777, I think the defense of exotics, primarily barriers, could be nearly as influential as index arbitrage. A barrier-defense is a huge directional bet, while Index arb is flat exposure. The size in Index arb is an order of mag larger, but hedged.
Hey Riskarb, A few questions/clarifications to bring myself and perhaps others up to date: What are you using to price these exotics? Are you still using the UNIVDRV add-in from MBRM? How does it compare with the trinomial pricing on Hoadley.net? Are you still trading the exotics through DB, SocGen and BNP-Paribas. Anyone else? Hedging strategy - why are you favoring futures over vanilla/convexity (is it the non-standard timeframes? - can weeklies be of use here?)? Also, if using futures, is there any merit to scaling in to the futures position to replicate convexity? Have you considered automating the hedging aspect or is this too much trouble/too much risk of whipsaw? Hedging points - will you be hedging based on sigmas or some other criteria? Might be way off base but, have you looked at trading FLEX options for hedging or is the size requirement too onerous? Question overload ha! For the benefit of others, some educational resources on these topics that might be useful can be found at Finpipe.com,Risklatte.com and in Taleb's Dynamic Hedging Look forward to the unfolding of journal. MoMoney.
Big deal, I legged into a SPY butterfly for a credit of $250. That $250 is MY take on the spread, pure cash...
Quote from momoneythansens: Hey Riskarb, A few questions/clarifications to bring myself and perhaps others up to date: What are you using to price these exotics? Are you still using the UNIVDRV add-in from MBRM? How does it compare with the trinomial pricing on Hoadley.net? I haven't used Hoadley's asp-stuff, but I am sure the models are comparable. I use MBRM, fincad and some brute-force continuous sampling models; MC, etc. [*]Are you still trading the exotics through DB, SocGen and BNP-Paribas. Anyone else? Yes. No. [*]Hedging strategy - why are you favoring futures over vanilla/convexity (is it the non-standard timeframes? - can weeklies be of use here?)? Also, if using futures, is there any merit to scaling in to the futures position to replicate convexity? Have you considered automating the hedging aspect or is this too much trouble/too much risk of whipsaw? It depends on wheter I prefer to run a discrete hedge on the underlying or simply prefer to run a synthetic replication of a vanilla counterpart. The SPX position is a kurtosis-play, otherwise I would've run a double barrier instead of the bull no touch. The skew in this position equates to 6.00 in edge/flat smile. The bull no touch would need to be priced at 1283.00 under a flat vol surface. I preferred to run a synthetic straddle to a frontspread. I would've played with gamma [straddle] had I sold the double barrier. Weeklies? No volume and ridiculous markets. There was a post in the exotics journal which outlined my gamma-replication with futures. It makes martingale strategies look tame. I try to remove most of the debit-risk immediately. [*]Hedging points - will you be hedging based on sigmas or some other criteria? Piss off, just kidding. =) [*]Might be way off base but, have you looked at trading FLEX options for hedging or is the size requirement too onerous? There isn't FLEX-trading in exotics, so I assume you're referring to FLEX vanilla gamma for hedging. No, I haven't considered it, as matching the tenor isn't much of an issue. I'm willing to buy less gamma in the hedge in exchange for time. Question overload ha! For the benefit of others, some educational resources on these topics that might be useful can be found at Finpipe.com,Risklatte.com and in Taleb's Dynamic Hedging Look forward to the unfolding of journal. MoMoney.
With a 1297 average short and built in profit, would you consider long calls now to lock in something and then no longer worry about the potential for large move higher eating into exotic option profit? Maybe on downward movement like today buy 1300 Calls for JUNE (I think the maturities do not match up exactly) so that the futures hedge is limited in the damage it does to the profits on the upside?
Yeah, due to LR on the downside. I am only up a handle on futures as I type this, so not much edge to purchase calls at this point. I am short puts, upside gamma in RUT as well. All of these trades are discretionary; it's not in my interest to replicate at -edge.
Thanks Riskarb, OK. Do you normally model in some skew when you're pricing say by taking cues from the skew in vanilla? Yes, not good. Forget round-trips. Seems par for the course as far as single listed CBOE products go.... Hehe. Still, the main benefit I saw with gamma-replication with futures is that you are very light on the initial hedge and therefore, if things move in the opposite direction the damage is minimal. Not sure what you mean by this. What is the stop-loss on the hedge if SPX turns higher from here and keeps going? Yeah, OK Yeah, I was thinking FLEX options might be useful from the hedging side of things of you are playing SPX exotics. I believe Euronext.Liffe licence FLEX for options on the FTSE100 too. Perhaps if you do any of your hybrid flies (double barrier, vanilla straddle) - FLEX options vs. vanilla might be an "option". Have no idea of how good the auction process is or edge loss involved. Not likely to be trading size enough to try them myself any time soon! OK, think I've reached my leech quota for the week. BTW, when are you going to start charging for my education? MoMoney.
I was thinking of a situation where you were short at average around 1297 and ES was at 1290 or so, buying the ES calls so that a large move upward is no longer a risk. What is LR in risk speak?