Skip to main content


Showing posts from September, 2017

If I Knew Then What I Know Now

I love cars (actually I find engineering in general fascinating). When I was about eight I was watching a Formula One race and the commentators mentioned that the current car was a big improvement over that of the year before. I remember vividly that this struck me as odd. If the same people made the improved car, why didn’t they just make that version first? Whether this thought was unusually astute or just stupid isn’t the point here. The point is that we can’t improve until we have something to improve on. We don’t just learn from mistakes, we also improve on our successes.
The first issue of “Volatility Trading” came out in 2008 and the much expanded second edition was released in 2013. I still firmly believe in the process I wrote about: find an edge, size appropriately, execute, evaluate, repeat. I also (typos aside) believe in the individual theories about volatility measurement, forecasting, hedging and sizing. But I have drastically changed my mind about the relative importa…

Night Terrors

Following on from my recent posts about trading volatility over weekends, I’m now going to briefly look at trading options overnight.
Option traders have always complained when they were too long options overnight, expecting to usually lose money on overnight longs. This doesn’t make sense in a pure Black-Scholes-Merton world. In that world the time decay (theta) will be balanced by the expected change in the underlying (gamma). But we have already seen that this doesn’t hold over weekends.  So while option traders might be the whiniest group of trading professionals and are more than willing to complain about anything (I’ve heard such classics as, “I hate summer” and “Christmas is literally the worst thing ever”), it is worth examining whether they were right about this particular thing.
Dmitriy Muravyev and Xuechuan Nia wrote a paper that studies this.  While it is very well known that returns to index options are negative (about -0.7% a day in terms of actual premium decay for the…