Tail Hedging Is Not As Easy As You Think
Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.
Options 101: Understanding Options Basics
Options have a bad reputation, and for good reason. After all, our friends at Wall Street Bets have taken over and turned the options market into a casino. But just like options can be used for gambling, they can also be used to structure risk and formulate payoffs that have the potential to reduce risk at the portfolio level. In fact, options are one of the best tools at our disposal to manage portfolio risk, if used correctly.
Momentum Everywhere, Including Equity Options
Option returns display momentum, meaning that firms whose options performed well in the previous 6 to 36 months are likely to see high option returns in the next month as well.
Focus on Income Can Undermine Returns: The Case of Covered Calls
Covered calls implemented to deliver higher derivative income should be expected to have (1) lower total returns, (2) higher tax realizations along the path, and (3) a more negatively skewed return profile. Investors who allocate to these strategies for their income alone, without accounting for these other considerations, might have made a devil’s bargain
Box Spreads: An Alternative to Treasury Bills?
Box spreads represent an opportunity to borrow and lend via the options market, at similar (and often better) rates than those that are available in the treasury bill market.
Novel explanations for risk-based option momentum
In this paper, we propose a cross-sectional option momentum strategy that is based on the risk component of delta-hedged option returns. We find strong evidence of risk continuation in option returns.
Does Momentum work in Option Markets?
This paper explores the question of option momentum by examining what the research says about the performance of option investments across different stocks.
Options Hedging & Leveraged ETFs in Market Swings
Earlier this year, GameStop stock rose like crazy in only a few hours with the effects of broker-dealer options hedging spurred by retail investor buying pressure. And from February to March 2020, options trading activity was also pointed to as a contributor to stock swings in the Covid-19 selloff. The market dropped 30% and then recovered quickly over the following weeks. It has been documented that the need for market makers to hedge their positions with options (given rapid changes in stock prices) can contribute to market and stock price swings. However, might there be other factors also at play in these types of stock and market fluctuations?
Using Machine Learning to Predict Options Returns
Option Return Predictability with Machine Learning and Big Data Bali, Beckmeyer, Moerke, WeigertA version of this paper can be found hereWant to read our summaries of [...]
Do Option Prices Inform Stock Returns?
In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are [...]