Stoking the Embers of Inflation is one of the more important articles we have written. The Monetary Equation Identity discussed in the article provides a counterintuitive way to think about inflation. It took us a long time to accept that this identity lays out a real case for stagflation.
Academic research refers to the persistent phenomenon of ex-post implied volatility (IV) exceeding realized volatility (HV) as the Volatility Risk Premium (VRP). As it applies to option premiums, this leads to a positive expected return for being a systematic option seller.
As we enter the third week of June, sentiment has steadily gotten more optimistic, with sentiment polls like Investors Intelligence having risen now for the 5th straight week, while Bears have dropped down under 18%. The net plurality now stands at 35%, which is worrisome given that Equity put/call data has also dipped down to levels last seen in late January when equities peaked.
VIX options use the CBOE Volatility Index (VIX) as itsunderlying asset. VIX options were the firstexchange-traded options that allowed investors to trade the market volatility. VIX options can be used as a hedge against sudden market decline, but also as speculation on future moves involatility.
Hedge funds and institutions have been using options to get market leverage for years. Warren Buffett has been known to buy calls and sell puts to get bullish exposure, and so has Carl Icahn. And recently I told my subscribers about a massive options trades that shows just how these big investors use options.
The synthetic long stock is a low-risk, highly leverage strategy. But for synthetic short stock, the risk profile is completely different. For the synthetic long, the combination consists of a long call and a short put, at the same strike, and at the same expiration.
When trading, I believe very strongly that the best method for accumulating profits over the years is to ignore whether a specific position is currently profitable or is losing money. When looking at any position, it's always necessary to make a buy/hold/sell decision. Of course, for most option traders 'hold' wins most of the time.
“The price of protecting quarterbacks was driven by the same forces that drove the price of other kinds of insurance: it rose with the value of the asset insured, with the risk posed to that asset.” -Michael Lewis, The Blind Side. Counter-intuitively, that is often not the case in the capital markets.
I'm getting a lot of emails asking me to recommend an options advisory service. If you currently subscribe to an option trading service, or if you’re considering doing so, here are some tips how to select one. Those tips will help you to avoid some costly mistakes.
On a personal level, one part of the options business that truly bothers me is that it its filled with people who want to take your money. I politely refer to them as hypesters, but a better term is swindler. Swindle: Use deception to deprive (someone) of money or possessions. (source: Google search)
There are hundreds of options trading "gurus" promising you all kinds of ridiculous returns like "5% per week". What most traders don't realize are the risks that come with those returns. I would like to share with you an email I got from one of those options "gurus".
When I work with individual investors or write blog posts and books, my objective is for the reader to learn something he/she does not already know. That includes providing enough details that the clouds disappear and the reader gains a better understanding of the topic under discussion.
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