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Simon Lack This article was authored by Simon Lack, founder of SL Advisors, LLC, a Registered Investment Advisor.
Everybody wants to know why the market just did what it did, and what its next likely move might be. Chinese equities don’t seem that important to us, but the U.S. sell-off in August coincided with the Chinese one, so maybe there’s a stronger connection than we thought. It’s important because investors would love to alter their risk profile profitably — taking more risk when markets are rising and less risk when they’re falling. There is of course an easy way to do this, which is through buying call options. Through their command of Greek, an option’s Delta (your exposure) moves in synchronicity with the market in a thoroughly satisfying way (if you’re long), and the more Gamma you have the more cooperatively your Delta recalibrates your risk appropriately. The snag with this most Utopian of investment postures is that buying options costs money. The happy state in which options deposit their holders cannot be had for free.
Nonetheless, the search for free, optimized risk is never-ending. Investors want more risk when it’s low and less when it’s high. Put another way, they want less risk but not yet, as St. Augustine ("Give me chastity…but not yet") might say if he was alive today and glued to CNBC. Older readers will recall Portfolio Insurance, which was blamed for the 1987 crash. Its adherents were req...................... To view our full article Click here
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