As an example, you sell an OTM put on S&P and buy an even-further-OTM call on VIX. VIX is a proxy for markets decline, but it's an imperfect hedge - you can imagine a scenario where S&P is down a lot while VIX has not reached your strike or something like that.
What risk management mistake did optionsellers.com fund manager do to blow up his fund and clients?
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Mate, are you aware we are talking about long wing positions? What is it with your short wings? Only total retards sell wings for pennies (unless and that is the only exception I can think of, you run a massive options book and trade relative value and are pretty much hedged in surrounding strikes and expires) . When you are short gamma then obviously that implies long wings in the event of hedges.
The bread and butter of most professional French prop options traders is to get paid gamma and to protect the wings. Never heard of a shop that approves selling wings. Ever.
The bread and butter of most professional French prop options traders is to get paid gamma and to protect the wings. Never heard of a shop that approves selling wings. Ever.
My pleasure. Most of the blowups that I can recall started as short wing carry positions, i.e. strike is far OTM and "the market would not get there". I've seen these both as expressing a view or a systematic strategy (e.g. LJM "safe" fund or these guys for that matter) or as a way to cheapen the position that expressed the core view (e.g. Citadel Eurodollar trade right before the GFC). It's not exactly selling crash, which is extreme short-dated moves, but it's in the same neck of the woods.
They are short convexity that can not be hedged without other convex instruments and then the underlying moves against them. If you are simply short gamma, you have a fairly defined range and you can, for better or for worse, rebalance your delta to limit your variance. On the other hand, if you are short wings, a lot of things go against you at the same time - you have very little gamma (or delta, for that matter) at the inception of the trade but you are short tons of dGamma/dSpot, you are short a fair bit of dVega/dSpot and, finally, you are short dVega/dVol. By the time that position becomes simply a short gamma position, it's a bit too late. "If the left one does not get you, then the right one will".
It's hard to define explicitly what differentiates a "short wing" from "short OTM gamma". Some people draw a hard delta boundary (e.g. 10 delta), but my personal metric is the relationship between Vega and delta - e.g. if you are short an OTM option where most of your daily PnL fluctuation can not be attributed to delta, thats a warning sign for me.
* Another useful metric is theta - if you are collecting and yet the book greeks (delta/gamma) look reasonable, there is something to worry about.
Well, but that would make it hard to collect 25% per year, right?
I think there was a thread about optimal delta hedging and how to deal with that. There is theory and there is practice, both are rather complex.
This is very untrue. Selling crash protection is a viable strategy if done with an actuarial mindset. "Only idiots sell them" is only one reason why they are usually over priced.
You can get quite large rather quickly selling crash protection(in over leveraged amounts) if you accept the fate that one day you will blow up spectacularly. These are the real idiots/scams
If we get another 15% decline in equity markets, I am sure you will here about some
PS. I think @sle is talking about short wings as that is the underlying topic of this thread.
Karen the Supertrader.
He was targeting 25% net of fees. Assuming 2/20 He was looking for 30%+. Thats a big difference then targeting 10%. Optionselling.com stated their strategy was selling 6-9 month DEEP OTM options (in their book they mention selling a delta 3). Achieving a 10% return selling delta 3's 6-9 months out does not sound like an easy task either (without taking on heavy downside risk)
Are we? Cause I've been talking about short wings pretty much from the first time I posted in this thread
In response to @MrMuppet, I am saying that in my recollection, positions that blow up funds are naked short wings, not short gamma. Maybe we are having a serious communication failure and in reality we are mostly in agreement?That's a very different trade. It is scary and has a potential to get one fired, but at the bird-eye level you usually you have a fair idea what the risk is in the book and you can cover it.
I've never worked for one (nor would I want to), but I certainly have seen plenty of them - the guys in the subject, the LJM guys et al. It seems like it's a strategy that attracts a lot of investors when the going is good.
https://www.ft.com/content/589157d8-e8ea-11e8-885c-e64da4c0f981
Wild gas price swings spur CME ‘emergency action’
US futures contract falls 14% after explosive rise the previous day
"The severity of the price action had analysts and traders suggesting that one or more distressed speculators were liquidating positions during a frantic week..."
Wild gas price swings spur CME ‘emergency action’
US futures contract falls 14% after explosive rise the previous day
"The severity of the price action had analysts and traders suggesting that one or more distressed speculators were liquidating positions during a frantic week..."
Thanks BigShort! WOW, targeting a 10% return annually is still very, very tough without taking on too much risk, I can't believe how much they must have been taking on shooting for a 25% return! Nuts!
These lawyers are leading the attempt to recover funds for the victims of OpitonSellers and INT FC Stone: http://www.optiontradinglaw.com/