Condor Options

Free Webinar on Volatility Skew – Wednesday, April 11

I’m giving a free webinar in partnership with TheStreet’s Options Profits service on Wednesday on option implied volatility skew. I’m going to review, quickly, what IV skew is, present the results of our recent study for Expiring Monthly, and work through some examples of how to use skew information in timing and structuring positions. When: Wednesday, April 11 Time: 5pm ET CLICK HERE to register for the webinar You will be able to pre-register but the presentation will not be live until…

Financial Innovation and Complexity

It’s become really popular in the financial media to rail against the complexity of financial products. For products offered to the public, those complaints seem justified. Mortgages are too complicated and trap-laden, in some versions, and the “vanilla product” idea championed by Elizabeth Warren for the CFPB seemed like a winner to me. On the investing side, the TVIX saga is just another example of why ETPs whose sole purpose is to offer access to more leverage should never…

Is the threat of airstrikes against Iran driving oil options prices higher?

Probably. First, some context. Here’s the one-month volatility risk premium in USO options since 2007. Think of this as an estimate of how richly or cheaply priced options on crude oil are, relative to the actual historical volatility of the asset. Any ratio above 1.00 indicates that option buyers were willing to pay a premium above the value of the volatility subsequently exhibited by crude oil futures. As you can see, the ratio is usually greater than one.…

The Unbrokenness of VXX

Some investors noticed a moment near the close of trading today during which VXX briefly was negative on the day. Here are the last couple days of VXX trading, plotted in 5-minute bars. Source: TD Ameritrade Those same investors probably clicked over to the CFE’s website and noticed that the VIX futures closed higher on the day. More than one person claimed that this was an indication of some kind of horrible tracking error or failure on the…

Are Volatility ETPs Like VXX and TVIX Going To Kill the Market?

The theory that volatility ETPs are somehow going to have adverse consequences on the market has been a popular theme for a month or two now at least. I’ve tried to show why this this idea doesn’t make sense twice; when it comes to zombie ideas, sometimes you have to just keep trying. If you want to claim that the increased volume in volatility ETPs is causing the VIX tail to wag the SPX dog, you owe the world the…

The Cost of Hedging Equity Exposure Is Higher Than It Looks

BofA interest rate strategists Ralph Axel and Ruslan Bikbov suggest that now would be a good time to buy tail risk hedges. (hat tip Joe Weisenthal) 6-month options on 10-year swap futures are as inexpensive now, they claim, as they’ve been in decades, excluding one period in 2006. 6M IV on 10Y Swap Futures, bp. Source: BofA Merrill Lynch Global Research So far, so good. If rates are your key concern, this looks like a decent time to…

A Quantitative Look at Volatility Skew

Implied volatility (IV) skew is one of the most important and interesting aspects of listed options. IV skew typically refers to the differences in the implied volatilities of options in the same expiration cycle with different strike prices. There have been many attempts in the academic literature to model the behavior of changes in skew, but the interpretation of skew information by traders is still done largely on a qualitative and ad hoc basis. In “Quantifiable Implied Volatility Skew,”…