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1/6
NOPE apparently means “net options pricing effect”, and the "theory" recognizes that delta hedging is highly self-reinforcing – i.e. rising prices force delta hedgers to buy, thus pushing prices up further, while falling prices do the opposite. https://www.ft.com/content/dd3b8f7b-ff0c-4887-b730-52a0fb0a11d2
NOPE apparently means “net options pricing effect”, and the "theory" recognizes that delta hedging is highly self-reinforcing – i.e. rising prices force delta hedgers to buy, thus pushing prices up further, while falling prices do the opposite. https://www.ft.com/content/dd3b8f7b-ff0c-4887-b730-52a0fb0a11d2
2/6
We've known this for a long time, however, and it is true of any form of leverage, with the main difference between "straight" leverage and leverage through options being that the former is linear and the latter non-linear.
We've known this for a long time, however, and it is true of any form of leverage, with the main difference between "straight" leverage and leverage through options being that the former is linear and the latter non-linear.
3/6
I discuss this in my 2001 book, for example, as an example of balance-sheet "inversion", as have George Soros, Hyman Minsky and, in a different way, Irving Fischer. When I used to trade Latin American bonds, we always kept an eye on the amount of... https://www.amazon.com/Volatility-Machine-Emerging-Economics-Financial-dp-0195143302/dp/0195143302/ref=mt_other?_encoding=UTF8&me=&qid=1618130289
I discuss this in my 2001 book, for example, as an example of balance-sheet "inversion", as have George Soros, Hyman Minsky and, in a different way, Irving Fischer. When I used to trade Latin American bonds, we always kept an eye on the amount of... https://www.amazon.com/Volatility-Machine-Emerging-Economics-Financial-dp-0195143302/dp/0195143302/ref=mt_other?_encoding=UTF8&me=&qid=1618130289
4/6
options and leveraged positions in the market because the more leverage there was, the more likely price moves in either direction (especially down) would be automatically reinforced by additional buying or selling. In fact I believe that the 1987 crash was widely blamed...
options and leveraged positions in the market because the more leverage there was, the more likely price moves in either direction (especially down) would be automatically reinforced by additional buying or selling. In fact I believe that the 1987 crash was widely blamed...
5/6
on "portfolio insurance" which was just delta hedging under a different name.
The important point, which we always relearn during a financial crisis and then promptly forget, is that techniques and instruments that are often counter-cyclical in well-functioning markets...
on "portfolio insurance" which was just delta hedging under a different name.
The important point, which we always relearn during a financial crisis and then promptly forget, is that techniques and instruments that are often counter-cyclical in well-functioning markets...
6/6
are likely to be used in highly pro-cyclical ways in speculative markets, and this mechanically causes volatility in both directions to rise, especially on the way down.
are likely to be used in highly pro-cyclical ways in speculative markets, and this mechanically causes volatility in both directions to rise, especially on the way down.
