The problem with short gamma

Discussion in 'Options' started by nitro, Mar 20, 2010.

  1. sle


    Variance is it's own little animal with a lot of fuzzy fur and wrinkles, so understanding how trade relative value there is a bit tricky. Now, for first order approximation, you can download the history of VIX, rescale it for the business day count and here you go, you got a rolling history of 1 month variance from the beginning of times.

    As a retail trader, however, you exposure to var swaps is a bit limited (unless you are running a fairly large book) and you are better off looking into relative value trading of VIX futures and options. There is like a tonn of things you could do there, from simple spreads and flys to fairly complex option strategies. If you add VXX and VXX options (or other VIX etfs), sky is the limit.
    #91     Oct 19, 2011
  2. sle


    Running a large var swap book is about as much fun as a root canal. Yes, you don't have the strike risk but there is soo much other stuff that comes into play (basis, convexity etc) and liquidity is nowhere near the vanilla options.
    #92     Oct 19, 2011
  3. nitro


    "Introduction to SPX Variance Strips

    CBOE has enhanced its trading systems with a new technology called BasketWeaver that will enable market participants to trade a large and complex portfolio of SPX options in a single transaction. This basket of SPX options, which we are calling "SPX Variance Strips," is intended to replicate implied variance exposure and will be quoted under the ticker symbol VSTRP. The quoting convention for VSTRPs is similar to that used in OTC variance trading: prices will be quoted in volatility terms, and quantities will be in contracts that have a multiplier (e.g., $25,000 or $50,000) that represents the aggregate vega of the SPX options comprising the VSTRP. CBOE intends to make VSTRP trading available each trading day."

    #93     Sep 2, 2012
  4. If option traders assume markets are efficient, by the definition provided by you (why the hell trade options?), then any and all trading (by them) outside of the purview of market-making would involve cognitive dissonance. All trading would involve adding liq and anyone taking liq would be the dumb-money.

    Predictable trends? An corr of zero in dispersion would imply betas of 1 on components. Do you see that expressed in the stuff you watch? I don't.

    Let's make a fwd-test. You hold a portfolio of short flies and I'll hold the same port of long flies. Let's see who does better (held to exp, no hedging).
    #94     Sep 2, 2012
  5. sle


    Yeah, yet another waste of an effort - nobody really trades full strips that much anyway, usually people trade lower strikes or ATM against their var swap positions. I think they should have concentrated on giving exchange MMs an incentive to trade their variance futures instead.
    #95     Sep 2, 2012
  6. nitro


    #96     Dec 21, 2012
  7. nitro


    This has changed slightly. See above posts.
    #97     Dec 21, 2012
  8. piezoe


    Once you can correctly parametize the collective, future human psyche and also know the value of the parameters, the problem is solved. :D

    Good luck, Nitro!
    #98     Dec 22, 2012