Naked short gamma is for funds only. The "trade" is like this: You write deep OTM in anything that has premium. You have a very steady return and that attracts the muppets aka. High Networth Individuals and accredited Investors. You collect a couple of million and make a good living out of your management fees. Since you win most of the time, the fund grows bigger and bigger and you make even more in management fees. If you are lucky, you get away with it for a very long time. If not, you blow up, fly under the radar for a couple of months and open up shop under a different name. Things to avoid: - avoid publicity like the plague. If people know your face from interviews, videos and TV, it's impossible to open a new fund once you've blown up. - Save up a couple of M. You need time to get the machine going again once the lawyers have left. Seriously, the naked short gamma game is around since the invention of options and a lot of big funds are doing this strategy. Due to the fact that so much money is attracted to the steady returns, you can make heaps of cash without really doing much. Selling premium isn't that complicated and for the most part it's a waiting game so you can focus on raising money. Doing this with your own account would be suicide but since you are cashing in on fees and leave the nuke risk to your investors, you are basically risk free.
Seems you really can't be wrong, or can you? Is apologizing or admitting mistakes really that difficult for you? How do you deal with losses in the market? Blame them on your neighboring trader?
I remember reading about "buy one, sell a ton" strategy. What do you think about it? Does it fall in the same category as being naked short or is it more hedged? Would it have worked in this kind of a move? It sounds so cool
<< decided against arguing cause it's counterproductive >> Of course it is hard to admit that you're wrong, that's in our nature. Losing money, however, is not a mistake, it's part of the game. My approach is to stick to my strategies and have a process for scaling the risk in different alphas. How do you deal with the losses? PS. I am not discussing this any further as it's becoming a waste of time. How about I admit that I am an idiot and you are smarter than me and we move on? PPS. There are very few things on earth I know well. Managing a vol book and understanding the risks is at the top of that list. That's why I felt compelled to argue.
To be fair, most of these people seem to blow up not on gamma, but on wings. I.e. they don't delta hedge and their strikes are far OTM. But yes, it was surprisingly easy to attract capital with various short premium strategies in the past 10 years.
So question for you guys. He was targeting 25%+ returns annually. I assume that made him sell more options than if he was targeting, say 10% annually. If he had ratcheted down his target returns to 10% annually, and reduced his option sales accordingly, would he have wiped out his/investors accounts like he did? Or would he have just suffered a large drawdown, but survived? I know you can always do bear spreads and what not to protect yourself in that way, I'm just curious as to how far one would have to ratchet down to avoid a blow up situation. If one targets 10% annual base instead of a 25% annual base, presumably the overall account risk is 250% less all else equal. Then maybe you could ratchet up and sell more options when natural gas (or whatever the underlying is) has move 1.5x or 2.0x or whatever is a serious, serious move (although one never knows how much it might change). Thanks!
Nobody called you an idiot nor did I ever compare our smarts. You called me out on claiming that there were no gaps in oil and gas. I disproved your claim. I find it the decent way and high road to admit a wrong when you call someone out and claim the opposite and get proven wrong. Pretty simple thing in my book. But then we all come from different cultures, perhaps that explains the difference?
Could you elaborate on this? I myself traded options in prop capacity at several banks for many years. A wing hedge is not far otm when delta moves in the direction of the wing, exactly as the hedge was intended. The strike should be closer to the money. Trading gamma is one of the hardest things in options trading imho, both on the long and short side. Entire books containing advance level math have been devoted to this topic. Let's use the example of a short atm straddle. And a tail hedge on the upside.
If they instead opted for a bear call spread, the returns would be lower but, there would not be a blowout. They can keep collecting their fees and also, get more clients? And even their clients would have accepted a large loss that did not totally wipe them out. They will just charge it to a one in a blue moon occurence and move on. Isn't this selling naked calls just killing the golden goose that lays the golden eggs?
My pleasure. Most of the blowups that I can recall started as short wing carry positions, i.e. strike is far OTM and "the market would not get there". I've seen these both as expressing a view or a systematic strategy (e.g. LJM "safe" fund or these guys for that matter) or as a way to cheapen the position that expressed the core view (e.g. Citadel Eurodollar trade right before the GFC). It's not exactly selling crash, which is extreme short-dated moves, but it's in the same neck of the woods. They are short convexity that can not be hedged without other convex instruments and then the underlying moves against them. If you are simply short gamma, you have a fairly defined range and you can, for better or for worse, rebalance your delta to limit your variance. On the other hand, if you are short wings, a lot of things go against you at the same time - you have very little gamma (or delta, for that matter) at the inception of the trade but you are short tons of dGamma/dSpot, you are short a fair bit of dVega/dSpot and, finally, you are short dVega/dVol. By the time that position becomes simply a short gamma position, it's a bit too late. "If the left one does not get you, then the right one will". It's hard to define explicitly what differentiates a "short wing" from "short OTM gamma". Some people draw a hard delta boundary (e.g. 10 delta), but my personal metric is the relationship between Vega and delta - e.g. if you are short an OTM option where most of your daily PnL fluctuation can not be attributed to delta, thats a warning sign for me. * Another useful metric is theta - if you are collecting and yet the book greeks (delta/gamma) look reasonable, there is something to worry about. Well, but that would make it hard to collect 25% per year, right? I think there was a thread about optimal delta hedging and how to deal with that. There is theory and there is practice, both are rather complex.