CAIA - 30 - Volatility, Correlation, and Dispersion Products Flashcards
___ ___are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.
Volatility derivatives are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.
Investments that tend to decline with increases in return volatility are said to be ___ volatility and have a ___risk premium.
Investments that tend to decline with increases in return volatility are said to be short volatility and have a positive risk premium.
Studies show that volatility ___ a unique risk factor.
Studies show that volatility is a unique risk factor.
An options ___ is the length of time until the contract expires
An options tenor is the length of time until the contract expires
The time decay of options decreases at the ___ ___of ___.
The time decay of options decreases at the square root of time.
A ___ ___ combines a short call and a short put on the same asset with the same strike price.
A short straddle combines a short call and a short put on the same asset with the same strike price.
A ___ ___combines a short call and a short put on the same asset, with different strikes.
A short strangle combines a short call and a short put on the same asset, with different strikes.
At-the-money straddles have ___ market beta.
At-the-money straddles have zero market beta.
A short ___ ___ involves selling an out-of-the-money bull spread and an out-of-the money bear spread.
A short iron condor involves selling an out-of-the-money bull spread and an out-of-the money bear spread.
A short ___ ___ involves selling a bull spread and a bear spread with the same middle strike price.
A short iron butterfly involves selling a bull spread and a bear spread with the same middle strike price.
___ reflects the effects of declines in return volatility of the underlying asset and ___directly reflects the passage of time. These two measures are ___ correlated.
Vega reflects the effects of declines in return volatility of the underlying asset and theta directly reflects the passage of time. These two measures are highly correlated.
Options with higher vega have ___ gammas and ___thetas. An option with higher vega decays ___each day than one with lower.
Options with higher vega have lower gammas and higher thetas. An option with higher vega decays more each day than one with lower.
___ risk can be reduced by hedging a call position with a short position in the underlying asset.
Delta risk can be reduced by hedging a call position with a short position in the underlying asset.
___-neutral hedged option positions are a play on the volatility of the option’s underlying asset.
Delta-neutral hedged option positions are a play on the volatility of the option’s underlying asset.
Delta-neutral portfolios that are long options are ___ gamma.
Delta-neutral portfolios that are long options are long gamma.
To keep a long gamma portfolio hedged, traders ___ as the stock price falls and ___as it rises.
To keep a long gamma portfolio hedged, traders buy as the stock price falls and sell as it rises.
If realized volatility exceeds the initial vega, then positive effects of long ___ dominate the effects of ___and the position experiences a ___.
If realized volatility exceeds the initial vega, then positive effects of long gamma dominate the effects of theta and the position experiences a gain.
Infrequent rebalancing is a bet that volatility will be ___.
Infrequent rebalancing is a bet that volatility will be directional.
Realized volatility ___-___, ___and has a ___ ___.
Realized volatility mean-reverts, clusters and has a long memory.
Volatility is often modeled using ___ ___ ___ ___ and ___ ___ models.
Volatility is often modeled using generalized autoregressive conditional heteroscedasticity (GARCH) and regime switching models.
An ___ ___ ___ represents several vegas relative to their tenor, moneyness or type.
An implied volatility structure represents several vegas relative to their tenor, moneyness or type.
A vega structure that focuses on the relationship between vegas and moneyness is a ___ ___.
A vega structure that focuses on the relationship between vegas and moneyness is a volatility skew.
An option’s ___ ___ is a graphical representation of vega for several options with different expiration dates and strike prices.
An option’s volatility surface is a graphical representation of vega for several options with different expiration dates and strike prices.
Volatility strategies have recovered from drawdowns in less than ___ year, which contrasts with long-only stocks, credit, or commodity investments that can take ___-___ years.
Volatility strategies have recovered from drawdowns in less than 1 year, which contrasts with long-only stocks, credit, or commodity investments that can take 1-2 years.
Mean reversion in realized volatility (is/is not) aribtragable.
Mean reversion in realized volatility is not aribtragable.
A ___ ___is a process that is used to model values that may experience large discrete changes.
A jump process is a process that is used to model values that may experience large discrete changes.
___ ___is the risk of continuous accrual of small changes in an asset’s volatility over time.
Volatility diffusion is the risk of continuous accrual of small changes in an asset’s volatility over time.
A ___ ___refers to the risk of large, sudden increases in voalitility.
A volatility jump refers to the risk of large, sudden increases in voalitility.
Continuous time diffusion process for returns (equation)
A ___ ___occurs when the observed behavior of a financial series undergoes a significant change.
A regime change occurs when the observed behavior of a financial series undergoes a significant change.
While quoted yields are used to calculate bond prices, quoted ___ ___ is used to calculate options and volatility swap prices.
While quoted yields are used to calculate bond prices, quoted implied volatility is used to calculate options and volatility swap prices.
Bond prices and volatility products are both driven by ___-___factors.
Bond prices and volatility products are both driven by mean-reverting factors.
Volatility and interest rates both have a ___ structure.
Volatility and interest rates both have a term structure.
___ of volatility and ___of bonds both require compensation for their risk.
Sellers of volatility and buyers of bonds both require compensation for their risk.
A ___ ___involves a variance buyer making a payment based on a predetermined variance level and receiving an asset’s annual realized variance.
A variance swap involves a variance buyer making a payment based on a predetermined variance level and receiving an asset’s annual realized variance.
Variance swap payoff (equation)
Swap notional value * (Realized variance - strike variance)
The ___ ___ ___ is a market-based estimation of the 30-day implied volatility of the S&P 500
The CBOE Volatility Index (VIX) is a market-based estimation of the 30-day implied volatility of the S&P 500
Calculation of the VIX uses a ___ ___ of S&P options. The variance swap rate is calculated immediately prior to and after ___ days. The VIX is the ___ ___ of the two variance rates.
Calculation of the VIX uses a weighted avg of S&P options. The variance swap rate is calculated immediately prior to and after 30 days. The VIX is the square root of the two variance rates.
The VIX ___ ___is the geographical representation of the relationship between prices of vix futures contracts and their settlement dates.
The VIX term structure is the geographical representation of the relationship between prices of vix futures contracts and their settlement dates.
The term structure of the VIX is generally in ___.
The term structure of the VIX is generally in contango.
A ___ ___ is a derivative contract that transfers the risk between two parties that the average correlation among a set of stocks differs from the swap’s strike correlation.
A correlation swap is a derivative contract that transfers the risk between two parties that the average correlation among a set of stocks differs from the swap’s strike correlation.
Correlation swap payoff (equation)
Swap Notion Value * (Avg Corr - Strike Corr)
Empirical research shows that implied correlations tend to be ___ relative to historical correlation.
Empirical research shows that implied correlations tend to be overpriced relative to historical correlation.
Owning a correlation swap during a crises is typically ___.
Owning a correlation swap during a crises is typically profitable.
To make a ___ trade, sell the volatility of the index and buy the volatility of the index components.
To make a dispersion trade, sell the volatility of the index and buy the volatility of the index components.
A ___ spread is a combination of long calls and short calls on the same underlying asset with the same expiration date but different strike prices. It is a type of skew spread.
A vertical spread is a combination of long calls and short calls on the same underlying asset with the same expiration date but different strike prices. It is a type of skew spread.
A ___ ___is a vertical spread with unequal numbers of long and short option positions.
A ratio spread is a vertical spread with unequal numbers of long and short option positions.
A ___ vertical spread is created using the same number of long and short positions
A pure vertical spread is created using the same number of long and short positions
A ___ spread is buying at the money puts and selling out of money puts and benefits if the asset value ___.
A bear spread is buying at the money puts and selling out of money puts and benefits if the asset value declines.
A ___ spread trade is buying at the money calls and selling out of the money calls and benefits if the underlying asset value ___.
A bull spread trade is buying at the money calls and selling out of the money calls and benefits if the underlying asset value increases.
___ ___occur because differences between implied volatilities of options with different strike prices. To exploit these differences, a traditional vertical spread strategy ___ OTM options with higher IV than at the money options.
Volatility skews occur because differences between implied volatilities of options with different strike prices. To exploit these differences, a traditional vertical spread strategy sells OTM options with higher IV than at the money options.
Vertical spreads commonly used in equities with delta hedging involve ___ ATM puts and ___OTM puts.
Vertical spreads commonly used in equities with delta hedging involve buying ATM puts and selling OTM puts.
A ___ spread trade is a combination of long calls and short calls on the same underlying asset with the same strike but different expiration dates.
A horizontal spread trade is a combination of long calls and short calls on the same underlying asset with the same strike but different expiration dates.
Horizontal spread trades have ___ exposure to changes in the underlying assets than vertical spread trades.
Horizontal spread trades have less exposure to changes in the underlying assets than vertical spread trades.
For a horizontal spread trade, if the short-term option IV is expected to increase relative to the long-term option IV, then the strategy ___ the short-term options and ___ the longer-term options.
For a horizontal spread trade, if the short-term option IV is expected to increase relative to the long-term option IV, then the strategy buys the short-term options and sells the longer-term options.
Payoffs on horizontal spread trades is ___ certain than vertical spread trades.
Payoffs on horizontal spread trades is less certain than vertical spread trades.
An ___-___ option spread involves a long option position in one asset and a short option position in another asset.
An inter-asset option spread involves a long option position in one asset and a short option position in another asset.
Inter-asset option spreads are ___ when volatility is high and ___ when volatility is low.
Inter-asset option spreads are high when volatility is high and low when volatility is low.
___ is an option prices’ sensitivity to a unit change in the underlying asset’s volatility or the option’s IV.
Vega is an option prices’ sensitivity to a unit change in the underlying asset’s volatility or the option’s IV.
Vega (Equation)
The ___ ___index is designed to extract the volatility or correlation risk premium.
The short volatility index is designed to extract the volatility or correlation risk premium.
The ___ ___index is designed to profit during market declines.
The long volatility index is designed to profit during market declines.
The ___ ___ ___index is designed to capitalize on volatility mispricings.
The relative value volatility index is designed to capitalize on volatility mispricings.
The ___ ___ ___ index is designed to protect against large broad market declines
The tail risk hedge index is designed to protect against large broad market declines
Long volatility and tail risk indices are ___ volatile than short volatility or long volatility indices.
Long volatility and tail risk indices are more volatile than short volatility or long volatility indices.
Relative value, short and long volatility strategies have ___ correlations.
Relative value, short and long volatility strategies have low correlations.
Relative value volatility strategies have ___ net vega exposure.
Relative value volatility strategies have small net vega exposure.
Long volatility funds tend to have ___ correlation with tail risk funds.
Long volatility funds tend to have high correlation with tail risk funds.
Long volatility strategies are ___ aggressive than tail risk strategies.
Long volatility strategies are less aggressive than tail risk strategies.
Unlike tail risk funds, long volatility funds (do/ do not) have a mandate to provide protection at all times.
Unlike tail risk funds, long volatility funds do not have a mandate to provide protection at all times.
A ___ ___is defined as an event/occurrence that deviates beyond that which is expected and that is extremely difficult to predict.
A black swan is defined as an event/occurrence that deviates beyond that which is expected and that is extremely difficult to predict.
Long volatility strategies have a ____ drag on performance due to ____ costs.
Long volatility strategies have a large drag on performance due to high costs.
