Tag Archive | "risk"

15% Discount for the VIX Portfolio Hedging (VXH) Strategy

Wednesday, November 9, 2011


We’ve never offered a discount before on the VIX Portfolio Hedging (VXH) Strategy, and the coupon code at the end of this post is only valid through the end of the week. I don’t know what’s going to happen in the future, but I know that the cost of hedging downside risk is relatively cheap here, and that some investors have taken an “all clear” attitude prematurely. If your portfolio didn’t weather the storms of August and September easily, you…

Investors Still Haven’t Understood Leveraged ETFs

Monday, November 29, 2010

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When leveraged and inverse ETFs were first launched, many investors weren’t aware of the negative effects that daily rebalancing would have on the long-term performance of those ETFs relative to their benchmarks. Those potential problems are now more widely known, and coverage of leveraged and inverse products often includes the advice that they are best used as trading vehicles rather than investment products – i.e. to avoid investment shortfalls due to rebalancing effects, the holding period for positions using these…

On Gamma and Holding Positions Through Expiration

Wednesday, November 25, 2009

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One of the most popular posts I’ve written is “The Bucking Gamma Bull,” in which I said: Think of your deltas as a mechanical bull, and your gammas as the rate and intensity at which the bull throws you around.  The ride starts off quietly, but as time goes on the bull gets increasingly difficult to ride, and eventually you’re likely to be thrown.  That’s exactly what happens during an expiration week in which the underlying…

The Volatility Risk Premium in Index Options

Friday, April 17, 2009


Two academic papers recently discussed over at the CXO Blog provide some good analysis of the volatility risk premium in equity index options.  The volatility risk premium is just the difference between the realized volatility of the underlying and the volatility implied by options prices.  What numerous academic studies have found is that index options are consistently priced at a higher volatility than is realized over the relevant time period. “The Volatility Premium” (Eraker 2008) locates one source of…

Meaningful Sharpe Ratios

Friday, February 13, 2009


To review, the Sharpe ratio is a measurement that tells us the risk-adjusted performance of a portfolio or strategy.  It is calculated by subtracting the risk-free rate from the strategy returns and dividing that by the standard deviation of returns.  The idea is to determine whether absolute returns are due to some desirable feature of the strategy or simply due to excess risk-taking. Not all Sharpe ratio figures are created equal.  To be more specific, one should be careful when…

Beta and Risk in Troubled Markets, Part 2

Friday, January 16, 2009

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In this mini-series, we’re examining the value of beta as a measurement of risk.  In this post, we want to examine how the betas of some popular stocks, indexes, and ETFs changed during 2008 and especially during the fall crash.  First, we should clarify exactly what we’re measuring. What is beta? Beta is metric that describes the systemic risk of an asset or portfolio.  Because it is not possible to alleviate all risk by simple diversification, investors and traders…

Beta and Risk in Troubled Markets, Part 1

Thursday, January 15, 2009

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The old maxim is that when major market movements occur, all betas go to one.  We decided to look at the beta for a few stocks during 2008 to determine whether and to what extent that maxim held true. The reason we wanted to investigate the beta exhibited during 2008 – and especially during the fall crash – is that investors and traders use beta as a measurement of how risky an asset is relative to the market, with the…

The Bucking Gamma Bull

Wednesday, January 7, 2009

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We’ve mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in.  In a nutshell, while it’s true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration, as shown below. There is no one right answer about how to trade expiration.  But if…

Cygnophobia and Robustness

Thursday, December 11, 2008


What is fear of swans called? We’ve searched and although it doesn’t seem to exist – so far – can we suggest ‘cygnophobia’, from the latin cygnus for swan? -WikiAnswers People love them some Taleb, and for good reason.  Both The Black Swan and Fooled by Randomness are good reads, with interesting and provocative ideas scattered liberally throughout.  But ever since the notion of the “black swan” (an unpredictable and counterfactually inexplicable event with…

Sans Synthetic Shorts

Wednesday, September 24, 2008


When the details of the short-selling ban began to leak out last week, options traders around the world snorted and said to themselves, “So what?”  That’s because it is easy to simulate a short stock position using options.  A synthetic short stock position is composed of one long ATM put option and one short ATM call option, on the the same underlying and in the same expiration cycle.  It has a risk profile identical to that of being short equity…


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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