The Black–Scholes-Merton model is the most frequently used option pricing model in the financial industry. However, it made use of assumptions that are not always realistic. A crucial assumption of the Black-Scholes-Merton model is a frictionless and elastic market. In other words, it assumes that there are no barriers to …

Volatility is a concept that is relatively well understood and used widely in the financial market. Correlation, on the other hand, is less understood. Nevertheless, it is used frequently in trading and portfolio management. Correlation between 2 assets is a measure that shows the strength of the relationship between them. …

In order to win in trading, one should have an edge, i.e. have a slight advantage over others. This means having information or strategies that the majority of other traders don’t have. There are a few different ways to get an edge in the trading world. One is by having …

Technical trading is a method of analyzing securities by studying past price movements and trends. Based on this analysis, traders then make decisions about what trades to make. Technical traders use indicators to develop algorithmic trading systems. These trading systems are popular in the equity and commodity futures markets. Reference …

Post-earnings-announcement drift (PEAD) is the tendency for a stock’s price to move in the direction of an earnings surprise for several weeks, or even months, following an earnings announcement. PEAD is a well-known phenomenon in the equity market, and trading strategies developed based on it resulted in superior returns. Reference …

A stop-loss order is an order to buy or sell a security when the price reaches a certain level. A stop-loss order is designed to limit an investor’s losses on a position in a security. There are two main types of stop-loss orders: stop market orders and stop-limit orders. A …

Across several time frames and equity markets, momentum trading strategies that involve buying past winners and selling past losers have produced considerable gains. In recent years, asset management firms have offered investment vehicles that provide investors with easy access to momentum strategies. The number of funds and the asset under …

Options volume has been shown to be a predictor of future market returns. By tracking the level of options volume, traders can get a sense of where the market is heading and make more informed investment decisions. On a similar topic, Reference examined the Option Volume Imbalance (OVI) and …

In the investing world, there are a variety of popular trading strategies that investors use to make money. One of the most popular is trend-following. This involves trying to identify when an asset is in an uptrend or downtrend and then buying or selling accordingly. While this approach can be …

The herd effect is when people do not pay attention to what they know. Instead, they follow what other people are doing. It is found that people tend to herd based on other investors’ activity, and not only their own behavior. They also tend to follow more extreme decisions made …