Well there's so much slippage involved in that I know most likely many are not profitable trading that way since decimalization, not just in equities but the technology is now available for options, but because they are actually auction instruments they're still horribly inefficient for all but the traders and marketmakers on the CBOE.
The embedded convexity makes options nearly impossible to back-test. Understanding the volatility relationships is a different story, but doing pure backtesting is nearly impossible. In life, of course, a lot of different ways coexist and grown-ups know this (let a hundreed flowers bloom, as Chineese say). You might believe that you like to trade directionally, someone uses options as cheap source of hedging and some people (yours truly, for example) trade only vol and only in a beta-neutral manner. Different skillsets, obviously and different education is required. Accusing someone of doing something wrong becayse they are doing things differently is foolish.
The concept is foreign, just like the stupid jackasses on C2 who ask why they can't be long and short the same forex pair simultaneously. I see it is handy as a hedge, but it will not make you money. You're still going to have to time it so putting on the position you're guaranteed to be losing in at least one of those positions. Again, <b>it's stupid.</b> Just from a commission perspective you'll probably have an extra 1 or 2 trades if you ever think you know when to take the strangle off.
While I do see the difficulty synthetic backtests from the underlying can be made into continuous options contracts, but without a quantum leap this technology will probably never see the light of day publicly.
You don't need to backtest, instead you want to try understand the relationships between implied and realized volatilities. Once you got a few good models, there is a lot of money to be made trading vol.
Hmmm. Again, that assumes edge which implies some kind of timing strategy. I hope you'll at least do yourself a favor and ask for a demo account to sim trade before you start. But I bet you've probably been trading awhile anyway so it might just be too late.
Yeah, it definitely is too late If you are trading volatility properly, most of your strategies are beta-neutral and do not involve "timing" in the sense you are using it. PS. a wise man would not argue about things that he does not understand
Pretending I don't know what I'm talking about doesn't make any sense. I've studied too much finance and scored over 70% on Alternative Investments and Options on my last CFA Exam
And you seriously think that it makes you know anything about what derivatives world is all about? I read some of my wifes medical books, but it does not make me a doctor. In any case, vol arb is something that's useful to know about, even if you yourself don't want to do it (e.g. i know a fair bit about trading commodities, though I would never touch them with a stick). You can do it in one of two ways - first one, is ask the right questions and people here will teach you a lot of things (if not me, then Atticus, for example) or you can persist in your "knowledge". If you understand enough to do stat arb, you should be able to grasp what vol arb is about. PS. Try talking to Martinghoul about trading bonds (CFA part 1, if i recall correctly) and swaps (part 2, i think), you will also learn a lot of new things.
A lot of us have taken the CFA and most of us know that you get a superficial knowledge from it at best and certainly you don't get any working knowledge in anythnig. Sle is probably one of the most volatility savvy people in world and he is kind enough to share that knowledge with people like you.