1 Week Finished

Why gamma of a call is equal to gamma of a put.


Optiver
From talking with some friends, I have decided that the way Optiver trains its traders is different from the way other firms train. Here are some notable differences:

1. The recruits have a wide range of experience. This makes a big difference in the type of options problems we can solve easily. Finding the formula, plotting curves, and taking derivatives are easy problems for any engineer / mathematically trained person. Explaining intuition, having financial intuition, and financial passion are entirely different. You might say, the second is more important than the first, and you might be right, but then again, you might be wrong.
2. Most young traders hedge their positions before they 1) go home or 2) especially before the weekend. I've noticed it's very easy for traders to get a good night's rest and it's easy to start with a fresh head every day.
3. Recruits come from all over the world (eg. Turkey, India, US, Italy, Netherlands), but the common language spoken in the company is English. It's a big advantage to be a native English speaker because you are able to explain what you understand, read books in English, and communicate what you do not understand.
4. Strong feeling of camaraderie. Unlike the BS that you may get fed at a Goldman type of place, traders really help each other out. The big guys look out for the little guys, and the little guys end up making money for the big guys. It feels great to be encouraged to do what you love to do / are good at.
5. Training is fast! (Actually, I cannot stand how slow the training is, but for engineers / others, this speed is incredible). To learn about Black-Scholes in one day, to understand gamma and vega in the third day, to sum in your head how much you make on gamma if a stock moves, to estimate delta for puts and calls just from looking at some strikes is some pretty serious stuff. All of the recruits did this within their first week!
6. Learning costs money. The trainee's are expected to make many mistakes. Those that do very safe total arbitrage trades all the time are perceived as too risk averse. A good trader isn't afraid of variance when the odds favor him / her (there aren't many her's around).
   

Life in Amsterdam
Amsterdam is a very open place. What strikes me most is how little waste is produced here. First of all, I have never seen a garbage truck. Yet, I never see garbage. People care very little about the type of transportation you use (that is, in terms of fashion). All in all, the feeling is very relaxed. This may be the best place to be in this time of my life.

Mathematics and Finance
For each post from now on, I have decided to have a question or thought about options.

1. If I have 0 delta, 10 gamma, and no other position, how much money do I make if the stock moves by 1 point? How much if it moves by 2 points? Does it matter if the stock goes up or goes down? Why? Can you think of a formula for this?
2. What is an argument for volatility increasing when the stock price falls?
3. Between gamma and vega, which is more sensitive to a)implied vol and b) realized vol

Please email me at igor.schmertzler@gmail.com with your thoughts / charts / graphs etc. I will post the best discussion of every week.

After 2 days of Training

Book
We are using Sheldon Natenberg's Option Volatility and Pricing as our 'bible'. ( This great book and others are listed on http://www.quantfs.com/libr.php )
First Day, Planned
9:30 - Meet with HR to go over company manual and straighten out are residual problems (banking, living, paperwork, etc.)
10:30 - Meet first Trading Mentor, get two assignments that go over definitions (do you know what an option is, what about what a butterfly is?)
12:00 - Eat Lunch
13:00 - Solutions to previous, Get next assignment (Expiration Graphs - 47 problems!)
15:30 - Solutions to previous, Get next assignment (Put call parity and Conversions / Reversals)
17:30 - Solutions to previous

First Day, Actual
8:05 - I was lucky enough to make friends with some traders in the class 2 months ahead of my trainee class, so I walked to work with them. The entire trip took about 20 minutes.
8:25 - Breakfast
8:43 - Show up for the 8:45 morning meeting
8:55 - Set up the desk. Traders get situated, finish up eating, enter adjustments into there models, anticipating the 9:00 am opening. Since it was labor day in the US, the markets were very quiet.
9:35 to 9:40 - No one is upstairs yet, when I go to check.
9:50 - Everyone is waiting for me to arrive, but its not a big deal because the trainee risk manager and trainee wholesale traders haven't arrived yet either. (Our trainee class is 10 people, even though Optiver tries to keep the trainee class at a max size of 6 people). We spend some time going over manual.
10:15 - We have nothing to do so we talk to each other and offer to play some cards.
10:30 - We get the first assignment. It takes about 30 minutes to complete.
11:00 - I sit with my friend and watch him trade for 45 minutes. I am relatively fluent with option theory, but its very hard to understand what is happening on the screen. Simple concepts like risk neutralization are easy to follow though (eg. If I am long delta and short vega, what can I buy to neutralize?)
12:00 - Lunch, officially costs 2 euro in the top floor of the building. The convenience is too incredible to pass up and the food is relatively delicious. However, I am told that the selection rarely changes so many traders get sick of the food and choose to just trade through lunch. I am not in the computer system since I am not an Amsterdam employee, so I have to sign a paper to indicate I have taken a lunch.
2:00 - We get solutions to the first set and start working on the second set.
3:30 - I am still feverishly working the expiration graphs (since there are 47 of them, but our trainer ask if we are finished. No one is finished)
5:30 - The trainer gives us solutions to the expiration graphs. Only the risk manager has finished them, and he has worked as a trader for the last six years. I am able to leave only 6 unfinished.
6:00 - We leave and I walk home with the traders that I watched trade in the morning. My anxiousness to get on the desk is very strong.
After dinner, I go over the solutions to the expiration graphs and read Chapter 11 in Natenberg because we are told to know put call parity and option arbitrage inside and out for the next day. Between that and skyping, I read myself asleep.

Second day
8:20 - We take the tram to work.
8:41 - Breakfast
8:44 - Walk into the morning meeting. Today, all the trainees were supposed to arrive before the start of the meeting but only three showed up on time.
8:55 - We get torn up for missing the morning meeting. Some people are still not at work. Everyone is told to get to work by 8:30. Optiver is running a tight ship here. (please e-mail me if tight ship is not an actual colloquialism)
9:00 - We quickly go over an example of an expiration graph and move onto Put call parity. Put call parity questions (15 questions, eg. give me the theoretical put value for stock = 61, call 60 @ 5, interest rate 5%, 6 months)
12:00 - Lunch
12:30 - Solutions and next assignment. Reversals and conversions for 17 questions with three parts per question (a. trade reversal or conversion, b. how much is the arbitrage, c. what is the implied interest?)
2:50 - Watch the traders trade and ask a couple of question about what different multiples mean on the screen.
3:30 - Solutions, and next assignment. Calculate conversion / reversal for 40 cases then add cost of dividends. Another conversion / reversal page...
4:30 - Discussion on how to treat dividends since discounting them on the conversions / reversals takes forever and doesn't change the answer much.
5:15 - Watch the traders make bank. Volume is spiking in anticipation of the US markets opening.
5:30 - Solutions to everything.
5:45 to 6:15 : We go over some more options theory like intrinsic value and time value. We are a full day behind in the training, so we will have to pick up the pace. For those that have never seen options, they are struggling considerably to keep up even though we are going 'very slowly'

I am pretty exhausted.

Trainee Quality
I am incredibly impressed with the quality of candidates in my training class. Everyone except for perhaps one person is maintaining very high consistency of correct answers and working quickly in a subject where they don't have much experience. It is a humbling experience to work with these guys.

Apartment Tour 2/2

The first picture is the view of the room coming in. Probably the most noticeable part of the room is how high the ceilings are. Since I am much smaller than the average height of a Dutch male, 5' 8" vs ~6'. (see link at the end). This is in pretty serious contrast to the room in the basement, which has ceilings at 2/3 the height. A nice plant (the small green thing in the center of the first picture) from IKEA makes me feel as if I have decorated the place. The second picture shows the incredible closet space. This room would suit a couple comfortably.

In the third picture, take a look at the size of the bed. It's big; it's low; and it is comfortable. The lowness of the bed (compared to American standards) further accentuates the openness. Behind the bed is my computer desk. Thanks to my parents, we were able to get this desk and chair from IKEA. The desk is a mere 45 euro and the chair is about 25 euro. This is where my outlet converter does quadruple-plus duty hooked into my surge protector. The desk lamp and the bed lamp are not necessary since the room is very well lit, but they have proved useful nonetheless. (Training is much faster / harder than I anticipated, but more on that in the next post)

The truly amazing part is how my room is connected to my own patio outside. Take a look at the double curtains opening to the double doors. For those that don't mind people in there room, this is a great place to host a small get-together. When the weather is nice, it's also incredibly relaxing to have your desk open to the outside.

For Prospective Optiver Traders: A note about living conditions
If you are an recruit for the offices not in Amsterdam, you get the three months of living provided. If you are working for the Amsterdam office, you get two months provided. So what happens if you do not like the place in which you are living? Ans: Optiver will pay for your living expenses if you choose to live someplace else. They will also help you relocate with the relocation allowance you are given. This policy usually carries over the two months a trader gets in his city of assignment, but you should check with each office. As of September 2007, the Chicago office allows it. Even if you love your apartment, you may be able to get an apartment leased with a friend and not lose the two months of free living.

References:
Dutch height: (http://www.channels.nl/knowledge/25041.html), (http://en.wikipedia.org/wiki/Human_height)