How to Hedge a Portfolio with Put Options

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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Probability Density Function for Prices from a GBM Process in R

We’ve been working on visualisation tools to make option pricing models intuitive to the non-mathematician. Fundamental to such an exercise is a way to model the random nature of asset price processes. The Geometric Brownian Motion (GBM) model is a ubiquitous way to do this. We can represent the price of an asset at time as […]

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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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Overnight and Intraday SPX returns

One of the things I’ve noticed from staring at the screen all day for the last few months is that most of the large negative returns in US stock indexes have come overnight. What do you mean by “overnight”? The core stock trading session for US stocks is between 9:30 am and 4 pm Eastern […]

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The VIX Futures Basis

In the eye of the recent storm, with VIX up over 50, many traders were looking to “short the VIX” using products like TVIX. “Surely it’s going to coming back down?” Well yeah, it will, eventually, but that doesn’t mean that you can profitably short VIX products. First, some basics… What is VIX? VIX is […]

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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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