tag:blogger.com,1999:blog-897456774486153841.post8881753371514455757..comments2024-03-29T03:46:10.767-07:00Comments on VIX and More: The Trader Development Stage Model and the Jump from Stocks to OptionsBill Lubyhttp://www.blogger.com/profile/01241003017364820134noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-897456774486153841.post-80766267121040639552009-10-02T10:33:43.941-07:002009-10-02T10:33:43.941-07:00Thanks for all the comments.
Mark, I am inclined ...Thanks for all the comments.<br /><br />Mark, I am inclined to agree that using the Greeks actually makes options easier to manage in terms of risk, particularly at a portfolio level. I suspect, however, that most beginners do not get much farther than delta, if they even get that far. Of course there are options positions with defined or limited risk, as well as positions with unlimited risk. Some options traders make sure they always have defined risk positions, so their risks are better managed than a stock trader who fails to put in an automated stop loss order. This is clearly a subject that needs to be explored further. As a matter of fact, I am going to make the Greeks a more important part of this blog going forward...<br /><br />Regarding Black Scholes and the risks associated with the fat tails, this is a critical point, but one that can be taken out of the equation with defined risk positions.<br /><br />Cheers,<br /><br />-BillBill Lubyhttps://www.blogger.com/profile/01241003017364820134noreply@blogger.comtag:blogger.com,1999:blog-897456774486153841.post-9067810765901116912009-10-01T08:08:23.380-07:002009-10-01T08:08:23.380-07:00@Mark: I respectfully disagree. Black Scholes is a...@Mark: I respectfully disagree. Black Scholes is an intellectual albatross and is regularly arbitraged whenever an option can be bought from a dealer pricing with the model and then sold into the open market based on actual demand. The quantitative risks of options only hold true most of the time, but when you get these tail events that seem to happen quarterly but are only supposed to happen every 100 years, then you can get burned very badly, especially if you are short and your hedges don´t work all of the sudden.Patrickhttps://www.blogger.com/profile/13614962832390315553noreply@blogger.comtag:blogger.com,1999:blog-897456774486153841.post-72625140141816717052009-09-30T20:35:34.579-07:002009-09-30T20:35:34.579-07:00"edges that work for stocks don’t necessarily..."edges that work for stocks don’t necessarily work for options and risk management becomes much more complicated and difficult."<br /><br />This is an interesting point of view, worth discussing.<br /><br />I agree that risk management becomes much more complicated. After all, when you own stock, there is only one variable to manage, and that's delta.<br /><br />The beauty of options is that risk can be quantified by using the "Greeks." The question becomes: does the ability to sue the Greeks to measure risk make things more or less difficult to manage?<br /><br />Can something be complicated, yet not difficult? I believe it can. Option traders can manage time decay, volatility risk, delta risk. And they can go further and manage second derivatives such as gamma.<br /><br />Risk is easily reduce with options. Bill, I agree it's more complicated that stocks, and it's more difficult because there's more to learn. On the other hand, does the ability to manage risk on several levels make it less difficult to be profitable?Mark Wolfingerhttp://blog.mdwoptions.com/options_for_rookiesnoreply@blogger.comtag:blogger.com,1999:blog-897456774486153841.post-60105796502646613862009-09-30T16:43:54.230-07:002009-09-30T16:43:54.230-07:00You sure play to the level of your competition Mr....You sure play to the level of your competition Mr. Luby. <br />LOL. <br />This second post is the higher level most of need to see, similar to a Dr. Steenbarger blog. Most of your Vix blogs are quite complicated, but then you impressed me greatly with the YUM/swine flu analysis a while back.<br />I'll stick with stocks for now and gradually pile on the Gladwellian 10,000 hours and wait for a real bull market before I enter the options foray. <br />Thanks.keithpiccirillohttps://www.blogger.com/profile/16713240199705068281noreply@blogger.comtag:blogger.com,1999:blog-897456774486153841.post-88819508462523949172009-09-30T16:41:51.157-07:002009-09-30T16:41:51.157-07:00While I thought your model was interesting I'd...While I thought your model was interesting I'd say a lot of caution professionals may express toward heavily using options is that counter-party risk is an increasingly real specter over these trades. What happens if major broker/dealers are exposed to gross amounts of short risk on gamma positions and get hit with 100-year-flood type losses, rendering them bankrupt? Who can you trust to not be vulnerable to the rest of the financial system?<br /><br />Personally I'm looking forward to when CDS contracts start being exchange traded.Patrickhttps://www.blogger.com/profile/13614962832390315553noreply@blogger.com