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O ptions and asset management

O ptions and asset management. 17 november 2010. Options play a central role in modern asset management. Provide important info Level of risk aversion Dispersion Related markets ( credits ) Hedging Single-name , portfolios Delta, gamma, vega , theta Expressing investment views

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O ptions and asset management

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  1. Options and asset management 17 november 2010

  2. Options play a central role in modern asset management Provide important info Level of risk aversion Dispersion Related markets (credits) Hedging Single-name, portfolios Delta, gamma, vega, theta Expressing investment views Covered callstrategies Collecting option premias (Insurance company approach) Boosting upside by using dividends to buyingcalls and so on…

  3. ImpliedvolatilityversuspriceS&P500 Vol is negative correlated to price Before the dotcomcrises and credit crises the relationshipinversed The level of correlation provides important information to markets participants Earlycyclestrategy: Sell options Late cyclestrategy: Buy options

  4. Impliedvolversusimpliedcorrelation S&P500 Averagecorrelation of the stocks comprising S&P500 using index options and options of the 50 largest stocks in the index Impliedvol is positivelycorrelated to impliedcorrelation Strategy September 2010: Shortcorrelation and longvol Add exposure index instead of single stocks whencorrelation is high

  5. Put-callspreadversusimpliedvol (atm) S&P500 Put-callspread is calculated at delta 10% (blueline) Spread is putvol minus callvol Red line is atmimpliedvol Put-callspread is positivelycorrelated to atmimpliedvol Jump-riskindicator Strategy: Hedgejump-risk with putspreads

  6. Credit marketImpliedvolversus credit spreads A market evenmore sensitive to jump-risk is corporatebonds (credits) A credit is a verydeepout-of-themoneyput However, two different markets with vastely different market participants Credit market gaveearlyindication of the credit crises

  7. Credit spreadcan be computedusing option model (Merton model)Someadjustmenthave to be made Volatility of total assets Equity and debt Default point At a certain asset level the bondcease (equity = 0) Barrier option (knockout) Recoveryvalue Usuallyvalueleft for bondholders in the event of default Recoveryvaluevaries with economiccycle

  8. The case of VolvoTheoreticalspread vs acutalspread Time serie analysis Far from a perfectrelationship But gives indication of whenvaluations in equity and credit is stressed Red territory, credit is expensive and equityvol high Green territory; credit cheap and equityvollow

  9. Basic MaterialsTheoreticalspread vs acutalspread Cross-sectionalanalysis Everypointrepresent a company in the Basic Materials sector The straight linerepresent the fair valuerelationship

  10. Expressing investment viewsThe case of LCRV LCRV (Loft Credit Relative Value) is a hedgefundwhichcore investment philosophy is to collect option premias and clippingcorporatebondcoupons – Ridingtheta Sensitive to large swings in volatility Impliedvolwashigher in 2009 than 2010

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