Totally agree. This is why re-structuring trades hasn't worked for me at least. I'll roll a position only if the premium hasn't kicked in and my thesis is the same. Funny you just replied to this thread as I'm reading your thread "Managing Deltas/Hedging Frequency"... A lot of it is over my head. I really haven't grasped delta hedging yet. I understand delta and overall portfolio beta-weighted delta and how you should maintain a certain number determined by your directional bias, but I never understood micro-managing delta. What the heck is a hysteresis band? @sle ? Lol All this stuff is very interesting and I'm going to learn it, I'm just not sure if it's practical. Nonetheless I feel having awareness of the technical stuff can't hurt you. What is fixed-delta limit? Fixed interval hedging? Does anyone really trade like this? I would assume it would just tear a hole in your commission percentage? But I'm not sure. I also want to get a discussion going on term structure and how to trade it. I see a lot of great posters on this forum talking about it in older threads/journals.
I also own a copy of "Dynamic Hedging" by Nassim Taleb. The majority of the info is in a foreign language to me, but the more I read the more familiarity. I'm interesting in exotics, I've seen @riskarb and @sle talk extensively about it.
“Some say IV is mean-reverting,” I’d agree, but means revert too. “Some say high vol begets higher vol and low vol begets lower vol. What do you think?” I agree, but subtly different. I think of it like molecules. Calm they tend to remain calm, but once you destabilize them they take time to settle down. In 2001ish the most ridiculous Nobel Prize was awarded to someone who said this. I turned to one of my junior traders, said, you do realize a Nobel was just awarded for explaining why vol curves go into contango and backwardation and neither contango nor backwardation was ever mentioned. I do not like economists, I find them worthless and ignorant, so maybe I am biased. “when looking at the ATM vol's are you looking at different durations” All durations, with primary focus on the first 2 months and whatever month in the back where the curve seems to go flat. Evrything else should fit fairly smoothly between those two points. Although with products that exhibit seasonality, that’s a whole different ballgame. “So you'd look at the IV of the ATM strike then compare it to the IV of the 25 delta strikes?” 10ish delta and below. Those exhibit the most winginess, and were the ones I most liked to own. “VIX “ A pet peeve of mine. The second someone calls VIX a fear index. I know they know nothing about what goes through the minds of a professional options trader. “Options price the future expected magnitude of a stocks price” That’s a disturbingly narrow definition. If you are reading a contract and see term “right to” there is probably an option. If you have a machine that takes inputs and can produce output which can be turned on and off - It’s an option. “Delta affects the price of this option the most” Yes they do, nonetheless, the following weirded me out the first time I heard it, but delta is too easily hedgeable and I was taught to not consider it as an option risk, but rather a bet determined by the trader. Now delta change due to gamma - different story. “just because vol is high doesn't mean its going to revert down. Vol can stay high for long periods of time. Its interesting that traders think just because vol is high that it must go down now..” Please don’t say traders in a universal fashion. I agree with what you say. I would rather sell low vol than high vol. Vol is only one piece of a multivariable puzzle. A product in unfamiliar territory might come off like a cheap prom dress, move back into an old range, vol comes off with it - you make 3 vol and get wiped out on the gamma move. “Is 150% IV rich? You could only know that by measuring that products IV from the past to determine that. “ I’d argue you can only know in the future. This looking at the past thing too much bothers me. I ignored news when I traded. I’ll let the collective wisdom of the market determine why it is priced there and accept that as ok. “When the author says "average true range - ATR" is this synonymous with historical/realized vol? If not, I'd like to hear your thoughts on this thinking process..” I provided a comment on this in one of my first posts when someone mentioned gamma trading. Although I don't know what false range is and therefore might be misinterpreting "true" range. As I already was called a troll for not knowing what DTE was when someone used the abbreviation (quite obvious once i did, just never heard it used before, and rather confusing since I only used trading day models since 1990), I'll express my ignorance with "true" and risk being called an ignorant troll again. ...My earlier comment... “if you are playing from the short side, expect that your volatility will at best match the volatility for the days range. You will do everything wrong at every moment and all your hedges attempting to control negative gamma will suck. On a super choppy, high vol day, you will rip yourself to pieces. Now if you are playing from the long side, I promise you that at absolute best you will match close to close vol, which is much lower than range vol. You will miss the tops, miss the bottoms, hedge too often when the market breaks out, and you will be lucky to match the results of if you just did nothing and hedged at the end of every day at the close.” ...Someone told me this signified I had been an unprofitable trader, didn’t know how to trade vol, and that someone who knows nothing about options will perform better... C’est la vie. Sorry if this is a lot at once… I really like your questions and honest attempt to learn this at a higher level. I tried to respond earlier but for some reason could not sign onto the forum this week when I was in Argentina. Damn commie anti-free market bastards that they are, probably blocked the site... or maybe I had the wrong password, but as it is more fun criticizing commies I’ll stick to the former.