Yeah, come to think of it... Kobe quake was the final nail in the coffin. Nikkei was only a couple of thousand points higher.
Selling gamma preferential over vega. Selling near-term premium which is far more sensitive to gamma/vega.
What instrument are you using to trade the Nikkei. Futures? Only index stock I can find is NKZ/WS. I'm not familiar with it at all.
Coach, Thanks for the translation. So in your example, 1220 to 1300 is the MM's expected distribution of pricing over the life of the straddle -- but is that 1 sd (68% of the time) or does sd not come into play here? Thanks!
It is based solely on their volatility estimate in their pricing models really. Imagine on a less sophisticated level you were asked to price the straddle. You would use Black-Scholes and simply derive a volatility input from whatever models or guesstimates you had available and price the put and call.
Could you also state in plain english what a : Standard Distribution is (I know its from stat, but how does it play into pricing the spx) What a Handle is. sd
Here is a link for the formal definition of a standard distribution: http://en.wikipedia.org/wiki/Normal_distribution Stock prices are assumed to have a lognormal distribution, which in non-mathematical english is a slightly different curve. The standard distribution is the good old bell curve you hear so much about. Distribution plays into pricing in that if you assume a certain volatility, that figure represents the standard deviation of the distribution of prices over time. If you have the standard deviation and a starting price, you can use statistics to derive an array of probable prices. The wider the standard deviation (volatility) the wider the range of prices. Black Scholes sort of does this using the lognormal distribution but takes it further using probabilities of the stock being at a certain price, then prices the option and discounts that value to the present yada yada yada. So the lognormal distribution estimate of prices is wider or narrower depending on the standard deviation/volatility input. Let the market makers worry about that really... Handles I believe is slang for a point on the index. So 10 handles would be 10 points.
when you sell gamma are you taking a directional rather than volatility risk? sorry for the elementary question...