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How Equity Managers Can Use Options-Implied Analytics

Frank Ferstler, Nicholas Pezolano

Long only or long/short portfolio managers with mandates that restrict use of trading derivatives can no longer afford to ignore the options market. With index and single name options volume often surpassing equity volume on a dollar or share basis, options trading has become the vehicle of choice for many retail traders, institutional investors and key politicians. Informed traders often choose the options market to trade first, causing the options market to lead the stock market. Equity managers are missing out on valuable insights the options market can provide to them. NewMark Risk removes the nuances and complexities of providing these insights allowing equity managers to utilize information the options market contains to better inform there investment decisions. Outside of the traditional greeks, there are over 100 analytics you can derive out of options data with NewMark Risk being the only source to provide all these option-implied analytics in one place.

Options-Implied analytics can be broken down into the following categories:
  • Surface Analytics - Given the nature of options data there are many 3-dimensional surfaces that you can derive, the most commonly looked at being the Implied Volatility Surface (IVS). There are many more such surfaces to consider.
  • Option/Stock Trading Flow Dynamics - Option based volume and measures of liquidity as well as option to stock relationships.
  • Options-Implied Characteristics
  • - Utilizing options data you can derive what the options market thinks various metrics should be, options can provide forward looking measures of variance, kurtosis, skewness, dividend yields to name a few examples.
  • Options-Implied Risk Premiums
  • - Analyzing the spread or difference between the options-implied and realized (underlying) analytics.

Within each category exists a rich set of analytics that can satisfy the needs of a wide range of equity investors. Equity portfolio managers can utilize options-implied analytics for both fundamental and quantitative strategies with some of the common use-cases below:

  • Trading Events.
  • Signals for a quant alpha model.
  • Enhance a fundamental or quantamental research process.
  • Features for a machine learning model.