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Where is the edge?
- Thread starter Capt Hobbes
- Start date
I agree with the statement that
"The speculator can choose to only bet when the odds are in his favour. "
The black swan risk is overblown. There is an edge/premium/positive expectancy here. Just need proper risk management so that one does not over-bet here.
Do you trust HF/Traders doing this for a living, or do you trust a book?
"The speculator can choose to only bet when the odds are in his favour. "
The black swan risk is overblown. There is an edge/premium/positive expectancy here. Just need proper risk management so that one does not over-bet here.
Do you trust HF/Traders doing this for a living, or do you trust a book?
Quote from newwurldmn:
It's two things:
1. It's the hedgers (who are much bigger than the vol markets). They buy vol to protect their portfolios. They don't care if they overpay slightly.
2. The market as a whole is slightly risk averse. It will pay to avoid infinite loss.
You can sell to the hedgers and monetize the overpriced volatility. There's positive expectancy, but the risk/reward and hence the realistic returns aren't great.
If you can improve the risk reward (through timing or underlying selection or risk management) then selling vol can be a great strategy.
I'm sure there are hedgers overpaying, but look at it from the perspective of a market maker. So say it's just you and an MM. You're claiming vol is overpriced due to the risk averse and the hedgers. That means the MM can post over priced offers and get hit all day long selling at a premium but why would he also bid at a premium? Wouldn't he be bidding to try and buy at a discount? If his bids are over pricing vol he would just get hit all over the place.
he (mm) aligns out of skew (fat vol)the options at the money or just in the money on say cisco 23.5or 24 calls after a big pop,the ones public is buying, then brings them in once it calms downQuote from jb514:
I'm sure there are hedgers overpaying, but look at it from the perspective of a market maker. So say it's just you and an MM. You're claiming vol is overpriced due to the risk averse and the hedgers. That means the MM can post over priced offers and get hit all day long selling at a premium but why would he also bid at a premium? Wouldn't he be bidding to try and buy at a discount? If his bids are over pricing vol he would just get hit all over the place.
Quote from njrookie1:
I do not see from the charts that the expectancy is negative.
That was a reference to the book I cited, referring to a base case selling program.
As to LJM, there is no way to know what they are doing exactly, but one might guess they should be already position sizing, and still having unacceptable drawdowns. Maybe they are idiots and did not position size - I do not know. Of course if they did, it would reduce their return.
There is a lot of difficulty in finding any example of a successful long-term selling program.
Quote from Capt Hobbes:
Hi all,
So I've been looking into options for the past 9 months or so, reading up on volatility and practicing in toy (single contract) sizes. It's all very fascinating, and Dr Cottle's "Hidden Reality" book has got to be most interesting read I've done in a while.
But I can't get rid of this nagging doubt. Take iron condors, for example, and any of the good books about them. They make it sound almost too easy. Like Benklifa's book says, just trade the math. Sell delta 10-12 two months out, buy further strikes, wait, exit, repeat. What's nagging me is if there is a statistical edge in that sort of setup, why aren't the big players doing the same in bulk and shrink the credit you receive until it's a tossup? And if the edge is not directly in expected payoff, where is it?
Who says the "big players" aren't doing this already? Keep in mind, a big player in the volatility markets is obviously dwarfed by those in other markets
Quote from jb514:
I'm sure there are hedgers overpaying, but look at it from the perspective of a market maker. So say it's just you and an MM. You're claiming vol is overpriced due to the risk averse and the hedgers. That means the MM can post over priced offers and get hit all day long selling at a premium but why would he also bid at a premium? Wouldn't he be bidding to try and buy at a discount? If his bids are over pricing vol he would just get hit all over the place.
Two things:
The mm will try to bid at fair value or lower. But mostly market makers try not to make money positioning. The lesser let exposure they have the better. He would love to sell to a hedger at 40 and buy from you at 38 and get his capital back to do it agaon