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.



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!