Volatility Tracker for January 19, 2010
Last week, I noted the very wide spread between short-term realized and implied volatilities. Although the selloff on Friday alleviated conditions slightly, [5] the spread is still large enough that traders inclined to be net sellers of options need not fear occasional daily increases in realized volatility. [6] The smartest trade in equity index options at this point might be to sell the wings and buy the guts on a dollar-neutral basis, delta-hedging as needed:…
David P. Simon, “Examination of long-term bond iShare option selling strategies,” Journal of Futures Markets advance online (2009).
This article examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. Unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. Short-term option selling strategies are enhanced when implied volatility is high relative to time series volatility forecasts. Risk management strategies such as stop loss…
The financial sector of the U.S. economy has had nearly a year to address the problems that exacerbated the crisis last fall. But many observers think that the banks haven’t done enough, and that another round of trouble may be developing for the sector. I will outline some of those concerns and then suggest some ways to use options to profit if there is indeed another shoe to drop in banking.
The Thesis
The primary obstacle facing large banks is that they…
Nassim Nicholas Taleb, author of the widely discussed The Black Swan and Fooled By Randomness, is out with a new paper. “The Fourth Quadrant: A Map of the Limits of Statistics” pursues a thesis very familiar to his readers, namely that economists and finance professionals put society at risk by offering false comfort in the form of statistical models.
Risk Does Not Equal Volatility
The novel effort here is Taleb’s attempt to map out which kinds of risks and events are more-or-less adequately captured…
To the right is a fun little trade called the Straddle Strangle Swap. Look familiar? It looks a lot like a simple calendar spread or a butterfly spread. In actuality it is both, making it what I consider a sort of super calendar spread. Now lets take a look at how to construct these and what qualities make them so super.
Straddle Strangle Swaps are a specific type of Double Diagonal. They involve selling a front month straddle and buying a…
Tuesday, January 19, 2010
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