I think it must be possible since there was a < -5% opening gap that occurred in August, 2015. Looks like the 5% rule only applies to after-hours trading.Is it possible to gap down over 5% now with the market circuit breakers?
I wouldn't expect them to, otherwise option prices would reflect it or there would be an arbitrage opportunity.First, the interim periods show no consistency.
SPY only began trading in 1993. I tried to analyze YAHOO! data for the SPX, but the data has different properties. It didn't reflect the ~9% opening gap-down moves that traders experienced in 1987, 2001 and 2008. Does anyone know why that would be the case?Second, there is no data shown prior to 1987.
How so? No predictions are made. It only reflects what actually happened. Color-coding was used to highlight the disparity in the frequency of events between -2% and -3% and those < -3%. Days where the markets gaps-down < -3% are far more rare. The effect is highly non-linear. In fact, it only happened 11 times since 1993. The vertical bands do suggest a clustering effect for market shocks, but that's well-known. I added them because they hint that opening gaps < -2% may sometimes be 'warning shots', which is a very useful concept, IMHO.Third, and most importantly, what would be the rationale for having a major gap-down at certain periodicity? In other words, I think this graph is suggesting something that is not there.
I'm sorry if I misinterpreted your original posting. Given the title of the thread, I assumed you were implying a major down occurrence is pending. I just tried to indicate that such a conclusion can not be drawn from the graph. I fully agree with Dan's view above.How so? No predictions are made.
Agreed. We can't make a reasonable prediction of the waiting time until the next ~9%+ black swan due to the limited sample size, but I don't think that means we shouldn't be discussing black swan risk management methodologies. At this moment, based on the three data points mentioned, I think it's prudent to assume these events have at most 14 years between them, even if that's not true.There is not a large enough data set to make any sort of statistical conclusion except what we already know which is that financial markets have fat tails.
This. I feel you already need to be net-long puts when the proverbial fan gets hit - it's too late when the market is free-falling. Puts will be very expensive then. One of the things Tom Sosnoff and I agree on.Conditional orders to buy a put can do the same thing but what if the market gaps past the trigger price?
There's no getting away from the fact that back ratios mean buying (very expensive) skew ... the only slight skew benefit is that being long the two means you can sell one teeny against it, if the back ratio is close in enough (that is, net you are selling a BWB with a very wide lower leg) ... doing this, you cap the left side of the t+0 but you can cap it at a positive terminal value.Has anyone been able to take advantage of skew when constructing backratios?
Not necessarily true. Following is chart (from the book "Second leg down") selling 1x2 put ratio on delta neutral basis weekly gross of costs. Average premium cost is 6 bp/week or about 3.1% per year.There's no getting away from the fact that back ratios mean buying (very expensive) skew ... the only slight skew benefit is that being long the two means you can sell one teeny against it, if the back ratio is close in enough (that is, net you are selling a BWB with a very wide lower leg) ... doing this, you cap the left side of the t+0 but you can cap it at a positive terminal value.
IMO back ratios are best constructed near strikes where your fly lower leg is, roughly and plus or minus ... in this area they can be significantly less expensive than equivalent long option protection, but they need to be managed (rolled, contracted) to avoid issues of sea of death and getting-too-expensive-to-hold. Most traders don't like this idea because effective hedging is very expensive ... you can't just blow a few hundred on unit puts and/or VIX calls and expect to have a good hedge for a 10% gap (30% yes, 10% no) ... rather, you have to get serious and say, for example, "I'm going to blow a full 33% of my expected trade profit on a hedge that will reduce my max loss by 66%, raise my far left p&l to about $0, and make my near t+0 line quite a bit better, but still very painful on a big gap down."
If you prefer to live the lifestyle of always being hedged for the big one, check out Bertino's group ... the ideas are (1) have your income structures far down enough so the hedges necessary to protect them are effective in spite of being very far OTM, and (2) as a way of life, always be blowing a chunk of your potential profits on building up your hedge portfolio ("blowing a chunk of your potential profits" is what Ron calls "getting free hedges"). It's quite impressive to see the hedge portfolios these guys are building up without spending much upfront.
That is a suspicious looking chart for a long-vol profile trade. Where is the short strike placed? How many DTE? Does "delta neutral basis weekly gross of costs" mean that you put in on delta neutral, then close out/reposition one week later?Not necessarily true. Following is chart (from the book "Second leg down") selling 1x2 put ratio on delta neutral basis weekly gross of costs. Average premium cost is 6 bp/week or about 3.1% per year.