Madoff: A Riot of Red Flags. CrossRef GregoriouG. This article discusses the Madoff strategy called the split-strike fonversion. This generates income for the trader, even if the implied volatilities of puts are higher than that of calls. Specifically, MADOFF caused those investor funds to be sent from a BLMIS account in New York, New York the "BLMIS Client Account"to accounts held by MSIL in London, United Kingdom the "MSIL Accounts"and further caused funds to be transferred from the MSIL Accounts to either the BLMIS Client Account or to another bank account in New York, New York, which was principally used to fund BLMIS's operations the "BLMIS Operating Account". Portfolio Performance Manipulation and Manipulation-proof Performance Measures.
That Bernard Madoff was playing a giant ponzi game is now well known. But what is not that well known is the strategy that he claimed to have implemented. Venkatesh That Bernard Madoff was playing a giant ponzi game is now well known. Worried investor looking at the monitor at Bombay Stock Exchange thinking about his investment. This article discusses the Madoff strategy called the split-strike conversion. It explains why traders construct such a strategy and the conditions under which it is gainful.
It also shows how the strategy can be modified to suit the present market conditions in India. But why is it called split-strike conversion? A conversion is a strategy where the trader buys an underlying contract and sells an offsetting synthetic contract. The conversion employs same strike for calls and puts. In a split-strike conversion, the ATM strike is instead split into split strike conversion investment strategy different OTM strikes.
A skew can be understood as a graph that plots the implied volatilities of various strikes of the same underlying for a particular month. If the implied volatilities of calls are greater than implied volatilities of puts, a trade can sell calls and buy puts. The problem at present is that the implied volatilities of puts are higher than implied volatilities of calls. Traders can, nevertheless, set-up a fence in the following scenario: First, a trader has to hold large-cap stocks that are closely correlated to the Nifty.
Second, the trader has to have a view that the underlying shares and therefore the index will decline in the near term. The trader can then buy OTM puts and sell OTM calls on the Index for the notional value as the underlying shares. Suppose the Nifty does decline in value, the OTM puts will generate substantial gains while the calls will expire worthless. This generates income for the trader, even if the implied volatilities of puts are higher than that of calls.
Traders can also adopt this strategy with a single stock or a futures contract. The criterion is that the primary position the stock or the futures contract has to be held for the longer term, unlike in the case of typical split-strike conversion, where the underlying is bought to arbitrage price differentials. If the underlying moves up, the trader can contain the losses on the synthetic position by selling the underlying with the intention of buying it back at a lower price at a later date.
Split-strike conversion is gainful only if the option skew favours the strategy. And even then, traders have to consider the cost of setting up the strategy, as there is two-leg brokerage commission. A directional fence discussed above may be more appropriate for traders who carry a negative split strike conversion investment strategy. The author is an investment strategist. He can be reached at enhancek oparty.ru.
Worried investor looking at the monitor at Bombay Stock Exchange thinking about his investment. Get more of your favourite news delivered to your inbox. Recent Article in PORTFOLIO. Group Sites: The Hindu. NEVER miss any latest news!
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It is now known that the very impressive investment returns An Analysis of the Split-Strike Conversion Strategy aspects of the split - strike strategy and.
Dec 16, 2008 · Madoff’s Not-So-Unique Options Strategy. By. David Gaffen. Dec 16, 2008 pm ET The. To Read the Full Story, Subscribe or.
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