Saturday, December 23, 2017

Knowledge as a VIRUS metaphor

With the year winding down there is less to write on about pure trades, so here is some more from the general metaphor pile to slather onto your short VIX ideas and maybe even apply elsewhere...

Knowledge as ..... a VIRUS
What? Isn't knowledge a good thing? Isn't knowledge a cure/medicine/salve?  This sounds like the worse metaphor ever-
I may have mentioned this before as it applies to many fields like general econ (paradox of thrift), but it is really slapping me back over the head with the crypto action (but I'll bring it back to short VIX).  Lets think of the spectrum of crypto investors, almost as a 1-10 scale of knowledgeably/awareness.  At the low end we have 1st time coinbase users who are seeing tweets and facebook posts from Tai Lopez, old people who think I can buy bitcoin "shares", all the way up to pure traders who know the underlying asset means nothing and it is just a vessel for volatility/price action.  In between we have all levels of early adopters/true believers/libertarians, and people who read at least some about the pending transactions, transaction fees, tether, different exchange issues.
If we had to break this down though, what percentage of "investors" in the space do you think can actually articulate
1. the underlying blockchain technology- proof of work
2. the purpose of that technology (censorship resistance, decentralized consensus, digital scarcity, anonymity)
3. the market structure they are getting into (unregulated islands of exchanges, structurally difficult arb between them, shutdowns anytime there is volume/price action)
4. longest chain/network effect vs liquidity as the primary value of various cryptos- BTC vs BCH vs Monero for darknet
5. all scaling "solutions" eventually create a more centralized structure (Lightning network, block size increase- defeating the #2 the initial purpose)
6. the ultimate cost users take on by using less efficient structures (blockchain vs database)
7. ICOs as a fundraising regulatory workaround, if any of these projects had real value as a business, then what function does a unique token have besides revenue/marketing.

If I had to guess, I would put 95%+ of "investors" into this  (1) category, and here is where my virus metaphor begins...

If 100% of crypto investors could fully articulate these issues, especially the conflict between the original value proposition and the current centralizing structures, how would that change trade valuation and trading dynamics?  I would suspect that a massive realization that the current crypto ecosystem and future improvements all don't really do what they set out to and are a pure inefficiency for 99% of users would bring the wind out of the sails, as opposed to the current shared hallucination that this is the future of everything on the planet, Dubai as the 1st "blockchain city," etc.

As long as this realization is among 1-5% of the investors/ecosystem, then the entire crypto space is insulated from a massive pop, because the ICOs and possibly ETFs will just keep getting made and everyone will play along.  In this way, the 1-5% of knowledgeable participant are the VIRUS, and if that knowledge spreads to the rest of the organism, it is put at exponentially more risk.
When a population is 99% vaccinated, the risk of a virus spreading through and wiping them out is almost 0.  In a picture, this is called herd immunity:
 So to apply this to the crypto landscape, the red figures are the 5% that see the impending structural issues in the crypto space.  In a population of blue figures (reasonable people, not crypto cult worshipers), then these simple explanations spread, and most of the population then becomes red and understanding.
Compared to our current structure of a few red characters in a sea of yellow idiots (immunized), no amount of pointing out facts will sway the bulk of the population as long as a high percent are immunized.  I think this is the current state of crypto where as long as you see these idiots on CNBC, then the canary is still alive and well.
I would watch out for the middle case where the number of immunized people drop, at which point the population is susceptible to a sudden exponential explosion in understanding.  The herd immunity holds at a high % immunized, but at a certain point- 90%, 75%.. who knows, the virus has enough paths to run rampant through the cracks and kill everything, there is a massive nonlinear tipping point.

Ok ok, back to short VIX and econ-  just like the herd immunity we currently have in crypto, I could easily see arguing we have a similar immunity in normal markets and econ.  What would markets and the world look like if the whole population understood short VIX as an asset class? No one would care about tax votes, elections, hurricanes- binary events.  Would market makers even act as a counterparty?  There would be no long VIX left.  Similarly in a broader econ sense, stuff like the paradox of thrift could lead to systemic issues, what happens when people stop buying new iphones every year? Thats our global economy!

So I started out wanting to shake these people and say WAKE UP! Or at least "please at least try to articulate these crypto issues rather than blindly yelling to HODL."- but maybe now I'm thinking twice..
Maybe the herd immunity of stupidity/ignorance on certain topics is required for bigger structures to continue.  If I want crypto to blow up then maybe I'm really asking for the global economy to blow up next because its not all that different.  Its just people going around and buying stuff to feel good, maybe we should just chill and be happy with that.

So if knowledge really is the virus in all of these structures, then maybe as a planet we are getting more and more healthy and vaccinated.  Could this be what the next phase of evolution looks like?  If we were too smart for our own good the global economy could've blown up a long time ago because there would be no counterparties.

In summary, knowledge is the virus that that is currently held at bay by the vaccinated/herd immunity effect of idiots.  You might notice this in your groups of friends or at work, so for now we just need to sit tight and if structures don't change, maybe we need to mediate on why the human condition is set up like this.

Tuesday, December 19, 2017

2017 Recap

With 2017 winding down and my short VIX allocation dropping precipitously due to spot vix, /vx, and the looming shadow of the uvxy reverse split , I guess its a week or so early but good enough time to recap.
 So for big bulletpoints its looking like:
~22% YTD (including cash, hedge positions; short vix component is ~100% ROIC as with most short VIX strats)  This is a rough number based on net liq after fees, with some open positions having a wide spread deep in or out of the money.
Portfolio allocations, mentioned from previous articles:
~20-40% hedge position in TLT options/metals options, this was a large % of the portfolio and a small net winner overall, so this year it was better than just cash.
~30-50% cash for the whole year, basically more ready for a vol spike than other strategies, and only really saw one in August.  This was a conservative short vol strategy.

Overall it doesn't look insane given SPY action for the year, but I am very happy with the flexibility and cash reserves given the potential for a correction.  Again this is a hybrid of the Boglehead total market buy and hold, with the Tastytrade option/theta approach, giving a similar exposure to long SPY with only a fraction of the portfolio (~15-20%) getting the downside velocity risk.  I know there are short VIX traders posting 200-300% ROI/ ROIC on portfolio margin using all buying power all the time at this VIX range, but I'm still on the "conservative" short VIX side.
When you are picking your option deltas, % in or out of the money, you kind of have to model in advance.  In the first few months of the year I was hoping to get 10-15% in a flat market, and then pounce if we got a big VIX spike.  With VIX crushes coming so frequently, I was able to roll and compound quicker, but obviously you can't plan for a market year like this so it looks lackluster, whereas if S&Ps were only up 10%, I'd look like a genius.
Overall I equate the whole portfolio to the at-the-money covered call poker example, where if we are making way above market average with a large cash/ bond position, then that is the situation you want anyway, and looking forward I'd rather have 15% risk on going into some crazy overnight crash than 100% in S&Ps.

Thoughts for next year, Macro thoughts for the future-

Portfolio allocation:
Regrets? Obviously in hindsight I should have loaded up more in the August dips, but for that matter I should have just been long UVXY puts no spread all year, of course that's not how you should think of risk going forward.  As I said a few times in articles- I'm almost glad when there are the slightest pangs of regret "I could have gone bigger," because that means the nebulous greed is out there and it didn't grab me yet.  Having cash left is like the old saying about rather having a gun and not needing it than needing it and not having it.  (Investing and poker are ripe with "firing your bullets, load up, empty the clip" metaphors) 
In terms of actual changes I think I might drop the metals component altogether and keep it closer to just short VIX/ bond options, and experiment with other small positions going forward.  I have a further note on crypto in a bit but it is possible in the short term that crypto might take some of the place of metals as a hedge and I don't want my 'hedge' position to be losing any liquidity/ premium.  Past that I'm just always looking to simplify. 

Risk/ROI thoughts:
Again, I'll get to crypto in a second but this ties in with risk, ROI, and just seeing flat numbers.  If I say I made 20% and an all-in short VIX trader made 100%+, then I'm the idiot. If he posts his YTD, then a 'crypto trader' is up 1000%, then the 2nd VIX trader is the idiot.  No one cares about risk management when they see the number at the end of the year (if it worked), they don't care about your cash %, hedge% and mechanics.  As a trader/investor only you can look out for that and you have to be the main person that truly cares about Sharpe and tail risk.  For that reason you should really ignore this whole blogpost or any twitter post on YTD but the one of you that made it this far is already this deep into the rambling.

Crypto thoughts-
I was going off in a previous article on the mechanics of BTC to USD on/off ramps and hardware/logistical issues.  Fortunately since then, the BTC transaction fees and pending transactions have gone through the roof, new market manipulation mechanics have surged,  and the spot price has naturally decoupled from any possible fear.  (I specifically wanted to discuss the logistical issues and not just the "mania" of the spot quote, so in that sense everything is going according to plan).
But Robert, when will you admit defeat and change your mind?
Very simple, when any pro blockchain person can actually articulate the efficiency without somehow doubling back and turning the whole thing back into a centralized structure. (hint: a truly decentralized blockchain is by design a less efficient database, so I'll be waiting a long time.) The real "correct" answer is regulatory arb where you can't use USD for a transaction and will pay the inefficiency in using crypto because it's your only option. Lightning network, centralized altcoins, Bcash under Roger Ver, straight up centralized databases that companies are calling "blockchain" for marketing value- I'm looking at you Microsoft- are the "answers" which all fall insanely short. While I'm at it asking the genie for more wishes, bring me a shark that outruns a cheetah, really hot air conditioning,  or pick your own better metaphor.
Again this is no price commentary because it will keep going up until it explodes, assuming at some point people will resume being rational actors in a game theory sense and won't want to 2- 10x their transaction times and fees for services.  I was recently mentioning BTC spot as a derivative on stupidity which you could get long on, which now given "institutional" interest I'm coming to the generalized case that it's a pure Keynesian beauty contest.

Well, there you have it, a year of trials and tribulations and petty bickering on twitter and in hindsight even I will only remember it as a number, if at all.  Perhaps next year will be even more fleeting.
As an aside, thank you to the 1-5 readers that actually see this, I was surprised to get to over 400 followers on twitter since the beginning of the voyage this year, most of that I'm assuming were misclicks.  This rambling is all I've got in my life right now, besides waking up to see some angry red numbers on the trading platform.  

So thank you all, and to all a good night!

Friday, December 8, 2017

Wisdom arb, BTC, everything as a derivative

I guess this is an unofficial pt.2 rambling on BTC etc, but at least trying to have a broader short VIX/ econ perspective.

What is a scam but wisdom arbitrage?
As a preface and reminder, I have no real issue with the core BTC protocol, most of my issues are with when BTC overlaps with USD- at exchanges, centralized businesses, price for electricity effecting mining priority/fees, and now even cash settled futures.   
"Scam" is just a classification described by regulators, bears, people who know more or less about something, so how does that even help?  Rather than think of structures as a binary 'scam' or 'legit/not scam', I try to think more broadly as levels/spreads of wisdom arbitrage.

"The stock market is a device for transferring money from the impatient to the patient."  

Is any wealth transfer a scam? Could Buffet have said "transferring from the ignorant to the informed"?  From the same idea could he say "fake IRS phone scams are a device for transferring from the ignorant to the informed?"  This is expressed with another classic: 
“When a man with money meets a man with experience, the man with experience leaves with money and the man with money leaves with experience.”  
Does this case always represent what you think of as a scam?  Is a first time trader setting a market order instead of a limit order being scammed by their broker, or are they exchanging some money now for experience later?  This is a tiny wisdom arb between the new trader and the broker- now the broker has a little more money and the trader has a little more wisdom, the spread on the arb has collapsed just as any normal arb functions; eventually that specific divergence dries up.  

One of my goals is not to 'point to how things should be,' as I'm not advocating a Mad Max Ancap unregulated wasteland, I just try to point out how things are and how we can better emotionlessly perceive them through the short VIX lens.  Whether you love or hate regulators, there will always be a place for them because people will always cry when they get wisdom arb'd. Then arb opportunities disappear and in time new ones will arrive.  The cycle goes on and on, so its important to recognize the structure that will always exist. When people cooperate, at a very basic level that is what government is.  When it gets more and more bloated then we call those decisions regulations, its an unavoidable part of the human condition.

Getting back to BTC and thinking about cases for further upside/downside, I was thinking broadly if you can consider BTC as a derivative of an underlying being stupidity/hope/etc.  While SPY options are very precise where you can fully calculate your exact delta exposure due to 1 tick changes,  BTC is a little more nebulous but if you think of a recreational buyer coming in at all time highs hoping it goes up (greater fool theory, etc), then a case to be long there is that BTC itself becomes long exposure to human stupidity, so its kind of a derivative of that, creating a further feedback loop.  This isn't really touching on the liquidity/market depth issues of crypto exchanges specifically, which would constitute another 4 hours of rambling.

Back to short VIX, given the Buffet quote and my previous discussions on short VIX=long SPY, I really think we can add short VIX to the list of wisdom arb areas.  My fear from that is that like all arbs, the well will eventually dry up, but at the same time if you picture that world, that would mean all future risk premium is 'correctly priced' which is hard to even make sense of conceptually.  If future risk/unknown didn't have a premium, that would shockwave into insurance and other markets.  

Next time you see a "scam", just think of it as a transaction, how much money vs wisdom is going in which direction, and how fast will this trade/spread contract, as if it was any other kind of arbitrage/convergence trade.


Wednesday, November 15, 2017

Waste.. or compost?

Before going off rambling I wanted to preface with a little twitter depression.  I set out not to post "trade journals," just tweeting entry/exits or making articles just about that. I want to delve into the qualitative discussion on why short VIX permeates everything and all its related metaphors.  I had a moment of weakness the other day and tweeted an svxy trade, mainly out of frustration on the uvxy spread/fills, but anyway I did it, I slipped up.  This spun off into a dozen replies about strategy, brokers, portfolio margin, and more, whereas I think I've maybe gotten a like once in response to dozens of conceptual articles and Janet posts.
I know people don't care but its just crazy seeing it in real time with metrics, such as views and responses to an article mentioning $gdxj $tlt vs general Fed discussion.  Anyway the point is industries like advertising work, even though it seems crazy that they just hashtag movies and go hard at the absolute lowest common denominator.  I'll do my best on avoiding that path.  I take pride in posting Janet pics and instantly losing followers.  Just like in video games if you are running into enemies, that means you are going the right way.

Now some rambling, continuing on the paradox of thrift/broad economy and our short VIX position.  In my youth I was consumed with  the concept of waste.  Government spending, smaller business inefficiency, why do we have more military spending than everyone combined, etc.
I was only seeing the one side of the transaction, the spending/debit.  When you back up and look at the whole ecosystem there is an equal and opposite credit/income for all that waste.  Thus my brilliant metaphor is to not look at insane budgets as waste but as compost.  That spending fuels businesses selling goods and services, employing people who then buy other things.  Thats the whole economy!
What do you think of as wasteful? Take one step back and look where that waste/spending is going, and the river's path of how it flows back into the economy.  And what if the money never goes back into the economy? What if it theoretically goes into a vault or is burned?  Then we just have scarcity making everyone else's money worth the tiniest bit more.  This is basically the situation with QE since 2008 just going to stock prices and banks and not causing inflation in the 'real economy' with helicopter money. 

What matters is the velocity of money and the fact that the whole system keeps trudging on.  There is a chance that the whole thing stumbles and disintegrates and that is long VIX, the counterparty.  As long as the money velocity keeps going and everyone wakes up tomorrow to get checks to do the same stuff, that is our VIX futures contraction playing out- future fear is overstated.

Friday, November 3, 2017

Is Janet really gone?

 Donald! There's somebody here that you simply MUST meet! Now am I pronouncing this right? Mr... Janet .. al ...Ghul?
You're not Janet al Ghul- I watched her term expire..
But- Is Janet al Ghul immortal? Are her models.. supernatural?

Or cheap parlor appointments to conceal your true identity, Janet...

Surely a man who spends his nights scrambling between hating big ugly bubbles and feeling very honored at all time highs wouldn't begrudge me dual mandates...

Anyway as usual the venn diagram overlap of the people who care about Janet/fed balance sheet/rates/VX and people who remember the Batman Begins party scene is probably under 1, so another post another 5 followers lost.  For the rest of you though (the less than 1), I think the Jay Powell appointment is pretty good for the short VIX crowd in the sense that he basically is Janet, just without the face that works with every move poster (so I don't know what I'm going to do..)

Here was an overview of some of his quotes per policy and this is as Janet as it gets among the other fed chair "candidates"

 The broader theme we come back to is again the SPECTRE/ League of Shadows in the sense that its clear change was never an option, whatever rhetoric from any side is the loudest and most distracting won't impact the true gears of the system which seem to be much lower longer term interest rates and thus cheap money/ increasing equities/ contracting VIX futures.  When a drastic or even slight change in the Fed's direction isn't possible in this environment where candidate Trump called out my baby Janet, then I don't know what you are hoping for if you really think this ship can change course.

So Ben, Janet, Jay, it really doesn't matter.  The concept of Janet is immortal, the League of Shadows will always return. 

Tuesday, October 31, 2017

"What's the problem?" theory

Here is some more of the macro/life view on short vix and how to apply it to the rest of your life and our world-

I call it "what's the problem" , which I guess can be expanded to "what's the problem" theory.  It is entwined with the short vix assumption that everything is overblown and implied volatility is overstated in all events, but it is a little more nuanced in that it applies to the thousand seemingly ridiculous structures we see daily:
We are in the 'everything bubble' - equities, bonds, crypto, real estate, the Fed has basically admitted they don't understand inflation (or more realistically refuse to admit the effects of QE), and all the bears will lament every nuke threat leads to new S&P all time highs-
 Yes it seems odd or unintuitive, but just step back and ask "whats the problem?"

I used to be mad at "bubbles" or waste, government burning money on anything and everything, but that is just the paradox of thrift.  As long as the money velocity keeps going, all that burning money is just other people's paychecks and that is just the economy.  Its a big organism and as long as it keeps moving, whats the problem? S&Ps are at all time highs, just like they have been for many points in the last century, the fiat money system based on target inflation is designed to increase.  The numbers always go up in the long run, unless they fully crash, at which point USD won't matter in any investment structure you have.

On a more micro econ note- what about the individual people that make up the insane masses, when they trainwreck through their life making insane destructive and stupid decisions?  I used to be mad at how they somehow turn out alright but now that is just like watching nature.  Bad decisions are good for the economy- they create opportunity and counterparties, which create velocity.  What if no one bought a new iphone every year, what if everyone was responsible? How would we have a consumption based economy if anyone could budget?  How would you have entire services like Geek Squad if everyone could plug in a cable?

What is the stupidest thing you've seen this week/month/year?  Now step back and really think "whats the problem?"  Who is the counterparty, where is this adding velocity to the money supply? Oh, now I get it!  

A case study from the other day- I was at an intersection with one of those huge digital "500,000 smoking deaths this year" billboards with the numbers incrementing.  Whats the problem?
We have:
- the smokers, they are buying some service they want
- the tobacco company making money, creating jobs (the #1 buzzword America loves)
-the billboard company with a client
-the tobacco/cancer/statistics research company putting their work out there,
 and thousands of idiots like me to comment on the whole mess.
 So really what is the problem?  Yes people will die but they would die some other way anyway, and if you try to save people one way you just end up killing someone else.  I'll have a whole different article later on the purpose of death for all the time values to money.  Whoever you think is the "bad guy" probably thinks the same right back at you.
The point is that things like this are what make up the economy and the machine of it to keep going.  These are what the jobs numbers come from, (which we love so much), its not people fulfilling some ultimate destiny, its just people getting checks to do stuff all day that may or may not even have value.  Some jobs negate each other like opposing lobbyists.  BUT, as long as that keeps the money velocity going, what's the problem?

The current global economy is the result of thousands of years of tiny economic experiments, and we are left with this monster.  Its full of insane people and decisions, but those things mean its still moving, and if there is any stupidity left then there is opportunity.  I think I'm mostly acclimated to the insanity, which is part of the short VIX thesis- people acclimate and that implied volatility is overstated.

Oh well, another rambling, 5 more followers lost.  I hope this sparks something in someone out there.  We are on countdown to see if I lose my Janet so I'll have to be strong as ever to really take my own medicine, and if she leaves... *slow tears from my eyes*... whats the problem....?

Friday, October 13, 2017

A fuller Short VIX portfolio

There is a whole risk spectrum to short VIX which a lot of these twitter idiots either ignore or absolutely refuse to understand which I've touched on before.  Short VIX isn't 100% of buying power in selling naked VIX calls, although I suppose that is the purest form to do.  (I'm not that crazy even though I see other twitter guys going all in portfolio margin)  The point is short VIX is exposure to the mechanics of VX futures converging to spot, and you can layer that exposure into your portfolio at 2 levels: product/strategy choice and % allocation.
  At the strategy choice level, I have dabbled across a few things including long XIV, short SVXY puts, SVXY verticals, short VXX call verticals, and now I'm touching on buying UVXY put spreads to get that extra decay. 
The main reason behind this switch is tweaking the full portfolio from:

-Short VIX exposure (~40-50%) plus cash to buy dips if the short VIX positions are tested,
-Higher yield short VIX exposure (~15%) plus uncorrelated positive premium positions (~50%) plus cash to buy dips.  Higher yield being closer to the money, going from SVXY to UVXY shorts.  We are trying to get a similar monthly premium with a lower max drawdown for the edge cases, making the cash position more effective.  With the way VIX products decay, you are either up or REALLY down, so unlike many products, it might make more sense to be closer to the money so the premium from most of the time better compensate the huge spikes down.

Here is a correlation sample of the main products I'm working with, going back ~8 years (to GDXJ inception):
(I'm using SPY as the baseline as my short VIX strategy is basically long SPY like Boglehead idiots just with more leverage/ multiple decay components)

Even if you are bearish on bonds given the macro Yellen show (which I semi agree with), this is still a short VIX portfolio 1st, so I am fine with having these uncorrelated positions to XIV because that is my main macro assumption.

I've been doing ATM TLT covered calls and very close ATM GDXJ diagonal/poor mans covered calls to create some kind of hybrid mega dividend.  I touched on the psychology of the ATM covered call in a previous article in that I'm trying to get the best downside breakeven and in this setup I'm trying to have the premium be the primary driver so that annual gain is the most easily modeled .

Is there a point here? Basically short VIX can be the core of a full portfolio which is complemented by a big cash position and uncorrelated underlyings to buffer the swings a bit. (Remember we are trying to create that poker cash game slow grind up)
Given the low spot VIX with my current short VIX allocation between 10-15%, if we have the overnight termination event wet dream that the bears can't stop about on twitter that will WIPE OUT ALL VIX SHORTERS, then hey, I'm down 15% and will probably have some insane pot odds to get back into new short vol positions.  Furthermore if we do have the nuclear winter, the uncorrelated positions should hold some value and a 'benchmark' portfolio of 100% SPY might be even worse.

I don't know why I even bother because we'll never hear a reasonable response from these people so I guess this is more for the one person out there that wants to join the discussion on tweaking short VIX portfolios to reduce the insane swings, or maybe someone that is trying to add a little short vol to their current portfolio.