Nitro, Thanks for sharing your knowledge. It is post like this with high content value that makes people keep coming to ET. A question pops up my mind after reading your post - If almost all option MM use such model then to what point would profit be arbitraged out? It seems to me if competition get really bad it would all boil down to execution speed or maybe customer order flows for MM/Broker firms like IB. Of course unless someone come up with a better model and could tighten up the spread further and assume higher risk without blowing up. But then the other guy would come up with still better models and faster executions. Would this ever end? Maybe in the end it's all about having customer orders and no one can make money without having a brokerage operation sitting on top of MM operation? Is that so? Or maybe the market is just so inefficient?
Good question. I'm interested in nitro's response, too. My own naive guess is that the only way to overcome this issue is by either having a "better" adaptation of the model (easier said than done given the formidable competition), or assuming some directional exposure in one form or another. If I had to bet a dollar, I would bet that it comes down to the latter for most people. Nitro?
ThunderDog, I'm not an expert in this thing so it's just my guess. I think Nitro does imply directional exposure in any single one trade. It's just a matter of "balancing" such exposure overall.
Yes, that sounds right. (Hey, it's Friday afternoon, cut me some slack, boyo. ) So I guess it's more a matter of directional bias with better odds, as per nitro's 60/40 coin toss analogy. But as the competition intensifies with other such sophisticated players, as you suggested, perhaps the hypothetical 60/40 begins to move closer to 51/49. Of course, at this point I'll believe anything.
I ask you then, how is it that the biggest players in the market, derivatives traders, assume a random underlying, and make money hand over fist? If the underlying is random, how can anyone make money? If you bet on a fair coin, how can you make money playing the flip of that coin? Nitro you are into books. Read AGAINST GODS by P. Bernstein, especially chapter on futures. It's absolutely irrelevant whether market is random or not. He is the only one (I know) who understand why it is possible to extract money from markets, philosophically speaking. Again it has nothing to do with random or non-random. One sentence says it all: VOLATILITY IS CHEAP P.S. These endless discussions about random vs no-random prove you can make $$$ without true understanding why it's actually possible.
your 's are OT for this thread but I will answer (See colored parsings) It's a funny thread anyway; as you know nitro put me on ignore the second post I made long ago. LOL.
continuation.... What fuels the capacity of your output? Past challenges presented to me whether desired or not. In the end, thinking critically most of the time is what enlarges capacity. Losing count of deaths, whether necessary or uncecessary, allows a person to grow to be able to meet challenges. Having the capacity to respond while skiing the inferno or the flying mile; recovering flight after being flipped over by a vertical shear near the deck; or seeing a fifty footer's bow buried seven feet in blue water while cutting sheets and men overboard are just extreme events. Sports emergencies are part of recreational opportunities. I was never CEO of more than five corporations at any time. Creating new businesses to solve institutional problems is THE opportunity of a lifetime. Today, I am a product of ever growing capacity. Merit badges started my capacity growth. Walking out of college in six years with two degrees came from two meals a day, paying my way without debt and taking extra courses every term of my schooling. I changed majors four times along the way. Once you sleep four hours a night and knock out books year after year and work at places like EOP, BTL, IBM and deal with creating institutional solutions like EPA, DOE, new fuels from biomass and waste, PL 92-500, etc, you get capacity. I give about everything away as SOP; it is helpful to others. Is it the emotion of 'caring'? Caring is the premise of about everything that is successful in the world. My first CARE project was KARE because CARE made us change the name. No problem. We simply changed the name to Knowledgable Action to Restore our Environment. It was the largest HEW grant ever given and it followed the Ford Foundation seed grant we got to create and awareness of what was wrong out there, later to be called the environment. Today everyone everwhere cares about the environment. People are now learning to care about energy. I use Franco Modigliani's work as my theme for the 19 products associated with our corporate thrust to assure that all families are prepared for any sudden unexpected harm and disasters. Our foundation deals with the results of these things when preparation has not been done. Intellectual eureka statements? I agreed with my psychiatrist several years ago to not continue my big ten list. At this point I have a way to seed the list with people who are acquiring mental stamina and capability. And I have stored piles of computers and rooms of stuff. The eureka comes from a small place. I continually dwell upon only one thing. The time and size of things. It takes 12 people to run SAC's trading. Coincidentally, it only takes about 12 days to rep any house's annual performance without affecting the markets. Nitro's commentary is humor to me and so is Derman's. What I do now is meet occasionally and fill in 8 1/2 by 11 sheets with logic pictures. Think of about 100 sheets to define a market pool extraction system. Each shape on each sheet is a snippet of future coding. Snippets are just a couple of pages of coding. A system is a time and size thing. Markets are where money is moved from one place to another. You do not leave money in the markets as you move it. You move it OUT of the market. Compounding capital is not done in one place. All you need is a pump and the pump pumps at the capacity the market offers. Food/diet? I no longer make food and diet decisions; I am past that. A team of people monitor and adjust me. I do not work very well at this point. Almost without exception the people I meet with know when to shut me down and get me into a recovery mode. I walk 3 miles a day in under 50 minutes but as the day goes on if I am "working" I can't maintain my O2 satisfactorily. I rest to not fade further. Sleep is a real enterprise for me. The game plan is to keep in condition by walking and gradually walk my way to a better condition. Other? As it turns out I am here to do a job. It is pretty clear to those who know me. I have a Jiminy Cricket and I always have had one. Naturally, I keep in touch and just tool along. I'll be going to Antartica for my birthday; by then I will have gotten five presents ready to hand out to everyone in the form of books that cover all the bases for families to have everything they need throughout their lives. Finally , what is your world view? I've always enjoyed that wonderful feeling of contributing to the world. I think of it as a balloon with a biosphere on the surface that is about equal to a coat of paint on the balloon. It has gotten tangible too. Review the Ebola news clips. Look at the light planes on runways and the clinics nearby. That came from Greenwich; a hedge separated Glennie's dad's place from ours and he wanted to do medicine in Africa. specialties spread around and quick transportation was the answer; figured out in his kitchen. You may have seen the spread of the EPA. I liked building trails from one nation to another under the world heritage program of the UN. Talking with its director in view of three of the four highest peaks in Canada was a treat for us when he came to our work site(volumteers man the program these days all over the world.) I like working with Ekistics as a global program on the science of human settlements. Doksiotis (SP) was a cool leader and it was the time of the world vis avis gaming problem solving. I did REPS in many countries. The Club of Rome project had two places in the US for adjusting coefficients. I played the Eastern game. 1958 marked the peak for all time is "satisfaction units" and the science definition of fads came out of the CR. ET has a global aspect to it. We lost track of how many were passing forward the trading in the very early 90's when it was 10K or more. Now we are in the third generation. 2007 has been a good wrap in ET. Now it is well known that the sun doen't set on PVT and SCT. We feel that the "measles" is underway. It looks like the manual and ATS's apply just as does music and architecture and enginering drawings. Of the world persons I have worked with, I like my rememberances of E. F. Schmacher, Doksiotos and Bucky best of all. My fav places are Zurich and Singapore and Tucson most of all. Uber [/B][/QUOTE]
You can't put these in the same category and expect anything but the most general response. Investors have their money working for them. Traders have to work for their money. Also, the term trader is a loose term thrown around on ET. If I play fastball in the ballpark with my friend, I am a baseball player, but would you put me in the same league as Arod? I guess what I am saying is that ET terribly warps what trading is. If there was one definition of a trader, it is: traders rarely take liquidity from markets, they provide it, at a cost of at least the B/A spread, and they always have some idea of when an asset is trading out of whack by some very precise measure. If you had the resources to be a MM, and you had the technological knowhow, and you had the trading experience, then by gawd man, yes. I am not saying that it is the only way to make money, but if I could compare MMs to the animal kingdom in Africa, then MMs would be the lions, certainly no worse the hyenas, in the food chain. nitro
YW. The thing that separates one option trader from another can be summed up in three concepts, volatility, volatility of volatility, and the error term in the estimation of the volatility of volatility . If your estimate of volatility is generally better than others, you will make money trading options, assuming you know how to put positions together. You have to know what tools (straddles, risk reversals, put/call spreads, ratio spreads, butterflies, etc etc etc) to use. When you are handed edge, how to put the pieces together as you get legs filled, or how quickly you hedge naked risk away. There is very little arbitrage in index options. Since our theos are generated from our estimate of vol, and someone else's is based on their estimate of vol, we may both think that we have an "arbitrage" and be on opposite sides of the trade. In equity options arbitrage is far more common, but not in index options. MMs are constantly working on their models. But the key to a good model isn't that it divines the future because that doesn't exist. Good models are highly calibrateable, so that a talented trader can adjust vol, skew, kurtosis, etc as he reads flow coming into the markets he makes. By doing so, he is making markets more aggressively on some strikes or months, and how he does that may depend on the position he already has on. The position manager tells you what your risks are, and you try to balance that out each day. I can't over stress how important the technology backing this operation is. 99% of the software we use is made in house, tailor made. Problems get turned around in minutes, and rarely longer than a day. I can't stress enough how mathematically precise options MM is, but what most do not know is that behind that precision there is a great trader, called the vol fitter, that makes it all work. It is a high art and probably cannot be automated, although that is debatable. I guess I didn't really answer your question. All I can tell you is that trading, when done right, is nearly as certain as getting a paycheck, a big fat one. Insitutions need insurance on their portfolios. MMs provide that at a cost. Is that inneficient? I have no idea. Both sides meet and do business each day. nitro