C. Jones, H. Mo, T. Wang – “Does Private Information from Options Markets Forecast Aggregate Stock Returns?”

In this paper, we show that the difference between the implied volatilities of call and put options on individual equities has strong predictive power for aggregate stock market returns. This predictability is inconsistent with a rational risk premia or liquidity-based explanation. It is, however, consistent with the implied volatility spread capturing private information, based on its ability to forecast future cash flow growth and discount rate shocks.Read More »

OptionMetrics’ 6th Annual Research Conference (ORC2017)

Hosted and sponsored by Fordham University, ORC2017 will bring together OptionMetrics users and researchers from both academia and industry to present and discuss their research. Anyone who currently uses or has an interest in using any of OptionMetrics’ IvyDB data products is invited to attend and submit papers for presentation at the conference. We look forward to seeing you there!Read More »

J. Gatheral, I. Matic, Ivan, R. Radoicic, D. Stefanica – “Tighter Bounds for Implied Volatility”

We establish bounds on Black-Scholes implied volatility that improve on the uniform bounds previously derived by Tehranchi. Our upper bound is uniform, while the lower bound holds for most options likely to be encountered in practical applications. We further demonstrate the practical effectiveness of our new bounds by showing how the efficiency of the bisection algorithm is improved for a snapshot of SPX options quotes.Read More »

R. Israelov – “Pathetic Protection: The Elusive Benefits of Protective Puts”

Conventional wisdom is that put options are effective drawdown protection tools. Unfortunately, in the typical use case, put options are quite ineffective at reducing drawdowns versus the simple alternative of statically reducing exposure to the underlying asset. This paper investigates drawdown characteristics of protected portfolios via simulation and a study of the CBOE S&P 500 5% Put Protection Index. Unless your option purchases and their maturities are timed just right around equity drawdowns, they may offer little downside protection. In fact, they could make things worse by increasing rather than decreasing drawdowns and volatility per unit of expected return.Read More »

Y. Yang, Y. Zheng, T.M. Hospedales – “Gated Neural Networks for Option Pricing: Rationality by Design”

We propose a neural network approach to price EU call options that significantly outperforms some existing pricing models and comes with guarantees that its predictions are economically reasonable. To achieve this, we introduce a class of gated neural networks that automatically learn to divide-and-conquer the problem space for robust and accurate pricing. We then derive instantiations of these networks that are ‘rational by design’… Read More »

ORC2016 Keynote Speaker: John Marshall

OptionMetrics is pleased to announce that John Marshall will join us this year as our ORC2016 Keynote Speaker. John Marshall manages the Goldman Sachs Derivatives Research team in New York, focusing on single stock options, sector options and cross-asset research. He has written over 2,500 options trade recommendations in collaboration with fundamental research analysts over the past 12 years as part of their flagship product, the Weekly Options Watch. He has published several major studies on how stocks and options trade around company events, systematic options selling… Read More »