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@muskk
ex-Rates exotic quant at CGML (London/Singapore), IIT Kanpur, Back in India.. trading equity vol
4 subscribers
Oct 22, 2022 • 7 tweets • 2 min read
(Thread) Event Volatility & Implied move

Objective: an event coming up next day and we want to calculate the expected move in the index/stock implied by option prices

Bro @l_thorizon mentioned on a call about implied move formula the other day (not for the first time)
+ ..so thought it's time to derive it.
(it’s been ages since I posted a thread so excuse any mistakes pls)

Events can be FED/RBI policy meetings, CPI data release, stock earnings. You can compute these for (say) Reliance, ICICIbank this weekend or for Nifty(or S&P500 if you’re
+
Apr 18, 2022 • 5 tweets • 2 min read
(quick thread)
Option strategies from probability density functions (pdfs)

Ref: papers.ssrn.com/sol3/papers.cf…

I'll summarize the paper...

The author presents an easy way to transform one's expectation of how returns distribution will pan out in the future("user-expected"
+ distribution) given current market implied distribution into appropriate trading strategies.

Let's say b(x) is what you expect index/stock returns "x" to be distributed in the future and m(x) is current market implied pdf based on prevailing option prices (see thread

+
Dec 30, 2021 • 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
+
Dec 27, 2021 • 4 tweets • 2 min read
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
+
Dec 20, 2021 • 10 tweets • 2 min read
(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
+
Dec 14, 2021 • 7 tweets • 2 min read
#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
+
Dec 10, 2021 • 6 tweets • 2 min read
(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
+ 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
+
Dec 8, 2021 • 6 tweets • 2 min read
(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
+

Nov 21, 2021 • 14 tweets • 4 min read
(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).

Nov 20, 2021 • 10 tweets • 3 min read
(Thread) Trading Ratio Spreads (Part 1)

Let’s try to understand what factors impact ratio spreads and how to trade & risk manage them.

As it’s impossible to fit everything into one thread I’m dividing this into two. I’ll cover factors that affect ratio spreads
+ in the first part and then discuss how to trade & risk manage them in the second (which I’ll post tomorrow morning). Finally, I’ll discuss the best case scenario to trade them that has a very good risk reward.

A quick (boring) intro:
Ratio spreads (RS): Short OTM/ATM options
+
Nov 14, 2021 • 9 tweets • 3 min read
(Thread) Stochastic processes

Thought of posting a primer on stochastic processes that’ll be useful for any future posts on whether deriving Black’s formula for pricing calls/puts (my next post and should be a quick one) or discussing interpolation of vol surfaces (SVI) etc. This should also help understanding my VIX derivation post better.

Any let's get started.

Any underlying variable, be it a Nifty/BankNifty, USDINR, crude etc, can be represented as a stochastic process with a drift and a diffusion(random) component.
+
Nov 7, 2021 • 14 tweets • 3 min read
(Thread) Risk premium in Index options

Just read the initial parts of first paper below and got a gist of that they're trying to do.

Objective of the paper is to analyze "risk premium" in OTM options (mostly on OTM puts) that can't be explained by
+

realized index returns distribution. To put it simply, selling deep OTM puts has been observed to be a profitable strategy and the authors try to confirm the existence of such risk premium by coming up with a "skew swap" strategy.
+
Oct 25, 2021 • 4 tweets • 2 min read
#Distribution Below is how an index return distribution can "potentially" evolve with time AS OBSERVED at starting time t=0.

As an example, one can view this as a potential #Nifty return distribution with PDFs given by Nov month end options (t=1), Dec month end options (t=2)..
+ Image and so on (T=1 can be weekly also but I reckon weekly distributions won't look that smooth based on what I observed of option price/IV behavior).

Things to note:

At t=0 nothing is random, everything deterministic and pdf is a dirac-delta function.

+
Oct 17, 2021 • 5 tweets • 3 min read
(Thread) Forecasting

Once upon a time (many many many years ago!) one of my friends was asked to implement a forecasting project as the last stage of getting an offer from a prop trading firm in Europe. Below is the problem statement:
+ Input data consists of (several hours of) trade and order book data for a listed product.
Order book data consists of time, bid/offer price and size resp. whereas the trade data
consists of time, price and volume.
Objective: Build a quantitative model to trade this instrument.
+
Oct 12, 2021 • 9 tweets • 3 min read
(Thread) Bnf synthetic weekly vs monthly futures

Chart below with basis varying between 63 & 89 (min/max). Started recording at 10:30 (there's a 15min gap at 14:05).

Observations and thoughts below.

@raghavanand648 would surely like to know your views

Image So the idea is that the basis (monthly minus weekly fut) of 60 odd will go up to say 90-95 and the way to trade in this case is long monthly future and "short weekly call plus long weekly put" at a strike that is close to synthetic future (check call - put + strike for any
+
Sep 29, 2021 • 6 tweets • 2 min read
I'll explain why. @raghavanand648 let me know if you agree.

First the straddle am looking at has strikes little above the spot and NOT near the future! Now, with Bnf fut at a 100pt+ premium to spot and given both have to converge end of day tomorrow,
+

, there will be much more downward price pressure on calls, in case of a flattish market open tomorrow (I'll come to this later), than there will be on puts. Why? Call/Put premiums follow Bnf Fut (obviously due to parity) and given they're affected by expected realized moves
+
Sep 3, 2021 • 8 tweets • 3 min read
Possible New SL (little thread) @mnopro suggested a few days ago about using call/put (leveraged) spreads for replicating SLs (can't find your tweet bro.. did you delete it?.. thought of embedding it here)

Let's practically look at how to apply it for Nifty/BN short positions
+ Was supposed to post this thread over the weekend but thought might be good time right now. Btw, this is only for EDUCAITONAL PURPOSES and might practically not be attractive. If you still want to use it check margin requirements, do your own analysis first.
+
Aug 29, 2021 • 12 tweets • 4 min read
Thread on deriving India VIX!

Get your pen and paper ready!

The NSE India VIX white paper (link below) only gives the formula and we will derive it in this thread. That'll be the only focus of this thread with more in future threads.
www1.nseindia.com/content/indice… This is going to be mathematical and my post yesterday about expectation and integration should help. But I’ll try to reduce jargon and leave out unnecessary mathematical details. Some topics such as stochastic processes have been touched upon here. Will post more on that later
+
Aug 28, 2021 • 11 tweets • 3 min read
(Thread) A basic math primer for people with non-math background (this will also help in understanding my post tomorrow on India VIX).

I’ll be simplifying a lot of math details here.

I’ll mostly talk on "expected value" and a bit on integration.
+ Expected value is one of the most important terms in financial markets. When we want to find fair value or “price” of any financial derivative we mathematically try to find its “expected value”. We will define what it is later on. But first let’s talk about random variables.
+
Aug 11, 2021 • 5 tweets • 2 min read
What's best to do when there's a big down move accompanied by IV spike? Let's discuss! First.. plots below. I added a new plot today with the following:
(put skew plot) put 200pts OTM - ATM IV &
(call skew plot) call 200pts OTM - ATM IV
Coming back. During days..
+ ImageImageImage ..(better close to expiry than say a friday), when big down move is accompanied by IV increase/spike which is most often the case anyway, best to do is to enter a call ratio spread and keep adding if the down move continues. Once the down move ends and there is a recovery..
+
Jul 21, 2021 • 11 tweets • 5 min read
@kunalkggupta8 Ok let me try to give a general/layman color to this. Apologies if it’s too basic and given I wrote the below very quickly apologies for any typos but you can always ask questions. As traders we mostly only deal with random variables be it Index/stocks and their options... @kunalkggupta8 ..Now, every random variable, say BankNifty(Bnf) as an example, has a set of outcomes it can achieve in any given period of time(it can, potentially, go anywhere from 0 to 100,000 in the next one day!) but each of these outcomes has a certain probability attached to it...