Using VIX to Help Trade Options
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Futures and Options Workbook
EEXAMININGXAMINING FUTURES AND OPTIONS TABLE OF 130 Grain Exchange Building 400 South 4th Street Minneapolis, MN 55415 www.mgex.com [email protected] 800.827.4746 612.321.7101 Fax: 612.339.1155 Acknowledgements We express our appreciation to those who generously gave their time and effort in reviewing this publication. MGEX members and member firm personnel DePaul University Professor Jin Choi Southern Illinois University Associate Professor Dwight R. Sanders National Futures Association (Glossary of Terms) INTRODUCTION: THE POWER OF CHOICE 2 SECTION I: HISTORY History of MGEX 3 SECTION II: THE FUTURES MARKET Futures Contracts 4 The Participants 4 Exchange Services 5 TEST Sections I & II 6 Answers Sections I & II 7 SECTION III: HEDGING AND THE BASIS The Basis 8 Short Hedge Example 9 Long Hedge Example 9 TEST Section III 10 Answers Section III 12 SECTION IV: THE POWER OF OPTIONS Definitions 13 Options and Futures Comparison Diagram 14 Option Prices 15 Intrinsic Value 15 Time Value 15 Time Value Cap Diagram 15 Options Classifications 16 Options Exercise 16 F CONTENTS Deltas 16 Examples 16 TEST Section IV 18 Answers Section IV 20 SECTION V: OPTIONS STRATEGIES Option Use and Price 21 Hedging with Options 22 TEST Section V 23 Answers Section V 24 CONCLUSION 25 GLOSSARY 26 THE POWER OF CHOICE How do commercial buyers and sellers of volatile commodities protect themselves from the ever-changing and unpredictable nature of today’s business climate? They use a practice called hedging. This time-tested practice has become a stan- dard in many industries. Hedging can be defined as taking offsetting positions in related markets. -
Evaluating the Performance of the WTI
An Evaluation of the Performance of Oil Price Benchmarks During the Financial Crisis Craig Pirrong Professor of Finance Energy Markets Director, Global Energy Management Institute Bauer College of Business University of Houston I. IntroDuction The events of late‐summer, 2008 through the spring of 2009 have attracted considerable attention to the performance of oil price benchmarks, most notably the Chicago Mercantile Exchange’s West Texas Intermediate crude oil contract (“WTI” or “CL” hereafter) and ICE Futures’ Brent crude oil contract (“Brent futures” or “CB” hereafter). In particular, the behavior of spreads between the prices of futures contracts of different maturities, and between futures prices and cash prices during the period following the Lehman Brothers collapse has sparked allegations that futures prices have become disconnected from the underlying cash market fundamentals. The WTI contract has been the subject of particular criticisms alleging the unrepresentativeness of the Midcontinent market as a global price benchmark. I have analyzed extensive data from the crude oil cash and futures markets to evaluate the performance of the WTI and Brent futures contracts during the LH2008‐FH2009 period. Although the analysis focuses on this period, it relies on data extending back to 1990 in order to put the performance in historical context. I have also incorporated some data on physical crude market fundamentals, most 1 notably stocks, as these are essential in providing an evaluation of contract performance and the relation between pricing and fundamentals. My conclusions are as follows: 1. The October, 2008‐March 2009 period was one of historically unprecedented volatility. By a variety of measures, volatility in this period was extremely high, even compared to the months surrounding the First Gulf War, previously the highest volatility period in the modern oil trading era. -
Encana Distinguished Lecture Series
Oil Futures Prices and OPEC Spare Capacity J.P. Morgan Center for Commodities Encana Distinguished Lecture Series September 18, 2014 Ms. Hilary Till, Principal, Premia Risk Consultancy, Inc., http://www.premiarisk.com; Research Associate, EDHEC-Risk Institute, http://www.edhec-risk.com; and Co-Editor, Intelligent Commodity Investing, http://www.riskbooks.com/intelligent-commodity-investing Disclaimers • This presentation is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities or other financial instruments. • The opinions expressed during this presentation are the personal opinions of Hilary Till and do not necessarily reflect those of other organizations with which Ms. Till is affiliated. • The information contained in this presentation has been assembled from sources believed to be reliable, but is not guaranteed by the presenter. • Any (inadvertent) errors and omissions are the responsibility of Ms. Till alone. 2 Oil Futures Prices and OPEC Spare Capacity I. Crude Oil’s Importance for Commodity Indexes II. Structural Curve Shape of Individual Futures Contracts III. Structural Curve Shape and the Implications for Crude Oil Futures Contracts IV. Commodity Futures Curve Shape and Inventories Icon above is based on the statue in the Chicago Board of Trade plaza. 3 Oil Futures Prices and OPEC Spare Capacity V. Special Features of Crude Oil Markets VI. What Happens When OPEC Spare Capacity Becomes Quite Low? VII. The Plausible Link Between OPEC Spare Capacity and a Crude Oil Futures Curve Shape VIII. Current (Official) Expectations on OPEC Spare Capacity IX. Trading and Investment Conclusion 4 Oil Futures Prices and OPEC Spare Capacity Appendix A: Portfolio-Level Returns from Rebalancing Appendix B: Month-to-Month Factors Influencing a Crude Oil Futures Curve Appendix C: Consideration of the “1986 Oil Tactic” 5 I. -
Options in Asset Allocation Problems: an Empirical Model Applied to the Italian FTSE MIB Index
Dipartimento di Impresa e Management Cattedra Asset Pricing Options in asset allocation problems: an empirical model applied to the Italian FTSE MIB Index Prof. Paolo Porchia Prof. Marco Pirra RELATORE CORRELATORE Matr. 705881 CANDIDATO Anno Accademico 2019/2020 1 2 Contents Introduction...................................................................................................................................................... 4 1). What are options? History, definitions, and strategies. .......................................................................... 6 1.1). Options: brief history and general definition. ....................................................................................... 6 1.2). Plain Vanilla and Exotic options: main determinants, greeks, payoffs. .............................................. 11 1.3) The most common options strategies. .................................................................................................. 21 2). The role of options in investors’ portfolios. ........................................................................................... 30 2.1). The role of options in buy and hold portfolios to solve the classic asset allocation problem. ............ 30 2.2). Benefit from including derivatives in optimal dynamic strategies. ..................................................... 37 2.3). Optimal Portfolio’s choices whit jumps in volatility. ......................................................................... 43 2.4). A myopic portfolio to exploit the mispricing. -
VIX Futures As a Market Timing Indicator
Journal of Risk and Financial Management Article VIX Futures as a Market Timing Indicator Athanasios P. Fassas 1 and Nikolas Hourvouliades 2,* 1 Department of Accounting and Finance, University of Thessaly, Larissa 41110, Greece 2 Department of Business Studies, American College of Thessaloniki, Thessaloniki 55535, Greece * Correspondence: [email protected]; Tel.: +30-2310-398385 Received: 10 June 2019; Accepted: 28 June 2019; Published: 1 July 2019 Abstract: Our work relates to the literature supporting that the VIX also mirrors investor sentiment and, thus, contains useful information regarding future S&P500 returns. The objective of this empirical analysis is to verify if the shape of the volatility futures term structure has signaling effects regarding future equity price movements, as several investors believe. Our findings generally support the hypothesis that the VIX term structure can be employed as a contrarian market timing indicator. The empirical analysis of this study has important practical implications for financial market practitioners, as it shows that they can use the VIX futures term structure not only as a proxy of market expectations on forward volatility, but also as a stock market timing tool. Keywords: VIX futures; volatility term structure; future equity returns; S&P500 1. Introduction A fundamental principle of finance is the positive expected return-risk trade-off. In this paper, we examine the dynamic dependencies between future equity returns and the term structure of VIX futures, i.e., the curve that connects daily settlement prices of individual VIX futures contracts to maturities across time. This study extends the VIX futures-related literature by testing the market timing ability of the VIX futures term structure regarding future stock movements. -
What's Price Got to Do with Term Structure?
What’s Price Got To Do With Term Structure? An Introduction to the Change in Realized Roll Yields: Redefining How Forward Curves Are Measured Contributors: Historically, investors have been drawn to the systematic return opportunities, or beta, of commodities due to their potentially inflation-hedging and Jodie Gunzberg, CFA diversifying properties. However, because contango was a persistent market Vice President, Commodities condition from 2005 to 2011, occurring in 93% of the months during that time, [email protected] roll yield had a negative impact on returns. As a result, it may have seemed to some that the liquidity risk premium had disappeared. Marya Alsati-Morad Associate Director, Commodities However, as discussed in our paper published in September 2013, entitled [email protected] “Identifying Return Opportunities in A Demand-Driven World Economy,” the environment may be changing. Specifically, the world economy may be Peter Tsui shifting from one driven by expansion of supply to one driven by expansion of Director, Index Research & Design demand, which could have a significant impact on commodity performance. [email protected] This impact would be directly related to two hallmarks of a world economy driven by expansion of demand: the increasing persistence of backwardation and the more frequent flipping of term structures. In order to benefit in this changing economic environment, the key is to implement flexibility to keep pace with the quickly changing term structures. To achieve flexibility, there are two primary ways to modify the first-generation ® flagship index, the S&P GSCI . The first method allows an index to select contracts with expirations that are either near- or longer-dated based on the commodity futures’ term structure. -
Structural Position-Taking in Crude Oil Futures Contracts
Structural Position-Taking in Crude Oil Futures Contracts November 2015 Hilary Till Research Associate, EDHEC-Risk Institute Principal, Premia Research LLC Abstract Should an investor enter into long-term positions in oil futures contracts? In answering this question, this paper will cover the following three considerations: (1) the case for structural positions in crude oil futures contracts; (2) useful indicators for avoiding crash risk; and (3) financial asset diversification for downside hedging of oil price risk. This paper will conclude by noting the conditions under which one might consider including oil futures contracts in an investment portfolio. This paper is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities or other financial instruments. The views expressed in this article are the personal opinions of Hilary Till and do not necessarily reflect the views of institutions with which Ms. Till is affiliated. Research assistance from Katherine Farren, CAIA, of Premia Risk Consultancy, Inc. is gratefully acknowledged. EDHEC is one of the top five business schools in France. Its reputation is built on the high quality of its faculty and the privileged relationship with professionals that the school has cultivated since its establishment in 1906. EDHEC Business School has decided to draw on its extensive knowledge of the professional environment and has therefore focused its research on themes that satisfy the needs of professionals. EDHEC pursues an active research policy in the field of finance. EDHEC-Risk Institute carries out numerous research programmes in the areas of asset allocation and risk management in both the 2 traditional and alternative investment universes. -
Evidence on the Performance of Condor Option Spreads in Australia
APPLIED FINANCE LETTERS VOLUME 06, ISSUE 01, 2017 FLIGHT OF THE CONDORS: EVIDENCE ON THE PERFORMANCE OF CONDOR OPTION SPREADS IN AUSTRALIA SCOTT J. NIBLOCK1* 1. Lecturer, School of Business & Tourism, Southern Cross University, Australia * Corresponding Author: Dr Scott J. Niblock, Lecturer, School of Business & Tourism, Southern Cross University, Gold Coast, Australia +61 7 5589 3098 [email protected] Abstract: This paper examined whether superior nominal and risk-adjusted returns could be generated using condor option spread strategies on a large capitalized Australian stock. Monthly Commonwealth Bank of Australia Ltd (CBA) condor option spreads were constructed from 2012 to 2015 and their returns established. Standard and alternative measures were used to determine the nominal and risk-adjusted performance of the spreads. The results show that the short put condor spread produced superior nominal and risk-adjusted returns, but seemingly underperformed when the upside potential ratio was taken into consideration. The long iron condor spread also offered reasonable returns across both performance metrics. On the other hand, the short call condor, long call condor, short iron condor and long put condor spreads did not perform as well on a nominal and risk- adjusted return basis. The results suggest that constructing spreads on the foundation of volatility preferences could be a driver of performance for condor option spreads strategies. For instance, short volatility condor spreads with negatively skewed return distribution shapes appear to add value, while long volatility condor spreads with positively skewed return distribution shapes seem to be less attractive over the sample period. Overall, condor option spreads demonstrate high risk-return profiles, offer versatility in their construction and intended pay-off outcomes, create value in some instances and can be executed across varying market conditions. -
Profiting with Iron Condor Option : Strategies from the Frontline For
ptg PROFITING WITH IRON CONDOR OPTIONS STRATEGIES FROM THE FRONTLINE FOR TRADING IN UPOR DOWN MARKETS M I C H A E L H A N A N I A B E N K L I F A Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistant: Pamela Boland Development Editor: Russ Hall Operations Manager: Gina Kanouse Senior Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Chuti Prasertsith Managing Editor: Kristy Hart Project Editor: Anne Goebel Copy Editor: Cheri Clark Proofreader: Linda Seifert Indexer: Lisa Stumpf Compositor: TnT Design, Inc. Manufacturing Buyer: Dan Uhrig © 2011 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. -
Confronting the Volatility Risk Premium on the S&P500
CBA Copenhagen Business School MSc in EBA Finance & Investment Master Thesis 2017 CONFRONTING THE VOLATILITY RISK PREMIUM ON THE S&P500 INDEX - AN EMPIRICAL STUDY Lea Jochumsen Victor Vogel Jørgensen Supervisor: Agatha Murgoci Time of submission: May 15, 2017 Page numbers and characters: 120 pages, 247,135 characters Confronting the volatility risk premium on the S&P500 index | 2017 Abstract This thesis examines the effectiveness of different short vega option combinations’ ability to capture the volatility risk premium on the S&P500 index. We find evidence that delta neutrality of the option combinations is required to gain factor exposure linked to the volatility risk premium. The short delta-hedged strangle proves to be the most profitable strategy to capture the volatility risk premium. However, neither of the initially tested strategies yields statistically significant returns. Using market timing indicators based on moving averages of the VIX- and CDX index, the returns of the option combinations considered are consistently improved and yield statistically significant returns. When considering transaction costs and margin requirements faced when trying to capture the volatility risk premium, the investment doesn’t seem as attractive, but is perusable when using market timing indicators. 1 ⏐ 144 Table of Contents ABSTRACT ........................................................................................................................................................ 1 CHAPTER 1 - INTRODUCTION ................................................................................................................... -
Proxy Statement Describe the Various Matters to Be Acted Upon During the Annual Meeting
CONTANGO OIL & GAS COMPANY 111 E. 5TH STREET, SUITE 300 FORT WORTH, TEXAS 76102 (817) 529-0059 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 30, 2021 Dear Contango Stockholder: We are pleased to invite you to attend the 2021 Annual Meeting of Stockholders of Contango Oil & Gas Company. The Annual Meeting will be held exclusively online via the Internet as a virtual web conference at www.virtualshareholdermeeting.com/MCF2021 on June 30, 2021, at 8:00 a.m., Central Daylight Time. In light of the COVID-19 pandemic, and for the health and well-being of our stockholders, employees and directors, this year’s Annual Meeting will be conducted as a virtual meeting of stockholders, which will be held exclusively online via the Internet as a virtual web conference. You will be able to attend and participate in the Annual Meeting by visiting www.virtualshareholdermeeting.com/MCF2021, where you will be able to listen to the meeting live, submit questions, and vote. There will not be a physical meeting location, and you will not be able to attend the Annual Meeting in person. Your vote is very important to us. Whether or not you plan to attend the Annual Meeting online, your shares should be represented and voted. Even if you plan to attend the Annual Meeting online, we recommend that you vote your shares prior to the Annual Meeting so that your vote will be counted if you later decide not to attend. The Notice of Annual Meeting of Stockholders and the accompanying proxy statement describe the various matters to be acted upon during the Annual Meeting. -
Options Trading
OPTIONS TRADING: THE HIDDEN REALITY RI$K DOCTOR GUIDE TO POSITION ADJUSTMENT AND HEDGING Charles M. Cottle ● OPTIONS: PERCEPTION AND DECEPTION and ● COULDA WOULDA SHOULDA revised and expanded www.RiskDoctor.com www.RiskIllustrated.com Chicago © Charles M. Cottle, 1996-2006 All rights reserved. No part of this publication may be printed, reproduced, stored in a retrieval system, or transmitted, emailed, uploaded in any form or by any means, electronic, mechanical photocopying, recording, or otherwise, without the prior written permission of the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author or the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. Published by RiskDoctor, Inc. Library of Congress Cataloging-in-Publication Data Cottle, Charles M. Adapted from: Options: Perception and Deception Position Dissection, Risk Analysis and Defensive Trading Strategies / Charles M. Cottle p. cm. ISBN 1-55738-907-1 ©1996 1. Options (Finance) 2. Risk Management 1. Title HG6024.A3C68 1996 332.63’228__dc20 96-11870 and Coulda Woulda Shoulda ©2001 Printed in the United States of America ISBN 0-9778691-72 First Edition: January 2006 To Sarah, JoJo, Austin and Mom Thanks again to Scott Snyder, Shelly Brown, Brian Schaer for the OptionVantage Software Graphics, Allan Wolff, Adam Frank, Tharma Rajenthiran, Ravindra Ramlakhan, Victor Brancale, Rudi Prenzlin, Roger Kilgore, PJ Scardino, Morgan Parker, Carl Knox and Sarah Williams the angel who revived the Appendix and Chapter 10.