Thursday, May 17, 2007

Pizza in a Cup

I've been asked what is the difference between making markets in options, trading merger arb spreads, and building diversified portfolios. The answer is your risk/time ratio. That is how long do you have to get out of a bad trade or position. In the first two cases, you would take on large risk, but have a small time frame. In the last case, we look at a longer time horizon hence taking less risk. This also allows us to rebalance quite frequently in order to capitalize on volatility.

Very scary to be leveraged up on the long side here. Gold/oil has started to diverge which should create a squeeze in dollar/yen as it has the last 2 years. 10yr also backing up to 4.75 which should send in the asset allocators soon. But I forgot, TTID.


Keith Berger said...

If only I understood what you're talking about, I'd comment more often... ;-)

I've gotten out of a few bad positions, but mostly to avoid a serious leg cramping issue.

Miss ya, cuz.

Eric P. said...

I don't understand either. But no one is reading it so I must be doing something right.