Reflection:
India VIX seems to be one of the most misinterpreted Index in desi Fintwit.
Understand that a 1% rise in VIX does not mean that the vols have gone up by 1%.
There is a non linear relationship between Nifty ATM vols and India VIX
Disclaimer: Not an investment advice
Brotip:
if you're new to options trading please don't learn from YT
Please read books from distinguished authors (some mentioned below):
1- Sheldon Natenberg
2- Euan Sinclair
3- Colin Bennett
4- NN Taleb
5- Sebastian Bossu
6- Emanuel Derman
7- Giles Jewitt
8- Espen Haug
Notes on Gamma Scalping -
Delta hedging inBlack Scholes world do not take into account the effect of skew/smile as options(s) move in or out of the money.
In real world, as options move up or down the smile curve, they are (in general) priced at a higher IV compared to atm.
/1
Reflection -
Seeing a lot of tweets suggesting options expiry day had huge volatility.
If you are merely looking at the change in option prices and calling it vol, then I think it's not correct way to see things.
/1
As I grow old, I realise I'm just a service provider..
to my kids
to my bosses
.
.
.
and hopefully to society
"What does a man do, Walter? A man provides... "
- Gus Fring, Breaking Bad
you buy options
I buy vols
we are not the same bro
you buy otm options
I buy kurtosis
we are not the same bro
you buy collars
I buy skew
We are not the same bro
you use stop losses
I hedge deltas
We are not the same bro
Implied Volatility Surface parameterization using Stochastic Volatility Inpired (J. Gatheral, 1999)
Applied this to Bank Nifty vols for an option chain snap in Mar-23
Advantage:
Arb free surface
Calibration doesn't look too bad, does it?
datasource: NSE
#Brotip
(as I keep receiving DMs on which books to read to understand option greeks etc):
I think below is one of the better ways to start learning options:
Steps:
1- Write down the formulae for Black Scholes Model in Excel (avoid downloading option calculator from internet)
I don't understand why retail traders don't collab more with others....
5 traders sitting together can get the data/ platform/ research infra worth 5x of their investment.
Also they can keep each other on check by not letting them go full tilt.
Feels like a win win to me!
Two dumb things I've heard people say on options:
1- delta of an ATM option is 0.5
2- it's 0.5 coz the stock has equal probability of going up and down
🤦
Some good things about bear markets:
1- more people concentrate back onto their day jobs
2- almost 0 discussions on financial independence
3- 'multibagger' gets deleted from lexicon
4- people talk about things other than markets in social gatherings
What else?
#bearmarket
Reflection -
Never met a trader in prop who after making a killing would stand up and announced how much they made.
In fact they would go extremely silent until someone else would figure out and create a brouhaha.
Pretty different from a fintwit culture I guess!
Reflection -
It seems some folks in Fintwit think that if option prices are swinging around wildly especially close to expiry, then it implies that volatility is high.
Volatility is a measure for the underlying and NOT for option price.
It's an input to option prices, but is
After listening to finfluencers, I realise that I'm a complete failure as I:
1- wasted money on education
2- learnt trigonometry instead of investing in school
3- bought underwear instead of investing in stock
4- did not apply supertrend on option premiums
#sarcasm
Everyone (in retail) 2021 seems to have ended in the green....
Just wonderig who lost money then:
1- market makers?
2- FIIs/DIIs?
3- HFTs
4- Hedge Funds
They have all paid to retail? Especially Fintwit 'professionals'?
🤔🤔
Perhaps the best intermediate level book for an options practitioner (trading/structuring/sales/market risk)
I read it quite late (when i started out the only great book on options used to be Dynamic Hedging by NN Taleb)
Fabulous content on option greeks and managing positions
Let me try and explain what is the probability of an option finishing ITM and why is it NOT equal to delta:
Assume that you want to enter a bet that Nifty will close above 17,500 on expiry at some date.
You have to pay me upfront some amount to enter the bet.
Need a strategy that makes money in:
Bull & bear mkt
Vol crush & spike
Long & Short term
Gamma & Theta
Vanna & Volga
Indices & Single stocks
Trending & Non treding days
Then want to invest the profits into a 1000x multibagger
Am I thinking big enough?
#Sarcasm
First law of Fintwit:
The number of tweets on trading psychology on a given day is inversely proportional to the (realized) volatility of the market.
Disclaimer: correlation not causation 😉
Many folks think if you survive the first 3-5 years in trading then you would be successful in the long run.
This is absolutely not true! You can fail even after 10, 15, 20 even 30 years.
/1
Note to self-
When you elevate from trading 1 lot to 100s of lot, you do not need to run your strategies by anyone, look for any social validation or justify anything to anyone.
You explore the jungle, walk your path and learn to ignore all the 1 lot Chintus along the way!
Reflection -
Fintwit seems to put a lot of emphasis on backtesting an option strategy for "consistent" profits, but hard there seems to be any discussion on pnl attribution.
While backtest is (arguably) good for idea generation, pnl attribution is more like post mortem.
/1
Folks into trading for less than 5 years and teaching how to trade is a huge red flag for me.
It seems they are more interested in a training career than trading
Fundamentally it's a confusing premise to a build a career.
The Indian Quants Community -
We are no less than Global Quants....
Sure we should learn from the Global pros but mathematics is in our blood!
Let's believe in us
&
uplift India Fintwit together to the next level!
Cheers 🍻
Reflection -
A risk guy thinks managing risk is alpha
A coder thinks execution is alpha
A quant thinks building robust models is alpha
An ML engineer thinks unsupervised learning on large data sets is alpha
A trader thinks screentime is alpha
.
.
.
Funny markets!
20 years from now....
5 trader who made exceptional money would be celebrated by the society and s/he will teach young minds how to trade
.
.
.
The remaining 95 would warn their kids why not to be a trader and how those 5 were lucky enough!
#outcomes
Reflection:
Frame of reference is a beautiful concept one usually learns in physics which as wide applications.
When there are too many moving parts in a system, a frame of reference, helps in isolating the moves one is interested in, keeping other moves relatively static.
/1
Note to self -
Your daily pnl swing is your greatest enemy to your progress. It holds back your attention like a magnet and doesn't let you scale.
It's like you boarded an expensive metered cab in a beautiful place and you keep checking the fare instead of enjoying the view!
Met some old friends who are top prop traders now.
Among the other things we discussed, had a good laugh at pnl screenshots folks post on Fintwit.
You know about traders' life when you meet genuine ones.
Here are some of the commonalities they all share:
Note to self:
Folks usually focus too much on trading their own accounts
rather than
developing skills to work for a big trader
The second approach is probably far more scalable and could take you places!
Disclaimer - could be a biased view
Introduce yourself with seven books:
1. Fooled by Randomness
2. Range
3. Reminiscences of a Stock Operator
4. When Genius Failed
5. The Undoing Project
6. Everybody Lies
7. The Rise of Carry
Am not gonna sugarcoat by saying these are easy to learn, they are not!!
My job is to discuss various approaches which pros use on a day to day basis to analyse markets
My hope is there will be a couple of young minds who get inspired and walk this path!
see you there🍻
My wish is more young traders develop a quantitative mindset and apply sound statistical techniques to analyse Indian markets.
From the land of Ramanujan, Mahalanobis and Vashishtha Narayan Singh, truly believe we could develop world class Quant centre of excellence here!
Many of my friends who have gone way beyond financial independence (read: have f u money) never ever talk about leaving their jobs....
They keep working hard (none of them work 9 to 5, they do much more), while their investments (of time + money) keep getting them richer.
Note to self -
Scaling up strategies is extremely difficult when they are exposed to jump risk.
This is because overcrowding makes the strategies susceptible to discontinuous behaviour.
This is why option expiry day trading is not too scalable.
/1
Strike selection for a directional options bet is a fascinating topic covered by (at)SinclairEuan in his book Positional Option Trading.
It's not a trivial exercise!
Disclaimer - feel free to have different views. This is my mathematical interpretation.
Why same strike Euopean calls and puts can't have different IVs?
Price of an option can be attributed to instrinsic value and time value.
For any strike, if call is itm, then put is otm
Reflection -
You cannot expect prop traders to manage their own risk.
That's why prop firms have risk managers who look at trader's positions independently.
It's not uncommon for traders to go on full tilt during adverse market conditions.
/1
Note to self -
Volatilities are mean reverting is like saying one day we will die.
The information is inconsequential, since we do not know "when".
Vols could probably remain sticky longer than one remains solvent.
Disclaimer - opinionated
Okay, here's a fun way to look at options:
Say you are long 16600 calls of Nifty (market at 16200). The position can be broken down as follows:
2*16600C
= (16200C +16200P)
+ (16600C -15800P)
+ (15800P -2*16200P + 16600P)
(using put/call parity)
Note to self:
First (and the only) rule of investing:
Return of capital is far far far more important than return on capital...
If you don't realise this, the other rules are useless!
My list of inspirational (non-quant) books on Financial markets -
Reminiscences of a stock operator
When Genius Failed
Fooled by Randomness
Liar's Poker
Barbarians at the Gate
Flash Crash
The Rise of Carry
Maybe i missed a few, these instantly came to mind.
What's yours?
Reflection -
Since an option settles to the future price, it's important that delta of an option is calculated wrt future and not underlying (spot) .
Calculating delta wrt spot aka spot-delta, ignores the change in basis between spot and future.
/1
note to self:
a big trader does not try to find a great strategy that works on all market conditions
rather
they find great markets where the strategies work!
scale, scale scale....across markets/assets/ instruments!
its the only way to play!
disclaimer: may not apply to you
Note to self:
1- Trading long tails is a hard game, which needs to be funded to keep playing it and ensuring that you don't go broke, or lose your morale.
2- You usually lose > 220 days a year, so you have to keep your chin up even when you're being ridiculed by the market.
"Papa, Papa I'm a good trader now!"
"Achha! Lekin beta account to abhi bhi loss mein hai?"
"Loss mat dekho Papa, last 25 baar se lagatar main broker wala certificate jeet raha hun!"
Note to self -
The WORST way to learn option trading is by trading 0dtes.
It's not trading, it's gambling on oversized gamma/theta mechanics.
Disclaimer - strong view
Note to self -
The game is not about achieving high returns (that's when one could get hurt).
It's about achieving scale (large capital base) at reasonable return.
That's how the big bois play!
#financial_markets
#trading
#scale
Note to self -
Instead of giving advice to folks in their 20s....
It's probably better to take some of their advice and hopefully collaborate with them
It's a life hack to stay relevant in this world!
#lifeatforty
Note to self:
markets ocassionally has tells, which sometimes we spot and call them alpha...
When markets become conscious of such tells, they go away (decay).
It's like the poker, if more people spot a s***er, the latter becomes conscious and leaves...
the rule is this: when
Fun fact on delta -
If you were to hold a delta hedged option portfolio overnight, too close to expiry, you may actually not be truly delta hedged.
The OTM options would bleed while ITMs will gain additional delta overnight.
This would make you long/ short at open
#charm
Option trading myth -
Selling options on expiry day has an edge over any other days, due to faster decay.
Explanation - The ratio of gamma/theta is independent of time to expiry.
If you told 1000 aspiring traders, that only about 10 of them would be successful in the long run, how many do you think would quit hearing such stats?
I think none!
Ego loves outliers when aligned to desires.
#1
%
Note to self -
The only way to learn trading size is by trading size.
Trading 1 lot profitably is not a guarantee to trade 100 profitably
Also when your daily pnl swings far exceeds your cost of living, you need to cross a psychological barrier that money is just a number!
India Fintwit is changing for the better.
Seeing some selfless guys doing some great work to uplift the knowledge levels of the community and not getting bogged down by daily pnls
Best wishes and kudos to you all:
@G3ni3sWish
@_not_linear
@shabbir_hasan_
@SachaSucha
It is very hard to justify why you want to trade options instead of futures if you have a directional view on the market.
For a future delta remains constant which makes it's easier to calculate the possible pnl scenarios.
Disclaimer: not an investment advice.
Reflection:
Many folks think (probably newbies) that trading is a game of predicting the direction of market move, volatility etc.
But as Taleb says in his book, Fooled by Randomness (trying to paraphrase):
If you think there is a 90%
Note to self -
Black Scholes option pricing model is continuous and fully consistent for every spot, vol and time inputs.
Its a misconception that the model does not work close to expiry.
Beauty of a consistent model is it does not break down under stress.
#option_pricing
Reflection:
There's a daylight of difference in trading option prices
and
trading the greeks of those prices.
The latter exposes you to purer forms of risk (if managed well) and lets you take only those risks you want in your books.
In the first approach of trading prices,
Note to self -
Running 15 different strategies on one underlying is much worse than running one strategy on 15 different undelyings.
Disclaimer: opinion
4- not once did they talk about their own pnl
5- none of them felt threatened by algos and thought the dumb ones created more opportunities
6- ALL of them took at least 3 years to become profitable
Disclaimer: my observations may be biased as meeting profitable traders is rare
Strong take -
Traders who are interviewed in their successful phase ought to be interviewed when they are in drawdown and thinking of quitting.
Otherwise, it's an incomplete analysis of their journey.
/1
So what do i mean by more plays:
Well, any option position can be broadly decomposed into 4 statistical moments of the underlying behaviour:
- move
- vol/ deviation
- skew/ assymetry
- kurtosis/ vol of vol
Think of your position as a combination/ portfolio of these moments.
It's funny that folks on Fintwit think selling options is a consistent way to make money with no other play in their kitty.
They are like hammersmiths looking for nails everywhere.
No wonder when there are no/ very few nails visible, they curse the system/ blame it on
It's only very rarely you find the Indian trading community being blessed by folks who have strong quantitative insights and no nonsense approach to markets.
Truly an honour to know him through this app
@muskk
from 02:24:00
Leaving aside folks who post fake screenshots, even if your pnl is legit, showing it off is pretty loathful
It's like you go to a party and show off your $3k Armani suit
Pro traders not only don't gaf, they think you have NO class and permanently close the doors to their access
Reflection:
Implied volatility percentiles (IVP) could be pretty misleading in identifying whether options are rich/cheap...
Like every other comparison in financial analytics, one needs to have a benchmark to compare IVs with.....
In this case, the comparison should be with
Bro 1: are you a trend follower or a mean reversion trader?
Bro 2: I trade skews and kurtosis
Bro 1: <confused> are those indicators?
Bro 2: no those are moments
Bro 1: <not convinced> never heard! Is it like super trend?
Bro 2: No
Bro 1: seems you never traded
Bro 2: yeah
Every single time i ask my friends if it was too cheesy to have gotten married on V Day...
The answer is always a resounding YES! 🤦♂️
You guys don't get it - coincidences are hard to forget! 😉
#AnniversaryRoundTheCorner
Craps on Volatility-
What does it even mean when people say option premiums are high/ low?
Worse, what does it even mean when they say VIX is high/low?
Level of implied volatility is meaningless without a reference to realised volatility
#VolMyths
#VIXCraps
Outcome oriented discussions in trading seem to be more popular than the process.
Someone flexing his/her new car purportedly bought from trading income tends to gather more audience, than someone who meticulously produces a thorough data analysis.
Why are we so shallow?
Note to self:
If you get too involved in one market and are desparately trying to make money there, you are trying to 'fit the curve'.
There could be 15 other markets, waiting for your trades - look around!
Disclaimer: not an advice.
Genuine question -
Why can't someone teach trading without posting their pnl?
And ofc without claiming anything about trading performance?
#simply_teach