- Introduction: Where’s a Bear to Hide
- A Simple Solution
- Too Much on the Table – The Core Correction
- Conclusion: Defensive Model Debut
- Appendix: Avoiding Intuition
Introduction: Where’s a Bear to Hide?
Educated investors have been opining about the many problems with the stock market for some time. The criticisms range from corporate profit margins being meaningfully above the historical average, the unsustainable behavior of central bankers, worries about the impact of a Europe that seems intent on unraveling, to the possibility that Chinese capital allocation may have been, at times, imperfect. As we noted in our paper on low volatility, investors have responded to these worries by embracing an entire class of low volatility products despite payoff structures that, in our mind, appear suboptimal relative to their own history. Similarly, a cursory look at the options market seems to tell a story of bear trading strategies. The net cost of implementing a 10% S&P collar currently approximates 3.5% per annum, an awfully high hurdle to overcome for all but the most committed of bears.1
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Considering the cost of this insurance, we believe it is worth remembering that implied volatilities are achieved less often than hedgers might hope.
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August 12, 2013 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
August 12, 2013
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin