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Weather Derivatives, Steven D. Dolvin

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Most people are aware of stock options or futures contracts on commodities such as gold and oil. However, the derivatives market is very diverse, including such things as weather derivatives. With hurricane season upon us, you may want to do some research on hurricane futures and options (http://www.cmegroup.com/trading/weather/hurricanes/hurricane.html). Essentially, these contracts allow insurers to transfer risk to other parties, such as hedge funds. See the article here, CME Group.

Selling Fear = Making Money, Steven D. Dolvin

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Buying put options is commonly understood to provide a measure of insurance against price declines. As such, the cost of options is strongly correlated to the amount of fear in the market. It might be prudent in these cases to make the opposite trade -- selling put options. The seller (or writer) collects the premium, which during times of fear is very large. The risk is a significant decline in prices. See the article here, Forbes.

Cds Trades Continue, Steven D. Dolvin

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JP Morgan recently announced a $2 billion loss, which renewed criticisms that originally surfaced during the credit crisis. While final details are still to come, initial reports suggest that much of the loss is attributable to the sale of Credit Default Swap (CDS) contracts. Similar exposures helped lead to the downfall of Lehman Bros., Bear Sterns, and AIG following the Crash of 2008. (See the article here, Fox Business.)

Shorting Via Options (Facebook), Steven D. Dolvin

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Following Facebook's IPO, investors were looking to short the stock. However, there was little (to no) available supply of shares to borrow. So, are we unable to create this position? Well, investors can resort to options.

Recall the Put-call parity equation:

S + P = C + K/(1+r)^t

If we rearrange the formula, we can create a synthetic (or replicated) position. So, if we wanted the equivalent of a short position in a stock:

-S = -C - K/(1+r)^t + P

Thus, to create a synthetic short, we would sell a call, short a t-bill (or borrow present value of …