Options: Huge Potential Benefits but Challenges · Options: Huge Potential Benefits but Challenges...

Options: Huge Potential Benefits but Challenges

Used correctly options dramatically improve alpha and reduce risk

But even identifying the input parameters may seem daunting…

How do we model distributions?

Once we do, what’s the best strategy?

Most of our inputs for strategy should already be known…

Optimal Strategy

Current Position(s)

Payout Objectives

Capital and Risk

Constraints

Interest Rates and Dividends

Live and Historic

Market DataVolatility and

Liquidity Analytics

Research

Trade Alerts and Signals

Investment Thesis

The expected distribution may differ from the implied……and therefore presents an opportunity.

Differences still hold true for indices…5 Year histogram of SPY versus implied…

Where does volatility come from? (or when)Twitter volatility is mostly earnings related.

DIS Example Tactical Strategy, Meets, Beats or Misses?

A “normal” view…

Example Tactical Strategy: Research creates a directional thesis

Prediction Focus: Performance around Earnings Announcement

Your analysis informs an expected distribution…

2Q2015 Disney Earnings Trade

Earnings Price Move Std Dev Weight

In line -8% 21% 0.52

Disappoints -11% 40% 0.24

Beats +9% 25% 0.24

A non-volatility trade suited to the weighted distribution.This incorporates slippage assumptions…

Disney Example Tactical Strategy:

Prediction

Optimized Strategy

Reference Strategy

P&L of Optimized vs Reference

2Q2015 Disney Earnings Trade

The strategy selection technique can be applied generally.

Matches or beats under most circumstances…

Options: Huge Potential Benefits but Challenges · Options: Huge Potential Benefits but Challenges...

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Transcript of Options: Huge Potential Benefits but Challenges · Options: Huge Potential Benefits but Challenges...

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