How Markets Become Efficient II
Last time I described, in the context of a normal retail operation, the “handing off” of high return opportunities by market “wholesalers” to players who are happy with a lower return. Let’s look at the mechanics of this process in the options market.
The Importance Of Hedging
In this commentary, I’ll follow up on the discussion from Tuesday, October 12, regarding the following e-mail from a subscriber:
The Importance Of The VIX
I recently received the following e-mail from a subscriber:
“On Oct. 5, when the S&P was around 1300, I bought some OEX Nov. 740 calls for 3 1/4. Today, Oct. 8, the S&P cash has increased nicely to up around 1336, but the bid on my 740 calls is only 2 5/8. What happened?”
The ‘Other’ Greeks: Theta, Vega and Rho
Look beyond delta to explore the other important options “Greeks” that are crucial to understanding the options markets.
Dynamic Arbitrage II
In the last commentary (October 5, 1999) we considered a stock selling for $50 a share and a call option on the stock with strike price 50, expiration 30 days away, value $5 and asking price $2.
Dynamic Arbitrage, Part I
How do you take advantage of an underpriced option? Suppose stock A is selling for $50 a share and has a call option with strike price 50, expiration 30 days away, value $5 and ask price $2. At a purchase price of $2, this call is underpriced, and perhaps appeared in one of the underpriced lists on the site. How can you exploit this situation?
Position Size II: Kelly Allocation (Optimal f)
Let us take a very simple betting situation, where the odds are grossly in favor of the bettor–a situation that would cause most traders to salivate.
How Large A Position Should You Take?
Suppose you have $100,000 in your trading account. You see a profit-making opportunity in an option, and need to decide how large a position you should take.
More on Stops
Although the usual object of a stop is to prevent your equity from falling too much, a more persuasive motivation for a stop is to exit your position when the position becomes a wager with a too small or even negative expectation, or with a risk too great for you.
Stops in Option Trading
I have been asked how to use stop policies in options trading, and whether one should look at the price of the underlying and set stops that depend on the underlying’s movement, or whether the option price should be used.
The Empirical Histogram
There are 147 15-day intervals between January 1 and August 18. Here is the 15-day histogram of these 147 percentage changes:
Estimating Volatility VII
There were 157 five-day intervals between January 1, 1999, and August 18, 1999. Here is the histogram of the 157 five-day percentage changes in IBM from January 1, 1999 to August 18, 1999: