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Thanks for your fast reply n help here but I don't think I understand much. I don't know the major differences between directional position and hedging position. What I know simply is that directional positioning has to do with options trading and hedging is more for the risk control of a commodity, on the prevention side, even tho both types do have contract expiration.
Can you help answer these questions from other members on NexusFi?
Thanks for the explanations on the requirements/qualifications to the membership of a prop firm. Furthermore, do you possibly know what a prop firm likely to trade/invest? What trading methodologies /strategies would it implement?
Through an investor friend's referral, I know of another trader in Houston who's starting a prop firm very soon and I know I probably can gain lots of hands on experiences and values down the road. However, I'd like to ask what's the price range of upfront training fees?
1) I think ES futures are going up. I will buy ES Futures
2) I think volatility will go higher - I will buy options combinations eg straddles and strangles
3) I think volatility will go lower - i will sell options combinations
4) I think the 1 year vs 2 year oil spread will widen. I sell 1 year futures and buy 2 year futures
The above are all types of directional views on the market which could be on prices, volatility, yields, spreads etc. So its nothing to do with the TYPE of contract, but rather due to a directional view on a market.
Hedging strategies:
1) I am long 100 shares of Microsoft. I don't want to sell them but I want to reduce some risk, so can sell some call options with a higher strike price, or sell short a different tech company with very similar business like to Microsoft
2) I am long 6 month expiry ES options. A customer wants me to make a price for 8 Month expiry ES options. As I am long I could show a better offer (selling price) for 8 month options as this would reduce my volatility exposure.
NOTE: Hedging strategies are there to reduce overall risk, but they do not completely remove risk. This is because you are either buying or selling a similar, closely correlated product.
Thank you very much for your patience. These examples give me better understandings the nature about what a Prop Trading firm would possibly do even though I don't know much about options yet. It seems that directional trading is more profit oriented n hedging is more of risk management n portfolio balance.
These would lead to my next questions. Comparing a Prop Trading firm and a hedge fund investment, which one would do better? This question might be very generalized but please shed some light for me.
Prop traders typically do not take outside money but trade their own capital. Prop trading can refer to a few structures:
1.
What: Market makers, HFT Firms. These are the top tier.
How: Market making, spread trading, other alpha, typically trading many products but some may specialize in underlying they hold
Why: Superior rates, firm capital, infrastructure
2.
What: Stock trading prop firms
How: Special structure
Why: Get around PDT, rates, capital, collaboration (i.e. trading on a floor)
3.
What: Hybrid pay models. Tryouts, educational fees, etc.
How: Pass the requirements, discretionary, directional,
Why: capital, contracts, collaboration, ability to trade discretionary or other risk strategies that top tier firms might not trade
Regarding prop firms vs. hedge funds
Prop traders seek higher returns but accept greater risk in exchange and strategies may not scale as well. Investors in hedge funds will not accept the same degree of risk or p&l swings. A hedge fund investor wants a very high probability of at least making a break even or small return even at the cost of a lower net return. A prop trader must make a higher return because they are trading less capital.
For futures props, the main thing that I look at is the "scale up". Some of the tryout models do not offer a meaningful scale up. So, these firms are more about traders who want to try it out with limited risk. But a serious prop should have ability to scale you up to some significant level.
Prop trading firm - is an entity that trades its own capital. It hires/trains traders to trade the company capital applying risk limits and performance targets to traders.
Hedge fund firm - is a collective investment organisation which pools money raised from investors in one or more funds, and hires/trains traders to run the portfolios. They usually charge a fixed % to the investors for managing the fund, as well as a performance % fee. Hedge funds must keep investors happy or perform well otherwise they will be hit with redemptions from investors which could mean they may have to liquidate positions. They usually have to market aggresively to get the funds in when launching the fund, unless the portfolio manager is well know in which case the name alone will sell the fund.
Thank you very much. I did research over the internet n did not find such in depth info like you do. You don't sound like a beginner at all. Do you mind if I ask more detailed questions based upon what you have provided? Tkx.
Sure, you can ask, and others here can answer too. But, sense you did not ask then I can only give the following answer: do not anchor your belief in success too strongly to any particular path, firm, guru, or methodology nor anchor or limit your beliefs in your abilities or based on the abilities of anyone else. Success is usually difficult but can be easy but surely becomes much less likely once you start "needing" the help from others, blindly following, or becoming pessimistic. Carefully discriminate the best opportunities, and do not be afraid to pursue them. Grow more confident when you have clarity and be timid when unsure. Be willing to revise your beliefs and your identity from time to time. Great luck with your journey!