The conventional wisdom about iron condors and other market-neutral option positions goes like this: “These strategies are profitable when markets are not trending in one direction. They are unprofitable during strongly trending markets.” Even Investopedia opts for this one-dimensional explanation:
This strategy is mainly used when a trader has a neutral outlook on the movement of the underlying security from which the options are derived.
There are two problems with the conventional wisdom. The first is that…
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…
The chart above plots the historical volatility of the closing prices of the S&P 500 (SPX) over the past 10, 30, 60, and 90 days. The 10 day line probably corresponds most closely to what most traders feel about how the market has acted. Notice that the 90 day reading has just drifted at around 60% since early December – it will take some time for the extreme moves from last year to be “worked off” as the rolling…
One of the trading myths we noted recently has generated some questions. There seem to be some passionate proponents of applying technical analysis to leveraged ETF charts out there, and while that notion has already been debunked elsewhere, we thought we’d take a different approach, just for fun.
Here’s an argument in favor of technical analysis based on support and resistance. Define “support and resistance” however you wish, as long as the definition has to do with price behavior…
Bankers, on hearing the news that they might not be guaranteed millions just for showing up at their desks, reacted thus:
Over the Counter claims that “working in high finance is not a job for the faint-hearted” (real quote). Besides the obvious risks of paper cuts and ergonomic discomfort, there is the ever-present possibility of not being lionized for simply following the formulas handed down by one’s B-school professors.
Man up, bankers. Shipbreaking in Bangladesh is not a…
Tuesday, February 17, 2009
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