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continue the financial market turmoil?

By: Mr. Diego Rebissoni (creator of www.leiod.com.ar)

In an effort to answer the question that I have made repeatedly in recent weeks about the turmoil in the American market, this article will try to provide tools to understand if the NYSE derivatives traders discounted over a period of turbulence or stability for the foreseeable future.

Who has not done any of the following questions after black October,
-may be repeated a similar crisis in the short term? "You step
worst of the crisis or there may be a second round?
"The prices will stabilize or continue to suffer significant variations?

A first concept which we must stop the volatility, this term is a proxy measure of changes in asset price and therefore the associated risk. Taking the example of Citigroup Inc. (Symbol C), and simplified way, if you have had percentage changes in the last 4 days of +5%, -4%, +10% -6%, Citi has been much more volatile or riskier other action against its variations have been, +1%, -2% +2% -3%. It is clear that this measure quantifies the changes, whether positive or negative and will not stop in its calculation methodology, but in concept.

Below the evolution of volatility for two assets that have focused a large volume of transactions in recent months and we will see clearly how these values \u200b\u200bare triggered by the crisis and still maintain high values. Examples include Citigroup Inc. (Symbol C) and a fund or ETF negotiable, representative of a barrel of oil (United States Oil Fund LP Symbol: USO)




be clearly seen in both graphs that the volatility reaches its maximum in the period from October to December 2008 and triple them, at least, the values \u200b\u200bof 2007. The big question is how to continue this story? While those who write this story will be the market and only with the passing of days know as it continues, we will use a technique widely spread in the options market to assess a possible trend.

Our technique is based on the Black & Scholes, who won the 1997 Nobel prize in economics for developing a formula for valuing financial options. The financial options for those who have not heard of them, are a right to buy / sell stock at a certain price until a certain point, but to acquire this right must pay a premium. Both economists developed a formula to determine a fair value of the premium and some of the key factors for determining the volatility of the stock.

For our use the implied volatility estimate for the next maturity of financial options, it is inferred that volatility complies with Black & Scholes formula to price premiums in the market operated on December 26, 2008. The following shows the results of evaluations.


The USO ETF graph shows values \u200b\u200babove average volatility of the crisis in the short term but slightly lower for longer durations. In the case of Citibank, the results are very different, the implied volatility of Black & Scholes is well below average values \u200b\u200bon Oct-Nov-Dec ('as if the derivatives market believe that volatility will fall heavily or do not agree with such volatility to value so high. ") A striking fact is that in both cases the volatility in the long run are located in similar values \u200b\u200b(70% -80%), representing approximately 3 times the value for 2007.

In short, the derivatives market or evaluating financial options for the long term, as the art of Black & Scholes, that volatility will remain very high compared to 2007 but below the averages at the time of panic the global market.

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volatility priced into the options market on the NYSE

By: Mr. Diego Rebissoni (creator of www.leiod.com.ar)

then analyze the volatility expected by the options market in the area of \u200b\u200bthe NYSE, in the coming months. The mechanism used to determine this is to calculate implied volatility operated in the options market for different maturities of underlying assets through the valuation method Black & Scholes. It is already widely used and distributed in the world of financial derivatives.

This valuation method considers variables such as stock price, the exercise price, expected volatility of the underlying asset, expiration date, dividends and risk-free rate to calculate the price of the option. For our example, the methodology is to find what volatility of the stock price meets operated in the market and thus infer the volatility that trainers expect forward prices in the options market.

Among the ETF shares or elected, we have derivative actions with good liquidity and all evaluations were conducted for options "In the Money", without considering possible payment of dividends.

www.leiod.com.ar / files / SPY.gif

In the first analysis shows the historical volatility of the SPDR S & P 500 ETF (Symbol: SPY ETF representative of Standard & Poors 500) and implied volatility for the next 6 maturities.

The first chart shows the evolution of the volatility of the SPY calculated, considering the diversion of 20 wheels of closing prices. It is located to close to 75%, well above the historical average volatility of 2007.
In the second graph shows that the expected volatility for options transactions on the SPY, around 70% annually for the short term, in line with the current volatility. For dates of exercise greater than 100 days, the volatility drops sharply, reaching values \u200b\u200bclose to 43%.

Performing the same analysis for stocks, options, Citigroup Inc. (Symbol C) observed results different.

www.leiod.com.ar / files / c.gif

For the short term, the implied volatility is at the order of 140% for the next 3 deadlines (Nov-Dec-Jan) while historical volatility of the asset is close to 110%. According to the proposed technique in the short term, the options market expects higher volatility in the case of Citigroup. Increasing periods, the options reflect lower-than-expected volatility of short-term but three times the historical values \u200b\u200bof 2007.

In summary, evaluating the derivatives market, according to the technique of Black & Scholes, that volatility will remain on the current values \u200b\u200bfor the short term, falling for longer periods but standing at significantly higher values \u200b\u200bthan those experienced in the years before the current financial crisis. Released

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Launch Covered with TS - Covered Call

covered: an interesting strategy in times of volatility
you ever thought of a fixed-term risk? That is what a large extent, the operation of covered writing, by which one acquires shares and sell the right to buy them at a specified price. Today, with highs hovering volatility around the world, this strategy offers returns greater than 100% per annum if the asset is maintained at its current value.

you ever thought of a fixed-term risk? This is undoubtedly a good definition for the startup operation covered. This strategy is very common in the market and consists of two steps: buy a stock and launch or sell a call option on that same action.

How is it done? How much can you win or lose? Can it be done at any time? Try to answer these and other frequently asked questions in the following paragraphs.

Quite possibly the most know what it is buying a stock but not what it means to launch a call or option to purchase. It basically involves selling to another investor a right for us to buy the shares referred to in the call at a certain price, which will be renamed the "strike price" or "strike price". For the assignment of that right we will charge a premium.

In short, we will be buying shares while selling a right to a third party we buy them at a specified price.

At this point, it is worth dwelling on some important clarifications:

1 - As with stocks, bonds and other financial assets, the options listed on the Bolsa de Comercio de Buenos Aires, but its liquidity is less than of these instruments. Among the options are more liquid Tenaris, Grupo Financiero Galicia, Pampa Holding, Petrobras Energía.

2 - To carry a pitch covered, you must first purchase the shares and then give the order to the operator to set an option on those shares. Thus, to have in your portfolio of stocks that could eventually buy, the investor will be "covered" and must leave the market to find them.

3 - How to choose exercise price for the sale of rights? My advice is to start with exercise prices (base) near the market price action. For example, Tenaris (TS) traded at 31 pesos, choose one of the bases available closer to that value (The bases are predetermined and should be chosen from those available). In this case, the choice would be "TS.C31.10DI" where "TS" is an option on the shares of Tenaris, "C" is "buying" the type of option is the 31.10 strike price, and "DI "December is the month of expiration of the option.

4 - The options that we will launch with an associated date representing the time to which we can exercise the right sold. In our market maturities occur the third Friday of each month par. Therefore, it is recommended that the launch about 60 days before maturity to reduce the impact of the fees that we our operator charged.

The right one is sold only exercised when the stock market price is trading above strike and in close proximity to the expiration dates. If it is exercised, the shares must be delivered. Should not be because the stock price fell or remained the same value and the exercise period expired, they may be selling to close the position, keep waiting for a boost or launch a new shopping option Based on the new market price.

How we will have won or lost in each case? What have been the returns of the operation?

If exercised the right, the capital invested will have been equal to the cost of stock less the money that was given by choice, while at the maturity of the option we will have sold the shares at a price "strike."

Here, the formula: Performance

Operation = 100 x [Price Prima + (Strike Price - Price Initial Action)] / (Initial Price Action - Price Prima)

If not exercised the right, the formula would : Performance

Operation = 100 x [Price Prima + (Final Price Action - Price Action MI)] / (Initial Price Action - Price Prima)

This second alternative can result in losing money. That will always happen to end up selling the shares at a price lower than the initially invested capital (purchase of shares unless selling the option).

To clarify the operation, we will analyze an example with Data Company's shares at the close of October 24, 2008.

Prices: 31 pesos per share.

Expiration option in December (56 days remaining to maturity). Exercise prices

available: 28.10 / 31.10 / 34.10 / 37.10 and more.

The best price is 31.10.

Operation: TS stock at $ 31 and sales to 5.05 TS.C31.10DI (As of October 24 closures).

The simulations below show results for different stock quotes on maturity,

www.leiod.com.ar / Released / OperacionEjemploTS.xls

Let us consider two important results:

1. If the stock price remains or increases, our annualized return will be in the order of 129% annually.

2. If the stock falls to 27 pesos (-13%), we have not lost since the low capital does not exceed the income from the sale of the option (13% vs. 15%). Remove the brackets

Finally, we know that the associated fees, charged by the operator us-decrease expected returns, especially if the startup operation is performed very close to the expiration date of the option.

The very high returns offered by this strategy today respond to the extreme volatility being experienced by markets around the world. Values \u200b\u200bshould be contrasted with those of early 2008, when annualized returns of similar operations were around 45%.

* Diego www.leiod.com.ar Rebissoni is the creator of a site that seeks to improve trading options in the area of \u200b\u200bthe Bolsa de Comercio de Buenos Aires.

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Bringing the investing public financing options: The first step, the purchase of a call. Covered Release

The aim of this paper is to give the investor the world of financial options in the area of \u200b\u200bthe Stock Exchange of Buenos Aires. What are the options? What is the purpose? How can I purchase? How I can win or lose? Are they too risky? And try to explain other issues along the following paragraphs.

What is an option?
As its name suggests is an option-right of the buyer to purchase stock at a specified price or exercise price, and this right may be exercised from the time of purchase until a certain date. The most important aspect of this definition is to remember that this product (option) gives us the right to buy other stocks.

How do you get or buy? Suppose
we decided to buy a call option or call (in English) on shares of Pampa Holding. To continue, we must define the strike price and expiration date. Remember we said in the definition, one option is a right to acquire shares at a specified price and time limit.

To choose the exercise price or strike recommend starting by price listed near the action, since those options are often the most frequent operations or liquidity. For example, PAMP is trading at $ 1.60 per share, choose from the available bases close to that value (the bases are determined, one should choose between the available and you can choose any). To our example is 1.54 and the choice is PAMC1.54OC where
PAM: option on the shares of Pampa Holding
C: type of choice for our case C Purchase. 1.54
: exercise price is the price at which we are entitled to buy the stock.
OC: month of expiry of the option, August.
As the expiration or time limit, in our market maturities occur the third Friday of even months. For our example, October is the month closest pair and the expiration date is 17 October. How much does

buy a call option? Do you regard the price of the option with the share price?
In our example, where we consider a quote from Pampa holding a $ 1.60 per share and bought the option exercise price of $ 1.54 per share, to buy this right, we could take at any time until the third Friday in October. Intuitively, if we can buy stocks because we have the $ 1.54 option, and the market costs $ 1.60 per share is expected or intuitive than the cost of the option or premium, is at least $ 0.06. Let's see why.
Suppose that the right (or premium) you can buy at $ 0.02 per share, and immediately exercised. Then buy the stock at the strike price $ 1.54 per share and the hypothetical investment in the premium is 0.02 over 1.54 for the purchase of shares.
The total is $ 1.56 per share. But there is the possibility of selling shares on the market that I have in my possession at 1.60 (market price or trading of course) and make a difference of $ 0.04 per share excluding commissions immediately. The minimum value of $ 0.06 will be called intrinsic value.

Now we must answer a second question on the premium. Should the premium cost more than the minimum?
The intuitive answer would be that the price of the option-premium should be $ 0.06 for no difference with the quoted price as explained above, but with this course we are leaving the possibility-probability that the rise in price action in the future.
Here we analyze one example to understand why the premium should have a value greater than the intrinsic.
Suppose two people, one who has the other $ 1.60 and $ 0.06, where the first action and buy a second purchase option to the intrinsic value. At the date of maturity of the option, we assume an increased share of $ 0.10, so Pampa Holding is trading at $ 1.70 per share. The first person to sell the stock at that value and the second runs its right to buy at $ 1.54 per share and sells it immediately to $ 1.70 per share.
So the first person earned $ 0.10 cents and the second won the deference between the sale and purchase payment less the premium above (1.70-1.54-0.06) = 0.10 $.
In conclusion, the two earned the same money but the second was to involve far less capital. Under this assumption would have been more profitable for the first person to do the same as the second and put the surplus money in the bank and collect interest. The same analysis can be performed to a drop in share price and the benefits to the buyer of the option will be similar with an additional advantage which is that if the action down $ 0.06 or more, the option holder only lost $ 0.06 to the maturity date. Then we can assert that the price of the premium will be higher than its intrinsic value and the difference between the total value of the premium, or the market price and intrinsic value is called time value.

much time should be the value, what variables involved, and other issues that deserve deeper, are not matters discussed in this article. As we will operate with relatively liquid options, the final price of the option is going to determine the market. For those who want to can progress further with concepts such as Black & Scholes valuation, volatility of the underlying asset, time value curve as the exercise price, etc..


Intuition, a way to understand the risk of the options.
Returning to our assumptions, let's add two more data. The date on which we perform the operation, for example August 29, 2008 and the premium paid for the option is $ 0.13 -. Suppose for a moment after the stock rises to $ 1.60 per share to $ 1.65 per share, equivalent to a percentage increase of around 3%. How much should vary intuitively option price? Intuitively, the increase should be closer to $ 0.05 which is the variation that suffered the asset, where the new price of the premium should be close to $ 0.18 / item. Calculating the return on my investment,

(Final Price - Initial Price) / Initial Price = (0.18-0.13) / 0.13 = 38%

So while in the possession of my performance shares is 3%, with the option to get much higher yields and the same reasoning applies to losses in the stock price with the loss. The real change in the premium price of an instant after the increase will be close to the intuitive values \u200b\u200bfor our example, but not necessarily be those values, deeper technical reasons and because the options market has its own supply and demand they will be the determinants of the final price.

Below is a simulation of option prices for different variations in the share price to an estimation method prices of widely used options in the market and recalling again that the values \u200b\u200bshown below are only theoretical and the real market is the one who set the options prices to changes in share price.

http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP2.xls


The passage of time, a blow to the buyer of options.
then show the same valuation method how detrimental over time to those who bought a financial or stock option. It is a fact to bear in mind because if the share price remains constant our cousin have decreased in value as we approach to date.
For our example, the premium of $ 0.13 / item becomes $ 0,094 / option 30 days after reaching its intrinsic value of $ 0.06 / option to the expiration date if the stock price does not change and remains with a quote of $ 1.60 per share.

http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP2.xls


Conclusions
Buy a call option to our portfolio gives us opportunities to have greater absolute relative returns over the actions, or gain or lose more in proportion compared to the holding of the shares. This concept is called leverage or leverage in English. On the other hand with the passage of time if everything remains constant, we must remember that our option is worth less and less.

The author is the creator of www.leiod.com.ar, a place to enhance options trading in the stock area of \u200b\u200bBuenos Aires. Released

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covered: an interesting strategy in times of volatility.

you ever thought of a fixed-term risk? This is a good description for the operation of covered writing. This strategy is very common in the market and consists of two parts. The first is to buy a stock and the second to launch or sell a call option on the same action. How

done? How I can win or lose? Can be made at any time? This and other questions that spring to mind when they first hear those two words, is what we will try to unveil in the next paragraphs.

Quite possibly the most know what it is buying a stock, but not which involves the release of the call or option to purchase. This last operation is to sell a right to another investor to buy shares (our actions) at a certain price (exercise price or strike price), charging investors a premium for the right. In other words, buy stocks and sell the other hand the right to buy the shares other at a certain price and in return receive a bonus.

Here we will dwell on some details needed for the sale of the right or option to purchase:
1 - The options listed on the Bolsa de Comercio de Buenos Aires as stocks, bonds or other instruments, but its liquidity is lower. Among the options are more liquid Grupo Financiero Galicia, Pampa Holding, Tenaris, Petrobras Energia and Mirgor.
2 - Buy things first and then notify your carrier that wants to launch an option over its shares, the mean operative quickly.
3 - What exercise exercise price of choice? Here I recommend to start with exercise prices or bases close to the quoted price action. For example, if PAMP trading at $ 1.50 per share, choose from the available bases close to that value (the bases are determined, one should choose between those available). For our example is 1.54 and the choice is PAMC1.54AG where
PAM: option on the shares of Pampa Holding
C: type of choice for our case C Purchase.
1.54: AG
exercise price, expiration month of the option, August.
4 - Time, date, month of expiration or exercise. The options that we will launch, have an associated date, which represents the time to which we can exercise the right. In our market maturities occur third Friday of even months. For our example, AG in August, the deadline is 15 August. It is recommended to release op about 60 days before maturity, to lessen the impact of the associated committees.

have sold the right to be exercised when the stock market is trading above the strike price and expiration dates very close to. Should the right be exercised, must tender their shares and otherwise may sell in the market to complete the transaction or perform the release process again but no stock. How

won or lost in each case? What are the returns of the operation?

If the right be exercised, the investment was the purchase of stock less the money that was given for the sale of the option and the expiration date will be withdrawn and shares will remain with the premium. Therefore,
Rend. Operation = 100 x Price Premium / (Initial Price Action - Price Prima)

The second possibility, the right is not exercised because the share price in the market is less than the strike or exercise price. In this case they can keep or sell shares at market price. Therefore,
Rend. Operation = 100 x [Price Prima + (Final Price Action - Price Action MI)] / (Price Action Initial - Price Prima)
In this second option is where the risk of losing money, because when the variation of the action in the negative is greater than the premium price start to lose money.

To clarify the operation, we will analyze an example of Pampa Holding shares for data at the end of June 27, 2008.
of contribution: $ 1.5 per share.
Expiration Option: if we are to late June, the pair is next August. Missing 49 days to maturity. Strike Prices available
August: 1.44, 1.54, 1.64, 1.74 and others.
As explained, the best price is 1.54.
Operation: PAMP to 1.54 purchase and sale of PAMPC1, 54AG to 0.12 (as closures).

The simulations below show results for different stock quotes at maturity
File

http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP.xls
Here it is worth stopping at two important results . The first is that if the stock price remains or increases, our annualized return is maintained in the order of 65% annually. The second important result is given in the event of a price of $ 1.4 per share, which diminishes its value action vs 7%. original value and yet we do not lose money (hedge effect). For price drops lose over 7% but still less than if we had bought the stock directly.

Finally, we consider that the fees associated with lower expected returns but not significantly so long as the startup operation is not carried out very close to the expiration date of the option.

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Changes

To avoid misunderstanding, we decided to leave the blog for comments related to options transactions. Articles and issues of interest.

I emphasize the theme of the site:
- Always try to follow your instincts. It's much better to err on the decision itself than with others. Make operations and lose, I assure you will learn more with losses than gains.

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