As a result, the trader can open long positions in the stocks in the upper 10% according to these criteria and short positions in the stocks in the lower 10%. On the other side it of the observation, stocks with the largest increases in put options implied volatilities over the previous month on average tend to have lower future returns. The observation suggests that stocks with the largest increases in call options implied volatilities over the previous month on average tend to have higher future returns. The implied volatility strategy is based on an observation on the put/call implied volatility of stock options. While this is counter intuitive because the general notion that higher risk yields higher returns the low-volatility anomaly strategy shows quite good returns. The low-volatility anomaly trading strategy relies on the observation that the future returns of low-return-volatility portfolios outperform the returns of high-return-volatility portfolios. The portfolio in this strategy consists of buying the top 10% stocks with the highest B/P ratio and selling short the bottom 10% with the lowest B/P ratio. The difference is that the performance selection criterion is based on book-to-price value (B/P ratio). This strategy is also based on buying the top winners and selling the bottom losers, like the price-momentum and the earnings-momentum strategies above. In the price-momentum strategy, the performance criterion is return, while in the earnings-momentum strategy the criterion is based on earnings. What is different is the performance criteria. The earnings-momentum strategy follows the same logic as the price-momentum strategy above – buying or selling the top/bottom 10% stocks according to their performance. The strategy can be long-only – you open long positions in the top 10% of the best-performing stocks, or long-short, where you buy the top 10% best performing and sell short the 10% of the worst-performing stocks. The performance criterion can be cumulative return, mean return, or risk-adjusted return. Basic trade could be enhanced by buying options of firms with high belief disagreement (high analysts’ disagreement about firms’ earnings).The price-momentum strategy is based on buying the best-performing stocks and selling the worst-performing stocks, according to a predefined criterion. Dispersion trading is a sort of correlation trading as trades are usually profitable in a time when the individual stocks are not strongly correlated and loses money during stress periods when correlation rises. The investor, therefore, could sell options on index and buy individual stocks options. The dispersion trading uses the known fact that the difference between implied and realized volatility is greater between index options than between individual stock options. There is, however, a more elegant way to exploit this risk premium – the dispersion trading. Trades routinely exploit this difference by selling options with consecutive delta hedging. The high difference between the implied volatility of index options and subsequent realized volatility is a known fact. Design multi-factor multi-asset portfolios.2000+ links to academic research papers. Unlocked Screener & 300+ Advanced Charts.
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