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.



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!

Friday, April 14, 2017

How many layers deep are we?

With the market closed for good Friday I'm getting a little stir crazy, I NEED A GREEN TICK!  Here's a quick aside I contemplate when thinking about derivatives and how many layers we have, where we've come from and how much deeper we could go.
I also mention this when explaining the journey from stocks (which most people understand) to how we get to SVXY options. 

So here is the dive to the Challenger deep:

S&P Stocks- this is where we start, where everyone understands. Apple, Microsoft, etc.
S&P Options- the first layer of derivatives, based on the above stocks.
Spot VIX- the actual VIX index, based on the Black-Scholes calculation of 30 day S&P options (above)
VIX  Options- we can't trade the spot VIX, its just a number, so VIX options allow bets on the index and are cash settled.
VIX Futures-  the futures /VX and further out are based on the VIX options at the money price at the corresponding expiration.
VIX ETFs- These are trade-able products that act like stock, based on combinations of VIX futures, constantly being rebalanced between the first 2 months or further out depending on the product.  Here we have VXX, XIV, UVXY, SVXY, TVIX and more.
SVXY Options-  Of the VIX ETFs, just UVXY and SVXY have options so far, thus that is the main product I use, allowing access to time decay and varied leverage on short/long volatility.  At this point we are on the 7th layer down of derivatives, sunlight does not penetrate this far down.

How much deeper can we go? Obviously increased volume/liquidity would lead to options on all the ETFs, as well as new ETFs (VMIN, VMAX are slightly "more accurate" versions of VXX, XIV).

While I do revel in how arbitrary all of this is, I do have to remember that even at 7 layers down in derivatives, these all eventually lead back to S&P stocks, so I guess we still are in reality.  Thanks for joining me on the dive!

Wednesday, April 12, 2017

The Short VIX Macro Barometer: The Petrodollar and Beyond

 While stock/etf/options on every underlying trade fairly independently of any "fundamentals," each asset class has some real world metrics that correlate to it, at least in the sense of idiot analyst "reasons" for underlying movement.

Stocks- we have earnings, guidance, CEO tweets...
Bonds- Fed funds rate, corporate bonds
Oil- inventory reports, OPEC news
Metals- combination of mining plus movement in the above assets, policy

So what is the real world underlying concept for volatility as an asset class? I would argue confidence and status quo.  Now lets delve into this magnum opus...

If you aren't already familiar, please read up on the background of the petrodollar.  As a quick summary, in 1971 when the US went off the gold standard, world currencies became free floating, with the exception of an agreement for Saudi Arabia to only sell oil in US dollars in exchange for military support.  This effectively backed the US dollar with oil (previously gold) and gave it a pseudo commodity-currency status.  As long as the dollar has this oil backing, there will be a continued demand for it despite how much is printed out of thin air.

How does this affect short VIX or the individual investor?

My first takeaway here is that I don't want to sound like a gold bug, proving the system is a broken fraud(even though it is).  For many years I shook my fist at the sky, yelling at everyone who would listen about how the whole world economy is based on monopoly money and how it is all rigged.  I still hold all those beliefs dear to my heart, but the difference is that now, when combined with options and liquid markets, we can take any side of a trade.  This is the key step I think gold bugs and doomsday preppers have ignored.  If you see someone profiting from a rigged system, piggyback on that!

Okay okay, are we getting to short VIX yet?

What is the risk for short VIX? As volatility is mean reverting and contango will keep short VIX products going up after corrections, we only need to dodge a tail risk which destroys the modern economy as we know it.  In the mean time, we can experience 25, 50, 90% drawdowns, which we maximize by keeping a large cash position and riding the dollar cost average all the way back up, combined with options reducing our basis.
Lets go back to this undefined tail risk.  My view is that if we have a volatility event so dramatic, much worse than 2008 in the sense that the core of the world economy is called into question (the unlimited debt ceiling that mechanically can't be repaid), then I can't see the rest of the market continuing anyway.  Similarly, if you are only holding onto cash because you want to avoid an almost 100% correction and buy the dip, I'm afraid there won't be much left to buy, or those "dollars" wont be worth much.  I call this "there won't be any home to go back to"
I agree with the sentiment that there could be an absolute global meltdown based on how far from reality any monetary system is, the difference is that in the aftermath, dollars, gold, property won't have any value- probably only bullets a la Mad Max.

So for one of my core assumptions as a small investor- lets assume the system will continue, and in that system we have to trade, and beat holding cash.

Lets delve a little more into why the US dollar and reserve currency will continue, as that can definitely be a distinction from the previous apocalypse scenario.
It wouldn't take you long to find this one chart or 10 new charts that prove we are about to have a 50% correction, in fact I've linked FinViz news in the sidebar to see the daily ZeroHedge articles predicting the last 20 of 0 crashes.  This data isn't new, and has been brewing and stirring since before 2008.  Did every fund, trader, and "the powers that be" not notice this?  The only difference between a monopoly game where one player has sharply expanding debt which is structurally unsalvageable and the US is my original point: confidence
Without even mentioning motives, one does have to take a step back and at least in a vacuum have some kind of awe for what central bankers have done in terms of keeping the system afloat.  When confidence is the only thing backing a belief in money and value, there is an incredible space for creativity.  For example, in order to build confidence in money, you can:

1. Make the currency "stronger," improve GDP to debt, "productivity," have it backed by something, thus making people believe in it's strength


2. Alter people's beliefs, have them not care about it or be to stupid to do so, thus bypassing the "strength" of the currency entirely.  If there is an Instagram post to like, who cares about the deficit?  Its almost a cleaner and more elegant solution- brute force can knock down a door, but knowledge is a skeleton key.
To clarify- I'm not even mad or hating on Instagram idiots- a younger me was, but I think I've evolved. Every time you like a post or watch a show or eat fast food, you are contributing to the economy in a profound way that you might not even understand.  Do you hate on bugs for flying around and pollinating or worms composting soil with their excrement?
 If disbelief in fiat money is a virus, then confidence is the vaccine.  If you have only 1 person in a population that doesn't believe money has value, then everything will hum along perfectly.  They have no one to transmit with.  Once there are a few, they can interact with their own form of currency/trade/debt, and the 99+% run into a snag when dealing with these few.  Vaccines fail when a large chunk of the population is susceptible, and the few immunized don't stop the spread of the idea (disbelief).

Coming back to short VIX and the idea of a two sided market- who is supporting short volatility and who is long volatility?  I would argue these central banks and governments are short volatility- they are looking to stabilize risk, avoid massive spikes, and micromanage everything.  Who is long volatility? The gold bugs I mentioned screaming for the next overdo crash. 
 If you had to pick a side, which horse would you bet on?  I completely sympathize with everyone calling for the next crash, but when you look at them all together, they are a bunch of guys in front of green screens and hotel room interviews with their only resource being their yelling and BUY GOLD links.
In contrast, lets look at the "short volatility" guys, the ones banking on the status quo.  Central banks, the IMF, the US government, other governments and by extension most of the world military- basically the bad guys (except in real life the bad guys always win).  These are real assets and forces behind short volatility.  In contrast to the youtube and blog personalities talking about the petrodollar, the opposition are basically Bond villains with even greater resources. 
Not only do they have the resources, but they will use them and protect the petrodollar at any cost.  Any Middle East country wants to buy oil in Euros? We'll handle that.  Gaddafi wants to make his own gold-backed money to buy oil? Give him the smack down.

What if the petrodollar fails, what if oil ends?  How will they keep the charade going?

I really think oil or the "petro" part of petrodollar is just a placeholder, that can and will change.  For example, if the planet somehow shifts to all electricity, the only structure that needs to stay in place is that all energy transactions (oil, electricity, nuclear or more) happen in dollars, call it the electrodollar.  Ultimate that will be backed by another 1971 Saudi Arabia style deal,  complements of unquestioned military force.  When I was younger I also questioned why the US spends more on military than every other country combined.  Its all clear in the scope of the petrodollar.  As long as the US has the force to require that the world keeps running on dollars, that is the confidence they need- they only need that structure, then they can print their way out of other problems (corrections, market cycles, sector shifts).  Thus the petrodollar becomes the electrodollar and finally the gundollar, wardollar, nukedollar... what is the catchiest?

As I'm writing this I'm seeing Trump now supporting Yellen, all of our war and structure in the Middle East, and everything pro-petrodollar that he previously ran against.  Its almost like his boss picked up the phone and explained everything clearly.  As investors we have to look at actions and make conclusions.  If Trump was deflected by this Bond villain system, how could any future politician even make a dent?

To sum up-  

What world underlyings correspond to volatility?- confidence and the status quo

Are you tired of seeing a rigged system keep going? You can keep screaming or take the other side

Short volatility, the idea that fear will correct and go lower, is backed by the most powerful resources in the world.  When in doubt, why not bet on those guys?

Almost each of these paragraphs could have an entire separate article and I hope to get to them all.  I hope this wets your whistle as an introduction to the macro case for short volatility, in case you didn't even know what world events correlate to it.

Monday, April 10, 2017

VIX Backwardation Part 2: Uncharted Waters

 I'm beginning to think more and more that we really are in uncharted waters/Stranger Tides, at least for VIX.  We are in the 2nd week where VIX futures are in backwardation and its only getting steeper.  Some theoretical causation for this from Wallstreet Journal/ Zerohedge is a "feedback loop" from many big funds shorting volatility.
At the close when I'm writing this I'm looking at over 4% backwardation with the front month higher than May AND June.  Furthermore in looking at contango data back to 2004, the VIX futures were only in backwardation when spot VIX had a high of under 15 once on 3/8/2007, and the backwardation was -.29%

Looking back even recently to ~2011, we can see every backwardation event was accompanied by a high spot VIX >20, until now.

So what to do?

Personally, I've added short SVXY calls to my position, extending my downside breakevens and adding a little long vol to take advantage of the futures curve.  Going forward, if this structure holds, I think I'll lean towards SVXY strangles/adding short calls onto my existing short puts as the backwardation takes a lot of risk off of the upside.
I'll probably get assigned stock on the puts on some of these expirations, at which point I'll basically be in SVXY covered calls, keeping the long term short VIX assumption.

But does this make sense?

I'm still holding to the core belief that VIX has to return to contango, as the concept of free insurance just doesn't make sense.  However, at the same time I'm not rigidly holding to the belief that the market or any part of our modern era has to make sense.  Flat earth and geocentrism made perfect sense as well!  (Now mix flat earth with uncharted waters)

With volatility as an asset class, it got me thinking about the other asset classes that don't make sense-

Negative interest rates- If you explain the concept of savings to a small child, or even mildly lucid marsupials, they will point out immediately how little sense it makes to lock in a loss of capital.  Of course you can academically say there are reasons and structures for why interest rates will go negative, but the glaring conceptual problem on the surface remains.

Swap/Treasury rates- This is less of a retail/small investor trade, but looking at various articles on over-the-counter swaps trading lower than 'risk free' US Treasuries, we see another glaring issue- How would something with more risk than an identical product ever be worth less, how is there no floor?

Has VIX ascended into the now trinity of asset classes which make no conceptual sense?  I was trying to wait a little to start writing about this as who knows, it could correct tomorrow.  Even if it does, that doesn't change the fact that a new floor or ceiling has been breached for volatility, so I might as well yell anyway.

One upside to all of this is the unknown of the market holds, and surprises us in new ways each time.  At the first level of investing we think something is overvalued or undervalued and take the corresponding position.  We soon learn that something "overvalued" can keep going up, even to a $1 Trillion market cap.  For this reason I think you should throw fundamental analysis out the door if you haven't already.
Step two is to trade based on mechanics such as convergence/divergence, contracting volatility, etc.  Unsurprisingly even then, trading based on a mechanical fundamental such as "interest rates can't be negative" will eventually break down.  The upside of all of this is that any market (even one of ideas) can be two-sided, which theoretically means continuing liquidity.

I am still SHORT VIX! However- given the pricing of futures I think it makes sense to convert some short SVXY puts to strangles, adding some premium where there is a little less risk than there was previously.
And if none of that makes sense, in addition to the fact that its all probably wrong, instead just look at what the futures curve is telling you:

  Just do it!

Thursday, April 6, 2017

Low VIX Contango Thoughts

A few times over the last two weeks I noticed my trusty blade glowing blue, noting VIX had dipped into backwardation-
Tastytrade had a great discussion yesterday which pointed at some of the underlying macro VIX issues that you have to contemplate when having short VIX as a core position.  In summary, backwardation in VIX futures at such a low level has been almost unheard of and potentially reflects how much big money could be behind short VIX.  (Along with their trade idea of getting long VIX as without much contango you are getting long VIX without the roll cost which should be free money)

Is the small front month backwardation after the tiniest dip just a visual representation of buy the dip?  Conceptually the futures curve is pricing in a very short term vol contraction, which correlates with an equities rebound

 With this backwardation oddity I went off walking, rambling, thinking about futures curves in general.  Will the VIX curve always look the same?  As VIX products are traded more and more (and the equity options they are based on)  will these weird curve changes become more commonplace?

Would it make sense for a theoretical VIX futures curve to be a flat line at 15 or whatever the average is?  I keep coming back to the conviction that VIX futures have to keep in contango most of the time because there will always be uncertainty.  To lose the long term contango structure is saying  "the future is solved" and in finance terms there is no risk premium associated with thinking "some risk will occur in the future."

Will we see a much flatter front 2 months on the VIX curve when /VX is in the low teens?  I think this is definitely possible as more backtesting shows that periods of low VIX lead to more low VIX on average.

Going back to the actual trade ideas, the short term backwardation was a theoretical impetus to get long VIX with very little roll cost.  On paper that trade looks good but in the larger scope of assuming that the very backwardation implies a short term vol contraction, I think it is hoping for two opposite things at the same time.

Whether I end up wrong or right in the short term, the whole event was a time to contemplate conviction in your beliefs and process.  If I believe in the structure of VIX contango, then I have to be short VIX. (with risk management/ cash position)  Is this what religion or faith feels like? Is this the church of SVXY?

Monday, April 3, 2017

Life Probability of Touch

As I'm writing these we have a little action with S&Ps down 15 and the VIX contango at 0.0, and it even touched negative for a minute.
I went to get a screenshot on vixcentral and we were already back to slightly above 0 contango.

Am I happy, sad, crestfallen?  In short vix land, specifically with half reserved in cash for those big dips, we are always hoping for a real action day to kick it off.  When we get these slight down days its just a tease, not giving a real entry point but instead your account of short SVXY puts just showing really angry red numbers at you. (with no strikes even breached)

Last week or two we had a similar down day where I was getting careful possibly too early, selling calls against my position and then having to cover them on the quick rebound.
The options/life lesson here is really taking a step back when it comes to probability of touch.

Just after my little overtrade with the calls and stock, I had the classic work experience of waiting to hear from someone before some project/task needed to start.
(If someone emails back after some meeting, then we will need to finish something by the end of day, whatever- just fill in your own office hell here and flavor to taste)

One person could start preconfiguring things immediately and emailing around just to find out later that everyone else is an idiot and never responds, and it was all for nothing.
I'll give you the spoiler for my day- no one emailed back AS USUAL and a less seasoned version of myself would have had a lot of extra fluster.

So why am I getting nervous in the exact same trading equivalent situation?  In life and work with idiots I already have the conceptual probability of touch baked in, and in options where its about 2x your chance of expiring in the money, I'm guessing the work probability is actually higher.

It comes back to muscle memory and staying mechanical.  One of the takeaways I'm hoping to create in this blog (and mostly for myself) is to intuitively get better at crossing over life/poker/etc experiences into options trading to bring down the learning curve.  Here I already have a great intuitive life experience to know how to chill out and let the options positions and theta just do their own work instead of freak out at the first red tick.  Maybe next time I'll take a bigger breath.

Position sizing, bankroll management, stay mechanical, don't get hit by a bus.

Tuesday, March 28, 2017

Stress as Gamma

/VX and short VIX have been on a bit of a ride the last few days, and I'm not trying to do a trade journal but I'll just mention some trades only because they got me thinking about gamma and how that relates to life.
Going into the last week or so with the 1st 1% SPY down move in ~110 days, I had all short SVXY puts of varying strikes and expirations. With the down day on the 24th  I added a short Apr 21 142 call to offset an Apr 21 put that was getting close to the money.  With the 2nd down day on the 27th I added a short 133.5 call to offset my weekly, adding a little more downside protection.

Fortunately (or unfortunately, the point being you shouldn't really care and just be prepared either way), that call was sold right at the local bottom and we shot up from there.  I planned to buy stock to cover that call around 133.25 or something, but like an IDIOT I did a limit order instead of stop limit and got the stock at 130.39.  We continued up and I correctly got a stop limit in the next day at 141.50 to cover the approaching 142 call.

I only mentioned this to set up my thoughts on Gamma, which I was contemplating, especially as some of these strikes are weeklies now- and holding straight stock had me watching the full ticks of basically an option at expiration.
I view gamma mainly through the lens of convexity/acceleration around expiration, as your time to be right or to correct from becoming wrong shrinks rapidly, so to me gamma is entwined with time, although that isn't its formal definition in relation to delta.

Like a lot of options topics, I feel gamma intuitively, and I think you should too if you have ever had a project due, a test, presentation, or anything with a time component- Basically STRESS.  (Does anyone not have this experience?)
Is stress just the gamma/acceleration/time convexity of some work/event/underlying?  
 Lets say you are assigned some project/report etc due in a week.

  "OK, we aren't stressed yet, this was just assigned so I'm where I need to be in this progression."

  Now lets fast forward to a day or two away- we haven't started and now have a much shorter time until expiration.  In this case the project is the underlying (like stock) and our delta (underlying directional change) is how "done" the project is. That stress of not being done is the convexity of how much time we have left for needed change to happen. This example is closer to buying a long Out of the Money option, as we start out needing for a directional change (finishing the project).

A short option equivalent (selling an Out of the Money, meaning you need no underlying directional change)  would be like being somewhere and needing not to be recognized,
"I'm almost out of here but what if they are catching on?!"  If something goes wrong there is no time to correct it.  Maybe a better thought is if you have a meeting set up and everything is ready, the fear creeps in about the catering or AV failing, there is no time to correct it right at the start of the meeting! (Having to prep AV a week earlier is no problem, basically a much lower delta effect on the position)

I think the ultimate short option/ gamma stress is death- does anyone else think about options and it immediately goes to thinking about mortality?

 Life is like one big LEAP option, the expiration and strike price are so far out of mind that you don't even worry about it.  Is a midlife crisis then a sudden realizing the convexity of the time we have left and what we have or haven't done?  And what about huge life medical events, is that huge underlying delta acceleration basically repricing where we are at on our LEAP curve just gamma?

Coming back to my initial trade, I ended up getting SVXY stock before I wanted to and sat there watching the full ticks of stock underlying change, where I am usually used to only watching the much smoother change of further away options.  That immediate stress of each tick was unavoidable even though intellectually I knew it meant nothing. 

So what do people do to reduce this stress? PUT IT OFF.  Yet in options land, this is usually the correct approach- rolling to a further duration to reduce gamma, or closing the position at 50% profit.  Maybe this is one case where options and an aspect of life don't add up. 

If these idiots who perpetually roll useless meetings to the next week and next, or put off projects by waiting to hear back on emails only knew what GENIUS option sellers they would be.  (slight sarcasm, but then again who knows)

Is there a takeaway here? Maybe to be more quantitatively mindful of the gamma stress in your own life so it doesn't feel as crazy to you, just realize the natural convexity with time.

Friday, March 24, 2017

Optionshouse Satisfaction Survey

 Today I got a customer satisfaction survey from Optionshouse, which I've left a while ago (Now on Tastyworks)

I've been trying to practice my deep breathing to keep my blood pressure down, but when they just ask for it then its a physical impossibility that I'm not gonna unload.

First there was a little checkbox list of why you are leaving, and it only let me pick one thing- how shortsighted.  Anyway I have no one to share my yelling with, so here is my monologue:

I wanted to select all of the above on reasons to leave, but if I HAD to single out something it would be platform usability.  I'm trying to remember back now to chronicle all the issues sequentially, although this might be out of order-

-At one point they made an overnight margin requirement change that no longer allowed calendar spreads so I woke up with $100k margin call emails,  literal nowhere on the OH site did it mention this and there was NO alert in advance, even though they send monthly advance reminders for whatever little seminar minutia was coming up at the time.  I think I was shuffled around between 3 customer support people trying to get to some kind of manager with some semblance of competence  but alas I was left high and dry.  In terms of customer service insanity, they all said this was a FINRA/SEC requirement for margin and were somehow oblivious that LITERALLY EVERY other broker lets you trade calendars with no problems.  I also couldn't find any evidence of this requirement on any FINRA/SEC web page.

-At one point the accounts summary/positions page just started showing a totally wrong net liquidity, although the individual positions were correct.  This is almost more shocking than the margin issue because I can tally the P/L per position at a glance (LITERALLY ADDITION), so I am completely at a loss about how they broke the basic functionality of adding columns in their software.  For example, excel can have add ins break that use complex functions, but there is no way to break down the absolute building blocks of addition and relation between cells.

-Later, and at multiple points, when sending a limit order, there was no indication that it went through, and no 'pending' order listed anywhere in orders or positions tab.  At this point the software had such a faulty history I assumed some kind of mini crash and put in the same limit order. When that price hit, now both orders suddenly blinked that they filled, doubling my planned exposure.  Fortunately I closed the position later for double the profit because I'm a genius, but no thanks to OH.  A week or two later I entered another trade and just like Charlie Brown with the football, of course the issue wasn't fixed.  I called customer support screaming and in shock that basic order functionality was down for a week or two, and support was super chill like "oh yeah they're working on it. don't worry the order is going through it just doesn't show up"

Frankly I'm semi in shock that OH has the gall to send  out a frowny to smiley face 'how are we doing' survey email, basically confirming that they have absolutely left our solar system in terms of coherence and are in some kind of dimension that we can't even quantify with our current fields of math and physics.

I would be absolutely flabbergasted if this survey was even read by a human.

Is there a metaphor or life lesson here? Unclear.
It was a personal reminder to me to always be looking for improvements; a core part of any business- especially if you view your investing as your own business.  A younger me would still be on OH grinning and bearing it, but if there is a chance to improve your margin or basis, you absolutely have to, that is the difference between 0 and 100.

I can't imagine ever being straight long stock without a covered call component.  If I can get something for .1% less than someone else, that is everything! 

Progress seems very small and incremental, and it is, but that is the water that wears through mountains.

 Thanks for listening