91–100 of 106 posts
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Someone with a strong math background should cut Wilmott and go directly to Shreve: Stochastic Calculus for Finance II (or Björk: Arbitrage Theory in Continuous Time).
I think that given the question about "how these instruments work in some depth" Hull is more appropriate.
Interesting, we’re in one of the largest crisis since decades and all these stock trading stories are popping up.
This has little to do with trading, and a lot to do with algorithms. I recommend reading the articl, it is well written :)
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Given the clear copyright statement, > Copyright (C) 2020-2021 Terence Kelly. All rights reserved. did you happen to get the author's permission to put that up? I don't even like IP law that much, but its funny to me how much no one gives a shit. This was a crime, albeit a silly and small one.
Copyright infringement is not a crime in and of itself. It's only criminal when it's done for commercial purpose with financial gain which is clearly not the case here.
US Copyright laws, sure, this statement is correct. In some countries (especially in Europe and Asia) however, this is pretty much the opposite.
(Point noted however that Mr. Kelly is probably American, which assuming you're American will be subjected to U.S. IP laws, especially DMCA provisions. Since that this is unprotected, DMCA circumvention is out and this infringement would be only a crime if this was specifically filed in court, and even them it might be argued that this is more of a civil lawsuit than a criminal lawsuit.)
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Sorry, I'm using risk premia incorrectly (quant equities isn't actually my thing). What I mean is that I don't believe smb truly delivers superior risk adjusted returns. For example, I believe the betting against beta factor (BAB) does, while smb does not.
We agree then, the size factor has not been really outperforming since it was introduced in the nineties. Maybe the drivers of the outperformace were things like transaction costs and lack of information which are less of an issue in recent times. For what it’s worth, the value factor is not doing well recently either...
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Generally speaking, a seller of naked puts is looking to supplement income via a stock they are willing to own at a lower level. If you are not willing to take delivery, it is probably better to sell a vertical spread so that there is a built in stop out. Here I'm speaking of transactions of a reasonable premium amount, not 5 or 10 cents. While it is true that the upside is unlimited against a naked call (and the dow…
This is why skew exists, and should not deter anyone. The vast majority of people should buy a 20-30% dip, and so the fact that 99% of the time you're not going to be assigned means that it's a good idea in most scenarios. I suggest most retail to be short straddles against a core underlying position for yield enhancement. Yes, over a number of decades you will have something go against you, but under the current mon…
Selling straddles or strangles against a long position in a stock that you do like is reasonable play, but there needs to be a full understanding of how vol and time decay can effect the value of the entire position up to maturity and a recognition that nobody is getting assigned/called early excepting unique circumstances (ie, high dividend stocks)
For those reasons, I'd only suggest these types of trades to fairly well capitalized retail investors and those who have taken the time to gain a basic understanding of equity options and the use of margin. In proper hands, these can be very rewarding trade ideas/techniques.
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This is why skew exists, and should not deter anyone. The vast majority of people should buy a 20-30% dip, and so the fact that 99% of the time you're not going to be assigned means that it's a good idea in most scenarios. I suggest most retail to be short straddles against a core underlying position for yield enhancement. Yes, over a number of decades you will have something go against you, but under the current mon…
> The vast majority of people should buy a 20-30% dip, and so the fact that 99% of the time you're not going to be assigned means that it's a good idea in most scenarios. So "people should buy a 20-30% dip" but should not be invested already? Because if they are, selling puts may not be a good idea.
That does not preculde already being invested as sitting on the sidelines waiting for such a move can be self defeating (the market rises 50% then drops 30% dramatically you would still be better off to have bought day one).
If you sell puts and are assigned, it may or may not happen at the optimal post crash price, but you will still be adding to your long at a much lower level. For instance, you sell a 30 put when the market is at 45. There is a great sell off, you are assigned when the underlying is trading at 25. You own at 30 less whatever premium you received, likely above 25. Certainly not the end of the world, but investor psychology is such that some people will be upset after the fact if they are paying more than current market price.
However, if you are not assigned you'll be pocketing those premiums as added income. But that is also another risk with naked puts - the market sells off but well before expiration and then rises again. You would miss the chance to buy unless you make the decision to take back the short puts at a loss and buy the cash at the now lower price. Again, you'll likely be paying net more than just having parked the cash and waited.
So naked puts may not be the best strategy if you know you absolutely positively will want to buy at a certain price, no matter what.
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I briefly looked at the README and code. The strategy is an implementation of The Wheel. Did you backtest the strategy including commissions? I doubt there is much left after commissions. See [0] for a backtest including commissions and [1] for a blog post from ORATS on how to backtest the strategy using the ORATS backtester. [0] https://www.reddit.com/r/options/comments/j3ofna/the_wheel_b... [1] https://blog.orats.c…
What many people don't understand about the relatively low-risk options strategies like the wheel or basic covered call selling is that, because they are low risk, they are less lucrative than many simpler strategies. The financial industry would not just leave that much risk-adjusted return on the table, after all. Just because a strategy is complex does not mean it is lucrative.
The Wheel as a strategy doesn't scale well, though. A good stock for the wheel has relatively low volatility, but with high volume of option interest. These two things are kind of opposed to each other, though. If a stock isn't very volatile, then there isn't much need for large option interest.
Of course there is a lot of overlap where things get interesting.
I think the reason why there aren't a lot of institutions running the wheel et. large. is because it just can't work at the scale they want to operate on. You can probably run the wheel pretty successfully at a million in capital (much larger than I'm used to), but at 10, 100, or 1 billion, it just doesn't work.
And what are they going to do? Pay some guy 200K to generate maybe 200K on a million in capital?
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What many people don't understand about the relatively low-risk options strategies like the wheel or basic covered call selling is that, because they are low risk, they are less lucrative than many simpler strategies. The financial industry would not just leave that much risk-adjusted return on the table, after all. Just because a strategy is complex does not mean it is lucrative.
I think you must mean that covered calls or the wheel are less lucrative than more complex strategies, unless I'm really missing something. Can't get much simpler than a CC. The Wheel as a strategy doesn't scale well, though. A good stock for the wheel has relatively low volatility, but with high volume of option interest. These two things are kind of opposed to each other, though. If a stock isn't very volatile, the…
Of course, you might have better luck wheeling on something with much more implied risk than SPY or cycling through some of the most risky stocks. But depending on where you are in the wheel, you are still yourself assuming risk that can make you lose money (e.g. a collapse in implied risk while you hold the stock).
When you say wheeling works best on a stock with low volatility and high OI, what you mean is that it works best on a security with under-priced risk. I am sure there are actually many funds running strategies based on exploiting over-priced risk premiums. They just have no need to trade options on the open market since they can work with a market maker who can take the other side for them.
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Generally speaking, a seller of naked puts is looking to supplement income via a stock they are willing to own at a lower level. If you are not willing to take delivery, it is probably better to sell a vertical spread so that there is a built in stop out. Here I'm speaking of transactions of a reasonable premium amount, not 5 or 10 cents. While it is true that the upside is unlimited against a naked call (and the dow…
> downside is 0 on a naked put What? If the stock goes lower than the strike price, the downside on a naked put is the difference between strike price and market price. You will be forced to take delivery of the stock at the strike price when you could have bought it for market price if you hadn't written the option. It is not 0.
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Knowledge is not infinitely accretive
Why not..? Asking because the explanation might end up helping me and also cure folks' HN addictions :D