Realized Volatility and Option Time Value Decay Patterns
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Buying Options on Futures Contracts. a Guide to Uses
NATIONAL FUTURES ASSOCIATION Buying Options on Futures Contracts A Guide to Uses and Risks Table of Contents 4 Introduction 6 Part One: The Vocabulary of Options Trading 10 Part Two: The Arithmetic of Option Premiums 10 Intrinsic Value 10 Time Value 12 Part Three: The Mechanics of Buying and Writing Options 12 Commission Charges 13 Leverage 13 The First Step: Calculate the Break-Even Price 15 Factors Affecting the Choice of an Option 18 After You Buy an Option: What Then? 21 Who Writes Options and Why 22 Risk Caution 23 Part Four: A Pre-Investment Checklist 25 NFA Information and Resources Buying Options on Futures Contracts: A Guide to Uses and Risks National Futures Association is a Congressionally authorized self- regulatory organization of the United States futures industry. Its mission is to provide innovative regulatory pro- grams and services that ensure futures industry integrity, protect market par- ticipants and help NFA Members meet their regulatory responsibilities. This booklet has been prepared as a part of NFA’s continuing public educa- tion efforts to provide information about the futures industry to potential investors. Disclaimer: This brochure only discusses the most common type of commodity options traded in the U.S.—options on futures contracts traded on a regulated exchange and exercisable at any time before they expire. If you are considering trading options on the underlying commodity itself or options that can only be exercised at or near their expiration date, ask your broker for more information. 3 Introduction Although futures contracts have been traded on U.S. exchanges since 1865, options on futures contracts were not introduced until 1982. -
YOLO Trading: Riding with the Herd During the Gamestop Episode
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lyócsa, Štefan; Baumöhl, Eduard; Vŷrost, Tomáš Working Paper YOLO trading: Riding with the herd during the GameStop episode Suggested Citation: Lyócsa, Štefan; Baumöhl, Eduard; Vŷrost, Tomáš (2021) : YOLO trading: Riding with the herd during the GameStop episode, ZBW - Leibniz Information Centre for Economics, Kiel, Hamburg This Version is available at: http://hdl.handle.net/10419/230679 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights -
November 4, 2016 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk
November 4, 2016 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 By email: [email protected] Re: File Reference Number 2016-310, Exposure Draft, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities Dear Ms. Cosper, The International Swaps and Derivatives Association’s (ISDA)1 Accounting Policy Committee appreciates the opportunity to comment on the Financial Accounting Standards Board’s (“FASB”) Exposure Draft, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (the “Exposure Draft”). Collectively, the Committee members have substantial professional expertise and practical experience addressing accounting policy issues related to financial instruments and specifically derivative financial instruments. This letter provides our organization’s overall views on the Exposure Draft and our responses to the questions for respondents included within the Exposure Draft. Overview ISDA supports the FASB’s efforts to simplify the accounting for hedging activities and address practice issues that have arisen under current generally accepted accounting principles (“GAAP”). We believe the Exposure Draft achieves the FASB’s objectives of improving the financial reporting of cash flow and fair value hedge relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifying the application of hedge accounting guidance in current GAAP. 1 Since 1985, the International Swaps and Derivatives Association has worked to make the global derivatives markets safer and more efficient. ISDA’s pioneering work in developing the ISDA Master Agreement and a wide range of related documentation materials, and in ensuring the enforceability of their netting and collateral provisions, has helped to significantly reduce credit and legal risk. -
Informed Trading and Price Discovery Before Corporate Events
ARTICLE IN PRESS JID: FINEC [m3Gdc; June 28, 2017;21:7 ] Journal of Financial Economics 0 0 0 (2017) 1–28 Contents lists available at ScienceDirect Journal of Financial Economics journal homepage: www.elsevier.com/locate/jfec Informed trading and price discovery before corporate ✩ events ∗ Shmuel Baruch a, Marios Panayides b, Kumar Venkataraman c, a David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA b Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA c Edwin L. Cox School of Business, Southern Methodist University, Dallas, TX 75275, USA a r t i c l e i n f o a b s t r a c t Article history: Stock prices incorporate less news before negative events than positive events. Further, Received 5 March 2015 informed agents use less price aggressive (limit) orders before negative events and more Revised 8 June 2016 price aggressive (market) orders before positive events (buy–sell asymmetry). Motivated Accepted 29 June 2016 by these patterns, we model the execution risk that informed agents impose on each other Available online xxx and relate the asymmetry to costly short selling. When investor base is narrow, security JEL classifications: borrowing is difficult, or the magnitude of the event is small, buy–sell asymmetry is pro- G11 nounced and price discovery before negative events is lower. Overall, we show that the G12 strategies of informed traders influence the process of price formation in financial mar- G14 kets, as predicted by theory. G18 ©2017 Elsevier B.V. All rights reserved. Keywords: Informed trader Insider trading Limit order Short selling Buy–sell asymmetry 1. -
Introduction to Options Mark Welch and James Mintert*
E-499 RM2-2.0 01-09 Risk Management Introduction To Options Mark Welch and James Mintert* Options give the agricultural industry a flexi- a put option can convert an option position into ble pricing tool that helps with price risk manage- a short futures position, established at the strike ment. Options offer a type of insurance against price, by exercising the put option. Similarly, the adverse price moves, require no margin deposits buyer of a call option can convert an option posi- for buyers, and allow buyers to participate in tion into a long futures position, established at favorable price moves. Commodity options are the strike price, by exercising the call option. The adaptable to a wide range of pricing situations. option buyer also can sell the option to someone For example, agricultural producers can use com- else or do nothing and let the option expire. The modity options to establish an approximate price choice of action is left entirely to the option buyer. floor, or ceiling, for their production or inputs. The option buyer obtains this right by paying the With today’s large price fluctuations, the financial premium to the option seller. payoff in controlling price risk and protecting What about the option seller? The option seller profits can be substantial. receives the premium from the option buyer. If the option buyer exercises the option, the option What is an Option? seller is obligated to take the opposite futures An option is simply the right, but not the position at the same strike price. Because of the obligation, to buy or sell a futures contract at seller’s obligation to take a futures position if the some predetermined price within a specified option is exercised, an option seller must post a time period. -
Derivative Instruments and Hedging Activities
www.pwc.com 2015 Derivative instruments and hedging activities www.pwc.com Derivative instruments and hedging activities 2013 Second edition, July 2015 Copyright © 2013-2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication. The content of this publication is based on information available as of March 31, 2013. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance that is issued. This publication has been updated to reflect new and updated authoritative and interpretative guidance since the 2012 edition. -
Can Underwriters Profit from IPO Underpricing?
Footloose with Green Shoes: Can Underwriters Profit from IPO Underpricing? Patrick M. Corrigan† Why are green shoe options used in initial public offerings (IPOs)? And why do underwriters usually short sell an issuer’s stock in connection with its IPO? Are underwriters permitted to profit from these trading po- sitions? Scholars have long argued that underwriters use green shoe options together with short sales to facilitate price stabilizing activities, and that U.S. securities laws prohibit underwriters from using green shoe options to profit from IPO underpricing. This Article finds the conventional wisdom lacking. I find that underwriters may permissibly profit from IPO under- pricing by pairing purchases under a green shoe option with offshore short sales. I also find that underwriters may permissibly profit from IPO over- pricing by short selling the issuer’s stock in the initial distribution. The possession of a green shoe option and the ability to short sell IPOs effectively makes underwriters long a straddle at the IPO price. This posi- tion creates troubling incentivizes for underwriters to underprice or over- price IPOs, but not to price them accurately. This new principal trading theory for green shoe options and under- writer short sales provides novel explanations for systematic IPO mispric- ing, the explosive initial return variability during the internet bubble, and the observation of “laddering” in severely underpriced IPOs. This Article concludes by charting a new path for the regulatory scheme that applies to principal trading by underwriters in connection with securities offerings. Consistent with the purpose of preserving the integrity of securities markets, regulators should address the incentives of under- writers directly by prohibiting underwriters of an offering from enriching themselves through trading in the issuer’s securities. -
Detecting the Great Short Squeeze on Volkswagen
PACFIN-00812; No of Pages 12 Pacific-Basin Finance Journal xxx (2016) xxx–xxx Contents lists available at ScienceDirect Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin Detecting the great short squeeze on Volkswagen Keith R.L. Godfrey The University of Western Australia Business School, 35 Stirling Highway, Nedlands 6009, Australia article info abstract Article history: On 28 October 2008 a short squeeze on Volkswagen stock propelled this car maker to become Received 25 November 2015 the world's most valuable company for a day. I study the market behavior empirically and in- Received in revised form 31 January 2016 vestigate whether the timing of the price spike could have been anticipated from earlier trad- Accepted 15 February 2016 ing. I utilize price information from regional stock exchanges in parallel with the primary Available online xxxx electronic trading platform Xetra. Although the trading volume on the seven regional ex- changes is small, the geographical variation in traded prices shows anomalies when the law JEL classifications: of supply and demand begins to overrule the law of one price, and this is observed more G12 than 24 h ahead of the price peak. I find that the coefficient of variation in the prices at the G17 regional exchanges is a leading indicator of the Volkswagen price spike. D43 D81 © 2016 Published by Elsevier B.V. Keywords: Short squeeze Volkswagen Porsche Regional variation Law of one price Limits to arbitrage 1. Introduction Financial events are notoriously difficult to predict. Investors and traders seek competitive advantages by analyzing information such as news releases, accounting reports, industry forecasts, technical trends, and quantitative trading behavior. -
EQUITY DERIVATIVES Faqs
NATIONAL INSTITUTE OF SECURITIES MARKETS SCHOOL FOR SECURITIES EDUCATION EQUITY DERIVATIVES Frequently Asked Questions (FAQs) Authors: NISM PGDM 2019-21 Batch Students: Abhilash Rathod Akash Sherry Akhilesh Krishnan Devansh Sharma Jyotsna Gupta Malaya Mohapatra Prahlad Arora Rajesh Gouda Rujuta Tamhankar Shreya Iyer Shubham Gurtu Vansh Agarwal Faculty Guide: Ritesh Nandwani, Program Director, PGDM, NISM Table of Contents Sr. Question Topic Page No No. Numbers 1 Introduction to Derivatives 1-16 2 2 Understanding Futures & Forwards 17-42 9 3 Understanding Options 43-66 20 4 Option Properties 66-90 29 5 Options Pricing & Valuation 91-95 39 6 Derivatives Applications 96-125 44 7 Options Trading Strategies 126-271 53 8 Risks involved in Derivatives trading 272-282 86 Trading, Margin requirements & 9 283-329 90 Position Limits in India 10 Clearing & Settlement in India 330-345 105 Annexures : Key Statistics & Trends - 113 1 | P a g e I. INTRODUCTION TO DERIVATIVES 1. What are Derivatives? Ans. A Derivative is a financial instrument whose value is derived from the value of an underlying asset. The underlying asset can be equity shares or index, precious metals, commodities, currencies, interest rates etc. A derivative instrument does not have any independent value. Its value is always dependent on the underlying assets. Derivatives can be used either to minimize risk (hedging) or assume risk with the expectation of some positive pay-off or reward (speculation). 2. What are some common types of Derivatives? Ans. The following are some common types of derivatives: a) Forwards b) Futures c) Options d) Swaps 3. What is Forward? A forward is a contractual agreement between two parties to buy/sell an underlying asset at a future date for a particular price that is pre‐decided on the date of contract. -
Understanding the Role of Debt in the Financial System1
UNDERSTANDING THE ROLE OF DEBT IN THE FINANCIAL SYSTEM1 By Bengt Holmstrom, MIT The 13th BIS Annual Conference, 2014 June 27, 2014, Lucerne, Switzerland (Preliminary draft, June 17, 2014) Abstract Money markets are fundamentally different from stock markets. Stock markets are about price discovery for the purpose of allocating risk efficiently. Money markets are about obviating the need for price discovery using over-collateralized debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. The paper presents a perspective on the logic of credit markets and the structure of debt-contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple, but useful for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets as illustrated in the paper. 1 I want to thank most particularly Daron Acemoglu, Tobias Adrian, Gary Gorton, Arvind Krishnamurthy, Antoine Martin, Jean Tirole, Andrei Shleifer and Robert Wilson for extensive discussions on this topic. Numerous others should be listed (and will be in later editions.) The paper draws on my Presidential Address before the Econometric Society, January 2012 and on my joint work with Tri Vi Dang and Gary Gorton. 1. Introduction A lot of progress has been made in understanding the financial crisis since it erupted in full force after Lehmann’s fall in September 2008. -
Secondary Market Trading and the Cost of New Debt Issuance
Secondary Market Trading and the Cost of New Debt Issuance Ryan L. Davis, David A. Maslar, and Brian S. Roseman* February 8, 2017 ABSTRACT We show that secondary market activity impacts the cost of issuing new debt in the primary market. Specifically, firms with existing illiquid debt have higher costs when issuing new debt. We also find that with the improvement in the price discovery process brought about by the introduction of TRACE reporting, firms that became TRACE listed subsequently had a lower cost of debt. Our results indicate that the secondary market functions of liquidity and price discovery are important to the primary market. Overall, the results presented in this paper provide a greater understanding of the connection between the secondary market and the real economy. *Ryan L. Davis is at The Collat School of Business, University of Alabama at Birmingham; David A. Maslar is at The Haslam College of Business, University of Tennessee; Brian S. Roseman is at The Mihaylo College of Business and Economics, California State University, Fullerton. We would like to thank Andrew Lynch, Joseph Greco, David Nanigian, Matthew Serfling, and seminar participants at the University of Mississippi and California State University, Fullerton for their helpful suggestions and feedback. Understanding how financial market activity impacts the real economy is one of the most important topics studied by financial economists. Since firms only raise capital in the primary market it is easy to conclude that trading in the secondary market does not directly affect firm activity, or in turn, the real economy. This potential disconnect leads some to view secondary markets as merely a sideshow to the real economy, an idea that has been debated in the academic literature since at least Bosworth (1975). -
Price Discovery in Stock and Option Markets: a Portfolio Approach
Price Discovery in Stock and Option Markets: A Portfolio Approach Jung Hwang and Raul Susmel* Department of Finance University of Houston Houston, TX 77204-6021 May, 2009 Abstract In this paper, we propose a new portfolio approach to estimate Hasbrouck’s (1995) information share (IS), which measures the relative contribution of one market to the variance of an efficient stock return process. Using GMM, we are able to estimate optimal weights for a portfolio of options to be used in Hasbrouck’s (1995) analysis. With our dataset, IS of the option market using only ATM call options lies between 31% and 46%, while IS using a portfolio of options lies between 47% and 58%, a statistically significant increase. This finding indicates that using only one type of options, as often done in the literature, may result in an underestimated measure. We also find that as we increase the resolution of the data from 30 seconds to 15 minutes, the weight of OTM options in a portfolio increases from 18% to 32%. This result shows that the OTM option market’s information takes time to be incorporated into stock prices since the information travels across stock and option markets. Keywords: Price discovery, Information share, efficient stock prices, GMM JEL Classification: G14, C52 * We would like to thank Tom George and Praveen Kumar for helpful comments. 1 Price Discovery in Stock and Option Markets: A Portfolio Approach Abstract In this paper, we propose a new portfolio approach to estimate Hasbrouck’s (1995) information share (IS), which measures the relative contribution of one market to the variance of an efficient stock return process.