You're mistaking me with Amalgam.
What is the best way to hedge a long SPY position against a future market crash?
- Thread starter Phill Twist
- Start date
You're mistaking me with Amalgam.
Oh, sorry.
What does P/C parity have to do with any of this? Right now paying for 1 yr protection against a 20% decline in SPY costs you over 3.00% of the amount you're insuring. Do this year after year after year and your returns suffer greatly, hence it is expensive.
insurance is always expensive unless you are so lucky as to have something really bad happen to you
But you said that hedging would be expensive especially for indices.
And I doubted it because it's the same proportion whether for stocks or indices.
P/C parity has an important role here, you just need to think about it:
If say a Put should be "expensive" as you say for indices, then there would be an imparity
for the Call side, ie. an arbitrage opportunity. P/C parity helps to close the gap and keep the balance between both sides.
Btw, there is an options method where you can buy an insurance for zero costs:
sell a Call and from the premium you get buy a Put, it's called Costless Collar (Zero-Cost Collar), details here:
http://www.theoptionsguide.com/costless-collar.aspx
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https://workspace.imperial.ac.uk/riskmanagementlab/public/wp05.pdf
Read the first sentence of the abstract.
"Writers of index options earn high returns due to a significant and high volatility risk premium, but writers of options
in single-stock markets earn lower returns."
My answer: BS!
The authors have not even been able to include the graphics in the pdf, all are missing.
Reading further they claim:
"There are two noteworthy points here: First, implied volatilities of individual stock options are on average much higher than the one of index options.
Second, the volatility risk premium is larger for index options."
The first statement is, of course, true, but the second statement cannot be true,
as it would be illogical and contradictionary.
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Your opinion is of no importance as that sentence is a fact.
BS, you shouldn't easily believe everything written by some incompetent authors.
And it seems to me that this paper has never been accepted for publication,
it's just an incomplete "work-in-progress" draft from the year 2009.
In an other paper from 2012 they make these abstruse (because contradictionary and illogical) claims:
"The average implied volatility of the constituents is 32.7% and the average
realized volatility is 31.8% which yields a volatility risk premium of 0.9%.
The average implied volatility of the index is 19.2% and the realized volatility
amounts to 16.7%, which yields a volatility risk premium of 2.5%."
Unbelievable! These relations can't be true, not mathematically!
And: the price of "risk premium" isn't determined by what they compute,
it is simply the premium of the call and put in the market.
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Are you mentally retarded?