All of the questions you are asking can be answered on the internet or from a book. Its not that hard it just takes a little time. There are people here who know what they are talking about but it might not be best to rely on information from unknown sources. P.S. I'm just jealous you have a job on a desk and I don't (yet).
Which leads to the next question. If he/she doesn't know all this stuff then how in the world did he/she get the job in the first place?:eek:
well i guess i'm one of those people who didn't get to start at the top... anyway, i came to this desk from another one, and have quickly come up the curve but need a little more info. like i said, i have read so many books, articles, websites, etc on options that it's crazy. but the floor lingo and terminology is a bit different. for example, the volatility strategy i worked on called your gamma-scalping example 'dynamic delta-hedging', so i know what it's all about, i just needed to connect the dots on the lingo. as for the vega and volatility questions; i came from a trading group that either used options to hedge equity positions, or to take directional bets on the underlying. my current group doesn't care, they are just taking views on the volatility itself and hedging out the equity risk, interest rate risk, etc... kind of backwards to me considering where i came from. i'll get it, i just need to talk it out with those who understand. while i'm at it, volatility traders: how do you monitor all of those stocks at all parts of the curve? how do you know when volatility is cheap or rich? i can run statistics up the wazoo telling you where the current level is in terms of its historical levels and statistical extremes, but it is where it is today for a certain reason. how do you know when to buy/sell each part of the curve? traders here say after watching it for a few months i'll get the hang of it, but i don't want to wing it, i want to understand the dynamics of how vol traders make their decisions. thanks all for your posts, they are all helping.
Vol traders make there decisions just like everyone else. They look at something, apply a value, and then buy when its cheap, and sell when its rich. If you asked 10 option desks what they thought what they used to analyze this, you probably would get a mix of historic vol, stats, and other math problems. In the end it ends up a supply and demand trade, and you hope to be ahead of the curve.
============ Straddle; As far as vol being cheap or rich ; but i do most of my planning night before on notebook sheets. And as far as to ''know'' when vol is rich or cheap,; probabilities apply and simplyfy some of it by plenty of after hours work on 7 more or less liquid stocks/ETFs My CPA doesnt like charts or graphs, but i do; a picture is worth 2ooo words. Maybe take you months; took me longer.
You ask some big questions. A good thing to remember is that there is a market for vol just like there is for the underlying. Only it isn't obvious and takes some skill to read. Supply and demand can throw things out of whack sometimes and that's when you have to pounce. Like last week(or was it two weeks agao, when I bought a 15 vol in CSCO. If markets were perfect, most of us wouldn't be here. I good place to start is to look at the skew and try and figure out what the market is pricing in and how the order flow is affecting it. There was a reason CSCO atms were at a 15 vol, 20 is a huge resistance. People were selling the 20 line to bring in cash. OF course, I bought them and sold itm. The stock was actually more volatile than the IV implied Which reminds me of another thing you should think about. If you punch up on Bloomberg the IV and HV, you will see that there isn't a perfect correlation. Try and figure out why, for instance, IV could be priced higher than the HV. A hint is that it isn't entirely from a risk premium. Quite often simple close to close volatility are poor measures of the actual vol. Anyways, good luck at the job.