Tag Archive | "Volatility"

Is Och-Ziff Reviving the Dispersion Trade?

Thursday, June 16, 2011


Och-Ziff Capital Management (NYSE:OZM), the publicly-traded fund of funds, is getting some attention today from its 13F disclosure to the SEC in May. The asset manager disclosed that it bought nearly $12B in equity options in the first quarter of 2011. Some traders interpreted this as a straightforward bet on increasing volatility, but I had the following comments in a Bloomberg story this morning: Och-Ziff might be following an options strategy known as a “dispersion trade”…

New eBook Short: Options and the Volatility Risk Premium

Tuesday, March 1, 2011


I’m excited to announce the publication of Options and the Volatility Risk Premium, a short eBook (about 4500 words) published by FT Press. I have written about the volatility risk premium (VRP) before on this blog, and published a feature article in Expiring Monthly last year on the presence of the VRP in commodity options. The first part of the text explains the concept of the volatility risk premium and gives a rationale…

Introducing the VIX Portfolio Hedging (VXH) Strategy

Tuesday, September 7, 2010


Since the 2008 financial crisis, I’ve been contacted regularly by clients and readers who are looking for effective and cost-efficient methods for hedging their portfolios. The more time I’ve spent researching the topic, the more I’ve become convinced that most widely-known methods are ineffective as hedges, inefficient from a cost standpoint, or both. After nearly a year of research, I have developed an alternative method that can provide meaningful protection against sudden and/or large market declines while not imposing excessive…

What to do with Oil Volatility

Tuesday, May 25, 2010


Crude has been hammered pretty hard in recent weeks. My instincts tend, like yours probably do, toward being a net seller of options when implied volatility has become historically expensive. But it’s also a good idea to respect the current trend, as I mention here: While capturing historically high implied volatility is often a profitable approach, a price trend this strong should be respected, so any short volatility trade should either be long some gamma or should have…

Volatility Tracker: Fear Returns

Monday, January 25, 2010


Volatility Tracker for the week of January 25, 2010 Implied volatility exploded in equities last week as markets were ravaged to the tune of…four per cent? [2] The term structure of implied volatility and the ratio of implied to realized volatility all moved back towards even, indicating how accustomed we had become to substantially overpriced options and contangoed VIX futures. [6,7,8] Implied volatility is now unsustainably high -unsustainable, that is, unless you expect two-thirds of trading days to begin…

The Allure of Deep Out-of-the-Money Options

Thursday, December 31, 2009


For an options trader, one of the most remarkable aspects of the 2008 financial crisis was that it featured months in which many options closed in or near the money when, even weeks before, they were deep out-of-the-money (DOTM) and “worthless.” The lesson is that ostensibly overpriced options are totally devoid of value, until they aren’t. This is not a new lesson: academics have spent decades creating and testing different models (Hull and White, Heston, Dupire, etc.) to better accommodate…

Volatility Tracker: No Surprises in Gold

Sunday, November 22, 2009


Volatility Tracker for the week of November 23, 2009 News-making price changes in gold [11] have not been accompanied by any particularly noteworthy behavior in the options market. While it would be wrong to suggest that options in any way “anticipated” the gold rally, it is also fair to say that price action in the underlying has been roughly in line with the expectations given by option prices.  Notice that the CBOE’s VIX-style gold volatility index (GVZ) has drifted between…

Average VIX Futures Volume Exceeds Crisis Levels

Wednesday, October 28, 2009


One average of the volume of contracts traded in VIX futures recently exceeded the level observed during the financial crisis of 2008, indicating that sophisticated traders and investors may be preparing for an end to the recent run-up in equity prices. The chart below shows the volume of trading in VIX futures (VX) since January 2008, along with a 20-day simple moving average of that volume; as evident there, the average volume in recent weeks is greater than at any…

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…

The VIX is Fungible

Friday, July 17, 2009

1 Comment

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,…

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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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