options

Posted on May 29, 2020 by
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Here's a round-up of our new articles this week. They cover crash protection, sloppy, noisy regressions, and data-munging skills. Finding Options for Effective Crash Protection Large capital losses can be devastating to your trading account. A couple of weeks ago, we explained how you can use SPY put options to protect your portfolio against severe market downside. If you're prepared to take on a little more sloppiness, there are often cheaper approaches available... https://robotwealth.com/finding-effective-crash-protection-using-downside-regressions/ Quant Skills Data manipulation skills are crucial to efficient quant trading. In the following posts, Ajet, Kris and I explain some of the skills you need to work with modern financial datasets. It's important not to use data from the future to analyse the past. Rolling and expanding windows are essential tools to help "walk your data forward" to avoid these issues. https://robotwealth.com/rolling-and-expanding-windows-for-dummies/ When you're working with large universes of stock data then you'll come across a lot of challenges. This article explains a trick to help deal with missing stock data. https://robotwealth.com/how-to-fill-gaps-in-large-stock-data-universes-using-tidyr-and-dplyr/ The kind of stuff that makes money tends to involve looking for edge in...

Posted on May 22, 2020 by
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Posted on May 11, 2020 by
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If you want to make money trading, you're going to need a way to identify when an asset is likely to be cheap and when it is likely to be expensive. You want to be a net buyer of the cheap stuff and a net seller of the expensive stuff. Thanks, Capitain Obvious. You're welcome. How does this relate to equity options? If we take the (liquid) US Equity options market as an example then there are an absolute ton of options contracts you could be trading. 95% of them are sufficiently fairly valued that you won't make much money trading them once you've paid all the costs to buy and sell them and hedge your risk. The remaining 5% are worth looking for. Options have a positive dependency on volatility. In looking for "cheap" or "expensive" options, we're really looking for cheap or expensive "volatility". So we ask the following questions: When does the forward volatility "implied" by options prices tend to be lower than the volatility that realises in the subsequent stock price process? We would look to buy...

Posted on May 08, 2020 by
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 pricing model. Or, at the least, an understanding of when and under what conditions put options tend to be cheap. The second doesn't necessarily. We'll assume that we're going to have to pay a premium to protect our portfolio - and that not losing a large amount of money is more important than the exact price we pay for it. Let's run through an example… We have a portfolio comprised entirely of 100 shares of SPY. About $29k worth. We can plot a payoff profile for our whole portfolio. This is going to show the dollar P&L from our portfolio at various SPY prices. At the time of writing, SPY closed at$287.05 if (!require("pacman")) install.packages("pacman") pacman::p_load(tidyverse, rvest, slider, tidyquant, alphavantager, kableExtra) SPYprice <- 287.05...