Are you sure about an option ticket being a ticket for an amusement ride? Only if you can easily digest the option going to zero..Sure,buy 10 40 cent options and walk away..Buy 1 AMZN 6(apx) month ATM call for 145 dollars,and I am guessing your view changes a bit..Yes,we are talking position sizing.. Im not sure of how you define linearity regarding the returns..If you are lucky and your directional guess is correct,your option delta approaches 1 and your gamma drops off..The returns will be linear.. You are no longer talking about option vol,we have moved to historical vol/realized vol..Less vol near the end may be better(assuming the stock doesnt go down 3% every day),or if if the higher vol swings trend higher and your option expires at a corresponding high... Less vol is definetly better on your stomach..at least mine
To the OP. Don't start with singles (long call or put). Start with bull and bear verticals. The synthetic relationship is governed by the box arbitrage, so it doesn't matter whether you buy a call vertical or sell a put vertical; they are equivalent. Delta sign will not invert, but gamma/theta/vega position does change (modality) on moneyness. WMT at 120. You're bullish to 125. A strip of call verticals: The 110/115 bull vert is short g/v. The 125/130 bull vert is long g/v. The exposures are nominal (per contract) on the "cheap and deep" stuff (110/115 and 125/130), but that's getting into the weeds for this thread. Start with verts and move on to more complex stuff later. Verticals (single exp) are delimited; so paying 4.18 for a 5-wide spread denotes limited sensitivities outside of delta. Look into synthetic relationships. It's important w.r.t. edge loss when choosing an equivalent OTM spread vs. choosing something ITM. Critical when valuing stuff that trades scarcely if at all.
I know if I debate/argument with you I will lose because you are way more knowledgeable and talented than I could ever dream to be. However in these particular examples you focused on a small part and call the whole idea silly. Trading non correlated, like like delta neutral, market neutral are very valid concept. The fact that the example used was poor does not negate putting forth that concept to educate us new to options. Same with periodicity. So, can you please give us some valid trades/examples to chew on if you don't mind? Never mind, I forgot, you blocked me so won't be able to read this.
Just be careful of something my Grandmother used to like to say. The best liars? The very best of them? Tell a whole lot of truth ... Or maybe it's not a lie. But it is ego. And they are broadcasting loud and clear how inexperienced they are, and that they don't have a lot of exposure to the various ways to trade markets. I've seen that happen A LOT with profitable Option Traders specifically. They have to have their one single way to trade, and if it ain't that? They don't believe it. Because of their inexperience. They haven't been exposed to guys trading Swaps. Or OTC. Or arbitrage. Or Deep Valuation Cash Flow guys centered in New York. Or Alternatives. Or distressed debt. They only know one thing, and can only speak from that one world view. And if it's NOT that world view? They get lost. Easily. And when it comes to Non-correlation? As I've said a million times, and just told you over in the Non-Corr thread and said from the outset? It doesn't have to be options. Equity Options in my own personal book? Is like ... 5% of the total weighting. The non-correlated thread is simple a ROUGH example to illustrate principles. It could be long-flat Equities, and a Mean Reversion Program in DBA That's it. IN FACT ... now I know my wording pisses some of them off? I'm going to intentionally word things a little weird, just to piss them off a little farther. LOL. What was it Bugs Bunny used to say? "Ain't I a devil?" LOL To judge the strength of Non-Correlation of Strategy? Do this. As I've said a million times. Don't listen to me For all you know ... I COULD be lying (See, I can say that, because it makes no difference to me. There's a big difference. I have no ego to protect. I AM interested that you understand the ideas and concepts) You may not have an ID at a website like Barclay Hedge, or IASG. So ... go to this site here. It's a database of Alternative Asset Management Firms. Start clicking on them, and counting how many say: "Multi-Strategy" and list a number of different markets they are in, with different types of strategies. I'm serious. Click on each one. Then look at the percentage of those Firms, that ARE NOT advertising themselves as a Single Program (That's done in the Alternative Asset Management world ... A LOT) that are multi-strategy, or ... diversified strategies, or non-correlated strategies, or whatever you want to call it. Hrm. I wonder why they would do that?
I am not calling the concepts silly. Volatility is negatively correlated to SPX index price. Stating that QQQ is "non correlated" to SPY is laughable. Stating that shorting a 15D call vert is non correlated is silly. It may be an outright short or a hedge, but correlated is not in common usage in this business to describe volatility exposure, moneyness or delta-sign. Not even on the net delta position in your book. "Periodicity" is used to describe cycles. Never used to denote time to expiration, avg holding period, etc. The dude is an idiot. It's like reading the rantings of a prison intellectual. Embarrassing and hella cringey.
He was using "non correlated" to describe a position that was bimodal to delta. "non correlated" bc he's holding a bear-vert on QQQ against a SPY cash long? So he was "non correlated" (sic) at inception, but that would have changed to "correlated" had the mkt taken a sh!t. Garbage. He's nuts. Certifiable.
You made some very valid points. Let me comment on some of them. Yes, amusement rides because I trade OTM so no intrinsic values. Don't trade AMZN but do trade GOOGL. For which I only trade around 10 contracts at a time and compare to the underlying, percentage wise, it is an amusement ride. If you start with delta of less than say 30-40 (.3 to .4 in your term), in a bull run up, gamma gives you a huge boost and the payout is nonlinear. You are right that at expiration, vol is historical vol. On each trade, I am at the mercy of luck but over hundreds of trades, if I have positive expectancy probability will be my friend, it will all even out. But, as @Wheezooo pointed out to me, at every moment I should look at the trade AT THAT MOMENT and make decision then/here which I haven't done. Homework for this weekend.
1. So what is non correlated to SPX? US currency, Japanese/US$ pair, R.E...? 2. Agree about periodicity. But aren't we trade with T to exp. avg. holding period, etc. matching the cycle periodicity?
Gold. Correlation can change. No. Cycle-length has nothing to do with time to exp or holding period. That's trading ebonics.
raVar wrote: Buy the calls, six to eight months in the future, with strikes three to four deep ITM. That way, if I'm right? Then hopefully the falling IV will help me enough to overcome some of the other math, and my delta's will thus improve with the passing of time (though time is working against me). BUT IF I'm right, then that might be the best way to go. Mathematically speaking. Six to Eight Months in the future ... 4 or 5 strikes deep in the money. And then the 180: It's like this venue for watching instant anger. It's sorta illuminating. And so many assumptions from so many. I made a couple of options comments? And dear God ... the assumptions. And dear lord, Options is precisely 5% of my book in one of my portfolios and 0% in another. I'm primarily trading different directional programs on outrights.