Friday, February 29, 2008

Volatility Trap


I am looking for prior research on a volatility trap. A trading strategy, which can be used to trap volatility. If there, any citations please let me know.

Best Regards, Suminda Sirinath Salpitikorala Dharmasena

P.S. Currently I am looking on how manipulate the Greeks, especially delta and implied volatility to get this effect which minimizing cost of implementing such scheme with the minimum monitory cost. - S.S.S.D.

P.P.S. This is linked to my previous post:

Volatility Trading


There are strategies, which use volatility like straddles. I am wondering if there are any published items where on strategies which try to capture volatility over a period by readjusting the positions.

Best regards, Suminda Sirinath Salpitikorala Dharmasena

P.S. I am not looking a delta neutral stratergy or a market neutral stratergy.

Tuesday, February 19, 2008

Beta Coefficient

Hi All,

I have been thinking about Beta Coefficient. Currently Beta’s is calculated in numerous ways as in CAPM. But I feel this mode of calculating beta may be flawed since the upside and downside volatilities differ. My opinion is that this should be calculated by regressing using the upside returns and down side return separately, i.e., my feeling is that the regression using upward returns and downward returns would be different. A stocks exposure to the market would be different in the upward movement and downward movement. Some stocks may react differently on downward movements than upward movements of the market, especially glamour, tech and growth stocks.

Any comments folks?

Best regards, Suminda Sirinath Salpitkorala Dharmasena

Asset Price: Random Walk?

Hi All,

Stock prices are generally held to be a random walk. But I have being thinking how is this possible since for a very old company, any information that was factored in about 50 years ago would hold the same weight. My thought is that this information will have a lesser weight as time progresses. This would imply that asset prices would have some serial correlation. To add more to this, daily data may appear as following a random walk since there is a lot of information which are factored in. If the sampling frequency is increased to say tick by tick data then returns may have some correlation.

What are your comments?

Suminda Sirinath Salpitikorala Dharmasena

Buyer's Option Price in the Prescence of Secondary Markets

Hi All,

I am currently studying derivatives and trying to improve my understanding on them. I have being thinking about the value of an option. This has two sides of it as I see it: 1) the writer's perspective and 2) buyers perspective.

Option pricing, what ever pricing formular used, takes into account the probability adjusted cash out flow of writing an option on expiration of exercising.

Since the option can be sold in the secondary market from the buyers perspective he has the chance of altering the expected cash inflow buy selling it. I have a feeling that this can be worked out by double integrating the option pricing formula used across the distribution of price over the life of the options. This expected value may be different from the option price.
Any comments on this? If you can direct me to online literature on similar thoughts I would be very happy.

Suminda Sirinath Salpitikorala Dharmasena

P.S. due to secondary markets the writer can also close his position early by buying back the option - S.S.S.D.