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Ditto. I was once told that in vol trading, if you're "making more than 60% a year, you're doing something wrong". The point being that with any option spreads

Ditto. I was once told that in vol trading, if you're "making more than 60% a year, you're doing something wrong". The point being that with any option spreads, there is a risk-reward ratio, professional's care about money management than profit. You're trying to earn on the theta decay or vice versa, facing theta decay and banking on gamma moves. So you're either facing the death of a thousand paper-cuts with option time premium eroding your bankroll, or you're facing the LTCM catastrophic loss with the wrong kind of risk management. Even when you trade directional, this past year, both realized and implied vol has been low, with VIX bouncing between 11-20 with median at 13 or 14; you can make lots of money long OTM options in 2008 or flash crash, basically you're playing Nassim Taleb's "long-tail"; this past year simply doesn't warrant that kind of performance unless you're doing some kind of OTM buying on biotech companies and betting correcting on a majority of your catalyst events.

nemanja 12y ago
Yep, you are spot on about how it works in the real world. Incidentally, you may get all three (i.e. small profits from daily delta adjustments + theta decay + gamma upside) on some trades, but the bottom line is that it always requires a vol view when you enter into the position, which lends it self to being wrong sometimes. There, you hit on another interesting point - even with all of the mess brewing in Ukraine, realized has been relatively low (and probably way below desks' expectations) this year, which I would bet caused some underperformance across the vol desks this year. Don't know what was realized vol in oil lately (likely high given recent price action, have no sense of the shape/magnitude), but perhaps that's where he's seen some returns in simulated trading. Needles to say simulated trading is very, very different than the real world, with bid/ask spread dynamics, options illiquidity, collateral requirements, funding costs, borrow costs, etc.

nemanja 12y ago

Yep, you are spot on about how it works in the real world. Incidentally, you may get all three (i.e. small profits from daily delta adjustments + theta decay + gamma upside) on some trades, but the bottom line is that it always requires a vol view when you enter into the position, which lends it self to being wrong sometimes. There, you hit on another interesting point - even with all of the mess brewing in Ukraine, realized has been relatively low (and probably way below desks' expectations) this year, which I would bet caused some underperformance across the vol desks this year. Don't know what was realized vol in oil lately (likely high given recent price action, have no sense of the shape/magnitude), but perhaps that's where he's seen some returns in simulated trading. Needles to say simulated trading is very, very different than the real world, with bid/ask spread dynamics, options illiquidity, collateral requirements, funding costs, borrow costs, etc.