New Positive Convexity Position

New Positive Convexity Position - Bullish GS

This is looking like a good time to try to capture upside in financials as the sector begins to show signs of life after a prolonged slump and implied volatility is cheap across the board.

New Position -Bullish Goldman Sachs

The chart:

Exponential trend analysis projects a +2.97% price appreciation over the next 20 trading days with a projected volatility of 20.36%... the at-the-money call is pricing at 25.1% vol.

Here's the stochastic price simulation:

Finally, the trade.

Short 100 shares at 158.72
Long 6 April 29th 157.5 calls at $5
Long 2 April 29th 160 calls at $3.70
Long 1 April 29th 162.5 call at $2.53

Break even price: $163.49
Convexity 14.83x at 16% price shock
Expected Value: +$1,770
Max Risk: ($3,873)

Here's the payoff chart:

Comments

Modeling Black-Litterman; Part 2 - Incorporating Manager Views

"The 'radical' of one century is the 'conservative' of the next." -Mark Twain In this series, I'm going to explore some of the advances in portfolio management, construction, and modeling since the advent of Harry Markowitz's Nobel Prize winning Modern Portfolio Theory (MPT) in 1952. MPT's mean-variance optimization approach shaped theoretical asset allocation models for decades after its introduction. However, the theory failed to become an accepted industry practice, so we'll explore why that is and what advances have developed in recent years to address the shortcomings of the original model. The Black-Litterman Formula The Black-Litterman formula incorporates two distinct inputs; the first is the Implied Equilibrium Return Vector we constructed in Part 1, the second is a series of vectors and matrices that incorporate a manager's views/forecasts of the market. The product of the formula is an updated Combined Expected Excess Return ...

Convexity as a Technical Indicator - Applications of the Second Derivative...

WHAT'S IN A NAME? In investment parlance, the term 'convexity' is typically reserved for the topic of fixed income risk; especially in regards to debt with embedded optionality where negative convexity is a prominent pricing factor. However, it is important to recall that 'convexity' (or 'concavity', for that matter) is a mathematical measurement used to describe the second derivative of a continuous, nonlinear function on an interval. The issue with confining the term to a single connotation is that - for better or worse - investment tools have become increasingly nonlinear since the days of the 60/40 model and convexity is present in a number of applications. The extent to which it has been circumscribed to a single asset class is evident in equity option jargon where the second derivative of the pricing function is called 'gamma' instead of convexity. Of course, the argument could be made that the principle purpose of option vernacular is to c...

Modeling Credit Risk...

Here's a link to a presentation I gave back in August on modeling credit risk. If anyone would like a copy of the slides, go ahead and drop me a line... https://www.gotostage.com/channel/39b3bd2dd467480a8200e7468c765143/recording/37684fe4e655449f9b473ec796241567/watch Timeline of the presentation: Presentation Begins: 0:58:00 Logistic Regression: ...

Blue Horseshoe Loves This Finance Blog

Search This Blog