's best to be short delta at inception when shorting vol. Note the prevailing skews by strike forward vol on a strike touch. The ATM line is 18 and the 30D down and out is 22... price 22 vol at time on a strike touch.

There is no edge loss to vega when buying upside vol on index. Anyone who tells you that simply doesn't know what they are doing in the space.

Don't short upside strikes unless it's a de facto delta position or net-long vols. Stickiness is a thing and you will get ravaged selling calls/cs.
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You are talking index not SN yes ^?
 
destriero said:
You'll know when your PNL exceeds your vol-figure. :)

The majority of novices short vol indiscriminately; short gamma when they want to short vol (weeklies); short neutral deltas at inception.

I can't tell you what level to short vols. You'll either never hit that decile or you'll be short everything. Stress positions using weekly options. IOW, if you're short vol in a 6W position--price the 5W position to arrive at your 1W hold. Obv this won't hold if the 6W is within an earnings release (and the 5W isn't).

Structurally, it's best to be short delta at inception when shorting vol. Note the prevailing skews by strike forward vol on a strike touch. The ATM line is 18 and the 30D down and out is 22... price 22 vol at time on a strike touch.

There is no edge loss to vega when buying upside vol on index. Anyone who tells you that simply doesn't know what they are doing in the space.

Don't short upside strikes unless it's a de facto delta position or net-long vols. Stickiness is a thing and you will get ravaged selling calls/cs.
More...

Thanks @destriero. I guess I was completely missing the change in vol with time aspect. This makes sense.
 
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