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Free Courses in Finance and Programming

Wednesday, September 12, 2012

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I don't know whether I'll be able to take advantage of these this fall, but if you have time, you should:

Straddles and the Volatility Risk Premium

Wednesday, September 30, 2009


Felix Goltz and Wan Ni Lai, “Empirical Properties of Straddle Returns,” The Journal of Derivatives 17:1 (Fall 2009), 38-48. Abstract: An at-the-money (ATM) straddle, i.e., going long an ATM call and an ATM put with the same maturity, is generally thought of as a volatility trade. It is essentially delta-neutral, but a large price move in either direction or an increase in implied volatility will produce a profit. A delta-neutral straddle position also has zero beta, so…

Dragon-Kings, Black Swans and the Prediction of Crises

Thursday, September 17, 2009


Dider Sornette, “Dragon-Kings, Black Swans and the Prediction of Crises,” Abstract: We develop the concept of “dragon-kings” corresponding to meaningful outliers, which are found to coexist with power laws in the distributions of event sizes under a broad range of conditions in a large variety of systems. These dragon-kings reveal the existence of mechanisms of self-organization that are not apparent otherwise from the distribution of their smaller siblings. We present a generic phase diagram to explain…

The Impact of Volatility Derivatives

Thursday, September 10, 2009

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Paul Dawson and Sotiris K. Staikouras, “The Impact of Volatility Derivatives on S&P 500 Volatility,” Journal of Futures Markets advance online (2009). This study investigates whether the newly cultivated platform of volatility derivatives has altered the volatility of the underlying S&P500 index. The findings suggest that the onset of the volatility derivatives trading has lowered the volatility of both the cash market volatility and the cash market index, and significantly reduced the impact of shocks to volatility.…

Selling Options on Treasury Bonds

Tuesday, September 1, 2009

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David P. Simon, “Examination of long-term bond iShare option selling strategies,” Journal of Futures Markets advance online (2009). This article examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. Unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. Short-term option selling strategies are enhanced when implied volatility is high relative to time series volatility forecasts. Risk management…

The Limits of Arbitrage

Wednesday, August 26, 2009


Let’s get this series started off right. Andrei Shleifer and Robert W. Vishny, “The Limits of Arbitrage,” The Journal of Finance 52:1 (1997). Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people’s capital. Such professional arbitrage has a number of interesting implications for security pricing, including…

New Series: Ivory Tower Incidentals

Sunday, August 23, 2009

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My research agenda – finance and otherwise – is longer than ever and I’m equally further behind. One thing blogging has taught us all is that the pace of thought required to tackle complicated, multi-faceted problems is often incongruous with the pace at which pithy bloggers operate. Imagine if the Critique of Pure Reason had been published in two-hundred-word pieces. Shudder. So given the choice between research progress and consistency in blogging, I want to opt for the former. But…

The Validity of Head and Shoulders Patterns

Thursday, July 16, 2009


At Friday’s close, technicians were generally pretty bearish on equity indexes, based on the head and shoulders pattern identified below. (Click images to enlarge.) Of course, this particular setup hasn’t panned out well so far: In the jargon, this week’s rally decisively violated the neckline and pushed up to attempt a retest of the right shoulder. I am unsure whether there are any vaunted technical analysis conventions allowing for mutant patterns featuring two right shoulders, but yesterday’s move…

The Lazy Guide to Delta Hedging

Friday, July 10, 2009


In my last post on this topic, “Why Delta Hedging Matters,” I argued that an essential aspect of options trading is hedging away unwanted risks. For most traders, the unwanted risk is usually to directional price movement, or delta risk.  We discuss this issue in the context of trading iron condors a fair amount on the members area of the site, but the principle is just as important whether you’re short one call contract or managing a book of…

Explaining Asymmetric Volatility

Tuesday, June 30, 2009

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Measurements of volatility typically refer to the standard deviation of returns over a specified period. That obviously includes returns both below and above the mean. In practice, however, investors tend to be concerned primarily with downside risk, leading them to regard returns differently: positive and negative logarithmic returns that are equally distant from the mean are not treated as such by investors. Negative surprises have a much greater effect on volatility than do positive ones – witness the explosion of…

Recent Volatility Research

Friday, February 27, 2009


Here are some recent articles of interest with their abstracts.  You’ll need university or institutional access for full text. George M. Constantinides, Jens Carsten Jackwerth, and Stylianos Perrakis, “Mispricing of S&P 500 Index Options,” Rev. Financ. Stud. 2009 22: 1247-1277. Widespread violations of stochastic dominance by 1-month S&P 500 index call options over 1986–2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although precrash…


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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