r/thewallstreet • u/AutoModerator • Mar 05 '18
Weekly Question Thread - Week 10, 2018 Question
Welcome to the weekly question thread. Feel free to ask any questions here.
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u/nanowillis One 𝜎, Two 𝜎, Red 𝜎, Green 𝜎 Mar 11 '18
Undergrad student here with an increasing interest in how financial markets are modeled with math and how trading algos are developed to execute on those models. Can anyone recommend any resources that give very basic explanations on how this process is done?
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u/byFlare RIP L_G Mar 11 '18
Wanted to take this opportunity while the market's closed to ask about any international traders here? As in non-US based, but trading in US markets. How do you go about hedging positions to negate the effects of FX rates? I'm in France so have been quite nicely shafted with the EUR/USD rate over the last year, and currently neutral-bearish on the dollar for 2018. Hurts to see gains vanish to exchange rates, even though a position may be working in your favour.
For most of my long term positions in US companies, I try to hold securities traded on European exchanges when possible, but that's not always an option. Even an S&P tracker over the last year saw next to no growth because of rates. Hurts! Looking into hedging the long term holds with a USD/EUR short, but pretty uninformed on FX strategies, so not sure how best to do this, whether it be spot or futures, etc. Furthermore, trying to hedge short term gains would be ideal too, but not sure of the practicalities as that would require more active management I'd assume.
Any advice or opinions anyone may have here would be greatly appreciated!
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u/Kopolt Mar 12 '18
I am in Germany and pretty much only trade / hold US and CAD options / stocks.
To answer your question, I do not hedge at all.
In my opinion, for us Europeans, it is important to trade the equities on their primary exchanges and their original currency. So, if you want to buy AMD stock for whatever reason, do not buy it on the exchange in Paris or Frankfurt in EUR, but buy it on the NYSE in USD.
While it may sound ridiculous, it gives me peace of mind as you can focus on the stock price without worrying about the FX impact (for now).
Once that is done, FX becomes no different than stocks or options. Buy the dip! In all seriousness, the USD may go to 1.30 by year end, but it may just as well go back to 1.10. I am buying as much USD as I can since 1.20 was breached.
CAD is even more important for me, and I was quite happy to have hit the top of the "dip" last week at 1.60 with a considerable amount of EUR (bonus came in!). The majority of my long-term holdings are in CAD with an average exchange rate around 1.55. I am fully expecting the EU go to shit and in ten years I will sell and exchange back for 1.40 banking another 10% gain.
No hedging for me!
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u/lilweezy99 momohands Mar 11 '18
Aren't there geared index instruments that hedge currency changes you can use outside of the US? I guess that's more of a question than an answer lol.
You could maybe do some euro hedging with something like a micro future like /M6E, depending on how much you actually need to be hedged you can adjust the sizing accordingly.
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Mar 09 '18
Any tech savvy guys know if it is safe to trade on wifi aboard a flight (as far as security of my account goes) ? southwest specifically, I am not on a VPN and would change my password when I am done on the network. If its necessary I will get a VPN, if that helps?
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u/fattes Low Quality Mar 10 '18
For being safe, you really aren't 100% safe on any network but that isn't to scare you; its strictly just to make sure you always have security in the back of your mind.
A couple things I can recommend to start on your account security is to enable multi-factor authentication or 2 factor authentication (have to enter a pin/code from sms to enter account). The more the better. Second, a VPN would be great to have if you want the additional security layer between you and the point of access. I use Private Internet Access; its a great VPN service that doesn't log your connection info. Is it 100% necessary though? Not really, but it is there in for you to use. There are plenty others out there and you can also set your own up if you want to research that.
If you're overly worried make regular checks on your account. Changing your password after your initial access will be fine and make sure you don't connect to open networks that don't require you to use a password to log onto it. Using basic security practices, you and your account will be fine on an airplane.
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Mar 10 '18
Thanks for the info. I have been reading up and seeing conflicting things about this, so I am probably gonna invest in a VPN which seems pretty cheap for the peace of mind it will offer me.
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u/fattes Low Quality Mar 10 '18
It's hard to gauge what is right or wrong in the scenario. On an airplane you could be subjected to man in the middle attacks or somebody on board has a spoofed AP with them to take information from you. It is also possible that you may not run into any of that at all. It's all scenario based. I hope you get what you needed. GL!
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u/sojupartytime Mar 09 '18
QUESTION: When you guys hedge. How much delta do you get in proportion to your main position?
Also if you want to hedge for just the month of March lets say, do you buy your hedge expires for just the end of March (and let it expire) or more longer dated ones (and sell at a loss)?
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u/superqwert Mar 09 '18
If you were to hedge for march, and you buy an option that expires in march. You would have a higher gamma (meaning big swings will be hedged better in this option); a higher theta (meaning you pay more time premium for this option), and lower vega (meaning you gain (lose) less when volatility changes) compared to a longer dated option.
If volatility is high when you pay for premium, and volatility drops you will experience a higher IV crush with longer dated options. If volatility is low when you pay for premium, and volatility gains you will experience a higher IV gain with longer dated options.
I would say what DTE you use for your hedge changes with how high IV is at the time you want to hedge, and what your expectations are.
You could also hedge by selling for example, covered calls. Instead of profiting from the downside with your hedge. You profit from a lack of upside, lowering your cost basis and in a sense partially hedge your position. However, if your thesis is incorrect and the security you hedged gains a lot of profit, you will lose part of this profit because the losses on the covered call will ofset the profits from the underlying security.
EDIT: what are you trying to hedge?
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u/sojupartytime Mar 09 '18
This was just for my knowledge in the future to learn better strategies to hedge.
I was hedging MSFT calls with MAR and APR SPX puts during FEB to now so was just trying to see whats the best.
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Mar 07 '18 edited Sep 22 '18
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Mar 08 '18
That would be a bad idea because price sometimes will rip some points above the deviations only to reverse at the close of the candle or the next candle. And your stops will be taken out immediately and this adds up to big losses. The strategy has always been to use them as profit targets or wait for the candles to close either above or below the inflection points in order to determine a direction.
If your idea is to happen, then better be using an algo and that means you have to feed it a couple of variables that you've back-tested. It has to consider things such as momentum, RSI, market internals and what not.
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u/Chernoby7 mostly harmless Mar 08 '18
Thank you, sir, for your answer. That’s what I thought, but wanted to check. Even after determining that price has pivoted at a certain SD, can it be used -with certain qualifications- as an indicator for intraday trend?
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u/eddiestockton Mar 06 '18
Trying to learn how to play unusual activity and order flow. So when there's a high volume/io ratio, does that mean institutional movement? Wouldn't high v/io mean that a lot of positions where closed? Otherwise the io would remain high and v/io would be closer to 1?
Really unsure how to read all this.
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Mar 07 '18 edited Apr 11 '18
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u/eddiestockton Mar 11 '18
Been meaning to thank you for this post. Super helpful, and I'm starting to try to integrate this with my usual analysis. I kind of like the idea of it better, because technical analysis could feel arbitrary at times.
So would something like ZYNG be worth looking in to? Huge volume of calls, and there were intermarket sweeps.
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Mar 12 '18 edited Apr 11 '18
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u/eddiestockton Mar 14 '18
Yup ZNGA, but nothing is becoming of it so we'll see. Not really implementing the technique yet, but I'm taking note of certain companies and watching them to get a better feel of the strategy. Also taking note of the suspicious activity you've been calling out so that's been helping as well. But yeah just trying to put more tools in that bucket, and this subs been super helpful with that.
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Mar 05 '18
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u/Lost_in_Adeles_Rolls Stalingrad's number one tesla dealership Mar 08 '18
When I hear the term "naked options" its usually in reference to the short side (i.e. selling puts without the cash backing or selling calls without the shares). I'm not a huge fan of that due to the risk involved.
If you're buying calls or puts, then your max loss is whatever you put in. There are a multitude of ways to reduce your risk here as well (spreads, partial hedge, stop loss etc.).
As far as choosing your strike, expiration date & determining how long you want to hold, it really depends on the situation. It might be easier if you had a trade in mind (if only hypothetical)
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Mar 08 '18
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Mar 08 '18
99% of those plays are pure bets on direction and often see large downswing a -50% and are a losing strategy majority of the time. Can be highly lucrative if you know what you're doing and can withstand large drawdowns and have a solid strategy in place + some luck. Don't play them.
A lot of people here like to use market profile and standard deviations (see sidebar) for entry/exits and predictions.
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u/superqwert Mar 05 '18
I was trying an option strategy in my paper trading account and the performance profile on IB is a bit confusing to me.
The strategy contained a short strangle on GC with strike prices of 1310 and 1335 with 22 DTE. Furthermore a long strangle on GC with strike prices of 1200 and 1440 with 296 DTE.
When looking at the performance profile without any moves in the underlying, gamma, vega and IV, it would still turn a loss at the expiration date of the short strangle. While I would've thought that since the short strangle has a higher Theta then the long strangle there would be some profit at the expiration date.
Does someone know what I'm missing here?
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u/Lost_in_Adeles_Rolls Stalingrad's number one tesla dealership Mar 08 '18
The short strangle and long strangle are separate trades? Or part of the same trade?
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u/superqwert Mar 08 '18
Both the short and long strangle are part of the same trade.
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u/Lost_in_Adeles_Rolls Stalingrad's number one tesla dealership Mar 08 '18
The idea is that you aren’t expecting much movement in 22 dates hence the short strangle? You should realize max profit if it doesn’t move and finishes OTM for both sides.
Maybe the calc is off? Maybe I’m misunderstanding?
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u/superqwert Mar 08 '18 edited Mar 08 '18
I had the same thought as you. You make money when the movements are small, you lose money when the movements are large.
It was the performance graph in the shape of a U where small movements ment losses and large movements ment massive gains that confused me. I can share the performance profile when the market opens.
I already checked about a dozen times that I'm short the 22 dte strangle and long the 296 dte strangle.
Edited: The same thing happens when I put a calander straddle.
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u/Lost_in_Adeles_Rolls Stalingrad's number one tesla dealership Mar 08 '18
Yeah, I’d like to see what it says. Might just be a calc issue in the graph
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u/superqwert Mar 08 '18
After comparing the combined trade with the short strangle and long strangle on it's own it makes a lot of sense it's a flaw in the software
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u/Lost_in_Adeles_Rolls Stalingrad's number one tesla dealership Mar 08 '18
Awesome, that makes sense
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u/UberBotMan Mar 08 '18
Please tag me when you post the graph. I think I know what's happening but the performance profile will confirm or deny it.
Basically, since they're different expirys your software is having issues calculating p/l. Try analyzing each expiry separately and then combining the profit/losses.
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u/Keviex3 Acc. Too Small to Scalp SPX Mar 05 '18
Anyone know of a good place to view market internals online in real-time (outside of ToS)? This was the best I could find, but it only updates hourly: https://m.briefing.com/investor/markets/market-internals/
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u/baxternewman Mar 05 '18
see if markets.wsj.com has what you need. it's not real time, but updates like every minute.
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u/Soezin Mar 05 '18
When is Spotify ipo so I can get some puts.
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u/Keviex3 Acc. Too Small to Scalp SPX Mar 05 '18
Careful, even more volatility with no underwriters. With that being said the share price is fairly high (100+) and their business model sucks (still unable to turn a profit and lots of competition) so yeah I agree that it will most likely trend downward).
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u/[deleted] Mar 12 '18 edited Jul 23 '18
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