How to Hedge a Portfolio with Put Options

There are 2 good reasons to buy put options: because you think they are cheap because you want downside protection. In the latter case, you are looking to use the skewed payoff profile of the put option to protect a portfolio against large downside moves without capping your upside too much. The first requires a …

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Pairs Trading Literature Review

This post summarises the key lessons of the academic literature that has been published on pairs trading.  The key themes are highlighted at the end of the page. Pair Trading Literature Review Gatev, Goetzmann, Rouwenhorst – “Pairs Trading: Performance of a Relative Value Arbitrage Strategy” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=141615 This is the first meaningful academic paper on pair …

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Are SPX Options Expensive?

Options are non-linear financial products that allow you to do useful things that you can’t easily do with other financial instruments. Let me give a specific illustration of options being useful… The chart below shows the monthly cumulative % performance of our RW systematic trading portfolio since we started trading it in October 2018. The …

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Humility and The Pain Trade

If you don’t bring a humble attitude to the markets, the markets will quickly humble you. Being humble is fundamental to everything we do at Robot Wealth: in our own trading, and in collaborative research in our Bootcamps. The more we trade, the more we are humbled by the markets. The more we are humbled …

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Trading Lessons from Gamblers

Pick the Easy Games Like many sociopaths, Frank Wallace was a fan of the philosophy of Ayn Rand. He wrote a book called “Poker: A Guaranteed Income for Life”, started a cult based on Rand’s philosophy of objectivism, and got convicted of tax fraud.   “Poker: A Guaranteed Income for Life” is about getting edges in …

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