[PDF] Option Implied Downside Risk Premiums eBook

Author : Yao Li
Publisher :
Page : 53 pages
File Size : 28,74 MB
Release : 2015
Category :
ISBN :

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This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the index options to replicate the downside risk factors and their average excess returns provide estimates of downside risk premiums. We show that all the market risk premium comes from the downside. The mimicking portfolio returns also show that most of the downside risk premium is associated with large market-level losses that are rarely observed. In contrast, investors seem to require little excess return for bearing moderate market-level losses. Therefore, the downside risk premium is largely a tail risk premium. We compare the downside risk premiums measured from stocks and the options to examine whether the risk is priced consistently across the two markets. Our evidence raises several concerns about the downside risk premium measures from the stock market. Overall, we find no robust evidence that downside risks are priced in the stock market in the same way as in the options market.

Author : Jared Woodard
Publisher : Pearson Education
Page : 49 pages
File Size : 50,15 MB
Release : 2011-02-17
Category : Business & Economics
ISBN : 0132756129

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Master the new edge in options trades: the hidden volatility risk premium that exists in options for every major asset class. One of the most exciting areas of recent financial research has been the study of how the volatility implied by option prices relates to the volatility exhibited by their underlying assets. Here, I’ll explain the concept of the volatility risk premium, present evidence for its presence in options on every major asset class, and show how to estimate, predict, and trade on it....

Author : Nikunj Kapadia
Publisher :
Page : pages
File Size : 21,22 MB
Release : 2003
Category :
ISBN :

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The research indicates that index option prices incorporate a negative volatility risk premium, thus providing a possible explanation of why Black-Scholes implied volatilities of index options on average exceed realized volatilities. This examination of the empirical implication of a market volatility risk premium on 25 individual equity options provides some new insights.While the Black-Scholes implied volatilities from individual equity options are also greater on average than historical return volatilities, the difference between them is much smaller than for the market index. Like index options, individual equity option prices embed a negative market volatility risk premium, although much smaller than for the index option - and idiosyncratic volatility does not appear to be priced.These empirical results provide a potential explanation of why buyers of individual equity options leave less money on the table than buyers of index options.

Author : Richard Lehman
Publisher : John Wiley & Sons
Page : 224 pages
File Size : 38,38 MB
Release : 2011-08-09
Category : Business & Economics
ISBN : 1118022262

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Practical option strategies for the new post-crisis financial market Traditional buy-and-hold investing has been seriously challenged in the wake of the recent financial crisis. With economic and market uncertainty at a very high level, options are still the most effective tool available for managing volatility and downside risk, yet they remain widely underutilized by individuals and investment managers. In Options for Volatile Markets, Richard Lehman and Lawrence McMillan provide you with specific strategies to lower portfolio volatility, bulletproof your portfolio against any catastrophe, and tailor your investments to the precise level of risk you are comfortable with. While the core strategy of this new edition remains covered call writing, the authors expand into more comprehensive option strategies that offer deeper downside protection or even allow investors to capitalize on market or individual stock volatility. In addition, they discuss new offerings like weekly expirations and options on ETFs. For investors who are looking to capitalize on global investment opportunities but are fearful of lurking "black swans", this book shows how ETFs and options can be utilized to construct portfolios that are continuously protected against unforeseen calamities. A complete guide to the increased control and lowered risk covered call writing offers active investors and traders Addresses the changing investment environment and how to use options to succeed within it Explains how to use options with exchange-traded funds Understanding options is now more important than ever, and with Options for Volatile Markets as your guide, you'll quickly learn how to use them to protect your portfolio as well as improve its overall performance.

Author : M. Thomsett
Publisher : Springer
Page : 411 pages
File Size : 41,47 MB
Release : 2015-12-11
Category : Business & Economics
ISBN : 1137322268

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An advanced strategic approach using options to reduce market risks while augmenting dividend income, this title moves beyond the basics of stocks and options. It shows how the three major segments (stocks, dividends, and options) are drawn together into a single and effective strategy to maximize income while eliminating market risk.

Author : Alexander Feser
Publisher :
Page : pages
File Size : 15,94 MB
Release : 2014
Category :
ISBN :

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The downside risk premium of a stock is caused by the shape of the risk-neutral distribution and the Downside Risk Capital Asset Pricing Model (DR-CAPM) is accurately explained by the risk-neutral moments of stocks. Using a set of 179 million equity options, this thesis demonstrates that the risk-neutral variance, risk-neutral skewness and risk-neutral kurtosis determine stocks ex-ante exposure to downside risk and ex-ante returns. A risk-neutral representation of beta and downside beta is derived and it implies that the downside risk premium is a compensation for the non-normality of the underlying return distribution.

Author : Peter Carr
Publisher :
Page : 56 pages
File Size : 24,21 MB
Release : 2017
Category :
ISBN :

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We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we show that just like option implied volatilities, realized and expected volatilities can also be constructed specific to, and different across, option contracts. Applying the new theory to the S&P 500 index time series and options data, we extract volatility risk and risk premium from the volatility surfaces, and find that the extracted risk premium significantly predicts future stock returns.

Author : Iwan Lottenbach
Publisher :
Page : pages
File Size : 26,59 MB
Release : 2015
Category :
ISBN :

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The thesis at hand investigates the risk and predictive value of dispersions computed over option-implied risk measures of individual stocks. The option-implied risk measure calculation rests upon the risk-neutral arbitrage pricing theory and does not assume an underlying pricing model such as Black & Scholes (1973). The analysis relies on a large individual stock and option data panel based on the S&P 500 equity index with observations from January 2000 to December 2012. While Fama & McBeth (1973) regressions - based on 16 risk-neural volatility and skewness ranked portfolios - reveal no statistically significant risk premium for dispersions of option-implied risk measures, the latter factors have a remarkable predictive power for S&P 500 index returns in three months. A mean normalized standard deviation dispersion of risk-neutral volatility (skewness) thereby induces a monthly index return of approximately 13% (3%) in three month. The adjusted R2 of approximately 2% is, furthermore, a considerably good result for a predictive return model. The thesis at hand on dispersion of option-implied risk measures motivates some further research in this field, as the potential of forecasting index returns has gained confidence.