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John Locke's Video (Must Watch) !

Discussion in 'Options' started by Kevin Lee, Sep 3, 2015.

  1. Kevin Lee

    Kevin Lee Well-Known Member

    John published a really insightful youtube video yesterday about how to navigate through this current environment.
    This video contains incredibly valuable learning for all traders. I highly recommend it.

    In particular, John gave a detailed explanation of why calendar is NOT a good volatility hedge. The learning on this is golden. I remember several years ago, using a calendar as a vega hedge was quite popular in "the other" community (you know which one :) ). As a student, I was taught that since calendar carries a positive vega, it will neutralize the vega risk of butterflies and condors. That made logical sense if we believe in trading by the greeks, but of course, in the real world, options don't work that way. Front month IV and back month IV don't move in tandem. The example that John showed in the video puts the nail in the coffin - calendar isn't just a poor vega hedge, in extreme environment like last week Monday, calendar's vega actually turned negative. Yes - the IV spike hurt calendars, but when IV crushed subsequently, calendars made good money ! This is also a great real-time example of weighted vega that Ron showed in his recent presentation.
     
    Gail, Capt Hobbes, Venkat and 5 others like this.
  2. GreenZone

    GreenZone Well-Known Member

    Yep, John is basically validating many of the things I presented in my weighted vega presentation.


    Now that we have a "big name" pushing the same info, hopefully the concept of weighted vega will get more exposure.
    I shared my presentation with John Locke over a month ago, and I received very positive feedback from him.
    He acknowledged that the concept of weighted vega is not understood by general trading community.
     
    Last edited: Sep 4, 2015
    Walker likes this.
  3. Georges

    Georges Well-Known Member

    Watched begin video John Lock.

    In Optionvue weekly chart.
    Recently first 2 weeks in August 2015 Implied Volatility arround 11-12%.
    Last 2 weeks begin September 2015 Implied Volatility arround 21-26%.
    October 2008 arround 60%.

    I understood John said, recent transition is the worst thing for market neutral traders who sell options.
    But from this volatility level to 2008 volatility level not a problem.

    Why is a transition from 11-12% range to 21-26% range is a problem, and from 21-26% to arround 60% not a problem?
     
  4. Kevin Lee

    Kevin Lee Well-Known Member

    George, I didn't hear John say it's not a problem from 26% to 60%. Maybe I missed it. I heard him say it's the worst scenario, which is true for vega negative strategies in general when vol spike up from a low to high. It's also true from 12% to 26% and it is certainly true for 26% to 60%. Perhaps when he said worst, he meant relative to the recent history. The environment in 2008 as well as 2011 as I remember was far worse than what we just experienced. John did say that strategies such as M3 was designed to handle the 2008 type of environment and hence should be no problem handling the volatility now.
     
  5. Georges

    Georges Well-Known Member

    Kevin,

    Thank you for answer. My message was based on what he said arround:

    ........
    03:42 minutes:
    From this point we are in one of the highest volatility levels we have seen since 2011, so in 4 years.
    Really from this volatility level to 2008 volatility level not a problem.
    But from a extreme low volatility environment we where, to this volatilty that's when the challenge comes in.
    ........

    It is because, I believe it must be what you wrote, that I replied to the video, to receive a comment from someone.
    I expect John Lock try it to tell what you wrote. Of course it's not about weighted words, but it's the nice great story and message
    he like to bring us that is important.

    After your reply, I'am sure I don't miss something I didn't know.

    John Locke is doing a great job to keep us updated.

    Regards
    Georges
     
  6. Jay Hattler

    Jay Hattler Well-Known Member

    Who is the 'other community' referred to by the OP?

    Jay
     
  7. N N

    N N Well-Known Member

    Question: why did the butterfly in his example perform so well given the spike in volatility? Understand the negative delta contributed a lot but why didn't the negative vega take it away? It seems that the delta -170 was almost equal to vega -150 which got more and more negative vega as it moved lower and flatter delta. Something to do with skew (OTM fly becoming ATM?) Just curious...
     

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