sorry but your answer shows clearly that you do not seem to possess a whole lot of technical options expertise. I dont question the way you trade but the issue arose whether option pricing models are important to exploit an edge. I claim they are essential. You did not answer in the slightest my questions about those options that empirically proved to be the most mistpriced. There is no way around a very refined model in order to be capable of accurately pricing the wings and far dated options.
WTF does "hedging style" have to do with model output? I would love to know which banks are mispricing Kospi vanilla options.
GS, JPM, DB, even SocGen and BNP among others, ask for some calendar spreads and ratios and you will sometimes be quite surprised. Or try 3-6 months out varswaps right after the open after turbulent US markets the night before...enough said... I am not gonna volunteer any more information as I still continue to work in the region and from time to time picked off those shops for nice arb profits and plan to continue in doing so..., my point was that models matter if you want to identify mispriced options, I am not gonna change my opinion and at least hoped I made couple others think about it...and yes...I believe mispriced options can also be identified on the retail side with some efforts put into your systems.
Sorry for newbie question. Aren't they mis-priced for a reason? Guess no model can accommodate every aspect of pricing. For example BS model doesn't know anything about Washington. Also curious if this mis-priced options always shift toward their so called "fair value". Why can't they move further away from their "model value" making "cheap options" cheaper? - SU
Statistical edge is only applicable if one is assuming an underlying pricing model, like Black Scholes. But even that is recently being questioned as being valid.
I doubt any non-professional trader who lacks extensive experience in financial engineering could both recognize and then successfully trade any type of static statistical edge. Nor is it necessary unless you're running millions. Better to think of "statistical edge" in terms of understanding that profitability zones occur during the life of a trade, even if the final payout behaves in a statistically perfect manner. You have to act when those profitable zones appear. Of course, looking at trading in this fashion implies intermittent hedging but isn't that where the fun is, anyway?
I was using DB Prime until 2008. I can state from experience that SocGen, RBS and UBS routinely misprice Euro-convention forward-start exotics. I've never seen any shop price vanilla equity index strikes out of line with, for example, Superderivates or Fenics on the FX-side, much less handing anyone a ready-arb. I asked you a question on page 9 of this thread -- what persistent LISTED vanilla vol-skew, in any market, have you been able to isolate at nominal gamma?
I think of it as swing trading--getting in and out on the right day/time makes up for the lack of a true statistical edge. That seems to me what a lot of people are saying here.
I would agree only if the premise of your argument is an illiquid spot. Such edge is neither scalable nor consistent, though still an edge for argument sake.
good questions...sure they are mispriced for a reason, be it as simple as supply/demand imbalances. And yes, this can further widen out. But given you hedged your remaining exposure with other options around those particular mispriced ones your pay day will at latest be expiration. Sure, there are a number of other risk considerations but to me it proved to be well worth the endeavor. I make it sound very simple, I admit it is not as simple as I described. For instance if you offset some of your mispriced May expiry risk with the June expiries you may want to shift back into May expiries as soon as you capture some or most of the mispricing.