By Colin Bennett
This ebook goals to fill the void among books supplying an creation to derivatives, and complex books whose audience are contributors of quantitative modelling group.
as a way to entice the widest viewers, this book attempts to imagine the smallest amount of past wisdom. The content material speedy strikes onto extra complex matters as a way to be aware of more effective and complex themes.
“A grasp piece to profit in a nutshell all of the necessities approximately volatility with a realistic and energetic method. A needs to read!”
Carole Bernard, fairness Derivatives professional at Bloomberg
“This booklet can be obvious because the ‘volatility bible’!”
Markus-Alexander Flesch, Head of revenues & advertising and marketing at Eurex
“I hugely suggest this publication either for these new to the fairness derivatives company, and for extra complicated readers. The stability among idea and perform is struck At-The-Money”
Paul Stephens, Head of Institutional advertising at CBOE
“One of the simplest assets available in the market for the volatility group”
Paul Britton, CEO and founding father of Capstone funding Advisors
“Colin has controlled to express frequently advanced by-product and volatility ideas with an admirable simplicity, a welcome switch from the all-too-dense tomes one often unearths at the topic”
Edmund Shing PhD, former Proprietary dealer at BNP Paribas
“In a crowded house, Colin has provided an invaluable and concise advisor”
Gary Delany, Director Europe on the ideas Council
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Extra resources for Trading Volatility, correlation, term structure, and skew 2014!!
OVERWRITING WITH NEAR-DATED OPTIONS IS BEST Near-dated options have the highest theta, so an investor earns the greatest carry from call overwriting with short-dated options. It is possible to overwrite with 12 one-month options in a year, as opposed to four three-month options or one 12-month option. While overwriting with the shortest maturity possible has the highest returns on average, the strategy does have potentially higher risk. If a market rises one month, then retreats back to its original value by the end of the quarter, a one-month call overwriting strategy will have suffered a loss on the first call sold but a three-month overwriting strategy will not have had a call expire ITM.
3 Volatility, Variance and Gamma Swaps. 2: Variance Is the Key, Not Volatility 51 This can also be seen from Figure 29 Profile of a Delta-Hedged Option in the previous section (page 46), as the additional profit from the move from 1% to 2% is three times the profit from 0% to 1% (for a total profit four times the profit for a 1% move). VOL SHOULD BE CONSIDERED A DERIVATIVE OF VAR The three examples above show why variance is the natural measure for deviation. Volatility, the square root of variance, should be considered a derivative of variance rather than a pure measure of deviation.
4: Call Overwriting 21 at a period of time where the SX5E had a positive return shows that for one-month options a strike between 103%-104% is best (see Figure 10 above). Typically call overwriting with c25% delta call options is best For three-month options, the optimal strike is a higher 107%-108%, but the outperformance is approximately half as good as for one-month options. These optimal strikes for overwriting could be seen to be arguably high, as recently there have been instances of severe declines (TMT bubble bursting, Lehman bankruptcy), which were followed by significant price rises afterwards.