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The Skinny on Options: Abstract Applications

Degrees of Drag

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Certain products are exposed to “drag” in the marketplace, simply based on their being priced off of the futures market, which is always in contango or backwardation. But if we dig a bit deeper, we learn that there is actually a secondary source of drag that some products also exhibit, and this is due to their being leveraged and reset on a regular basis - often daily. This daily reset alone induces what is referred to as a “volatility tax”, and today, we see exactly how that can significantly suppress returns.

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