As a fellow options trader, I love how you approach the options markets from a solid mathematical perspective. Me and my friend, who is also an options trader, always laugh with the youtube videos about the "option educators" because they make one mistake after another, like saying that covered calls are better than naked puts not knowing they are synthetics or not understanding that delta changes in a nonlinear way or not understanding that it is more about EV than probability of profit (even though probability of profit changes the betting size) and so on. (In my experience, peaks in volatility are a sign of a strong uptrend or downtrend reversing, so my strategy is always to sell volatility in that strategy and have some delta in the opposite direction by reducing it but not eliminating it completely, work just the other day with the silver crazy, was long $12 calls and short $50 calls at a 1:4 ratio) Good job!
EXCELLENT! I’ve been using RUclips to (usually in vain) enhance my never-ending quest to better understand derivatives - and specifically options, how to determine the optimal trading strategies for the volatility regime, etc. I had plenty of calculus while at University and then an engineering career that actually required me to use it (not that it has given me as much “edge” as I initially imagined - when I discovered options - and that their pricing (in part) - is accomplished with probability-based price model... which is in the form of a very simple second-order differential equation. When I finally began to actively trade, I desperately tried to make it as complex as possible... but over time had to admit that consistent success was most easily obtained by excessively SIMPLIFYING everything (although I was dismayed to find out my Excel generated volatility surfaces... were, at best, unnecessary. In fact if truth br told - I probably spent the better part of two YEARS trying to (yes, I admit it) develop the Holy Grail - in the form of a STRATEGY (and the more complex the better!). Meanwhile - however, I WAS actively trading every day, of course recording my trade parameters - and of course the results. Finally I “consciously” realized what I had probably already known - on some level - for quite awhile. That simply by using standard strategies (which CAN be significantly tweaked and optimized - which also, of course are suitable for both current skew and volatility structure (all of which is pretty straight forward... it’s those random four, five, or evev SIX sigma marker moves, that keep us on our toes). And IN FACT, the way you survive those - is ALSO the way you succeed in general. Which of course is NOT typically a function of your strategy choice - but of your so-called Money Management plan. Of course this is nothing but 9th grade algebra and a little undergraduate statistics, but the efffects of different “plans” on what REALLY matters - your equity curve - is really hard to overstate. Also, once you get to that point where you are successful consistently, then you can also start to experiment using shpecific compounding approaches. I’m still often amazed at the potential outcomes - of even modest compounding - given that with options - making 5% of your total account - every WEEK - is nothing special (though risk management becomes critical. I apologize for the long-winded comment (and ALL of the typos - on a keyboard I can type almost as fast as I can think - but NOT SO on these tiny damn phones)... my point was primarily to thank you for this whole series on dynamic hedging - a concept thst I might have learned a bit too early in my education- as the math and overall mechanics was very clear - yet I’ve never actually used it because I’ve lacked a full “grasping” of the subject - and just knowing the steps to take does not give me enough comfort level to put skin in that game. So perhaps I wasn’t ready yet, or perhaps your VERY concise lecture ability - and teaching style is what mattered. Is that shameless pandering to win the book? No - for all I know the contest is over. If not I will wait and see - having a autographed version would be an excellent addition to the library. But if that’s not possible then for sure - I will purchase it. Thanks much, T.
hi, thanks for your videos, i guess u are new to youtube, but your experience in options is amazing. I just wonder if u hv planned on explaining further on vol arb. 1. say... give examples of the entire trade "cycle". u've explained the IV from low to high, how about high to low. 2. And when would be a good time to maintain net 0 positions, and when do I initiate new positions ? eg. IV is low when its below 32. when it cross 32, u buy iv ? And high iv defined as say.. 64% do u then sell after it cross 64 and lower ?
Hi Dennis, Thanks for your message, I am glad you find the videos helpful. I have been a little bit slow at putting up videos over the last week, but plan on returning to daily uploads starting next week. I'll add your suggestions to my list of videos to make, and hopefully I'll get all of your questions answered shortly. Patrick
He described IV from high to low -- that's the participants short volatility, needing extra compensation for unlimited losses, losing profit on delta hedging transactions, etc. On positions -- the question is: do you think volatility will increase? Decrease? No opinion? Your position simply reflects your outlook on markets, no? Personally, I'm struck by how long and far down implied volatility on US indexes can move during a "cycle" -- that feeds a short volatility positioning bias I have, even when IV is "low". But also, I find it useful to have a "profit release valve" by having long volatility exposure. Basically -- instead of alternating short/long vol, you could also diversify and run both in parallel ;-)
a DEALER takes the other side of your trade/transaction/order... a MARKET MAKER sets the price for the asset that is traded. Dealers are liquidity providers. some brokers do this too. Market makers are Central Banks that set the price for the currency OR the price engine / price algorithm that sets the price for futures using the bid/ask
Maybe somebody already asked this, but if you buy an OTM call and the price doesn't move, the call stays out of the money and the delta would have to got to zero and if you buy an ITM call and the price doesn't move, the call stays in the money and the delta would have to got to 1. that would mean you would sell or buy back the shares you hedged at the same price so you would still lose the full premium of the call, but the delta does change even if the price stays the same doesn't it?
As time goes by the delta will change, but any buying and selling be happening at the same price, thus generating no profit (and running up transaction costs). Thus you lose the entire premium for an OTM option and you lose the time value component for an ITM option.
Nice video, my question is how to pick the right options for the gamma scalping, how do we compare real volatility vs implied volatility? That explanation would be great 🙂 also real examples of trading floor insights
Scalping game is really scalping deltas ie buying and selling the stock or futures. Whatever is the underlying. A market maker makes his money through collecting edge on the bid ask of the options. You don’t want to be crossing the bid ask to rebalance your delta. It’s too expensive. Plus you introduce other Greeks. Simpler and cheaper to rebalance using the underlying.
I don't get the second example of being long and right. It's written that the seller of the option would have received the full premium but would have been doing the opposite of our trades and lost a fortune. Why would the seller be trading at all? Why not write the call option, sell it, then keep the premium and not do anything else? He could also trade the market like us, and buy the stock at 0 then sell at 1000 each time while keeping the premium since it's on the spot market. I don't get why he loses to quote " a ferocious amount of money". I tried to consider an angle I wasn't seeing, and thought maybe the seller owns shares and sells volatility to us? Okay, even then if the price swings from 100 to 0 to 1000, isn't the seller still in profit? He holds the shares all the way to 0, then sells it when he recovers and shoots to 1000, while still keeping the premium we paid him. How does the seller lose?
So it is a bet on high or low volatility if i get it right. For a moment a thought it be a way to make money with bitcoin before i relized that options would be prized in and nobody is selling and buying crypto on that frequency since it is to expensive and slow.
No. It’s best left to market makers that collect edge taking the other side of trades. If you’re going to guess on the direction of volatility you might as well guess on the direction of a stock.
Dude I have a question this is making a lightbulb go off. Follow me here.. APRE 0 volume May 15th calls. Obviously IV is low.. all time low or near it. 30-50% below PT by analyst. Could you not sell at the ask to the market makers for less than you paid on an IV Spike?
You can just trade the options on their own, but then you are more exposed to the price risk of the underlying. If you wanted that exposure it is easier to just trade the underlying.
Why do many traders trade on volatility? Is it easier to know when the realized volatility is below or above the market forecast than betting on stocks directly?
Until vix futures and variance swaps the volatility component of options was probably the only way to hedge embedded options in structured products. Some traders speculate on the direction of volatility but net are probably as unsuccessful as traders trying to predict the direction of the underlying. Often traders are using outright options and the market makers taking the other side of their trades are managing their inventory through this delta neutral method. And until 1987 the whole curve of an expiration month basically traded at one IV so there was less vol risk. Volatility tends to move much slower than the underlying. There were ways to hedge the other inputs that determine the price of an option except the volatility component until vix futures.
Thank you. Very informative but in my view had to watch the video like 5+ times and still could not make it into a practical procedure to trade. I bought the book to find a way to make it a strategy that I can implement. I'm doing CSP and rolling them until expire OTM. Hugely profitable for sure, but require to hedge constantly against black swans all time. I could settle with less profit and more peace of mind.
An example procedure matching his description: buy an ATM call and short 50 shares; trade shares to bring the delta back to zero once per regular trading session until expiration or until outlook changes.
Remember Patrick's point that options need quite a profit margin for the seller's high risk (even "when IV is low", arguably) -- so holding a straddle for 90 days sounds quite expensive. I'd ask questions like "how can I reduce the risk of not capturing enough realized volatility or IV increase?" "How can I reduce the cost of my volatility exposure?" "Where else might I look for more/less sensitivity to realized volatility during the life of this trade?" Answering these questions could actually be fun and interesting.
In the long and right case, could some one explain why we hedge by buying when the delta is zero and hedge by selling when delta is 1. I thought it was the other way round. We have to buy the full notional when delta is 1 and when it is zero essentially there is no hedge and hence we sell all the underlying
The delta of the call is zero. Not the net position. So if you start off long 2 ATM calls and short 1 future then the futures selloffs hard so the calls now have a delta of 0 then your net delta is short 1 from the initial short future. So you have to buy back the future to get back to delta neutral. If in the other scenario the futures rally excessively then the calls have a delta of 2 and your short 1 future for a net delta of +1. So you have to sell another future to get to delta neutral.
No one has commented on the sound of the person who enters and proceeds to shave with an electric razor for the last five minutes of this video? Impossible.
You're right in pointing out that it isn't actually arbitrage and it really pisses me off that the word 'arbitrage' is misused all over the place, particularly with 'retail arbitrage' which is nothing more than simple trading. You buy something cheaply and then hope to sell it for more money. That's trading. Not arbitrage. Stop using this word incorrectly.
I bought 1 call and 1 put, both ATM and hedging the delta. The underlying IV was below its historical average, yet both contracts lost money as IV increased. My question would be is this volatility trade still possible if someone is simply buying delta hedged puts and calls when the IV is low, or does this only involve those who are writing the options into the market?
It works for volatility buyers and sellers (they just want/expect different market behavior). Your trade could have struggled for many reasons -- did you get a good fill price on the contracts? Did IV increase on your portion of the maturity curve? Also, did you attempt to extract profits from increased realized volatility by rehedging?
Patrick RUclips doesn't deserve you! You are by far the best resource for the inner workings of options in a manner retail can understand.
Man, I'm going back and watching your older videos. The filming and lighting is much better now. The content is still gold nonetheless.
I prefer his older videos. Actually educational
As a fellow options trader, I love how you approach the options markets from a solid mathematical perspective. Me and my friend, who is also an options trader, always laugh with the youtube videos about the "option educators" because they make one mistake after another, like saying that covered calls are better than naked puts not knowing they are synthetics or not understanding that delta changes in a nonlinear way or not understanding that it is more about EV than probability of profit (even though probability of profit changes the betting size) and so on. (In my experience, peaks in volatility are a sign of a strong uptrend or downtrend reversing, so my strategy is always to sell volatility in that strategy and have some delta in the opposite direction by reducing it but not eliminating it completely, work just the other day with the silver crazy, was long $12 calls and short $50 calls at a 1:4 ratio) Good job!
damn, good advice at the end. i was wondering how you could be delta neutral, but maybe have a directional bet on the side
@dimitrivancamp1013 can you please say where did you get your options education please, what recourses/courses or books did you use?
@@КирилСпасов-о5ф Read books
@@dimitrivancamp1013 Okay, could you please share any books that stood out to you?
@@КирилСпасов-о5ф The business of Options, Options trading & Volatility and all books by Jeff Augen
Good explanation
Thanks for your comment. I love your channel too. Congrats on hitting 2 million subs. I'm still looking forward to hitting 1k.
Thio joe learning about vol arb, never knew he traded
EXCELLENT! I’ve been using RUclips to (usually in vain) enhance my never-ending quest to better understand derivatives - and specifically options, how to determine the optimal trading strategies for the volatility regime, etc. I had plenty of calculus while at University and then an engineering career that actually required me to use it (not that it has given me as much “edge” as I initially imagined - when I discovered options - and that their pricing (in part) - is accomplished with probability-based price model... which is in the form of a very simple second-order differential equation. When I finally began to actively trade, I desperately tried to make it as complex as possible... but over time had to admit that consistent success was most easily obtained by excessively SIMPLIFYING everything (although I was dismayed to find out my Excel generated volatility surfaces... were, at best, unnecessary. In fact if truth br told - I probably spent the better part of two YEARS trying to (yes, I admit it) develop the Holy Grail - in the form of a STRATEGY (and the more complex the better!). Meanwhile - however, I WAS actively trading every day, of course recording my trade parameters - and of course the results. Finally I “consciously” realized what I had probably already known - on some level - for quite awhile. That simply by using standard strategies (which CAN be significantly tweaked and optimized - which also, of course are suitable for both current skew and volatility structure (all of which is pretty straight forward... it’s those random four, five, or evev SIX sigma marker moves, that keep us on our toes). And IN FACT, the way you survive those - is ALSO the way you succeed in general. Which of course is NOT typically a function of your strategy choice - but of your so-called Money Management plan. Of course this is nothing but 9th grade algebra and a little undergraduate statistics, but the efffects of different “plans” on what REALLY matters - your equity curve - is really hard to overstate. Also, once you get to that point where you are successful consistently, then you can also start to experiment using shpecific compounding approaches. I’m still often amazed at the potential outcomes - of even modest compounding - given that with options - making 5% of your total account - every WEEK - is nothing special (though risk management becomes critical. I apologize for the long-winded comment (and ALL of the typos - on a keyboard I can type almost as fast as I can think - but NOT SO on these tiny damn phones)... my point was primarily to thank you for this whole series on dynamic hedging - a concept thst I might have learned a bit too early in my education- as the math and overall mechanics was very clear - yet I’ve never actually used it because I’ve lacked a full “grasping” of the subject - and just knowing the steps to take does not give me enough comfort level to put skin in that game. So perhaps I wasn’t ready yet, or perhaps your VERY concise lecture ability - and teaching style is what mattered. Is that shameless pandering to win the book? No - for all I know the contest is over. If not I will wait and see - having a autographed version would be an excellent addition to the library. But if that’s not possible then for sure - I will purchase it. Thanks much, T.
You forgot to close brackets twice, im very confused. Please give it a third edit, thanks in advance
Love the videos, so much important information to take in. I would suggest turning down the volume on the intro song a little bit.
Very awesome. Best channel period.
Thats brilliant, would have been a great strategy during the crash and subsequent weeks in march
Lol
Greeks attribution:
Delta PnL: delta * dSpot
Gamma PnL: 0.5gamma * dSpot^2
Theta PnL: theta * dTime
Vega PnL: vega * dIV
hi, thanks for your videos, i guess u are new to youtube, but your experience in options is amazing. I just wonder if u hv planned on explaining further on vol arb.
1. say... give examples of the entire trade "cycle". u've explained the IV from low to high, how about high to low.
2. And when would be a good time to maintain net 0 positions, and when do I initiate new positions ?
eg. IV is low when its below 32. when it cross 32, u buy iv ? And high iv defined as say.. 64% do u then sell after it cross 64 and lower ?
Hi Dennis, Thanks for your message, I am glad you find the videos helpful. I have been a little bit slow at putting up videos over the last week, but plan on returning to daily uploads starting next week. I'll add your suggestions to my list of videos to make, and hopefully I'll get all of your questions answered shortly.
Patrick
He described IV from high to low -- that's the participants short volatility, needing extra compensation for unlimited losses, losing profit on delta hedging transactions, etc.
On positions -- the question is: do you think volatility will increase? Decrease? No opinion? Your position simply reflects your outlook on markets, no? Personally, I'm struck by how long and far down implied volatility on US indexes can move during a "cycle" -- that feeds a short volatility positioning bias I have, even when IV is "low". But also, I find it useful to have a "profit release valve" by having long volatility exposure. Basically -- instead of alternating short/long vol, you could also diversify and run both in parallel ;-)
Great series, thanks for making
excellent video, thanks a lot!
excellent videos! priceless.
I finally understand what volatility trading is :)
Glad to have helped.
so clearly explained. complicated things on textbook become so simple
a DEALER takes the other side of your trade/transaction/order...
a MARKET MAKER sets the price for the asset that is traded.
Dealers are liquidity providers. some brokers do this too.
Market makers are Central Banks that set the price for the currency OR the price engine / price algorithm that sets the price for futures using the bid/ask
Excellent!
amazing work
Maybe somebody already asked this, but if you buy an OTM call and the price doesn't move, the call stays out of the money and the delta would have to got to zero and if you buy an ITM call and the price doesn't move, the call stays in the money and the delta would have to got to 1. that would mean you would sell or buy back the shares you hedged at the same price so you would still lose the full premium of the call, but the delta does change even if the price stays the same doesn't it?
As time goes by the delta will change, but any buying and selling be happening at the same price, thus generating no profit (and running up transaction costs). Thus you lose the entire premium for an OTM option and you lose the time value component for an ITM option.
Nice video, my question is how to pick the right options for the gamma scalping, how do we compare real volatility vs implied volatility? That explanation would be great 🙂 also real examples of trading floor insights
Scalping game is really scalping deltas ie buying and selling the stock or futures. Whatever is the underlying. A market maker makes his money through collecting edge on the bid ask of the options. You don’t want to be crossing the bid ask to rebalance your delta. It’s too expensive. Plus you introduce other Greeks. Simpler and cheaper to rebalance using the underlying.
thanks for your videos mate
Thanks, glad you find them helpful.
Thank you for this info. Could this be done using a combination of SQQQ & TQQQ and playing off the other?
Great video!
I don't get the second example of being long and right. It's written that the seller of the option would have received the full premium but would have been doing the opposite of our trades and lost a fortune. Why would the seller be trading at all? Why not write the call option, sell it, then keep the premium and not do anything else? He could also trade the market like us, and buy the stock at 0 then sell at 1000 each time while keeping the premium since it's on the spot market. I don't get why he loses to quote " a ferocious amount of money".
I tried to consider an angle I wasn't seeing, and thought maybe the seller owns shares and sells volatility to us? Okay, even then if the price swings from 100 to 0 to 1000, isn't the seller still in profit? He holds the shares all the way to 0, then sells it when he recovers and shoots to 1000, while still keeping the premium we paid him. How does the seller lose?
How do you know how far in the future to make the expiration date and how many dollars up or down the strike prices are?
People who sell options usually assume the volatility will stay close to what it was in the recent past?
Would you mind creating a playlist with regards to this subject ?
STONKS!
16 pc IV should mean 1 SD of forecast annualised realised volatility over life of option is 16 pc
So it is a bet on high or low volatility if i get it right.
For a moment a thought it be a way to make money with bitcoin before i relized that options would be prized in and nobody is selling and buying crypto on that frequency since it is to expensive and slow.
Hey Patrick, is this strategy a good way to get started in options trading?
No. It’s best left to market makers that collect edge taking the other side of trades. If you’re going to guess on the direction of volatility you might as well guess on the direction of a stock.
Dude I have a question this is making a lightbulb go off. Follow me here.. APRE 0 volume May 15th calls. Obviously IV is low.. all time low or near it. 30-50% below PT by analyst. Could you not sell at the ask to the market makers for less than you paid on an IV Spike?
thx bro
No problem
so it seems the frequency of dynamic hedging impacts the profitability of the strategy. Anyway, very good video!
That is correct. I talk a little bit about that in my video on volatility swaps too.
Do you necessarily have to hedge your deltas with long/short shares?
You can just trade the options on their own, but then you are more exposed to the price risk of the underlying. If you wanted that exposure it is easier to just trade the underlying.
You have good content but you should use some examples and graphics to explain
Not meaning to be pedantic. I am a bit of a noob, but isn't 16% vol a 0.8% daily move?
Why do many traders trade on volatility? Is it easier to know when the realized volatility is below or above the market forecast than betting on stocks directly?
Until vix futures and variance swaps the volatility component of options was probably the only way to hedge embedded options in structured products.
Some traders speculate on the direction of volatility but net are probably as unsuccessful as traders trying to predict the direction of the underlying.
Often traders are using outright options and the market makers taking the other side of their trades are managing their inventory through this delta neutral method. And until 1987 the whole curve of an expiration month basically traded at one IV so there was less vol risk.
Volatility tends to move much slower than the underlying. There were ways to hedge the other inputs that determine the price of an option except the volatility component until vix futures.
Thank you. Very informative but in my view had to watch the video like 5+ times and still could not make it into a practical procedure to trade. I bought the book to find a way to make it a strategy that I can implement. I'm doing CSP and rolling them until expire OTM. Hugely profitable for sure, but require to hedge constantly against black swans all time. I could settle with less profit and more peace of mind.
An example procedure matching his description: buy an ATM call and short 50 shares; trade shares to bring the delta back to zero once per regular trading session until expiration or until outlook changes.
Am I right to assume that when IV is low, purchasing a long dated straddle and hedging it daily till 90 days exp would be a profitable strategy?
Buying a straddle is long vol, so you would make money if actual vol turned out to be greater than implied vol when you bought.
Remember Patrick's point that options need quite a profit margin for the seller's high risk (even "when IV is low", arguably) -- so holding a straddle for 90 days sounds quite expensive. I'd ask questions like "how can I reduce the risk of not capturing enough realized volatility or IV increase?" "How can I reduce the cost of my volatility exposure?" "Where else might I look for more/less sensitivity to realized volatility during the life of this trade?" Answering these questions could actually be fun and interesting.
Can retail investors utilize volatility arbitrage?
In the long and right case, could some one explain why we hedge by buying when the delta is zero and hedge by selling when delta is 1. I thought it was the other way round. We have to buy the full notional when delta is 1 and when it is zero essentially there is no hedge and hence we sell all the underlying
The delta of the call is zero. Not the net position. So if you start off long 2 ATM calls and short 1 future then the futures selloffs hard so the calls now have a delta of 0 then your net delta is short 1 from the initial short future. So you have to buy back the future to get back to delta neutral.
If in the other scenario the futures rally excessively then the calls have a delta of 2 and your short 1 future for a net delta of +1. So you have to sell another future to get to delta neutral.
No one has commented on the sound of the person who enters and proceeds to shave with an electric razor for the last five minutes of this video? Impossible.
You're right in pointing out that it isn't actually arbitrage and it really pisses me off that the word 'arbitrage' is misused all over the place, particularly with 'retail arbitrage' which is nothing more than simple trading. You buy something cheaply and then hope to sell it for more money. That's trading. Not arbitrage. Stop using this word incorrectly.
Volatility arbitrage is a technical term with a particular meaning. He's not using it incorrectly.
He, himself doesn't dictate the vernacular. He's said in a previous video exactly what you're saying about finance.
How do we effectively manage the gamma risk exposure?
If you’re long then there is not gamma risk. Just theta. If short then by negative gamma scalping with the underlying.
@@75pdubs most often this strategy is short gamma. And if gamma when you don't manage well will kill your strategy when it blows up.
I bought 1 call and 1 put, both ATM and hedging the delta. The underlying IV was below its historical average, yet both contracts lost money as IV increased. My question would be is this volatility trade still possible if someone is simply buying delta hedged puts and calls when the IV is low, or does this only involve those who are writing the options into the market?
It works for volatility buyers and sellers (they just want/expect different market behavior). Your trade could have struggled for many reasons -- did you get a good fill price on the contracts? Did IV increase on your portion of the maturity curve? Also, did you attempt to extract profits from increased realized volatility by rehedging?
I became a millionaire using $2,000 & implied volatility thanks so much
How did you do it? Thanks 👍🙏
tell us about it 👀
gotta make it simpler for the masses man
lol fair, but there is TONS out there for the masses -- and yet there's almost no one else like him!
Good job ❤, JESUS IS COMING BACK VERY SOON; WATCH AND PREPARE❤