Not really -- essentially, the paper provides a method of determining the hedging cost for an institution who issues an option (or other derivative) and who must hedge it with a fixed bound on "gamma" given Black-Scholes-like assumptions about an asset price. (The gamma they bound is not the usual gamma.) The math problem is somewhat interesting, but the economic problem is, well, not...
No argument here. Like I said, there are some really smart people on this forum, and you just demonstrated it. But for the sake of discussion, does this area of analysis pertain to "All" Options speculators (including retail traders), or just the 'inside' crowd who get special margin rates & or transaction costs? Rgds, Mech
Yip, My strategy does not have many small losses, but many small winners, with the potential for windfall profits. I'm not sure what post you gleamed that info from. You maybe confusing my strategy with my comments on Taleb's strategy.
I'm not really sure how to answer this question. Murray has quite a big project he is undertaking and I obviously want to see that it is successful. I have traders in my office that I spend a lot of time with teaching them how to trade and sharing my experiences. It's a lot harder for remote traders. I have helped a lot of people on ET that have no association with me or my firm. I have helped guys gets jobs, get capital, or helped them understand risks in their OWN strategy. I'm very suspicious of people that I have not met in person. I much rather help people that I know versus complete strangers. So I can't honestly say it's a dollar amount issue but rather a trust issue. Usually, I invite people to come to Chicago and spend some time in my office so I can get to know them a little bit. After that, I usually have no issues with helping what I can on a remote basis. Not sure if this answers your question, my answers were kind of vague.
Actually that thread was meant to be an academic exercise. It actually does serve a useful purpose in understanding how options work. I would never start a thread explaining how I trade in detail on ET.
We have remote market makers in our firm. Almost impossible to do it from your home unless you want to spend a fortune on IT infrastructure. RMM is done off floor but usually from an office of some kind.
OK, as for this discussion on naked option selling, rather then respond to a specific post, I'll respond to everyone in general. There are valid arguments made by both sides. But here is what I want you think about. What is the cost of being wrong? Everything I do in life, trading or otherwise centers around this central tenet. I am wrong quite often in life, but usually the things I am wrong about do not carry dire consequences. For example, if I forget what time a movie was suppose to start. Or if I am wrong about the score to last night's football game. Or perhaps wrong about some trivial piece of information such as how high did the fed funds rate get in 2000. These things are of little importance in the big picture. Other things you do not want to be wrong about. For example, the babysitter you hire to watch over your children, having unprotected sex with the wrong person, underpaying your taxes, or perhaps even, the amount of inebriation while getting behind the wheel of a car. In these situations, being wrong carries substantially more risk. Well, in trading, I always ask myself, what is the cost of being wrong. Not what is the likelihood of being wrong. These are two different things. Let's say I have a trade on that says there is a 99% probability I will make a little bit of money every month. But a 1% probability that I lose everything to my name. Even though that 1% is very unlikely, the cost of being wrong is just too great. Think of this. Would you put a gun to your head that had 99 empty chambers and one chamber with a bullet in it and pull the trigger? Of course not. Even though there is a 99% chance everything will be fine, that 1% will result in immediate death, therefore you don't do it. But for some psychological reason, we don't fear losing all our money to be the same as death, even though to some people the events are analogous. I have made a decision in my life to not trade in such a way that if the worst of luck happened to me. If Murphy's law went into effect. If the grim reaper should knock on my door, or the kiss of death should sit down beside me, I will not have the possibility of financial ruin. That doesn't mean I won't lose money, it's just that I won't have a strategy that offers me that possibility. I often hear many on this thread espouse their track records and their experience and how many years of profitability they have had only because their dark day is still ahead of them. Because they have not seen it yet, they believe it doesn't exist. To use a funny example, take life. A 32 year old man has lived 11,680 successful days without dying. He must be immortal as he had not died once yet during those 11,680 days therefore I doubt he will ever die. This is a common fallacy of course. Our mind is built to use past experience, not true probability when it comes to making decisions. In the 1980's it was the disbelief that AIDS existed. Hey, if you never got it, why would you believe you ever would? The thing is, the only way to get around this barrier in our mind is to force ourselves not to look at past experience, but rather future possibilities or what Taleb called alternative lives. If you had to make the same trade 1000 times under 1000 different lives, how many times would that decision produce a positive outcome or a negative outcome. Under many situations, what happened to LTCM in 1998 would not have happened under some of their alternative lives, a few of them would have lead LTCM to be the most successful fund ever. So back to naked options selling. One has to ask themselves is it really worth the risk to take in such small amounts of money to have the goddess of risk pay you a visit. Do you really want to tempt fate that much? Growing up I have always been taught their were two paths in every forest. There was always an easier path that everyone would be inclined to choose. It carried a lot of hidden risks, but most people would get through OK. The rewards were often less then satisfactory on this path. Then there was the other path. The other path was always darker, harder, more challenging and many did not make it through. But the rewards were substantial, not always from a monetary standpoint, but from a personal standpoint of taking the road less travelled. Selling naked puts might be easy and produce years of gains, but anyone can do it. The risks to some are huge and quite devastating. I, on the other hand, decided I would learn to actually trade. I would work harder then everyone else. I would not follow the crowd, and to me, regardless of what the monetary outcome is, I come away with something much more rewarding. That is a life much more satisfying and personally fulfilling.
Mav, did you co-write Taleb's "FBR" book? I personally think any premium seller who is serious about their trading should read that book to at least balance their views on risk. I think the main reason traders ignore the big cost of taking a bet sometimes is they think they can "risk manage" the position. Many are over confident in their risk management abilities, while others rather play it safe and never put themselves in a position where they will find out how good of a risk manager they really are. As you said, by the time you find that out, it could very well be too late.