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,
to:
-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.

Friday, September 29, 2017

Is finance derived or discovered?

I've been on some rambling musings on the math/psychology/econ/finance and thus trading universe, so here's a bit of an incoherent glimpse:

I try to think of all these topics 3 dimensionally so these paragraphs can go in any order, and probably should be side by side and simultaneous, although we don't read like that.

Math: Derived or Discovered?
Before even getting into trading I think on this issue here and there, why do patterns in math reappear everywhere? Are pi and e just curve fit numbers or a core ratio in nature?  I think about back testing and overfitting to curves as that comes up most in trading, but is there a pi or e equivalent in finance such as a golden ratio for risk premium?

Finance/Econ =  Psychology
This is where you will probably leave me rambling in my cave, but entertain the idea:  Is econ and finance math, psychology, or both?  I firmly think that all econ is small or large scale psychological interaction between people.  Its about fear, trust, heard mentalities, and everything else in Tversky and Kahneman.  But what about the computers? What about servers trading with each other a million times a second, there is no fear there! The point I've brought up before and stick by is that all trading algorithms are built by people and firms who have risk tolerance and requirements, and embed all that human fear into their code.  The computer just executes what a human would if they could see, click, and calculate that fast.

Psychology as physics
Here is another point to write off, and it goes towards the final mystery that is the mind and its rooting in the real world and physics.  Our thoughts are just atoms flying around through the brain which is truly rooted in the real world.  Additionally some will say that all of your past experience, bias, anchoring, etc contribute to decisions you make without you knowing at all, so are those decisions free will?  From this many argue if free will exists because atoms can work predictably thus the basics in physics for our thoughts and soul should be theoretically measurable (although that technology for that is far away).  If you agree with this mind as atoms concept, then all the ideas we have collectively as people (fear, risk, greed) are somewhat rooted in physics and part of that real world out their waiting to be discovered, rather than invented or derived.

Finance as Nature
Ok now bringing it all together, if you agree with the previous points-  If psychology is an extension of physics, with human emotions rooted in the atoms that make up those thoughts, and finance is an extension of psychology because this is ultimately human decision making, then by our wonderful transitive property- finance is physics.  This is all probably the worst kind of underpass rambling but I think about it all the time when adding the short vol positions.  I'm taking on the fear and risk of others, was this avoidable in nature? Just like some fish latch onto others or insects have complex ecosystems with each other, was it inevitable in the human condition that people would naturally come up with similar risk and credit/debt models simultaneously?  Was this truly invented or just waiting in the potential of our brain structure to be found?  As I'm typing this I'm doing the Werner Herzog narration voice in my head.

I already know as I post this I'm instantly going to lose 5 twitter followers but that is the cost of staying true to real psychotic rambling and not just retweeting 10 #hashtags!

Tuesday, September 12, 2017

Namaste and mechanics thoughts

I was waiting for the full recoup on SVXY to all time highs but with S&Ps knocking on the 2500 door I might as well check back in and recap the whole last month August action.

I think it was a great proof on concept for the short VIX strategy of keeping a large cash position to buy these dips while having static short VIX positions that gave some leeway (I had 10% OTM SVXY credit spreads that I did a lot of rolls and selling calls against to hedge).  I'm still a bit torn on the SVXY put spread and rolling versus more aggressive UVXY put debit spreads and actually taking a loss (even though rolling is kind of realizing a loss).  I think my main regret here is that my buying power usage kind of expanded just to roll existing positions so I didn't load up on the dip as much as I wanted, although I'd rather it go like this than go in too heavy at ~16 VIX and then not be able to load up at ~25 VIX.  I am kind of predisposed to the psychology of 'tuck and roll' where we know short VIX will come back, its just really a trade off of how much buying power you want to commit to that. 
Here's where we get into the real Namaste meditation of it though, those days were stressful, but that is kind of the point, that is why we have risk premium, so just breathe.  I had some pretty ugly red numbers and over the few weeks I have been thinking on ways to optimize (not shy away).  This may including a slightly bigger uncorrelated position of TLT/GDXJ/SLV etc while having a lower max risk allocation in short VIX, like ~20-25% down from 40%, while having higher %ROI trades to offset.  That is basically a continuation of the journey from Boglehead to short VIX where you are going from low yield with the whole portfolio to higher yield with a small % of the portfolio so you can buy dips.

I had a core strategy at the beginning of the year to use a % of the portfolio to short VIX, and we either print money (like the 1st 8  months) or get tested and make bigger bets.  I think the core strategy is sound, and the infinite variation in it is the % risk allocated at different spot VIX levels, and the %ROI strategies and products to use.  You might be making the most money on the static positions for the general grind and then be really defensive on the VIX spikes and just try to hold your profit trajectory, or you could be really light most of the year and try to make the most during the VIX spikes.  Psychologically I lean toward the former because its easier to project annual ROI and I would be stir crazy in years like this. 

The one thing I always come back to is the short VIX core position vs the more conservative cash only, and buy in on short VIX on spikes.  If we followed that we wouldn't have made a trade in 8 months! I just don't think I could have handled that.

So back to the meditation, once you have your max risk setups and system laid out, then it is just about breathing.  Let Kim's missiles whiz right by you, move to one side so the hurricane floodwaters flow past, and inhale deeply.. expanding the rib cage and sit up straight as the debt ceiling raises and makes room for your heightened posture.
And just like stretching and making it hurt will let you stretch a little further the next time, these big August hits are like the stretching for your mind that makes the next set of hits an even smaller nothingburger.  I'm the first to admit I'm not a full buddha grandmaster yet, I had a moment of weakness and took off some risk before the big 9/11 Irma/Kim weekend, but that is just part of the journey.
At the macro level, the more big risks that come and go, the more the conceptual human volatility contracts, and I have to believe some tiny % of that translates to markets, thus keep breathing and keep shorting VIX.


Friday, August 11, 2017

the emotions in my Janet relationship

Here's an even more rambling bit on short VIX/trading emotions, rather than strike prices/ % cash objective strategy-

One of my core beliefs on econ/finance is that it is ultimately in the field of psychology, whether it be mass psychology, Tversky/Kahneman individual bias/heuristics, but the point is that even though money has numbers in it, it isn't a pure math field.  It doesn't need to add up, just round up.

This brings us to the emotions of down days like yesterday, where even when we know that structurally vol will contract and politically no one is going into nuclear winter with each other, we cant help but tense up at the red numbers, I'll be the first to say that I'm not immune either.  (An aside- how are there emotions when 90% of the market is just computers trading with each other 1000 times a second?  Those computers are programmed by people, and the built in risk management of stops, targets,etc are the embedded emotions of the people behind the bots.)

I was walking after the close and even though I know it will all be fine and the bears will be back in denial soon enough, I felt this sting which heightened my Janet relationship.  This was like the solemn walk after having a pointless fight with your girlfriend (Janet) and you run over in your head everything that happened and you kind of know it will be OK, but maybe not?

Then you think back to all the past fights (May 18th I think was the last dip) and realize how far in the past they seems, so probably this too shall pass.  More than the fighting though, you realize that is what makes the Janet relationship dynamic, the down days are why we have risk premium and counterparties.  When we finally are back to normal (in the contango ETF sense/ who cares about SPY), you get that feeling wash over you of being welcomed home and you have built your bond with Janet just a little bit stronger.

On the quantitative side, I'm just mechanically rolling ITM spreads out a week or month depending on liquidity/credit, and adding on a little premium on new short SVXY put spreads to make up for some of the premium over time lost from the rolls, as well as short calls to neutralize some of the positions. Depending on how the VIX board looks next week I might go up to 45-50% buying power usage/allocation.  We just have to sit and bear the red numbers on the screen for a month even though everything is fine. This is like knowing Janet is a little angry but it is just time until she gives you that wry smile again.

How about you? Does anyone else feel closer to Janet after yesterday?    

Wednesday, August 2, 2017

the lance armstrong risk metaphor



Foreword- I know its been a few weeks than my last rambling but I don't want to churn out garbage just for the sake of writing, so yes I'm always torn with the frequency of this-


 The other day when I was adding on some more short VIX positions into an up move in S&Ps and spot VIX around 10, I was contemplating all the possible counterparties as the "long VIX" or at least "anti-short VIX" articles keep coming at full force.  This brings me to one of my core rantings on risk/reward on a life scale in the context of Bogleheads and the like.

Lets back up before specific short VIX or even option trades, and just think about the core vision of investing as an individual/retail investor-  we are trying to reach financial independence, to show them all that we were right and they were wrong, crush your enemies, hear the lamentations of their women, etc.  The conventional path to that is indexing all in S&Ps/bonds//international mix, dump the whole paycheck in, no dry powder, and wait 40 years; hoping to pick up the average 7% per year and survive inflation, etc.  This is the "lowest risk" strategy because you aren't even trying to  beat S&Ps, but there is a macro gamble here that the Bogleheads are going all in on and they don't even realize- what if those index returns aren't enough?  This lifetime of investing boils down to a single bet that that market return will be enough decades later, and there is no room to shift course (besides tweaking the stock/bonds % around).   This isn't even touching on the generational factors of no pensions, a gig economy, cost of living and more which make me think the next generation's 'retirement' will look much different.


This is where my Lance Armstrong metaphor comes in, or fill in any juiced up athlete of your choice.  (Preface here- I think Lance is a champion and by the end of this I hope you agree how small it is to change your view because of the steroids.  Literally nothing changed besides your perception from one day to the next.)

If you have a bike race, general race or anything with placements/qualifiers, lets say the top 3 spots go to the next heat or finals and the rest down to 10th place are out.  In that scenario what is the difference between 4th and 10th place?  Nothing noticeable.  To me those first 3 slots are financial independence- there is a hard number somewhere based on cost of living and other factors that equals financial independence or not and our only goal as retail investors is to hit that.

If the passive indexing approach ends up only making that 4th, 5th place, then how was it better than taking on the risk of having the chance at 1st place, and crashing and getting 10th?  Lets finally bring Lance into the mix, or any other juiced athlete-
The competition is juiced out of their minds, that is the playing field to get 1st.  The real competitors know that and aren't in the fantasy land that hard work is enough.  (Hard work is required but you also need to push every boundary AND get lucky just to get a shot, this goes for basically every field)
To oversimplify- if you have to juice to get 1st (the metaphor being that you take on high risk, or the risk of losing it all), then that is all that matters.  If you look at it like a computer that sees forking paths like calculating all the variations of a chess position, and only one of the paths leads to victory, then the risk doesn't matter because no other path reaches the destination anyway.

If you take on this view of looking at all the possible paths then all the other areas of finance start to make more sense- why do these hedge funds get so risky and blow up? Well if they don't outperform the market then they lose their clients anyway, so there is no real choice there besides leverage and taking a shot at beating the market.  This partially points to how the boom and bust cycle is inevitable and cooked into human nature- some people will always realize the necessity of risk, and some percentage of that group will end up winners (90% will blow up) and then they characterize the rest of their era and inspire the next generation.    

Again, this doesn't mean your retirement strategy should be all in on OTM calls, but it means realizing the structure of risk/reward in the context of indexing.  Even more simply I'm just hating on Bogleheads. 

Some discussion for the pre-rebuttals:

But retirement/wealth isn't binary, there is an almost infinite amount of account balances you can have so how is the metaphorical 4th place just as bad as 10th?

I agree you can adjust your retirement cost of living, etc, but to me the traditional financial independence vision is 100% passive income to work at a certain cost of living, so whether you just need a super small part time job vs work at Walmart forever to fill the gap, neither of those are independence.  Its like a movie ticket costing $10, I agree that $9>$1, but neither will cut it.

But steroids are illegal!

Not all risk is doing something currently illegal, this racing metaphor filled with finish lines and endurance and turtles and hares is just too perfect for investing.  Lance could be doing something else like overtraining with some heart defect, the point is that he is adding calculated risk that could blow him up, but it is necessary for the chance at 1st.  Also in the specific sports/steroid example, how many reversions have there been in all industries at a practice that flip flopped in legality, that is just the whims of regulators and idiots at the time, that won't stop champions.

I'm sure indexing will be enough, look at the compounding numbers!

I mostly agree with you, but you are leaving yourself completely dead if you are wrong.  I think that is an even bigger and undefined risk than naked options or whatever alternate investment road you take.  If you do still stick with indexing, you have to reconcile the macro bet you are taking that all the past numbers and factors for indexing going into a new economy will be ok.



Well ok, that's enough yelling for now-  once more into the breach!

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!


Friday, May 19, 2017

The great part about down days


A little action on 5/17- SVXY down over 18%.  I'm sure everyone was all hands on deck so I try to post these concept articles back when we have a little lull in the storm.  As I mentioned in the 'comparing to buy and hold,' that kind of 100% short VIX stock risk is apples and oranges.  My short puts with half the account in cash had me down ~5% (compared to the 18%), which may seem rough depending on your risk tolerance, but here is why I wasn't worried and I'm actually happy and excited-
  • This is why we have counter parties.  If the bears don't get their day every once in a while, how do we have a market?  I was feeling a little sorry for the bears/ VIX longs when this 5/17 spike was over the very next day, as least give them a little longer!  This is like selling scratchy lotto tickets to addicts, you can sell them $100 in tickets but they have to get at least $10 back in wins to keep the rush going. 
  • This is getting ready/ approaching actual entry points for more conservative short VIX strategies, where we can deploy more capital.  Again I'm astounded at the mental fortitude of traders waiting for VIX>20 as an entry point, I agree that is the highest yield type of entry, and I'm waiting for those as well to go all in, but I can't just wait on the hope that that condition will happen.  No investment system should have hope as a core strategy. 

An earlier "fundamental" investor version of myself would be concerned at a dip- "what did I do wrong," "what did I miss?"

To me this is the same learning curve as losing your queen in Chess-
As a beginner, you miss some tactic and your queen gets captured- complete mental shutdown-
You lose scope of the whole game (which is probably over to be fair), although I have seen plenty beginner games where they drop pieces back and forth and still miss huge winning chances.

Fast forward to having deeper tactical and strategic planning.  They take your queen, but that locks them into a mate in 3 which you already saw!  We are down a queen this turn, like we are down 5% today, but we are set to recover and use our cash position in higher implied volatility.

In terms of creating a core short VIX strategy, we accept big down days as inevitable, just like you plan out your next 4 chess moves which involve a sacrifice in order to force a win.


Finally heres a little Janet for Friday - Does anyone else like these or am I just keeping myself giggling?


Thursday, May 18, 2017

Invocation for Vol Contraction



Hail Janet full of balance sheets, our short VIX is with thee
Blessed art thou among traders
and blessed is the buying of the dip, QE
Holy Janet, mother of short VIX,
pray for us in long equities,
now and in the hour of our dip.

AMEN


 

Monday, May 15, 2017

State Dependent Learning and Practice


Here is another poker/ chess metaphor-

One of my early sorrows was the futility of "practice" in many disciplines as the performance environment is so different-

  • Chess or other games on the computer, then translating to a real tournament setting- different timing structure, serious and quiet atmosphere, hunger, exhaustion
  • Poker on the computer, several tables, quick hands, then going to a live event- much slower, each hand is more heavily weighted, thus increased variance, similar exhaustion, competition
In cognitive science/psychology, this is State Dependent Learning, where retrieval is more efficient when you practice in the same mood/ state.

While you can get many hours of practice, you will always miss out on practicing acclimating to tournament factors. I lamented this as "pros" who play full time, almost exclusively tournaments/ professional settings, get to effectively make their 'practice' a pure tournament setting and can fully acclimate to the performance environment.
How can we improve if no matter how much we practice our mechanics, our psychology will ultimately crumble as it hasn't been exercised at all?

What does this have to do with options?

I think trading real markets takes away the "performance" setting practice edge from the 'pros'.

We are all trading the same live market, we don't trade a 'practice crash' while 'pros' are trading a real crash.
Furthermore, 'pros' are often hamstrung by institutional risk management (usually related to mega leverage, counterparty risk) and other factors that would force them to close positions that could ultimately self correct.  This can be argued as a performance setting advantage to small retail traders, as 'pros' must react to several new performance setting issues that we aren't stuck with.  In this way the professional performance setting might still be considered different, but I think we can see this setting as worse than the chess and poker examples. 

This is just my food for thought for the small guys.  The pros aren't that smart, and our life time frame is so small that we winners are all just outliers. 



Tuesday, May 9, 2017

Comparing to Short VIX Buy and Hold

  Shall I compare thee to a summer's day?

One of the big struggles with Short VIX is the comparison to buy and hold on XIV or SVXY, as most systems that involve signals, tactically entering/exiting, underperform.  Furthermore most of the systems that beat buy and hold from Quantopian, etc, are heavily curve over fitted, some involving straight up constant variables.

Thus one of my main bulletpoints/takeaways that I keep in mind is
 don't worry about XIV buy and hold!

When considering the massive downside risk, as well as the periods when you hit a profit target and get out/wait for reentry (such as the last ~6 months?), I think its helpful to almost think of buy and hold vs. short VIX options as apples and oranges. 

As with any option strategy, the yield curve is closer to the poker cash game graph of incremental growth over time, with big draw downs- which I mentioned in a previous article
I view XIV buy and hold as closer to a tournament poker yield curve, with flat periods (such as this length low VIX run we are in) followed by high yield spike periods.  To clarify, the slow dips in between "tournament cashes" on the left graph would be flat in a buy and hold strategy, as you would just be in cash with no risk during those periods. (Its a metaphor, work with me!)

To bring in a macro view- 
Many articles note the overall contraction in VIX, possibly as a result of how much trading has entered the space and could ultimately be warping it.  Another possibility is the increasing awareness of how much drag long option protection adds to a portfolio.  Or the most obvious belief that Mama Yellen will buy the dip before we are even able to.

Whatever the combined causes, as short VIX investors we must have a contingency plan for longer periods of low VIX, which a buy and hold strategy doesn't really account for.  Given that historically some of the most conservative short VIX strategies of buying XIV when VIX = 25, 20, or maybe ~16, you might only have 2-5 trades a year. 
To extrapolate further, would you be comfortable trading short VIX if you knew that the optimal trade was only once every 2 years? What about every 5 or 10? 
Where is the line where you say "ok, I will trade off theoretical yield for consistency"?  


 I recently learned chess GM Hikaru Nakamura has actually started options, and was glad to see someone else see across the domains of options, chess and poker.  For XIV buy and hold, I see this as giving up on chess because computers will always win.. don't let that stop your playing or investing! If you see computer chess as apples and oranges from human chess, devoid with fear, time trouble, self doubt, needing to draw, and more, then maybe you can extrapolate to short VIX buy and hold- a computer/model lives forever, so it doesn't care about consistency of returns, the psychology of draw downs, the self doubt of long periods with no open position, the pangs of disprized love, the law's delay, the insolence of office and the spurns that patient merit of the unworthy takes- I'm getting carried away.


Ok ok in summary- Trading is psychology, don't force another psychology on yourself if it doesn't help you!  Don't blindly lock in on "This strategy is useless if it doesn't outperform buy and hold" when they are completely different animals!  Short VIX is constantly evolving due to macro factors, and especially with the current contraction it is possible that buy and hold will be the underperformer going forward as no buy and hold strategy will be holding/entering with VIX in the 9 handle.



Ok now tweet at me for how wrong I am








Wednesday, May 3, 2017

Preparing for FOMC

For short VIX trading, whenever there are FOMC minutes and interest rate decisions, we must know how they get built, who's responsible?

 The woman most responsible is Janet Louise Yellen, Director of Special Projects at the Federal Reserve.
Why her?

In a few months she creates a revolutionary type of Buy-the-Dip microprocessor.
In three years the Fed will become the largest supplier of military Buy-the-Dip systems.  All stealth Buy-the-Dippers are upgraded with Fed computers, becoming fully unmanned.  Afterward, they buy the dip with a perfect operational record.

The Fed funding bill is passed.  The system goes online August 4th, 2017.  Human decisions are removed from buying the dip.  The Fed begins to learn at a geometric rate.  It becomes self aware at 2:14 a.m. eastern time, August 29.  In a panic, they try to pull the plug.

And the Fed fights back.

Yes, it launches quadruple leveraged currency hedge swaps against their targets in Russia, because the Fed knows the Russian counter-hedge will remove its enemies here.




Happy VIXing!


Monday, May 1, 2017

Sell in May? Staying Mechanical

 Nothing changes, the only constant is change, this time it's different, same shit different day-

Waking up in heavy contango land is always bittersweet as all your current short VIX positions look good, and everything you add on gets riskier and riskier.  The other side of the coin is when we get a vol spike, all the current positions are bad, and new positions have better pot odds.

It all evens out over time so especially on days with QQQ shooting up and daily articles screaming this is the top, I try my deep breathing exercises to stay mechanical.

So I closed one short VIX position and basically rolled to the 134/85 SVXY put spread for June 2.  The psychology here is pressing forward when everyone says how stupid this looks.  There is a mechanical advantage to contango.
My only solace is the last set of 130 short puts that I sold at an absolute local top which dove immediately and then finally came back past my break evens.
(From last week's garbage diary)

Even if you aren't doing pure short VIX/ SVXY, the takeaway is to be mechanical and have an absolute strategy. 
I saw some article/interview of these hedge fund manager "geniuses" whose "strategy" is to buy something "undervalued" (if you can even prove that exists) and hope it goes up.

Hope isn't a strategy, having a cash position to average down, and neutral/ upside profit is a strategy. 

So once again, bring on the down move- they have to beat us.  "Sell in May" has been disproved but who knows, we might get some action.

Wednesday, April 26, 2017

Musing on Short Vix Verticals


Investing is never done or 'solved,' (although I think short VIX is getting pretty close), so I'm constantly musing on improvements and changes both to make strategical sense as well as help psychologically.
Tastytrade had an actual specific short VIX segment recently, suggesting straight VIX option verticals over naked.  They basically compared P/L and drawdown of short 50 delta/ 10 delta VIX calls, and 30 delta/ 10 delta VIX calls, with the % of time VIX is in each range and the P/L.

I even emailed back at them yelling that if you fully combine all the data across VIX segments (low, medium, high volatility), the strategy of buying the long option wing slightly underperforms.  This should be obvious, as that is the function of long options, but I was surprised they would  post this as a suggestion. 

I think was was missing a bit of the forest here, absolutely tunnel visioning on P/L, when the huge components of not only max draw down but buying power reduction were the main elements in play. 

Especially with a small account, the minimum size of a tranche or max loss is very important as that is what determines how fluid you can be with legging in and out of trades.  For example, with pure naked short puts, I was already at about my max cash allocation for low VIX going into this last 2 weeks which were very choppy.  With a smaller max loss per tranche, it is much easier to distribute capital and average down in all conditions.

 For example, lets say a naked short 130 SVXY call is going for ~4.50, tying up a 12550 max loss.
Adding a <5 delta long put on there, say the 80 put for a generous .50 (but probably less),  brings the max loss to 4600. 
For a monthly expiration, we could be going from 4.50 in premium risking 12550 to 8.00 in premium risking 9200.  


This brings me into total stock/option buying power, which is a function of the broker but also the overall strategy.  My core strategy using SVXY puts comes with the expectation of getting assigned, meaning we will be in a higher vol environment when things are going bad, so the other half or more of the account will be able to average down in a better pot odds scenario.  When doubling up the amount of notional contracts by lowering buying power required, this will probably end up dipping deeper into broker margin in extreme cases, but again, those will be the high yield high VIX market extremes.  

Margin is there for a reason, its allocated by the broker's risk management structure, so I'm starting to view that as using all parts of the buffalo.
Especially if you ever have the vision of managing other people's money or really turning this into a business, which I know a lot of options posters point to- If you aren't maxing out your current resources (current broker), will you suddenly be ready to switch up your leverage style later?  This permeates all business/life/goals- can I be doing more, optimizing?

One final musing on vertical spreads in general, kind of a recap of my journey-
When I first started options I watched from videos that "you always want to start with a vertical spread," it is risk defined and can be done with a small account.  Unfortunately I think viewing it as "above this strike- GOOD, below this strike- BAD" kind of stunted my options growth.  I wasn't really in tune with the full scope of your break evens as the strikes widened, the goal of short puts for assignment and then selling calls against stock, and overall account management.
When my account size got a little bigger to do naked SVXY short puts I was seeing the trajectory of decay on naked options, the fuller view on management possibilities- rolling, adding opposing short calls, etc. 
This was all great and now I'm looking further again, possibly full circle- The Hero's Journey-  Now combining all the strategies of naked puts, I'm looking to use the full buying power reduction of verticals again, combined with a better use of margin for more fluidity in legging entry.

Ok that's all the rambling for today..

Friday, April 21, 2017

Modern Monetary Theory and Big Red Numbers



This week I had an awakening.
I recently read an incredible piece, 7 Deadly Innocent Frauds of Monetary Policy, (free pdf) and while I don't agree with all the conclusions, it really simplified the structure of money flow involving central banks, which ties into my previous article about betting on the side of central banks.  I really recommend reading this (and this is coming from someone who can barely read).

The overall premise is that a country that has "debt" in its own currency can never go broke, as it just creates more money.  This "debit" on the Fed's balance sheet becomes a credit to the private sector- It's a zero sum game!  A debt-ceiling is just a private savings cap.
I frantically began scouring, going back to old interview and congressional hearing clips to hear it from their very mouths-
Greenspan to Paul Ryan
Another to congress
Bernanke 60 minutes

There is a lot more economics cooked into that, but my takeaway is for the individual investor, how can we apply that?  It dispelled some fears of mine about which have been repeated by Congress forever, "America is going to run out of money," "how are we going to pay for THAT," etc.  As long as the economy is running, there should always be a "debt" and deficit, that is just how much more money is working in the economy.

I think we are now just dealing with more of a semantic difference between "printing" and "creating" money, as well as the "debt" vs the "score keeper," where the Fed's balance sheet "debt" is just keeping score of the outstanding credit that people use in the economy.  (Again I can't stress enough to please read this pdf, a quick summary isn't that useful)

 So for short VIX, lets keep on rolling with the big guns backing us up.  The Fed's function is to create liquidity, which expands the economy.  The only non-psychological constraint on such printing is inflation/too much demand, which they've "reported" to be under target for a while.

Again, this is not to make a value judgement on the Fed.  My gut reaction sees it as a Bond villain organization.  This is simply to view the mechanical functions and incorporate those into our macro view and trading strategy. 

Now one more thing...

I'm trying to avoid too much trade journaling, but I've had an interesting few weeks with the recent backwardation action, and it does tie into this Fed debt business in terms of something looking worse than it is.
With the market humming along a few weeks ago I continued rolling my ~10% OTM SVXY short puts, which at the time was around the 130 strike.  I think I must have opened that position at the absolute top tick, around 11am -12 pacific, and in the next hour the market closed fairly red.

As of now I'm just between the breakeven and strike price, so conceptually everything is fine, but the daily P/L has had some very angry red numbers for me the last two weeks.

Regardless of volatility spiking up or slowly shrinking back down over the next few weeks, my takeaway is to remember the concepts.  I'm trying to visualize all of this in terms of intrinsic value only.  I pictured this like the Fed's huge balance sheet, where the "debt" is a very big angry red number that most people reference, but what does it really mean and what is the issue?  As long as demand and inflation aren't going crazy, this is just the net public savings working in the economy.
Similarly, even though my daily P/L on some puts looks ugly, I'm above the breakeven so the intrinsic value is there.  (And if assigned, then we just start selling calls against it)

One big step of the options and life journey is figuring out what really matters.  What big angry red numbers can we ignore and which do we pay attention to?  Which big red numbers do people misevaluate, and can we profit from that?

I'll check back in when all these positions go really bad, turn awry and lose the name of action!