Expensive put options

manta · Post by **manta** » Fri Sep 17, 2004 3:53 pm

dadeto,

If I am not that stupid I would say it jumps from 5 to 13 (more or less).

dadeto · Post by **dadeto** » Fri Sep 17, 2004 4:10 pm

The BIG amount of options doesn't matter. Say, he sells options for 3% of AUM (that would be his monthly return if they finish OTM). On sep 10 he buys them back for double the price and realises -3% performance.

Conclusion: the guy was very lucky the index dropped to his treshold of -6% during the two weeks preceeding sep 11. If Sep 11 had happened on Aug 20, then it would have been a little more painful. But still, not a blow out. What if the market had just gapped down 10% or 15% on aug 20 without a chance to buy the puts back on the way down?

btw, if I remebmer correctly he didn't include 1987 in his backtesting...

I would be happy to start a hedge with this wonderfull idea!

dadeto · Post by **dadeto** » Fri Sep 17, 2004 4:20 pm

thanks manta!

in that case he sells a little less than 3%. which is in line with his average winning month of 2.59.

RFMontraz · Post by **RFMontraz** » Fri Sep 17, 2004 4:32 pm

Dadeto what you are saying makes a lot of sense.

Still the hypotesis is that he bought his options back and [b]didn't sell others[/b] (other strikes, next expiry etc). That is not obvious because if he trades this stuff in a systmatic way he "should" be always in the market somehow (unless his policy is: if I'm forced to buy the options back I don't sell anything else in that month, I take my little loss and I do the same thing the next moth after this month expiry). Coincidentially the 21th Sep01 (expiry) was the bottom of the bottoms.

Dunno, just tossing ideas around...

dadeto · Post by **dadeto** » Fri Sep 17, 2004 4:41 pm

thanks RFM!

now when do we start this fund? the only thing we have to avoid is big crashes that gap more than 5% in the sp Wink

opmtrader · Post by **opmtrader** » Sat Sep 18, 2004 5:46 pm

Here's a look at Zenith's Equity Curve

http://www.iasg.com/SnapshotPT.asp?ID=753

dadeto · Post by **dadeto** » Sat Sep 18, 2004 11:29 pm

Is this the same fund as before? Caus' the performances don't look exactly the same...

opmtrader · Post by **opmtrader** » Sun Sep 19, 2004 1:18 am

Yes, this the same fund, Zenith Resources. I would trust the IASG results.

RFMontraz · Post by **RFMontraz** » Sun Sep 19, 2004 5:37 pm

[b]dadeto[/b]: [i]The BIG amount of options doesn't matter. Say, he sells options for 3% of AUM (that would be his monthly return if they finish OTM). On sep 10 he buys them back for double the price and realises -3% performance.[/i]

[i](...)[/i]

[i]in that case he sells a little less than 3%. which is in line with his average winning month of 2.59[/i]

While I initially agreed with you, I've now taken another (closer) look at his monthly performance and there's something that doesn't quite fit with what you are saying. If he was doing what you suggest I'd expect to see gains of 3% (more or less) max. Instead there are months during which he has a positive return of 6/7/8%. How would you explain that?

opmtrader · Post by **opmtrader** » Sun Sep 19, 2004 7:06 pm

Hey guys, just wanted to add something. I'm really not advocating this strategy. I have no clue whether or not this guy is prime for a blowup. He seems to have mitigated his losses during a time which one would have to assume would adversely test his strategy.

To me this man's success shows the need for many of us to branch out into testing option strategies. It is a place where I for one have seriously overlooked. I began my "formal" trading career by dabbling in short premium strategies and quickly endured losses (and found that legging into them at better prices was the driver of much of the profitability - i.e. directional trading). I would like to reenter the options fray someday as there are other vectors to be exploited than just delta in directional trading, I just need to figure out how to do so properly.

Can any of the veterans tell us where to start? Any good options data sources out there? Is it a mortal sin to use the underlying to simulate option prices (i.e. using past realized volatility as implied volatility)?

Should we start a seperate thread to discuss the questions above?