Two academic papers recently discussed over at the CXO Blog provide some good analysis of the volatility risk premium in equity index options. The volatility risk premium is just the difference between the realized volatility of the underlying and the volatility implied by options prices. What numerous academic studies have found is that index options are consistently priced at a higher volatility than is realized over the relevant time period.
“The Volatility Premium” (Eraker 2008) locates one source of this premium in the…
When the details of the short-selling ban began to leak out last week, options traders around the world snorted and said to themselves, “So what?” That’s because it is easy to simulate a short stock position using options. A synthetic short stock position is composed of one long ATM put option and one short ATM call option, on the the same underlying and in the same expiration cycle. It has a risk profile identical to that of being short equity…
The Striking Price column in this weekend’s Barron’s features John Marshall from Goldman, who suggests an “opportunity to buy volatility” in the S&P Materials sector via the tracking ETF (XLB). He makes the bearish case for XLB, arguing: 1) that the materials sector is particularly vulnerable to any slowdown in global growth, 2) that the ETF components include some less resilient names, and don’t feature the best of breed like POT and MOS, and 3) that hedge funds are relatively overweighted…
Back on April 9, we published a bonus trade for our members that allowed them to participate in the rally that ensued, but with absolute downside protection. We brought in a $0.20 credit upon opening the position, and you could sell it to close today for about $0.32, which means this trade returned $0.52, for a 28% return on capital risked. Not too shabby.
The broken call condor was constructed like this:
+1 SPY May 141 call
-1 SPY May 142 call
-1 SPY May 144…
These are very short term overbought/oversold technical plays only.
Energy (XLE)
Thesis: The Energy ETF is well overbought on a short-term basis – practically maxed out at 99.98, and the implied volatility relative to its historical volatility over the past 21 sessions is also giving a sell signal.
Trade: Buy buy buy lots of naked puts! Just kidding. The XLE April 80/82 call vertical is selling for about $0.60. There are only 8 days left until April expiration if things don’t turn out…
Friday, April 17, 2009
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