I don't know whether I'll be able to take advantage of these this fall, but if you have time, you should:
Hayne E. Leland, “Options and Expectations,” UC-Berkeley Research Program in Finance Working Paper RPF-267, October 1996.
Abstract: Who should buy options (ordinary or “exotic”), and who should sell? Buyers and sellers must differ from the average investor, who will not undertake options positions. We develop a simple binomial model to characterize the expectations (relative to the average or consensus) which must be held by investors to justify buying or selling various types of derivatives, or following dynamic…
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…
Dider Sornette, “Dragon-Kings, Black Swans and the Prediction of Crises,” http://arxiv.org/abs/0907.4290.
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…
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.…
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…
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…
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…
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…
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…
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…
Wednesday, September 12, 2012
1 Comment