Ask me anything about options

[Sensibull]

@dexter007

Hi Abid,

Thanks for conducting this AMA.

How do you recommend we correct our legged positions as per the changed volatility

Ex: I have formed a iron condor by selling 10200 PUT and 10500 CALL based on VIX index 1SD probability.

Now the IV’s have expanded a lot and the safe range according to VIX is 10000 - 10700. What you recommend in this case ? Should we sell our old positions and create a new leg as per current volatility ? I am ready to bear some M2M loss but want to make sure I am still in the game and make some money by end of the month .

Hey @dexter007 ,

Tough question. If I were you I would not get out of a position unless

1. Your iron condor is making losses.
2. You are seeing the possibility of a big move (in which case you should not have the bigger condor either, and rather have options bought)

[Sensibull]

@abbanerjee

My question isnt about any segment. Its more about how do sellers of options make money in general as I assume they quote both sides. I have not worked in market making as well, and hence I dont know how this works and I thought you might be knowing.

I really dont understand the statement where you say that in case there is no view one can quote both sides and earn the bid offer spread. This is exactly what my question is infact. Say that you are quoting Nifty Put at bid-offer spread of Rs 3. How would you do this ? I can think that one would put a limit order to both buy and sell at 3 Rs apart. Is that how it works ? And what happens if one of your limit order is filled. How do you then earn the bid ask. Can you setup a limit order such that the moment one of your legs are filled you can go arround and square it off hence earning the bid-ask. This is what I am not able to get my head arround. Hopefully you can understand my question - and maybe the answer is more basic than how market making works, but thats really what I am trying to ask. How exactly does one earn the bid-ask spread.

Hey @abbanerjee - Let us logically think it through.

1. We know this happens in illiquid markets . So they bid offer is wide.

2. We know the market maker has no definite interest. He/ She thinks rangebound

3. So in a mild range- bound market let us assume you are quoting a wide bid offer, say 3 points on NIFTY. You get hit on bid and offer 10 times. Thats 30 points. and let us say that NIFTY move is very small, so any losses you might have had to take by improving the bid/ offer after one side got hit, or by covering at a loss is smaller than the 30 points.

The catch is getting hit 3 points many times. You get it hit 100 times, it is 300 points.

I guess. Again, have not done it in real life, sorry about that bit. I’m asking this to people who I know who have done that. Will get back!

[dexter007]

yes my Iron condor will make loss due to volatility skew where I will start bleeding more in my short PUT position compared to CALL position short gain So what you recommend at this state ? Exit or reposition ?

[dexter007]

Hey Abid,

One more question

What strategy you recommend when you know for sure the VIX will increase or there will be lots of uncertainty . This will come handy next month when there will be elections and FED announcements. Market for sure will not remain calm and may become violent. Is there any strategy which makes us money irrespective of the direction but by just based on volatility. (Delta neutral strategy may not be helpful when VIX expands like anything right so there should be something else.

[mparmar]

@Abid_Hassan hi abid I am trading into currency options and want to develop more. What are the prospects of currency trading in India. Moreover what strategies can be explored for CD options . Need your opinions .

[Spaceship]

Currency options in India lacks liquidity.

[Sensibull]

@dexter007

yes my Iron condor will make loss due to volatility skew where I will start bleeding more in my short PUT position compared to CALL position short gain So what you recommend at this state ? Exit or reposition ?

Hey @dexter007

Depends on you view on the index. On a lot of occasions, we take MTM because vol increases. But you realize it back as higher theta incoming with passage of time. I think it all boils down to what you expect the index to do. If you think it is rangebound, might make sense to stay.

But again, now I am treading on the “advice” territory, so I will stop treading

[Sensibull]

@dexter007

Hey Abid,

One more question

What strategy you recommend when you know for sure the VIX will increase or there will be lots of uncertainty . This will come handy next month when there will be elections and FED announcements. Market for sure will not remain calm and may become violent. Is there any strategy which makes us money irrespective of the direction but by just based on volatility. (Delta neutral strategy may not be helpful when VIX expands like anything right so there should be something else.

If you think there will be big movement, go for high gamma ATM options, which is basically near month. If you think there will be increase in vol, go for high vega, which is far month.

If I were you, vol increases when there is a huge downmove. So I will buy OTM puts which will benefit from vol increase. Also, the vega will increase when OTM becomes ATM, thereby giving you bigger gains on you vol increase.

Here is one catch though. When you buy a lower strike it is OTM. OTM strikes have a higher vol because vol skew. When NIFTY drops, the same OTM will now become an ATM, which means a drop in vol.

What I mean to say is let us say India VIX is 13, and a strike which is 200 points below has a vol of 15. So you bought 10300 at 13, and 10100 was at 15. (VIX = 2% skew)

NIFTY goes to 10100, sure vols will increase, VIX is now 15%. But your 10100 is now ATM, which means 10100 vol did not increase.

So you delta will need to compensate for your theta bleed.

Finally, if you need to capture violence, you need delta, or gamma. One idea is buy straddles, or buy straddles and sell the far OTM wings (butterfly)

[Sensibull]

@Spaceship

Currency options in India lacks liquidity.

Hey @Spaceship

Are you sure of that? I agree they dont have interbank kind of liquidity. But smaller lot sizes get decent entry exit without impact

[Sensibull]

@mparmar

@Abid_Hassan hi abid I am trading into currency options and want to develop more. What are the prospects of currency trading in India. Moreover what strategies can be explored for CD options . Need your opinions .

Currency trading is actually a fairly profitable business for many institutions.

There is hardly any difference between option trading in currency and equity. One observable difference you can play with of course is the future - spot premium.

You can see that USDINR spot today is 64.57 and Dec future closed at 64.78. This premium 20 paise premium is a constantly eroding number, and this can mean something. Not going to give a view on this though

Let me know if you have more specific queries, we can keep talking

[Bhuvan]

Guys, thanks k your all the questions and that that concludes this AMA. We’ll have Abid for another AMA sometime in the future.