A Day in the Life of an Options Trader at a Bulge Bracket Bank: From Delta to Vega and Back Again
This is a guest post from “DerivsTrading,” an experienced options trader who has worked at both bulge-bracket banks and hedge funds in London. He defied the odds and broke into sales & trading coming from a non-target school.
We’ve covered a few days and 48-hour periods in the lives of sales & trading interns before, but what about when you start working full-time?
Even if the hours and stress levels are still brutal, do you at least get to do more “real work”?
Or are you stuck picking up lunch for everyone on your desk?
Let’s jump into this day-in-the-life account and see exactly what you do as a full-time options trader at a bulge bracket bank – and hey, you might even improve your knowledge of the Greek language in the process…
5:45 AM: Wake up. No matter which desk you end up on, you are most likely going to be waking up around this time.
Adjust your sleeping habits accordingly or suffer for most of the day. Also keep in mind that even if you go out the night before, you are still expected to be in on time and alert. Any signs that you are at less than 100% capacity will be looked upon very badly.
6:30 AM: Arrive on the desk. The market opens in 90 minutes, so it’s really a countdown from here. 20 minutes is spent just turning on all the systems; with 4 computers and each one running 10-15 different applications, this is quite time-consuming.
Inevitably, you’ll forget to log into at least one crucial system each day and then realize it at the absolute worst moment.
6:50 AM: Start reading various new sources – generally FT, Bloomberg, City AM, and then the internal research that comes out. Finish off with a couple broker chats.
You need to know, before the open, any market information that can affect your stocks – how it might affect your P&L and what the Cash Equities Traders are calling it that day (most cash traders after a big piece of news will call a stock up or down x%).
7:15 AM: Look at the largest positions on the book and try to come up with a rough game plan for the day. I generally like to make a list of risks I don’t like, in order of priority, and then work down the list throughout the day.
You want to make sure you know the biggest risks in every category (e.g. gamma, vega, delta, decay, skew, div).
NOTE FOR NON-TRADERS: These metrics all measure characteristics of options; for example, delta is the rate of change of the option value relative to the changes in the underlying asset’s price (basically the first derivative with respect to price).
Vega is the first derivative of the option’s value with respect to the underlying asset’s volatility; gamma is the second derivative of the option’s value with respect to underlying asset price (so the first derivative of delta).
Unlike in investment banking, you actually need to know (some) math here.
In a large options book there is also a lot of “hidden risk.”
Therefore, you can’t just look at your overall risk for a name – you need to know where your largest strikes are, and how your risk changes through spot and time.
For example, you might see yourself long gamma, but actually you might be short a strike that expires in 2 weeks that is 10% away.
You need to know about all of that because if the stock makes a big move, that strike will start kicking out a very large short gamma (this is also why most traders are unwilling to sell short dated OTM options).
Morning Meetings: The Worst Time to Show Up with a Hangover?
7:30 AM: Morning meeting with sales and research, which is generally the worst moment of your entire day if you have had a rough night out. The macro summary is given, and then everyone discusses important research updates.
7:50 AM: Take one final glance over the stock news to make sure you haven’t missed anything just before the open (which is at 8 AM in London and a few other regions).
You never want your boss to ask you a question that you don’t have an answer to: if you’re running risk, you need to be aware of everything at all times.
8:00 AM: The market opens. You watch any big movers, see that cash equity prices find their levels fairly quickly but volatility (vol) levels adjust a bit more slowly; generally, within the first 10 minutes you get an idea of where vol is on most names.
If there are earnings or big announcements, you will generally not quote until the screens come in a bit. For the first 10 minutes, the vol spread will be extremely wide and you can easily get picked off.
8:15 AM: First wave of client requests comes in. If you cover several sectors, you can get a backlog of 7-10 prices pretty quickly.
You prioritize all these requests by client and size; even when you only have a couple minutes for each price, you need to make sure you have all your bases covered.
Options trading is very tricky because there are so many different risks – you need to make sure you’re not being picked off on vol (check if anything similar in the broker market is already trading to hedge your risk and skew pricing accordingly), make sure you’re not being picked off on divs, and make sure that you can find borrow on the stock if you’re selling shares as part of the trade.
If the government steps in and restricts short-selling for some reason, this last risk can become more of an issue.
US vs. European Options
8:30 AM: Finally send off last of the prices, get some time to look at how the book is doing, and start phoning up brokers and start working some trades.
Options on single stocks in Europe trade a bit differently than in the US because the liquidity is not the same – the issue is that screen prices are kept very tight in extremely small sizes, and clients expect the same spreads in sizes that are 50x larger.
But the problem is that unless you can find someone to find the other side in the broker market, you will get wider prices with brokers than you give to your clients.
This means that to survive, you constantly need to be aware of what brokers are working so that you can spot chances to offload risk.
That way, when a client request comes in you can skew it appropriately. The best case scenario: when you know someone is a buyer in the broker market, you can buy it from a client at a vol from mids, and then offload it in the broker market at a vol above.
However, this is very rare, so most of the time you need to make a price based on a prop view (if you will). You need to price it according to your view of the trade, instead of where you can offload it.
9:15 AM: Things start calming down around this time, and you might chat with co-workers or use the time to go for a bathroom break.
Always go when you have a chance and not when you need to – nothing distracts you more than having to go to the bathroom when you’re in the middle of something.
10:00 AM: It’s still fairly quiet, so you finally get to fire up Excel and work on some longer-term projects. It gets difficult on a flow book because you need to find the balance between looking after the risk, but at the same time also exploring opportunities to move the business forward.
It’s sort of like the dilemma mid-level bankers face in executing deals vs. sourcing new business when moving up the ladder…
10:15 AM: Spoke too soon – a big client request comes in, and it’s a good client so the price needs to be very competitive.
This is a double-edged sword: you can take a lot of P&L upfront on the trade, but you know that getting out of the position is impossible and will take a couple weeks. So you price it with the help of the senior guys on the desk and get back to Excel.
12:00 PM: A company you’re following announces a profit warning – unfortunately, you have a short gamma position and the stock is down 5%. This is one of the situations you hate to be in.
NOTE: This is bad news because gamma is the second derivative of an option’s value with respect to the underlying stock price… so if you’re long gamma, you benefit from stock price movement, and the bigger the better. If you’re short gamma that hurts you because you’ve bet against stock price movement and now the stock has just made a big move.
Because of the short gamma, you are long a lot of delta.
Do you sell the shares 5% down, or hold on and hope it rallies back?
As a personal rule, I like to keep my delta’s from my short gamma’s to a certain limit, and I hedge so that it never crosses that limit.
You do not want to be stuck with a stock that drops 20% in a day and just sit there watching it. It’s important that you know everything about your short gamma’s, more so than your long’s, because if something gaps down you need to know the impact on your P&L and delta.
With longs it’s fine because of the positive P&L, but negative P&L always brings more senior attention and means that you’re more likely to get questions on what you’re doing.
You also need to make sure you know not just your local risk, but also your risk as spot prices move.
In a client flow book you have thousands of positions, so your risk can quite easily flip as parameters move. That is why you need to look at your risk in three dimensions: time, spot, and volatility.
These added dimensions make derivatives more interesting than delta one products (e.g. futures, forwards, or anything else with a linear, symmetric payoff profile), but also harder to risk-manage.
12:30 PM: The stock has calmed down so you get back to Excel, keeping an eye on the chart in the corner of the screen in case there’s any follow-up movement.
1:30 PM: You attend an IT meeting for 30 minutes, where you’re really just listening to updates on various projects that they’re working on for trading desks.
2:00 PM: You get back to the desk to find 10 prices waiting for you. Lock back into the cockpit.
Pricing becomes routine after a while. This can become dangerous, especially with very small requests.
You have to make sure that for every single price, you are very rigorous in assessing all the different risks; you can easily get picked off because you missed an announcement in a company conference call that dividends were being changed or restructured, for example.
3:00 PM: You have a big short gamma expiry today that is OTC and has just rallied close to the strike. Pin risk is very real.
The stock is trading just above the strike and you are fully hedged, which means that if it dips below, the delta flips from 0 to 1 (or 1 to 0 but it has the same effect), so all of a sudden you get very long delta if it’s a sizeable position.
A long delta position isn’t a problem if the stock stays near that strike, but it could then drop 3% and you would lose quite a bit in that scenario.
However, if you sell shares and it comes back up through the strike you get short a lot of delta. This situation gets even worse if the stock is illiquid and you get long/short several times the daily volume.
Your choices are very limited at these times, and you need to be aware of the strike risk days or weeks leading up to the expiry so you can plan accordingly.
4:00 PM: You slowly start hedging the smaller delta positions on the book so you can spend the last 15 minutes focusing on the 10-15 large positions and expiries.
This is one of the most hectic times of the day, as you need to hedge quite a large percentage of daily volume for a lot of stocks.
In addition, several prices come in for clients, and you are trying to finish off some stuff you have been working in the broker market.
On a standard day there are 20-30 things you need to be on top of, and so mentally it does stretch you a bit. Another tricky thing is that different markets close at different times of the day, so you can’t necessarily stop paying attention or finish up right away as soon as the market of the city you’re in closes.
4:35 PM: The markets close, so you finish off all outstanding bookings before running the final P&L for the day.
Technically, your day is done once you submit the P&L, but you normally stay until 6 PM to work on your longer-term projects and think about new trade ideas.
It’s the only time of the day where you don’t need to monitor something, so it’s actually the most productive time for “new business generation” as well.
6:45 PM: Wrap things up and head home.
This is a guest post from “DerivsTrading,” an experienced options trader who has worked at both bulge-bracket banks and hedge funds in London. He defied the odds and broke into sales & trading coming from a non-target school.
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Im fairly new posting here but been reading for a while. Trying to break into S&T and doing preperations. Trying to consume and read as much as possible for my preparations and read/listen to everything here about S&T @ M&I. For me it seems like http://salesandtradingcareers.com/ is not working anymore and I wonder if the site has moved or if the material from there is availeable to get anywhere else or any other source of up to date s&t preparations.
All help is appreicated
Unfortunately, the author no longer maintains that site. I don’t know of any other good sources for S&T interview preparation, but we have published a few S&T articles recently and plan to publish a few more, including updated versions of existing articles, later this year.
I’m wondering, aside from IBD, what are some other typically followed routes to get into a Hedge Fund/Prop Trading Firm? If I’m not interested in Private Equity, I’m thinking perhaps IBD isn’t necessary. I’ve got prior experience shadowing Asset Management at Fidelity and trading at a small bank, are AM/ Trading (even though Prop trading at banks is dying) viable routes into HFs, or is IBD a more commonly trodden path?
How much can I rake in as a derivatives trader ? Thx !
At a large bank? Not as much as you used to. Cash compensation tends to level off in the low hundreds of thousands. You might earn more, but most of it will be in the form of stock or deferred cash.
I’m trying to download derivstrading’s internship guide off his website (salesandtradingcareers.com), but I get an error when I click on the link to purchase the guide. Is there any alternative way to buy the guide?
Hmm I am not sure about that one… have you already contacted him through the site? I’ll send a message to ask right now. You could also try the direct site link here:
I have a question regarding one of the option strategies, that is called Collar. When you sell a collar, is there always 2 dudes to the trade, first buying a put and then selling a call. Are those 2 trades done with the same counterparty or different? Also when you write an option , can your market value ever be positive? Thanks
The counter-parties can be different. I’m not sure what you mean by your second question.
Thank you for your great post, it is really helpful.
My question is, as I am starting my summer analyst program at an options trading desk (at a BB in Asia, so I would assume it would have a similar office culture & environment) , I was curious if you would suggest any books or any way I could better prepare myself for that?
Thanks a lot!
Jisung, I don’t know of any books off the top of my head, but I’d suggest that you check out the books here: http://www.amazon.com/Best-Sellers-Books-Options-Trading/zgbs/books/2672
Is this similar to delta 1 trading? and If so, are delta 1 desks the hottest desks at the moment? Is there potentially money to be made in that area?
So the day wraps up at 7pm, then what ?
What does he do when he gets back ?
What does he do for fun ?
Female companion ? (Or male)
All of the above?
Traders tend to go to sleep quite early (or get good at being sleep-deprived) so on weeknights there may not be that much to do for fun after work. One senior trader I knew had about an hour of free time each day, which he spent playing video games before going to sleep early.
How different is the work on a simple agency trading desk?
I’ve heard its extremely boring in comparison.
Also, how tolerant are seniors when it comes to an error in judgment? Are there standardized strategies when you encounter a ‘Shit!’ moment?
I’ll attempt to answer for the author here – the work is quite a bit different in prop vs. agency trading. There is some overlap but investing the firm’s funds vs. taking client requests requires a different skill set. And yes, many people do get bored of agency trading.
I can’t speak directly to your last 2 questions, but my understanding is that the tolerance for errors is quite low in trading because “errors” could cost the firm massive amounts of money (See: JPM Whale), whereas in banking a misplaced comma will not result in the apocalypse.
How much does luck play in your career advancement?
I’ve heard a lot of varying accounts of former traders saying that the chances of making it big are so small, but the upside potential is so great, that you might as well swing for the fences.
Also, on the opposite side, how much does surviving have to do with luck? You talk a lot about how difficult it is to manage this many positions, but are you ever in a position where you have to sacrifice your P&L to appease a major client? I could imagine there would be times where you know you’re going to lose a lot of money on a trade, but you have to take the opposite side due to who the client is.
Or, on a long enough time frame does skill win out in the end?
Luck plays a role day to day in terms of pnl as you deal with uncertainty, but when you deal with uncertainty you sort of need to develop a mindset that you cant control the lines on the screen, all you can do is work as hard as you can in terms of being prepared so you make the right decisions with the information you have at the time. You arent a fortune teller, and noone expects you to be one, but you are expected to make good risk management decisions every day.
I think every desk will sacrifice pnl for certain clients, it has to do with looking at how much business the clients do holistically.
Thanks for the post!
How competitive is recruiting for options trading. I’m sure it’s competitive as well but I’m curious wrt numbers vs less quant roles such as IBD, ER or even trading of vanilla products. Also vs other quant roles like risk mgmt.
The author may drop by later to answer that, but trading in general is tough because there are relatively fewer spots and, unlike in banking, they don’t really need people to do “grunt work” as much… if they don’t think you could potentially make them money one day, they won’t make an offer. Not sure about the relative competitiveness of options desks specifically.
at the more senior levels it isnearly impossibleright now, any hire needs to go throuh so much red tape at the moment, people do not want to be adding headcount, especially expensive head count.
this leaves the junior positions, the problem with this is that the whole pipeline has become a bit static. So it used to be that there was a graduate, and then in 3 years he owuld become AD and then the desk would take on another graduate. However, with the empohasis on headcount, the junior AD is going to be doing a lot of the work a new grad would be doing because a)he wants to keep his job and b)its a lot cheaper for hte desk than to take ona graduate. So interms of getting in id say the only option is internship and get hired of the back of it
With all the metrics such as Delta, Gamma and Vega involved, it seems options trading has a heavier focus on risk assessment than quantification of fundamental value.
That is somewhat true, but fundamental value is still important. Managing risk is super-important with any type of derivative though (and trading in general).
Yes, sellside trading on a flow options desk isnt about identifying fundamental value in the Buffet style sense. At the core of it its more about relative value. I personally think in a market making seat you can maximize profits relative to PNL volatility by focusing on relative value. This is because you can often get on the bid and offer. So lets say you buy Dec13 ATM vol on a stock at 20%, now you think the fair price is at 21%, and lets call the the expected value of the realize vol. Now the issue is realized volatility can be very volatile, so lets say you its expected is 21, but it can range based on historical observations between 10 and 55. Now you expect to make 1 vol, but the stdev of that return is rather large. But what if you can sell mar14 at 25 vol, with the Mar fair being at 24.5. Now you make an expected 1 vol on the Dec13, and half a vol on the mar13, so 1.5 vols in total, and you are left with hte spread risk between the two motnhs. Now this can still move, but the spread trade between Dec13 and Mar14 will be hopefully much less volatile than the single expiry outright.
In terms of risk management, id say on a flow desk that is the key thing. You cover so many names and make so many pricesthat you need to be defensive first, it is a very reactive trading seat in tht sense. A lot of your positions are given to you, you dont have 20-30 positions you researched intensenly, you have 1000’s of positions that you are managing.
As usual, I am willing to answer any questions readers may have about the material.
Holy Christ, I started developing an ulcer around 12:00 PM of your day. How do you deal with the stress? Do you genuinely find what you do rewarding? The way it was written it seems like you are always on tenterhooks that the bottom is going to drop out and you are going to get royally fucked somehow.
Thanks for doing this, incredibly interesting!
Haha thats not a bad way to put it, yes you do honestly sit there a lot of the time going through those “getting fucked scenarios”, because especially with options there are so many hidden risks that a big part of the job is trying to make sure you are aware of them. For example a simple scenario is that you are long gamma with earnings coming up, but lets say earnings are 24th of May but most of your long gamma rolls off on the 22nd (its an OTC position). Now once that rolls off lets say you are flat gamma, but actually you have some short Jun13 downside options so if the stock drops 4% you actually become short gamma very quickly. This is quite a simple scenario, but the trick comes when you have a book of 100 names that you have to keep track of these types of things for each one. Stress comes from missing something like this and losing money because of an oversight on your part. In terms of general stress, theres currently a thread on wallstreetoasis where i hve written quite a bit on general stress in a trading seat. Not sure if Brian allows to post links but its quite easy to find.
Thanks! I will dig the thread up. Do you like what you do? I know you mentioned the time/vol/spot makes things interesting, but it seems like no regular human could keep track of all those things for 100 names… what happens if you get really sick and cant come in? Does another trader take care of your book for the day (I imagine that must be incredibly hard if they too have to think about their own 100 names).
Thanks again so much for the response! Incredibly educational reading your experiences.
Yea i find it very interesting every day, and i love having something where results are so directly trackable every day.
In terms of monitoring everything, you honestly get used to it. Your eyes become very well adapted at searching for things on all the screens. Also there is always a hierarchy of things you are looking at, so you will always have 4-5 fires that are at your forefront of your mind, and then the other 90 things are on the backburner because they arent crucial, and you pay attnetion to them when you get a chance.
In terms of covering books, most teams have a system, and there will usually always be some cross coverage so multiple people on a book.