A thought on premium in options.
Index options should be "overpriced". The question is how much premium do they deserve.
If stocks warrant a risk premium over the RFR it's because their systematic risk cannot be hedged.
Index options should be "overpriced". The question is how much premium do they deserve.
If stocks warrant a risk premium over the RFR it's because their systematic risk cannot be hedged.
Index options must conceptually inherit this premium otherwise there would an arb in portfolio allocation.
A index option, held delta neutral, gets paid as correlations in the marketplace increase. It literally makes money when systematic risk embodies.
A index option, held delta neutral, gets paid as correlations in the marketplace increase. It literally makes money when systematic risk embodies.
A standard for deciding if puts are expensive:
Its price should have enough premium in it that by buying a put, if delta hedged, that you would actually have basis risk. In other words, it's premium should make it uncertain that you would actually make money in a sell-off.
Its price should have enough premium in it that by buying a put, if delta hedged, that you would actually have basis risk. In other words, it's premium should make it uncertain that you would actually make money in a sell-off.
If your argument is that it's expensive in a vacuum (perhaps as a comparison to realized vol) then what if it was only 1% premium to realized?
That sounds like a bargain for something that hedges the risk that, like, the whole world has.
That sounds like a bargain for something that hedges the risk that, like, the whole world has.
This isn't news to most investors or anyone who understands portfolio construction and the beauty of neg corrs.
But the perspective might be useful to younger or more novice learners.
It's just another instance of the sun/rain example:
moontowermeta.com/you-dont-see-t…
But the perspective might be useful to younger or more novice learners.
It's just another instance of the sun/rain example:
moontowermeta.com/you-dont-see-t…
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