DNT Bets

I placed some virtual DNT trades utilizing the calculator linked here. The underlying idea is overpriced volatility will cause DNT exotics to trade cheap, in other words, the likelihood of a barrier being touched is greater under high volatility therefore the bet is less likely to win and hence trade cheaper. One can make money if there is a large enough discrepancy between implied volatility and realized volatility. My thinking is that the pricing algo’s simply take the vol-line from the vanilla equities and plug it into a similar calculator, from some empirical testing of a few random names that seems to be the case. I would be very interested to see if these brokers perform any inventory pricing management similar to a sports bookie; If everyone is betting on the Yankees, increase the odds on the Mets to encourage that bet to even out inventory.

DNT exotics are an interesting product because these are also heavily path dependent, so one needs a volatility edge combined with some ability to predict direction. Super quant I am not but simple support/resistance or an understanding of the driving forces behind the movement of a particular stock are more art and science, simple but not easy to do and to date I don’t know of any holy grail of price/path forecasting.

ScreenHunter_01 Oct. 06 10.52

* QCOM trades were placed for testing purposes on a small edge, its my opinion that it is better to monitor price in real-time to get a ‘feel’ for the movement of the option versus underlying. The other trades are based on my belief of a specific vol edge.

~ by largecaptrader on October 6, 2009.

One Response to “DNT Bets”

  1. […] Update DNT Bets Update to some DNT bets originally placed here. […]

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