Alpha Exchange
25 Sayings on Vol and Risk…Part 1 of 5
Jan 31, 2024
In this podcast, the speaker discusses the current state of market risk and shares a list of 25 sayings on vol and risk. They explore the importance of big moves in option trading, analyze S&P movements and their impact on investor psychology, discuss long volatility vs short volatility, and examine the impact of trades on market risk.
26:52
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Quick takeaways
- Large moves in underlying assets have a significant impact on the profitability of options trades due to the convexity effect of options.
- Theta is the rent paid on Gamma in option trading, and high levels of Gamma also come with a high cost of Theta decay, especially in short-dated options close to the money.
Deep dives
Main Ideas/Key Points/Insights 1: The impact of big moves on option trades
One of the main ideas explored in the podcast is the significance of large moves in determining the profitability of option trades. The podcast highlights that options are convex instruments and that substantial one-day percent moves have a significant impact on profit and loss (P&L). It is emphasized that when changes in the underlying asset are small, the convexity effect of options is not of great consequence. However, when there are substantially large moves, this convexity effect becomes crucial. The podcast presents the example of the S&P in 2023, where there were very limited significant moves, resulting in low realized volatility and a decline in the VIX.
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