Currency risk, political risk...? You do get excess reward, in expectation, for holding any risk that others want to unload. MM and retail traders also are rewarded for making the markets efficient, I suppose.
IV/HV has nothing to do with it. it's the same as saying there's a good time to be betting red and a good time to be betting black in roulette. after the spin which color to have played is obvious. it's the same with IV. you can't know future volatility. after the fact you can say actual volatility was higher than where i bought IV so i was right. but you can't know this before hand. that's what efficiency is about. every trade is a push. and with the example, IV was sold (the short straddle) higher than it was later bought (the long strangle hedge). otherwise there could not be any chance of profit.
Samson... don't you think that maverick74 has been implying that throughout this entire thread? Many times direction is very important factor in building a position, and adjusting/managing it correctly for greater returns. IMHO ... your point is exactly correct! this week is an excellent example... I closed many long calls.. and converted my strategies in tune with my "expectations" on ST direction being somewhat lower. Rolled some of these profits into back months (like December) while holding or adding front month shorts (calls). Of course I might have been wrong (and still may be if we get some st v-bottom and head to new highs) but like maverick74 said on this thread..... in the pursuit of decent profits one must consistenly flirt with risks in (options) trading... the key being to keep them reasonable by (among other things) an excellent understand of (options) fundamentals/theory, and consistent improvement of trading skills. Ice
I'm not talking about long term trades, I'm talking about taking advantage of short term discrepencies in the flow of information. Further, if you hedge the trade properly, you are removing any currency risk/political risk there is. That's what including the underlying currencies does. EDIT: I should say "mitigating" any currency risk, not eliminating, i suppose. - The New Guy
but riskarb.. not everyone is trading the size you likely trade... (given the onerous retail marginning scam-policies)... and perhaps not the style you adopt... thus their margins are different; make any sense or am I off-base here? Not to mention retail margins
Agreed. Then you are contributing toward making the markets more efficient. Hypothetically, if they already are, the cost of the hedge would cancel your gains on the stock side, assuming all elswe equal. [edit] OK, but then you're mitigating your profit?
look, i have never denied that inefficiencies occur. they undoubtedly occur and they are also undoubtedly short term phenomena that make devising a system for trading them a ticking time bomb. if inefficiencies did not exist there'd be no reason for the battalions of highly paid folks on wall street. their job is to make the markets efficient by exploiting any arb situations or inefficiencies that show up on the radar. retail customers can devote their time in pursuit of finding these anomalies as well. my only argument is that from a cost/benefit perspective it's nonsensical. so for a retail guy or gal to win at this game accepting that the house has the edge is the first step in approaching the challenge of making money. believing otherwise is living in a fantasy realm.
expectancy is completely quantifiable and empirically validated. every trade has zero expectancy at fair value with no commissions. where i will agree with you is that the only positive expectancy that i've found is in the individual trader.
The problem with this thread is that there's so much going on it's easy to lose the plot . I'll re-post the original quote... IV has everything to do with it ! If your short straddle could be closed at 10% vol, do you really think you're adding value / improving the position by going long a strangle at 12% vol ? And unless the vol smile goes inverted that's the deal.
You might be right in the comparison there, since I don't believe in those either. Everytime you 'leverage a winner' you have an opinion about what will happen next compared to the situation now. Your previous position has no relevance to that. Suppose you use two different accounts then, in one account you sold the straddle. After a week you decide to buy a butterfly in the other account, and close the straddle in the first account. It's equivalent of course. The owners of both accounts should ask at any time why this action was taken, without knowledge of the other account. I agree, I'm not disputing that. This is tricky. I think winners are skilled bettors, adjusting their risk when they know their chances are changing. This cannot be done in roulette but it can be done in finite cardgames, like blackjack. Knowing your odds in the future and adjusting accordingly will give you positive expectancy. No question about that. Adjusting your position because you have some indication about the future, approaching the market with tools to determine the odds and preposition yourself to profit from it is maybe possible, maybe not. That's not what I'm questioning. But your decision to convert to another position should only be based on that, not on what you own already (because of previous assumptions about the future). I consider that approach about the same as 'averaging down' or 'not taking my losses yet' or, yes, 'leveraging winners', now you mention it. Ursa..