People are excited about tail risk. On the institutional side, banks and asset managers are packaging up complex, multi-asset hedging products and selling them to pension funds, endowments, and other natural longs. On the retail side, Barclays and others are getting great traction with products like VXX, VXZ, VXX options and now XXV (see Bill’s helpful overview of this space). I’m hoping to join the fray, too, with a managed account program and subscription product set to launch in the next…
Felix Salmon is doubtful about whether it is possible to hedge tail risk, and I wholeheartedly agree with the data he cites showing that, of eight major asset classes, only volatility and managed futures offer genuine non-correlation to market returns. In fact, I’ll go a step further: I’m not that enthusiastic about the benefits of managed futures, at least in their current form. As a registered commodity trading advisor, I’ve seen the sorts of strategies that most of my peers are…
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 a delta bias…
My colleague at Expiring Monthly, Adam Warner, has taken people to task over the last several days for obsessing over the VIX, and especially for misapplying it:
OK, what’s wrong with this statement:
Look at that…$VIX drops below 20 and pigs fly again. Only reliable indicator that I know of that level.
If you answered “everything” you would be correct. But let’s see how far off the reservation someone can go in 140 characters. And again, this is a very sharp mind, albeit…
In absolute terms, equity implied volatility is as low here as it’s been for ages. A naive reaction to a decline in implied volatility is to take a long volatility view by buying straddles, strangles, etc. on the expectation that implied volatility will revert to a higher long-term mean. But that’s an easy way to go broke as the market continues to drift, especially since implied volatility has carried a hefty premium to short-term realized volatility for many months now.…
Friday, July 23, 2010
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