Hi rally, Do you trade VIX futures almost exclusively to express your views on index vol and especially to short it? Or do you trade SPX options as well? Wondering if there is a difference between the two in overall edge to be captured or in capital intensivity.
If that is what you professionals do, we mom and pop amateur retails don't have to worry about you eating our lunch.
timing comes from order entry.. even for DOTM options. You can’t just blindly buy them, as you’ll bleed continuously. There’s a way these guys finance these options via short premium as well so it’s not solely long DOTM strikes. But at the same time I’ve never traded this way and most likely never will, but understanding the characteristics is interesting
I bet Taleb just does put ratio backspreads. Seems hard to believe he just buys otm puts with his giant brain. But what do I know.
While models might assume a normal distribution, it would seem no-one uses those models to actually price options because the prices don't follow a normal distribution model do they?
The continuously compounded daily returns of a stock or equity index are generally accepted to be normally distributed, which is a common assumption in most option pricing models. While the price of a stock or index is lognormally distributed since its price cannot go below zero. Often times (as we saw March and early April) stock market returns displayed a leptokurtic distribution with fatter tails and more data points with 3+ standard deviation moves. However, everyone still quotes, prices, and hedges options from pricing models that use normally distributed returns in the underlying.
According to Professor Taleb, the downside put skew is not steep enough. Or maybe the vol smile should be less linear and more convex, more parabolic on the far-out put wings.
One strategy he has talked about in the past was to buy T-bills, and use the interest income to purchase OTM options. That is an example of his barbell strategy, in other words take low risk and enormous risk at the same time. I do not know what strategies he uses currently.