Tag: quantitative strategy

Quantitative Strategy

The Volatility Premium and Black-Scholes Pricing

The Volatility Premium and Black-Scholes Pricing

The implied volatility is generally equal to or significantly greater than the forecasted volatility; for instance, the BSM implied volatility is, in general, an upward biased estimator. Indeed, by selling implied volatility a risk premium is provided because of the many expected and unexpected events that may occur. Moreover, market microstructure posits that implied volatility should be biased high because market makers profit from the bid-ask spread in the options by slightly raising their quotes (i.e., going slight long volatility exposure particularly on the downside). However, this absolutely doesn’t mean that it is always possible to profit by selling implied volatility

A Primer on Option Pricing Models

A Primer on Option Pricing Models

Option Pricing. An option is a contract entitling the holder to buy or sell designated security at or within a certain period of time at a particular price. Options contracts are characterized by a nonlinear payoff because the price depends on a nonlinear function of the underlying. Thus, it is impossible to price without a model for the underlying but the assumptions of mathematical finance (not moving the market; liquidity, jumps; shorting; fractional quantities; no transaction costs) substantially make difficult to determine a single model always valid with the changing market conditions.

A Primer on Financial Derivatives

A Primer on Financial Derivatives

Financial derivatives are often used for commodities, like corn, oil, gasoline, or gold, and for currencies, often the U.S. Dollar abd the Euro. However, there are derivatives based on stocks, bonds, interest rates, and indices. Companies use derivatives to lower their operational risk for the delivery of raw materials, the changes in exchange rates or in interest rates. Trading requires a small down payment (margin) and usually consists of rolling positions (contracts are liquidated by another derivative before coming to term).

Safe Heaven Portfolio Analysis

Safe Heaven Portfolio Analysis

Safe heaven portfolio can be a wise option considering 2019 marks the 11th year to an already-extended bull market which started in in the aftermath of the great financial crisis. It has been a long and very rewarding run for all investors… Especially REIT investors who have continued their long streak of market outperformance. Since we are likely to hit a recession sooner rather than later (1-2 years), tracking a safe heaven portfolio is important.

Guessing Market Cycles

Guessing Market Cycles

Market cycles can be analized through the formation of bubbles consisting of four phases: Accumulation, Mark-Up, Distribution, and Mark-Down. Usually, accumulation coincides with the early stages of recovery, mark-up with the consolidation of the economic condition leading to a bullish sentiment, distribution substantially with lateral movements and indecision in market sentiment, and mark-down with the early stages of mid recession.

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