Karen the Supertrader - TastyTrade Hybrid Experiment

Discussion in 'Journals' started by Sweet Bobby, May 18, 2016.

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  1. Maverick74

    Maverick74

    They are not. VX futures currently has a record short interest. The entire world is short vol.
     
    #561     Aug 25, 2016
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  2. Agreed. The present day cost of protection from future fear is overpriced. If there were no risk, everyone would be doing it. Some of us are willing to assume the risk, while others like to criticize us.
     
    #562     Aug 25, 2016
  3. Maverick74

    Maverick74

    This is also false. And everyone is doing it. Bobby, you said you were in grad school. May I ask what you are studying?
     
    #563     Aug 25, 2016
  4. Financial planning and counseling.
     
    #564     Aug 25, 2016
  5. JackRab

    JackRab

    Hmm, I get where everyone is going to. I understand that if IV>HV it seems a correct strategy to sell vol... But as @Maverick74 says... it's that way for a reason.

    In my opinion it's the same why equity usually trades rich if compared to bookvalue/earnings/etc. It's upside vs downside.

    Upside in selling vol is capture the premium, which is what... straddles are about 3.5% of underlying value.. (ES). So, any move beyond that is the downside... which have bigger tails.
    So in that sense, IV>HV because of tail risk...
     
    #565     Aug 26, 2016
  6. atrp2biz

    atrp2biz

    Short interest in futures?
     
    #566     Aug 26, 2016
  7. Maverick74

    Maverick74

    Short VX futures as in short the VIX as in short vol. The short vol is the most crowded trade in the world and in fact is the most crowded traded in history.
     
    #567     Aug 26, 2016
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  8. atrp2biz

    atrp2biz

    So much for tulips.

    By definition of open interest, there are just as many long.

    However, I don't disagree that volatility is currently low.
     
    #568     Aug 26, 2016
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  9. Maverick74

    Maverick74

    No, that is not correct either. It has to do with statistics. Implied volatility is representing an expected value of a distribution of prices. Realized vol is "one particular path". The "realized vol" is one version of the past. It happened to be the color of the marble drawn from the urn. But in reality there are many possible distributions. A trader is not betting on "one outcome" but rather the expected value of ALL the outcomes.

    Non trading example. I go to the bar every single night and get drunk and drive home. I have done this 100 nights in a row. The outcome each and every time is that I made it home safely and no one was hurt. That is realized vol. The truth is, there is some alternate path that could have happened where I end up dead along with a mother and her 3 children. The fact that this didn't happen is merely by chance. But the forecaster HAS to price this in. Therefore the expected value of the number of deaths to be expected from this behavior is in fact not zero as the "realized vol" suggests. Remember, there are no deaths in my sample of 100 nights of drunken driving. But the expected value of deaths is certainly not zero. Maybe it's 1.2 or 1.6 or 2.3 but it certainly is NOT zero. This value is the premium above the actual outcome which in this case is no deaths. You HAVE to understand this about options. There are many possible distributions but the realized vol is only capturing one. The implied vol has to price in all of them. THAT is why there is a premium. You guys have to understand this if you are going to trade options.
     
    #569     Aug 26, 2016
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  10. JackRab

    JackRab

    That's basically what I meant. It trades rich because of all the possibilities and that there are always outliers, which will push realized vol beyond a certain range.
     
    #570     Aug 26, 2016
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