| | | Hi Don,
with the implied volatility of options being so low, you have market operators who are using put options, the volatility etf's, volatilty futures and Over the Counter products designed by banks and financial firms to give them downside some inexpensive downside protection of a portfolio's of to use a Finance term "risk assets" including equities, ETF's, high yield debt, bank loans, stock index futures other exchange traded futures and an ocean of other derivatives.
Professional option book makers buy implied volatility when it's low and sell when it's high. They also tend to couple that with delta neutral hedging where they are selling and buying combinations of Options to offset traders who are making outright directional bets on a given stock, stock index, currency, bond etc. And THERE ARE plenty of people, hedge funds and institutions that are doing THAT.
Jim Cramer used to talk about stocks getting pinned to a strike price.what he was talking about was the delta neutral option writing where the options writer could buy or sell stock in the correct ratio of the cost of selling the puts and calls and the option market makers are indifferent to the price movement of what they are hedging.
I knew a quite nifty guy who worked on the FX options desk at Chemical Bank... which bought Manny Hanny, then bought Chase Manhattan and then rolled it up with JP Morgan .
I was in an options breakout session with him and in about 30 minutes he could explain very effectively how delta neutral hedging works and why the spots currency dealers where always going to the options desk and asking where the currency futures / (which also meant where the spot currency ) would close at the time of options expiration. The point of departure in the discussion is to understand what ratio writing is...and we have to realize that AI computers really squeeze the arbitrage aspects out of options where ever there is sufficient depth in the market.
That is a key reason why implied volatility has trended lower over the course of time, to my understanding.
interestingly, way out of the money options are occasionally under priced... we'll see the VIX over 15 within the next 21 trading days..... a 92.7% confidence interval, I am told.
I was never very conversant in Mathematical proof theorems myself -g-
Hope that helps a little,
John |
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