Thursday, July 19, 2012

Colm O’Shea quote (why he bought CDS instead of equity puts leading up to crisis)

From the book Hedge Fund Market Wizards:

“The advantage of CDS was that it was a cheaper way of doing the trade. One problem with buying equity puts is that equity volatility tends to be very expensive. Who is the natural seller of equity puts? No one. Who is the natural buyer of equity puts? Everyone. The world is long equities, and people like owning insurance, so there is an excess of natural buyers for equity puts. That is why equity option prices are structurally expensive.”