Quote from cvds16:
yeah, Madoff's chart probably looked just like that one
Madoff was "slow and steady"
What is this option selling hedge fund's edge??
- Thread starter short&naked
- Start date
Madoff was "slow and steady"
Hmmmm... I not so quick to "fad" his strategy of short premium. Granted short straddles are not for the meek of heart.
The key with short premium is to manage your risk & as another poster mentioned not get complacent. You would be surprised despite all the "Taleb Black swan crapping on your windshield & losing control/hitting a tree" fears of short premium. It's is consistent even despite tail risks. It's the bread & butter for a lot of bank desks in FX, floor traders in multiple markets to supplement market making. Not w/o risk though...2008 wrecked alot of short vol traders lunch.
Your going to take a loss & even a HUGE one every now & then, but this trading is no different from trading price. The trick is to get right back in there the next time you see an opportunity, in the next expiration & sell again.
Just look at his P&L performance for 2008 & then 2009 back to back years(2008 -48.47%, then 2009 +50.02%) Also, on a month to month basis. Look at early Jan/Feb 2008 (Jan -12.39% then Feb +14.99%) He cleans himself up.
Short gamma/Long theta risk is an advanced trade. Especially if doing it with gamma scalping & alike. It has it's place like all other approaches. It's not free lunch, but will work. Only a lil cost prohibitive for the individual trader with a small acct as margin requirements can be large & you have to be prepared & know your market/vols & your instruments.
Regardless of how many times you hear it. Time still passes & options still expire OTM & worthless. Just ask any exchange floor member in any option pit, regardless of instrument or exchange. All about handling the risk I guess.
Just an opinion.
The key with short premium is to manage your risk & as another poster mentioned not get complacent. You would be surprised despite all the "Taleb Black swan crapping on your windshield & losing control/hitting a tree" fears of short premium. It's is consistent even despite tail risks. It's the bread & butter for a lot of bank desks in FX, floor traders in multiple markets to supplement market making. Not w/o risk though...2008 wrecked alot of short vol traders lunch.
Your going to take a loss & even a HUGE one every now & then, but this trading is no different from trading price. The trick is to get right back in there the next time you see an opportunity, in the next expiration & sell again.
Just look at his P&L performance for 2008 & then 2009 back to back years(2008 -48.47%, then 2009 +50.02%) Also, on a month to month basis. Look at early Jan/Feb 2008 (Jan -12.39% then Feb +14.99%) He cleans himself up.
Short gamma/Long theta risk is an advanced trade. Especially if doing it with gamma scalping & alike. It has it's place like all other approaches. It's not free lunch, but will work. Only a lil cost prohibitive for the individual trader with a small acct as margin requirements can be large & you have to be prepared & know your market/vols & your instruments.
Regardless of how many times you hear it. Time still passes & options still expire OTM & worthless. Just ask any exchange floor member in any option pit, regardless of instrument or exchange. All about handling the risk I guess.
Just an opinion.
Someone mentioned ACE, I assume they meant ACE Investment Strategies, LLC.
Just one more of the selling options till I die funds. They claim they manage over 100 million, so my question is how in the world do they get that much money with nothing but failure?
Look at their disclosure docs and how many accounts with profit vs a loss were closed in the last five years.
Here are the numbers for a few of their programs with the number of account closed with a profit first, and then those closed with a loss:
106, 776
6, 42
9, 87
2, 10
66, 235
3, 19
2, 39
27, 21
48, 177
So 269 accounts closed with profits, 1406 closed with a loss. That comes to an 84% probability of losing your money with this guy.
The first fund listed has a performance of 11.56, -.33, -61.27, 31.2, -1.26 which compounded would be a 44% loss over 5 years.
Just one more of the selling options till I die funds. They claim they manage over 100 million, so my question is how in the world do they get that much money with nothing but failure?
Look at their disclosure docs and how many accounts with profit vs a loss were closed in the last five years.
Here are the numbers for a few of their programs with the number of account closed with a profit first, and then those closed with a loss:
106, 776
6, 42
9, 87
2, 10
66, 235
3, 19
2, 39
27, 21
48, 177
So 269 accounts closed with profits, 1406 closed with a loss. That comes to an 84% probability of losing your money with this guy.
The first fund listed has a performance of 11.56, -.33, -61.27, 31.2, -1.26 which compounded would be a 44% loss over 5 years.
Spot on!
I didn't read J-Law's post as saying floor traders try to sell premium, just that they would know that a lot of options expire. Of course a market maker tries to hedge positions and stay neutral if they can't offload on the other end.
J-Law, thank you for your thoughtful post.
Interestingly, Taleb's own black swan insurance fund was closed a few years after some crappy returns.
Although it isn't a market law, if a major crash (black swan) occurs, the market tends to be oversold to such an extent that a second one is unlikely to follow it (anytime soon). Right after seems to be the time to start selling some serious Vega when it comes at a premium. This is probably why LJM always recovered so nicely.
I have yet to see a strategy that can exploit long vega inefficiencies (unless you go the HFT route).
It's not about managing the risk. First and foremost, it's about making sure that you don't sell these options at stupidly low prices in the first place.
There's no problem with this fund. They're perfectly upfront about the stuff they're doing and the return/drawdown profile they offer the investor. It's up to the investor to decide if it's the sort of thing they're into.
There's no problem with this fund. They're perfectly upfront about the stuff they're doing and the return/drawdown profile they offer the investor. It's up to the investor to decide if it's the sort of thing they're into.