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Stop Losses in Options Trading

Posted on August 16, 2021 By 
A financial option is a rather complex instrument. Unlike delta-one products, an option value depends not only on the underlying, but also on volatility, time to maturity, strike, interest rate, and dividends. Options have been used as hedging instruments, but they’re becoming a speculative vehicle these days thanks to a …
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Is Cointegration the Best Method for Pairs Trading?

Posted on August 10, 2021 By 
Pairs trading is a classic “market-neutral” trading strategy. Previously, we highlighted an article that claims that cointegration is a superior method for selecting pairs . On the same topic, Reference examined more pair selection methods. Specifically, it investigated the following approaches, Distance: Pairs are identified by using distance metrics. …
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Do Arbitrage Opportunities Still Exist?

Posted on August 5, 2021 By 
The arbitrage principle is one of the cornerstones of modern finance, and it’s being used widely, from derivative pricing to hedging, trading, and risk management. Theoretically, there is only one arbitrage principle. Practically, however, there are other types of arbitrage, some of which are relaxed forms of the strictest one. …
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An Application of Volatility Estimators

Posted on August 3, 2021 By 
Volatility estimators are a useful tool in volatility trading and risk management. We have discussed several types of volatility estimators, ranging from the simple Close-to-Close Historical Volatility to more complex ones like the Garman-Klass-Yang-Zhang volatility. As discussed in Reference , volatility estimators can also be used directly in delta-one trading …
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Are Accounting Numbers Useful?

Posted on July 31, 2021 By 
Accounting numbers are prevalent in financial reporting, business valuation, and investment management. They’re so frequently used that the practitioners rarely asked pragmatic questions such as: are they useful, do they account for some meaningful risks, can they be used to price assets. A recent article attempts to bring some …
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Pricing Convertible Bonds Using Monte-Carlo Simulations

Posted on July 28, 2021 By 
Convertible bonds are complex securities that are part debt, part equity. The main feature of a convertible bond is the conversion that allows the bondholder to convert debt to equity. In addition, there can be many other “exotic” features such as callable, puttable, forced conversion, soft call, contingent conversion, etc. …
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Are Index Options Markets Efficient?

Posted on July 25, 2021 By 
Options market efficiency is a topic of interest not only to academics but also to practitioners. There is a body of research focusing on market inefficiency. For example, we recently highlighted a research paper dealing with sector ETFs’ implied volatilities and correlations. The research result implies that the options market …
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Can Dividend Yield Be Negative?

Posted on July 14, 2021 By 
We previously discussed implied dividend yield and how to extract it from traded financial instruments. Given that dividend is considered a cash payment the shareholder receives when holding a stock, naturally one would think that dividend yield can only be zero or positive. We recently, however,  worked with a client …
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