Tag Archives: tail-risk

Strike Price

Instl Options Trading Liquidity Reined In By Regulatory Rules and Leverage Ratios

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MarketsMuse.com Strike Price update strikes at the heart of how the financial industry’s new regulatory regime is impacting liquidity across the institutional options market, courtesy of 09 April coverage by MarketsMedia.com.

marketsmedia logo april 15Regulatory requirements that dealers keep more capital on their balance sheets is squeezing options liquidity for institutional traders, who buy and sell the equity derivatives to generate alpha and hedge long- and short-term exposures in their portfolios.

“The regulatory environment is affecting liquidity and pricing for investors in option markets,” said John Burrello, senior trader at Invesco. “Basel III, Volcker, and Dodd-Frank have made broker-dealer balance sheet capacity more expensive – and that is being passed onto investors through wider bid/ask spreads and less capital commitment.”

The introduction of the leverage ratio – which has a target ratio of 3.0% under Basel III – is a hallmark risk-based capital requirement. Starting in 2015, banks will be required to disclose the leverage ratio, with a view to migrating it to a Pillar 1 requirement by 2018 after a final calibration

Basel III will have a significant impact on banks and force changes in the way trading and prime brokerage desks operate. Although these measures are aimed at the banking sector specifically, repercussions will be felt throughout the network of market and counterparty relationships which make up the global financial system.

This is especially true for investors looking to hedge longer-term exposures, “because dealers have to tie up that risk on their balance sheets,” said Burrello. “It has also affected even short-term tail hedging, because dealer stress-tests account for potential capital needed to take the other side of downside tail events.”

At the same time, custodians and prime brokers have started asking clients to hedge tail risk more aggressively in order to avoid increased collateral requirements. “As in other markets, like treasuries and credit, equity options could potentially become less liquid as a result of decreased broker-dealer balance sheet capacity,” Burrello said.

For the entire story from MarketsMedia.com, please click here

Fixed Income, Global Macro Strategy

Crude Oil, Contango and Confusion; Global Macro View

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MarketsMuse provides below extracts from Feb 2 edition of Rareview Macro’s Sight Beyond Sight as a courtesy to our readers. The entire edition of today’s SBS newsletter is available via the link below.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Professionals Taking Move in Crude Oil Seriously…Concern Over Deeper Move Lower in Risk

  • No One Prepared for Deflation Risk to Subside
  • Left Tail Risk:  Removing Two Key Peg Break Conversations (for today)
  • China-Korea-Japan Battle – KRW/JPY Hedge
  • Switzerland – Update
  • Model Portfolio Update – January 30, 2015 COB:  -0.33% WTD, -0.88% MTD, -0.88% YTD

No One Prepared for Deflation Risk to Subside Continue reading →

ETF News, Strike Price

Institutional investors see big tail-risk event ahead

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Courtesy of Christine Williamson

About three-quarters of executives from a mixed universe of institutional investors think a significant tail-risk event is likely to very likely within the next 12 months, according to a new survey from State Street Global Advisors.

Survey respondents — money managers, family offices, consultants and private banks — expect the five most likely causes of a tail-risk event in the next year would be a global economic recession (36%); a recession in Europe (35%); the breakup of the eurozone (33%); Greece dropping the euro (29%); and a recession in the U.S. (21%). (Percentages total more than 100% because respondents could select multiple causes.)

About 80% said they believe that tail-risk management should be an integral part of portfolio management, and 73% said they are better prepared to weather a severe market downturn since making strategic asset allocation changes after the 2008 market crash.

Fully 80% of the universe said they are somewhat confident to very confident that they have some form of downside protection in place that will protect their portfolio from the ravages of a severe downturn in the market, said Michael Arone, managing director and global head of portfolio strategy at SSgA, in an interview.

When it comes to the strategies that provide the most effective hedge against tail risk, 61% of SSgA’s survey group named diversification over traditional asset classes; 55% cited risk-budgeting techniques; 53%, managed volatility equity allocations; 50%, direct hedges; 43%, other alternative investments; 39%, managed futures allocation; 38%, single-strategy hedge funds; and 37% named hedge funds of funds.

Prior to the 2008 tail-risk event, 89% of institutional investors — a category in which SSgA included pension funds, money managers and private banks — diversified across asset classes, a practice that dropped to 67% in mid-2012. Risk budgeting was employed by 71% of institutional survey respondents pre-crash vs. 63% post-crash in mid-2012; managed volatility equity strategies, 50% pre-crash, 55% mid-2012; managed futures allocation, 44% pre-crash, 39% mid-2012; direct hedging, 36% pre-crash, 44% mid-2012; hedge funds of funds, 41% pre-crash, 28% mid-2012; single strategy hedge funds, 34% pre-crash, 39% mid-2012; and other alternative investments, 57% pre-crash, 58% mid-2012.

SSgA commissioned the survey, which interviewed 310 investment professionals in June and July.

The firm’s full report, “Managing Investments in Volatile Markets,” will be available on Sept. 27.

Original Story Link: http://www.pionline.com/article/20120924/reg/120929951

This copy is for your personal, non-commercial use only. Reproductions and distribution of this news stor

ETF News, Strike Price

Collaring Multiple-Asset ETFs to Manage Tail Risk

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Courtesy of Phil Gocke, Options Industry Council

Since the 2008-09 financial crisis and the central bank’s response of near zero interest rates, financial markets have been vacillating violently between risk-on and risk-off periods. This bipolar attitude toward risk has increased asset class correlations, negating the effective benefit of many traditional equity diversifiers. In this unpredictable climate, investors are focused on seeking strategies that offer downside protection but also upside participation.

One solution to achieving both of these often mutually exclusive desires is an option-based equity collar. A long collar strategy involves owning the underlying, while being long a put option with a strike price below the market and short a call option with a strike price above the market. This orientation of the strike prices makes each put and call option out-of-the-money (OTM). An option collar can provide portfolios with greater downside risk protection than standard multi-asset diversification programs, but they also allow for profits during risk-on rallies.

Recent research has examined the performance of the collar strategy against a range of exchange-traded funds (ETFs) across multiple asset classes, including equity, currency, commodity, fixed income and real estate. The resulting book, “Option-Based Risk Management in a Multi-Asset World,” was authored by Research Analyst Edward Szado and University of Massachusetts Isenberg School of Management Professor of Finance Thomas Schneeweis. Their analysis shows that for most of the asset classes considered, an option-based collar strategy, using six-month put purchases and consecutive one-month call writes, provides a holy grail of investing of improved risk-adjusted performance and significant risk reduction.

“Collar growth” (below) illustrates the benefit of an equity collar strategy on the popular SPDR S&P 500 (SPY) ETF. Over the 55-month study period ending Dec. 30, 2011, the 2% OTM passive SPY collar returned more than 22% (4.5% annually), while the long SPY experienced a loss of more than 9% (–2.1% annually). The collar earns its superior returns with less than half the risk as measured by the standard deviation (8.4% for the collar vs. 19.5% for SPY).

One of the most telling statistics supporting the potential benefit of equity collar protection is the maximum drawdown. During the study period, SPY experienced a maximum loss of 50.8% while the 2% OTM collar reduced this negative performance by four-fifths to a maximum loss of 11.1%. Continue reading →