re: To STRANGLE ... andrewk4
Hi Andrew, ( I have to write offline .. new HC configuration locks out Norton ... grrr)
Firstly, I went to lengths to qualify my post on 'risk-neutral' by saying that we all know that BSOPM can NEVER be frictionless. To think that is to miss my point completely.
However, pure maths fanatics will adopt the linear argument which is simply dismissive of even the possibility. I qualified ... 'given circumstance and volatility' it can occur ... and the actual numbers I used proved that it can... and posted a profit to boot.
The actual numbers are in the record books and protractors will need to wrestle with them ... not with me ... lol
I am not about to embark on a new branch of derivative maths based on this observation ... although the email reply yesterday from Chris Temby to my last question suggested I have now exhausted his knowledge on this subject ... (or perhaps his patience ... lol )
Recent market volatility has seen many opportunities for those trading Warrants (unable to write ...sniff) so covering strategies need to be a little different ... hence my posts in recent times on these issues...
I don't use the popular STRADDLE to cover positions (say overnight for NCP due to gaps) as I don't buy ATM (at-the-money) anything ... as we know, returns and premiums favour those 2-3 clicks OTM.
The STRANGLE for covering bought positions is preferable and for those able to 'crunch' their own numbers to project outcomes from warrants to create a neutral coverage ... don't forget you can also RATIO.
At the concept level ... we are trading into the future ... a spreadsheet might extend a 100 date series ... and so become a workbook. (D&D Series (workdays) for this)
All info on derivatives focusses in a GROOVE of the NOW and the SINGULAR ... making green in the market is about probabilities of where a stock price is going to be at some point in the future ... we need to move our head.
Depending on H/Vol and your own preferences ... say fibonacci ... with a little thought you might be able to write a formula that makes a 'guesstimate' of some forward projections of underlying price ... these might be linear or regressive depending on your interest here... this exercise is somewhat academic but gets our head out in front and some numbers to put in out spreadsheet.
Like most things this becomes a practised skill according to individual stock profile ... as these are updated continuously by the ACTUAL, your spreadsheet is being constantly reset ... works not unlike the ODDS probability concept. You really only need to be in the ball-park with this as you are concerned with the next two weeks in terms of entries/exits ...
Your spreadsheet would also be updating the actual I/VOL to crunch actual FAIR VALUE against ACTUAL PRICES and so your HISTORY is being created ... the patterns begin to emerge and become recognisable over time ... particularly as individual derivatives approach EXPIRY ...
The exercise produces the optimum derivatives according to strategy and risk profile (Call and Put) and these could be keyed in ... (or colour highlighted)thereafter will be the focus of out attention in the main.
Don't forget you still have your charts and wotnot to guide also ... I/Vol slows as prices peak/retrace ...
Your spreadsheet might be SPLIT into a current working(s) of known derivatives crunched from the list below of all offerings for a given underlying ... about 50 max out 2-3 months ... no point having 2003 offerings for instance.
The lower left might include the relative inputs and each cell (100x50) solves an individual value ... weekly columns for yield/%'s etc can be added (I have a neat Macro to do all this in one operation) ... inputs can be pasted into worksheets (HTML) and tidied up to suit ... voila ... instant crunching out 100x50 iterations ... a picture is worth a thousand words ...
Temby's formula might be a drag on puter resources here ... I use a formula/macro combo which crunches 100x50 fast. (mrs rem has these under lock and key for the usual reasons) His formula for I/Vol is too complicated ... better the (H/Vol) one I gave you which is suited for Excel and can be annualised and be compared with market I/Vol ...
The underlying price can be a Web Query or just manually keyed in ... the result auto-solves intraday ... you will see the movements in I/Vol when derivative prices move away from fair value ... these signal market sentiment.
I stress the focus in the price movement of the UNDERLYING and MARKET DEPTH ... all stems from this. My BSOPM crunches smack between the MM Bid/Ask with monotonous regularity ... and can say Warrant quotes are usually spot-on for those who doubt them ... MM's use auto-calc against the underlying just as I do these days and I play a game with my mouse to beat them ... lol
You are correct concerning trading behaviour ... PATIENCE is the key to every trade ... there is a point when the ENTRY can be made and more importantly when the EXIT should be made ... I use tight stops to protect profit/capital.
I 'set the week' ahead over the weekend ... I am not greedy ... I like 3-4 to trade in any given week which have entries triggered ... don't like holding over weekend but do and STRANGLE to cover .
If you cannot crunch ETO I/Vols then you can get them from AFR ... (avoid wide spreads) you solve for them singularly with Excel Goal Seek if you have the BS derivative price. Your workbook is a continuum in any case once you have your first set of numbers ... just open it up Monday morning and ...
I cannot stress the 'forward projection' concept enough ... if you get your head out in front ... you will quickly know what works for you and what you need ... every time you have an idea ... write another formula ... update your template so it is to hand for that next new stock/derivative exercise.
Even Hoadley stops at the present ... I went the next step to project into the future.
Once you have your forward underlying projections your 'cruncher' will the do the derivatives choosing for you ... you can apply your own risk profile ... extend the thing as you like ... Spreads etc ...
Make a $quillion ...
Cheers ...
This is only my (I think I am a tad in front) view ... read the red stuff.
