have you ever traded options on futures? are they much different as far as risk / reward compared to equities?
Why would you want to lean long delta when long vega and vice versa? Should you not be short vega/long delta OR long vega, short delta since vol usually pops on downdrafts and vol erodes on up moves (generally) since up moves are usually slower than downdrafts Would'nt that make the case for long delta short vega? thanks
The reason for the leaning has to do with examining where the risk is in your portfolio. If I'm long vega, that means if the underlying rallies, vol will probably drop hurting my position. There for to offset that I would want to lean long so that I can offset my vega loss on the rallies. Same for selloffs. If I'm short vega, I really want to the stock to rally right not selloff. If the stock sells off my short vega position could really explode in my face so in that instance I would want to be short deltas. Now keep in mind we are talking about leaning here, not an outright huge long or short position. And what do I define as leaning? Keeping my deltas at 2 to 1 to my gamma. Again, as a rule of thumb, whenever you are in a position ask yourself this very simple question. Where is my risk? What would hurt my position? If i'm long a bunch of straddles, I really want the market to selloff not rally. So a rally would hurt me theoretically. So I would lean my deltas long 2 to 1 to my gamma so that if the mkt just keeps going up and the vol just keeps dropping, I am fairly hedged. And by keeping the delta to gamma ratio at 2 to 1, that means that if the stock opens down 10 pts tomorrow, it will only take 2 pts to burn off my long deltas and start getting short. This is why you have to keep that ratio tight. For the gaps. Does this make sense to everybody? Good, now go make a killing! And remember during the holiday season, give a little something back to good old Mav. And and by the way, this is assuming a market neutral bias. If you are in a position that is breaking down or breaking out, treat your deltas accordingly. My prognosis is based on having no clear idea of where the underlying is going. I hope that helps.
I have never traded options on futures but if I did, then I would trade them the same way I trade equity options.
Seth, I traded futures optons for 6 years and I find it more interesting that equities for the simple reason that the skew shifts dramatically depending on supply/demand outlook for the comm. Equities on the other hand seems to have identical skew profile . i.e. the put IV's step higher and the call Iv flatten out due to the buy writers club. Hard to find good spreads. A commodity with a bullish bias for example would have a flat put skew but a highly stepped up call skew so if a trader wishes to fade the market, the market is paying him i.e. giving him a good edge to fade it. i.e. a call spread fair value at 50 might be trading for 40 so if trader want to fade bull bias at least he is being compensated for it. Some futures have a very steep call and put skew so one can sell a fly cheap. you don't find those skews in equities much. At least my scanner can't !
GA, While I've never traded futures options either, you forgot to mention another attractive aspect of them -- SPAN margin. On the other hand, I've heard liquidity is spotty. Was that your experience? HD
I was on the floor so it was not a problem. However, if a trader can get floor access it is not an issue. Main thing that freaks people out especially the ones who are from the equities side is that there are no bids/offer/size quotes available electronically. All they see are last print so to scalp it is impossible BUT if you are a position trader it should'nt be a big deal in fact it is better in some ways than equities since your order is broadcast to all participants for them to compete on. For ex. I have an outlook in cotton so I want to put on a 2 x 5 x 3 fly, I call the floor , broker announces to the pit, pit locals gives 2 sided market since they don't know which side you are coming. They say 40 bid at 42, you tell your broker do buy it 50 times, he calls you back, he says done 50 flies at 42. It could be that easy.
GA, Yeah, it was the nontransparancy of pricing info that held me back from taking the leap into futures options when I first looked into it a couple years back. But that's good to know. I may now revisit it, particularly with the pending introduction of the intriguing new VIX futures and options, which I've been thinking might be a perfect candidate for iron condors or other range bound plays. Thanks. HD
I too was very Vega negative for most of the year - but have begun to step away from that over the past couple of months. I will simply say that I think there are more than a few Vega sellers who are looking to hold a more diverse portfolio in the current market. I don't trade options exclusively, and currently focusing on small-cap momentum plays that I hope will do well during December / January, and selling premium around them. A couple of winners have been CYD and ASTT, while NFLX and NTES are currently showing me red.
Guys: Based on the posts I am reading here I got to say something. I feel bad stepping up here because anything I say is going to sound snotty or arrogant and that is not what I want. Look, your not up to speed on the basics (everybody). You are competing with floor traders who don't know sh#t, but upstairs is a guy (or girl) who has a PHD in math/computer science, finance, etc and THEY are controlling the game from up there. They have an in-depth understanding of the greeks, stress tested portfolio methods that give them a measurable mathmatical edge, and a lot more money to spend than you do. Finally, when the professionals see the order flow, they have the ability to "squeeze" specific strikes (and you don't). Go back to the basics (McMillan, Nattenberg) or if you think you have it all down, read "The Business Of Options" by Marty O'Connell, or "Dynamic Hedging" by Taleb. If you are sure you have it together, then god bless you, go right ahead and don't change a thing. Steve46