Your investments

i think you probably bought GE a little too late. it's not like their offloading financial assets/division is new news (though the $30b loan portfolio to WF announced recently is, i guess)

i live in a city where a nice apartment fetches a few million dollars. i don't think people are renting them out for 10% of their purchase price every year, which is roughly the long-term average you could expect on an index fund

and i posted my investments earlier in this thread

 

I'm considering in investing in 07GP, maybe I'll be able to flip it.

 

I've already been bought in for a while. I've sold off and re-bought one time short term, but have long term shares, and will possibly do the same in a week or two.






Here is my current long-term buy-in. On my last short term (2 week) GE trade I picked up 4.4% profit. If I sold this one at current close @ 28.06 I would make 8.6% profit on the 2.5k investment

 

Delivering a presentation to Senior VP of MS monday on INCY. Does anybody have any better ideas than a short butterfly? Any insight at all would be nice. Might help me brainstorm a bit

 

gonna wager a guess and say you know more about these kinds of options strategies than anyone else here . but i'll play: why short butterfly instead of long straddle/strangle? what are you expecting to happen/based off of which assumptions?

also once you get a job at MS i expect 20% of your bonus for helping. thanks in advance.

 

I did it today, I actually included a Short butterfly VS long straddle slide cuz of u

The implied volatility on the INCY security is pretty high right now, meaning premiums cost a lot of $$$$. To take advantage of that, we want to be writers of the options instead of buyers. That's essentially the only difference between a short butterfly and a long straddle. Short butterflies benefit from higher premiums while long straddles don't.

I'm expecting there to be a lot of movement as it finds it's new consolidation level (test both resistance and supports again at least once). I cant be bothered typing it all right now but I assure you I talked about it today haha

Dude said he agreed w/ me and liked that I chose a short butterfly vs a long straddle. Dude said he would do the same thing. swagggggg

 

I'm confused why you would want to use that strategy.

In general, bets long on volatility are an expected loss because implied volatility tends to be substantially larger than actual realized volatility (the reasons for this are numerous and outside the scope of this post). As you mentioned, a short butterfly and long straddle are similar. They are both bets long on volatility. However, you are incorrect that you are able to "take advantage" of the "high cost" premiums with this strategy for a few reasons.

1. By using a short butterfly instead of a long straddle, you are not "gaining" anything from the premiums. What you ARE doing is sacrificing some of your potential gains (the gains that are realized in times of high volatility) to increase your gains in times of low volatility. In other words, you are buying insurance. Insurance is not free. You are not making profit by buying insurance. You are only hedging yourself.

2. You can only expect to profit from a long volatility bet if you have warranted reason to believe that actual volatility will be sufficiently larger than implied volatility. This is, historically speaking, not likely. The volatility risk premium is pretty massive.

Lastly, although it is easy to look at the cost of premiums and say that they cost "a lot" compared to their historical cost, such an approach is incorrect. The absolute cost of the premium is a useless number without putting it into perspective. In general, you want to put it into perspective with volatility. Higher volatility means higher premiums which means higher cost but NOT higher value (for the seller) or lower value (for the buyer).

There is a fantastic journal article that AQR published recently which does a great job of explaining this. You can find it at https://www.aqr.com/library/journal-articles/still-not-cheap-portfolio-protection-in-calm-markets


In summary... It doesn't matter whether you go with the long straddle or a short butterfly. If you have no good reason to believe actual volatility will be sufficiently larger than implied volatility, then you and the Senior VP made a losing bet.

 

I don't think Mr. VP is trading these on this client's portfolios, but I'm confused as to why it's a bad bet.



A long straddle you're buying 2 options. IV is really high right now actually an all time high for this securitiy, meaning the premiums paid are pretty expensive. I'll post the option chain below



Profit using a long straddle = Price of Underlying - Strike Price of Long Call - Net Premium Paid

The net premium paid will cut into our overall profit pretty harshly, no?

Now when we write a short butterfly, we're selling two contracts and buying two contracts and our profit is calculated using

Max Profit = Net Premium Received - Commissions Paid

Meaning we will make our most money when the underlying value is outside our out most strikes prices. Which Monday and today proved pretty easily with 5% changes both days.

IDK, I might be approaching it wrong but I was always taught when IV is high, we want to be writers instead of buyers and long straddle is literally just buying while creating a short butterfly is a lot less costly, but I do understand a short butterfly does limit my potential gains

I definitely still have a lot to learn so the insight is much appreciated

 

(keep having your discussion and ignore me, by all means. also - hey nike, haven't seen you around in a while )

but just wondering about people's thoughts on WMT - down from 90 to 60 this year (down 10% today), but it's pretty much been at 60 for a decade. not sure if it's worth buying for the swing... or if there will even be one

 

The two main things it comes down to are 1) the volatility risk premium and 2) premiums are not a measure of value.

1. Volatility Risk Premium
As mentioned earlier, implied volatility tends to be far greater than ex-post realized volatility. Volatility is one of the most substantial contributors to the option premium, and the volatility priced in to the option premium is the implied volatility. As such, option premiums for long volatility strategies are systematically expensive since one is overpaying for the volatility exposure. This means that, on average, you are expected to lose money. The only way to make an expected profit is if you have sufficient reason to believe actual volatility will be far greater than implied volatility (and it has been shown that in order for long volatility to be profitable, the level of actual volatility needs to be so much higher that the events we call black swan events become common occurrences).

2. Premiums are not a measure of added value
When implied volatility is high, it means that the option is expected to have a higher likelihood of ending up in the money than when volatility is low. Because of this, the writer of the option demands a higher premium as compensation for this additional risk. However, on a risk adjusted basis, this compensation is not any different. There is no added value.

Now moving on from that, some comments on your argument. Profit formulas are not as simple as they seem. This is because the components of the formula are all correlated with each other. A high net premium paid implies that the price of the underlying stock is more likely to fluctuate a lot. As each variable changes, so do the others.

You should definitely forget the idea that “when IV is high, we want to be writers instead of buyers.” Again, premium is not a measure of value. When IV is high, premiums are high because the option writer is exposed to greater risk and needs to be compensated for it. Compensation (profit) in and of itself is not meaningful. It must be adjusted for risk to have any meaning.

I would highly recommend reading the AQR paper I mentioned in my last post. It does an amazing job of explaining these concepts in a pretty understandable way.


EDIT: Hi Superfluous Yeah, I haven't had time to be around much lately. Recruitment turned out to be way more time consuming than I could have ever imagined. Unfortunately, this means I have had to put all those projects on hold indefinitely. :/ On a side note, I decided to take a gap year and continue working at the hedge fund. It's been a pretty great experience, and I'm excited to keep working there. How have things been going for you?

 

Gonna give it a read in class right now. I appreciate the feedback brotha

 

Hope you like it! It's one of my favorite recent publications.

Anyways, are you interning during the school year? Or is this senior VP person just a mentor/networking contact? It's great to see more finance folks on this forum. I think it's a natural progression for many of us who loved merching/investing/gambling/staking on RS.

 

oh wow, that's a big choice, but it sounds like it's panning out for you, which is great. i'm well. moved to boston and started working for a consulting firm which has been awesome so far. super interesting work and enough compensation that i'm comfortable from this point onwards... so no complaints

 

I'm interning yeah. It's pretty sick and a lot of fun and learning lots. Definitely is a natural progression. That's where this all started for me

 

Congratulations! MS is a great place to start off. Is this an internship outside of the United States? From what I understand, non-summer internships at the bulge brackets aren't too common in the US. What desk are you on?

 

I'm going to send you a PM about the specifics as they're a bit personal and I've definitely said some things on this forum that I don't want being brought back up into my life in the real world, but it's called the Global Wealth internship (part 2)

 

Nice earnings beat for LUV and GOOG, I have 18.84% gains on my LUV position

 

still a jblu fanboy over here. but on the bright side i haven't lost money for a few weeks, so that's nice

 

Marijuana stocks. With the upcoming legalization invest low.

 

Sold outta GE with nice profits after their earnings.

Looking to buy into PLUG heavily. They have deals with Home Depot and Kroger that are WAY undervalued to investors. Hydrogen-cell machines are more cost-efficient, energy efficient, and environmentally sound. Plug Power beat some tough earnings estimate and has exponentially growing revenue. They also are doing a lot in Europe announced announced Oct 22.

Mostly bought in at 1.80s right now. Also have a smaller trade in @ 1.69 on a stop order. Also have had trades before Cycle 2 that gained 17% profit, sold out when it was high, then continued to buy in when it was under 2.00.

Wish I had more capital