Firstly: hey Basic. Always nice to have a few more practitioners in here; stick around, we could use more pros on these forums.
hi ST,
1. can u explain what u wrote?
"For example, Chris, if you were actually as good a trader as you claim you are, you’d make a lot more money as a PM at a hedge fund than you would running your own portfolio. You’d be earning 1.5-and-15 (it’s not 2-and-20 any more) on a much larger pool of assets."
do you mean a salary of 1.5m to 15m in dollars a year???
Lol, wouldn’t that be nice? No - someone explained this already upthread, but that “x-and-y” convention is how hedge funds describe their fee structure. The “x” (one-and-a-half, in this case) is the base performance fee that gets charged no matter how the fund performs; the “y” is the percentage of the gains that get charged.
So “1.5-and-15” is shorthand for “you pay 1.5% of your assets per year, and 15% of any profits”.
(There’s a lot of room for nuance here! Sometimes there’s a “high water mark”, where the fee on profits doesn’t get charged during drawdowns; sometimes there’s a benchmark, where the fee on profits only gets charged for profits in excess of a benchmark index (so that you don’t pay for just index-hugging performance), and those fees are ALWAYS negotiable if you’re a big enough investor.)
2. do you trade in stocks options for income?
do you think it's a wise thing to do?
professionally, do hedge funds trade ( sell call / put options ) for income?
1) no.
2) no.
3) no—or, at least, they shouldn’t be, and you should fire any fund manager who does.
Here’s why:
I am curious about selling call options and selling put options for some stocks.
OK, here’s the deal. The trade you’re trying to do—selling options around your stock positions, either selling calls (call overwriting) or puts (put underwriting)—used to be a good one! Short-dated stock options were systematically overpriced, and you could reliably make better-than-cash returns by either selling calls or selling puts. The “income” schtick worked.
The problem is, people discovered this effect... and, like all good things in the markets except diversification and time, it stopped working as soon as people discovered it. Big mutual funds, and big real-money investors, all piled
so much money into short-date-option-selling strategies that the systematic overpricing of short-dated options went away, and selling short-dated options is no longer a profitable strategy.
In short: don’t do this. You’ll probably end up doing worse than if you’d just bought the stock and left it alone.
(N.b.: I haven’t looked at this for options markets outside the USA. But there isn’t really a liquid retail equity options market anywhere outside the USA except maybe Korea, so even if there are markets where short-dated options are still systematically overpriced, neither you nor I can take advantage of it.)
Let me try my hand at this. I used to trade for an insti, ran a 2 billion USD dollar book at peak. Moved on to a HF.
Nice! What asset classes did you trade? (I was a pretty pure FX vol guy when I was doing this professionally... I’ve expanded into STIR and equities in my PA since I quit the game, mostly because FX vol is honestly not a tremendously exciting or lucrative market, even when you’re the house.)
HFs are absolute return funds. Do anything as long as it can make money.
This is totally nitpicking, but doesn’t this depend a bit on the fund’s mandate? I’d think a long-only equity fund would be more focused on relative return, though obviously a L/S equity fund where the benchmark is cash, or a systematic fund, is gonna be different.
overall, would you think that options trading is an overall losing strategy?
including selling call options for bullish stocks for a very short period, such as 10 days?
That’s just a directional bet that the stock is going to reverse.
If you actually want to do that, you’re going to need to start with a data set: “do stocks that have gone up a lot tend to mean-revert within the next x days?”. There might not be an effect there; at least, not a tradable one. And even if there is an effect, it might be easier to exploit it by just shorting the stock or buying puts, rather than selling calls.
You’re kinda trying to justify a call-selling strategy and backing into the situations where it might work, rather than seeing a systematic issue in the markets and saying “I wonder if a call-selling strategy would work here”.
Well, I think ST is more qualified than me to answer this.
The best options players are Americans. Not sure why but the Yankees seem to do it well.
Americans for liquid options, because they own the market in high-frequency stuff. My guess is that it’s a mix of two things:
1) Equity options kind of arose in the USA and they’ve stayed there, kind of like how London still has a lock on FX market talent even though the market is now entirely global and mostly electronic. (Or kind of like how the French banks have a lock on exotic and long-dated options talent, so it always seems to be the French banks blowing up on wacky structured products, ahem Natixis ahem!)
And all the old-school professional options shops (O’Connor, Timber Hill, Cooper Neff, et al) were American, even though they got rolled up into global operations (UBS/IBKR/BNP respectively).
2) America is also where all the high-frequency talent has sprung up, probably because there are so many distinct trading venues scattered all across the country (lots in New Jersey, a few in Chicago, and I think the Pacific Exchange has its matching engine in San Francisco still), and being the fastest between trading venues has always been a money-maker. Having Citadel, SIG, HRT, Jane Street, etc etc etc creates a great, self-sustaining incubator for talent.
His choice of job, writing a book and consultancy fee (there's an opportunity cost for everything) is just his life choice. He wants to bring his own flavor of financial literacy and this is his way to express it. Smart people go to work to learn, build and be part of something. Money is a small consideration for smart people coz money can never satisfy intellectual curiosity.
Pretty much! I loved trading, but I needed a change, and I found it by moving to the tech sector and to San Francisco. The nice little corollary to that was that it gave me time to write, which I absolutely love.
Very few folks we were in SnT will be on HWZ.
...or Twitter, for that matter. But honestly, some of my best connections and conversations have come from the bird site. Highly recommended.
hi ST,
do u use iceberg orders?
what are the pros and cons about it?
Lol—I’m flattered, but you are MASSIVELY overestimating the kind of size I move.
Anyway. For anyone who’s wondering, think of a real iceberg: most of its volume is hidden below the surface. An iceberg order is like that: a small quantity gets posted in the lit markets, and a larger quantity is hidden—either broken into smaller chunks and reloaded as each small order gets nibbled away, so the full size of the order never appears in the books; or, if a big order appears on the other side, the iceberg algo will generally be smart enough to grab the entire amount.
Two things though:
1) Icebergs are only useful if you’re trying to do large size. For 99.9% of the people on this thread, you’ll never need to worry about them.
2) Icebergs do make sure that the full size of your order never appears in the book, but a dumb iceberg algo can be surprisingly easy to spot. If you see an order continually getting taken and reappearing at the same price, you might assume, correctly, that someone has a lot to buy at that price... and then you would front-run the hell out of them.
Anyway, long and short of it, unless you’re trying to do very large size, in markets that support it, don’t worry about icebergs.
I think Basic had a mention of VWAP/TWAP orders... don’t use these if you’re trying to do any meaningful size, they’re way too easy for HF types to sniff out and front-run.
Supposed you have a chunk of iwda with IBKR say 2m usd worth. Does it make sense to transfer part of the holdings to another brokers or a few brokers? For diversification?
I know people disagree with me on this, but I don’t think it makes sense to go to the hassle of opening up multiple brokerage accounts until you get
very big. Like, the only reason I have more than one brokerage account is that my mortgage lender made me move a bunch of assets from IBKR to their brokerage to get a discount on my mortgage refinance.
I don’t
want to have to track my holdings across multiple brokers, it’s a huge pain in the proverbial. And neither of them is going anywhere: IBKR is a top-rated broker with excellent risk-control systems, and the mortgage lender is a giant retail bank.
In short, I’d keep everything at IBKR if I could.
