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Showing posts from May, 2021

Dynamic Option Valuation Applied to the Russell 2000

"Lighting makes no sound until it strikes." -Martin Luther King Jr. The Russell 2000 is interesting right now as the historic post-Covid run-up in small cap stocks - most notably the meme stocks of AMC and GME - has left the index in uncharted territory.... literally. This gives us a chance to explore some dynamic option valuation techniques that I've previously discussed here and in presentations to the Houston Investor's Association. Let's begin with the monthly chart... Here, we get a good look at the run small cap's have had going all the way back to 2009 but especially in the post-Covid rally.  From the context of 'variance' to the index's 20 period moving average, this period represents the most over-extended the Russell has ever been from the trailing mean. Here's the distribution of the historical 20 period variance measurements... In this chart, five of the top seven measurements are from this year... that means the upside variance f...

VIX Hedge Update...

Given today's market volatility, I wanted to quickly follow up on Michael Kuhow's volatility hedge I commented on a few weeks back on Twitter... https://twitter.com/42BrooklynDodge/status/1392506799941632007?s=20 The VIX call spread Michael recommended is currently in the black but - as a hedge - it is poorly positioned to offer support should the market volatility continue... let's take a look at the risk of the call spread vs a straight long call... The call spread is under performing the straight call in every way... PnL is lower, position delta, gamma, vega and leverage are all lower meaning should the market volatility continue to escalate, the spread will be a poor hedge going forward vs buying the straight call.