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Entries from February 16th, 2009

Options Spreads Reduce Cost, Define Risk/Reward

February 16th, 2009 · No Comments · It's all Greek to me, Options 101

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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Fat Tails and Options Selling, Part II

February 13th, 2009 · 2 Comments · It's all Greek to me, Options 101

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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Time Value and Out-of-the-Money Options

February 11th, 2009 · 1 Comment · Hot Stocks, It's all Greek to me, Options 101, The Markets

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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Fat Tails and Options Selling, Part I

February 10th, 2009 · 2 Comments · Options 101, The Markets

One of the buzzwords in the financial community in 2008 was “fat tail” – the outlier that breaks price returns from a normal distribution. Perhaps the most famous comment came from David Viniar, CFO of Goldman Sachs (ticker: GS), who said their models “were seeing things that were 25-standard deviation moves, several days in a [...]

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Urban Outfitters (URBN): Strong Results, Weak Stock

February 8th, 2009 · No Comments · Hot Stocks

Step aside Abercombie (ticker: ANF), H&M, and all other prophets of all things young and hip. While other retailers saw sales predictably crumble in the face of a difficult consumer spending environment, Urban Outfitters (URBN) has been a bit of an outsider. During the fourth quarter, which included a subdued holiday shopping period, Urban Outfitters, [...]

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Profiting from Volatility by Selling Options

February 6th, 2009 · 1 Comment · It's all Greek to me, Options 101

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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