thanks for sharing this but not sure it had an edge over a simple short treasury futs position. Point is people often claim they trade the option at limited risk vs other assets. I dont understand why, I can play the delta in the same risk limited way than the option. Trading skew and IV directly are entirely different and I agree there are strategies with edge, I trade some of them myself regularly.
I am imprecise precisely because it's not salient to the point I am trying to make. My point about bid/offer is simple. Whatever edge you think you have is eroded by the bid/offer you have to pay. As a result, given the same expected return, the higher your transaction costs, the smaller your ex-ante Sharpe going to be. As to your question about options vs pure delta, I can give you many examples, but they're all in my world, i.e. the world of rates, where direction and vol are often not independent. If you're curious, look up 'bull steepeners'/'bear flatteners' types of trades and you will hopefully see what I mean. Finally, one of the other reasons to use options is the limited max drawdown aspect of it (if you're long). That's something you CANNOT replicate using the underlying outright.
disgree with every single point of yours and touched on all issues you mentioned before. BTW, I worked at a rates exotic desk before your points on the dependence of vol and rates are not plausible in the slightest.
I do not see any comments of yours that even remotely address what I have said. As to your other comment, I am rather sorry for the rates desk that employed you (if indeed they did). Would you mind telling me what sort of models were used by your exotic rates desk to price trades? What sorts of trades were they? For the record, if you're, in fact, saying that in the world of interest rate options, rates and vol are independent, you are, quite clearly, CLUELESS!
I have a feeling that I already read asiaprop posts beforeâ¦the style is very familiar â¦must be under another handle; I just canât remember which one Thoughts?
http://www.elitetrader.com/vb/showthread.php?s=&postid=2528592#post2528592 That's really great! I think you're going to re-write (aka re-invent) the foundation theory of options pricing! Thanks!
Perfect, SABR is, in fact, almost universally the mkt convention... However, I am now at a loss as to how to interpret your commentary. Help me, pls, asiaprop. Here's what I said: Here's what you said: How am I to understand your commentary? You seem to contradict yourself... At any rate, what I said about options stands. I do not see any reason to disdain the trading of vol any which way you like. Pure and straight, if you're so inclined and have the ability to do it; as part of a directional trade, if you feel like it.
buddy, possible you had a drink too much? a) let me make it very easy for you: "...the world of rates, where direction and vol are often not independent" (you said) <> "your points on the dependence of vol and rates are not plausible in the slightest" (I said) just because you did not get the point does not mean I contradicted myself. b) "At any rate, what I said about options stands. I do not see any reason to disdain the trading of vol any which way you like. Pure and straight, if you're so inclined and have the ability to do it; as part of a directional trade, if you feel like it." What are you actually trying to say?
Anything is possible, including a version of English language where "not plausible"("not independent") = "not independent"... Just indulge me, pls, my friend. What exactly is your point? Without reference to any previous posts, yours or mine, what are you saying? Specifically, in the world of interest rates (let's take vanilla swaptions, nothing exotic) are vol and direction independent or not? As to what I am trying to say, I have said it arnd five times now, elaborating in various ways. I will now be very clear: 1) There IS NOTHING WRONG with using trades that have a volatility component to express a view on either vol or direction or both. There are various circumstances where different types of trades will offer specific advantages. 2) Your point about being able to replicate any directional trade done through options using straight underlying is NAIVE. Is that clear enough for you?