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Article Archive For Andrew Sterge

  • Trading volatility by Andrew Sterge

    ARTICLE SYNOPSIS ...Trading volatility by Andrew Sterge In the winter and spring of 1989, I made a series of Eurodollar options trades which show the logic of ""trading volatility."" This sort of trading is the bread and butter of many institutional traders, that is to say, large, well-financed traders. Understanding what such traders do is vital to an independent trader. One of the first things to understand about volatility is that it does not exhibit long trends like some common stocks but is more cyclical (or ""mean reverting"") in nature. Thus, extremes in volatility are more likely opportunities to fade th...

  • Volatility skews by Andrew Sterge

    ARTICLE SYNOPSIS ...Volatility skews by Andrew Sterge It is inevitable that relative mispricings occur among many different options on a single underlying instrument. It is possible to exploit these mispricings using the Black-Scholes theory of option valuation, despite risk and the inherent flaws in the model. This can be done by trading spreads in which theoretically underpriced options are bought and theoretically overpriced options are sold. Analysis of virtually any class of option prices reveals that the options do not all trade at the same implied volatility. This is counterintuitive, because implied vol...

  • Trading options volatility by Andrew J. Sterge

    ARTICLE SYNOPSIS ...Trading options volatility by Andrew J. Sterge Options are much more than a hedging vehicle or leveraged way of participating in spot or futures markets. Indeed, options create strategies that did not exist before in trading an option's underlying instrument. These strategies are known as volatility trades and the benefit is that you usually don't have to pick market direction, something always tough to do. Instead, you bet on whether an option's volatility is cheap or rich, in other words, undervalued or overvalued. The term volatility is used with abandon in discussions of options, this on...

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