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Where is the edge?
- Thread starter Capt Hobbes
- Start date
Quote from TskTsk:
Which is kind of surprising to me, considering there is systematic overpricing you'd think institutionals would get in on it. In essence though it's just short vol so I guess there are other ways to do it besides iron condors
Most insitutional investors don't like to be short vol because they are afraid of the business shut down risks. (Why there's a systematic overpricing of vol)
But if you are going to be short vol it's better to be short ATM as you get more vega/risk and you minimize trickier greeks like dgamma/dspot. If you were shorting OTM, it's because you had an explicit view on skew.
All the risks taken had to be explained to their bosses and explaining that you are shorting an iron condor where the gamma of gamma will go crazy if the market sells off 5% is a tough argument to make.
Quote from newwurldmn:
Most insitutional investors don't like to be short vol because they are afraid of the business shut down risks. (Why there's a systematic overpricing of vol)
But if you are going to be short vol it's better to be short ATM as you get more vega/risk and you minimize trickier greeks like dgamma/dspot. If you were shorting OTM, it's because you had an explicit view on skew.
All the risks taken had to be explained to their bosses and explaining that you are shorting an iron condor where the gamma of gamma will go crazy if the market sells off 5% is a tough argument to make.
Some who advocate selling ICs recommend utilising a portion of the premium collected to buy 'units', far OTM puts for pennies, as a hedge against such sell offs.
Presumably this will mitigate the damage somewhat, but I wonder if it would be adequate in the scenario you describe?
Quote from justrading:
Some who advocate selling ICs recommend utilising a portion of the premium collected to buy 'units', far OTM puts for pennies, as a hedge against such sell offs.
Presumably this will mitigate the damage somewhat, but I wonder if it would be adequate in the scenario you describe?
It helps. But is often not enough.
Quote from newwurldmn:
It helps. But is often not enough.
Why not sell SP500 otm put spreads whith a stop on the short leg place stop where a percent pull back in the underlying historically wasn't a pull back but a Fundy shift in trend IE down ... hence get your size or leverage correct with your capital nobody speaks to this on Et its about leverage. ?
You could. That could improve your risk reward, but its besides the point.
Selling vol is positive expectancy but with poor risk reward ratio.
Institutions try not to sell vol where they have lots of other risk factors unless they are massively compensated for it.
Selling vol is positive expectancy but with poor risk reward ratio.
Institutions try not to sell vol where they have lots of other risk factors unless they are massively compensated for it.
Quote from newwurldmn:
You could. That could improve your risk reward, but its besides the point.
Selling vol is positive expectancy but with poor risk reward ratio.
Institutions try not to sell vol where they have lots of other risk factors unless they are massively compensated for it.
What is the ultimate trading method for non institutional money then
Quote from Capt Hobbes:
... what real edge can an individual options trader have in the market? Or I guess what I really care about is, what do I need to work on to find my edge?
The edge is in how you manage the trade as time progress. Options give you more flexibility in modifying your position as your expectation changes over time.
Quote from Ghost of Cutten:
You could replicate this by just buying the S&P with a bit of leverage. E.g. 150% long S&P. You would outperform for years until one year you get a margin call blow up. Only 2008, 1973-74, 1937, 1929-32, 1907 would have triggered a margin call in the last 110 years on a 150% long account, in the USA anyway. So you have a good chance of doing well, attracting client capital, and creaming off the fees by writing hidden OTM puts.
In fact this would be a great business model for unethical traders. Simply leverage the S&P, throw in a few random offset positions long & short on small size to disguise your closet indexing, and write some political bullshit and trading saws in your quarterly newsletter. Outperform 4 years out of 5, funnel your bonus each year into safe haven assets. If you hit a killer bear market then just fold the fund, blame 'unforseen events', and laugh as your T-bonds go up 20%, cash in, then re-open a year or two later with an 'improved hedging strategy'. The market has just tanked 40%+ the 1-2 years before, so odds are it's another 5+ years before another repeat, that's good enough to have a big run and prove yourself as a 'comeback king'.
I couldn't agree more with this description of the majority of "money managers / hedge funds." Finally, my thoughts expressed in a few brutally honest sentences.