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Technical Analysis Fallacy

  • #49,881
  • Edited 10:46am Sep 10, 2014 10:22am | Edited 10:46am
Quoting fti
{quote} Understood, my friend. Yo are not totally in wrong direction. But i just want to explain why there will not be much inpt from me on that aspects of trade. I hope you will understand. i tip help you off, look carefully at the greeks, and you need build very nice clear model see the shifts. Good hunting. enjoy. regards http://www.youtube.com/watch?v=gVMqE9LUfn0 http://www.youtube.com/watch?v=OpgBuDvU9gw

thought of something new today, learning how to embed positive carry spots into option strategies like butterfly to boost the carry through put and also pay for risk involved in the option strategy.

like butterflies has to sell 2 ATM calls and buy 1 OTM call and 1 ITM call, so if the short spot has positive carry, we could transform the 2x ATM calls synthetically into 2 x short spot + 2 x short puts, and layer on the OTM and ITM call, and gain 2x interest in the positive carry with ratio to 1x position size. so if the interest is enough, it should end as a 0 loss or gain only scenario.

or i could try synthesize synthetics to fit into spreads, and then create a box which appreciates with time because of positive interest.
  • #49,882
  • Sep 10, 2014 11:04am Sep 10, 2014 11:04am
Quoting CookieMonsta
{quote} thought of something new today, learning how to embed positive carry spots into option strategies like butterfly to boost the carry through put and also pay for risk involved in the option strategy. like butterflies has to sell 2 ATM calls and buy 1 OTM call and 1 ITM call, so if the short spot has positive carry, we could transform the 2x ATM calls synthetically into 2 x short spot + 2 x short puts, and layer on...
hello Cookie, would like to chip in a bit here. I am in agreement with fti that the long sword thingy is only economical with scale i.e. large capital like a bank and it would be a big opportunity cost to spend energy there. In the bank, the clients will buy or sell options/spot to the bank and the bank would act as counterparty to provide the service earning transaction fees, volatility premium, spread. With scale, the transaction fees & options premium would become sizeable and thus profitable.

I guess you already understood the following but just to mention for the benefit of other reader and to highlight economy of scale:
Then the bank would mostly hedge that away using options/spot at negligible transaction cost and I thus I think one of the one of the important component in this MO is Delta Hedging which i deduced from what fti discussed in the early part of this thred and since their transaction cost is lets just say zero, the delta hedge would be very effective affording a mostly no lose scenario due to "free" money from transaction fees, premium, spread. in addition they would make big bucks if they guess the market condition correctly and position their payoff profile accordlingly.. for range: butterfly, condor; for breakout & uptick in vol: straddle, strangle, and so on

so, if one start using the long sword, is as though one is becoming a minibank. is not cost effective due to high retail transaction cost which will affect your delta hedge effectiveness as you will adjust less due to expensive transaction cost and the retail spread of the instruments.

the long sword is mostly only useful to big players which have to manage unwanted natural risk. for eg: why would one want to engineer a zero cost option? For a jap exporter, lets say he will receive USD in 1 months time. however, he has a fx rate range which his company is comfortable with but is afraid the yen will strengthen excessively in one month's time. if his comfort range is 100 to 101, then what he can do is to buy 1 month put option at 100 and sell a 1 month call option at 101 to offset the cost of the put.
in this case, in one month's time, if USDJPY goes below 100, his put will be ITM and and locked his rate to 100 with his newly received spot position. if it goes above 101, his call will be OTM and his rate locked at 101. if USDJPY stays between 100 to 101, he can sell his USD in the range he wants

if you do not need to receive USD in 1 months time and you engineer the zero cost option with nothing else in the portfolio, it is a synthetic short and it is better to trade USDJPY by going short since the view is that yen will strengthen and save the hassle. because if USDJPY goes to 102 along the way, that call is going to cost instrinsic + implied volatility to unwind if one did not hedge the greeks frequently and if one waits till expiry to unwind, then opprtunity cost will come into play.

mastering fti's AOW and MM and trading the underlying is actually much much more profitable.
THE ALL is MIND; The Universe is Mental
  • #49,883
  • Sep 10, 2014 12:07pm Sep 10, 2014 12:07pm
Chief,

Aussie tanking....here is some news flowing...

http://www.theepochtimes.com/n3/9459...-kind-of-coup/

V
  • #49,884
  • Sep 10, 2014 1:06pm Sep 10, 2014 1:06pm
Quoting Jacque
{quote} hello Cookie, would like to chip in a bit here. I am in agreement with fti that the long sword thingy is only economical with scale i.e. large capital like a bank and it would be a big opportunity cost to spend energy there. In the bank, the clients will buy or sell options/spot to the bank and the bank would act as counterparty to provide the service earning transaction fees, volatility premium, spread. With scale, the transaction fees & options premium would become sizeable and thus profitable. I guess you already understood the following...
Hi jacque, yep I agree with you on that, however, a unique position to retail is this, u decide if you want a position, which means we can establish the position right from the start and can factor in the r&r before establishing the position, so we would know the position has potential outright.However I do not agree with you that this strategy takes a lot of effort, in that there are 2 principles at work here, first there is carry trade to gain in interest so we need to go 6 months out at least, next, it is to use options to hedge fluctuations, so the options was never meant for speculation but primarily to protect fluctuation of floating rates, so that we do not lose our interest gains from fluctuation in prices. So my assumption is very simple, I don't know where the markets will be 6months from now, but if the interest rates differentials hold, we will always make risk free money, and from this point on it is all a matter of size, and since we are not speculating in high risk situation, we can employ a little bit of leverage to it, since we are proving at the start, the robustness of the strategy. If the interest rates do not change, we just leave it alone for 6 months. So in that sense the primary goal is carry trading interest, and hedging away risk from floating rates fluctuation.Well this strategy was for me to establish passive income, and can be a way to make money if the markets don't go anywhere, and just goes in a small range, and when complemented with fti's method your risk profile gets smaller, since your p&l at the end of 6 months there is always a positive value to increase it. I'm mainly interested in risk adjusted returns and 1 way is having a strategy that's always slowly generating cash day in day out with as little risk as possible if we could engineer it that way.Also sometimes when I feel like taking a break from active trading, I can just let this strategy run and take a back seat and relax. Or when the markets are flat, I got passive income to fall back on at least to tide me over the sluggish period.
  • #49,885
  • Edited 2:27pm Sep 10, 2014 2:12pm | Edited 2:27pm
Quoting fti
{quote} when doing credit analysis on broking, It not matters what their staff driving. It not matters what their staff use to light their cigarettes. If anything , if they flaunt, then is big red flag for me. It not even matters if they own BIg giant office tower. Only thing matters is NTA (make sure their assets books is at least 2X their liability book)and that they peeps with honour and with clear mission statements and corp culture. And never spend all your moneys at 1 drinkhole. goodnite, today very tired, racing up and down, round...
@cookie & Jacque
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@vic careful with aus, daily little bugger
though gold, swis & dollar telling me a lot of stories, best stick to nimble

@fti Not sure how I learn like three or more things in each single post of yours
Rest well Mr. found another Lana song to my liking that you might enjoy.
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  • #49,886
  • Sep 11, 2014 4:21am Sep 11, 2014 4:21am


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  • #49,887
  • Sep 11, 2014 4:38am Sep 11, 2014 4:38am
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  • #49,888
  • Sep 11, 2014 4:41am Sep 11, 2014 4:41am
Quoting fti
http://www.youtube.com/watch?v=1seUPbmZ-9s
Thank you for this
H.D
  • #49,889
  • Edited 4:54am Sep 11, 2014 4:43am | Edited 4:54am
Enjoy, the good blows.

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  • #49,890
  • Sep 11, 2014 4:44am Sep 11, 2014 4:44am
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  • #49,891
  • Sep 11, 2014 5:54am Sep 11, 2014 5:54am
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  • #49,892
  • Edited 6:56am Sep 11, 2014 6:43am | Edited 6:56am
Quoting CookieMonsta
{quote} Hi jacque, yep I agree with you on that, however, a unique position to retail is this, u decide if you want a position, which means we can establish the position right from the start and can factor in the r&r before establishing the position, so we would know the position has potential outright.However I do not agree with you that this strategy takes a lot of effort, in that there are 2 principles at work here, first there is carry trade to gain in interest so we need to go 6 months out at least, next, it is to use options to hedge fluctuations,...
hey Cookie, thanks for following up. I got the primary goal and the idea of hedging. Hedging is where the trickyness is. Lets look at 2 points:

1. No arbitrage principle
2. Option pricing model

First, lets assume we have the perfect model to price options and we look at "No arbitrage princple". The key input would have implied volatility, risk free rate, interest rates of the currencies. Lets further assume that the implied volatility, interest rate and all is the same at the end of the option tenor. Then the market maker would price it in such a way that there will no arbitrage opportunity. if there is such an opportunity, the market maker would have the fastest finger to do boxes and reversal to profit from the mispricing. thus, we as retailers would not privy to such an edge to make money.

Second, in the real world, implied volatility, interest rate, risk free rate are subject to change and option pricing model are not perfect, then essentially, we have converted the spot price risk to volatility, interest rate, risk free rate risk and model risk to name a few by including options and hedging the delta . then if we have no natural position to speak of and we construct a option payoff on purpose to mimick a recieve fixed rate profile, wont we be better off buying the underlying that will pay a fixed rate, such as bond? this is because we wouldnt need to deal with the managing the greeks and extra transaction cost from managing the greeks. Recall the zero cost option example than to unwind the position, we have to pay instrinsic + implied voliatiliy. the implied volatility would be one of the knife to cut us and then followed by retail spread and retail brokerage. if we hedge away the downside spot price risk then we are left with betting on the greeks i.e. the implied volaility, etc. if we let it expire, then we pay opportunity cost. so you see nothing is free.

I am only able to see one way of doing it now which is to buy the currency bond and then a vanilla fx put option of the same tenor to convert it back to the home currency at expiry at a particular rate, that would take a bit of cake out from the bond return but the greeks would be simple to see.

So only if we have natural positions such as that of a exporter company, a portfolio manager who has a spot positions by his client mandate and wants to enhance the yield or a big capitalized bank providing financial svc, then this would allow the long sword strategy to be viable in my humble opinion
THE ALL is MIND; The Universe is Mental
  • #49,893
  • Edited 6:58am Sep 11, 2014 6:47am | Edited 6:58am
Lets assume i went to the himalaya mountains.
we further assume that i not coming down.

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regards
  • #49,894
  • Edited 10:23am Sep 11, 2014 9:43am | Edited 10:23am
happy 9/11
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  • #49,895
  • Sep 11, 2014 10:16am Sep 11, 2014 10:16am
Quoting Jacque
{quote} hey Cookie, thanks for following up. I got the primary goal and the idea of hedging. Hedging is where the trickyness is. Lets look at 2 points: 1. No arbitrage principle 2. Option pricing model First, lets assume we have the perfect model to price options and we look at "No arbitrage princple". The key input would have implied volatility, risk free rate, interest rates of the currencies. Lets further assume that the implied volatility, interest rate and all is the same at the end of the option tenor. Then the market maker would price it...
hi jacque,

i have explored the bond method, as for bonds, there is always default risk, so this must be factored in too, even greece can default on its debt, and that is why i wanted to use currencies and interest differentials, as im not directly bearing default risk. if we bought bonds + puts + credit default swaps, we would end up making nothing, and pay out on the cost probably. another tool afforded in currency trading is leverage but where it is employed needs to be carefully engineered.

yea it seems that they price in the interest rate differentials, but it seems that it is possible to exploit that, by buying 1 6 month put and selling 6 1 month calls for 6 months, and exploit the rate of decay in the different months leading to option expiry.

well the idea is to give up opportunity cost, because we don't want opportunities for this particular strategy, since it is meant to complement fti's methodology, we just want fixed rate income, we are giving up opportunity cost and hedging the greeks for fixed income, and that is the sole goal of the method, no speculation is allowed at all, because i agree with you that it is quicker and easier to use fti's method to trade for much profits.

http://www.optiongenius.com/images/timedecay.JPG
  • #49,896
  • Edited 10:53am Sep 11, 2014 10:36am | Edited 10:53am
Quoting fti
{quote} when doing credit analysis on broking, It not matters what their staff driving. It not matters what their staff use to light their cigarettes. If anything , if they flaunt, then is big red flag for me. It not even matters if they own BIg giant office tower. Only thing matters is NTA (make sure their assets books is at least 2X their liability book)and that they peeps with honour and with clear mission statements and corp culture. And never spend all your moneys at 1 drinkhole. goodnite, today very tired, racing up and down, round...
with regard to spending all my money in one drinkhole, when it comes to depositing money w brokers ...

if i only have 10k, and i deposit it w one broker, i might be sufficiently capitalized if i were to trade small unit sizes.
but that would be putting all my money in one drink hole.

However, if i were to divide my money into 2 parts of 5k each, and deposit it w 2 brokers, then although i am not spending my money in one drinkhole, thereby lowering my counterparty credit risk, but i will not be sufficiently capitalized to fight a sustained battle....

Hmmm, seems like a dilemma btw the devil and the deep blue sea ?
any opinions ?

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  • #49,897
  • Sep 11, 2014 10:47am Sep 11, 2014 10:47am
Quoting appleboy
{quote} with regard to spending all my money in one drinkhole, if i only have 10k, and i deposit it w one broker, i might be sufficiently capitalized if i were to trade small unit sizes. but that would be putting all my money in one drink hole. However, if i were to divide my money into 2 parts of 5k each, and deposit it w 2 brokers, then although i am not spending my money in one drinkhole, thereby lowering my counterparty credit risk, but i will not be sufficiently capitalized to fight a sustained battle.... Hmmm, seems like a dilemma btw the...
I have the same issue my friend.
I'm well capitalized to play comfortably well, but all in one place.
If I split, I feel as if my footing will be a little off strangely.
I haven't made enough foreign capital to split, and I wasn't thinking on doing so until at least 25k...
From my understanding, lessening the gear is what the little fella should aim for, no?
  • #49,898
  • Sep 11, 2014 11:10am Sep 11, 2014 11:10am
I dont understand ?

10 k : 50 leverage total in account -> 500,000 Units with one broker

scenario 2

5k : 50 leverage total with broker 1 ->250,000


5k : 50 leverage total with broker 2 ->250,000

Total 500,000

Now you are fighting a fight...and lets say you have exhausted your limit on Broker 1 , You just move to the next broker for the higher rescue or attacks?...it would not be easy you have to swtich the windows but thats preety much it....

V
  • #49,899
  • Sep 11, 2014 11:19am Sep 11, 2014 11:19am
Quoting indianguyinny24
I dont understand ? 10 k : 50 leverage total in account -> 500,000 Units with one broker scenario 2 5k : 50 leverage total with broker 1 ->250,000 5k : 50 leverage total with broker 2 ->250,000 Total 500,000 Now you are fighting a fight...and lets say you have exhausted your limit on Broker 1 , You just move to the next broker for the higher rescue or attacks?...it would not be easy you have to swtich the windows but thats preety much it.... V
god damn
You bust a 5k account and are going to try it on the next window?
no fucking way, at least I wouldn't attempt.
Straight up martingale against a falling knife, that deep.
Anyway, it makes good sense.
  • #49,900
  • Sep 11, 2014 11:28am Sep 11, 2014 11:28am
Quoting indianguyinny24
I dont understand ? 10 k : 50 leverage total in account -> 500,000 Units with one broker scenario 2 5k : 50 leverage total with broker 1 ->250,000 5k : 50 leverage total with broker 2 ->250,000 Total 500,000 Now you are fighting a fight...and lets say you have exhausted your limit on Broker 1 , You just move to the next broker for the higher rescue or attacks?...it would not be easy you have to swtich the windows but thats preety much it.... V
I think the issue is a sufficiently capitalized account with a regulated , hopefully , honest broker who's not a punk.

Prob not leverage up to 50x on each broker, cos already when one mount's a rescue with no leverage, your risk jumps geometrically.
With leverage on a rescue one's risk jumps exponentially.
It would have been pretty easy to blow an account with one broker if one is not well capitalized,
so a 5k leveraged account blown on one broker would be just that - blown.
switching the window to another broker will not assure you that the same thing wont happen again w the 2nd broker.

would a solution just be a 10k deposit w a regulated broker in your country of domicile,
and you trading w minimal leverage,
and small initial unit size,
and then keep eagle eyes on your broker to make sure he ain't trying anything that isnt sex and candy....
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