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Tag Archive | "risk management"

The Allure of Deep Out-of-the-Money Options

Thursday, December 31, 2009

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For an options trader, one of the most remarkable aspects of the 2008 financial crisis was that it featured months in which many options closed in or near the money when, even weeks before, they were deep out-of-the-money (DOTM) and “worthless.” The lesson is that ostensibly overpriced options are totally devoid of value, until they aren’t. This is not a new lesson: academics have spent decades creating and testing different models (Hull and White, Heston, Dupire, etc.) to better accommodate…

How to Be Risk-Averse

Thursday, November 12, 2009

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Felix Salmon is skeptical about the ability of average investors to protect themselves from major economic risks: [T]here really isn’t an easy or obvious way for an investor to be highly risk-averse in this market, not when one of the biggest tail risks that people want to protect themselves against is inflation. Big investors can try taking the Taleb approach of buying large numbers of out-of-the-money options and reckoning that a bunch of them will pay off when the next crisis hits,…

Calendar Options Quarterly Review

Thursday, October 29, 2009

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Earlier this month, we announced a change in how we're going to publicize the performance of our strategies. Much as a company's performance and the price of its stock can suffer in the long-run as a result of too much focus on short-term performance, we believe that investors do best when they take a long-term perspective...

The Lazy Guide to Delta Hedging

Friday, July 10, 2009

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In my last post on this topic, “Why Delta Hedging Matters,” I argued that an essential aspect of options trading is hedging away unwanted risks. For most traders, the unwanted risk is usually to directional price movement, or delta risk.  We discuss this issue in the context of trading iron condors a fair amount on the members area of the site, but the principle is just as important whether you’re short one call contract or managing a book of hundreds of…

Options, Timing, and Risk Management

Tuesday, March 31, 2009

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Today’s losing trade can be tomorrow’s saving grace. The graph below plots the risk profile for the trades we currently have open in our iron condor newsletter.  The curved white line represents profit/loss today at various SPY price levels; the other lines move forward in time, with the final line plotting p/l at expiration.  This graph doesn’t model changes in implied volatility, although since we are short vega, profits will rise inversely to implied volatility. We’re not shy about posting losing results;…

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