Who is really making a living trading options??
- Thread starter nnfx
- Start date
Would be happy to...
Yes, hence see what I have mentioned above. Specifically, it's not about the leverage in this case, but rather about the embedded liquidity option.
"Yes, of course. Implied volatility is a characteristic of an option that has a one-to-one relationship with a particular price. However, while the price of an option is not a particularly useful measure, IV allows you to perform some analysis. At the very least, it allows you to compare two different options and draw all sorts of potentially useful conclusions. It also allows you to assess a given option in a historical context, which obviously would be impossible to do with a price. For example, in FX people look at risk reversals. If all you had were historical time series of relevant option prices, you would have a really hard time assessing the current mkt pricing of a risk reversal in a historical context. If you have time series of vols for the right options, it's a whole new ballgame. I think of the relationship between prices and vols for options as being similar to the relationship between prices and yields for bonds.
2) There are indicators based on volume, price, time, range, star positions, and probably phases of the moon. Aren't there?
I have no doubt there are many selling secret indicator formulas on this very board!
I dunno about any secret indicator formulas. But aren't most "indicators", esp the TA ones, based on price and price alone?
3) Fair enough, so how does one use implied volatility to make money?
Well, there's a whole variety of ways to do it. I think there's a couple of threads that discuss some examples. I can certainly discuss how I use it, but it might not help, given that I work with a different asset class."
I am travelling next week so I need to wrap up some of this for a while.
Point 3: I really like sle's reformation of the question, so let's deal with that. Let's stay general since I am not going to reveal exactly what I do to a group chatroom, just as you or sle shouldn't either.
Point 2:
Yes most TA indicators deal with price and time. They are lagging since they need a price to be calculated. You are actually trading in the future so they have limited usage in my view. Even I can trade well in the past (a legend in my own mind!). I don't think there is much edge in indicators so I don't use them much although I started with them long ago. I prefer raw data to trade what I see.
That said, trading is possible even with an imperfect indicator. Experience, instinct, and emotional control can win the day. Some thought behind exactly what a trade is might help one progress. Indicators have another issue - they tend to encourage people to over-optimize because of human nature.
Let's dispense with this part.
Point 1: If there is a 1 to 1 (as previously pointed out by the model you use to invert price to get IV), is the reverse also true? Given an IV, can a price be determined. If they are the same thing as I believe and this is not true, what then does that imply?
If IV and price are the same thing then IV can't give you more information that price. It implies there is no edge there. Keep in mind what I said about indicators though - it is fine to use it anyways in your trades.
We are into theoretical areas and so I am not always correct, these are just my opinions and how I look at the world and how I do things.
The process you describe could be done with a one year candle and the current price in my view. The information is the same and it is all backward looking.
2) There are indicators based on volume, price, time, range, star positions, and probably phases of the moon. Aren't there?
I have no doubt there are many selling secret indicator formulas on this very board!
I dunno about any secret indicator formulas. But aren't most "indicators", esp the TA ones, based on price and price alone?
3) Fair enough, so how does one use implied volatility to make money?
Well, there's a whole variety of ways to do it. I think there's a couple of threads that discuss some examples. I can certainly discuss how I use it, but it might not help, given that I work with a different asset class."
I am travelling next week so I need to wrap up some of this for a while.
Point 3: I really like sle's reformation of the question, so let's deal with that. Let's stay general since I am not going to reveal exactly what I do to a group chatroom, just as you or sle shouldn't either.
Point 2:
Yes most TA indicators deal with price and time. They are lagging since they need a price to be calculated. You are actually trading in the future so they have limited usage in my view. Even I can trade well in the past (a legend in my own mind!). I don't think there is much edge in indicators so I don't use them much although I started with them long ago. I prefer raw data to trade what I see.
That said, trading is possible even with an imperfect indicator. Experience, instinct, and emotional control can win the day. Some thought behind exactly what a trade is might help one progress. Indicators have another issue - they tend to encourage people to over-optimize because of human nature.
Let's dispense with this part.
Point 1: If there is a 1 to 1 (as previously pointed out by the model you use to invert price to get IV), is the reverse also true? Given an IV, can a price be determined. If they are the same thing as I believe and this is not true, what then does that imply?
If IV and price are the same thing then IV can't give you more information that price. It implies there is no edge there. Keep in mind what I said about indicators though - it is fine to use it anyways in your trades.
We are into theoretical areas and so I am not always correct, these are just my opinions and how I look at the world and how I do things.
The process you describe could be done with a one year candle and the current price in my view. The information is the same and it is all backward looking.
"I found a breakthrough 2 1/2 years ago ..........
Liquid options are more or less fairly priced. It is not so much their pricing that matters as is what you do with them and to them. Remember, Black Scholes is limited. It is an accommodation. Think outside the box. "
Superb comments Pelagos.
Keep looking for breakthroughs. It will keep you sharp even if you don't find them. I have spent much time asking myself, just what is an edge anyways? Where to they come from if the market is so efficient? What is market efficiency anyways? Is it constant?
Your comment on fair pricing is precisely what I was trying to say by the bookie analogy.
Keep thinking outside the box. Another question is why does the general "helpful" trading press concentrate on the BS equation so much? Read the history before it for a real laugh at how options were priced. Nothing much is new under the sun! Bookies love the BS equation - is it because they would like nothing more than you earn money on all your positions?
Thank you for contributing.
Liquid options are more or less fairly priced. It is not so much their pricing that matters as is what you do with them and to them. Remember, Black Scholes is limited. It is an accommodation. Think outside the box. "
Superb comments Pelagos.
Keep looking for breakthroughs. It will keep you sharp even if you don't find them. I have spent much time asking myself, just what is an edge anyways? Where to they come from if the market is so efficient? What is market efficiency anyways? Is it constant?
Your comment on fair pricing is precisely what I was trying to say by the bookie analogy.
Keep thinking outside the box. Another question is why does the general "helpful" trading press concentrate on the BS equation so much? Read the history before it for a real laugh at how options were priced. Nothing much is new under the sun! Bookies love the BS equation - is it because they would like nothing more than you earn money on all your positions?
Thank you for contributing.
Quote from opt789:
He is losing his touch in this thread. Not one insistence that someone should commit suicide for the benefit of the community, no reference to a poster being on some esoteric drug, no bitingly humorous jabs about how someone is to moronic to even function. Must be in an unusually good mood.
FU
WTF are you babbling about? I think it's pretty clear who's side I am on. You admonish me as a disciple and then ask me to "take a side"? I generally side with those who know of wtf they speak. I also consider it pretty shady to call out the head of a derivatives desk for "newbishness" and then attempt to spin the gaffe.
On the topic: Ask yourself why OTC dealing always involves quoting the market in vol and not premium.
Simply, there is no context in quoting premium as there is no reference to delta, moneyness, etc. The vol-line is used to isolate.
"The real question is - how do you discover that the current implied is rich or cheap?"
Point 3:
I like questions, especially quality ones like this one. Given my beliefs let's substitute price for current implied volatility. (Over a longer period other things drive the BS equation. There are edges there also I suspect.) So the question is the same one for every thing bought or sold. Is this a fair price?
I think the answer is different for hedgers, market makers, and speculators. One must be clear why one is buying or selling risk to answer it.
If bookies (bucket shops etc.) price options, then the IV or price does indicate something. It indicates what the bookie sees. IV is the odds. The bookie has known behavior. From that one can guess at the likely scenario.
There are several patterns based on precisely what the underlying and the bookie are trying to do. Computers are very powerful but one weakness is they must use a pattern. Humans can do goofy things. (look at my trades sometimes for example)
Does that help on how I view the option market and my trades?
Point 3:
I like questions, especially quality ones like this one. Given my beliefs let's substitute price for current implied volatility. (Over a longer period other things drive the BS equation. There are edges there also I suspect.) So the question is the same one for every thing bought or sold. Is this a fair price?
I think the answer is different for hedgers, market makers, and speculators. One must be clear why one is buying or selling risk to answer it.
If bookies (bucket shops etc.) price options, then the IV or price does indicate something. It indicates what the bookie sees. IV is the odds. The bookie has known behavior. From that one can guess at the likely scenario.
There are several patterns based on precisely what the underlying and the bookie are trying to do. Computers are very powerful but one weakness is they must use a pattern. Humans can do goofy things. (look at my trades sometimes for example)
Does that help on how I view the option market and my trades?
"WTF are you babbling about? I think it's pretty clear who's side I am on. You admonish me as a disciple and then ask me to "take a side"? I generally side with those who know of wtf they speak.
Those who live by the sword die by the sword. Tell me how your previous posts contributed to our discussion.
Stop ad hominem, join the rest of the civil community, and show me where my babbles are incorrect then. That I am open to.
Those who live by the sword die by the sword. Tell me how your previous posts contributed to our discussion.
Stop ad hominem, join the rest of the civil community, and show me where my babbles are incorrect then. That I am open to.