what is the best way to trade skew while hedging delta, gamma, vega, and theta?

Quote from MBC:

No smarter than anyone. Just asking questions thats all. Why defensive ? I amjust interested in learning what exactly differentiates Vol. trading from any other guess ? Vol. trading while making markets ( not price taking) but offering the bid ask can be interesting..... basically a market maker in a niche market, can be nice.
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When I read "Black Swan", I can't agree one point Telab any more: there are no experts in "moving" fields like investing but there are experts in static fields like dentist. I resonate a theory in terms of various strategies: trading is simply dealing with the other side of the deal, a human being. It is a bit overcomplicated treating them as numbers. Advanced maths doesn't change the fact that two person are making a deal. But I would like to know how they would treat me. I think it is good to know.
 
Quote from MBC:
I have been around these Vol. traders, they are no different then any other trader when we talk returns over period of time. They have good years and no so good.
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Pure beta-neutral vol people are pretty rare, as it requires a confluence of skills and experience that is rather unusual. Most people have a math or science background combined with many years of option-trading experience in large institutions.

In general, their returns are very similar in style to that of any other statistical arbitrage people that try to be beta-neutral - they don't blow up, they bleed. So yes, the returns may vary, but many generate very reasonable Sharpe. The idea is to exploit inefficiencies in the options markets, not at the level of pure arbitrage but more at the level of statistical relationships.

Quote from MBC:
No smarter than anyone. Just asking questions thats all. Why defensive ? I amjust interested in learning what exactly differentiates Vol. trading from any other guess ?
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There is no guessing, it's not that different from any other systematic strategy. When I decide that Russell 2000 gamma is rich vs S&P 500 gamma, there is not guessing involved. You look at the models based on statistical relationships of the assets, models based on implied/realized volatility, maybe some actuarial models or even technical models (ranges etc) and say "ok, lets buy SPY straddles and sell IWM straddles in a beta-gamma neutral ratio".

While the trading itself is usually not automated, the predictive abilities of the models are back-tested in-sample/out-of-sample and usually, each trading decision is made based on output of 3-4 different models.

The key difference is that unlike statistical arbitrage in linear instruments, statistical trading in options requires more background, more infrastructure and more capital. So there are more opportunities in vol out there, especially if you are managing a medium-sized book (i'd say 5 to 20 million).
 
Quote from sle:

Pure beta-neutral vol people are pretty rare, as it requires a confluence of skills and experience that is rather unusual. Most people have a math or science background combined with many years of option-trading experience in large institutions.

In general, their returns are very similar in style to that of any other statistical arbitrage people that try to be beta-neutral - they don't blow up, they bleed. So yes, the returns may vary, but many generate very reasonable Sharpe. The idea is to exploit inefficiencies in the options markets, not at the level of pure arbitrage but more at the level of statistical relationships.


There is no guessing, it's not that different from any other systematic strategy. When I decide that Russell 2000 gamma is rich vs S&P 500 gamma, there is not guessing involved. You look at the models based on statistical relationships of the assets, models based on implied/realized volatility, maybe some actuarial models or even technical models (ranges etc) and say "ok, lets buy SPY straddles and sell IWM straddles in a beta-gamma neutral ratio".

While the trading itself is usually not automated, the predictive abilities of the models are back-tested in-sample/out-of-sample and usually, each trading decision is made based on output of 3-4 different models.

The key difference is that unlike statistical arbitrage in linear instruments, statistical trading in options requires more background, more infrastructure and more capital. So there are more opportunities in vol out there, especially if you are managing a medium-sized book (i'd say 5 to 20 million).
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Excellent, thanks

Just wanted to make sure its not somthing most if not all people here on ET can really do well ( capital, infastructure etc;)
 
option mkt has some inherent inefficiency because equity market is net long and risk averse investor/fund manager can rationally justify paying a premium to reduce risk.

human psychology also leads to some statistically stable vol reactions to mkt events. trading vol gives you a whole different dimension or dimensions that you can express your view about.

njrookie
 
got alot out of this thread.. thanks.. key points of interest..
normalizing skew by SKEW = [IV(25delta) - IV(75delta)] / IV(50delta) to the atms..

and root time vega across the term ..

root time is interesting to me because your using a fixed point on the term to find relativity in pricing by the sqt(t)
i read some where about using the 3rd month.. or the farthers most liquid month to find relativity to.. idk.. i hope i have the understanding of this right..

i've been reading about this stuff alot lately.. i can only absorb so much at a time.. i really hope one day i'll have a grip, and something to offer respectively.
 
Quote from atticus:

WHAT THE FUCK. "You'll probably make less" which defines a hedge.... make less when right, lose less when wrong.

You are so out of your depth it's ridiculous. You aren't nuts, you're retarded.
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"First they ignore you, then they ridicule you, then they fight you, and then you win........."
 
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