20 Things to Do Before You Ask for a Price (Part 3)

Welcome to Part 3 of “20 Things to do Before You Ask for a Price”. To review, “20 Things” is a to-do list I developed more than 2 decades ago while running a derivative sales team. The desk committed a substantial amount of capital in pursuit of business, which made it easy to win trades but also easy to lose money in the process of winning those trades. 20 Things was about playing defense and offense simultaneously by requiring the salesperson to be an active part of the price discovery process. While the trader would ultimately make the price and bear the risk, the salesperson, through 20 Things, could be a valuable part of the process. The result: better risk taking and a more sustainable business. Here are things 11-15. I hope you enjoy and find this useful. I wish you an excellent Thanksgiving holiday. 11. Corporate action? Is this stock a deal name or subject to some other corporate action? Use the CACS function on Bloomberg to look for corporate actions. Deal names can have very unique implied distributions and are difficult to provide risk capital into in option trades. 12. Evaluate the vol. What is the implied volatility of the name? How does it compare to realized volatility? How does the name spread versus index or sub-index volatility? Run the GV function. 13. What does strike skew look like? The skew may be indicative of the amount of gap risk potential in the name. Run Bloomberg command OVDV SKEW and look at the spread in risk reversals on the OMON screen. 14. What is the shape of the term structure? This can give a sense as to how much the market is willing to pay for an event (ie, earnings or an FDA announcement). Run Bloomberg command OVDV TRMS. 15. What is the vol risk in the trade? Is this a long-dated option on a high-priced stock? If so, you should know what the vega of the option is. Example: 10k F Jan’25 11 strike calls have far less vega than 10k MSFT Jan’27 430 call. These very different options call for different kinds of dialogue with the trader and client. Use the Bloomberg OV function.

Om Podcasten

The Alpha Exchange is a podcast series launched by Dean Curnutt to explore topics in financial markets, risk management and capital allocation in the alternatives industry. Our in depth discussions with highly established industry professionals seek to uncover the nuanced and complex interactions between economic, monetary, financial, regulatory and geopolitical sources of risk. We aim to learn from the perspective our guests can bring with respect to the history of financial and business cycles, promoting a better understanding among listeners as to how prior periods provide important context to present day dynamics. The “price of risk” is an important topic. Here we engage experts in their assessment of risk premium levels in the context of uncertainty. Is the level of compensation attractive? Because Central Banks have played so important a role in markets post crisis, our discussions sometimes aim to better understand the evolution of monetary policy and the degree to which the real and financial economy will be impacted. An especially important area of focus is on derivative products and how they interact with risk taking and carry dynamics. Our conversations seek to enlighten listeners, for example, as to the factors that promoted the February melt-down of the VIX complex. We do NOT ask our guests for their political opinions. We seek a better understanding of the market impact of regulatory change, election outcomes and events of geopolitical consequence. Our discussions cover markets from a macro perspective with an assessment of risk and opportunity across asset classes. Within equity markets, we may explore the relative attractiveness of sectors but will NOT discuss single stocks.