Per a previous question on this topic -- markets generally fall fast and rise slowly: what options strategies or other strategies can one use to take advantage of this common occurrence?
$\begingroup$
$\endgroup$
3
-
1$\begingroup$ It's largely already priced in, and arguably is actually over-priced in, so you'd do better in many situations betting markets will fall slower and rise faster than what is implied. $\endgroup$– Tal FishmanCommented Nov 28, 2011 at 14:27
-
$\begingroup$ @Tal: Very good point! $\endgroup$– vonjdCommented Nov 28, 2011 at 18:21
-
$\begingroup$ Can you please give an example of how it is "already priced in"? $\endgroup$– RayCommented Nov 28, 2011 at 19:10
Add a comment
|
3 Answers
$\begingroup$
$\endgroup$
2
To avoid confusion, this only applies to most equity/index option. In a return distribution, there's a measurement called skewness which measures the asymmetry of upside and downside. Let's define that as 30d Put Premium/ 30d Call Premium. It's already priced in because most of the time, skew > 1.
However, if you trade commodities or companies that might get bought, you'll often see skew < 1. You'd expect skew < 1 for a commodity because it's the safe heaven when the market tanks. For companies that might get bought (especially for a big premium), people are willing to pay for calls in case of a big upside gap move.
Typically mega cap companies have larger skew than a mid/small cap because it probably won't get taken out, doesn't have much upside because it's so established and so people are paying for the puts to protect against a black swam event like the BP spill.
So you can't really "take advantage" of that statement given there's implied skew already. It comes down to what you think about skew versus implied skew.
After all, realized skew is generally lower than implied skew so you'd expect to make money by shorting skew. However, in crisis times like 2008 and now, you need a lot of capital to stay short skew.
-
-
$\begingroup$ Hi DKM, welcome to quant.SE and thanks for helping to clarify this issue. $\endgroup$ Commented Dec 1, 2011 at 21:34
$\begingroup$
$\endgroup$
6
Are you sure of what you advance ? Because I pay the same volatility for my 90% puts and my 90% calls.
-
$\begingroup$ Can you please clarify the term "90% puts and calls"? $\endgroup$– RayCommented Nov 28, 2011 at 16:35
-
$\begingroup$ Strike = 90% of Forward (Discounted Spot) $\endgroup$– LlianeCommented Nov 29, 2011 at 9:06
-
$\begingroup$ Thanks Lliane. Did you see Tal's comment above, also DKM's answer below? Thoughts? $\endgroup$– RayCommented Nov 29, 2011 at 20:12
-
$\begingroup$ I don't see how it could be priced in, doesn't make any sense to me. The risk free interest rate is something that is priced in, not the rise in volatility when things go bad. $\endgroup$– LlianeCommented Nov 30, 2011 at 0:47
-
$\begingroup$ Sure you can buy deep OTM Puts and sell slightly ITM Puts, but it doesn't match any mathematical model. Also, you're probably gonna pay a stupidly high premiums on those deep OTM Puts, which explains why Black Swan funds returns are lame except for the really short term view. $\endgroup$– LlianeCommented Nov 30, 2011 at 0:53
$\begingroup$
$\endgroup$
Nassim Taleb has a strategy that he described in Active Trader magazine (partial interview here. As I recall, he would buy deep out-of-the-money puts, anticipating the faster fall.
He is called the actions of some traders, to sell deep OTM puts, to be "picking up pennies in front of steam rollers." In this case (buying those puts), he is the steam roller.
Of course, he is losing money every day due to time decay, so this strategy is for those with a long-term view.
