Don, Not to beat a dead horse here but I could probably write a book on options and what you just posted must be in latin. We are either so far apart here or somebody re-wrote the rules of options and didn't tell me. Like I said before, why don't you put on a hypothetical position with XYZ as your underlying at a 50 strike and then I'll show you how that position will blow up. You still made no reference to what you would do about the negative gamma except hoping its not near the strike. I don't know what that is. Yes your gamma is the highest at the strike but you will have negative away from the strike too. And it doesn't matter if you have excess calls sold, if you sold 10 calls in the front month and bought 10 on the back month, YOU STILL HAVE GAMMA RISK. Then if you put on ratios in the back month you are adding more gamma risk but only slightly more. Don, if you want to sleep better on the weekend, put on a ratio spread on your long front month premium before the weekend and take it off on monday.
Yes, absolutely, yes, the position that I would prefer. To Mr. Maverick: I brought in the big gun to review our string of posts, just to see if I was missing something...(my brother, who has obviously made millions trading options on the floor (much more than I), and since we both traded belly to belly with Blair Hull and other super - pros, I figured that I maybe these guys and you were thinking alike)....well, that is not necessarily the case. FOR CONTINUED DISCUSSION ONLY, NOT BEING ARGUMENTATIVE, PLEASE UNDERSTAND ME WHEN I SAY THIS... So, Bob and I discussed this thread, and he said that "I would never want to be long gamma" "short far term, and long short term is certainly something I would never do"....he also said " I would never be long gamma (vertical) over the weekend. To be fair, I am sure that you were simply commenting on being "safe" for the weekend, not saying that it makes any sense to do, right? My point is that we like to have the clock tick in our favor, and that we don't worry about stock movement nearly as much as time decay. If the implied volatility is higher than the historical volaltility then you want to be short gammas. If the implied is at or lower than the historical volatility, then long gamma would make sense. Since implied volatiltiy is higher than historical (actual) volatility over 90% of the time, it rarely if ever makes sense to be long gamma. We may both understand what we are talking about, and simply disagree on the approach to making money with options. (Dead horse still cringing).....LOL Don
Here is a deep thought on long gamma for a long cal position... just to muddy the waters a little bit. Don't ya'lls think it is possible maybe in the ag options to be long cal and long gamma? Check this out what if July options is at 70 IV vols and August is at 45 vols. You can be short July Long Aug and MAYBE be long gamma! highly unlikely but is it possible?
Yes, with a big enough spread on the Vol that is possible. Remember Vol has a relationship that is similar to time. The higher the Vol, the option acts more like a longer term options and the smaller the Vol, it acts like an option with less time. So if you sell a very high Vol option and buy a cheap enough option you could temporarily have a position that would act as a long gamma position. But the spread in the Vol would have to be huge and there would have to be some strange reasons for why that would be happening because there would be a lot of arbitrage there. Especially if they were only one month apart. If you see one of those trades you let me know.
OK, let me continue the discussion. Not being argumentative of course. Let me make a very simple statement about implied volatility here and how it relates to statistical volatility. And if a newbie reads this and saves a few bucks from it then I have done my job. One of the biggest fallacies and I mean we are talking huge fallacy here is the relationship between implied and statistical volatility. If you trade with the idea that if implied is over stat and you sell the options because of that and vice versa buy options when the implied is less then the stat, mark my words, you will have a financial lesson that will be devastating. And please Don, I hope you guys are not teaching your traders this. Now, I am not saying this is the case 100% of the time, but in my experience implied leads stat about 90% of the time. Example, say the stat vol on IBM is 45 and the implied vol is 55. Well, these options are overpriced right? WRONG! The implied is telling you that the marketplace believes that the stat vol is actually going to increase that is why everyone is buying paper. Now say that stat vol is 55 on IBM and the implied vol is 45, well options are too cheap right? WRONG! Paper is getting sold and they are selling it because they believe that the stock is going to settle down and not move as much. Please, whatever you do, do not trade options by comparing the stat vol to the implied vol except to buy the options when they are over their stat and sell them when they are under their stat. Don it really surprises me to hear you say that. If you trade on the floor, you must know this. Every MM on the floor knows this. As far as being short gamma Don, there are many ways to earn the premium on options without trying to steal the theta. Why not sell the vega? You will profit from eroding premiums without exposing yourself to a stock halt pre-open that could put you and your entire firm out of business. I love long gamma because those gaps can make your entire year, and when a stock breaks out and runs, you can have a money printing machine on your hands. However like I said before, I would sell overpriced back month premium and maybe even sell index premium to reduce my theta exposure. And if your still not happy, add a ratio spread on Friday to hold over the weekend on your front month premium. Then take it off on Monday. At least you reduce your gamma exposure 4 out of 5 days a week and can collect the weekend premium. Most floor guys if they want to earn the theta will put on backspreads. This way, they can capture that front month premium around the strike and if the market takes off or the stock gaps, their position will become a long gamma position and they won't get hurt. So they essentially are short gamma short premium around the ATM strike and if the stock runs or gaps, the position becomes a long gamma long premium position. This is how guys avoid blowing up on the floor. Don, if you traded on the floor you have to know this stuff. Maybe you just forgot over the years. But this stuff is absolutely critical to understanding options. There really is not much room for error. I still disagree with your original post about adjusting the back month options on long calendars. That is just way too much risk to accept. Sooner or later you will get clipped. And when you do your clearing firm will come down to the floor and have you escorted out with security guards. And believe me, that does happen. Don, that $1000 course I keep hearing about that offer your new traders, perhaps I should come in and teach the options part? What do you think? I'll give a group discount.
My comments here are probably superfluous since Maverick has explained it all much better than I could. However, I felt compelled to reiterate a critical point that Maverick just made about volatility in the event some may have glossed over it. I think there is a fundamental misunderstanding about vol among many novice options traders (and apparently other more experienced types who should know better). It concerns the relationship between statistical vol and implied vol and what makes an option "cheap" or "expensive". A given option is not expensive or cheap because its IV is above or below its SV. Nor is an XYZ option expensive because its IV is 60 when the IV of a "cheap" ABC option is "only" 30. Rather, what is relevant is where an option's IV is relative to where the implied vol of the options on that same underlying security has been over some defined period. If its in the 90th percentile of where its IV has been over the past 3 years, then its fair to call the option expensive. Conversely, if its in the 4th percentile, its safe to call it cheap. These are basic concepts and trading options without understanding them will no doubt be highly detrimental to one's financial health, whether trading on or off the floor.
Way too much typing, and all over ths basic, simplistic valuations of options. I didn't "forget" much, not to worry. I'm glad that Mr. Mav understands the nuances of implied vs. historical volatility, and I'm sure that anyone I speak to will understand as well. I prefer to buy lower implied, sell higher implied, especially when the volatility is on a downward swing....nothing more, nothing less. I hope you're making good money, that's what we're all after. Since trading, whether options, stocks, or futures, is only minimally related to all the technicals, after we learn them, we can focus on the other concepts overall concepts involved. All the best... Don
Don, Have you ever thought about going into politics? You would be really good at it. Seriously. You really know how to duck a question. LOL. All I asked you to do was post an example of a typical trade you might do that would convey your thoughts on this subject. And if you can't do it, have your brother come in here and post it. What do you say?
I posted this originally in the thread regarding the new VIX futures, but I wanted to share this again. OK Don, so you like being short gamma, then this could be the best thing in the world for you and your bro. Let's say the VIX future is trading at 26, you sell the 28 put, which makes you short gamma, collecting decay, and LONG VOLATILITY BEING SHORT OPTIONS !!! Take it a step further and go ahead and sell the 24 call too. Now you're flat (delta) in the VIX future, flat vega (being short twice as many options also), and collecting on both the call and put. Don, I think you should open another Bright office in Chi-town, and put me and Mav in charge !!!!!!!!!!!! Vega