# Anything about XJO



## Fox (8 November 2009)

I have a lot of questions which are XJO specific, and thought of putting this thread together for those sharing an interest in XJO. The first question I have is regarding XJO historical volatility.

The graph below is the 30 day HV of XJO going back almost 4 years, which I obtained using the Hoadley tool. My understanding is that HV's are mean reverting. The problem of course is determining what the mean should be. The mean will vary depending on how far back in time you look.

My opinion is that the peaks before March 08 and before Dec 08 can be discounted as extra-ordinary events ie. black swans. Ignoring those two peaks, HV lies somewhere between 8% to 30%. From visual inspection, I would probably call 15% as the mean HV.

It would be great to hear the opinion of others. There's probably no right answer, but the more opinion we have, the more we can think/consider, before coming to our own conclusions. So, what do you think the mean HV is?


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## cutz (8 November 2009)

Hi Fox,

For the seven year period up to the peak of the last bull market 20 period HV average of 10.5, some periods of around 6.

Year 2001 to present, 20 period HV average of 14.5.

My opinion only using excel spreadsheet so may not be totally accurate.

Stuffed if i know how to make money when Vol returns to those extreme lows.


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## Fox (8 November 2009)

cutz said:


> Stuffed if i know how to make money when Vol returns to those extreme lows.



If we take the view that HV will revert to the mean of around 10%, that means that there is still time to take advantage of short vega positions. So, that to me is a good thing.

However, I really don't know what to make of XJO's vol in the next 30 days. For a while, I thought that HV was possibly going up as IV was doing just that. My gut feel is that it will stay at its current range of 18% to 20%. I can't see the HV reverting to the 10% mark in the next 30 days. Of course all this is just gut feel and not based on any fancy vol forecaster.

Is that how others see it as well?


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## cutz (8 November 2009)

cutz said:


> 20 period HV




Actually folks, please read that as 20 day HV, to late to change it.

Fox, 

I reckon volatility may kick up again, i don't think we're out of the woods yet. Bad news stories are flowing back in again, our big four banks which make up a huge chunk of the ASX200 have a lot of interest tied up in our property market which is starting to look like a bubble, personally i prefer to be slightly long volatility.

Gut feel with me also, who knows how things will pan out.


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## beerwm (8 November 2009)

not sure if this thread is restricted to options [ cause i dont really follow them ]

My thinking is volitilty will mirror that of 2003-2007, unless we see some significant selling, which history shows pushes up volitility


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## Grinder (9 November 2009)

Hey guys,

Trying to predict HV is'nt too disimmilar to making a prediction on anything really, find it can be alittle more forgiving then trying to pick direction but ultimately it's the same thing. Thus, I give it it's due respect but prefer to focus on short term IV and balance out my positions accordingly.

My above  is not XJO specific but it can be.


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## Fox (9 November 2009)

beerwm said:


> My thinking is volitilty will mirror that of 2003-2007, unless we see some significant selling, which history shows pushes up volitility



Hi beerwm, 

We have not seen two consecutive years of negative growth of the ASX index since the great depression if I'm not mistaken. I can understand your optimism that we will see a repeat of 2003-2007 from now onwards. 

Your chart is interesting in that shows historical volatility as a ratio. The numerator of the ratio is the 20 day HV I assume. What is the denominator of the ratio? Is it the average HV?

Also what is the difference between the calculation of fast vs. slow volatility ratios?

Fox


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## cutz (9 November 2009)

Hi Fox,

With regard to making money when volatility returns to extreme lows my concern is there have been long periods in history where IV just bounces around 6-8%. With those sort of figures and having a view that vol will stay where it is positive theta will be fairy low when selling premium (limited risk premium).


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## wayneL (9 November 2009)

A better question is how future HV projection measures against current IV.

Low realized volatility is not a problem if you get paid for the risk of HV possibly increasing. Plus you can bet on an increase in vols via horizontal/diagonal strategies.


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## Grinder (9 November 2009)

wayneL said:


> A better question is how future HV projection measures against current IV.
> 
> Low realized volatility is not a problem if you get paid for the risk of HV possibly increasing. Plus you can bet on an increase in vols via horizontal/diagonal strategies.




Exactly; and no reason why you can't hedge some short vegas if you have'nt a clue what it will do.


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## Fox (9 November 2009)

wayneL said:


> A better question is how future HV projection measures against current IV.



I propose a competition to pick future HV ie. the 30 day HV for XJO as calculated using Hoadley for the period ending 17 Dec 2009. There will be no prize money as your trades should reward you handsomely. The winner will be bestowed the title Soothsayer Of The Month.

Winning 3 consecutive titles will entitle you to be Master Soothsayer. Winning 4 consecutive Master Soothsayer titles will grant you the honour of being Grand Master Soothsayer. The rest of us will crouch in submission as you walk past, shielding our eyes from the radiance of your super natural abilities.

Entries close this weekend.

My entry for the competition is 20.5% based on my belief that future HV will remain unchanged from current HV levels.


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## cutz (10 November 2009)

Hi guy's,

An interesting phenomena i been observing recently is the creeping up of XJO quotes (IV) after 4.10pm even with a steady index. OK if you're selling i guess but who wants to wait around till after the market closes.

Any ideas on why this happens ?

BTW Fox, my prediction, XJO 20 day HV 30% by Christmas, wishful thinking perhaps.


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## skyQuake (10 November 2009)

cutz said:


> Hi guy's,
> 
> An interesting phenomena i been observing recently is the creeping up of XJO quotes (IV) after 4.10pm even with a steady index. OK if you're selling i guess but who wants to wait around till after the market closes.
> 
> ...




Probably delta rather than IV cause the SPI is still open? Does this occur with stocks too?


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## cutz (10 November 2009)

Good point skyQuake,

Something i overlooked, and yep there was a selloff on the SPI at ~4.15pm  ( don't have to tell you that ) which i didn't notice, causing the puts to increase in value.

Doesn't happen to the equity options because the quotes are pulled at 4.00pm.

Thanks mate.


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## Fox (10 November 2009)

cutz said:


> BTW Fox, my prediction, XJO 20 day HV 30% by Christmas, wishful thinking perhaps.
> ...



Oh! Looks like I've got some competition. I was thinking that I was going to win by default. So, it's my 20.5% vs your 30% .



cutz said:


> Something i overlooked, and yep there was a selloff on the SPI at ~4.15pm ...



Can I get some help understanding this? When you say SPI, I presume you mean the SPI futures traded on the SFE? So, if MMs observe at 4.15pm that the December SFE SPI futures were down, MMs would quote the XJO puts at a higher price. Is that what you think happened?

Also, I did not realise MMs quoted at that time ie. after 4.00pm. I must have a closer look tomorrow to see when MMs stop quoting for the day.


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## cutz (10 November 2009)

Hi Fox,

MM's use SPI contracts to hedge XJO options, the day session trades till 4.30pm hence you'll see XJO option quotes on till this time.

And yep you're correct these are SFE traded SPI futures.





Fox said:


> Oh! Looks like I've got some competition. I was thinking that I was going to win by default. So, it's my 20.5% vs your 30% .




Yep,

Got a serious gut feel on this, could be a signal that there will be a volatility collapse.


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## Grinder (11 November 2009)

can't let it be a 2 horse race. Put me in for *18*. Not worth anything though, don't trade XJO anymore & if I did would be worth even less.


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## Fox (11 November 2009)

Grinder said:


> can't let it be a 2 horse race. Put me in for *18*.



The Soothsayer of the Month title gets more elusive and prestigious . Is this the Shocking equivalent of our little Melbourne Cup?

Cutz, the competition is for 30 day HV on 17 Dec 2009 (see post #11). Your entry is "XJO *20 day HV* 30% by *Christmas*". Do you still want to maintain your entry at 30% for 30 day HV by 17 Dec 2009?

Summary to date:
Grinder 18%
Cutz 30% (30 day HV by 17 Dec 2009?)
Fox 20.5%

Remember, entries close this weekend.


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## Fox (11 November 2009)

Can I get the XJO experts help on this? 

The attached diagram is a snapshot of Interactive Brokers TWS platform 1 hour before market opens.

1. Why is AP 4 points down before the market has even opened? The contract info shows that AP is the S&P/ASX 200 Index. If this is the case, why should the figure even be available before market opens?
2. Could AP be the SPI futures index? If this is the case, how is this index determined? Is it determined by using the Dec SPI futures contract of 4755 and then discounting the cost of carry, which then gives you 4730?

Thanks.


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## skyQuake (11 November 2009)

Fox said:


> Can I get the XJO experts help on this?
> 
> The attached diagram is a snapshot of Interactive Brokers TWS platform 1 hour before market opens.
> 
> ...






APSPOT = SPI futs. Don't know what IB has AP, SPI and XJO.
Imo the AP you're seeing is just the matching price.
What is AP showing now?

As of 11:15:30
SPI = 4775
XJO = 4763


And put me down for 15%


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## sails (11 November 2009)

Fox -  I understand that AP is IB's XJO index and is most likely to be match prices as skyQuake has suggested.

Iress also has match prices (might be called something different though) for individual stocks somewhere in the market depth window.  These often fluctuate wildly prior to market open - and more so on expiry days (both equities and future expiries).  I never found them to be much use and, in fact, can be quite alarming if match prices are excessively violent. 

Here is a link that explains the nuts and bolts of opening auction: http://www.asx.com.au/resources/education/basics/open_Close.htm.


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## cutz (11 November 2009)

Yeah Fox,

Keep me at 30%, 20 day and 30 day run pretty close.

Regarding AP premarket, match price makes sense as the others have suggested. Of course now as you're probably well aware XJO (AP) and SPI are matched, SPI Dec contacts are trading higher due to the cost of carry.


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## Fox (11 November 2009)

Sails, skyQuake, Cutz,

I don't know what "price matching" means. I had a quick look at the link to ASX Sails posted and it describes how opening prices are determined. So I presume "price matching" means the XJO index calculated using the anticipated opening price as determined by the ASX formula?



skyQuake said:


> What is AP showing now?
> 
> As of 11:15:30
> SPI = 4775
> XJO = 4763



I've attached the same TWS page at around 12.26pm. Both AP and SPI are the same, with AP being rounded to the nearest integer. You must be referring to another SPI than the one I'm viewing with TWS. Do you know where I can find the SPI you are looking at? Can it be obtained from Yahoo?



skyQuake said:


> And put me down for 15%



And the competition heats up! Big gap between Cutz and skyQuake.

Summary to date:
skyQuake 15%
Grinder 18%
Cutz 30% (30 day HV by 17 Dec 2009?)
Fox 20.5%


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## sails (11 November 2009)

Fox said:


> Sails, skyQuake, Cutz,
> 
> I don't know what "price matching" means. I had a quick look at the link to ASX Sails posted and it describes how opening prices are determined. So I presume "price matching" means the XJO index calculated using the anticipated opening price as determined by the ASX formula?




Each individual stock goes through this process during pre-open and then again at closing auction (4-4:10pm) - using market depth as opposed to using last trade prices during normal trading hours.  

Some software (eg Iress, TWS) also average out a "match" or "indicative" open price for the index in the same way that individual stock trading prices are averaged to create an index price.  

 lol - my post reads like double dutch - hope you can understand it, Fox...


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## Fox (15 November 2009)

Can anyone tell me how to get the SPI after 4.10pm?

I know how to get the SPI December contract info from TWS. For example, let's say that the SPI December contract is trading at 4770 at Tuesday, 3am Sydney time. Since December expiry is about a month away, if we factor in the cost of carry, the SPI on Tuesday, 3am should be worth less than 4770, say 4758.

Where can I find the value of the SPI at Tuesday, 3am ie. the 4758 in the example above? Is there an IB TWS code that I can use? If not, is there a yahoo quote symbol to get this info?

Thank you.


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## skyQuake (15 November 2009)

Fox said:


> Can anyone tell me how to get the SPI after 4.10pm?
> 
> I know how to get the SPI December contract info from TWS. For example, let's say that the SPI December contract is trading at 4770 at Tuesday, 3am Sydney time. Since December expiry is about a month away, if we factor in the cost of carry, the SPI on Tuesday, 3am should be worth less than 4770, say 4758.
> 
> ...




Do you mean XJO (our index) instead? Index doesnt trade past 4:10, only SPI. And all calcs are based off that.


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## Chris45 (15 November 2009)

Fox said:


> Can anyone tell me how to get the SPI after 4.10pm?



Is this any help?

http://futuresource.quote.com/charts/charts.jsp?s=APS Z9-SFE&o=&a=V:15&z=800x550&d=HIGH&b=bar&st=


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## Fox (15 November 2009)

Thanks skyQuake and Chris45.



skyQuake said:


> Do you mean XJO (our index) instead? Index doesnt trade past 4:10, only SPI. And all calcs are based off that.



Yes, you are right, in that what I really want is the *estimate* what the *XJO index* will be based on the SPI at Tuesday 3am. I am just too lazy to do the "calcs" myself .

Typically, when the US market tumbles, the Dec SPI (APZ9) tumbles as well. When I wake up from my beauty sleep at 7am, I can see that APZ9 has tumbled. However I do not know how much the XJO will be estimated to fall when the Oz market opens at 10.00am Sydney time. As a rough estimate, when I see that APZ9 falls 20 points, I approximate the XJO to most likely tumble by 20 points as well, when the Oz market opens. 

I was just wondering if there is a source/website where the XJO is extrapolated from APZ9 to give me a quick reference to what the XJO will most likely be when the Oz market opens. By extrapolating, I mean discounting APZ9 by the cost of carry. Looks like this info is not available ie. I will need to extrapolate APZ9 myself  to estimate what XJO will be at 10.00am.


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## skyQuake (15 November 2009)

Fox said:


> Thanks skyQuake and Chris45.
> 
> 
> Yes, you are right, in that what I really want is the *estimate* what the *XJO index* will be based on the SPI at Tuesday 3am. I am just too lazy to do the "calcs" myself .
> ...




No such thing exists. However you can just find the difference between Index and SPI intraday (say 25 pts)
And use SPI -25 to work out where index should be.

Its really guesswork as the spread of SPI at night could be 10pts or more. So whatever last traded price will have to do.


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## Fox (16 November 2009)

In the last week or two, I have followed the SPI because I started trading XJO options. I'm in awe of how the SPI can forecast XJO so accurately. As far as the SPI performance goes, the direction and amount of change of XJO, is forecast with the same degree of success as the daily weather forecast put out by the Bureau of Meteorology. 

When the Bureau predicts a maximum temperature of 25 degrees, it is very likely to be the case. Likewise, when the SPI predicts a fall of around 50 points, it is also very likely to occur when markets open. How do they do it?

For weather forecasting, there are probably scientific theories and computer models that assist with generating forecast. My impression is that quality inputs to the models will produce quality forecasts.

Is this how the index futures market players work as well? What sort of inputs do they use for their models? I imagine global and national economic news will be the main inputs. Can anyone here who trades the SPI, give me a starting point to understanding index futures? Some good web articles or recommendations for good books?


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## skyQuake (16 November 2009)

Fox said:


> In the last week or two, I have followed the SPI because I started trading XJO options. I'm in awe of how the SPI can forecast XJO so accurately. As far as the SPI performance goes, the direction and amount of change of XJO, is forecast with the same degree of success as the daily weather forecast put out by the Bureau of Meteorology.
> 
> When the Bureau predicts a maximum temperature of 25 degrees, it is very likely to be the case. Likewise, when the SPI predicts a fall of around 50 points, it is also very likely to occur when markets open. How do they do it?
> 
> ...




Because SPI can be cash settled.(ie you get your basket of shares in relative proportions if you choose to settle with shares) So an arbitrage opportunity exists if its out of whack. Night SPI mainly follows the US futures, and/or what big player wants the SPI to do at the time...
http://www.sfe.com.au/content/aboutsfe/brochures/006_spi200.pdf


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## Fox (16 November 2009)

skyQuake said:


> So an arbitrage opportunity exists if its out of whack.



Ah! I see. Arbitrage will always the great leveller.



skyQuake said:


> Night SPI mainly follows the US futures, and/or what big player wants the SPI to do at the time...



So that explains how the SPI is priced after Oz market hours. It just seems so incredibly amazing that external factors like those you mentioned above, plus arbitrage, can be such a good predictor of the XJO. Almost like the tail wagging the dog.

Thanks skyQuake.


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## Fox (21 November 2009)

I am seeking help with an XJO CFD question. With equity CFD (eg. CBA) which pay dividends, the seller of the CFD will have to pay the buyer, the dividend amount.

According to the ASX, this is the case with XJO CFDs as well. The dividend of a share that constitutes the XJO index is paid on ex-dividend date for that share. Can anyone with first hand experience of XJO CFDs confirm that this is indeed the case? 

Thanks.


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## lukeaye (21 November 2009)

Yes i can confirm this, i have had first hand pain with this one.

I was short 2 standard lots and a few of the banks went x-divedend. That ended up costing me about $800. Never make that mistake again.

Very important to check what companies are going ex-dividend. I think the rule is though, you have to hold those contract after the close. If you are short during the day, and exit at 3.59 then you won't have to pay.


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## Lone Wolf (21 November 2009)

When a company pays out a dividend its share price should go down accordingly. In theory, shouldn't the loss from dividend payments be offset by the profit made from the falling price? Or is the balance somehow tipped against you by the broker in CFD's?


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## Fox (21 November 2009)

Lukeaye, Thanks for confirming dividend payout for XJO. I have some short positions open and had not checked for the possibility of paying dividends. With 200 shares making up the index, it would be terribly difficult to monitor this.



Lone Wolf said:


> When a company pays out a dividend its share price should go down accordingly. In theory, shouldn't the loss from dividend payments be offset by the profit made from the falling price?



That's the *theory* but not necessarily the case in *practice*. I've had first hand experience with Amcor CFDs where I had to pay dividends with no commensurate fall in the Amcor share price. To add salt to the wound, the Amcor share price rose even higher after ex-dividend.


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## skc (21 November 2009)

Lone Wolf said:


> When a company pays out a dividend its share price should go down accordingly. In theory, shouldn't the loss from dividend payments be offset by the profit made from the falling price? Or is the balance somehow tipped against you by the broker in CFD's?




Depending on the broker there is probably some minor rounding error against you.

It's actually quite easy to monitor the dividend situation with XJO. Know the top 20 companies and you are very well covered, and note end of Dec when all the REITs and others go ex-div which usually has a massive impact.



Fox said:


> That's the *theory* but not necessarily the case in *practice*. I've had first hand experience with Amcor CFDs where I had to pay dividends with no commensurate fall in the Amcor share price. To add salt to the wound, the Amcor share price rose even higher after ex-dividend.




Doesn't that just mean you read the market incorrectly?


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## Lone Wolf (21 November 2009)

Fox said:


> That's the *theory* but not necessarily the case in *practice*. I've had first hand experience with Amcor CFDs where I had to pay dividends with no commensurate fall in the Amcor share price. To add salt to the wound, the Amcor share price rose even higher after ex-dividend.




There will be cases where you don't notice an adjustment to the share price because buyers drive the price up more than the dividend adjustment brings it down. But the price should still have been adjusted. It just means that if it weren't for the dividend adjustment price would have gone even higher than it did.

If it doesn't work like that then you could just hold stock long enough to collect the div, sell it and move on to the next. Or could this actually work if you had low enough brokerage?

I guess the real question was, when shorting the XJO, does the broker charge you more than what's fair? In that case you always lose more than you gain.


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## lukeaye (21 November 2009)

Well it can be factored in, but at the end of the day, if you are short, and the overseas markets start rallying, your little "factor in" will not only end up costing you the dividend, but also the total loss amount. In Volatile markets these factor ins mean absolutely 0.

How many stocks have you seen that capital raise then open higher then they bloody closed at 2 days later!

I know BSL, macquarie, Perseus mining all displayed this.

Also the thing is, with this ex-dividend payment your responsible for, that is actual capital that you have to pay. Its not a running loss that may turn around for you. ITS YOUR MONEY


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## mazzatelli (26 November 2009)

Fox said:


> So, what do you think the mean HV is?




If you are going to contextualize stat vol without using statistical methods, its better to use vol cones than eyeballing a graph with subjective lookback periods.


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## Fox (26 November 2009)

Hi Mazza,

Good to have our resident quant back! Going cold turkey without your insights has not been easy .



mazzatelli said:


> If you are going to contextualize stat vol without using statistical methods, its better to use vol cones than eyeballing a graph with subjective lookback periods.



My "eyeballed" mean vol (20.5%) came surprising close to the vol cone average (20.6%) . Great suggestion ie. using vol cones. Less subjective and in the case of XJO, the "eyeballed" mean was arrived at without having to manually discount the 40% and 60% peaks. 

*Competition update:*
skyQuake 15%
*Grinder 18%*
Cutz 30% 
Fox 20.5%

With vol cone validation, I'm glad that I picked 20.5%. However, the latest 30 day HV of *17.9%* puts Grinder in the lead (and he doesn't even trade XJO!). As things stand:


I need to have faith in mean reversion. 
Cutz is praying for another Global Financial Crisis. 
skyQuake might just give Grinder a run for his money.


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## cutz (26 November 2009)

Fox said:


> Cutz is praying for another Global Financial Crisis.




lol,

Yeah a pickup in volatility would certainly be nice, quickly running out of time.

Actually I should be careful what I wish for.


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## mazzatelli (26 November 2009)

lol...too many commitments so won't be around much [not that you need my bs], but sick this week 

I haven't modeled anything relating to ASX for years now, but have seen proprietary iv indexes [similar to VIX] constructed using XJO options for forecasts [10 - 20 days is optimal]. 

I'm guessing cutz is loaded up on back month wrangles  Can't blame him, after watching MQG for such a long time :


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## cutz (26 November 2009)

mazzatelli said:


> I'm guessing cutz is loaded up on back month wrangles




Geez mazza, you can read me like a book.

Gotta love those wrangles, and I still can't keep my hands off MQG.


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## Grinder (27 November 2009)

cutz said:


> lol,
> 
> Yeah a pickup in volatility would certainly be nice, quickly running out of time.
> 
> Actually I should be careful what I wish for.




Your wish may be granted very soon. Think a leadership change could be in the making, is that a tsunami I see in the distance?


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## cutz (18 December 2009)

Good call Grinder,

30 day at 16.7, 18 is pretty close.


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## Fox (18 December 2009)

Yep, Grinder's the winner. Hoadley's 30 day HV is 17.1%. Congratulations Grinder a.k.a Soothsayer of the Month. What is your secret to success?


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## Grinder (18 December 2009)

What can I say? guess I just have the midas touch eheh.. shame I can't do that when it counts. 

Lads, I'd like to be referred to as Soothsayer for the remainder of the month


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## Fox (7 January 2010)

I need the voice of experience here. Any advice is much appreciated.

XJO's IV is at it's lowest in the last 12 months. If I were to make a vol bet, it would be for IV to rise. As such, I am planning to avoid short vega positions.

The recent Santa rally saw XJO rise approx. 7% since 18 Dec 2009 when Grinder won the Soothsayer of the month award. Given such rapid moves, I am nervous about putting on XJO calenders. That leaves me with either a DD or a custom built vega neutral/positive theta position.

Any thoughts/comments on the following:
a. Given the fact that IV is ultra low, would it be reasonable to bet that IV will rise in the next month or two?
b. Would you consider a DD for the Feb expiry? If not, how would you play it? ie. how would you grind a theta profit from this low (and trending lower) IV environment?


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## sails (7 January 2010)

Hi Fox - might be worth looking at a weekly and monthly xjoiv chart before deciding on which strategy to use.  I remember IV levels being quite low on the index at times, so it would be interesting to get a longer range view of IV.


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## Fox (8 January 2010)

sails said:


> I remember IV levels being quite low on the index at times, so it would be interesting to get a longer range view of IV.



Thanks Sails. You are certainly right about longer term IV figures being low. IV went down as low as 4% four years ago.


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## Grinder (8 January 2010)

Fox said:


> I need the voice of experience here. Any advice is much appreciated.
> 
> XJO's IV is at it's lowest in the last 12 months. If I were to make a vol bet, it would be for IV to rise. As such, I am planning to avoid short vega positions.
> 
> ...




ahh.. these are some of the paramount questions a premium seller must face in this type of environment. Wish I had the answers... at some point a vol prediction needs to be made and an analysis of where IV is at in relation to HV over 30, 60 90 days. DDs are one way, but needs to be managed carefully & closely if IV drops. 

A few things I would consider in a low IV environment for grinding out profits is to not go out too far in months, keep position sizing in perpective, be patient for any movement of an opportunity to open a position when IV jumps & most importantly manage the downside with added protection.


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## mazzatelli (9 January 2010)

Fox said:


> a. Given the fact that IV is ultra low, would it be reasonable to bet that IV will rise in the next month or two?




More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.


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## sails (9 January 2010)

mazzatelli said:


> More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.




Profound, Mazza!  So much packed into two sentences... 

By "vol clustering" do you mean the points where vol spends more time?  
Haha - it's obvious I'm no quant - I'm sure you would have a much more professional and efficient way of wording my question!


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## mazzatelli (9 January 2010)

sails said:


> Profound, Mazza!  So much packed into two sentences...
> 
> By "vol clustering" do you mean the points where vol spends more time?
> Haha - it's obvious I'm no quant - I'm sure you would have a much more professional and efficient way of wording my question!




lol, not really...I'm rehashing verbatim from textbooks :

yes, cluster - its when high[low] vol tends to follow high[low] vol before any reversion to the mean occurs - and even then for most datasets I have worked with, I haven't seen any with very strong long term mean reversion.

So simple example, todays variance is dependent on a [past var x weight] + error term + constant. The weight parameter and number of past terms will help determine the amount of cluster.

@Fox
If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.


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## Fox (9 January 2010)

mazzatelli said:


> yes, cluster - its when high[low] vol tends to follow high[low] vol before any reversion to the mean occurs



Is *serial correlation* another term for vol clustering? Interesting that vol clustering dominates mean reversion. That's a valuable piece of info.



mazzatelli said:


> @Fox
> If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.



A bit too late for that . Put on my first ever calender (ATM) on 18 Dec 2009 thinking that vol could only revert to the mean and that Christmas would be a quiet period ie. little spot movement. Of course the Santa rally lead to a 7% lightning fast upward move and IV dropped by 1.5%. Ouch! Christmas wasn't too merry this year .


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## mazzatelli (9 January 2010)

Fox said:


> Is *serial correlation* another term for vol clustering? Interesting that vol clustering dominates mean reversion. That's a valuable piece of info.
> 
> A bit too late for that . Put on my first ever calender (ATM) on 18 Dec 2009 thinking that vol could only revert to the mean and that Christmas would be a quiet period ie. little spot movement. Of course the Santa rally lead to a 7% lightning fast upward move and IV dropped by 1.5%. Ouch! Christmas wasn't too merry this year .




Serial correlation/auto-regression [AR] attempts to describe vol clustering mathematically rather than being vol clustering. e.g. you could model interest rates as an AR process. 

Ah, Fox - better luck next time . Perhaps look at combinations involving short front month, long back month.


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## Fox (9 January 2010)

mazzatelli said:


> More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.
> 
> Serial correlation/auto-regression [AR] attempts to describe vol clustering mathematically rather than being vol clustering.



Ahh! I now understand your faith in, and penchant for, AR modelling when it comes to predicting vol. Not quite a crystal ball, but the next closest thing to it  . Thanks Mazza.


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## Fox (1 February 2010)

mazzatelli said:


> If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.



Does anyone trade calenders as an income strategy? What I have gathered so far is that for a calender to be successful, you need contradicting circumstances ie. spot prices should ideally remain still while IV stays still or increases. 

In the real world, IV goes down if the spot stays still or rallies. IV goes up if the spot falls quickly. Either scenario hurts the calender. It would appear then that calenders can only be an income strategy only under very specific circumstances, and not something you put on every month. 

1. Are there any traders out there trading calenders on index options as an income strategy? 
2. If calenders require contradicting requirements of a quiet spot AND rising IV, why does the Dan Sheridan in his CBOE videos rave about calenders as a monthly income strategy?
3. Should calenders be used primarily for directional bets or delta hedging purposes only?


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## Toothyfish (12 February 2010)

Hi,
I was wondering if IB has CFDs for the XJO? Would anyone know the ticker symbol?
Or is there anyway to trade the XJO Point for point?.... with minimal slippage.
(Short of doing a basket of it's components) 
I have been trading the AP but slippage for options is too high. It's too hard to get out quickly and keep to my money management rules. 
Also I would like to set up conditional orders and can't do that too well with options.
Many thanks


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## Trembling Hand (12 February 2010)

Toothyfish said:


> Hi,
> I was wondering if IB has CFDs for the XJO? Would anyone know the ticker symbol?
> Or is there anyway to trade the XJO Point for point?.... with minimal slippage.
> (Short of doing a basket of it's components)
> ...




SPI futures, You wouldn't touch anything else for directional trades.


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## cutz (12 February 2010)

Toothyfish said:


> Hi,
> I was wondering if IB has CFDs for the XJO? Would anyone know the ticker symbol?
> Or is there anyway to trade the XJO Point for point?.... with minimal slippage.
> (Short of doing a basket of it's components)
> ...




Yeah IB do have it, can't remember the code but it's IQV6 on iress, ATM 4556.4/4562 but it does vary.

With XJO i've found option synthetics (synthetic long/short) work best, the spreads are normally fairly tight, obviously not tight enough for short term trading but acceptable for adjustments.


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## Toothyfish (12 February 2010)

Sorry about that waffle.
What I meant to say was does IB have a code for XJO CFD which is IQ with the Australian brokers.


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## cutz (12 February 2010)

Sorry about the waffle.

Punch in SPI on TWS, select CFD.


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## Toothyfish (12 February 2010)

Beautiful! Thanks Cutz!   :worship:
Tried to contact IB but their MSG Site is down for maintenance.... during Market hours. Not good form.
Anyway.


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## cutz (12 February 2010)

No worries Toothyfish.

Are you looking at using it for hedging or straight out trading ?


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## Toothyfish (15 February 2010)

Thanks for the responses
Sorry for hijacking this thread.
Trading, I just made a little automated strategy on the XJO and want to test it out. 
Just a play account and Options obviously won't be suitable.


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## mazzatelli (12 April 2010)

Grinder said:


> Mazza, with historical models to use when trying  to forecast vol, such as ARCH or GARCH which can give off stochastic vol  or moving averages and exponential methods as an alternative, what do  you like to use?




I moved it here, as the other thread was VIX specific

I run a GARCH (p,q) and/or GJR-GARCH + exogenous regressors for equity/index vol. 
It will depend on the market/asset I'm analyzing - so diagnostic tests are important.


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## mazzatelli (12 April 2010)

Fox said:


> 1. Are there any traders out there trading calenders on index options as an income strategy?
> 2. If calenders require contradicting requirements of a quiet spot AND rising IV, why does the Dan Sheridan in his CBOE videos rave about calenders as a monthly income strategy?
> 3. Should calenders be used primarily for directional bets or delta hedging purposes only?




Missed this, but:
1/ No, for reasons you mentioned 
2/ Doesn't he play very short term, quick turnover of very cheap calendars?
3/ Not optimal for delta hedging, unless your trying to replicate the gamma+ vega convexity against your initial position


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## Grinder (13 April 2010)

mazzatelli said:


> Missed this, but:
> 1/ No, for reasons you mentioned
> 2/ Doesn't he play very short term, quick turnover of very cheap calendars?
> 3/ Not optimal for delta hedging, unless your trying to replicate the gamma+ vega convexity against your initial position




1. not as income but under optimal conditions might take a vol bet
2. Think he might also us strict management so as to not let em get outta hand.
3. Hedging some short vega is all I use em for, but as Mazza said it's not optimal. 



mazzatelli said:


> I moved it here, as the other thread was VIX specific
> 
> I run a GARCH (p,q) and/or GJR-GARCH + exogenous regressors for equity/index vol.
> It will depend on the market/asset I'm analyzing - so diagnostic tests are important.




Your obviously got access to systems where you can run the data that a  lowly retail trader like myself cannot do. Even if I did I probs would'nt know where to start


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## mazzatelli (13 April 2010)

You can use R or Matlab for retail scale - they have add-in modules. R is free and open source - though command line driven, so more learning investment is required.

My suggestion would be to read vol forecasting literature especially Bollersev and Anderson, to determine whether there is any utility.
For some balance, Taleb and McMillan for example, don't think highly of GARCH models. 

In the end it will come to the models + heuristics on part of the user. Enjoy


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## Grinder (14 April 2010)

mazzatelli said:


> You can use R or Matlab for retail scale - they have add-in modules. R is free and open source - though command line driven, so more learning investment is required.
> 
> My suggestion would be to read vol forecasting literature especially Bollersev and Anderson, to determine whether there is any utility.
> For some balance, Taleb and McMillan for example, don't think highly of GARCH models.
> ...




I don't put alot of faith in forecasting models and have read both Taleb and McMillian but nothing from Bollersev and Anderson as yet. Thanks for the direction to Matlab, will check it out and see how far I get.


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## Fox (14 April 2010)

mazzatelli said:


> 2/ Doesn't he play very short term, quick turnover of very cheap calendars?



There is also something not quite right about his video examples of managing income trades. He seems to have tight control of delta at the start of the trade but lets delta rise dangerously high towards the end of the trade. In the end, it would appear that his trades are sometimes profitable due to the spot moving favourably in his direction.

Perhaps he takes more risk with delta towards the end of the trade because of higher theta? ie. his end of trade *delta to theta ratio* is commensurate to the ratio at the start of trade?



mazzatelli said:


> In a nutshell: just because its low doesn't mean it will revert
> *Knowing the speed of reversion* average and amount of time it clusters in addition would be helpful. But definitely not an indicator to be taken by itself.



Is the speed of reversion an observed speed? ie. is this speed from observed historical vol data? 

As for the speed of reversion of vol forecasts, am I correct to say that the speed of reversion of GARCH forecasts will depend on the GARCH parameters you input to your model?


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## Grinder (14 April 2010)

Fox,
Know your questions were for Mazza but will throw in my 



Fox said:


> There is also something not quite right about his video examples of managing income trades. He seems to have tight control of delta at the start of the trade but lets delta rise dangerously high towards the end of the trade. In the end, it would appear that his trades are sometimes profitable due to the spot moving favourably in his direction.
> 
> Perhaps he takes more risk with delta towards the end of the trade because of higher theta? ie. his end of trade *delta to theta ratio* is commensurate to the ratio at the start of trade?




On Dan: I like the way he goes about it but can't help but think you might be onto something here. I haven't checked it out his webcasts in quite sometime but do remmember the theme of the majority of his trades were to keep them going (even when delta was pushing quite high) till theta really kicked in, then the spot seemed to move in his favour.  




Fox said:


> Is the speed of reversion an observed speed? ie. is this speed from observed historical vol data?
> 
> As for the speed of reversion of vol forecasts, am I correct to say that the speed of reversion of GARCH forecasts will depend on the GARCH parameters you input to your model?




Can't answer that question but my guess would be yes. Figure it all depends on how far back you are looking and the size of the data, and then to also forecast vol is to favour one model which was undertaken when markets were behaving quite differently to how they are at another point in time. 

Like I said it's just my  and am sure Mazza will enlighten me.


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## mazzatelli (14 April 2010)

Fox said:


> In the end, it would appear that his trades are sometimes profitable due to the spot moving favourably in his direction.
> Perhaps he takes more risk with delta towards the end of the trade  because of higher theta? ie. his end of trade *delta to theta ratio*  is commensurate to the ratio at the start of trade?





Grinder said:


> remember the theme of the majority of his trades were to keep them going  (even when delta was pushing quite high) till theta really kicked in,  then the spot seemed to move in his favour.




imo more to do with betting on mean reversion than theta. If spot is far otm [assuming atm calendar] theta inverts => negative [trimodal]. 



Fox said:


> Is the speed of reversion an observed speed? ie. is this speed from observed historical vol data?
> As for the speed of reversion of vol forecasts, am I correct to say that the speed of reversion of GARCH forecasts will depend on the GARCH parameters you input to your model?





Grinder said:


> Can't answer that question but my guess would be yes. Figure it all depends on how far back you are looking and the size of the data, and then to also forecast vol is to favour one model which was undertaken when markets were behaving quite   differently to how they are at another point in time.




The speed, will come from the co-efficients that GARCH estimates. 
In terms of size of data - there are diagnostics to select representative samples and keep standard errors as low as possible [basic stats] + heuristics e.g earnings etc

Forecasts aren't the end of the process - there's still trading rules and optimal hedging approaches that need to be considered :crap:


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## mazzatelli (15 April 2010)

Fox said:


> Perhaps he takes more risk with delta towards the end of the trade because of higher theta? ie. his end of trade *delta to theta ratio* is commensurate to the ratio at the start of trade?






> majority of his trades were to keep them going  (even when delta was  pushing quite high) till theta really kicked in,  then the spot seemed  to move in his favour



Didn't realise the edit got cut out - adding to my point about theta getting smaller the further away from the strike and eventually inverting to negative - I can't see the delta to theta ratio spoken of.

Is this an ATM calendar you're discussing Fox?


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## Fox (16 April 2010)

mazzatelli said:


> I can't see the delta to theta ratio spoken of.
> 
> Is this an ATM calendar you're discussing Fox?



Apologies for the confusion. I had swapped topics and departed from calender trades, but still referring to DS videos. 

I was NOT referring to Dan's calender trades. I was referring to his IC and IB videos, whereby he puts in a lot of effort to cut deltas at the start of the trade, but lets his deltas build to such high levels a week before expiry. It just does not make sense to me that his trades always ends up profitable because the spot moved favourably for him ie. having exposure to high deltas and yet have the spot move in your favour. Seems more of taking a punt than good risk management.

As far as delta:theta ratio for an IC is concerned, theta does increase towards expiry. Hence, my comment that perhaps he lets delta get higher towards expiry as well, such that the delta:theta ratio still remains fairly constant. I recall reading a DS related article where a delta:theta ratio of less than 8% was described as acceptable risk.


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## Grinder (16 April 2010)

I sat through a couple of his webcasts to freshen up on his methods again.

Heres what I found:

He put an IC at 30 days out then after 10 days the sp moved up 5% so he rolled half the puts up and a quarter of the calls. Market then did nothing for the next 10 days in which theta really kicked in and he had made 15% profit.

Another one he kept buying calls as the market kept moving up whilst at the same time cutting deltas, then the sp stopped and theta did the rest.

It's a tough call, theres some good mangement but also depends on theta comming good at the right time.  Hhmmmm.. undecided as yet. Might have ta sit through a few more.


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## mazzatelli (16 April 2010)

Fox said:


> As far as delta:theta ratio for an IC is concerned, theta does increase  towards expiry. Hence, my comment that perhaps he lets delta get higher  towards expiry as well, such that the delta:theta ratio still remains  fairly constant. I recall reading a DS related article where a  delta:theta ratio of less than 8% was described as acceptable  risk.




The theta in these positions are trimodal and  polarity is topical on spot. I was assuming short strikes violated close  to expiry- hence negative theta. Having read up on the approach, I'm  assuming the position is not kept if the ratio is high/inverts.



Grinder said:


> He put an IC at 30 days out then after 10 days the sp moved up 5% so he  rolled half the puts up and a quarter of the calls. Market then did  nothing for the next 10 days in which theta really kicked in and he had  made 15% profit.




I suspect the drop in vol [stagnant  market] would contribute more to PnL than theta with  10 days til expiry.



Fox said:


> It just does not make  sense to me that his trades always  ends up profitable because the spot moved favourably for him ie. having  exposure to high deltas and yet have the spot move in your favour.  Seems more of taking a punt than good risk management.




The conditions seem diametric. New traders are  taught to throw neutral delta positions at the market, but then have to  make directional bets on adjustments, despite being wrong on realized  vol.

There's no issue  if one is adept at directional bets [vol/price], which I am sure Dan is, but for  his students who only know neutral delta, it is  uncomfortable for sure. It's the selling point along with it being "passive" income.

I tried [unsuccessfully] to bring this  idea of punts in the IC strategies thread - you have to come to the same  conclusion anyway haha

All in all, I can't stomach the <10 delta short strikes and expensive replications
Each to their own


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## Grinder (17 April 2010)

mazzatelli said:


> There's no issue  if one is adept at directional bets [vol/price], which I am sure Dan is, but for his students who only know neutral delta, it is  uncomfortable for sure. It's the selling point along with it being "passive" income.




spot on like usual mazza. There not for everyone and nor should they be, speaking from my own experience it's taken me 2 years to be able to comfortably trade them profitably


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