I am using uppermark. There are some questions related to options. ie Merger arbitrage = selling puts options ? Hedge fund managers = long call options? so hedge fund investors = short call options ? Can we do a summary on all the strategies ?
Convergence trading funds, corporate restructuring funds, selling insurance, and selling a put option all have similar risk/return profiles.
Basically in all those different trades your assuming nothing goes wrong and that you get paid the amount of the spread that takes into account IF the transaction doesn’t work out. Similar to an insurance company that receives fees UNTIL there is an accident where it loses money. Thats why there is a high positive kurtosis because there is a fat tail event.
how about for CDO / CDS investors ? Are they buying/selling a call/put ? Anyone ? many thanks…
Merger arb - Can take any position in options depending on whether they believe the merger will go through or not. The problem is that normal option pricing is probably not appropriate because there is a binary event which is not part of standard option pricing. Hedge fund managers - Are invested in their own funds or their investors hate it. Most hedge funds are long vol on way or another but whether or not they are long calls exactly is not clear. Investors are just partners in the fund. CDO/CDS investors - Are short default options, I guess, but option pricing is pretty useless for valuing these products. I’d go with the same sort of negative skew, fat tails that go with short option strategies though.