Update DNT Bets

Update to some DNT bets originally placed here.

After news released on GOOG and Verizon dial, it made a straight run up to 535 or so and knocked out this DNT price for a complete loss. So yeah that sucked. However, pricing of the DNT did not change so I put the trade on again re-centered at its current price. ScreenHunter_02 Oct. 10 22.48

ScreenHunter_01 Oct. 16 08.52

This bet worked out a lot better and ended up with a ‘scratch’ on the trade. At this time I am still examining the strategy and so haven’t approached my optimal sizing yet. Once a database of historical trades is collected, including win/loss rate and average or approximate risk to reward as defined by the prices paid I can utilize something like half-kelly betting or fixed fractional. These trade sizes were somewhat arbitrarily picked.

The other valuable lesson here is observing the path dependency effect and importantly the serial dependence of the returns. The pricing of the bet offered significant edge compared to the realized volatility of the underlying for that time frame. IOW, the price of the bet incorporated a range of say 50 points whereas historically leading up to it the actual range was more like 30 points. However the news release changed the dynamic, the market liked the news, the broader indices were moving higher, and subsequent moves in the same direction caused the realized vol to spike. In trading DNT’s the path is critical to the payout and it takes an understanding of how/why stock prices move to properly approach these bets. GOOG rallied on news however earnings were scheduled for a week later. My thought process was the underlying would digest the move and flatten out as earnings came closer.

~ by largecaptrader on October 18, 2009.

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