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Market volatility/Risk management

Discussion in 'General Discussion' started by Hugh, Oct 5, 2015.

  1. Hugh

    Hugh Well-Known Member

    How is everyone doing in this volatile market? Some of these moves are rattling my confidence. Any comments on whether right now its best to gamma scalp, take time off, or hedge very tightly?

    I've been trading a weekly ES condor with debit spreads to protect the credit spreads and I'm hanging in there but this sure isn't much fun....
     
  2. tom

    tom Administrator Staff Member

    Non-directional trades with weeklies with these types of moves sure would be challenging. My rule of thumb is to go farther out the more the market heats up to get a flatter T+0 with very low gamma. Paul Demer's trades and Brian Larson's Rhino trade do this and I'm sure they are sleeping ok :)
     
    Chaitanya likes this.
  3. Hugh

    Hugh Well-Known Member

    Thanks Tom, any idea where I can see their strategies assuming I don't get a hit on Google?
     
  4. Hugh

    Hugh Well-Known Member

    The Rhino Trade looks very similar to Tony Sizemore's trades
     
  5. vega4mike

    vega4mike Well-Known Member

    Tony's trades tend to be more short term i.e less than 25 DTE, very high gamma, the Rhino is between 56 to 84 DTE, low gamma, so the Rhino should be a low maintenance trade compared to Tony's.
     
    GreenZone likes this.
  6. Hugh

    Hugh Well-Known Member

    tks for the feedback, please can you elaborate more on the differences between the trades?
     
  7. vega4mike

    vega4mike Well-Known Member

    I am no expert on the Rhino Trade or Tony's Trades, although I was in his trading room for a brief period a few years ago. I've attached one of potential setups as an example, other traders who are more familiar with his trades may wish to chime in.
    Example of a Rhino trade also uploaded so you can compare the trades. Example of Tony's Setup_RiskGraph.PNG Example of Tony's Setup.PNG Rhino Trade Setup-Greeks.PNG Rhino Trade Setup-Risk Graph.PNG
    Something to note with the Tony trade setup,is if threre is a moderate spike in volatility, the T+0 line immeadiately goes under, I used to trade this structure on a 2 weekly basis, I had mixed results & the bad results always were due to a spike in vol, whereas to my knowledge the M3 & Rhino can withstand some hike in vol before the T+0 line goes under.
    But like I said I'm no expert in any of these trades, so other traders may have different opinions.
     
  8. Hugh

    Hugh Well-Known Member

    Thanks Mike. I'm busy comparing a V condor with a variant of the Rhino. If the Rhino is placed further OTM to avoid the sea of death, and a small credit spread and calendar are added to the call side you'll have a wide profit gap, flat T0 and a small but more probably profit. Possibly good for low DTE trades like weeklies. Have a look at the attached word doc and let me know what you think?
     

    Attached Files:

  9. vega4mike

    vega4mike Well-Known Member

    Hugh,
    I've compared both trades in OV, greeks and risk graphs attached, the modified rhino is smoother to the upside (higher delta), while the Condor appears smoother to the downside, though with extreme moves either side the modified Hugh's Modified Rhino Structure_Greeks.PNG Hugh's Modified Rhino Structure_Greeks.PNG Hugh's Modified Rhino Structure_Risk Graph.PNG Hugh Condor_Greeks.PNG Hugh's Condor Risk Graph.PNG Condor_Modified Rhino superimposed.PNG rhino will lose less than the condor (see the superimposed risk graphs), this is probably due to its lower gamma.
    So, if you expect a quiet week, the condor may be your preferred trade as the higher theta, will quickly kick in, however, if wild ride begins in earnest, forget the the high theta trade, the gamma will rip into the trade.:eek:
    Hope this helps, as always other more knowledgeable trades than myself can chip in.
     

    Attached Files:

    GreenZone likes this.
  10. Hugh

    Hugh Well-Known Member

    Thanks Mike, I appreciate your post and analysis. Looking at the entire graph the Rhino is more stable, however if you consider hedging you can look at it another way...
    • If you eyeball the graph showing the comparison the T0 graphs are roughly the same up to +-1% move in the spot, but the condor will have a higher theta.
    • Unless we have a flash crash/rally there should be time for a contingent order to trigger before a 1% move and cut delta by half or 3/4
    • Therefore isn't the condor is a better trade? (Market in sane mode, contingent orders in place and will execute)
    • Whipsaw could be a problem, but the greater theta may absorb some of these losses
    I can't really find an answer to this, got any suggestions?
     
  11. vega4mike

    vega4mike Well-Known Member

    A contingent order triggering all relies on factors that is outside a traders control, so yes in an ideal world, where my resting orders will be triggered & the mkts are calm, then the condor may be the preferred trade, but as option traders, we like to think of ourselves as risk managers first, then option traders, now with the scenario (Market in sane mode, contingent orders in place and will execute) for the condor being the preferred trade is that a risk we can control or not?. I accept that the mkt will trade in a sane mode more times than an insane mode, buts its the losses incurred during the insane mode that drives condor traders up the wall & leaves them with a negative expectancy.

    Another thing, when the mkt goes crazy, don't expect the theta to absorb any losses, the mkt makers will hold that premium (gamma--speed of movement, vol spike), a combo of -ve gamma & vol spike will overwhelm the position, i'm sure this has happened to may traders in the past.;)
     
  12. Hugh

    Hugh Well-Known Member

    Yes you are right. By theta absorbing losses I meant over the life of the trade, not on the bad day.

    Do you have any rules how big delta/gamma/vega should be on an absolute basis or say relative to theta?
     
  13. Hugh

    Hugh Well-Known Member

    Mike the attached doc shows what I mean by how much should you hedge. By increasing the long legs of a basic condor the trade can be changed from risky (large gamm, -ve T0 curve), to probably unprofitable (huge long calls and puts, small gamma, flat T0). Along this range what do you think the most optimal hedge is?

    Maybe as a benchmark risk can be limited to x% of NAV or a multiple of theta for a 2 std move. Any suggestions?
     

    Attached Files:

  14. vega4mike

    vega4mike Well-Known Member

    Do you have any rules how big delta/gamma/vega should be on an absolute basis or say relative to theta? - I typically trade by monitoring the T+0 line and as they are long term trades, I dont really use any kind of ratios. I do keep an eye on the Delta/Theta ratio, if it begins to be greater that 1.5, which I take to mean not enough theta in the trade & becoming more of a directional bet. Given everything I've heard about the position vega, I've come to not really believe in whats it telling me as it dosen't always imply what one expects. John Locke has talked extensively about this. His trades are very negative vega, in all mkt enviroments & they work. Main worry is if you're outside your tent of profit and you have a position of positive vega, your T+0 showing a profit if the mkt goes up, may not turn out to be the case, also if the mkt does fall, you wont be making the the kind of money you were expecting(if you search the forums, this has been discussed extensively by those trading John Locke's M3).

    Maybe as a benchmark risk can be limited to x% of NAV or a multiple of theta for a 2 std move. Any suggestions? - Sorry can't help with these, as any ratios you are likely to come up with will lose efficacy due to the multidimentional nature of the greeks, i.e the vomma, shadow gamma, etc the so called 2nd or 3rd order greeks, - not really kowledgeble with these 3rd dimensional greeks, but to use ratios with any degree of accuracy, you may need to understand them, its like looking at your delta without understanding the influence of your gamma.

    Using a call to hedge the upside of a condor appears to work from the diagram, but I have a feeling that when the move happens, that call will not provide much of a protection as the mkt makers suck the premium out of it, another case of when the greeks lie.:confused:


    I trade using most of the principles laid out by John Locke, he's done a considerable amount of backtesting & lots of livetrading so I know his style of trading works:)
     

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