What does it mean to long convexity of options?
"First lets understand what convexity means: Convexity -  convexity refers to non-linearities in a financial model. In other   words, if the price of an underlying variable changes, the price of an   output does not change linearly, but depends on the second derivative   (or, loosely speaking, higher-order terms) of the modeling function.   Geometrically, the model is no longer flat but curved, and the degree   of curvature is called the convexity. Okay so for us idiots this means: if the price of ABC (we will call P) is determined by X and Y. Then if X decreases by 5 then the value of P might not necessarily decrease by 5 but instead is also dependent on Y (wtf$%#! is Y?, who cares, its not important for us to know, we can understand what convexity is without knowing the math behind it). So if we chart this the line would look like a curve. (clearly this is an over simplification of the math involved but it gives us an idea) So now in terms of options, convexity is also known as gamma, it will probably be easier to talk about gamma instead of using a confusing word like convexity(gamma is the convexity of options). So lets define Gamma: Gamma - The rate of change for delta with respect to the underlying asset's price. So the gamma of an option indicates how the delta of an option will change relative to a 1 point move in the underlying asset. In other words, the Gamma shows the option delta's sensitivity to market price changes. or Gamma shows how volatile an option is relative to movements in the underlying asset. So the answer is: If we are long gamma (convexity of an option) it simply means we are betting on higher volatility in the underlying asset(in your case the VIX). Really that simple? Well kinda, to fully understand how this works you really need to understand the math behind it. But yes being long gamma means being long volatility. An example of being ""long gamma"" is a ""long straddle"" Side Note: I personally do trade the VIX and it can be very volatile, you can make or lose lots of money very quickly trading VIX options. Some resources: What does it mean to be ""long gamma"" in options trading? Convexity(finance) Long Gamma – How to Make a Long Gamma Position Work for You Delta - Investopedia Straddles & Strangles - further reading if your interested. Carry(investment) - even more reading." Long convexity is achieved by owning long dated low delta options. When a significant move occurs in the underlying the volatility curve will move higher. Instead of a linear relationship between your long position and it's return, you receive a multiple of the linear return. For example: Share price $50 Long 1 (equals 100 shares) contract of a 2 year 100 call Assume this is a 5 delta option If the stock price rises to $70 the delta of the option will rise because it is now closer to the strike. Lets assume it is now a 20 delta option. Then  Expected return on a $20 price move higher, 100 shares($20)(.20-.05)=$300 However what happens is the entire volatility surface rises and causes the 20 delta option to be 30 delta option. Then The return on a $20 price move higher, 100 shares($20)(.30-.05)=$500 This $200 extra gain is due to convexity and explains why option traders are willing to pay above the theoretical price for these options. Convexity refers to vega. Gamma refers to delta. Negative carry refers to time decay.
After searching a bit and talking to some investment advisors in India I got below information. So thought of posting it so that others can get benefited. This is specific to indian mutual funds, not sure whether this is same for other markets. Even currency used for examples is also indian rupee. A mutual fund generally offers two schemes: dividend and growth. The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time. In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time. The impact on the NAV The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.  How does this impact us? We don't gain or lose per se by selecting any one scheme. Either we make the choice to get the money regularly (dividend) or at one go (growth). If we choose the growth option, we can make money by selling the units at a high NAV at a later date. If we choose the dividend option, we will get the money time and again as well as avail of a higher NAV (though the NAV here is not as high as that of a growth option). Say there is a fund with an NAV of Rs 18. It declares a dividend of 20%. This means it will pay 20% of the face value. The face value of a mutual fund unit is 10 (its NAV in this case is 18). So it will give us Rs 2 per unit. If we own 1,000 units of the fund, we will get Rs 2,000. Since it has paid Rs 2 per unit, the NAV will fall from Rs 18 to Rs 16. If we invest in the growth option, we can sell the units for Rs 18. If we invest in the dividend option, we can sell the units for Rs 16, since we already made a profit of Rs 2 per unit earlier. What we must know about dividends The dividend is not guaranteed. If a fund declared dividends twice last year, it does not mean it will do so again this year. We could get a dividend just once or we might not even get it this year. Remember, though, declaring a dividend is solely at the fund's discretion; the periodicity is not certain nor is the amount fixed. "SELL -10 VERTICAL $IYR 100 AUG 09 32/34 CALL @.80 LMT 1) we are talking about options, these are a derivative product whose price is based on 6 variables. 2) options allow you to create risk out of thin air, and those risks come with shapes, and the only limit is your imagination (and how much your margin/borrowing costs are). Whereas a simple asset like the shares for $IYR only has a linear risk profile. stock goes up, you make money, stock goes down, you lose money, and that risk graph looks linear. a ""vertical"" has a nonlinear risk profile 3) a vertical is a type of ""spread"" that requires holding options that expire at the same time, but at different strike prices. 3b) This particular KIND of vertical is called a bear call spread (BCS). Since you are bearish (this makes money if the stock goes down, or stays in a very specific range) but are using calls which are a bullish options product. 4) -10 means you are selling the vertical. +10 means you are buying the vertical. A ""long"" vertical is initiated by buying an option closer to the money, and selling an option at a higher strike price. This would be +X A ""short"" vertical is initiated by selling an option closer to the money and buying an option at a higher strike price. The quantity would be -X 5) 32/34 stands for the strike prices. so you would be selling 10 call options at the 32 strike price, and buying 10 call options at the 34 strike price, both options expire in August 6) LMT stands for limit order, and $.80 is the limit order price that is desired. OPENING a vertical spread requires knowledge of options as well as how to send orders. MANAGING a vertical requires even more finesse, as you can ""leg-in"" and ""leg-out"" of spreads, without sending the entire order to the exchange floor at once. There is much to learn." "There is no zero risk option! There is no safe parking zone for turbulent times! There is no such thing as a zero-risk investment.  You would do well to get this out of your head now.  Cash, though it will retain its principle over time, will always be subject to inflation risk (assuming a positive-inflation environment which, historically in the US anyway, has always been the case since the Great Depression). But I couldn't find a ""Pure Cash - No investment option"" - what I mean by this is an option where my money is kept idle without investing in any kind of financial instrument (stocks, bonds, other MFs, currencies, forex etc etc whatever).  Getting back to the real crux of your question, several other answers have already highlighted that you're looking for a money market fund.  These will likely be as close to cash as you will get in a retirement account for the reasons listed in @KentA's answer. Investing in short-term notes would also be another relatively low-risk alternative to a money market fund.  Again, this is low-risk, not no-risk. I wanted such kinda option because things may turn bad and I may want nothing invested in the stock markets/bond markets. I was thinking that if the market turns bear then I would move everything to cash Unless you have a the innate ability to perfectly time the market, you are better off keeping your investments where they are and riding out the bear market.  Cash does not generate dividends - most funds in a retirement account do.  Sure, you may have a paper loss of principle in a bear market, but this will go away once the market turns bull again.  Assuming you have a fairly long time before you retire, this should not concern you in the slightest. Again, I want to stress that market timing does not work.  Even the professionals, who get paid the big bucks to do this, on average, get it right as often as they get it wrong.  If you had this ability, you would not be asking financial questions on Stack Exchange, I can tell you that. I would recommend you read The Four Pillars of Investing, by William Bernstein.  He has a very no-nonsense approach to investing and retirement that would serve you (or anybody) well in turbulent financial markets.  His discussion on risk is especially applicable to your situation." "Is option trading permitted in the account? Most 401(k) do not permit this. 1 - it means none traded today. 2 - there are 50 outstanding contracts. Each one has a guy who is long and a guy who is short.  3 - not really, it might depend on the stock.  4 - no. With commissions so low, and the inherent leverage of options, one contract reflecting 100 shares of the underlying stock, the minimum is what you can sleep soundly with.  5 - because GLD does not reflect precisely 1/10 oz of gold's price. If you look at the prospectus, it reads ""The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses."" Since there are no dividends to take expenses from, the GLD price will erode by .4% each year compared to the price of 1/10oz gold." I researched quite a bit around this topic, and it seems that this is indeed false. Long ter asset growth does not converge to the compound interest rate of expected return. While it is true that standard deviations of annualized return decrease over time, because the asset value itself changes over time, the standard deviations of the total return actually increases.      Thus, it is wrong to say that you can take increased risk because you have a longer time horizon.  Source "I agree, this is an great discussion.  I think I understand your position now - Black-Scholes is an equilibrium model because its a model that in effect says, ""here's the price of an option if the underlying follows this stochastic process"". I guess my question is then - what would a strictly ""no arbitrage"" equity option model look like then (e.g. one analogous to Hull-White)? Does such a concept even make sense?" Intuitive? I doubt it. Derivatives are not the simplest thing to understand.  The price is either in the money or it isn't. (by the way, exactly 'at the money' is not 'in the money.') An option that's not in the money has time value only. As the price rises, and the option is more and more in the money, the time value drops. We have a $40 stock. It makes sense to me that a $40 strike price is all just a bet the stock will rise, there's no intrinsic value. The option prices at about $4.00 for one year out, with 25% volatility. But the strike of $30 is at $10.68, with $10 in the money and only .68 in time premium. There's a great calculator on line to tinker with.  Volatility is a key component of options trading. Think about it. If a stock rises 5%/yr but rarely goes up any more or less, just steady up, why would you even buy an option that was even 10% out of the money? The only way I can describe this is to look at a bell curve and how there's a 1/6 chance the event will be above one standard deviation. If that standard deviation is small, the chance of hitting the higher strikes is also small.  I wrote an article Betting on Apple at 9 to 2 in which I describe how a pair of option trades was set up so that a 35% rise in Apple stock would return 354% and Apple had two years to reach its target. I offer this as an example of options trading not being theory, but something that many are engaged in. What I found curious about the trade was that Apple's volatility was high enough that a 35% move didn't seem like the 4.5 to 1 risk the market said it was. As of today, Apple needs to rise 13% in the next 10 months for the trade to pay off. (Disclosure - the long time to expiration was both good and bad, two years to recover 35% seemed reasonable, but 2 years could bring anything in the macro sense. Another recession, some worldwide event that would impact Apple's market, etc. The average investor will not have the patience for these long term option trades.) "This is basically martingale, which there is a lot of research on. Basically in bets that have positive expected value such as inflation hedged assets this works better over the long term, than bets that have negative expected value such as table games at casinos. But remember, whatever your analysis is: The market can stay irrational longer than you can stay solvent. Things that can disrupt your solvency are things such as options expiration, limitations of a company's ability to stay afloat, limitations in a company's ability to stay listed on an exchange, limitations on your borrowings and interest payments, a finite amount of capital you can ever acquire (which means there is a limited amount of times you can double down). Best to get out of the losers and free up capital for the winners. If your ""trade"" turned into an ""investment"", ditch it. Don't get married to positions."