Options and Market Declines

By November 6, 2018 Blog

            At Cornell-Capital we write a lot of options.  In some cases, it is part of a hedging strategy in which we own the underlying stock.  But it many cases, Tesla is an example, it is naked writing.  You would think that these short options positions would do well when the market drops like it did in October and they do, but less than you would expect.  The reason is that market declines, particularly recently, are associated with increases volatility.  For example, changes in the VIX index are negatively correlated with the return on the market.  The result is that when stock prices fall, volatility rises, so that there are two offsetting effects on the price of options.  The rising volatility pushes option prices up, muting the impact of declining prices.

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