Category: DERIVATIVES

Risks of Short-dated Options Order Flow

Options, particularly short-dated ones, are gaining popularity among retail traders, with their trading volume increasing significantly. While some research argues that short-dated options do not impact the market, certain market practitioners hold opposing views. Reference investigated the risks associated with short-dated options order flow. It examined the effective trading …

VIX Manipulation: Evidence from SPX Options and Market Data

Market manipulation refers to intentional actions taken to distort the normal functioning of financial markets, often to benefit specific individuals or entities at the expense of others. These actions can include spreading false information, rigging prices, or creating artificial demand or supply. A notable example is the LIBOR manipulation scandal, …

Trading Volatility Skew: Can Forecasts Increase Returns?

Volatility skew refers to the observed pattern where implied volatility varies depending on the strike price of an option. Typically, in equity markets, out-of-the-money (OTM) put options exhibit higher implied volatility than at-the-money (ATM) or out-of-the-money call options. This phenomenon reflects market participants’ demand for protection against downside risks, as …

Incorporating Memory and Stochastic Volatility into Geometric Brownian Motion Model

Geometric Brownian Motion (GBM) is a widely used mathematical model for simulating the random behaviour of asset prices in financial markets. It assumes that the price of an asset follows a continuous-time stochastic process, where the logarithmic returns are normally distributed. GBM is foundational in option pricing models like Black-Scholes-Merton. …

How Will Bitcoin ETF Options Impact The Markets?

Bitcoin ETF options started trading last week. The debut of Bitcoin ETF options was met with significant bullish sentiment, as over 80% of trades were call options. Investors exhibited strong optimism about Bitcoin’s future price, with many purchasing options at a strike price of $100,000. This launch marks an important …

No-arbitrage Model for Pricing CAT Bonds

Catastrophe bonds, or CAT bonds, are a type of risk-linked security designed to transfer the financial risk of natural disasters from insurers to investors. These bonds are typically issued by insurance or reinsurance companies to cover significant losses caused by events such as hurricanes, earthquakes, or floods. Investors in CAT …

Causal Relationship Between VIX ETPs and Futures in Low- and High-Volatility Regimes

VIX Exchange-Traded Products (ETPs) are financial instruments designed to provide exposure to the CBOE Volatility Index (VIX), which measures the market’s expectation of 30-day forward-looking volatility derived from S&P 500 options. VIX ETPs, such as ETFs and ETNs, allow investors to gain exposure to volatility without directly trading options or …

Machine Learning Models for Predicting Implied Volatility Surfaces

The Implied Volatility Surface (IVS) represents the variation of implied volatility across different strike prices and maturities for options on the same underlying asset. It provides a three-dimensional view where implied volatility is plotted against strike price (moneyness) and time to expiration, capturing market sentiment about expected future volatility. Unlike …

Term Structure of VIX Futures

VIX futures are financial derivatives that allow traders to speculate on or hedge against future volatility in the stock market, specifically the S&P 500 index. They are based on the CBOE Volatility Index (VIX), which measures market expectations of near-term volatility. Unlike spot VIX, which reflects current market volatility, VIX …