One of the most popular posts I’ve written is “The Bucking Gamma Bull,” in which I said:
Think of your deltas as a mechanical bull, and your gammas as the rate and intensity at which the bull throws you around. The ride starts off quietly, but as time goes on the bull gets increasingly difficult to ride, and eventually you’re likely to be thrown. That’s exactly what happens during an expiration week in which the underlying makes an unexpected move: option…
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…
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 comparing…
In this mini-series, we’re examining the value of beta as a measurement of risk. In this post, we want to examine how the betas of some popular stocks, indexes, and ETFs changed during 2008 and especially during the fall crash. First, we should clarify exactly what we’re measuring.
What is beta?
Beta is metric that describes the systemic risk of an asset or portfolio. Because it is not possible to alleviate all risk by simple diversification, investors and traders use beta to…
The old maxim is that when major market movements occur, all betas go to one. We decided to look at the beta for a few stocks during 2008 to determine whether and to what extent that maxim held true.
The reason we wanted to investigate the beta exhibited during 2008 – and especially during the fall crash – is that investors and traders use beta as a measurement of how risky an asset is relative to the market, with the goal…
Wednesday, November 25, 2009
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