Trade in Groups

Back in July 2008, I first noted that institutions were pulling back on options trading volume. Recently, Bloomberg has picked up on the story because the reduced supply has led to higher hedging costs – a simple application of Econ 101. The combo of less capital available to make markets in options and higher volatility […]

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Previously, we discussed how market returns are distributed by focusing on a single stock. This time, we are going to look at a focused but sector diversified ETF – the Financial SPDR (ticker: XLF). Remember, the tentative conclusions drawn before implied that historical volatility measures lose their value beyond a short time frame, and that […]

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Returning readers will be familiar with our continued negative outlooks for many of the market’s problem children – financials, REITs, and certain commodities. A short while ago, we posted about an aggressive series of trades on that thesis, and promised to track the progress of both the underlying positions as well as a specific options […]

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A while back, we demonstrated how high volatility relates to options premiums using a Geometric Brownian Motion (GBM) model. That might sound complicated, but the charts included in that article give a good visual depiction of volatility’s impact, so check it out. For a more simple explanation of why options are currently so valuable, consider […]

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Last time, we examined how options on index volatility (such as the VIX) could possibly function as an attractive asset class because of its unique nature and diversification benefits. This is supported by a 2007 Goldman Sachs research note, although their particular strategy relied on institutional tools like variance swaps and volatility forwards – individual […]

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In late 2007, Goldman Sachs released a research note entitled “Volatility as an Asset Class,” where they argued that the diversified returns from strategies involving equity index volatility made it worthy of an allocation from investors. While I disagreed with their particular approach because of risk management concerns, the underlying point – that strategies involving […]

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May you live in interesting times.
-Ancient Chinese Curse
Stress in the financial markets has been spilling over into other areas, affecting equities, derivatives, and a wide array fixed income products. Because of their multiple uses and leveraged nature, the equity derivatives market is an especially interesting point of study, because the behavior of numerous speculators and […]

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As an options trader, implied volatility and time decay are two critical components to keep an eye on. This article will focus on volatility for those just beginning to dabble in options. At the end of the article a short explanation of time decay is included.
Markets determine option buy points by using forward-looking pricing models. […]

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Volatility
Volatility can be a very important factor in deciding what kind of options to buy or sell. Volatility shows the investor the range that a stocks price has fluctuated in a certain period. The official mathematical value of volatility is denoted as “the annualized standard deviation of a stocks daily price changes.”
There are two […]

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