Friday, May 26, 2017

Volatility and options

Matt Levine doing his Bloomberg column on supposed volatility fixing.   What is the range of likely stock price bets coming up in he near future.  The estimated price variation is volatility.  The estimate price variation  compared to an estimate single price gives us the risk, pricing risk for a given stock.  But future price variation can be traded, it is a priceable sequence.  If we are betting on future prices, then we can buy future volatility to hedge out price. The effect is to limit price variation, over all, as if the market manipulates VIX, which it does.

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We talked on Wednesday about the CBOE Volatility Index, the VIX, which is an index of implied volatility based on S&P 500 Index stock options. The VIX is used as the reference for VIX futures and options, and we discussed a paper by John Griffin and Amin Shams of the University of Texas arguing that a monthly auction for the S&P 500 options is manipulated to influence the price of the VIX and the settlement prices of VIX derivatives.

The sandbox has already decomposed volatility via auto trading. It cannot be realized as a supply chain product which is what the current system does.  That is bad, creating a supply chain for paper trading, paper is to liquid to follow established queues for  long.

Indices and their products are hard to trade in the sand box as the individual components will break out as subtrades, and the index becomes permanently hedged. This is what is happening to the VIX trade.

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