That is an excellent suggestion. Most days I spent my time backtesting things like butterflies, straddles, condors, spreads or analyzing "price action"... and haven't found any consistent winners so I continue to trade single legs.
IC, I think you are barking up the wrong tree when it comes to delta hedging/trading your gamma.. Why do you want to go down that road??
I recommended he should because 1- he wants to understand Greeks and that is the only way he will. 2- he is playing with a product he only understands from a 10,000 ft level, and to me that's no understanding at all. If you want to obtain mastery in sometiomg that requires you remove gaps in understanding otherwise you are building the top of a pyramid floating on air. This will at a minimum broaden his insights to why, what is priced where. Obviously, transitioning to trading like that is not going to be feasible for him. But learning will do wonders. - my opinion.
A $5 10D put at 22-vol may be $4.5 at 18-vol. Skew exists because it cannot be arbitraged. All of the demand is for down and out puts... for good reason. "For the want of an eighth the kingdom was lost"
I could be wrong,but he strikes me as more of a directional guy than volatility trader. Not saying he shouldn't understand options,I'm just wondering why he's wants to go down the delta hedging path... He mentioned backtesting various option strategies and price action but couldnt find any consistent winners.. I'm attempting to transition from a vol trader to directional as my natural bias is to be short gamma,but not in this vol enviorment.
My apologies if I am missing something. Had a long day here with family health issues. Touch distracted, but I was responding to him saying" "...Very interesting to read how professionals think and trade." -"I feel so inadequate. What should I do?" I understood that he wanted to understand greeks better. First I made a pee-pee joke, then decided to assist with what I believed would be beneficial. Maybe I should have left it at the pee-pee joke. . and now I'm just thoroughly confused. Is that you or him stating, "I'm attempting to transition from a vol trader to directional as my natural bias is to be short gamma,but not in this vol enviorment" - If it was him, I totally missed that. But I stopped paying attention to this thread after I felt I said too much earlier. I like IC, nice guy, I'd be happy to see him grip certain concepts better than he does. And I agree once again, he is definitely not going to be a vol trader., but it can't hurt to understand. It's not understanding that leads people to be susceptible to the con artist - sell puts, sell premium, 99.99% of options go out worthless, this strategy is better than that one bullshit. Like I said in one of my first posts. I tell everyone to just keep the fuck away from options... But hey, if you are going to play in the mouth of the beast, at least know everything you can. Edit: To possibly express it better. Take a look at his comment of having done a thousand trades and broken even. But he doesn't connect that to the gamma/theta relationship determining pricing. That this is why that is happening. So basically he looks at spreads, and can't connect their pricing to valuation beyond IV is this and mkt is that. Understanding the micro structure will help him have a better understanding of how mkt is determined.
The pee pee joke was a tough act to follow! I am the one attempting to transition from a vol trader to more directional in nature.. Wile I am 100% down with what you prescribed IC,I dont see him as a delta hedger.. IMHO,he would be better off running IB's optimizer and understanding why the strategies chosen were optimal given his chosen parameters... But if he wants to really sink his teeth into options,he should do as you suggested
Thank you all for the coaching. I appreciate all the helpful suggestions and will try them all. I am not completely ignorant, I do understand the definitions of options, the greeks, the combinations and know how to use BSM to calculate the value of options. I read McMillan cover to cover, Hull, all the chapters on equity options. However, as you folks know all too well, that does not give me the skills or the license to trade options profitably the way you do, just like I can't practice surgery after reading Gray's Anatomy. I trade equity options full time since 2013 and make a very good living because of the bull market and because I know my underlying. Traded the same underlying for years, the last 7 simply replaced margins with options. You are correct. I generally ignored volatility, the only thing I care is can the underlying move enough to cover the initial cost of my option? Best wishes for the new year.
Because leverage is a very dangerous game. I like to be able to sleep nights. Still have nightmares on dot com and 2008-9 crashes. I was almost wiped out both times and time is not on my side.