Every time I write about financial journalism, I always end up sounding cantankerous and bitter. So let’s start things off with some genuine praise. The story “Biggest VIX Drop Hides Options Bets S&P 500 Will Fall” yesterday from Bloomberg includes the following:
The reading indicates a 68 percent likelihood the S&P 500 will fluctuate as much as 7.3 percent in the next 30 days, according to data compiled by Bloomberg. That compares with the VIX’s all-time high of 80.86 in November,…
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…
Mr. Potter: [to George Bailey] Look at you. You used to be so cocky. You were going to go out and conquer the world. You once called me “a warped, frustrated, old man!” What are you but a warped, frustrated young man? A miserable little clerk crawling in here on your hands and knees and begging for help. No securities, no stocks, no bonds. Nothin’ but a miserable little $500 equity in a life insurance policy.
[Potter chuckles]
Mr. Potter: You’re worth…
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…
Tuesday, July 7, 2009
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