What Does This Desk Trade?
"Volatility Flow Stocks US Desk" What does this desk trade exactly? Is it strictly taking equity positions and making profits on volatility or would you guys say derivatives are involved? Thnks
Signle stock options. Flow for customers. Maybe US index option too
yup...sounds right
They trade vega. So with options, they will hedge everything except volatility. That means rho, delta, etc. all get pulled to the ground.
This is inaccurate. You're giving him the impression that they leave their vol exposed.
The keyword is "flow desk", all this means is they make markets in instruments that have a vega component (or sensitivity to volatility).
These desks hedge all those greeks (delta, gamma, rho, etc.) IN ADDITION to vega.
What you said implies that the desk would let a client sell them tons of BP options and the flow desk would sit there like an idiot and buy it all up and remain long vega. Hardly, they'd hedge that vega faster than that oil can leak because a fall in BP volatility would kill them.
CD~
Pick up Hull and Natenberg and read them.
Right, let me be clear:
Ok, you're the flow desk. You trade vega. What's that mean? It means you trade the volatility sensitivity of a security. But the problem is, securities come with other risks. These risks all have names like delta (sensitivity to the underlying securities price movement), gamma (the second derivative of delta), rho (the interests rate/funding sensitivity), theta (time sensitivity), etc.
To make a position based solely on vega, you must hedge away all these other risks. That's your first job. Your second job is to manage the risk of your portfolio while making markets. That means managing your vega and not eating up anything you find while servicing your clients.
As a rule, please don't sit around like an idiot! =)
Tell me how you're going to trade vega, but be theta and gamma neutral in the same months. Please do.
Thanks guys. So what would you guys say an interview for a position on the desk would consist of? It's for an summer internship. Obviously, I must know the Greeks. Possible questions? Any insight is appreciated.
These should start you off...
Question 1) Say I want to get long vega, short gamma on Apple stock, how would you do it?
Question 2) Say GOOG is trading at 500. Which has a higher delta, a call option struck at 500 expiring in 1 month or a call option struck at 500 expiring in 2 months? (assume volatility is the same for both)
Slightly trickier than question 1:
Question 3) Say you want to get short gamma, short theta on Apple stock, how would you do it?
long wings short ats
might be easier to describe it for a newbie as paying or collecting theta.
can you guys recommend any good books to learn about the greeks and options?
Hull is also good. I actually have an extra copy if you would be interested in buying it cheap. PM me if interested.
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