- How do you look for opportunities?
- Step 2: Model Driven vs Systemic
- Variance Risk Premium
- Positional Option Trading
- Directional Trading with Options
How do you look for opportunities?
SSRN Papers, dont want crowded
Step 1: Know your type of edge
- Risk premium (like selling options) - usually there, smaller but stable. Akin to betting on an NBA game
- Market inefficiency - comes occasionally, harder to build a business on, but better returns, bet bigger
Step 2: Model Driven vs Systemic
- You have a model, compare it, and trade vs theoretical value. Smaller wins but less noisy.
- Systemic - you are dealing with uncertainties, you don't have a prediction for any specific trade, just the set as a whole. Much nosier, more profitable generally.
Variance Risk Premium
- Big funds trying to harvest this in non sophisticated way
- 20 or 30 years ago the VRP was so strong you could make money doing anything
In the future, it will still be there, but you will have to be sophisticated
Positional Option Trading
What does buyside & retail get wrong?
Equity Factors as a source of return in options
Directional Trading with Options
Risk Neutral Probability: Don't take into consideration drift
People backrest with a static vega amount, when the PnL would be dependent on vol level
So many degrees of freedom in Options
Options have expiration dates
Options as a risk management vehicle
- Best time to be alive, on average, has always been now!
- Maybe we won't have a vaccine soon...but the world will tend to get better again...