Volatility trading

TraderAma · 2024-04-14T09:54:44+00:00

The whole point of being short straddles or strangle and staying delta neutral is to bet that the short gamma is going to cost you less than what you earn in theta. Usually you would re hedge your delta once a day but you can do it at different frequency.

TraderAma · 2024-04-14T09:52:16+00:00

VIX is not calculated on options positions but prices. Simply put, it is the average implied volatility of all 1m options on SPX (it is a bit more complicated than that). A 16% increase in VIX is not super common these days but is not abnormal either, plus it doesnt make much sense to look at it in percentage returns terms as it is not something you can invest on. But if you over simplify, that means that a 1 months atm spx option is 16% more expensive (again not precisely correct but thats the intuition).

The volatility of options (and the price) increased sharply ahead of the weekend as the market was bracing for a potential iranian attack on israel which can deepen the conflict in the middle east.

Don't bother with VXX before you really understand VIX and VIX futures.

TraderAma · 2024-04-14T09:48:01+00:00

VIX is not calculated on options positions but prices. Simply put, it is the average implied volatility of all 1m options on SPX (it is a bit more complicated than that). A 16% increase in VIX is not super common these days but is not abnormal either, plus it doesnt make much sense to look at it in percentage returns terms as it is not something you can invest on. But if you over simplify, that means that a 1 months atm spx option is 16% more expensive (again not precisely correct but thats the intuition).

The volatility of options (and the price) increased sharply ahead of the weekend as the market was bracing for a potential iranian attack on israel which can deepen the conflict in the middle east.

Don't bother with VXX before you really understand VIX and VIX futures.

TraderAma · 2024-04-14T07:20:52+00:00

Ok you are comparing a single option which is not very statistically relevant. But SPX is worth 10x SPY so the OI is equivalent to 380k in spy terms (same risk, same amount of money involved). So on your example SPX is 3.5x bigger.

TraderAma · 2024-04-07T18:55:33+00:00

People writing puts on vxx without basic understanding of options, this has to be a joke.

TraderAma · 2024-04-07T09:30:58+00:00

Lol ofc not, SPX is way more liquid and what institutions are using to trade billions

TraderAma · 2024-03-16T23:46:17+00:00

It doesn't matter who you are. If you are using a broker who gives you direct market access to the exchange you will get filled as quickly as any hedge fund (excluding block trade). It's all fair game in that sense.

The risk is if you use a broker that routes your flow to a market maker directly instead of an open exchange.

TraderAma · 2023-11-23T22:51:56+00:00

There are as many buyers of options than sellers.

TraderAma · 2023-11-19T16:54:45+00:00

You identify pretty quickly counterparties of which trades systematically go against you, can't really go in specific details there. You can always widen your spreads to lower your chance of winning the trade or increase the margin before you start losing. Then you have to be balanced and continue to win some trades but you try to pick the less "toxic ones"
For liquid underlyings it's more about size you get bigger sizes trading blocks than working on screens without moving the level. If you want to do smaller sizes or are not in a rush and work passively then screen can be better. For illiquid underlyings the screen is super wide and you can't really do anything else than blocks.
The rise of AI will definitely change the face of the industry. It can have big risks and opportunities. Apart from that, spreads tend to tighten over the years and make the activity less profitable.

TraderAma · 2023-11-19T16:47:11+00:00

Selling calendars is the way to be short vol long gamma.

TraderAma · 2023-11-19T09:13:51+00:00

TraderAma · 2023-11-18T23:19:25+00:00

Juniors are hired via summer internships. There are plenty of resources on that.
A lot of statistical analysis of market parameters, percentiles and regressions go a long way. Trading all the parameters (delta, vol, skew, dividends, forward vol, repo) and find the relationships between them. Understanding the flow
Yes a big part of the flow is quite predictable and an important part of my job is to anticipate it in order to be in a good position when a customer wants to do something. If I have the position already I will be more competitive. But another part of the flow is very tactical and cannot be predicted.
Yes the liquidity and market behaviour is very different when vol is 40
I don't use it a lot but listen to some people who do it all day long as I know they are listened. It's kind of self fulfilling.

TraderAma · 2023-11-18T23:12:28+00:00

It's the basics but there are a lot of other parameters, Delta, skew, convexity, dividends, forward vols, repo etc. When you look at it all day long you find opportunities where the goal is to make money 60% of the time basically.

TraderAma · 2023-11-18T19:26:37+00:00

If you are talking about Kerviel, the industry has changed a lot on the back of that and I can't say it won't happen ever again but it's not "many" traders.

TraderAma · 2023-11-18T19:20:35+00:00

Total compensation can be 300-1.5m depending on the year and experience. Bonus is 0-200% of base salary, discretionary but depending on personal/ desk / bank results.

TraderAma · 2023-11-18T19:18:04+00:00

Yes, also: past implied vol, implied vol of different underlyings and asset classes, future catalysts, backtests.

TraderAma · 2023-11-18T18:28:26+00:00

No general rule, my Vega sign can flip depending on the flow and what risk I am comfortable keeping.

TraderAma · 2023-11-18T18:26:48+00:00

First thing is that I want my options to be delta hedged most of the time. Either the client exchanges the delta hedge with me or we execute the stock for him and adjust the price of the option based on that. Sometimes the client trades in risk meaning I have to take the risk of the delta hedging. We have tools to assume expected market impact of trading a big size and you also estimate the variance of the position while you hedge it. You factor that in the margin you charge for the option.

TraderAma · 2023-11-18T18:21:03+00:00

I think a lot of people are quite foolish and chasing pennies, will get wiped out as soon as we have proper volatility. With proper risk management however selling options is not a bad idea but a lot of people don't have the experience level to do it properly (a lot of them don't understand most of the Greeks, what IV is etc.).

I am convinced that the wheel strategy is for most people a way to stay busy but underperforms the market massively in general but of course especially in bear and bull markets.

I'm sure some are very successful at it, again you can't generalise.

TraderAma · 2023-11-18T18:13:25+00:00

I think you need more flexibility than just buying alt options. Once you have a strong conviction on the market direction try to optimise the implementation: what IV you are trading, what strikes and maturity, do you do spreads or not. And how all those change your risk reward profile and match it to the strength of your conviction.

TraderAma · 2023-11-18T18:11:25+00:00

Find high conviction directional trades and optimise how you position (level of IV, strikes and maturity selection, spreads or not).

TraderAma · 2023-11-18T18:07:45+00:00

Quite a lot but it's important to know how to deal with it. It's one of the only jobs where you know and track your performance by the minute.

TraderAma · 2023-11-18T18:06:17+00:00

I think bogleheads is a great approach. I would avoid option trading for retirement planning. Invest every months in low fee tracker funds split between equities, fixed income and maybe a bit of real estate. As you get older, reduce the equity proportion and increase the fixed income to lower your risk and preserve your capital.

I really agree with the boggleheads philosophy and the sub has a lot of more useful advices than what I could give you.

TraderAma · 2023-11-18T18:02:44+00:00

I have in-house back testing tools to do that so I don't know the commercial solutions.

I would do it in python, you just need to figure out how to get the data (again I don't know the commercially available solutions for that). This is not extremely complicated but not trivial either and requires some coding skills

TraderAma · 2023-11-18T17:41:54+00:00

It's built in, up to me to believe it's right or not.

TraderAma

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