Barron’s: An Example of Some Sloppy Journalism (at best)

I admit, I flip through Barron’s Online each weekend, printing out and at least skimming many articles, although it’s often just to see what the herd is thinking (also hoping to find a little witty word play in Alan Ableson’s column). Anyway, in this week’s “The Striking Price” column, Kopin Tan talks about market anxiety and its effect on implied volatility in options…


…Instead of trying to explain options specifics here, I refer you to an options website or book (try Options Volatility and Pricing, by Sheldon Natenberg). Anyway, Tan talks about spikes in volatility as opportunities to sell options, specifically puts. Tan goes on to say that selling puts “can be risky since it requires buying stock in a declining market.” Not to oversimplify, but that statement is actually exactly 180 degrees wrong when you consider your basic delta-neutral options hedging strategy, which requires short put holders to hedge their positions by selling more stock (or synthetic stock) as prices decline and short call holders to hedge their positions by buying more stock as prices rally. This is one of the factors that contributed to the crash of 1987. As the market kept falling, derivatives traders rushed to hedge their short options exposure by selling stock and futures, creating a self-reinforcing spiral. Anyway, I’m not trying to bash Mr. Tan, just to point out that the media and journalism is full of intentional or unintentional misinformation and over simplification. Just because a journalist or commentator is a good writer or speaker doesn’t mean they understand and can communicate the subject matter. It’s another example of why you need to question everything and think for yourself!