What does Karen the Supertrader and her results say about volatility? Oversold?

[darwin666]

would you guys agree with one corollary. ie. if you follow Karen's trading method, if you play your position conservatively blowing up on the Call side is far less a possibility than on the put side. .
Even though the last 4 years action shows that Call selling has been painful, the possibility of a sharp rise( say 10%) in a day or 2 is not possible in the call side., while the same can easily occur on the down side.

btw, the darn premiums on the call side.- force you to come v close to the money. while put side does have some far OTM puts which give decent. but , as obvious , that is precisely the Black swan risk which they hold.

 

[daniel5198]

... the possibility of a sharp rise( say 10%) in a day or 2 is not possible in the call side.,....

Well, I wouldn't say that...

 

[sle]

Even though the last 4 years action shows that Call selling has been painful, the possibility of a sharp rise( say 10%) in a day or 2 is not possible in the call side., while the same can easily occur on the down side.

actually, the biggest 1-day move in the past 10 years has been to the upside:
max 11.58% 13-Oct-08
min -9.04% 15-Oct-08
Experience shows (personal and otherwise) that volatile moves to the upside are more painful for variety of reasons.

 

[darwin666]

actually, the biggest 1-day move in the past 10 years has been to the upside:
max 11.58% 13-Oct-08
min -9.04% 15-Oct-08
Experience shows (personal and otherwise) that volatile moves to the upside are more painful for variety of reasons.

true.. but.. OCT 2008.... who in his right mind would be trading those choppy waters..
that entire period was like a BAD DREAM... ha ha... the days leading upto OCT- obviously we know what all happened and we were at the edge of our seats..
right now , its smooth sailing -all the way. till a BLACK SWAN hits on the down side..

so , if I have to learn from past.. assuming a BS hits.. dont try to , the week after that, make money on the call side.. as it could violently come back.
that point. I do agree..

 

[sle]

so , if I have to learn from past.. assuming a BS hits.. dont try to , the week after that, make money on the call side.. as it could violently come back.
that point. I do agree..

It's a tricky issue. On one side, when vols are as elevated as they were during the '08 or '11, there are a lot of opportunities. On the other side, pure convexity selling might be a poor choice, even to the upside. Short high-strike vega, long ATM gamma is, in my view, the right trade in this sort of situation, but there is some hindsight trading there.

 

[kinggyppo]

actually, the biggest 1-day move in the past 10 years has been to the upside:
max 11.58% 13-Oct-08
min -9.04% 15-Oct-08
Experience shows (personal and otherwise) that volatile moves to the upside are more painful for variety of reasons.

 

[Dolemite]

It's a tricky issue. On one side, when vols are as elevated as they were during the '08 or '11, there are a lot of opportunities. On the other side, pure convexity selling might be a poor choice, even to the upside. Short high-strike vega, long ATM gamma is, in my view, the right trade in this sort of situation, but there is some hindsight trading there.

I am trying to follow you, if you just had a huge move with vols pumping up why would you want to be long the ATM gamma?

 

[kinggyppo]

It's a tricky issue. On one side, when vols are as elevated as they were during the '08 or '11, there are a lot of opportunities. On the other side, pure convexity selling might be a poor choice, even to the upside. Short high-strike vega, long ATM gamma is, in my view, the right trade in this sort of situation, but there is some hindsight trading there.

there are interesting ideas in this tread, I am sure you can figure it out...

http://www.elitetrader.com/vb/showthread.php?t=169349

 

[Dolemite]

there are interesting ideas in this tread, I am sure you can figure it out...

http://www.elitetrader.com/vb/showthread.php?t=169349

Not sure if you were answering my question but what I am asking is if you just had a big move wouldn't you want to be short the gamma and atm assuming that the move is over?

 

[sle]

I am trying to follow you, if you just had a huge move with vols pumping up why would you want to be long the ATM gamma?

When short-dated vols are high, it does not nessesarily mean that they are cheap. You can get some serious moves and be protected well by shorting vega against it. Since I am bored senseless today, let me elaborate. The conventional volarb wisdome goes along these lines.

When implied vols are high due to an expected event or there are specific events that market is expecting, you want to be long gamma and short vega. E.g. when the market is expecting the Congress to vote on the budget or EU vote on a bailout, you want to be long short-dated convexity (RV vs IV) and protect yourself with a short vega position. Usually, you want to add a little vega/spot convexity into the mixed to play the directional component of volatility. This way, in both quick resolution or complete market puke you should be ok. In case of a non-event, your short vega should protect you from being destroyed on your long gamma. The pain trade here is, obviously, transofrmation of a violent event into a long-term fear which is not reflected in realized vol but is reflected in elevated levels of implied.

In case of a non-specific "expectation of a shit-storm", you want to sell gamma and protect yourself using a long vega position. In this case, you predicting that the fears persist (as they usually do) and implied volatility stays elevated despite low levels of realized vols. Your worst case scenario in this case is a relief rally where you lose money on your short gamma position and get hurt on your long vega position too.

Caveat emptor - in addition to the logic above, you want to develop a quantiative framework to figure out richness/cheapness of vega/gamma and the right hedge ratios.