Today I will mainly share my experience and experience of trading options volatility rates in the US. I returned home last April as a market trader, off-the-shelf options and quantitative investing in consultative futures. I will divide options strategies into several categories, mainly about what options actually do, hoping to be an inspiration for you.
There are two types of options, one is bullish and one is bearish, for example, now sugar 1705 is worth 6500 yuan, and I hope to buy sugar futures worth 6500 yuan in a month. This is your right.
Of course, it doesn't have to be 6500 yuan, I hope to be able to buy this futures at 6700 yuan in a month, it's 6500, 6700 yuan or even 7000 yuan, different options give you a lot of different combinations, futures can't do that, futures are now bought at whatever price, they're going up, they're going down, they're going down.
The basic strategy of options, the easiest thing to do with options. The first is a simple buy and sell, you can buy and sell, and you can also sell, and there are also buy and sell, which are four combinations. Because there are different underlying prices, you can do all kinds of combinations, underlying prices, underlying prices can be combined, different underlying prices can be combined, different expirations can also be combined, options plus underlying prices then become a three-dimensional transaction.
The price differential combination is based on your different view of the market, such as in the next month, five months, six months, how you think this indicator will move, such as the white sugar 1709 contract in the next three months, first gaining 6900 yuan, then falling back to 6500 yuan, continue to fall to 6300 yuan, and then falling back to 6700 yuan, if you have these views, you can express your opinion with different trading prices.
You think you've been down for a while and you can't break $6,300, you sell $6,300 down, and the rights are yours again. So you can do all kinds of combinations using options. If you can't do that with futures, this point you can only do this operation with a stop-loss break even, with options, you can do a more complex and better suited to your expected strategy.
There is also a combination of options and quotes, which you would normally do very well in futures investing, and this time an additional option can be combined with your quotation. For example, you hold more than 1,709 contracts, but you think the price will not exceed 6,900, so you sell the quotes, reserve the quotes, you sell the quotes and increase the income. If you do more, and finally you look in the right direction, the price rises but does not exceed 6,900, you sell the 6900 more profitable than other strategies, this is the strategy of the option.
You can also control the risk, for example, you still buy 1709 white sugar contract, you are afraid that if it falls you will have a relatively large loss, at this time you can buy a bear option, for example, you spend 5% of your money to buy a bear option, now 6500, you buy a bear, you spend 5% of your money to save 6500, this is more than the head there will be no more losses, because below 6500, your bear counterparty is obliged to compensate you, but the 5% money will not return.
If the future really falls, your biggest loss is this 5%. So after the option, you don't need to stop the loss, your loss is up to 5%, but if you go up, you're right, this gain is yours. If the futures are about to stop the loss, especially retail stop loss is the most unreliable thing, stop, lose 5% and endure to 6%, endure to the end, it doesn't matter, the account is not seen every day, many retailers are in this state.
There are many combinations of options strategies, bulls, bears, cross, butterflies, and calendar, which can be used in practice, and you can make a variety of combinations as long as you have a view of the market.
Calendar price differential, the calendar price differential of futures is different from the stock ETF index, because the corresponding index of each option is a futures contract of a certain month, the corresponding index of the stock ETF is that stock, so the stock ETF index option is a price of the same index, the futures option each option corresponds to different indices, these indices may have a relatively high relevance, may contract fluctuation in May, September contracts also fluctuate, but there are often nightly variations, we do nightly dividend, because the price of the futures expired every month is not fully synchronized, sometimes the price rises into water, sometimes it turns into water, which is very variable.
Therefore, it is important to be careful with the calendar price difference of the futures option, which is very different from the common stock price. If you are using the calendar price difference in real-time, you should be careful. Commodity options and stock options markets are not the same. If the relative value of the two-month futures price difference changes, it will not affect the value of the option, because the stock options in different months correspond to the same price, which is not the same, there is a big difference in real-time.
There are some inherent mathematical relationships between options and indices, and these mathematical relationships must be maintained, and when you violate this relationship, you will have the opportunity to hedge against risk. For example, the simplest option parity formula is that the option's bearish and bearish options have a mathematical relationship that must be satisfied, and when it is not satisfied, you can hedge against it.
Or you have a multi-headed can make a profit, you sell a put option, increase your income, if in the future the market does not rise above the trading price you sell, the right money is your increased income. Options can also be synthesized, for example, you buy a put, sell a put, which is composed of a multi-head. Or vice versa, you buy a put, sell a put and become a blank head. Options can be synthesized futures, futures can do everything options can do.
Options have a theoretical model, the most common being the Black-Scholes model, in which the variables are the strike price, the price of the underlying asset, the time, the interest rate, and one of the invisible variables is the volatility rate, why does the volatility affect the price of the option?
So when I sell options, I decide how much I'm going to pay for this probability in the future, what does this probability have to do with? It has to do with the magnitude of the volatility in the price of the asset, which is very large and can easily exceed the price of the option, which is a bit more expensive to sell. The most invisible and most important factor in option pricing is the volatility.
With this formula, if you have the actual volatility, say you know what the volatility is in the next month, you can calculate what the option price is. But where is the problem?
The volatility rate divided by the actual volatility rate and the implied volatility rate, the actual volatility rate is how much volatility is actually caused by the asset in this index in the next month, the implied volatility rate is only a rough estimate when the option is sold, I think how expensive the option should be, the price of the option you sell can be reflected from that pricing formula, this is called the implied volatility rate.
So the volatility is the real price of the option. When you look at an option and you want to know if it's expensive or cheap, you use this model to project the implied volatility, you look at what the actual volatility is, the actual volatility can be calculated, for example, the last month, half a year, year, the market price changes are formulated, here I list the algorithm for the actual volatility, the simplest criterion is bad.
You calculate the implied volatility rate and the actual volatility rate to know whether the option is expensive or cheap. For example, the recent black volatility rate is very high, anyone who wants to buy the option on the black to protect the fall, at first glance the price does not buy, too expensive, why is it expensive?
Different volatility rates have different methods of comparison, Parkinson is more commonly used, not only to consider the price fluctuation of the closing price, but also to consider the fluctuation of the day, the highs and lows of the day, and use this fluctuation to calculate the actual fluctuation rate. This actual fluctuation rate can help you estimate whether the recent market is volatile or unilateral.
Since volatility is the price of an option, how can I predict what the volatility will be in the next 1 month, 3 months, there are many methods, GARCH is the most famous and also won the Nobel Prize. It uses historical data to predict future volatility, it seems to be predictable, but is it actually predictable?
In turn, I use the data from the last month to predict the next month, the last month the Fed just held a meeting, there is a relatively large volatility in the market, the next month there is no such meeting, do you use this data to predict right? or wrong. So in the real world, we do not use GARCH, we prefer to use the volatility rate, its average is probably an estimate of the relationship between the actual volatility and the implied volatility rate to decide whether I buy or sell, do more or do nothing.
I know that there is a hedge fund in Boston that claims to make money with GARCH and wants to work with us, but we don't trust it and we don't find a good entry point, so we don't work with it. Less than two years later, the hedge fund is gone. It's possible that the money he made in those two years was a coincidence, he predicted luck with GARCH, and then he went on to do something that definitely didn't work.
This is the guy I mentioned earlier, a volatility bull named Nassim Taleb, the author of Black Swan, this guy is a bull, he started out as an options trader, forex, commodities, indices, stocks, and then he felt he wasn't good enough in theory, so he ran to NYU for his PhD, and then he came back to be a trader, both in theory and in practice, and he wrote a book called Dynamic Hedging: Managing Vanilla and Exotic Options, which he called the bible of how we do volatility hedging, and we can always be inspired whenever we don't understand something or something confusing comes up in his book, and a lot of our control indicators are inspired by his book.
The Greek values, the variables that affect the price of the options, so you've got a lot of confusing stuff going on, which is the sensitivity of the price of the option to different variables, and how the price of the option changes when these variables change by one unit. This is not difficult to understand in theory, the problem is that you understand it, you don't remember it, and after a long time, you forget it.
Options by its definition have some inherent mathematical relationships, where there is a chance of no risk leverage when the mathematical relationship is not satisfied. Butterfly spread, where you sell the middle two bidding options, and then buy a real-value bidding option on both sides, a worthless bidding option, whose return is shaped like a butterfly.
The cross-supplement is a simple mathematical relationship where you make a cross-supplement if the price goes up or down, the value of the cross-supplement should go up or down.
Calendar price differential interest rate, stocks or indices, the price difference of the same mark, this is also what you have to spend money to buy, because you are going to buy long months sell recent months, long months of time, time value should be more expensive, recent months should be cheaper, you buy long months sell recent months must be profitable. But sometimes there will be you buy far months on the contrary cheap, recent months expensive, that is not right, at this time you desperately buy far sell recent months, this money is stable.
Conversion and reverse options, bullish and bearish options can be synthesized futures, synthesized futures have a price, real futures also have a price, compare the two prices, if the price is different you can buy cheap and sell expensive, which is also a risk-free option.
I suspect that there is no risk-free leverage opportunity now. But because we are market traders, in order to keep the market stable, to complete the obligations of the exchange, we do not have a risk-free leverage opportunity at the beginning of the process, because the market is smooth and there are no problems, but we definitely have a strategy to run a risk-free leverage. 50 ETFs were there in March 2015 and until March 2016 there was a risk-free leverage opportunity.
Options also have another advantage, futures are multi-headed or empty-headed, the market moves to make money, the options market is also non-moving to make money, add a good tool to your investment strategy. Many of the CTAs here, you are the most bitter is that it is difficult to find a strategy of average returns, everyone is trend-following, when there is no trend it is bad, always stop loss, withdrawal is big.
If you look at the scalar quote in your mind, you can quickly do a calculation to see if this equation is equal, if it is not equal, you think there may be a leverage opportunity, of course you are calculating in the orderly way.
The concept of the term hedge: you have a multi-headed asset buy a bearish to protect this price, if the price falls, you can avoid a big loss. There are several problems to be aware of, we also encountered in the United States, always someone comes to ask you to help me make a strategy, I am now a multi-headed stock, if the stock market goes up, I will make a lot of money, if it goes down guarantee me not to lose too much.
But there are very few times when the market falls, especially the US stock market, from March 9, 2009, when President Obama called for people to buy stocks, until now Trump came to power. 8 years of bull market. It must be terrible if you buy a bear option all the time and do a bear protection. We did a review, every month you buy a bear option to protect your multi-head position, and the final loss is much more money than the stock market makes.
The concept of the term collateral is good, but the insurance is expensive. At that time we also had a client who asked us to do the term collateral, can you give me insurance, and not spend too much money. If you can not do a simple option purchase, what is so good, what is the free insurance?
We gave him a strategy, we bought a six-month bearish, 0.5 delta-level bearish, and then sold two 0.25 delta-level bearish in January, which is equivalent to the calendar counterparts, bought a long-term one, sold two short-term ones, and rolled back the expiry date every month, and sold five short-term ones, you had to do a little combination, you couldn't just buy one bearish, and it certainly didn't work out.
Alternatively, if the hedge is profitable, you buy the downside, if it really quickly falls, then you are going to make a profit, you are going to flatten the deep real-value option, and you are going to buy a par value or a zero value option as protection. Because a real-value option is equivalent to hedging with a futures, it makes no sense, you should throw away the futures, take the profit of the option hedge, get a profit, and then buy a par value, or even buy two zero values.
There was a guy who did a power coal buy-down protection, power coal fell quickly, we told him to flatten this one, and then buy two more worthless ones. Then the power coal pump went back, and he was happy, because buying a worthless one was cheap. The option to go back is equivalent to a set of hedging periods and it's a waste, because you are a multi-head power coal profit, you don't care about the white money.
The option variation is the model I just mentioned of the time-proportional price difference to make the option, which may be more attractive to users. The choice of time, if you have a need for long-term option protection, you should pay attention to the volatility of the option, depending on the volatility can know when it is cheaper, often when the volatility is lower, you buy a slightly longer term option is cheaper, not to buy a month's option every time the market falls.
If you are a long-term trader, you should buy a slightly longer-term option when the volatility is relatively low. For example, you can buy a six-month bear option once and it will certainly be cheaper than you can buy six times a month. Although you can see that a one-month expiration option is cheaper, if you buy six times a month, it is definitely not as good as buying a six-month option directly from the beginning, because the more time consuming the relationship, the shorter the expiration option is.
The gain strategy is to sell the put option as a reserve, which is a very popular strategy in the United States, and almost all equity funds do this strategy. Because the CBOE has an index dedicated to this strategy, one is BXM, one is BXY.
The chart above is the slope of the S&P 500's 30-day implied volatility curve, and the one on the right is very low. That's what these fund managers are selling, everybody's selling, and you can see that the S&P 500's volatility is very low, a few bucks, a piece is fine.
This is just the comparison, the difference between selling a flat-value bull and selling a negative-value bull, red is the index of selling a negative-value bull. You sell a negative-value bull, what if the market goes up and exceeds the market price, it means that you are short, you keep selling a flat-value bull more times, you sell a negative-value bull less times, so selling a negative-value bull will be better.
In addition, the overall trend for the S&P 500 is upward, so selling the peg is always a gap, selling the even value is often a gap. You do the gain strategy is definitely to sell the zero-value peg option, as for how much to sell? How are you going to decide?
But the more often the right call is less valuable, you have to make a choice, you choose a point where 80% of the time you won't be called away, say a zero value of about 5%, you make this decision based on your own research. This is our white sugar main contract monthly return distribution, which is close to the S&P 500, but not biased to the right, closer to the middle, to the normal distribution.
Retail options are market speculation, where the dream is to buy a bearish bearish, then the market suddenly rises, or buy a bearish, then the market suddenly falls. Because options can be leveraged, the higher the leverage, the more leverage the bearish has.
Here I have listed some of the most commonly used spreads in market speculation, such as reversal/conversion, which you can synthesize with a bullish/bullish futures. Many people think that a cross and a wide spread are volatility trading, which is not the case. When you buy a cross, you still want the market to rise or fall, although the volatility spread adds value to you, but your strategy is not a volatility strategy.
Unilateral speculation has a buy-to-let strategy, a buy-to-let strategy and a trend or rollover, futures can be both buy-to-let and down, but can also be done when options are rollover.
We have done the statistics, if you expect a large return with options is unrealistic, even if you play a hand, as long as you continue to do it will eventually lose all the money, buying options must be a strategy to lose money, to make money is certainly by selling options, but selling options one of the biggest problems is the risk, when you sell once the market is unfavorable to you losses are unlimited, whether you sell up or down.
Volatility is an invisible variable, which is why the BLACK-SCHOLES model mentioned above is used. It is a pricing formula that also reveals a principle that the option can be replicated by the appropriate broker through a continuous buying and selling. When you buy and sell the option at a certain rate, the final profit and loss is equal to the option fee, so the option is replicated against the dynamics of the leveraged index, at which time the option can be traded at a volatile rate.
The price of the option is determined by the volatility rate, so you buy and sell constantly according to the price changes in the market, you make more money when you copy options with volatility, when the volatility rate is high, you make more money, the option fee is more expensive, if the volatility is low, the fee is less, the option is cheaper. If you buy an option or sell an option, you can hedge it with a replica, and finally the price you get is the price of the actual volatility rate, the price you buy and sell is the price of the implied volatility rate, at which time you can speculate between the implied volatility rate and the actual volatility rate, make a profit. This is the simplest meaning of volatility speculation, this is the principle revealed by the BLACK-SCHOLES formula.
We have a formula for calculating the actual volatility, for example, the actual volatility in the last month was only 10%, and now the volatility in the beans is 17%. I should empty the beans option and then hedge with the beans futures endlessly, if the final actual volatility is really 10%, you sell 17%, gain 7 points.
The simplest is that you buy the option and then copy it over and over with the index, making it delta-neutral, shielding the sensitivity of the option to the one-sided direction of the market. If you buy the option and then do the neutral hedging, you're actually buying it over and over at the bottom and selling it at the top, and everyone has room to polish the process, which becomes a process of buying low and selling high, which is comfortable.
The client has a demand, needs price insurance, he buys you a down, what do you do? You copy the option with a blank in the futures and then sell it to the client, which is the out-of-the-box option. Compared to the in-the-box option, the out-of-the-box option does not have a standard format, the liquidity is also a little bit worse, the price difference is larger, and there is also a liquidation risk, so we are looking forward to the out-of-the-box platform of the brick and mortar store.
This is probably commonly used, there is a relative relationship between the different volatility rates between the different options, and in the extreme case you can buy one and sell the other. Data standardization is used in quantitative techniques, how to scan the data to get these opportunities, quantify it, and by quantifying you can automatically scan the opportunity to find the transaction.
This is a strategy I did in 2009, and by the time I left in 2012, I had done it for three years, and it paid off well. Whether it was using a large probability distribution of options, or using a calendar spread or butterfly, is there a strategy where you make money when the market is not moving?
For example, we look at the historical distribution of the S&P 500 and find that most of the time it's static. I design a strategy where I keep buying calendar spreads and then holding them, say for a fixed 30-day period, and every 30 days I flatten the front. I do this by using probability events, and the end result is pretty much the same, a 70% win rate, an average return of about 40%, and of course a slight pullback.
I'm not going to talk about the more subtle volatility leverage that options can do, for example, the leverage is what we did the most in 2007 and 2008, the spread between the two volatility rates, which we did a lot of, and the market capacity is big.
Translated by Poker Investors
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