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Protecting Portfolios with Options Strategies

Protecting Portfolios with Options Strategies

Options are often used to reduce or eliminate the risk of holding one particular investment position by taking another position. In general, a long option position is a speculation that something will happen (bear, bull, lateral) whereas a short option is a speculation that something will NOT happen (not bear, not bull, not lateral).

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.

Financial Constraints on Inventory Investment

Financial Constraints on Inventory Investment

Inventories have been studied by macro-economist for their role in the business cycles (Abramovitz 1950) and their relation with corporate profits (Mitchell 1951, Lucas 1977) and with the volatility of cash flows (Fazzari, Hubbard et al. 1988), both key leading indicators of the state of the economy (Carpenter, Fazzari et al. 1994); other evidence suggests their implications on the general level of the economy in case of financial shocks because of erroneous forecasts (Bernanke and Gertler 1989, Bernanke, Gertler et al. 1996) or their limited efficiency in collateralization (Berk 2014).

Event Studies

Event Studies

Event studies are generally employed by financial economists to specify and test interesting economic hypotheses. Systematically nonzero abnormal security returns that persist after a particular type of corporate event are inconsistent with market efficiency. Common examples include earnings, mergers, and capital issuances.

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.

Oil Correlations with Commodity Currencies

Oil Correlations with Commodity Currencies

Currencies move with supply and demand, politics, interest rates, speculation, and GDP. Thus, whenever growth in a country is mainly commanded by commodities exports, some currencies are generally correlated with commodity prices. Major commodity currencies include the Australian Dollar, the New Zealand Dollar, the Canadian Dollar, the Japanese Yen, and the Swiss Franc. Minor currencies include the Russian Ruble, the Colombian Peso, and the Peruvian Sol.

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