Would you say that was just good luck? Also, can you help me predict whether the housing market in Australia will crash? Seriously, I'm at the brink of getting into a mortgage and subsequent heavy leveraging so I'm really trying to figure it out.
This is only my guess, but sounds like someone banked it in gold.
The Aussie housing situation is difficult to predict. Our government keeps intervening (FHOG etc) and we are one of the few countries with negative gearing. I don't think it is worth getting into property atm, especially in Sydney.
I'm sorry I've given you the impression of being among the Contrarian-just-for-the-fuck-of-it crowd.
Though it may seem like I'm picking an argument, I'm actually willing to let you convince me.
It's okay, no animosity here - but for the record I do respect other disciplines such as physics, engineering, medicine etc and always encourage people to follow what interests them most.
You may have rubbed me a bit when you said there are more "honest ways" to make a living.
I'd like it if you were to explain a little more in-depth How it works.
The ramifications are immaterial to me at this point, so I'm just curious about the actual structure of the intellectual challenge here.
How the puzzle is, how you go about deciphering it, and the basic structure of the game.
But it still sounds a little like gambling to me.
There are many puzzles, depending on what the purpose of the trade is, the underlying, the products available to execute what you desire.
We'll continue to play the "market is all about predicting, especially picking peaks and buying troughs" puzzle from the sell-side.
Some firms treat the movement of stock price as Geometric Brownian motion - this is used in the Black-Scholes model to price options. How then do they make money, if essentially they consider the underlying random?
If we reduce it to a fair coin toss game with bets, how can we win consistently, without being able to predict the event?
Other headaches include executing your ideas. There were a few who predicted equity crashes, but how to execute and profit from this as an institutional investor? Pre-1987 there was no volatility skew in put options, so you could, and people did, make money being long put options. These days, large crashes are priced in (hence the skew), so it is not as easy as buying put options anymore.
My impression is of a fluctuating market, at least short-term. which makes the derivative jump. Are you then using an average delta over time and basically try to keep it at a positive slope, and gauge whether or not it is going to approach the neutral ? (in which case you drop it like it's hot ? )
When you use products like vanilla options, their value is contingent on price, time/volatility and interest rates - so for math folk partial differential equations come in. You can think of delta as the first derivative of measuring and options sensitivity to price (velocity), Gamma the second (acceleration).
If the position is structured to be delta neutral, small short term-market fluctuations do not affect the position a great deal. Being delta neutral though, means you are trying to capture volatility of an asset - but because there is an expiry date on these products, and depending on the volatility position, you have time (theta) working for or against you. E.g. if time is against you, the value of the option decreases as every day passes (non linear).
So in answer to your question from a speculating point of view, no - generally you are trying to keep delta = 0, if delta neutral is desired. When to drop it if it is hot? Model parameters and portfolio management skills, which is separate to a trading skill set, comes in. That is another topic in itself.
For instance you believe volatility will deflate, so structure a position to take advantage of that e.g. short straddle. Once enough deflation has occurred, one can long the strangle and minimize or even eliminate all risk, while maintaining a payoff that resembles a butterfly spread. In this case, there is no need to drop it if it moves against you, but rather trying to maximize profit.
Note that there was risk, and that was when we were short the original straddle.
In the case of vanilla ops, there are a multitude of positions that can be taken
http://en.wikipedia.org/wiki/Options_strategies
and you can shift from one position to another e.g. short straddle + long strangle = butterfly spread outlined above, to capture/hedge whatever is required.
Why capture volatility? Though a latent variable, it has characteristics that make it easier to model comparatively to stock price e.g. reversion to mean, clustering.
There's much more to consider and discuss, I'm suspecting with all the financial jargon, you will think wtf - but just a sample of the complexity and challenge available.
I haven't tried Forex but it intrigues me, when I get a some extra cash I might play with it.
Seriously, I'm at the brink of getting into a mortgage and subsequent heavy leveraging so I'm really trying to figure it out.
