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30 Dec 21, 4 tweets, 1 min read
#OptionExpiry
Quick note on Nifty/BankNifty options

Asian/Averaging options

Given option prices are settled based on average of last half hour prices (correct me if interval is wrong) perhaps in 5min intervals (trust me I couldn't find an NSE doc on this piece🤦‍♂️) our options
+
are actually Asian options.
So,

Asian call payoff : max(avg(S(ti) - strike,0) where S(ti) last 30mins, 5 min intervals prices (say)
and not european i.e. max(S(T) - strike,0)

The impact of averaging feature will be much less when we are away from expiry but gain significance
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As we are closer and specially in the second half of the expiry.

Now I won't bore you with the math of pricing them (which isn't trivial and done by matching 1st, 2nd moments of an assumed log-normal distribution of the averaged price and finding parameters i.e. mean/variance
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with that of the weighted average of the stock)

Suffice to remember that price of the asian is less than price of the european and this also means vol of the asian is less than that of the european.

Happy expiry trading! 😝

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More from @muskk

ExoticQuant Profile picture
27 Dec 21
I usually don't do the "role model" thingy but if there's anyone I look up to and want to be like (in a couple of years time!) that's Benn Eifert @bennpeifert

@mnopro pointed me to his handle a couple of months ago and I recently watched his mixing with models YT video & gone
+
through some of his posts and given my experience interacting with HF friends or interviewing with HFs during my 10years working in London I can honestly say he's right up there with the best. Don't get me wrong there's absolute garbage as well on the HF side (and I'll share
+
my thoughts on that some other time), but the CIO folks are altogether different class and Benn seems no different. The clarity with which he speaks about anything Vol related is mind-boggling(!) & something I'd like to aspire to.

(Hello Benn - this is not fake praise
+
Read 4 tweets
ExoticQuant Profile picture
20 Dec 21
(Thread) One of my more important posts from a trading point of view (hardly any quanty stuff in this one). Might be relevant now hence posting.

Just so it's clear for anyone wanting to trade call ratio spreads in the future in a bear market:

(this is my approach anyway..)

Best time to enter zero-cost call ratios or a ladder (shorts at multiple strikes) is when IVs are shooting up combined with mkt going down. Today was a classic example.

If we see the kind of fall we saw today in Nifty keep long leg 100pt OTM and
+
short leg atleast 300pts further away and you can increase the ratio higher than 1:3 (you'll have to, to keep it zero-cost). You can make it credit depending on your risk-appetitie and your skill in adjusting these.

So when you enter this you will be net short vega.
+
Read 10 tweets
ExoticQuant Profile picture
14 Dec 21
#Strangles A little note on getting into strangles in a bear market scenario

If you're an intra-day trader selling delta-neutral strangles on non-expiry days in the morning and holding them till day end then be careful of the following when market is expected to be bearish.
+
Given short strangles are short vol trades (-ve vega) the view is not just on benefitting from theta but more importantly on vols going down during the day. So in a bearish scenario when vols are expected to go up with market going down your strangle position
+
will get affected in the following way:

- Loss due to vols going up with this being a -ve vega position. There are other vol factors that you'll be short on such as skew (below), convexity of the vol surface and these increase as well affecting the position negatively.

+
Read 7 tweets
ExoticQuant Profile picture
10 Dec 21
(A little thread)
#PnlExplain
Whatever options position one enters it's important to know the risks one is taking and hence where the PnL is coming from. As an example if one is taking delta-neutral strangles (say 2% away OTMs on Nifty weeklies) at market open on a Friday and
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within a couple of hours sees a 5pt reduction in the price of the strangle (with delta still neutral) then the PnL is coming from the following:
Vega - given this is a -ve vega/short vol position a decrease in implied vols of both the OTM options in those couple of hours
+
results in a positive Pnl

Theta decay - this is technically the decrease in an option price in a given period of time "keeping all other factors constant".

In all likelihood given the current vol levels, Vega would've driven the 5pt Pnl profit more than theta given +
Read 6 tweets
ExoticQuant Profile picture
8 Dec 21
(Thread) A quick note on strangles

If you are selling strangles in a bullish, low vol environment keep the following in mind:

Assuming you entered a delta-neutral strangle on an index(Nifty/Bnf), any further upmove on the index will change delta of the strangle, i.e. making
+
it -ve, rapidly and more likely to hit SL on the call side. Given vols are already low at entry further decrease in vols contributing to call delta getting supressed is immaterial, i.e. vanna impact is low (check post below on vanna in general), and so
+

call delta will mostly only depend on index moves. In other words, your PnL doesn't have a buffer from vanna effect and is exposed solely to index moves and how good is your SL strategy. The Pnl's movement isn't smooth and adjustments become difficult.
+
Read 6 tweets
ExoticQuant Profile picture
21 Nov 21
(Thread) Trading Ratio Spreads (Part 2)

The main bit!

I’ll mostly focus on credit put ratio spread in this thread.

(yesterday's thread below for linking both)

First let's look at best time to enter the trade.
+

Trade entry point: Two scenarios. One safe and one aggressive. See pic below (pasting pic to reduce length of this thread).

Once we enter, how does the price of PRS behave?

Let’s focus on expiry trading as this is the easier bit compared to trading them on other days or entering positional (which I'll cover in future posts).

First let me quickly mention what I did last Thursday.
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Read 14 tweets

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