Tuesday, July 11, 2017

Short VIX ramblings on free will, freedom, the cave, and a little more Crypto


So I was catching up on some Boethius the other day, the whole reconciling divine omniscience and free will which is pure stupidity, but it spurred me to resume rambling on the nature of freedom and how that goes into our short VIX pocket-

I would argue on a more macro level that more freedom equals more volatility.  This is before even getting into S&P options/ black scholes and actual VIX, but the human concept of volatility- wider standard deviations for actual events, higher chances for corner case probabilities.  Lets look at an even simpler example- Checkers vs Chess:

On turn one you have 7 possible Checkers moves, whereas Chess has 20, and grows exponentially to 400 possibilities on White's 2nd turn, including the possibility of a turn 2 win.  To me that is real world volatility- more options, more chance for advantage and loss.

Lets mosey back to finance and markets, where macro freedom trends can now inform our market view. 

Do you see the total space of finance/economics to be growing freer or more constrained?  

I think this is a legitimate two sided discussion with arguments for each side, and that is why we have counterparties.  The ultimate point, however, is that if you think the universe that is finance and markets is on the trajectory of constraint, then that would lend to short volatility as fewer options and less freedom would lead to less total market action and movement which should be visible in the options prices and thus the VIX.  Furthermore, actual implementations such as market breakers, capital controls, etc all put us ever so slightly on that constraining trajectory. 

One important bulletpoint to insert at this point is the argument that if we go the China route of full capital control and the market fully collapses leading to higher volatility.  I agree that we would have higher volatility, but if it is high enough that the USD collapses, then no other boring S&P investments matter anyways!

I'm bringing some of this up due to the recent action in cryptocurrency and the ICO explosion with potential SEC oversight/regulation.  Going back to my 1st article on Bitcoin, asking the Bitcoin original purist/ libertarians if Bitcoin even can do what it sets out to (anonymous/decentralization), I again bring up the shadow of government on the areas where the blockchain code ends and enforcement begins- at the exchanges, ICO companies, and services.  You may disagree but I think the last few months of action show that the original vision of crypto has been lost, and the bulk of the silicon valley new investors don't remotely care about the anonymity and decentralization, instead caring about and even using words like "governance."  That right there should be the glaring warning light and death blow if you didn't see it before.

Ok ok this is about the actual VIX though-  
The point of the crypo contraction and oversight is that we got a glimpse of what expanding economic/financial freedom would look like, and that door got slammed in our face, almost from within the crypto community before government has truly stepped in.  Kudos to Janet and the rest of SPECTRE as they realized they would only need to take action if it didn't implode internally first.
A blockchain can definitely exist, but there will be no real disruptive freedom attached to it, and thus it will just be less efficient than a central database.  More importantly, the ideological crushing of this outlet to more freedom and options will in a small way contain some price action in actual markets (either to the upside with AMD, NVDA cards now that mining payout will theoretically go lower, or to the downside in that a possible disruptive technology was neutered and markets will chop along as usual.)

Crypto is just one example here, who knows what will come next but the point is the systems are already in place (central banks, US military) that can crush innovation if it truly has the potential for disrupting the financial status quo (if those new industries don't implode internally first)

I've been going in circles just muttering but the real takeaway here is my last point "if they don't implode internally first" and to me that is an issue of human nature.  For a technology or idea to be freeing, it has to let go some amount of security- and on a human nature level I think this is something that will almost never happen, and why Janet et al. can just sit on their hands and wait for these things to blow up. 

People don't really want freedom.  The original idea of an anonymous/decentralized crypto meant real freedom for the few believers, but as it reaches larger adoption, people will give up every drop of freedom the second something goes wrong.  "The exchange took my money, ETH dropped by 50%, my transaction isn't going through, call the SEC!"  This goes way past crypto into every other area where government regulation just multiplies like slime in a little petri dish- net neutrality, driverless cars, recreational drones.

If you agree that it is in human nature to cooperate, and ultimately give up freedom for security, then it follows there will be that slight amount of fewer options, which ultimately bleed into financial markets and prices, and ultimately the VIX.

Just a reminder- YES there still will be corrections and crashes. I am talking about a long term trajectory and core position which will ride out the storm of volatility.  Prices will always go up and down, but if there is even one less far corner option, then that price movement is that 1 cent less exaggerated.

Yes- this is all dark, we are somewhat going back into Plato's cave year by year while we swipe on instagram on our iphone 10's all day.  As investors, the least we can do is factor in these macro issues into our core position and make a few bucks as we are on the way to our North Korea work camp gulag tombs singing And the land of the freeeeee



Monday, July 3, 2017

Praying for Janet!

Queen Janet is down today! But just like Conan she will return!

"Federal Reserve Chair Janet L. Yellen was treated at King Edward VII hospital in London over the weekend for a urinary tract infection. She was admitted Friday and released Monday. She is returning to Washington, D.C., and expects to resume her schedule as planned this week.
Chair Yellen was in London for an event Tuesday, June 27, at the British Academy and stayed in London for a brief vacation with her family."

All the markets, they cannot sever us.  If I were fully leveraged and you still printing for life, I'd come back...
...back from the pit of hell to print at your side!




Friday, June 30, 2017

Check back on the river- Another Poker metaphor

Controlled down days like yesterday which trigger all the "is this over" articles are the high point of my week or month-
While my daily P/L is down and the screen is angry and red at me, this is setting up a scenario where performance increases.
One of the trials and tribulations of rolling a constant core position (short VIX or otherwise) is the sorrow of closing at a profit means the new open position will be a worse entry, where if you roll early in a down move, you are locking in a scratch or smaller profit in order to enter at at better pot odds.  There is no core position situation where you have a great close and reopen in the same product.
(This should all be obvious but it's important to psychologically drop that bad entry/exit mindset and just think about the mechanics of the core position)

Anyway that's all a little background flavor but now that the waters are smoothing back out, I wanted to scribble down a poker metaphor that I wax poetic on and is pretty applicable to picking your risk-

If you've ever been check raised on the river in a big hand one of your gut reactions is to throw up because you have brought this upon yourself- you could always have checked back and potentially won, or just lost a smaller hand.
 (I could spend all day posting Tony G videos but lets continue-) 

 Obviously these players have a huge hand history with each other and have a higher % of trapping and 'tricky' plays but in terms of a simple hand analysis, When you have Kings against two check calls on this board which has potential trips and flush, what hand is check calling you three streets that you beat? I would rather lock in a smaller win then add unnecessary risk on that river.

So what is the option metaphor?

To me this is like covered call/ Poor man covered call (diagonal) strike selection.  While we have been in a permanent bull market and backtested 30 delta covered calls are the best performers, I don't want a strategy based on that, and I'd rather set myself up with the best breakevens if things go wrong.
This is why I like ATM covered calls, (the 1st OTM strike).  If that is breached, I've locked in the call premium and the trade is a winner. I don't need more juice in those winning situations, I'd rather model an annual return on getting 2% or so monthly (or leveraged up with diagonals).  You are setting yourself up for more scenarios, and you are making your returns more consistent to model, being mostly premium/theta based than delta/direction based.

The nearest OTM strike is like checking back on the river in a big pot.  Like Tony G, if you have Kings you are already ahead of all the bluff hands and a tiny amount of weaker hands that couldn't call.  As Tony, you can just check back and win a smaller pot to fight the next day.  In the disaster scenario when Patrick is trapping with a full house, you aren't helping yourself at all to the downside, and as a trader , that is where I want and need the help!

A little Friday musing for you..

Monday, June 19, 2017

More reconciling with buy and hold

(I'll open with a Janet in case anyone is here for that)


Another weekend Mosque killing, another gap up- Looking good for the Boglehead crowd-

Here is a fundamental question I have for the buy and hold believers:

...First some rambling though, this is based on comparing buy and hold stock (SPY for example) vs selling puts, strangles or buying covered calls, depending on your risk tolerance. (I'm scared to death of upside risk)
Selling puts or strangles is optimized for the underlying trading within the expected range, which is already something Bogleheads seem to expect, "average" market returns, compounded with dividends (to compare to covered calls), etc.
I'll break this down into the 3 cases of down, flat and up markets-

  • In a down market, selling puts (or strangles), or buying covered calls give you a better downside breakeven than stock, whereas buy and hold stock is just max delta on the entire downmove.
  • In a flat market, the short options clearly outperform the non moving underlying and crush dividends.
  • Finally, in an up market the buy and hold stock has the chance to outperform (with unlimited upside :) ), yet it still needs a greater than "expected" move (1 st. dev.) to beat short options (depending on strikes)
Given all this, the buy and hold stock strategy is truly only aiming for greater than expected upside moves,
So why not just buy OTM calls? 

Maybe literally 0 buy and hold Bogleheads care, but I haven't seen this addressed by anyone so it makes me feel like I'm in my corner with my crazy pills.  
Yes I know this is simplified but between OTM calls, deep ITM LEAPS or anywhere in between, you are taking the same position with better leverage.

Just a Monday musing, please forward to a Boglehead so we can check reality!



Wednesday, June 14, 2017

Musings for Short VIX haters

 Here's a little Janet for FOMC day-
Now back to musing and ranting...

Even with two brief days of action, the last month has been a fairly quiet grind after the 17th.  About the only thing to do is leg into more short VIX and read the various articles maligning it.

If you have any long VIX or at least anti-short VIX friends, maybe you can forward this to get their input or to reconcile their ideas-

1. As I see it, short VIX is long equities, long AMERICA.  
ie. VIX is uncorrelated with SPY ~80% of the time.  To all the articles against 'vol tourists' as well as big funds and the feedback loop of short VIX, they fail to note (or really contemplate) the structural interaction with S&P options, thus S&Ps.  If you think short VIX is going to blow up (VIX will spike), then you are just writing an article that equities will correct!  On some level this is the standard financial news level of garbage writing two articles per day instead of one, getting the 'short VIX risk' article as a freebie on top of the 'markets are at a top' article.

2. Given that, yes we know equities will correct and VIX will spike!  Short VIX doesn't mean being all in on short at the money VIX calls, it is a macro outlook/ core position that can be reflected in many kinds of trades with different risk parameters.  Given the option pricing most of these trades are just leveraged equivalents of long equities, with a directional decay component that S&Ps can't replicate.
Boglehead indexing investors don't buy all in out of the money SPY calls, and short VIX traders don't use all their capital on the absolute max risk trades.  Is this complicated to CNBC idiots?

3. Back to my first point of long AMERICA, short fear- these anti-short VIX people should have simultaneous articles against their fundamentals guru Warren Buffett, who spells out the long equities position of betting on American ingenuity, yada yada.  I'm not as big on Warren but most of these idiots are, and his 'bet on America' ideology equals short VIX!  Furthermore you have to be betting against America (not just in the S&P corporation sense)- we have 300bil/ month from central banks pumping into our markets, we can create any money we want, and have a bigger military than the planet if anyone has issues with that structure.. hello?!?

4. One last point- one of the 1st things I internalized early in my financial journey was from Tastytrade- In a liquid two sided market, if you think something is stupid, take the other side! I'm waiting for these anti-short VIX idiots to post a long VIX trade.  I know this is mostly yelling at the wind as .001% of finance writers have any stake in the game (and they note that as an admirable trait) but its just some ammo in the back of my head.  If you think short VIX is so catastrophic, then where is your huge long VIX trade that you are losing on daily?

Somewhere between musing and ranting, oh well.  I'll go back to waiting for some VIX spike to pile more into.

Monday, June 5, 2017

Bitcoin: Is decentralization possible?

Disclaimers- This is all coming from someone who doesn't own any bitcoin or other cryptocurrencies, and I don't have a PhD in cryptography (crypto is insanely complicated at a software level) so I am giving a pass to most of the software questions with crypto.  This is primarily an equity investor perspective on the transition point between the digital side of crypto and where it meets the water's edge of requiring real world resources, and ultimately being influenced by real economics and politics. 
And yes I think this tangentially ties into Short VIX, we will get there!
 

Is Decentralization possible?

I would break the crypto crowd into the groups of true believers/ early adopters and investors/speculators.  However far down the chain from the true believers of a decentralized digital currency, when looking at it from an investment standpoint as a commodity such as gold, there must be some trailing connection back to its original 'value' to justify it's speculative value.  (I'll get into intrinsic value as well)
I understand all or at least some of the vision of the true believers- a decentralized currency which isn't manipulated by central banks, interest rates, and global politics.  This is based on a public ledger which is transparent and accountable for transactions, yet anonymous for individual users.
I don't even want to dispute the main bulletpoints against crypto such as:
  • It isn't backed by anything (neither is any currency, its just public perception)
  • It can be hacked (again not even getting into the software behind it but assuming the hash/algorithms aren't solved like SHA 1 , plus similar hashes back up many non Bitcoin services) 
  • It isn't doesn't scale (Assuming software changes such as soft and hardforks can overcome the maximum block size and current max transactions caps. Again I'm trying to avoid the pure software/ math PhD issues.)
I want to discuss the point where the digital currency meets real world resources and policies , which ultimately tie back to the currency-

I wonder the original vision of Satoshi, if he imagined many people privately running the full blockchain node on their computer, and possibly mining with a backup computer, or even a few computers together in a garage?
Whatever the vision, it very quickly morphed much past that into groups coming together to pool resources and build huge computer farms in cooled buildings/warehouses to mine huge amounts of bitcoin.  Whats even more impressive is the hardware innovation of ASIC processors  which are basically a hardware specifically optimized to compute the Bitcoin hash, effectively making normal mining noncompetitive. 

Here is my first question to Bitcoin true believers-
How can the mining infrastructure and the ideal "decentralization" of node management and mining account for the acceleration of infrastructure/ hash power at the top?
   Unfortunately there is a lot of reading to do to get even close to up to speed with the huge amount of interlocking pieces, but here is a semi quick overview on the ASIC and ASICboost hardware situation.  The key takeaway is the potential patent issue of current or future hardware/software implementations that give an advantage in Bitcoin mining.  This brings real world government and patent law into the "decentralized" digital currency.  Seeing how quickly that came up in the scope of Bitcoin, was interaction with government ever avoidable?

Even if there was no patent/hardware advantage to specific processors, we still must account for the concentration of mining in China, with pools which account for ~60% of blocks mined. 

This comes to my second question-

How does the "decentralized" model account for the natural accumulation of resources at the top, who ultimately influence the software direction of Bitcoin itself?
The biggest example character I see is Jihan Wu who runs one of the largest mining pools and has influence on the software direction of the blockchain.
As the direction of software changes are based on the majority of mining, we see the influence of single actors rising almost organically in what was supposed to be a "decentralized" system.  Again there is a lot of reading to do but given the infrastructure advantage Wu has, his position on potential software forks obviously leans in the direction of an advantage to his own infrastructure system and against any "nuclear" option which reverts the ASIC advantage.


I was going to get into further valuation/ fundamental analysis (which I think is stupid for stocks, so why delve into it for another asset class) but maybe that will be for another article, if anyone cares.
While these questions (which I haven't seen a rebuttal to) point issues at Bitcoin and cryptocurrencies, I think it points out an even more fascinating characteristic of people and economies- the organic ability to centralize.
Despite entropy of the universe and the human condition which has us on the trajectory to destroy ourselves, moments like this show an incredible ability for people to pool resources to optimize, even if the consequence is destroying the underlying ideal of democracy.
There is an incredible parallel here to the trajectory of governments where an initial independent "decentralized" group of people come together, pooling resources to achieve more, while in the process end up throwing away their freedom for "security."  
If Wu didn't do it with Bitcoin it would easily have been someone else, because it is in human nature to optimize even if it means destroying the long term structure (look at smog in China).

If you haven't read enough secondary articles yet, here is a Google Talks of Janis Varoufakis on the 2015 Greek crisis.  At ~20min he summarizes a lot of my thoughts on cryptocurrencies concisely:
Money can be digital, but it can't be apolitical. 

Money is a function of human emotion.  He is speaking to engineers/number people at Google and points out just because money/economics has numbers in it, it is an illusion to think that some algorithm can solve global finance. Money has numbers but is more than a math problem.

And I promised this would tie back to Short VIX-
Given all these points, is decentralization truly possible?  Given the history of the planet for resources to pool, organize and create a top heavy power structure, why would Bitcoin be able to break out of that as long as it is in the rest of our physical world?  There are still people involved. 
Given all of this I truly don't think cryptocurrency has the capacity to take over global finance in the sense that the aforementioned true believers do. That means the true power still lies with central banks, which will ultimately suppress volatility- by printing their way out of a crisis.  
Cryptocurriences aren't centrally managed at the software/scarcity level, and can't print their way out of a crisis.  I try to make Short VIX more than the trade idea of short VXX spreads, it is a world view.  Volatility is overstated, new structures will not be destructively disruptive, things will blow over.

And finally , a wonder Yellen -





Wednesday, May 31, 2017

Having a Core position

 One thing to reconcile when having constant short VIX positions on (at all VIX levels) is the obvious downside risk, and more specifically the average days to expiration on your positions.
A common TastyTrade/ OptionsAlpha/ etc strategy is to put positions on in high IV and to take them off at 50% max profit, or roll at 50% to take off that gamma risk I've discussed in earlier articles.

However, with short VIX as a core position, no matter what my portfolio average DTE is, I will have the same notional risk on at all times.  In this case, is there a difference between rolling out a month with 2 weeks left or just waiting until expiration and re adding the position? 

As long as you are keeping the core position, the early rolling/gamma protection doesn't help your long term returns because you will never be out during the draw down moment.  Furthermore, if the underlying is going to come back up anyway, there isn't much difference from being assigned , and then selling calls back up to the assigned strike and getting out of it.

If your core position is being a firefighter, your risk is always on, and you don't get to pick being off in advance of the week some big fire happens.  The 50% max profit/TastyTrade firefighter is basically taking on a contract position the week after a huge fire, whereas the career firefighter is there the whole time (and getting paid for it).  These last few weeks have been very quiet, we firefighters are just waiting to slide down that pole.

Obviously there is an ebb and flow to this, so for extreme VIX contraction it would make sense to roll early and bring in more premium if the current contract is mostly squeezed out- But in general, if we are just playing it for theta (at this low 10-11 VIX) then it might be best to just keep the position on and avoid doubling your commissions/fees in rolling.  With SVXY specifically, the illiquid long options make it rough to close your very profitable spread early. (I am shifting to a lot more VXX call spreads though, before you yell in protest)

Just some food for though when contemplating the full short VIX lifestyle, ok now back to the 9 handle!