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For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. Ignoring compounding effects, this would indicate returns from approximately negative 3% to positive 17% most of the time (19 times out of 20, or 95% via a two standard deviation rule).
The price of this option is influenced by multiple factors, including the stock’s current price, the option’s strike price, time to expiration and implied volatility. If the market expects a ...
When trading stocks or stock options, there are certain indicators you may use to track price momentum. Implied volatility, which measures how likely a security’s price is to change, can be ...
The underlying is usually a financial instrument with an active or liquid options market, such as foreign exchange, stock indices, or single stocks. Unlike an investment in options, whose volatility exposure is contaminated by its price dependence, these swaps provide pure exposure to volatility alone.
Comparison of asset and risk allocations. Risk parity is a conceptual approach to investing which attempts to provide a lower risk and lower fee alternative to the traditional portfolio allocation of 60% in shares and 40% bonds which carries 90% of its risk in the stock portion of the portfolio (see illustration).
Some energy stocks, in fact, can protect you from volatile commodity prices to a large extent and earn you solid returns over time. Case in point: Enterprise Products Partners.
It consists of adjusting the Black–Scholes theoretical value (BSTV) by the cost of a portfolio which hedges three main risks associated to the volatility of the option: the Vega, the Vanna and the Volga. The Vanna is the sensitivity of the Vega with respect to a change in the spot FX rate:
It is debatable whether the hedge was effective from a market risk standpoint, but it was the liquidity crisis caused by staggering margin calls on the futures that forced Metallgesellschaft to unwind the positions. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks.