Gamma Trading (or Variations Of)

[bobcollett 10]

Hi SIUYA

And the longer the expiry date , the easier it is to get a "froption"

Am I right?

I cant get a "froption" in two weeks???

regards

bobc

[SIUYA 11]

Hi SIUYA

And the longer the expiry date , the easier it is to get a "froption"

Am I right?

I cant get a "froption" in two weeks???

regards

bobc

 

The longer the expiry date is away, then the higher likelihood of the underlying moving far enough away from the strike.....its not so much the time to getting a free option. Its just that when they occur, you should keep them and then make the most of them when they occur.

 

You ideally should have a rationale for buying and selling in the first place, and in your normal rehedging sometimes the end result is that you get a free option.

 

eg; lets say you buy a call in an instrument that is trending up, hedge it well, trade around the gamma etc - pay for the time decay - odds are you might not have made any money, but if the instrument has trended up still, you might now be fully hedged and have an OTM put. Often people will unwind or sell out the options.

I would prefer to keep them.

 

If you get one within 2 weeks its probably through luck....and then making the most of that opportunity.

......war story fade out.....

 

Asian financial crisis Oct 1997. (my exact memory of the details here are fuzzy but the ideas are the same) It happened a few days before expiry, so most options had very little time decay.

 

A stock I was trading opened down with the market crashing - everyone was worried about their downside risk. I assumed if this stock was already down 25% the risk was on the upside. The stock was around $19.20 and everyone was wanting to buy the 18.00 puts (fear!)

I was actually short the $20 puts and long the 17.50 puts, so I bought the 20 puts, and sold the 1800 puts. I bought a put spread. But I was not bearish I just wanted to get my short options back and was willing to purchase the stock outright if it fell another 10%.

To hedge this as I was not short I bought the underlying stock, and as luck would have it I managed to not only buy my shorts back, but bought more of the $20 strike....all for parity for where I could buy my stock.

ie; if the stock was at 19.20 I purchased the 20-18 put spread for 80 cents and bought stock at 19.20 to hedge.

 

As the deltas of the 20 puts were 1, the 18 puts was 0 --- it was a few days before expiry. I ended up completely hedging the 20 strike.

 

Guess what happened - that afternoon the market for the stock was about 19.80, and the next day or two the stock rallied again - I think it closed about 20.80. I let it run because I viewed it as a freebie.

Point was I managed to get a very good risk reward trade on - not quite a freebie but close enough in my book - it made good money, purely because I thought in those terms.

 

So yes you can get them - but its incredibly rare.

(remind me if I forget I will tell another way to get cheap options on some rare events in another post)

..................

 

 

 

Over the years there have been plenty of market corrections either through disasters/black swans or through just normal market corrections, stock profit warnings or similar. If you look at my examples they dont necessarily move that much, and in % terms its relatively normal events.

 

 

.............

People might say - why not just buy OTM puts occasionally.

That would be ideal - if your timing is right. Remember this is not about picking direction or timing, its about ending up with them as a result of the gamma trading.

 

Point is - its an opportunity that you have to make the most of when they occur. (and unlike what some risk managers believe, these 6 standard deviation results that occur only ever 100 years seem to occur more often than that)

[zdo 20]

I confess.

 

short version: In the mid to late 80’s, I used ‘greek’ (near*) net zeros to churn commissions from well capitalized account holders.

… (* with just a little tilt and "variations thereof" added here and there - that were often based only on from a ‘visiting’ young gun bond cash futures arbtrader from Chicago who was renting office space from me and from a friend who was making a killing in muni options, etc.) :wherestheshakemyheadandwondersmiley:

 

During this time period, I also had two personal accounts dedicated to writing / selling premium.

 

The whole process was not fun for me. It was not at all ‘disastrous’ for the accounts… however, that capital could have been allocated much more wisely…

[SIUYA 11]

I confess.

 

short version: In the mid to late 80’s, I used ‘greek’ (near*) net zeros to churn commissions from well capitalized account holders.

… (* with just a little tilt and "variations thereof" added here and there - that were often based only on from a ‘visiting’ young gun bond cash futures arbtrader from Chicago who was renting office space from me and from a friend who was making a killing in muni options, etc.) :wherestheshakemyheadandwondersmiley:

 

During this time period, I also had two personal accounts dedicated to writing / selling premium.

 

The whole process was not fun for me. It was not at all ‘disastrous’ for the accounts… however, that capital could have been allocated much more wisely…

 

 

One of my best months trading in one particular stock was being short a lot of options - it was also my most nerve racking, and as I understood the risks.....but the reality hits home when you have good months when trading long vol - particularly when concentrated in a few select positions or stocks....very hard to beat those months (as opposed to a more short vol portfolio approach) (Dont forget this was also multiple strikes and series, and I also dont necessarily think that buying options is the only way to go.)

 

For me the only thing I remind my self when shorting options is this - the most you will make out of them is on the day you sell them, and the one piece of advice for those who sell is that you should always buy back those short options from people once you have made most of your money - just because its theoretically worth zero does not mean the risk has gone. That only goes when they expire.

 

Did you have them churning short options, or simply churning - plus in the 80s commissions would have absolutely killed them!

Tell more please - I like these types of stories.

[SIUYA 11]

another risk to the strategy story......

 

One time I went on holiday and I was leaving positions with my then business partner to manage - he also traded the same way and we shared offices etc.

I expected on particular stock to have a good move coming up - not sure in which direction but that wedge, triangle whoo haa never developed and instead became a really tight crappy congestion.

 

My instructions where to do nothing, dont trade the gamma - I was away for three weeks I expected to come back and see a big move int he stock and that he would not have hedged for me and I was going to make plenty....:doh:

Three weeks later, the first thing he says when I walked into the room 'The bad news is the stock did nothing, the good news is you were not here to watch the agony of it doing nothing every day.'

The range was so tight even if i asked him to trade the gamma it would have been useless and probably only covered 10-20% of the time decay......the implied volatilities had fallen, no one was buying options, it was death by a thousand cuts. So he was right - if I was there, it would have been miserable.

 

What did I do - I steeled myself this was going to be a horrible end to the month, unless the impending move I had hoped for was going to occur. So I mentally wrote it all off and thought if I could get back to some sort of BE I was going to be happy.

At this stage there was approximately 3 weeks until expiry.

With about ten days to go - the move occurred, and it was so slow it was even more agony wondering if I should have been now trading the gamma - but I did not - I let the deltas run. (This at the time was the hard part - not to meddle with my plan)

I got out of jail and once back to BE I hedged everything. I hated that month and count it as lucky to have not been my worst month ever by a long shot.

 

The funny thing was - if I had let the deltas run for the last 3-4 days into the actual expiry day it would have been a great month for the PL as the move then accelerated.

 

So the reminder that it can all go horribly wrong trading this way still needs to be at the front of your mind, and what are you going to do about it when it does, and while it would have been good to win - for me it was about keeping in the game mentally - so taking the book down and hedging once back to BE as part of the game plan was good enough.

 

It is not all happy sailing and it can be death by a thousand cuts and luck plays a big part.

At least when you are short options, the pain is often quick, but when short and in pain, there is usually no exit as the market is in pain as well and you never know how much you can loose, whereas I had the ability to understand it and mentally accept it and plan for it.

[zdo 20]

Did you have them churning short options, or simply churning - plus in the 80s commissions would have absolutely killed them!

Tell more please - I like these types of stories.

 

SUIYA,

It wasn’t really ‘churning’ . They were a set of well capitalized clients from silicon valley who were ironically more welcome to selling premium than they were buying it. I had them writing far out in time, far out of money delta matching calls and puts with weekly selling more of one to bring the balance back in to zero delta or to the recommended deviance (hence the ‘churning’ -er- commission revenue) . The ‘recommended deviance’ off 0 often ‘had’ to be neutralized … which was ‘convenient ‘ for the commission revenue stream … some fizz without real CO2 * :rofl: …

 

… and yes, commissions were an issue, even though by that time discount commissions had arrived… still significantly higher than now…

 

It was a good 2 year run. The 'time' for it was over (and the 'happening' was over for me and them) by apr 87

 

zdo

 

 

* Pop Rocks!