You'll simply hedge less size on the skewed-vols assuming implied vols are indicative of realized stat-vol. The edge, or lack thereof, will be reflected in the hedging frequency. What concerns me of this "FairVal" talk is the guy who is proven right on vol, but misses that long gamma hedge by a few ticks. A buddy was long 30 Cu futures into the rally and missed his sigma-point by 4 ticks. It reversed to neutrality. Happens ever single day in every crowd of locals. There is no difference in the expectancy of the long/short vertical. I am sure we're aware of that and the fallacy of models as well. What makes the long spread "better" is gap-risk... if you're long the spread and spoos open down 100 on some event risk you're rich, at the expense of the seller. There is no analog for the short 2sigma credit spreader. Throw vols out the window. It's pure distribution risk. Can someone go 10 years or more selling upside gamma? Sure.
Mo: Of course I think you're good for a lot more than just research. You're just really good at navigating, searching, threading, etc. this site. I posted a question to Mav regarding program trading. I'd be curious to know what your opinion is on program trading and how it affects the markets, if at all.
Phil, My posts are not directed at you per se, you can relax now. LOL. I'm trying to express some general thoughts. Let me clarify something. Why are you assuming the long debit trader needs a big move. Can I not make .40 to .50 on a debit spread on a nice one day move in the SPX? Why do I need a 200 pt move to make money. I think some of you are confusing the idea of making long shot bets with debit spreads. We are not talking about the same thing. I am not refering to what many of you think Taleb does, that is buy puts 500 pts OTM waiting for a crash. I am refering to any spread that is long premium. I just wanted to make that a little more clear. Phil, you skipped over what I said about p&l distribution. Debit spreads and credit spreads are both equal and in that the sum of their probabilities will be the same. The difference is in the p&l distribution. And that can be huge.
I understand what you are saying. I still think what you propose would work better on SPY or XSP for those that are interested because the SPX spreads will eat all of the $0.40 you can make. One thing that is in line with what you are saying is that I am playing the VIX long call hedges on the notion of a fat tail spike in VIX. Assuming the VIX options move as I expect them to on a volatility spike (assumption which as of yet cannot be proven according to JA), then I could potentially make significant profits on such a spike even with the put spreads in place. This "hedge" is sort of playing the fat tails from the IV standpoint. P.S. Why did you go back and edit and BOLD your last sentence LOL..... P.S.S. Preferred sucks LOL
Short answer: I doubt I have any value-add on this topic but..... Progressively tighter markets with the possible consequence of greater brittleness? Pure conjecture! Your guess is as good as mine.
Hey Phil, You like to demonstrate the validity of different strategies using real money. Why don't you run credit/debit spreads side by side, say 10 contracts a piece. Let's see which one does better. LOL
Uh oh, the last time a suggestion of doing a contra journal was raised, it didn't go too well Coincidentally (or not) it was about the same time that Maverick asked that special question LOL: http://www.elitetrader.com/vb/showthread.php?s=&postid=870792#post870792
I will get to it right after.. [pulling out list of 100 things to do by July!] I do not think the SPX is the best vehicle for the debit spreads so I would rather not put some of my duckets to test it
That f*cking c*cksucker motherf*cking Phil *&%^$#%%^%^&^! Just kidding Phil. Knee jerk repsonse to that old post of yours. sorry.
Did I prove you wrong at least about those "con-man" and "shill" cracks and how I had an alterior motive Besides you made up for it with VT lol....