Most retail rats launch their trading endeavors (calling it a ‘career’ would be a vast exaggeration) by voluntarily checking themselves into a financial industry indoctrination camp where they are force fed a corrosive diet of nonsense such as magic candle patterns, Elliott Wave theory, moon phases, solar cycles, Bradley Turn Dates, Hindenburg Omens, etc.
In my time here at Evil Speculator I have come across a considerable number of traders who seem to have a particular obsession with a handful of symbols they feel ‘most comfortable’ trading. This seems to apply in particular to indices and ETFs – I can point at a few traders in this comment section who seem to be focused on three or four symbols they trade on almost a daily basis.
In a featured comment yesterday I mentioned gamma risk in SPX and SPY options as one of the reasons explaining recent hedging activity in the VIX and ES futures. It’s a complex topic that we’ll have to peel one slice at a time. Let’s begin by considering that options in essence are multi-dimensional financial derivatives in that they exhibit sensitivity to not only price, but also time and volatility (yes interest rates as well but that’s not an issue in our current market environment).
Volatility is a tough beast to tame, despite the general consensus among finance geeks and quant traders that it’s a lot easier to predict than signed returns. GARCH is your friend but it gives us an unsigned return – a range of 20 handles means that the market could as easily run up 20 as it could drop by 20. So what do we do?