Dispersion trades The dispersion trade has become increasingly popular with hedge funds that want to bet on an end to the high level of correlation between the large stocks that constitute index components.
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A fund manager would typically sell options on the index and buy options on the individual stocks composing the index. If maximum dispersion occurs, the options on the individual stocks make money, while the short index option loses only a small amount of money. The dispersion trade is effectively going short on correlation and going long on volatility. Tail risk funds The tail risk fund — a fund designed to provide liquidity in the event of certain risks occurring e.
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This is really an insurance policy, with the investor exchanging an underperforming strategy for the expectation of liquidity. Tail risk funds often take contrarian macro positions by using long-term put options. The debate over whether it is really possible for a fund to anticipate tail risks — by definition hard to predict — must be offset against the expectations of the investor.
The investor is looking for a bear fund to minimise portfolio damage. The cause of that downturn may be unpredictable, but the reaction of the market can be predictable. The real question is the size of the market decline. With the advent of tail-protected ETFs for investors and given recent trading patterns, it is clear that products that can provide this level of hedging will continue to be popular with investors.
The big picture Options are the third most widely used asset class for algorithmic funds after equities and foreign exchange. This is thanks to the increased use of electronic trading for options transactions, trades that were previously reliant on manual options writing and voice broking. One of the key selling points for hedge funds has been the liquidity and operational efficiencies associated with exchange-traded options.
In particular, advances in algorithmic trading have permitted fund managers to access superior pricing across multiple exchanges via smart order processes. Outside North America, locally traded equity options have not been enjoyingthe high growth experienced by US equity options. In Asia, single stock options are hampered by lack of opportunity and demand, while in Europe structural features such as country and currency fragmentation, and a preponderance of smaller company issues are retarding growth see Fig.
Increasingly, hedge funds are embracing weekly options to more sensitively control positions, enabling successful positions to be harvested more quickly. Share your thoughts with other customers. Write a customer review. Showing of 2 reviews. Top Reviews Most recent Top Reviews. There was a problem filtering reviews right now. Please try again later. Format: Paperback Verified Purchase. If your an option trader, do not buy this book or any book written by these authors.
This book is about a drama-thriller, not option trading. These authors are scum. Format: Paperback. Mountjoy-Pepka presents a fresh approach to understanding the stockmarket by taking us on a mystery journey with terrific characters, intriguing plot twists, and a ton of thoughtful insights into how money affects our society, our politics, and our financial future. I look forward to reading the entire series.
What a great way to learn about stocks, investing and what the hell is really going on. See both reviews.
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Time value represents the added value an investor has to pay for an option above the intrinsic value. So, the price of the option in our example can be thought of as the following:. In real life, options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely. The distinction between American and European options has nothing to do with geography, only with early exercise.
Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium. Or they can become totally different products all together with "optionality" embedded in them.
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Again, exotic options are typically for professional derivatives traders. Options can also be categorized by their duration. Short-term options are those that expire generally within a year.
LEAPS are identical to regular options, they just have longer durations. Options can also be distinguished by when their expiration date falls. Sets of options now expire weekly on each Friday, at the end of the month, or even on a daily basis. Index and ETF options also sometimes offer quarterly expiries.
More and more traders are finding option data through online sources. While each source has its own format for presenting the data, the key components generally include the following variables:. This position profits if the price of the underlying rises falls , and your downside is limited to loss of the option premium spent. You would enter this strategy if you expect a large move in the stock but are not sure which direction.
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Basically, you need the stock to have a move outside of a range. A strangle requires larger price moves in either direction to profit but is also less expensive than a straddle. Spreads use two or more options positions of the same class. They combine having a market opinion speculation with limiting losses hedging. Spreads often limit potential upside as well.
Yet these strategies can still be desirable since they usually cost less when compared to a single options leg. Vertical spreads involve selling one option to buy another. Generally, the second option is the same type and same expiration, but a different strike.
The spread is profitable if the underlying asset increases in price, but the upside is limited due to the short call strike. The benefit, however, is that selling the higher strike call reduces the cost of buying the lower one. Combinations are trades constructed with both a call and a put. Why not just buy the stock? Maybe some legal or regulatory reason restricts you from owning it.
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But you may be allowed to create a synthetic position using options. In a long butterfly, the middle strike option is sold and the outside strikes are bought in a ratio of buy one, sell two, buy one. If this ratio does not hold, it is not a butterfly. The outside strikes are commonly referred to as the wings of the butterfly, and the inside strike as the body.
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