Duel of the Deltas: Calculating Moneyness via Dual Delta

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You would have to search long and hard to find an options trader who isn’t familiar with the concept of delta. As one of the most basic option sensitivities, or “Greeks”, delta expresses the relationship between the value of the option and the value of the underlying security. Secondarily, the delta is also sometimes used as an ad lib approximation of the percentage chance that an option will expire in the money. While this can be a quick and useful approximation, it’s not as accurate as many believe it to be. To correctly calculate the percentage chance that an option will expire in the money, one has to calculate what’s known as the “Dual Delta”.

Rule of Sixteen

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The “Rule of Sixteen” is a simple approximation used by option traders to quickly get an idea of the potential move a particular underlying security might make. As a quick example, suppose it’s a day before expiration and you’re trying to determine how concerned you should be about covering a position of out of the money options. The Rule of Sixteen says that with an implied volatility of 32 there is about a 2/3rds chance that the underlying will move 2% or less in that one remaining day. One out of every three days the underlying will move more than 2%.

Path Independence of Volatility

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Volatility is undoubtably one of the most important aspects of option trading. Although the basic idea of calculating historical volatility as the annualized standard deviation of a series of lognormal close to close price returns is fairly simple, there exist a broad range of adaptations of this general idea in an attempt to glean additional insight and efficiency from market data. Nonetheless, this traditional method of calculating volatility is still in wide use due to the simplicity of its calculation and the intuitive nature of its insights.

Volatility of VIX

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The S&P 500 index (SPX) has been down five of the past six trading sessions and along with that has come a significant increase in the VIX implied volatility index. But the most interesting aspect of the selloff is not the current level of the VIX, but the size of the increase and the speed with which it’s taken place, or in other words, the volatility of implied volatility.

Sell Rosh Hashanah, Buy Yom Kippur?

With yesterday’s 1.6% sell off in the major indices, and the fact that it happened to coincide with the start of Rosh Hashanah, some traders were dredging up the “Sell Rosh Hashanah, Buy Yom Kippur” adage to try to the explain the market action. Like many of these old adages, it’s hard to know whether there’s any quantitive data that actually supports their use. Much of the time, even if these strategies did work at some time in the past, they rarely do today. But there’s no way to know without crunching the data, so that’s what we did.

Sell in May? Redux: Another 30 Years

Following on yesterday’s post, I decided to extend our analysis back another 30 years to provide more context to the old adage of “Sell in May and go away”. Again, I’m using historical price data for the S&P 500 index (SPX), but this time with data covering the 30 years from 1964 to 1993.

Sell in May?

The old adage says to “Sell in May and go away”. That’s simple enough, but it’s less clear when it’s the appropriate time to buy back in. Some traders suggest going long again after Labor Day, which is the first Monday in September. Others completely avoid historically treacherous October and stay away until the beginning of November, a full 6 months!