Selling Premiums On Stocks

Discussion in 'Options' started by tyrant, Nov 30, 2006.

  1. newbunch

    newbunch

    Using weekly S&P data back to 1950, I see:
    Skew -0.25
    Kurt 3.31

    BTW, where did you find daily data going back to 1900? I'd love to have that data set.
     
    #31     Nov 30, 2006
  2. Interesting discussion. I predict this going for a few more pages.

    Data mining can be very tricky when it comes to selling naked premium. If i studied 10 thousand tickers out there i am sure i could find 10 that never experienced a fat tail during a market(index) fat tail event. Then i can go ahead and call these "my market" and think i am better off selling juice in my market vs the indices. Flip that and reverse for selling index premium. The mere fact that one market("my market" or the index market) saw no fat tail or the tail wasnt as fat in the past doesnt mean it will be so in the future. False sense of security? Anyone? I suppose i am in the minority yet again. :(
     
    #32     Dec 1, 2006
  3. wayneL

    wayneL

    It doesn't matter what the actual volatility figure is in determining over or under value. 100% vol could be considered cheap if the realized volatility is 150%.

    With indexes, implied volatilities are consistently higher than realized volatilities, therefore overvalued.

    All the while IVs have been 10%, the realized vols have been 6 or 7%.

    The rub in this circumstance comes if selling at 10% and then getting a realized volatility spike.
     
    #33     Dec 1, 2006
  4. wayneL

    wayneL

    Agree,

    A good case for limited risk strategies... flies, condors etc.
     
    #34     Dec 1, 2006
  5. tyrant

    tyrant

    The argument here is not whether one should sell naked or bounded, but whether it is better to sell in index or stock options.
     
    #35     Dec 1, 2006
  6. tyrant

    tyrant

    So after taking into consideration such circumstances when selling at 10% and later realizing a much higher volatility, can you still say they are chronically overvalued? How about stock options, are they also chonically overvalued, or are they undervalued?
     
    #36     Dec 1, 2006
  7. gbos

    gbos

    I know the number sound strange but it is correct. If the data set contains some extreme events, then kurtosis is very high.

    Taking sub periods for example….

    During the 1990s , kurtosis only 4.34 (relatively quite period)
    During the 1980s , kurtosis skyrocketing to 100 (the crash data contribute a lot to it)

    etc.
     
    #37     Dec 1, 2006
  8. gbos

    gbos

    Dow quotes...
     
    #38     Dec 1, 2006
  9. Two reasons. First, currency risk. Second, I’m doing quite well trading the UK markets, so have no reason to look elsewhere. If it ain’t broke I’m not one to fix it.

    Almost exclusively selling naked premium. I know the risks involved, but do believe that if you limit exposure such that a fairly hard hit can be taken, you’ll make a good return.

    I’ve never had an option exercised against me. I won't deny an element of luck there, but I won’t be short an American option with a delta more than 0.80, neither will I be short Calls over ex-div day.

    Makes perfect sense to me.

    That Kurtosis value is more like it - slightly fatter tails than a perfectly normal distribution. I wouldn’t mind betting that if you looked at each component stock, the weighted average would be less than 3.31.

    I agree entirely. But, if you are going to trade options you have to make some assumptions based on (amongst other things) historic data. Refusing to trade in case you get hit by a 6-sigma is rather like refusing to go into your house in case it gets hit by a thunderbolt, no ?

    That sounds about right. I’m just wondering how far back in time is relevant ? 10 years ? 20 years ? Subjective !
     
    #39     Dec 1, 2006
  10. GBOS

    Thanks for that data. Any chance you could post it up in Excel format ?
     
    #40     Dec 1, 2006