well thats one approach. i like it BIG SHORT style in small way (i have no 100s millions to trade). in other words, i like betting not the farm but big chunks of it, and less often, very patiently.i dont fit well with daytrading, i llike to enter a position along weeks, than manage it for weeks or months, take few 100s%, get out. then maybe wait few weeks or even months, looking evaluating new posibilities etc.
PLEASE CAN YOU EXPLAIN A BIT MORE ? OR WHAT BOOKS OR WEBSITES CAN I LEARN THAT FROM ??? what i think i understand is that there is a certain sweet spot in vega covexity for certain OTM strikes for a given tenor. you gave specific exemple of 950 strike for 6 months + skew, when we were at cca 2000 on spx, and that together should give up to 100x payout in case of 50% downside within the expiry time, right ? so what i can read from that, is that for 6months exp. & put strike that is a little more than expected crash, given put can grow 1000s of % with the probable heightened volatility packed into the premiums. right ? BUT WHAT I CANT READ or understand from it: 1./ how does the vega convexity sweet spot move up or down on the strike dimension (how fast and how much) with increased/decreased sigma of the crash ? lets say instead of -50% that i will take as the middle value, to lets say -30% and -70% crash in the same time frame ? 2./ AND ALSO, the second part to get a grip of how it works more intuitively: if i keep the expected crash level at 50%, BUT move the time frame from 6 months over and under, i.e.: to 3 months and also 1year(or 2 years), then HOW WOULD THE VEGA CONVEX. SWEET SPOT ON THE STRIKE MOVE ACCORDINGLY ??? i think if you give me these 2 or help me to understand how to understand them, i can do my homework and try to count some specific exemples for some expected scenarios. then you check if and what i understood or not...? thank you very much !!!)))
LOL a 50% crash in the sp500 within is such a high sigma event I'm pretty sure anyone who took the opposite side of the puts you bought would be bankrupt after. Your return would be 100,000s% not 1,000s. This is taken from an Nassim Taleb interview regarding way out the money options: "Here’s one thing you can learn from this: If you owned an option that was 20 standard deviations out of the money — and I had plenty of those — how many cumulative months of time decay could you sustain if it moved into the money? AT: I don’t know. A few dozen? NNT: I quizzed traders, and they were telling me two or three years. But it was 67,000 months of time decay. You get paid 67,000 times your bet. AT: Is this what you meant in Fooled by Randomness when you discussed the importance of asymmetrical bets — that to measure an outcome you need to consider both probability and the size of the payoff? NNT: Exactly. It means you don’t need the event to happen often for you to be compensated. And you don’t need to be right on the event, because you can bleed for 67,000 months and still be ahead. After the crash, I told management at Credit Suisse First Boston, “Let me bleed 67,000 months before you question my strategy. But if you have a 24-sigma event on an option that’s 24 standard deviations out of the money, your payoff is 750,000 times your bet, which is what happened in eurodollars. It is totally irrelevant whether these events happen every 20 or 50 years. Secondly, the further out of the money an option is, the more complicated it is for the human mind to calculate its properties."
Think of it this way. Define the crash from a perspective of volatility instead of price level. What do you think VIX would do in a crash? 70? 80? 120? During the Oct '87 crash the VIX (or VXO I believe) hit near 150. Take simple Black-Scholes, and using the excel solver you can solve for the strike of an SPX option that maximizes dVega/dVol (also called "volga" or "vega convexity"), subject to your different vol levels and expirations. Maybe plot a few tables to get a clearer picture of how this derivative evolves based on your different inputs. You can find the formula for volga or any other greeks/"bastard" greeks with a google search if you don't already have them.
So since 1987 he has only made $35M * 0.03 = 1.05m / 19 years = $55,263/year 55K a year? that sucks The majority of his money the past 19 years has likely been made off taking 2/20 from his clients
I have no idea but he has stated it publicly several times. He commands high figures for speeches and still trades options out of an addiction and is said to have a 7 figure income according to tax returns.
Thanks for all of the helpful replies. I've learned a lot from reading the four pages of this thread. I've only been trading for a few months now, so I have no intention of investing a lot of money on any single scenario. I ended up buying some shares of Ultra Short S&P 500 (SDS) a few days ago and put a tight stop in. I'm afraid to actually short sell anything at this point, so buying the inverse ETFs and put options seemed like a good direction for me. I prefer being long in a bull market, but I figure I need to gain some experience with down times like this.
Thank you for your insights. Good thing I have done some hedging and protecting my trades so the recent losses are not as large as not hedging. Thanks to some technical analyses from some of you last year, I have also been taking some money off the table and are entering some new trades today, still, since I am mostly long, overall 2016 started out very bad for me. What are your collective opinions about the market?