Over the last couple of months, we have really challenged ourselves to think creatively about some difficult topics. On January 29 and March 4, we took a fresh and innovative look at market dynamics through a game theoretical framework. We did this by examining the investor/advisor relationship and studying the magnitude of market moves. On February 19 and February 26, we took our first steps into the world of probability theory, as we outlined what conditional probability is and why it is important. To do this, we had some fun with the “Monte Hall Problem” and we dove into Bayes’ Theorem.
Back in December, 2015, we dissected volatility’s relationship with delta, and we were able to conclude that its impact is entirely driven by the relative moneyness of the option. On February 5, we discussed whether or not it made sense to inventory long volatility. Looking at both leveraged volatility products, like VXX or UVXY, and the futures market itself, we concluded that the contango that exists in the volatility futures makes it very costly to hold volatility indefinitely.
On January 22, we showed how the Black Scholes model can be used to compute volatility. From this, we were able to demonstrate how volatility is consistently overpriced, which could be interpreted as a market inefficiency. Back in December, 2015, we took a look at the price impact asymmetry that exists in the marketplace, which suggested that it is costlier to sell in down markets than it is to buy in up markets. This lends even more weight to the significant velocity of down moves. Lastly, on March 11 and March 18, we learned what Geometric Brownian Motion was, and discussed the details relating to how this mathematical concept modeled stock price movements.
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