Everyone knows that implied volatility and stock returns tend to be negatively correlated. The results from a recent study we did showed, though, that when implied volatility and stock...
Only a few years ago, 130/30 funds were all the rage. They allowed equity managers who had traditionally been bound to a long-only strategy to make use of short exposure to shape their portfolios. The ability to take short and levered long positions was supposed to reduce the overall riskiness of the portfolio and also to provide new ways to beat the benchmarks, e.g. by adding long exposure to the best stocks in a sector and taking short positions in…
Probably. First, some context. Here’s the one-month volatility risk premium in USO options since 2007.
Think of this as an estimate of how richly or cheaply priced options on crude oil are, relative to the actual historical volatility of the asset. Any ratio above 1.00 indicates that option buyers were willing to pay a premium above the value of the volatility subsequently exhibited by crude oil futures. As you can see, the ratio is usually greater than one.…
After the close on Thursday, even as traders were marveling at the 13% move after Google announced its earnings triumph, Baidu was also up substantially after hours (2.8%) on no apparent news. This got me wondering whether there was any steady relationship between the two – after all, Baidu is colloquially “the Google of China,” so it isn’t hard to imagine people trading the two stocks similarly.
On the day after Google reported earnings, the returns of the stocks…
If you’re trading a strategy with a long-term record of solid performance and a steadily rising equity curve, a great time to increase your exposure to that strategy is after the strategy has suffered a losing period. In other words, given a strong and consistent strategy, you should buy that strategy on the dips.
The thinking here is the same as it is for any buy-on-the-dips approach to investing in stocks. Because equities have tended to rise…
Felix Salmon is doubtful about whether it is possible to hedge tail risk, and I wholeheartedly agree with the data he cites showing that, of eight major asset classes, only volatility and managed futures offer genuine non-correlation to market returns. In fact, I’ll go a step further: I’m not that enthusiastic about the benefits of managed futures, at least in their current form. As a registered commodity trading advisor, I’ve seen the sorts of strategies that most of…
It is a relatively simple matter to backtest a strategy trading price-based expectations: a little spreadsheet know-how or, failing that, any of the scores of software packages now on offer will get the job done. But testing the historical performance of well-defined options strategies involves much more complexity, and imposes significantly greater data requirements. The difference between stocks/futures/forex and options is so great, in fact, that no retail platform today offers a straightforward way to run thorough tests of quantitative…
If you hold a position larger than a specified threshold in a futures or options contract that is regulated by the CFTC, your clearing firm must report it and classify your position as either commercial or non-commercial (I prefer the clarity of the old “hedging vs speculative” language, but whatever). Futures traders have been tracking these reports for years, but I’m not aware of any studies that analyze the history of VIX futures commitments, with the exception of a…
Some people regard the bond market as the most mature financial market, providing discipline and stability where stock operators merely exhibit fear and greed. I’m not out to settle any internecine disputes here, but I do want to examine a strategy premised on the view that behavior in the bond market might tell us something useful about the equity market.
Conventionally, investor preference for higher yield correlates with a positive overall economic outlook. Brett Steenbarger looks at this phenomenon…
I propose the following rule of thumb for VIX interpretation:
If you think some VIX movement entails a proposition p and movement in the other volatility indexes VXN, RVX, and VXD doesn’t entail p, you shouldn’t believe p.
Why accept this rule? Because equity indexes are highly correlated, especially over the very short term, and volatility indexes are calculated using the same methodology, such that in the case of a divergence of one volatility index from the others,…
Tuesday, March 26, 2013
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