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anyone sell index puts for cash flow?

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  • hatton1 hatton1 
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    Status: Physician
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    Interesting thread.  The incredible rush that you feel when money is made very quickly leads most people down a very slippery slope.  If you do this with a small part of your portfolio you will be ok.

    Click to expand…

    Possibly, but even with a 10% allocation, 3X leverage and 100% appreciation, you will be up 30% for the year which can still get you into gambling in a bad way. I think the only way around it is to drink the wine, lose your brain and money and come out the other side hopefully a wiser gambler. This sort of money-losing, going broke, transformational experience either has you turning into a hopeless gambler or a shrewd one.

    Click to expand…

    I had a couple of 10 bagger stocks in the late 90s (oracle and intel).  Tremendous rush.  I still remember it.  I did not become a gambler.  Interesting to think about.  As I have aged my risk tolerance which was very high in my youth has declined.  I guess this happens to most of us.

    #171374 Reply
     Dr.V. Investor 
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    Status: Physician
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    Joined: 03/12/2017

    We only do put options so the risk is more limited.

    Very interesting thread.  I cannot help but recall a previous partner of my spouse, a very brilliant copywriter.  He is probably the top in his job.  He earned millions with his copywriting.  One of the courses he wrote was for courses on option trading.  He lost a lot, barely able to pay his bills.  We were almost afraid to ask him how he lost his fortune, he eventually mentioned part of it is option trading.

    #171453 Reply
    Zaphod Zaphod 
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    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    We only do put options so the risk is more limited.

    Very interesting thread.  I cannot help but recall a previous partner of my spouse, a very brilliant copywriter.  He is probably the top in his job.  He earned millions with his copywriting.  One of the courses he wrote was for courses on option trading.  He lost a lot, barely able to pay his bills.  We were almost afraid to ask him how he lost his fortune, he eventually mentioned part of it is option trading.

    Click to expand…

    You mean cash secured or naked? Limited can still be catastrophic.

    #171461 Reply
     Dr.V. Investor 
    Participant
    Status: Physician
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    Joined: 03/12/2017

    cash secured.  if we lose it, we just use it for TLH.

    #171474 Reply
    Liked by Zaphod
    Zaphod Zaphod 
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    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    cash secured.  if we lose it, we just use it for TLH.

    Click to expand…

    Yeah, nothing wrong with that really. Especially if you get put to with a bounce. At any rate you learn where you’re really comfortable owning a stock/index.

    #171499 Reply
     untargetedtherapy 
    Participant
    Status: Physician
    Posts: 8
    Joined: 12/01/2018

    estimating the tail risk for SPX is feasible using historical data.  totally different than volatility products, single stocks, commodities etc.  SPX doesn’t go down (or up) 50% in 3 days, etc.

    then it all comes down to trade size.  it is quite difficult to blow up IF one is positioned appropriately small, ie not risk more than 1-2% per trade, based on correct estimate of tail risk.  margin requirements account for IV spike in high vol markets.  just look at the buying power impact of individual trade, and you can do the math.  i also found it useful to study historical options data at major IV spikes.

    https://optionalpha.com/members/tracks/intermediate-course/trade-size-capital-reserves

    this video addresses some of these points.

    #171551 Reply
     Dont_know_mind 
    Participant
    Status: Physician
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    Joined: 11/21/2017
    Splash Refinancing Bonus

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    Click to expand…

    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

    Click to expand…

    Very interesting Zaphod and thanks for sharing that. The VIX spike in Feb didn’t register on my radar because it didn’t correlate with any other movements to indicate systemic risk so I ignored it and never looked into who died and why.

    I guess with these things, it is easy to look in hindsight, but very hard to have a position with enough size to make any difference in real time. I think the informational, research and computational advantage is the key and I’m afraid we are not really in the game. A funny thing is that if there is a big enough difference in the time player A computes the outcome and player D computes the outcome, player A will have set a trap for player D by this time.

    You sometimes see this in very highly anticipated events where the opposite occurs. The main players have figured it out long beforehand and play along to profit from the anticipation of the news before reversing their positions and profiting further by burning the computationally weaker or slower players. The most clear example I can think of this in the last few years was when Mario Draghi announced Euro QE (around 2015). I can’t find a youtube clip of it, but I remember watching it and in the middle of his speech announcing the long expected euro QE a short squeeze started, and the EURO ended 500 pips higher than at the beginning of his speech, which is the opposite of what was expected and pretty hilarious.

    The problem with short term setups that look very attractive is that you never know if it will turn out to be a trap and whether you are truly computationally ahead of the game. Usually, it would be a fluke in my case to be truly ahead of the game, given how much analytic resources I have compared to larger players. Then there is the tax effect of holding anything for shorter than a 1 year holding period, which is very unattractive. You basically have to get double the return for the same effect with the short term stuff.

    I find systemic risk very interesting because that is where the strong hands will get shaken. My strategy is to do nothing until they’ve all knocked themselves out. This requires a very big shock. Which seems to occur every 5 years or so. And then things can get very mispriced. And it allows for a 1+ year holding period which is more efficient tax-wise.

    So in the case of VIX earlier this year, what stopped you from re-entering shorting VIX after the spike at 50 ? How do you know if it is the beginning of a spike further. Like Bitcoin shorting at 20k, you know it will very likely be lower in the next year, but the path could involve a move to 200k first. I think in real time, it is very hard to scale sufficiently in a low risk manner, to make the profit worthwhile.

    To the OP: with selling naked puts, other then the tail that will get you one day, there is the risk of the 1 day flash crash. You will wonder what happened, then realize you just got killed. That risk is not worth taking. Like selling EUR-CHF puts on the peg, profitable until one day it breaks.

     

    Click to expand…

    I did reshort the VIX the very next day and continued to do so for several months. It never reached that high again. The beauty of volatility is its easily computed, and you can see things like that coming, or at least the probability being elevated and adjust sizing or positions that are best suited.

    In fact there were many that did. Like I said, shorting VIX is the usual easy way to make money as its the most common outcome, but I was long given the R/R was obvious (ie, once the term structure gets to a certain level and flatness, there is only so much upside and only downside risk). Also, when it starts moving it needs to be respected. Everyone was on the same side of the boat in Feb, and it was kind of a tail wagging the dog event.

    It can be hard, but theres no need to make it all at once. This is more of a systematic thing, and its not difficult to make a decent amount given the triple digit IVs of the instruments. Position sizing and defined risks are key of course.

    Click to expand…

    I think it depends on your personality. I am not really a trader. At heart I’m a fundamental, long term macro speculator. This is just part of my makeup and I don’t think I could change that. What I have changed or attempted to do is getting better mental flexibility, risk control and figuring out where I have an edge.

    I have difficulty punting on instruments I’m not familiar with. Earlier this year I did short 1 bitcoin before it started cratering but exited for a $50 profit. I also went long 1 VIX contract before the spike and also exited at a small profit. I guess I can have an idea of what is in play and I might sate a desire to do something by buying or selling 1 contract, but I can’t really bring myself to hold anything I don’t know well. I’m not sure why I do it. I guess it’s like dieting, sometimes you have to eat something, but better to know in advance and make it small.

    I do like the setup after liquidation though and I agree that shorting VIX in Feb after the spike was a good setup. Like going long USD-CHF after the peg break. This is very satisfying. One important thing to ascertain is the macro effect of the news dislocation – if there is a minimal macro effect (eg small number of VIX players being carted off, small number of forex players being taken out by SNB) then reversion to the mean tends to be quite rapid. But if the macro consequences are likely to be significant there can be waves of volatility for weeks or months – such as with Brexit on GBP-USD. In the latter, the reversion to the mean play is much trickier. Although intellectually satisfying, I haven’t found this type of investing to be that profitable in the grand scheme of things.

    I think where I disagree with you is that these mean reversion plays or trades are not really worth the risk. I want to reduce my error rate by minimizing the number of moves I need to make so my investing strategy is based on very little activity now.

     

    #171558 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 576
    Joined: 11/21/2017

    Interesting thread.  The incredible rush that you feel when money is made very quickly leads most people down a very slippery slope.  If you do this with a small part of your portfolio you will be ok.

    Click to expand…

    Possibly, but even with a 10% allocation, 3X leverage and 100% appreciation, you will be up 30% for the year which can still get you into gambling in a bad way. I think the only way around it is to drink the wine, lose your brain and money and come out the other side hopefully a wiser gambler. This sort of money-losing, going broke, transformational experience either has you turning into a hopeless gambler or a shrewd one.

    Click to expand…

    I had a couple of 10 bagger stocks in the late 90s (oracle and intel).  Tremendous rush.  I still remember it.  I did not become a gambler.  Interesting to think about.  As I have aged my risk tolerance which was very high in my youth has declined.  I guess this happens to most of us.

    Click to expand…

    My risk tolerance has reduced too but I’m still mesmerized by the 10 baggers. That’s all I look at. Maybe I’m deluded…

    #171559 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 576
    Joined: 11/21/2017

    estimating the tail risk for SPX is feasible using historical data.  totally different than volatility products, single stocks, commodities etc.  SPX doesn’t go down (or up) 50% in 3 days, etc.

    then it all comes down to trade size.  it is quite difficult to blow up IF one is positioned appropriately small, ie not risk more than 1-2% per trade, based on correct estimate of tail risk.  margin requirements account for IV spike in high vol markets.  just look at the buying power impact of individual trade, and you can do the math.  i also found it useful to study historical options data at major IV spikes.

    https://optionalpha.com/members/tracks/intermediate-course/trade-size-capital-reserves

    this video addresses some of these points.

    Click to expand…

    Sold automated trading systems fail at a higher rate than discretionary traders, who still fail at a 95% rate.

    I’m not sure why your trading system with 1-2% per trade, selling naked put options 30-90 days out, at 50% of the face value of your portfolio would outperform. If you want us to analyse it, could you outline 1) your total portfolio 2) your trading portfoilio size 3) your exact trade strategy ? I am not sure if I understand it

    I suppose from a broad perspective, it seems to me backward to be selling put options at the tail end of a bull market that started in 2009. If you put a gun to my head and I had to choose between a system of buying or selling put options in the next year I would be a buyer. In fact, if there is a spike to new highs I will be cashing out some more or buying some put options or some sort of portfolio protection. Which has me quite worried, because using myself as a contrarian indicator, I really wonder whether we are forming a top for the cycle which I just missed. I would be cheering for a melt up, but I wouldn’t bet on it. I think it is too early to be buying put options but then so does everyone else. I think you are insane to be selling put options here, but I could be wrong.

    I wonder whether I will have enough cash in a years time and whether this whole thing can hang together until then. It’s pretty geriatric and obese already. But like Robert Schiller said “But you know, some of these obese people live to be 100 years, so you never know”.

    #171560 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 305
    Joined: 01/26/2017

    estimating the tail risk for SPX is feasible using historical data.  totally different than volatility products, single stocks, commodities etc.  SPX doesn’t go down (or up) 50% in 3 days, etc.

    then it all comes down to trade size.  it is quite difficult to blow up IF one is positioned appropriately small, ie not risk more than 1-2% per trade, based on correct estimate of tail risk.  margin requirements account for IV spike in high vol markets.  just look at the buying power impact of individual trade, and you can do the math.  i also found it useful to study historical options data at major IV spikes.

    https://optionalpha.com/members/tracks/intermediate-course/trade-size-capital-reserves

    this video addresses some of these points.

    Click to expand…

    again, a very low reward, high risk strategy akin to picking up pennies in front of a steamroller.

    fatpig

    #171565 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4782
    Joined: 01/12/2016

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    Click to expand…

    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

    Click to expand…

    Very interesting Zaphod and thanks for sharing that. The VIX spike in Feb didn’t register on my radar because it didn’t correlate with any other movements to indicate systemic risk so I ignored it and never looked into who died and why.

    I guess with these things, it is easy to look in hindsight, but very hard to have a position with enough size to make any difference in real time. I think the informational, research and computational advantage is the key and I’m afraid we are not really in the game. A funny thing is that if there is a big enough difference in the time player A computes the outcome and player D computes the outcome, player A will have set a trap for player D by this time.

    You sometimes see this in very highly anticipated events where the opposite occurs. The main players have figured it out long beforehand and play along to profit from the anticipation of the news before reversing their positions and profiting further by burning the computationally weaker or slower players. The most clear example I can think of this in the last few years was when Mario Draghi announced Euro QE (around 2015). I can’t find a youtube clip of it, but I remember watching it and in the middle of his speech announcing the long expected euro QE a short squeeze started, and the EURO ended 500 pips higher than at the beginning of his speech, which is the opposite of what was expected and pretty hilarious.

    The problem with short term setups that look very attractive is that you never know if it will turn out to be a trap and whether you are truly computationally ahead of the game. Usually, it would be a fluke in my case to be truly ahead of the game, given how much analytic resources I have compared to larger players. Then there is the tax effect of holding anything for shorter than a 1 year holding period, which is very unattractive. You basically have to get double the return for the same effect with the short term stuff.

    I find systemic risk very interesting because that is where the strong hands will get shaken. My strategy is to do nothing until they’ve all knocked themselves out. This requires a very big shock. Which seems to occur every 5 years or so. And then things can get very mispriced. And it allows for a 1+ year holding period which is more efficient tax-wise.

    So in the case of VIX earlier this year, what stopped you from re-entering shorting VIX after the spike at 50 ? How do you know if it is the beginning of a spike further. Like Bitcoin shorting at 20k, you know it will very likely be lower in the next year, but the path could involve a move to 200k first. I think in real time, it is very hard to scale sufficiently in a low risk manner, to make the profit worthwhile.

    To the OP: with selling naked puts, other then the tail that will get you one day, there is the risk of the 1 day flash crash. You will wonder what happened, then realize you just got killed. That risk is not worth taking. Like selling EUR-CHF puts on the peg, profitable until one day it breaks.

     

    Click to expand…

    I did reshort the VIX the very next day and continued to do so for several months. It never reached that high again. The beauty of volatility is its easily computed, and you can see things like that coming, or at least the probability being elevated and adjust sizing or positions that are best suited.

    In fact there were many that did. Like I said, shorting VIX is the usual easy way to make money as its the most common outcome, but I was long given the R/R was obvious (ie, once the term structure gets to a certain level and flatness, there is only so much upside and only downside risk). Also, when it starts moving it needs to be respected. Everyone was on the same side of the boat in Feb, and it was kind of a tail wagging the dog event.

    It can be hard, but theres no need to make it all at once. This is more of a systematic thing, and its not difficult to make a decent amount given the triple digit IVs of the instruments. Position sizing and defined risks are key of course.

    Click to expand…

    I think it depends on your personality. I am not really a trader. At heart I’m a fundamental, long term macro speculator. This is just part of my makeup and I don’t think I could change that. What I have changed or attempted to do is getting better mental flexibility, risk control and figuring out where I have an edge.

    I have difficulty punting on instruments I’m not familiar with. Earlier this year I did short 1 bitcoin before it started cratering but exited for a $50 profit. I also went long 1 VIX contract before the spike and also exited at a small profit. I guess I can have an idea of what is in play and I might sate a desire to do something by buying or selling 1 contract, but I can’t really bring myself to hold anything I don’t know well. I’m not sure why I do it. I guess it’s like dieting, sometimes you have to eat something, but better to know in advance and make it small.

    I do like the setup after liquidation though and I agree that shorting VIX in Feb after the spike was a good setup. Like going long USD-CHF after the peg break. This is very satisfying. One important thing to ascertain is the macro effect of the news dislocation – if there is a minimal macro effect (eg small number of VIX players being carted off, small number of forex players being taken out by SNB) then reversion to the mean tends to be quite rapid. But if the macro consequences are likely to be significant there can be waves of volatility for weeks or months – such as with Brexit on GBP-USD. In the latter, the reversion to the mean play is much trickier. Although intellectually satisfying, I haven’t found this type of investing to be that profitable in the grand scheme of things.

    I think where I disagree with you is that these mean reversion plays or trades are not really worth the risk. I want to reduce my error rate by minimizing the number of moves I need to make so my investing strategy is based on very little activity now.

     

    Click to expand…

    Absolutely agree you shouldnt be playing in what you dont understand. Not a really big fan of mean reversion either. That may or may not ever work, who knows.

    VIX is very special as a trade, it is also very volatile so it can be painful. It is reverting but in a special way, more of an oscillator.

    The reason it has worked for long periods of time is due to skew, term structure, and the nature of volatility. Every month when a futures contract closes it locks in that gain/loss and starts anew. You can calculate your r/r based on curve position/shape and (some) historical parameters (these are not to be depended on as they will change). For example, theoretical low of volatility is >0, low in reality is mid 8s. Its essentially a mode reverting instrument but different given its a calculation and not trade able.

    For the vol etps, you can simply use a rough calculation on how much value its going to lose daily to choose your spots. Since its like a 4th level derivative (spx options, calc, futures, and then etp on those) it has a lot of systematic drag that is in your favor. I have a spread sheet where I have all manners of historical drag and theoretical ones and basically it predicts the price of the instrument in question to the day within whatever range you deem appropriate. Years like 2017 that were so steady you’d come within pennies even a year out, other years like this one its not as useful. However, part of the game is recognizing when its not wise to play.

    If you are willing you can make gobs on either side of it given the tremendous IV/premium in the instruments. Its harder now without a -1x inverse and only 1 2x long etp, those were great. I’ve never liked direct shorting (unlimited loss potential, broker buying you out, etc..) and have mostly used options to define the trade.

    Volatility is incredibly complex and part of why I think its a decent arena, because so few have an inkling of whats going on they stay away or enter without understanding. Whether or not its worth the risk totally depends on what risks you take. More likely it isnt worth your time.

    #171583 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 576
    Joined: 11/21/2017

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

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    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

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    Very interesting Zaphod and thanks for sharing that. The VIX spike in Feb didn’t register on my radar because it didn’t correlate with any other movements to indicate systemic risk so I ignored it and never looked into who died and why.

    I guess with these things, it is easy to look in hindsight, but very hard to have a position with enough size to make any difference in real time. I think the informational, research and computational advantage is the key and I’m afraid we are not really in the game. A funny thing is that if there is a big enough difference in the time player A computes the outcome and player D computes the outcome, player A will have set a trap for player D by this time.

    You sometimes see this in very highly anticipated events where the opposite occurs. The main players have figured it out long beforehand and play along to profit from the anticipation of the news before reversing their positions and profiting further by burning the computationally weaker or slower players. The most clear example I can think of this in the last few years was when Mario Draghi announced Euro QE (around 2015). I can’t find a youtube clip of it, but I remember watching it and in the middle of his speech announcing the long expected euro QE a short squeeze started, and the EURO ended 500 pips higher than at the beginning of his speech, which is the opposite of what was expected and pretty hilarious.

    The problem with short term setups that look very attractive is that you never know if it will turn out to be a trap and whether you are truly computationally ahead of the game. Usually, it would be a fluke in my case to be truly ahead of the game, given how much analytic resources I have compared to larger players. Then there is the tax effect of holding anything for shorter than a 1 year holding period, which is very unattractive. You basically have to get double the return for the same effect with the short term stuff.

    I find systemic risk very interesting because that is where the strong hands will get shaken. My strategy is to do nothing until they’ve all knocked themselves out. This requires a very big shock. Which seems to occur every 5 years or so. And then things can get very mispriced. And it allows for a 1+ year holding period which is more efficient tax-wise.

    So in the case of VIX earlier this year, what stopped you from re-entering shorting VIX after the spike at 50 ? How do you know if it is the beginning of a spike further. Like Bitcoin shorting at 20k, you know it will very likely be lower in the next year, but the path could involve a move to 200k first. I think in real time, it is very hard to scale sufficiently in a low risk manner, to make the profit worthwhile.

    To the OP: with selling naked puts, other then the tail that will get you one day, there is the risk of the 1 day flash crash. You will wonder what happened, then realize you just got killed. That risk is not worth taking. Like selling EUR-CHF puts on the peg, profitable until one day it breaks.

     

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    I did reshort the VIX the very next day and continued to do so for several months. It never reached that high again. The beauty of volatility is its easily computed, and you can see things like that coming, or at least the probability being elevated and adjust sizing or positions that are best suited.

    In fact there were many that did. Like I said, shorting VIX is the usual easy way to make money as its the most common outcome, but I was long given the R/R was obvious (ie, once the term structure gets to a certain level and flatness, there is only so much upside and only downside risk). Also, when it starts moving it needs to be respected. Everyone was on the same side of the boat in Feb, and it was kind of a tail wagging the dog event.

    It can be hard, but theres no need to make it all at once. This is more of a systematic thing, and its not difficult to make a decent amount given the triple digit IVs of the instruments. Position sizing and defined risks are key of course.

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    I think it depends on your personality. I am not really a trader. At heart I’m a fundamental, long term macro speculator. This is just part of my makeup and I don’t think I could change that. What I have changed or attempted to do is getting better mental flexibility, risk control and figuring out where I have an edge.

    I have difficulty punting on instruments I’m not familiar with. Earlier this year I did short 1 bitcoin before it started cratering but exited for a $50 profit. I also went long 1 VIX contract before the spike and also exited at a small profit. I guess I can have an idea of what is in play and I might sate a desire to do something by buying or selling 1 contract, but I can’t really bring myself to hold anything I don’t know well. I’m not sure why I do it. I guess it’s like dieting, sometimes you have to eat something, but better to know in advance and make it small.

    I do like the setup after liquidation though and I agree that shorting VIX in Feb after the spike was a good setup. Like going long USD-CHF after the peg break. This is very satisfying. One important thing to ascertain is the macro effect of the news dislocation – if there is a minimal macro effect (eg small number of VIX players being carted off, small number of forex players being taken out by SNB) then reversion to the mean tends to be quite rapid. But if the macro consequences are likely to be significant there can be waves of volatility for weeks or months – such as with Brexit on GBP-USD. In the latter, the reversion to the mean play is much trickier. Although intellectually satisfying, I haven’t found this type of investing to be that profitable in the grand scheme of things.

    I think where I disagree with you is that these mean reversion plays or trades are not really worth the risk. I want to reduce my error rate by minimizing the number of moves I need to make so my investing strategy is based on very little activity now.

     

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    Absolutely agree you shouldnt be playing in what you dont understand. Not a really big fan of mean reversion either. That may or may not ever work, who knows.

    VIX is very special as a trade, it is also very volatile so it can be painful. It is reverting but in a special way, more of an oscillator.

    The reason it has worked for long periods of time is due to skew, term structure, and the nature of volatility. Every month when a futures contract closes it locks in that gain/loss and starts anew. You can calculate your r/r based on curve position/shape and (some) historical parameters (these are not to be depended on as they will change). For example, theoretical low of volatility is >0, low in reality is mid 8s. Its essentially a mode reverting instrument but different given its a calculation and not trade able.

    For the vol etps, you can simply use a rough calculation on how much value its going to lose daily to choose your spots. Since its like a 4th level derivative (spx options, calc, futures, and then etp on those) it has a lot of systematic drag that is in your favor. I have a spread sheet where I have all manners of historical drag and theoretical ones and basically it predicts the price of the instrument in question to the day within whatever range you deem appropriate. Years like 2017 that were so steady you’d come within pennies even a year out, other years like this one its not as useful. However, part of the game is recognizing when its not wise to play.

    If you are willing you can make gobs on either side of it given the tremendous IV/premium in the instruments. Its harder now without a -1x inverse and only 1 2x long etp, those were great. I’ve never liked direct shorting (unlimited loss potential, broker buying you out, etc..) and have mostly used options to define the trade.

    Volatility is incredibly complex and part of why I think its a decent arena, because so few have an inkling of whats going on they stay away or enter without understanding. Whether or not its worth the risk totally depends on what risks you take. More likely it isnt worth your time.

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    Yes, somehow I get tempted to get involved when I see something in play. But I can’t hold any size or for very long because I really don’t understand the market. I’m not sure why I get suckered into a punt, at least nowadays I do something very small.

    I think you would need a lot of spare time and motivation to do a deep dive into stuff when it gets to an extreme pricing point. VIX I never found that interesting, so I gave it a miss and will probably continue to do so.

    One thing that could change you as a trader is to hold something for a good gain. I think it’s an experiential thing. If you can find a good trend and hold onto something that appreciates 4-5X, then that solidifies in your mind that you can do it. That knowledge may make you less likely to cut winners short in the future. Or cutting short might be the right way to go. Hindsight is 20:20

    #171764 Reply
    Liked by Doc Spouse, Zaphod

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