options: huge potential benefits but challenges · options: huge potential benefits but challenges...
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 11
Options: Huge Potential Benefits but Challenges
Used correctly options dramatically improve alpha and reduce risk
But even identifying the input parameters may seem daunting…
How do we model distributions?
Once we do, what’s the best strategy?
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 22
Most of our inputs for strategy should already be known…
Optimal Strategy
Current Position(s)
Payout Objectives
Capital and Risk
Constraints
Interest Rates and Dividends
Live and Historic
Market DataVolatility and
Liquidity Analytics
Research
Trade Alerts and Signals
Investment Thesis
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 33
The expected distribution may differ from the implied……and therefore presents an opportunity.
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 44
Differences still hold true for indices…5 Year histogram of SPY versus implied…
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 55
Where does volatility come from? (or when)Twitter volatility is mostly earnings related.
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 66
DIS Example Tactical Strategy, Meets, Beats or Misses?
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 77
A “normal” view…
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 88
Example Tactical Strategy: Research creates a directional thesis
Prediction Focus: Performance around Earnings Announcement
Your analysis informs an expected distribution…
2Q2015 Disney Earnings Trade
Earnings Price Move Std Dev Weight
In line -8% 21% 0.52
Disappoints -11% 40% 0.24
Beats +9% 25% 0.24
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 99
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 1010
A non-volatility trade suited to the weighted distribution.This incorporates slippage assumptions…
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© 2016 Tradelegs LLC. All rights reserved. Tradelegs ConfidentialTradelegs Intro.2016v1 1111
Disney Example Tactical Strategy:
Prediction
Optimized Strategy
Reference Strategy
P&L of Optimized vs Reference
2Q2015 Disney Earnings Trade
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The strategy selection technique can be applied generally.
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Matches or beats under most circumstances…