SKEW

[rffrydr]

Skew has many guises but one of them is the Grim Reaper:




http://www.minyanville.com/businessmarkets/articles/bp-option-trading-equity-options-volatility/6/16/2010/id/28720

http://www.derivativesstrategy.com/magazine/archive/1999/1199fea4.asp

http://www.minyanville.com/businessmarkets/articles/options-put-write-buy-write-howard/5/17/2010/id/28293


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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Funny you should mention skew. Was just studying this the other day.

Following is a quick exercise taken from Chapter 5 of the book "Exotic Options and Hybrids."

Q) Imagine you are in charge of Delta hedging a portfolio of options. And let's assume that you are short skew and volatility goes down. Would you end up buying or selling underlying shares?

A) The skew increases the price of OTM puts and ITM calls; and decreases the price of OTM calls and ITM puts. Being short the skew can mean being short OTM puts, short ITM calls, long OTM calls or long ITM puts. Let's consider the case where you are long OTM call options. If volatility goes down, the Delta of OTM calls goes down. Since you are long the options, the portfolio overall Delta is then negative. Therefore, you have to buy shares to maintain sensitivity to the spot price of underlying shares.

[rffrydr]

The euro unmoved:

http://www.minyanville.com/businessmarkets/articles/euro-greece-eurozone-currencies-implied-volatility/6/28/2011/id/35366
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

It's always a buyers market:



Riches await masters of the selling discipline

By John Authers

Published: May 6 2011 20:21 | Last updated: May 6 2011 20:21

[img]Countless books are devoted to buying stocks – which stocks to buy and when to buy them. Not one, as far as I am aware, has been devoted exclusively to selling them.

This has it the wrong way around. All of us – professionals as much as personal investors – are far more likely to lose money by getting the selling wrong, not the buying.

At first blush, this seems silly. In any transaction someone is buying and someone is selling. How can one side persistently do better than the other?

But behavioural finance, the discipline of applying experimental psychology to economic decisions, can explain the problem. When buying, you have a vast universe of opportunities. When selling, your universe is limited only to those stocks that you have already decided, at some point in the past, that it was a good idea to buy. That raises a battalion of psychological issues.

Selling might mean admitting a mistake (never easy). It might mean taking profits, bidding adieu to a success or starting over again in an uncertain world. And on some occasions it might mean taking a loss. This raises the issue of loss aversion; irrationally but consistently, we find it far harder to accept a small loss than we do to take a poor but positive return.

Thus psychological hardwiring makes us far more likely to make bad mistakes when selling than when buying.

When Michael Ervolini, whose Boston-based Cabot Research has led work in the field, polled investment managers on their selling procedures, he found that 81 per cent relied substantially on judgment, while only 29 per cent claimed to be “highly disciplined” or driven by objective criteria. While many managers judged themselves by the overall performance of their portfolio, only 16 per cent made any specific attempt to gauge whether they had sold at the right time.

Merely tightening up on sales discipline and taking some basic steps to avoid the main psychological traps – such as flashing up specific quantified warnings on trading screens whenever traders sell – could, according to Cabot, raise excess returns by a percentage point.

Beyond psychology, there are institutional reasons why analysts do a better job recommending buys than sells. Fascinating new research by Man Group shows that analysts’ “buy” recommendations often have a positive effect on returns (and that the more experienced an analyst, the more positive the effect, demonstrating perhaps both their greater knowledge and the greater influence they will have over the market).

But experience is actually a negative when it comes to recommending “sells”. In all cases, a stock will fall initially on a “sell” notice, simply because investors take heed of the analyst. But after that, as the chart shows, the story is mixed. After “sell” notes by analysts in the job for more than 10 years, the stock tends to trade well above where it was in the first place, within 100 trading days. When analysts in their first year say “sell”, stocks tend to bounce along the bottom. Nobody is good at selling, and analysts get worse at it as their careers progress.

This is because analysts face institutional constraints. Quite apart from pressure to help out in-house investment bankers, analysts need information and access. Companies dislike it when an analyst recommends selling their stock, and so they are less likely to return their calls. Over time, subtly and unsubtly, analysts get captured by the companies they cover.

Sandy Rattray of Man, who conducted the research, says: “Analysts are essentially useless at ‘sell’ recommendations. And we’ve generally found that when people are better at ‘buys’, they tend to be worse at ‘sells’ – it applies across the board.”

All of this is surprising because, with the growth of hedge funds, it is ever easier to sell short – borrow a stock and then sell it, creating a profit if it can subsequently be bought back at a lower price. The universe of potential shorts is as big as the universe of longs.

But still analysts, and sophisticated hedge fund managers, find it much easier to come up with good ideas for buying than for selling. Various popular hedge fund strategies require each long position to be paired with a matching short. In practice, the long positions tend to be held in individual stocks – but the short positions are merely index trackers.

Shorting requires levels of fortitude not required of buyers. Potential losses are infinite (while if you buy, the losses are capped at 100 per cent). Companies dislike short sellers trying to force down their share price, and often press back. Some of the most famous short sales were carried out against vociferous corporate opposition.

And so, despite the abundant evidence that it is the greatest weakness in the way we invest, selling discipline continues to go unexplored, and value goes begging. The prize for whoever can master the discipline of selling will be great indeed.[/img]
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Today is the Tomorrow you worried about Yesterday!