Via Waters:

“Dharamshi predicts that the availability of low-touch trading will cause volumes to double over the next couple of years. The firm already has 150 foreign institutional clients in London and Hong Kong and Dharamshi says the availability of DMA will lure a new crowd of statistical-arbitrage hedge funds and program traders to India. Motilal Oswal already has interest from potential new clients in the US and Singapore, he says. According to Omnesys’ Kudva, the availability of DMA will also encourage brokers’ existing clients to trade more as there will be less of a chance of their brokers front-running orders.”

Better than a thousand hollow words
is one word that brings peace.
Better than a thousand hollow verses
is one verse that brings peace.
It is better to conquer yourself
than to win a thousand battles.
Then the victory is yours.

- Buddha

Holding an option entails some risk, and the value of that option depends on the ‘market price’ of that risk – the covariance of the risk with an appropriate discount factor. Nonetheless we would like not to go back to ‘absolute’ methods that try to price all assets. We can still form an approximate hedge based on a portfolio of basis assets ‘closest to’ the focus payoff. Then the uncertainty about the option value is reduced only to figuring out the price of the residual.

“Implied volatility is the the wrong number to put in the wrong formula to get the right price of the plain vanilla option”

Fall Mountains, Just Don’t fall on me!

For some reason , I have never come across anyone in my friends circle/my faculty , who have mentioned this book.I have read a lot of books on option pricing , volatility , but none , NONE, so far is any where close to this beautiful book by Riccardo Rebonato.

It is so gripping(well gripping might sound far fetched for a book on options, but that’s what it is) right from the first page of the book.

Ambient - Design at its best

_Data doesn’t have to be dry. We’re used to seeing online information delivered as boring numbers, dense charts, or incomprehensible tables. This is dramatically different from the way we think about the analog world. We know if the pond is frozen from the color of the water. We can tell the status of the gas in our car by glancing at a simple gauge. The smile on a friend’s face is all we need to know a lot of complicated data about whether we’re doing something right or not.

Via Seth(Flipping the Funnel):

One of the most profitable small businesses in Queens, NY, is a little Thai restaurant named after its owner. Mrs.Sripraphai sells amazing Thai food. With no advertising, they’ve managed to keep the place packed, night after night.

The buzz about the restaurant got so loud that the all-powerful New York Times could no longer ignore the place—even though it’s not in Manhattan. A two-star review (almost unheard of for a restaurant like this) led to long lines—even after the restaurant doubled in size.
So what’s the secret? How did she do it?

Mark Cuban is charged with Insider trading

Mark Cuban is definitely one guy whose success story has inspired quite a few to always do what they love .

Now this news item is disturbing !! . I hope he comes out clean. I think he will.

Well, there are is an alphabet soup of Volatility spreads that a trader can enter in to. However , this is something which I came across recently and I believe is probably the best way to classify time spreads Vs Others.

Time spreads want low real volatility of the prices and high implied volatility. Trader does not want underlying to move but at the same time wants market expectation about the movement of underlying to strengthen. Under these seemingly opposing circumstances, a long time spread trader makes money. This is a great way to differentiate between all the rest of spreads like callback , putback,ratio vertical callback, ratio vertical put back ,straddle, strangle, butterflies etc, etc…The rest of the spreads depend upon similar movement of real vol and implied vol. BUT NOT time spreads!!

Vol modeling is tough! but I think it is well worth the effort ..Why do I think so? Well there are many reasons…But the simplest way to answer is by a simple question !

If you buy an option at implied vol = 20% , delta hedge it and notice that the realized vol is 30% , do you make money ?

Yes, would be your answer , if you just understand at a 10,000 ft view!

“The fox knows many things, but the hedgehog knows one big thing.” - Archilochus (7th-century b.c.e.)

Here are a few links which talk about the deeper meaning of the above quote.

Jim Collins View :

The fox is a cunning creature, able to devise a myriad of complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, beautiful, fleet of foot, and crafty—the fox looks like the sure winner. The hedgehog, on the other hand, is a dowdier creature, looking like a genetic mix-up between a porcupine and a small armadillo. He waddles along, going about his simple day, searching for lunch and taking care of his home.

Triple witching hour is the last hour of the stock market trading session (3:00-4:00 P.M., New York Time) on the third Friday of every March, June, September, and December. Those days are the expiration of three kinds of securities:

* Stock index futures.
* Stock market index options.
* Stock options.

The simultaneous expirations generally increases the trading volume of options, futures and the underlying stocks, and occasionally increases volatility of prices of related securities.

Via Ashish

Michael Lewis revisits Liar’s Poker as WallStreet era ends.

Link

Here is a service which captures Head of Long Tail! Buzz Tracker

A motivating read in recession times

Link :How Rafat Ali Found a Job

Via Raghu :

Indian Cricket lovers would love this write up, atleast my generation would enjoy it.

Losing my religion

Another attempt to fill this gap:

http://www.filtrbox.com/overview.php

Via FT:

As the economy crumbles, the Lipstick Index - that frivolous financial barometer that says cosmetics sales rise in direct relation to free-falling finances - has jumped. Sales in the last few months are up 40 percent.The idea here is that rather than go for the £100 pair of boots or dress or whatever, women will instead opt for a £10 lipstick pick-me-up in times of economic uncertainty.

“You don’t really care until you care” (meaning until you have a position) - Anonymous Trader

How true ? A quant might built a SVI parametric stochastic vol model and calibrate the parameters , produce beautiful graphs and sleep peacefully at night assuming that one has created a fascinating fit. Little does it matter in real world. If the same quant were asked to trade S&P options , then probably the whole model development might be approached from a different perspective. . So, the moot question is Do quants make better traders, as they probably can think more than trust the gut !! Should quants aspire to be traders ?

Picked up this book from B&N today . Reader friendly 150 page book that I managed to read over the subway ride back.

Well, I was just curious to find out what makes the system so addictive . In the past, I had witnessed a couple of abacus competitions and was amazed by the speed with which calculations are done. There are atleast 2 clubs that I am aware of in Hyd(India). The expert in one of the clubs was so proficient that he could add about 15 numbers in air with just a mental image of abacus. He was able to add all those numbers in less than 3-4 sec.

Better than a hundred years of mischief
is one day spent in contemplation.
Better than a hundred years of ignorance
is one day spent in reflection.
Better than a hundred years in idleness
is one day spent in determination.
Better to live one day wondering
how all things arise and pass away.

- Zen

Here is the detailed document on the regulation involving shorting in India.

Shorting

Now one can avoid the costly route of using derivatives for shorting! Good news for arb traders

Imagine the Earth devoid of human life, inhabited only by plants and animals. Would it still have a past and a future? Could we still speak of time in any meaningful way? The question “What time is it?” or “What’s the date today?” - if anybody were there to ask it - would be quite meaningless. The oak tree or the eagle would be bemused by such a question. “What time?” they would ask. “Well, of course, it’s now. The time is now. What else is there?”

With an emergent market like India, NRI is taking a new meaning “Newly Relocated to India”

With enormous strides in the capital markets, it is the probably one of the best times to work from Mumbai.

Local arb traders with out access to any computers are estimated to make $250 to $300 a month. Most of them generate numbers based on eye arbitrage, meaning visual and manual arb spreads. I strongly think that machines can add another 0 , i.e $2500-$3000 to that local arb trader’s take home . Who will extract local arb from markets ? Well, most of the talent is out in NY, London, Japan and Hongkong, atleast for now.

“Creeping Featuritis” :

Technology applications accrue additional buttons, switches and scrollbars without any apparent purpose

Via Economist : How Porsche fleeced hedge funds and roiled the world’s financial markets

GREAT cornering and eye-popping acceleration make Porsche’s cars popular among thrill-seeking bankers and hedge-fund managers. Now its clients are discovering that the carmaker itself has an unexpected talent for cornering markets. In a few tumultuous days it is thought to have made a cool €6 billion-12 billion ($7.5 billion-15 billion) on the share price of Volkswagen (VW)—a coup that has roiled the world’s financial markets.

What’s the difference between a bond and a bond trader?
A bond matures. :)

Dots are disappearing fast enough and I am not yet in Shawshank mood !! Scary!

My laptop crashed 10 days back and I had to make do with out one till the new one arrives. After a looooong time, staying completely away from system allowed me some time to think on some aspects which I had not focused on . Managed to read some terrific books on Fourier series in the last 10 days. Fourier series is something that I learnt in undergrad and conveniently forgot it as I never came across a practical application(may be bhag daud ki zindagi mein, never took time to understand i guess), until I came across Vol Modeling.

Link: Obama becomes first black president in landslide

With this anticipated news becoming a reality, I expect a Bull run tomorrow. May be a 500 - 700 point increase in Dow and a correlated increase in S&P is on cards. In such situations, a straddle on S&P500 is guaranteed to make money !! Option traders will make hay when Obama/Sun shines!

In my last post on this wonderful book , I will try to summarize the Credit products highlighted in the book.

Credit Risk is managed by Commercial Banks and Market Risk is managed by Ibanks. Ibanks are not comfortable holding stuff for a long time. However with the onset of credit wars, Ibanks Vs Commercial banks, it started the biggest party of the decade, the credit derivatives party.

What’s the real use of credit derivatives ? It is not to transfer risk , it is an instrument to free up capital. Total return swap by Bankers trust was the first taste of slew of derivative products to hit the market. First to default basked was picked up eagerly by all the investors. Slowly CDS market started to bloom. Initially there were a ton of difficulties in kickstarting CDS market. The problems were , firstly, CDS is like an insurance on the credit characteristics of the loan. There was a quite a lot of time spent on details such as whether making this asset a legal asset in the first place. The other problems associated with CDS was WHO and HOW ? Who was the reference entity in a CDS and How much would the payment be ? As products become exotic WHO and HOW questions became very very complicated to answer.

Continuing from the previous post on Traders Guns and Money, here is second part of the book summary!.

**Show me the Money :
**

What’s this chapter about ?It is about profit and loss and how dicey things can get.

Profits in derivatives can be compared to Heisenberg uncertainty principle where basic matter behaves as a form of particle and wave, the experiment result depends on what is your initial assumption. Profits in derivatives behave in a similar way. There is accounting profit, there is trading profit and then there is THE PROFIT, which is the bonus that the trader gets at the end of the year. There can be three different numbers for the same time period for a trader. Profit process is a stochastic process I guess :)

The day I read “Innumeracy”, I began appreciating numbers. Even though I was dealing with numbers prior to that day, that book clearly showed me that I was innumerate .That coupled with my love of life( the book which I have fallen in love and my romance continues till this day) , “The Art of Profitability " , made me realize that I was total crap in numeracy skills. From that day, I have constantly strived to improved my numeracy skills.

This company has to be run out of Bangalore / Hyderabad or some location in India. This is a classic human powered search and I have no clue why this guy is running it out of US. And now he is laying off people and blaming it on economy!! Com’on!!

Link : tough decisions!!

The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left. - Anonymous

Got to grade the exam that I administered last week to freshmen…It is already 3AM..have been postponing the activity since 2 weeks….conducting an exam is easy, the grading is the boring part !!.. I always find something that takes priority over grading..and here I am now facing the deadline after all..I have to grade it by today
and
I have absolutely no energy to do it..Partly because, the activity itself is meaningless..How does it matter if a student is able to calculate difference quotient or not ? Limits, Continuity, Reimann Calculus is good and good for classroom..Once one steps in to the real world, the world is characterized by nonlinearity, stochastics , random jumps etc…One thing that this teaching experience has done to me…It has been made me far more patient than I really think I am !! I wish I could take some time out and give the real importance of reimann calculus to all the students,which is - TO IGNORE IT !!! and persuade them to explore randomness !

Notional in $B

Market Value in $B

Paul Graham in his new essay says good economy/bad economy is like rounding off error when compared to the people who are involved in the startup. However bad economy might just be a shade better than a good one!

Link

Via Maulik :

Taleb said the “use of probabilistic methods for the estimation of risks did just blow up the banking system.”

Risk Expert Calls For LTCM Pair To Lose Nobel Prize

Via: Trader News

Sell side needs to develop tools now if one has to exploit arb!

Looks like there is a tremendous opportunity for building sell side tools!

Via EMII:

A new over-the-counter option has been launched that allows users to hedge against hurricanes making landfall in specific U.S. Atlantic and Gulf coast regions.

Weather Risk Solutions’ Hurricane Risk Landfall Options or HuRLOs is be sold via Chicago Mercantile Exchange brokers. Rather than using direct counterparties, the options are cleared via the CME’s Clearing360 platform, which clears over-the-counter transactions. So far, users include reinsurance companies, insurance companies and power companies.

This is a book which is guaranteed to make you laugh!!! Yes , it is a book on derivatives but it is written in a great humorous style that it WILL MAKE YOU LAUGH. I bet!

I picked up this book almost 10 months back. Speed read it . Had lent it to one of my friends and hence could not write a summary in time. Now that this book is back with me, Let me try to summarize a couple of interesting things from the book.

The day I read “Innumeracy”, I began appreciating numbers. Even though I was dealing with numbers prior to that day, that book clearly showed me that I was innumerate .That coupled with my love of life( the book which I have fallen in love and my romance continues till this day) , “The Art of Profitability " , made me realize that I was total crap in numeracy skills. From that day, I have constantly strived to improved my numeracy skills.