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Dec
23
comment How to trade volatility?
Then you should trade the gamma of the underlying options, simple as that, though I highly doubt that you have a reliable point forecast of future realized volatility. But hypothetically speaking if you had then you could profit by buying or selling gamma.
Dec
19
comment How can I calculate the margin requirements for a Bitcoin futures contract?
I can hardly wait for futures and other derivatives on an asset that itself changes hands at realized 100%+ (almost no matter over which timeframe) volatility. I guess with the end of the QE program phased in today we all need to start chasing other paper tigers.
Dec
18
comment BS Implied Volatility under Normal returns
How do you define "theoretical prices"? Option prices or the prices of the underlying? Keep in mind that price volatility of the underlying or the option itself are completely different concepts from implied volatility, even the dynamics of their correlations are completely unpredictable.
Dec
16
comment Random Brownian Simulation Startling Results
I highly suspect you set up something incorrectly on your spread sheet in terms of random number generation. First of all I think we can all agree that theoretically the subsequent results of fair coin flips are independent of each other. Even Excel's basic random number generator is good enough to get you an expected value of almost 0.5 if you simulate, for example, 10000 times. Now, a betting strategy is an entirely different issue but you should first get the basic setup right. Double check your Excel functions
Dec
16
comment Random Brownian Simulation Startling Results
I disagree, for such simple game you can just link the seed to the current seconds/milliseconds passed since 1900. I like to emphasize that we are here talking about a simple thought exercise not a complex system in which a much better random number generation algorithm is demanded.
Dec
2
comment Which measure to determine Risk?
There are no robust methods in risk management, though there are sound and reasonable ones. That is all I can tell you from a practitioner's point of view, someone whose positions have been "frozen" all of a sudden intraday multiple times because the exchange halted the stock and re-opened it days, sometimes weeks, later. Someone who had to deal with multi limit-up/limit-down days. You get the point, I hope; there are no robust risk management models that capture such events. Look to properly handle 95% of the cases, which is what is already provided and deal with the rest on your own.
Dec
1
comment Which measure to determine Risk?
...just adding one additional thought: Does it matter what your professor or even Ito thinks how risk should be defined if you adhere to theoretical models no matter how remote they are from reality if your trading desks lose tens of millions just because traders were not forced earlier to reduce risk. And all that because your "models" did not yet flag limit violations because they are so abstracted from reality.
Dec
1
comment Which measure to determine Risk?
The reason why one gets away pricing derivatives in the risk-neutral probability space (given certain conditions are met) is because the drift is already accounted for through the underlying and because of the hedge argument. This, however, is not the case when you take a straight exposure to cash equity. Of course you can always setup an equity pricing model where you end up with a stochastic differential in which the drift term "vaporized" but I question its usefulness. For pricing its perfectly fine as long as everyone agrees on the same way (such as B-S) but risk?
Nov
30
comment open-source implementation of orderbook from FAST?
@javapowered, with all due respect but it sounds like you are missing some crucial basics here. You can't derive your best bid/offer without building and maintaining the book and that is precisely what Louis has already told you
Nov
30
comment Which measure to determine Risk?
I am not a believer in Value at Risk (VaR) and when I think about true exposure to firm-specific risk then you are in effect at the mercy of the specific equity return and hence risk. The classic theoretical model of assuming a BM driven process with specific drift is anyway a flawed concept no matter how you turn it. For equity linked or direct equity exposure other models, such as those that incorporate jumps, are way superior vs the traditional Ornstein–Uhlenbeck process, for example. My point is that you deliberately chose to expose yourself to the equity drift -> use it.
Nov
28
comment Is price gaping the major risk that market maker has?
@pteetor, maybe someone else can chime in but I would identify gap risk as the major risk in providing liquidity in general, unless we are talking about highly illiquid stocks and/or stocks that trade at 2-3 levels throughout the whole trading session. Properly managing inventory to high frequency trading is like the necessity for humans to walk in order to go to work. Not being able to intelligently manage inventory should by default disqualify one to even participate in this advanced trading environment.
Nov
26
comment What is the industry standard Quant Finance modeling library for F#
@Nikos, but let me ask you a question as well if I may: Several months have passed, can you say with confidence that F# has solved sufficiently many problems for you at fair trade-offs and acceptable compromises that C# or other .Net products would not have? Please keep in mind that all .Net get compiled into the same CLR. If problem expression appears to be better served in F# then I reckon the real problem lies in the user's ability to transfer concrete problems into the next "abstraction layer".
Nov
26
comment What is the industry standard Quant Finance modeling library for F#
...looking for a language that offers support on the quant side through analytics libraries? Most likely not. I just think the quant industry is currently very well served on all ends, Matlab and Mathematica on the raw Math side, R/SPSS/... on the stats side, C++ and .Net (and Java for frontend apps) on the programming/implementation side. And I believe Big Data will catch a lot more attention by the quant community, but I just do not see the benefit of broad support for functional languages, sure they solve individual problems but it costs tons to change languages in large dev environments.
Nov
26
comment What is the industry standard Quant Finance modeling library for F#
Yes and here is why: If your requirements are raw performance such as throughput and latency then go with C or C++, if you need libraries that support quant analytics then for modeling purposes go with Matlab or R, else C++ or C#. If you have programmed for any length of time you will value the importance of broad support and vast amounts of open source solutions and libraries. For today's average quant's job requirements I do not see where a functional language is supposed to kick in. I am sure there are people that still swear by Cobol or Fortran but would I recommend such to someone...
Nov
24
comment Is price gaping the major risk that market maker has?
@pteetor, sounds to me you are describing the "chicken or egg problem". Sure most all risks in this space can be traced back to improper inventory management. But I think what smyoo describes is yet a risk that truly has little to do with inventory management. In his example there is nothing you can do or could have done better other than not having provided liquidity in the market in the first place which is easy to say in hindsight. Inventory management in this example is really not the issue imho.
Nov
21
comment Can I trade the volume of a security or index?
You can express views on volume indirectly through VWAP order types. You can pay 10-15 pips for a guaranteed vwap price and look to beat that through a hedge of your own if you believe you have a superior view on price levels and where volume trades. But this is more an expression of trading intraday volume.
Nov
21
comment Black-Scholes: Why the focus on volatility?
I addressed many of your comments and questions and you all debunked them. I also added references for you to read up on. What else do you need? There are different IVs across moneyness and the reason is explained in detail in many answers on this board. Please search for one of my past answers to this particular question as I am a little short of time right now.
Nov
21
comment Black-Scholes: Why the focus on volatility?
@AndrewDabrowski, I stand by my explanation. Implied volatility is never a "fudge factor" but rather an actively traded "asset class". Maybe you want to write up an answer to your own question if you think all other answers are incorrect, which of course begs the question why you would have asked in the first place.
Nov
13
comment Risk and Reward in practice
Absolutely, agree fully. And then I also know several of the momentum based funds' owners personally, some of which manage just double digit millions, some triple digits, not huge by any of today's standards. But many have been in existence for several decades and if you follow momentum based fund performances you will see there were years where such funds horribly underperformed. Yet, investors stuck with those funds for various reasons, among others of course long-term performance, but also honesty, trust, and integrity in its management.
Nov
12
comment Risk and Reward in practice
@Richard, sorry I did not mean to address you directly, my comments are more geared towards most of the buy-side fund industry. Regarding your last sentence, I believe if one handles money responsibly while generating alpha, over a long period of time then clients will stick with such PM even if he underperforms others at a certain point in time.