Here are some quotes from a Wall Street Journal story about how a successful hedge fund manager uses options. It is useful to be able to back out an implied distribution from a set of option prices that you can compare with your views and trade against if your view differs greatly. ********************************************************** Mr. Talpins is a “macro” trader who uses options to try to capture the upside of—and limit potential losses from—strategies aimed at anticipating global economic shifts. Paying for stock and bond options can lead to losses in placid markets, but volatility over the past year has buoyed Element’s bullish wagers on U.S. stocks and the U.S. dollar. Mr. Talpin’s bearish bets on the U.S. interest rates and the euro also have paid off. “Element is great at using options in a thoughtful way, so they often make more money when they get it right than they lose when they’re wrong,” says Adam Blitz, chief executive officer of Evanston Capital Management, which manages portfolios that invest in Element. ... Mr. Talpins, a former Yale University math whiz who, people close to the firm say, logs into the fund’s computer system every day on vacation, spends much of his time focused on developing broad investment themes. His focus is on attempting to meld old-school macro bets with a newer, quantitative approach that features structured wagers in stock, bond and currency markets. An ideal trade might be one that yields gains only with a sharp rally, but keeps possible losses limited, rather than making outright wagers on the future of stocks or bonds. In late winter of 2017, for example, Mr. Talpins anticipated that Congress would pass a corporate-tax deal. Element loaded up on options on the S&P 500, a move that cost the fund for much of the year but led to huge gains when the deal came together and stocks climbed.
Two questions for you: 1. What do you mean by "implied distribution from a set of option prices"? 2. Is he mainly a directional options trader then? I thought successful professional option traders mostly traded non directional?
When I interviewed with Element (many years ago), they were looking to get long the SPX but to do it via risk reversals to monetize the skew.
1. See the paper Recovering Probabilistic Information From Options Prices and the Underlying or the article Estimating Option-Implied Probability Distributions for Asset Pricing . 2. Looks like it. He is not market maker, and market makers are usually non-directional.
Excellent article, unfortunately I don't know how to run MATLAB. Need to take a class, do you have any recommendation? I do understand the basic concepts of the article. Thank you.