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 [...]
Entries Tagged as 'Options 101'
Options Spreads Reduce Cost, Define Risk/Reward
February 16th, 2009 · No Comments · It's all Greek to me, Options 101
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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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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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The Value of Out-of-the-Money Options
January 31st, 2009 · 1 Comment · Hot Stocks, Options 101, The Markets
The bearish outlook given yesterday was based off a combination of general economic data (fundamental) as well as a handful of indicators about market internals (technical). The underlying theme here is that the leaders into this crisis – namely, real estate and financials – have not yet hit a bottom (or at least need to re-test lows). [...]
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Absolute Returns for Individual Investors: Commodities, Part III
January 29th, 2009 · No Comments · Hot Stocks, Options 101
This series on commodities has taken a detour or two, but the recent explanation of how to use a covered call strategy brings us back to one of the original points about commodities: when used in combination with other strategies, they can both provide income and change the correlation of a portfolio. A problem [...]
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Absolute Returns for Individual Investors: Covered Calls
January 28th, 2009 · No Comments · Hot Stocks, Options 101
An area of opportunity for individual investors that we’ve only touched briefly on so far is traditional options. This article assumes you have a basic understanding of call options – if not, a few quick primers can get you up to speed – see here for a basic long call, and here for covered calls. [...]
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Absolute Returns for Individual Investors: Volatility, Part II
January 8th, 2009 · No Comments · It's all Greek to me, Options 101
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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Absolute Returns for Individual Investors: Volatility, Part I
January 7th, 2009 · 1 Comment · It's all Greek to me, Options 101
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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