Search
Generic filters
Search in excerpt

An ETF for every investor.

CASH

Horizons High Interest Savings ETF

Price
$50.03
$0.00
0.00%
NAV
$50.0050
$0.0050
0.01%

Benchmark

Fixed Income

Fact Sheet
Learn more about CASH

QQCC

Horizons NASDAQ-100 Covered Call ETF

Price
$4.71
$-0.09
-1.88%
NAV
$4.6947
$-0.0318
-0.67%

Active

Covered Call

Fact Sheet
Learn more about QQCC

HRAA

Horizons ReSolve Adaptive Asset Allocation ETF

Price
$11.13
$0.01
0.09%
NAV
$11.1590
$-0.0250
-0.22%

Active

Corporate Class – Alternative

Fact Sheet
Learn more about HRAA
Explore All Products
Search
Generic filters
Search in excerpt
Back to Media

Mark Twain Might Have Been a Great Option Trader

the-twainster-(1).jpg
 

BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

November 17, 2017

Mark Twain is attributed to having said, “I’ve known a great many worries, but most of them never happened.”  Ever since the market crash of 1987, option markets have been more inclined to price in the possibility of a severe downside sell-off by pushing up the relative prices for out-of-the money puts. 

That year, when the Dow dropped 22.6% in one day, market participants felt the pain of a multi-standard deviation move to the downside. Look at your probability bell curves and they’ll show a 68% chance of no more than a one standard deviation move, or a 99.7% chance of no more than a three standard deviation move. On Black Monday (October 19, 1987), the Dow fell by a jaw-dropping 22 standard deviations! The option trading world experienced a ‘light-bulb-over-the-head’ moment and realized that a crash down is more likely than a crash up. Hence the emergence of option skew, a pronounced elevation in out-of-the-money put values sometimes known as ‘volatility smile’ – although it’s more of a volatility smirk since the puts are more bid-up than the calls.  

But is this fear warranted? Well, as Twain alluded, most of the things that we fear may never come true. However, option markets price-in fear and it can therefore be monetized. What an amazing thing to be able to monetize event risk that in a sense doesn’t materialize most of the time! This has led to a consistent profitability in selling downside skew. From 1988 to 2014, the CBOE’s PUT Index (which actually sells closer to the money strikes on a monthly basis) had outperformed the S&P 500 Total Return Index by about 0.4% annualized but has experienced less volatility (roughly 12% daily realized volatility versus 18% for the S&P 500, or 30% lower than the underlying market’s volatility). In the observed 26 years, the Dow was up 860% – selling fear properly can indeed pay. Right now, S&P 500 skew is as high as we’ve seen it for some time. Smile at the opportunity.

 mark-twain-3.JPG

Source: LivevolCore, as at October 25, 2017.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
 

Get Horizons insights in your inbox

Please select whether you are an…*
* Indicates required field

Related Posts

At Horizons ETFs, we believe in education as empowerment. We endeavor to equip Canadian investors with the knowledge and tools they need to navigate the investing world. From the ETF basics to more complex topics like how our suite of inverse and leveraged funds work, our comprehensive learning library aims to be accessible for all investors, from beginners to experienced traders!