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Interesting article but for a different take on a statistical approach to the market, curious if any peeps on HN are into volatility trading? From what I under

Interesting article but for a different take on a statistical approach to the market, curious if any peeps on HN are into volatility trading? From what I understand a lot of the "DIY vendors" cater to the equity crowd, meaning people who build their models on technical indicators (MACD, RSI, advancers/decliners ratio, Fibonacci golden ratio retracement, MA); you build your model of some combined signals, back-test it with historical data on some tickers to see if it's promising. I trade options, specifically selling 1.8-2 sigma calls and puts (with 90%-95% probability of not being in the money) on the major market indices (SPX, RUT, NDX) 45 days out from expirations; so kinda of like an insurance company underwriting policy or a bookie taking bets from both sides. When the market moves against me (e.g., Grexit), I try to hedge my exposure to that side of the market by buying a longer dated call and put neutralizing the delta of my overall book (kind of like going to the re-insurance market to hedge my book); and also adjust the spread or close it entirely for a loss if risk/reward no longer works out. But I never trade directional or have any market outlook; and do this systematically and only thing I change is sizing my book depending on how high VIX is (insurance premium/market fear). This is a well-documented and traded strategy for peeps who follow, say TastyTrade, volatility arbitrage funds or just options in general. Just curious if anyone here also trades this way?

lifeisstillgood 11y ago
I don't trade but I am interested in understanding what HFT and other algorithmic trading actually is (having been fooled by The Flash Boys into thinking it's something it's not and having been frustrated trying to find out what it really all is. Any pointers gratefully rcvd
- noname123 11y ago
  Np, lifeisstillgood. I'm busy at work today, so am afraid I can't give full-length explanations. However I'll provide some links to some of the ideas. HFT: Most HFT strategies involves making a market or rebate trading. https://en.wikipedia.org/w/index.php?title=Market_maker&section=6#How_a_market_maker_makes_money https://en.wikipedia.org/w/index.php?title=Market_maker&sect... https://en.wikipedia.org/wiki/Day_trading#Rebate_trading https://en.wikipedia.org/wiki/Day_trading#Rebate_trading They leverage being co-located next to the exchange servers and trading algorithmically. Anyone can sign up (provided you have >500K capital). http://www.lightspeedinstitutional.com/automated-trading/lightspeed-gateway/ http://www.lightspeedinstitutional.com/automated-trading/lig... http://limebrokerage.com/SystematicTrading/Network/CoLocation http://limebrokerage.com/SystematicTrading/Network/CoLocatio... Algorithmic Trading: HFT is form of algo-trading, just higher frequency. Most peeps in the WSJ article is probably hooked up to Interactive Brokers via Quantopian doing swing trading (entering and exiting a position on order of days or weeks). Here is a good Quantopian back test: https://www.quantopian.com/posts/system-based-on-easy-volatility-investing-by-tony-cooper-at-double-digit-numerics https://www.quantopian.com/posts/system-based-on-easy-volati... The paper behind the back test: http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Vola... The gist is selling VXX, the VIX 30-day synthetic futures when a VIX ratio indicates that it is too overpriced. But should give you an idea of how a backtest works and how signal (VIX ratio) is generated. Options Trading: It's harder to explain options satisfactorily in short space of time (basically you can google Black-Scholes model, options, option greeks). There's a whole online retail community devoted to this and probably very cultish and strange to people who don't follow it; but if you want to check it out: (https://www.tastytrade.com/tt/ https://www.tastytrade.com/tt/)
  - lifeisstillgood 11y ago
    Thanks to both of you- lots to sink my teeth into
- evanpw 11y ago
  This blog is the best public description I've seen: https://mechanicalmarkets.wordpress.com/2015/01/13/trader-type-and-order-age/ https://mechanicalmarkets.wordpress.com/2015/01/13/trader-ty...
conistonwater 11y ago
This strategy is often used in finance courses (in the context of portfolio optimization) as an example that very badly trips up conventional risk measures due to the very peculiar and ill-behaved risk distribution. Insurance companies depend on risk pooling, and bookmakers depend on running balanced books, which would distinguish them from this type of strategy.
rbinv 11y ago
If all those TastyTrade strategies work, why isn't it being automated and backed by significant funding? Serious question.
- gnaritas 11y ago
  Because significant funding requires significant liquidity and strategies that work for an individual trader can exploit being small to find opportunities too small for big money to bother chasing. Small players can enter and exit trades instantly with little slippage, big players move the market and have to play a very different game to open large positions.
- TuringNYC 11y ago
  Someone with significant funding could try -- but they will end up having 10 meetings with employees, contractors, accountants, auditors, and before you know it, you have eaten up all the profit the trade might have produced. Think of that awesome baseball card you purchased at a 10 cent discount at the corner shop. Would it make sense for Goldman Sachs to do a comprehensive search for all such deals and "profit" 10cents a piece off them?
throwawaymsft 11y ago
I do something similar trading volatility, using mean reversion/contango to make directional options plays. After a spike like Grexit volatility tends to return to its historical mean.
- noname123 11y ago
  OK. Cool, I assume you trade either VIX put spreads or calendar spreads, or short VXX or long XIV on a VIX spike? If so, I do this as well. :)
jmpeax 11y ago
> But I never trade directional or have any market outlook I'm an amateur to all of this, but isn't trading volatility the same as directional trading? Volatility goes up and down just like price goes up and down, isn't it just one time-derivative way, what's really the difference? Why not trade on volatility of volatility?
- TuringNYC 11y ago
  You can trade volatility of volatility (e.g. VIX options), or even volatility-of-volatility-of-volatility -- except the greater the degree of derivative, the fewer options you have to trade using publicly-listed securities. Also, even if there are publicly-listed securities, the lesser the liquidity and thus the harder/impossible to get in-out of trades. This can work if you are a big firm with access to private contractual derivatives, but you would still suffer from the 2nd problem: liquidity.

lifeisstillgood 11y ago

I don't trade but I am interested in understanding what HFT and other algorithmic trading actually is (having been fooled by The Flash Boys into thinking it's something it's not and having been frustrated trying to find out what it really all is. Any pointers gratefully rcvd

noname123 11y ago
Np, lifeisstillgood. I'm busy at work today, so am afraid I can't give full-length explanations. However I'll provide some links to some of the ideas. HFT: Most HFT strategies involves making a market or rebate trading. https://en.wikipedia.org/w/index.php?title=Market_maker&section=6#How_a_market_maker_makes_money https://en.wikipedia.org/w/index.php?title=Market_maker&sect... https://en.wikipedia.org/wiki/Day_trading#Rebate_trading https://en.wikipedia.org/wiki/Day_trading#Rebate_trading They leverage being co-located next to the exchange servers and trading algorithmically. Anyone can sign up (provided you have >500K capital). http://www.lightspeedinstitutional.com/automated-trading/lightspeed-gateway/ http://www.lightspeedinstitutional.com/automated-trading/lig... http://limebrokerage.com/SystematicTrading/Network/CoLocation http://limebrokerage.com/SystematicTrading/Network/CoLocatio... Algorithmic Trading: HFT is form of algo-trading, just higher frequency. Most peeps in the WSJ article is probably hooked up to Interactive Brokers via Quantopian doing swing trading (entering and exiting a position on order of days or weeks). Here is a good Quantopian back test: https://www.quantopian.com/posts/system-based-on-easy-volatility-investing-by-tony-cooper-at-double-digit-numerics https://www.quantopian.com/posts/system-based-on-easy-volati... The paper behind the back test: http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Vola... The gist is selling VXX, the VIX 30-day synthetic futures when a VIX ratio indicates that it is too overpriced. But should give you an idea of how a backtest works and how signal (VIX ratio) is generated. Options Trading: It's harder to explain options satisfactorily in short space of time (basically you can google Black-Scholes model, options, option greeks). There's a whole online retail community devoted to this and probably very cultish and strange to people who don't follow it; but if you want to check it out: (https://www.tastytrade.com/tt/ https://www.tastytrade.com/tt/)
- lifeisstillgood 11y ago
  Thanks to both of you- lots to sink my teeth into
evanpw 11y ago
This blog is the best public description I've seen: https://mechanicalmarkets.wordpress.com/2015/01/13/trader-type-and-order-age/ https://mechanicalmarkets.wordpress.com/2015/01/13/trader-ty...

conistonwater 11y ago

This strategy is often used in finance courses (in the context of portfolio optimization) as an example that very badly trips up conventional risk measures due to the very peculiar and ill-behaved risk distribution. Insurance companies depend on risk pooling, and bookmakers depend on running balanced books, which would distinguish them from this type of strategy.

rbinv 11y ago

If all those TastyTrade strategies work, why isn't it being automated and backed by significant funding? Serious question.

gnaritas 11y ago
Because significant funding requires significant liquidity and strategies that work for an individual trader can exploit being small to find opportunities too small for big money to bother chasing. Small players can enter and exit trades instantly with little slippage, big players move the market and have to play a very different game to open large positions.
TuringNYC 11y ago
Someone with significant funding could try -- but they will end up having 10 meetings with employees, contractors, accountants, auditors, and before you know it, you have eaten up all the profit the trade might have produced. Think of that awesome baseball card you purchased at a 10 cent discount at the corner shop. Would it make sense for Goldman Sachs to do a comprehensive search for all such deals and "profit" 10cents a piece off them?

throwawaymsft 11y ago

I do something similar trading volatility, using mean reversion/contango to make directional options plays. After a spike like Grexit volatility tends to return to its historical mean.

noname123 11y ago
OK. Cool, I assume you trade either VIX put spreads or calendar spreads, or short VXX or long XIV on a VIX spike? If so, I do this as well. :)

jmpeax 11y ago

> But I never trade directional or have any market outlook I'm an amateur to all of this, but isn't trading volatility the same as directional trading? Volatility goes up and down just like price goes up and down, isn't it just one time-derivative way, what's really the difference? Why not trade on volatility of volatility?

TuringNYC 11y ago
You can trade volatility of volatility (e.g. VIX options), or even volatility-of-volatility-of-volatility -- except the greater the degree of derivative, the fewer options you have to trade using publicly-listed securities. Also, even if there are publicly-listed securities, the lesser the liquidity and thus the harder/impossible to get in-out of trades. This can work if you are a big firm with access to private contractual derivatives, but you would still suffer from the 2nd problem: liquidity.