Index

1. 1x2 ratio spreads

see also butterflies; ratio spreads

1. 25 and 10 delta puts strategy
2. 36 South
3. 60/40 stocks/bonds portfolio mix
4. 665 puts
5. academic ideas, critique
6. active fund managers

see also fund managers

1. advance/decline ratios
2. ‘aftershock’ hedges, butterflies
3. ‘air pocket’ declines
4. airplane ticket trade
5. alpha

definition

1. ambulance-style strategies
2. American options
3. Animal Farm (Orwell)
4. ‘Anti-Fragile’ trades
5. Apple
6. arbitrage
7. arrogance dangers
8. Asness, Cliff
9. asset allocations
10. asset managers
11. astronomy
12. ‘asymptotics’
13. at-the-money options (ATMs)

definition

1. Australian Dollar (AUD)
2. Austrian capital markets
3. autoregressive models

see also GARCH. . .

1. back-tests

cautionary note

1. backwardation

see also futures; long-dated contracts; short-dated contracts definition

1. bad news
2. ‘bad’ options
3. balance sheets, central banks
4. bandwagons
5. bankruptcies

see also liquidations

1. banks

see also central. . .; LIBOR; loans collateral credit supply increases crises critique failures ‘great multiplier’ status multiplier effect profits runs

1. barbell approaches
2. Barclays CTA indices
3. BARRA model
4. barrier options
5. basis points
6. ‘Batman’ trades

see also gamma; ratio spreads

1. bear markets

claws of the bear put options

1. bear strategies
2. behavioural finance

see also crowding problems

1. ‘being able to sleep at night’ principle
2. ‘bell curves’

see also normal distributions

1. Berlin Wall
2. beta

see also stock indices definition

1. biases
2. bid ask spreads
3. binary options
4. binary VIX-derived risk index
5. binomial model
6. Black 76 pricing formula
7. Black Monday fluctuations on October 19 1987
8. black swans

see also extreme events

1. Black-Derman-Toy model
2. Black-Litterman model of 1990
3. Black-Scholes model

see also implied volatility assumptions background definition historical background parameters

1. Black-Scholes-Merton assumptions
2. bleed

see also theta (time decay) definition

1. bonds

see also corporate. . .; government. . .; high yield. . . futures hedging sovereign bond risks interest rates MOVE over-priced considerations premia stock return contrasts yield curves

1. bonuses
2. Brazil
3. breakouts, definition
4. bubbles

see also bull markets; speculators

1. bull markets

see also bubbles

1. butterflies

see also fixed-width. . .; iron. . .; put flies; ratio spreads definition

1. ‘buy high and sell higher’ mantra
2. ‘buy low and sell high’ mantra
3. ‘buy-write’ strategy see covered call writing
4. buying time, weekly options
5. calendar spreads
6. call options

building blocks bull markets definition put-call parity spread trades uses options

1. call ratio spreads
2. call spreads on bond futures
3. calm periods, rationalisations
4. CAPE ratio
5. Capital Asset Pricing Model (CAPM)

definition

1. Carlson, Mark A.
2. carry trade strategies see FX carry trade strategies
3. cascades, market sell-offs
4. cash
5. CBOE
6. central banks

see also banks balance sheets critique monetary policy quantitative easing (QE) rescue packages roles

1. CFTC
2. chameleon Bund skew
3. chaos theory
4. chasing 1-day moves, trend following
5. Chicago Mercantile Exchange (CME)
6. China
7. Choudhry, M.
8. claws of the bear
9. collapse point theory
10. collateral

see also equities; real estate

1. commercial paper
2. commodities

see also individual commodities

1. Commodity Trading Advisors (CTAs)
2. common mistakes
3. computers, critique
4. Conan Doyle, Arthur
5. conditional correlation

see also correlations definition

1. conditional performance of hedging strategies
2. constant maturity bonds, definition
3. contagion
4. contango

see also forward curves; futures; long-dated contracts; short-dated contracts definition

1. continuous return distributions
2. contrarian strategies
3. convertible bonds
4. convexity
5. corporate bonds

see also bonds

1. corporate events
2. correlations

see also implied. . . black swans definitions implied volatility skew impacts liquidity US equity/bond volatilities volatility indices

1. cost of carry
2. cotton
3. counter-cyclical approaches
4. counterparty credit risk
5. covariance matrix

see also correlations; volatilities

1. covered call writing, definition
2. CPI inflation
3. crashes

see also crises; ‘Flash Crashes’

1. credit cycles
2. credit default swaps
3. credit derivatives
4. credit risk
5. credit spreads
6. credit supply increases
7. crises

see also crashes; European. . .; extreme events; global financial. . .; market drops; portfolio insurance. . .; systemic risks banks cascades fireflies impact curves lessons learned LIBOR mathematical biology analogy May 2010 monetary policy negative feedback loops panicking investors paths policy control strategies pre-conditions preceding down days predictions quantitative easing (QE) reasons Sornette’s claim summary and conclusion

1. ‘crisis alpha’ strategies

books definition market timing trend following

1. cross-sectional study, roll yield
2. Crossborder Capital
3. crowding problems

see also behavioural finance

1. CTA indices, trend following
2. currencies

AUD/JPY CHF/EUR CVIX EUR/CHF EUR/USD GBP/USD pegs USD/JPY

1. currency options

see also FX. . .

1. currency risks
2. customised trend following
3. ‘cutting their losses and letting their profits run’ policies
4. CVIX
5. data tabulations, critique
6. DAX
7. defaults
8. defensive strategies, trend following
9. deflation
10. deformable sheets
11. deleveraging
12. delta

see also gamma; spot. . .; underlying. . . definition

1. delta calls
2. delta hedging

see also dynamic aspects of hedging critique definition idealised case practical limits

1. delta neutrality

imbalance considerations

1. delta puts
2. deposits
3. Derman, E.
4. diffusion-type equations

see also Black-Scholes model

1. direct lending, definition
2. discrete price trees
3. dispersion, definition
4. diversification

across time critique

1. dividends, r-d factors
2. do Prado paper (2013)
3. doomsday bets
4. Dow Jones Industrial Average
5. ‘dragon kings’ outliers
6. drift
7. Druckenmiller, Stanley
8. duration hedging
9. dynamic aspects of hedging

see also delta hedging

1. earnings reports, corporate events
2. economic growth
3. ‘econophysics’
4. emerging markets
5. energies
6. Enron
7. equities

see also stock. . .;

1. equity index options
2. equity risk premiums
3. Euro (EUR)
4. European Central Bank (ECB)
5. European Crisis of 2011
6. European options

see also options

1. Eurostoxx
2. Everest Capital
3. ‘every dog has its day’ saying
4. exercise, options theory
5. ‘extreme event hedging’ books
6. extreme events

see also crises; ‘Flash Crashes’; market drops; random shocks holistic approaches macro perspectives predictions probabilities random walks Sornette’s claim summary and conclusion

1. failures

see also crises banks

1. ‘fair value’ arguments

losing positions

1. Farmer’s Oxford group
2. fat tails

‘dragon kings’ outliers short-dated options

1. Fed Funds rate
2. Federal Reserve Bank
3. fees
4. fireflies
5. fixed-width put flies
6. ‘Flash Crashes’

see also crises; extreme events background definition summary and conclusion

1. flex features
2. ‘flight to quality’ scenarios
3. floors
4. ‘flow’ traders
5. forecasts see predictions
6. forward curves
7. forwards

see also FX carry trade strategies

1. France
2. French capital markets
3. FTSE 100 index
4. fund managers

see also portfolio managers

1. fundamental analysis
2. futures

see also backwardation; contango; interest rate. . .; portfolio insurance; roll yield bonds definitions options on futures uses versus spot

1. futures term structure

definition

1. FX carry trade strategies

see also currency. . .; forwards

1. Gaddis, William, Jr
2. gambling tactics
3. gamma

see also delta; short-dated options definition

1. gap risks
2. GARCH type econometric forecast volatility models
3. Gaussian distributions see normal distributions
4. GBP
5. GDP
6. gearing
7. German Bund
8. German capital markets
9. Germany
10. global financial crisis from 2007

beta causes central bank rescue packages toxic stocks

1. glossary
2. gold
3. Goldman Sachs
4. Gopikrishnan, P.
5. government bonds
6. ‘gray swan’ hedges, call spreads on bond futures
7. Great Depression-type scenarios
8. ‘great multiplier’ status, banks
9. Greece
10. greed/fear vulnerabilities, options
11. the Greeks

see also beta; delta; gamma; rho; theta; vega definition

1. Greenspan, Alan
2. GVIX indices
3. hanging-on approaches, losing positions
4. Haug, E.G.
5. hedge funds

definition failures

1. hedging

see also delta. . . common mistakes conditional performance of hedging strategies costs dynamic aspects implausible scenarios imprecise but effective hedges market drops negative risk premiums over/under-hedging considerations overlay strategies rationalisations risk-regime analysis sad truths sceptics small moves ‘sombrero’ strategy sovereign bond risks ‘square root’ strategy strategies summary time scales the wings zugzwang chess situation

1. hedging options with other options
2. Henriksson-Merton model
3. heuristic arguments
4. ‘high risk’ scenarios
5. high volatility
6. high yield bonds
7. high-frequency finance
8. historical volatility

see also realised. . .; volatilities

1. hockey stick payouts
2. holistic approaches, extreme events
3. ‘hope is not an investment strategy’ philosophies, losing positions
4. Hurst exponent
5. Hussman, John
6. hyper-inflation
7. hypothesis tests, model contrasts
8. impact curves
9. implausible scenarios, hedging
10. implied correlation
11. implied correlation skew
12. implied distributions
13. implied volatilities

see also Black-Scholes model; insurance; options ATM implied volatility determinants long-dated options over-priced considerations

1. implied volatility indices

see also CVIX; MOVE; V2X; VIX

1. implied volatility skew

definition risky asset dynamics

1. implied volatility smiles
2. implied volatility surfaces
3. implied-historical volatility spreads
4. imprecise but effective hedges
5. in-the-money options (ITMs)
6. incentive structures, hedge funds
7. index put spreads
8. indirect hedges
9. inflation rates
10. institutional investors

see also investors; pension funds

1. insurance

see also hedging; implied volatilities; options costs over-priced aspects portfolio insurance crisis of 1987 selling philosophies summary and conclusions

1. interest rate futures
2. interest rate options
3. interest rate risk
4. interest rates

see also LIBOR; rho

1. interpolated implied volatilities
2. intrinsic values of options, definition
3. intuition
4. ‘inverse problem’
5. investment clock concepts
6. investors

see also institutional. . . perceptions

1. IPOs
2. iron (centred) flies
3. iShares MSCI Brazil ETF
4. ‘it looks good at, looks great at, looks absolutely fantastic at 70 and you’re out of business at 60’ saying
5. Jacobs, Bruce
6. Japan
7. Japanese Government Bond (JGB)
8. Japanese Yen (JPY)
9. Johnson & Johnson
10. Journal of Political Economy
11. jumps
12. Kelly’s criterion
13. knock options
14. kurtosis of returns
15. ladders
16. latent risk
17. law of large numbers
18. lazy sod approaches
19. Lefèvre, Edwin
20. leg downs
21. ‘LEGO’ trend following
22. Lehman Brothers
23. Leland, O’Brien, Rubinstein portfolio insurance strategy (LOR)
24. lessons learned, crises
25. Letters to a Young Poet (Rilke)
26. leverage

see also gearing; liquidity

1. LIBOR
2. ‘line item’ approaches
3. liquidations
4. liquidity
5. loans

see also banks

1. ‘log log’ plots
2. long calls strategy
3. long gamma strategies
4. long options
5. long positions
6. long puts
7. long volatility managers

see also trend following

1. long-dated contracts
2. long-dated options

background definition implied volatilities investment clock concepts r-d factors underpriced evidence uses vega

1. lookback windows
2. losing positions

‘fair value’ arguments hanging-on approaches shorting considerations

1. lottery-ticket weekly option approaches
2. low volatility
3. macro perspectives, extreme events
4. MACs see moving average crossover systems
5. Malek’s risk index
6. Mandelbrot, B.
7. margin calls
8. marginal risks
9. mark-to-market factors
10. market capitalisation weights
11. market drops

background contrarian strategies equity risk premium hedging index put spreads mean reversion ‘oversold’ assets remarkable second moment selling VIX upside summary Texas-style hedging trading reversals vicious reversals VIX

1. market makers
2. market risks

see also systemic risks

1. market sell-offs

see also crises; extreme events; market drops cascades impact curves risk premia

1. market timing, ‘crisis alpha’ strategies
2. markets

see also bear. . .; bull. . .; market drops CAPE ratio definition major countries risk-on/risk-off phases

1. Markowitz portfolio theory
2. mathematical biology analogy, ‘Flash Crashes’
3. the Matterhorn
4. maturity dates
5. Maxwell’s equations
6. mean reversion

see also VIX definition volatilities

1. means

see also normal distributions

1. medium-term options
2. ‘melt ups’
3. mergers
4. Merton’s approach to options pricing
5. meteorology
6. Mexican Peso
7. middle strike, butterflies
8. model-independent considerations, VIX
9. models

see also individual models hypothesis testing contrasts standard risk models

1. modern portfolio theory
2. momentum-based systems see trend following
3. monetary policy
4. monetised profits

see also taking profits

1. money supply
2. money-ness concepts

see also at-the. . .; in-the. . .; out-of-the. . . definition

1. Monte Carlo simulations
2. mortgage-backed securities (MBSs)
3. MOVE
4. moving average crossover systems (MACs)
5. moving averages

see also Z scores

1. ‘Mrs Watanabe trade’
2. MSCI World index
3. multi-asset class investors
4. multiples
5. multiplier effect, banks
6. naked puts, ‘sombrero’ performance
7. NASDAQ
8. natural gas
9. negative feedback loops, crises
10. negative risk premiums, hedging
11. net asset values (NAVs)
12. New York and Erie Railroad Company
13. Newton’s laws of motion
14. Niederhoffer, Victor
15. Nikkei
16. noise
17. non-centred flies

see also butterflies

1. non-diversifiable risks

see also systemic risks

1. normal distributions

critique definition

1. NYSE
2. oil
3. ‘Old Turkey’
4. Olsen, Richard
5. opportunities, volatilities
6. option chains
7. options

see also American. . .; call. . .; currency. . .; equity index. . .; European. . .; Greeks; implied volatilities; insurance; interest rate. . .; put. . .; straddles; strangles; VIX and 10 delta puts strategy back-tests building blocks costs definitions deformable sheets greed/fear vulnerabilities historical background intrinsic values of options ladders pricing ratio spreads replication approaches short-dated options strategies structures summary theory uses options weekly options

1. options on bonds
2. options on futures
3. oranges
4. orderly behaviour, liquidations
5. out-of-the-money options (OTMs)

definition

1. over-buying options strategies
2. over-priced considerations
3. overconfidence dangers
4. overfitting pitfalls
5. overlay strategies, hedging
6. ‘oversold’ assets, market drops
7. overview of the book
8. overwriting strategies
9. panicking investors
10. Parkinson’s volatility estimate formulae
11. partial differential equations

see also Black-Scholes model

1. paths, crises
2. pattern recognition techniques

see also trend following

1. payouts

see also profits

1. pegs, currencies
2. pension funds
3. People’s Bank of China (PBoC)
4. performance charts, payout curves
5. persistence, risk regimes
6. perturbation analysis
7. physicists
8. piecewise linear functions
9. plain vanilla options, definition
10. plans
11. plausible losses
12. plumbers
13. policy control strategies, crises
14. Ponzi schemes
15. portfolio insurance

see also insurance; risk parity strategies definition

1. portfolio insurance crisis of 1987

background lessons learned

1. portfolio managers

see also fund managers 60/40 stocks/bonds portfolio mix Markowitz portfolio theory standard risk models taking advantage of corrections Texas-style hedging

1. Portugal
2. positive feedback loops
3. power law distributions
4. Powerball tickets of the hedging world
5. prayer
6. pre-conditions, crises
7. predictions

background summary and conclusion

1. premiums, options theory
2. price to earnings ratios (P/Es)
3. prices of assets, returns
4. pricing

see also Black. . . options volatilities

1. probabilities, extreme events
2. profits

see also payouts banks insurance taking profits

1. purchasing power parity (PPP)
2. put flies
3. put options

and 10 delta puts strategy puts bear markets building blocks definition spread trades uses values

1. put ratio spreads
2. put spreads
3. put-call parity
4. quadratic regression
5. ‘quant crisis’ of August 2007
6. quantitative easing (QE)
7. quantitative investment conferences
8. r-d factors, long-dated options
9. R-squared of the regression
10. random shocks

see also extreme events

1. random walks

extreme events

1. randomly weighted portfolios, performance comparisons
2. ratio spreads

see also ‘Batman’ trades; butterflies; ladders 1x2 ratio spreads and 10 delta puts strategy background definition Powerball tickets of the hedging world

1. rational decisions
2. ratios

see also CAPE. . .; Sharpe. . .; spread. . .

1. reactive strategies
2. real estate
3. realised volatility

see also historical. . .; volatilities critique

1. rebalancing strategies
2. regrets
3. regulators
4. relative-value hedges
5. Reminiscences of a Stock Operator (Lefèvre)
6. replication approaches
7. repricing of risk

definition

1. repurchase loans (repos)
2. returns

see also alpha bonds/stocks contrasts CAPE ratio inflation rates market comparisons normal distributions prices of assets remarkable second moment risk-adjusted returns sequences trend following

1. reversals
2. rho

see also interest rates definition

1. risk

see also volatilities background what others are holding what others are likely to do

1. risk committees
2. risk management

see also hedging summary traditional risk management limitations trend following zugzwang chess situation

1. risk parity strategies

see also portfolio insurance

1. risk premia, market sell-offs
2. risk reversal option structure (RRs)
3. risk-adjusted returns
4. risk-free rates
5. risk-on/risk-off phases, markets
6. risk-regime analysis, hedging
7. risky assets

see also stock indices definition

1. roll down impacts
2. roll yield

see also futures cross-sectional study definition VIX

1. rolling options
2. rotation strategies
3. Rothard’s views on banks
4. runs on banks
5. Russian capital markets
6. S&P 500 (SPX)

put ratio spreads VIX

1. sad truths
2. ‘safe’ havens

fallacy

1. sceptics, hedging
2. schadenfreude
3. schizophrenic investors
4. Scholes, Myron

see also Black-Scholes model

1. SEC
2. second leg down concept

see also VIX. . . background

1. selection bias
2. selling philosophies, insurance
3. settlements, options theory
4. Seykota, Ed
5. shadow banks
6. Shanghai Composite Index
7. Sharpe ratio

see also risk-adjusted returns; volatilities definition

1. short futures, long calls strategy
2. short gamma strategies
3. short options
4. short positions
5. short volatility strategies
6. short-dated contracts
7. short-dated options

see also gamma background definition fat tails uses vega

1. short-dated puts
2. short-term trades
3. signal to noise ratios

see also trend following

1. singularities
2. skewness concepts
3. skills’ needs
4. small moves, hedging
5. solipsism strategies
6. ‘sombrero’ strategy

see also ratio spreads

1. Sornette’s claim, crises
2. Soros, George
3. sovereign bonds

see also bonds hedging sovereign bond risks

1. soybeans
2. speculators

see also bubbles

1. spot prices

see also underlying. . . futures versus spot options theory

1. spot VIX

see also VIX

1. spread trades

definition

1. ‘square root’ strategy
2. standard deviations

see also normal distributions Z scores

1. Stanley Group at Boston University
2. static options hedges
3. ‘stationary’ processes
4. statistical methods, critique
5. step function, yield curves
6. stochastic calculus
7. stock indices

see also equities bond return contrasts construction methods implied correlation skew volatility of the components weightings

1. ‘stocks go up in the long term’ bulls
2. ‘stocks for the long run’ crowd
3. stop losses
4. storage costs
5. straddles

definition

1. strangles

definition

1. strikes

definition

1. Strogatz, Steven
2. survival tactics
3. ‘sweet spot’ lines
4. Swiss Franc (CHF)
5. Swiss National Bank (SNB)
6. Switzerland
7. SX5E
8. systematic trading strategies
9. systemic risks

see also crises; market risks; non-diversifiable risks increases

1. systems, critique
2. ‘tail risk protection’
3. taking profits

see also monetised profits

1. Taleb, N.
2. taxes
3. term structure of interest rates, trend following
4. term structure of volatility

definition

1. Texas-style hedging
2. ‘there are old traders and there are bold traders, but there are no old bold traders’ saying
3. theta (time decay)

see also bleed background definition vega/theta ratio

1. ‘this time it’s different’ rationalisations
2. time decay

see also theta. . . background

1. ‘time is on your side’ saying
2. ‘time in the market is more important than timing in the market’ saying
3. time series, liquidity
4. toxic stocks, global financial crisis from 2007
5. ‘trading the coastline’
6. transaction costs, market drops
7. trend following xi

advantages background xi chasing 1-day moves contrarian strategies ‘crisis alpha’ strategies critique CTA indices customised trend following 143 definition direct data analysis diversification across time dogma downside hedges high volatility ‘LEGO’ trend following long options analogy market timing Niederhoffer argument returns signal to noise ratios summary taking advantage of corrections term structure of interest rates uses volatilities

1. Treynor-Black model
2. ‘true’ returns
3. TVIX
4. Twain, Mark
5. Tyson, Mike
6. UCITS funds
7. UK

capital markets GBP government bonds

1. unbounded risk
2. underlying prices

see also spot. . .

1. US capital markets, successes
2. US Dollar (USD)
3. US Federal Reserve Bank
4. US M2 money supply
5. US Savings and Loans crisis in 1991
6. US Treasuries
7. USO
8. utility functions
9. V2X
10. Value-at-Risk (VaR)
11. values

see also pricing call options put options

1. variable delta puts
2. variance concepts
3. variance swaps

see also VIX

1. variance-covariance matrix approach
2. vega

see also volatilities definition long-dated options short-dated options vega/theta ratio

1. venture capital
2. vertical spreads

see also spread trades definition

1. Viniar, David
2. VIX

see also volatility indices background calculation methods critique definition futures term structure market drops model-independent considerations oasis-or-mirage analysis risk-regime analysis roll yield S&P 500 (SPX) uses

1. VIX 25 delta calls
2. VIX futures
3. VIX options
4. VIX puts, market drops
5. volatilities

see also high. . .; implied. . .; risk. . .; vega buying outright volatility credit cycles definitions equity index components GARCH type econometric forecast volatility models leverage mean reversion opportunities prices of options term structure of volatility trend following

1. volatility cycles, credit cycles
2. volatility indices 5

see also CVIX; MOVE; V2X; VIX correlations Z scores

1. volatility of returns, definition
2. volatility smiles
3. volatility surfaces

see also wings

1. volga

see also implied volatility; vega definition

1. volumes, strategy considerations
2. VSTOXX index
3. VXX

see also futures; VIX. . .

1. Wall Street Journal
2. warrants
3. weekly options

buying time contagion effects costs selective applications of the strategy uses

1. weightings, stock indices
2. West Texas Intermediate (WTI)
3. Wilmott, P.
4. win/loss ratios, trend following dogma
5. the wings

see also volatility surfaces definition

1. yield curves

backwardation bond prices futures term structure shapes step function

1. yield-enhancing weekly option approaches
2. Z scores

see also moving averages definition

1. zero coupon bonds
2. zugzwang chess situation