Category: Finance


Option-implied probability distributions, part 2

In Part 1 of this series, we demonstrated that the prices of option butterfly spreads imply a probability distribution of prices for the underlying asset. In this post, we will first examine the limiting case of butterfly spreads. Then, we will tackle the industry-standard approach for constructing PDFs from option prices: interpolating in volatility space to generate a volatility surface, converting this into a continuous set of option prices, then applying the Breeden-Litzenberger formula to find the PDF.

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Option-implied probability distributions, part 1

The goal of this two-part series is to understand what option prices can tell us about the implied probability distribution of future asset prices. Part 1 lays the groundwork and examines an intuitive approach using butterfly spreads.

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The Big Shorts: what is the smart money betting against?

Hedge funds in the UK are legally obligated to disclose to the Financial Conduct Authority (FCA) whenever their net short position in a particular listed company reaches 0.5% of the issued equity capital. In this post, I investigate a publicly available dataset containing information about these large institutional short positions in UK equities and attempt to understand the value that this data contains.

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A Tanker Trade

April 2020 has been a volatile month for oil. Last week, the May WTI contract traded at a low of minus \$40 a barrel. In a desperate search for storage space, people have been chartering oil tankers to use as floating storage units, leading to a price surge in shares of tanker companies like Nordic American Tanker (46%), Teekay (30%), and Scorpio Tankers (59%). In this post, we aim to build a framework for forecasting the revenue of DHT Holdings (NYSE:DHT), a tanker company.

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Understanding the market's expectations of COVID-19

One of the reasons why I find markets fascinating is that they are capable of integrating huge amounts of information, misinformation, hope, fear and uncertainty into a single number – the price of an asset. In this post, we work backwards, quantitatively examining what the current price of an asset can tell us about its future prospects.

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An asymmetric bet on interest rates

In this post, we discuss how asymmetric bets can be evaluated with the expected value. Following this, I argue that the market was overestimating the probability of a rate cut in July 2019 and examine how the inherent asymmetry of the situation can set the stage for a profitable macro bet.

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