Long volatility should be considered a factor that earns positive returns over the long term. At least that's what One River Asset Management’s Patrick Kazley suggests in his piece "Heretical Thinking: The Long Volatility Premium"
It is well-known that box spreads offer investors the ability to lend via the options market at similar rates to Treasury Bills. But there is another, less popular side of the box spread market – borrowing money. This articles dives into the mechanics of how to use box spreads to borrow at low costs.
Buffer ETFs have become one of the fastest-growing product lines in finance. But what risks are buffer investors carrying without realizing it? Let's zoom in on the two areas where they fall short and propose potential solutions that seek to address these issues.
On the surface, buffer ETFs appear attractive: they seek to capture some upside while mitigating a portion of losses. However, this does not mean they are risk-free. In fact, under certain market conditions, these products can significantly underperform.
Buffer ETFs have moved from niche idea to mainstream product in just a few years. That’s not just growth—it’s a trend! But what’s behind it? Are buffer ETFs a breakthrough in risk management… or are they more complex and potentially riskier than they appear?
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 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.
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.
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 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.
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.
This paper explores the question of option momentum by examining what the research says about the performance of option investments across different stocks.
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?
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 [...]
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 [...]
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