Tuesday, February 13, 2018

VIXtermination aftermath

I'm still here, no suicide livestream, I've just been breathing/decompressing for a bit as this XIV/SVXY show hit me a little harder than I planned for a few reasons, mostly conceptual-

The #1 takeaway I'll put first- from the UVXY/VXX and /VX action after 2/5, it looks like the life thesis of the short vol trade endures.  Lets give it a month or 6 and see where we are at.

Now the XIV/SVXY issue-
This hit me hardest as I came in the last 2 years with the plan of having small defined risk positions and waiting for these good pot odds situations to scale in.  I don't know how many excel sheets of weekly, monthly yearly price and % moves I've looked at in every product, and of course pretty much every article and interview on them.
One of the 'conservative' Vol strats I've seen backtested a lot on quantopian, etc is XIV buy and hold with a certain portfolio % after such 16, 20 , or higher VIX spikes which we finally got.
In my own backtesting and referencing across all these other resources, XIV/SVXY went perfectly through 2011, 2015 flash crashes, S&P 10% downmoves and VIX popping to 50, getting about a 50% decline in the most extreme of these market moves, which I showed in one of my earlier articles.

The main pain of this whole thing is that VXX and UVXY seem to be working perfectly in comparison.  Due to the option spreads during big VIX spikes  in these products it makes more sense to just get stock.  The final dagger is the majority of the 'move' happening in 15min of aftermarket trading.

I have to admit I made a big mistake, I got a tranche of stock (covered call) too many in SVXY on the 5th trying to catch the falling knife..
Like I've written before its just like poker or chess where 99% of the game plays in a certain 'range' such as raise fold, 3 bet fold, C bet fold, and then in a 5 hour session your entire P/L comes down to one huge hand of nuts vs 2nd nuts on the river.  A GM chess game is 6 hours of perfect moves back and forth, dead even until one move misses a 7 move tactic and the game ends immediately, there is no ebb and flow back from there.  Even though it was a huge risk management mistake, I still felt double headshot because I had to be in SVXY with that mistake to get the full decapitation.  Here is my 2/5 flowchart-

I think it was more impatience than greed, but I then mused that impatience is just greed for time, and time and money have their own dynamic exchange rate, so impatience really is greed.  What a failure..

"Fortunately" this was SVXY and not XIV, but it seems like fate anyway, as I'm only in it for the option chain, what if XIV with the 80% termination clause had options and SVXY with the discretionary clause didn't?

If I just took the exact same directional risk/position sizing in UVXY/VXX on the Feb 5th dip the P/L this year would be 2 different planets (see above flowchart).  Some of my short vol positions were VXX, UVXY spreads going into the 5th, and given the duration and potential rolling out these might be salvageable, but the equivalent SVXY short put spreads at the time definitely are not and did not behave like any backtesting in the history of the product.

VXX/UVXY takeaways? - Should we be spreading position risk across multiple similar products just to hedge such a failure? In a way I did have this but between UVXY, VXX and SVXY I was heaviest in SVXY due to waiting on the UVXY reverse split.  (One of my ironically most prophetic moments)
All the ideas of long SVXY/XIV having the least amount of duration risk vs 60day+ VXX, UVXY spreads, all means nothing.

One final point on the "manipulation" articles that came out: I think that could definitely be possible, with a 10 year product disappearing in 15 minutes during the tiny futures window overlap.  Even if you agree there is no 100% evidence out yet, I think refusing to believe that its possible is just too 'head in the sand' given the libor and metals manipulations over the last 5-10 years.  The main point is that the manipulation shouldn't matter, it was my risk management that killed me right at the end.  A good strategy and psychology should endure through something like that with enough duration/delta/product diversity/cash to take a bump like that. 
One of the 2nd main takeaways from this is that I'm trying to not throw it all away and turn too cynical like the Zerohedge comments section who drool for years to get a story like this.  I still believe in short VIX and all the market action in a week since the 5th agrees with me.

Short VIX takeaways for this year and beyond:
This year looks fully wrecked, so I'll just be chipping away with short vol positions, slightly slanted more on the "soft cap iron condor" side adding a little risk to the vol short side because of how much contraction I could use now.  In the few days after 2/5, I got some VXX short put spreads a little over 30% OTM for the month, which backtested for all of VXX only happened once or twice hitting 32% decay (which I should be at with the net premium).  Its dark even mentioning this because we just saw the folly of trading based on the entire backtested history of a product, but if we give up on any data we have then what is the point of any of it/
Beyond the recovery trajectory, if you just think about short VIX in a vacuum if you are starting now, its an incredible pot odds time to short VIX, and more importantly a huge blow up like this gives the bears and long VIX crowd a dream to cling to for another 5-10 years.  I know I messed up this year, but this makes the next 5 years that much better- for me and everyone.  Again I'm trying to think of a long term investment strategy- asset class wise and in terms of improving myself.
(Yes of course SPY can and probably still will crash more this year but that doesn't change the pot odds of shorting VIX with spot way over the 'long term average' and above the whole year of futures pricing)

Sorrow takeaways:
For the last week I've had so much chest pain I couldn't shake, even though I know the trajectory of Vol going forward should go down.  I know it could've been worse, I could have made a bigger mistake, and intellectually I know I'll be fine and life goes on, just my heart doesn't know yet. I need to get through this chest pain and get it all back to normal.
A little of this whole rambling is just to my one reader.. don't give up on me yet. I just want to get back to my routine of twitter and all the market news sites and getting back to MSpainting Jay Powell, there is so much work to do. 
This was like another Janet break up where we just need to get back on track, let the scars heal, and in time it will just be a blip on a huge chart.
One more sorrow bit, with the last week or two of crypto action which I could take no pleasure in.  Watching Bitconnect and others fully blow up as expected was bittersweet as XIV blew up, because to outsiders these are just the same thing.  If you tell someone XIV or BCC lost 99% they just say 'oh so thats like a scam/penny stock/ponzi/whatever'?  There's no retort really, we just have to breath and know the market vol mechanics. 
I feel like I've let short VIX down, like I don't deserve the name right now because I just made a stupid trade, it might as well have been going all leveraged on long options around some AMD earnings or going all in on some crypto before an announcement.  I just made an emotional mistake almost unrelated to VIX.  This was an XIV/SVXY problem but it was more a me problem. 

Half of this feels like some stupid youtube apology video, and I think the whole situation will only get better with time.  Making mistakes is part of the short VIX life metaphor, just don't make one all-game over mistake, and ride out the smaller mistakes/jumps/spikes/fear.  Its an important growth experience, and I hope you will accept me back in your heart-

Wednesday, January 31, 2018

Thin value pt 2- soft cap iron condor

Continuing from my last post on the "thin value bet" to add a little juice to short VIX positions, I thought I'd add a sample trade/ more fleshed out idea-

The soft cap iron condor:
My idea for this is basically a very skewed iron condor in certain conditions which aims to add a little premium or reduce max loss on a position at the chance of losing due to a huge vol collapse.
Taking the existing portfolio risk of 10-20% max draw down with your short vol positions, we add verticals on the other side at about the 20% monthly decay mark which is about the max where VXX goes per month- the "soft cap".  Those verticals aim to have a max loss equal to the max profit of the short vol verticals, meaning there is no risk of loss to the short vol side, but you theoretically could have a month ending up a scratch.  In real trading conditions that much vol decay would have you rolling up/down the other side, but that complicates the simplified model.

I was going to scribble this out in MSPaint but what is thinkorswim even for? Might as well make it look a little more accurate if we can. So here is the "soft cap iron condor" in VXX :
 This is using sample numbers from the 1/30/2018 close, with VXX at 30.60
Assuming a sample 10k portfolio, targeting 20% max draw down from the short vol positions (verticals) we would have 2k max risk to play with-
Short side:
35/38 call spread (~15% out of the money) for .44 cr, $256 risk =~ 8 spreads
= $2048 risk, $352 credit

Normally this is where we would stop, but depending on spot VIX being super low, low spot with not much /VX premium over spot, or if your positions are at max loss and you want to take some max loss off, we add the skewed opposite side:

Long side:
$352 risk available, from the $352 credit from the short side
20% otm =~24.5 put
24.5/23.5= .13cr, 87 risk =~4 spreads
$348 risk, $52credit

Why is this different from $SPY iron condors?
Unlike straight stocks that have earnings, buyouts, crazy FOMO, short squeeze/melt ups, VIX products have some conceptual constraints which I was pointing to earlier such as the decay behavior in the 9 handle:
Going back to SVXY/VXX inception, 9 handle VIX closes don't hit that 20% monthly decay historically.  Again this might not persist forever but its at least a start into quantifying directional risk differently for this different product.  

-Obviously there is no free money anywhere so this is just a way to flatten risk and add more trade offs.
-I wouldn't do this right after a VIX spike because historically that is when you can hit those 20% monthly decay numbers (the quick VIX drop after a spike). I might add this on if after a VIX spike if all my other positions are max loss and you would be fine with a potential scratch for the month if it would take some max loss off.
-Obviously we won't be in the 9 handle forever so as spot VIX gets higher the 20% monthly breach risk goes up.
-It seems like the lower liquidity products (SVXY) almost factor this in and a lot of times the ~20% otm strike on the long vol credit side is the last one, meaning you can't make a vertical to reduce buying power reduction. For example even though most of my positions were SVXY short put spreads, a single 20% otm naked call was 20k BPR in Tastyworks.
-Due to the spread/liquidity issue, this type of trade might be confined to VXX.  However, when dealing with such ~.12cr spread, depending on your broker the commissions really eat at those if you don't have some bulk pricing, so again this is really a marginal trade I wouldn't have always by default.

All of that being said, this might be a strategy to consider more as we go into a higher treasury yield/lower dollar environment where VIX might reach a new normal above the 10-11 handle that we saw for most of 2017.  If we have more choppy market action then having a trade like this on might allow for single day VIX spike windows to take it off at a profit and look to re establish in a few days.

Thursday, January 25, 2018

Thin value bets- flattening VIX delta

 Another poker metaphor, the thin value bet:  you might have top pair/ two pair on a potential straight or flush board, get checked to on the river and make a small 'value' bet in position.  If the opponent has nothing, they probably fold and you get no value, they could also be trapping with a big hand and giving you the rope to hang yourself with.  They could even call with a better 'hand that can't call' like a pair with better kicker.  The key case and point of this VIX trade is when they call with a slightly worse hand, and pay you off with the 'thin value.'

I think it was Phil Galfond who said 'if your thin value bets never get called, then you aren't thin value betting enough.'  This is where I'm starting from in this trade idea: yes we are adding some risk, but over thousands of hands (or trades), we are trying to boost expected value/yield/pot odds/whatever metaphor you're on.

This goes back to a post I made recently with VIX still in the 9s, I was examining the max monthly SVXY up moves for the product's history, looking to kind of bet on the decay 'cap' given the mechanics of /VX rolling to spot:
My finding was that with spot VIX under 10, SVXY never had a monthly gain topping 15%, which is coincidentally right around where the option chain ends on a lot of cycles.  (Almost like they are trying to tell us something).  That being said, the last strike is usually at the 15% mark, but with no strike after that, you can't create a spread to reduce buying power reduction, and for SVXY nosebleeds the liquidity/spreads are horrible so you would have to probably hold til expiration and take the hit either way.  (And obviously this 9 handle soft cap trend might not continue going forward)
On the BPR point, I was again looking at SVXY calls today and even though I have a couple hundred long deltas, it looked like there was no BPR offset (on Tastyworks at least), so a 150 short call was like 20k bpr.  (this was around the 15% mark if you are reading this in the distant future).

In the search for yield I went back into the more liquid VXX to look at the numbers with us now in the 11 handle:
Obviously there are more 15% breaches when you go from 9 to the 11 handle, but when looking further at the roll yield/roll premium/contango (/VX to spot, whatever you want to call it) for some of these days, the front month difference was more pronounced than now with usually over $1-1.50 between spot and /VX for ~30 days.
Here is one such day from the above spreadsheet where 1 month from this date VXX lost ~20%

Given the current term structure, the roll yield has been around $1 or less for the average 30 days, so that lowers the mechanical chance of an insane 15% breaching run.

Given all this I bit the bullet on VXX Feb 23 23.5/22.5 short put spreads for .12c credit, this being my thin value bet. (on 1/25/18)  Given the data its a marginal ish trade (right on the 15% decay edge and the %ROI takes a hit due to commissions at the low total premium levels unless you have some insane volume with a specific broker), but is effectively flattening my total short VIX delta at a credit.  If I have all this short VIX delta, I'm at least tickled to try to squeeze a few more drops out.

Historically I've been more scared of the VIX downside than upside (or reverse for SVXY) because with spikes it will come back but if you are long VIX it might never come back, and the only adjustment when it aggressively grinds against you is to move up your short VIX strikes and add more risk for incoming spikes.  All that being said- if this is breached,
1. it is statistically unusual, and
2. the majority of the short VIX portfolio is going to be hitting max profit way sooner and compounding as I keep rolling up and out.

Again, this is a complement to the short VIX portfolio, I am still negative delta on VIX, and the max loss to the VIX downside is only ~1/15 of my VIX spike risk.  I'm just dipping the toe in the water, so this is possibly something to leg further into.
Additionally, if you care about macro factors such as the lower dollar index and increasing bond yields and think the heavy decay of 2017 with VIX in the 11 handle might not continue with these changing conditions, this might be a reasonable idea.

Overall, this is basically a very skewed iron condor structure, but more entry specific in that we're only adding the 'long' VIX deltas with a specific futures structure and won't statically keep it on if there is a VIX spike, and the max risk is still heavily skewed to the VIX spiking side, so even a max loss on the VIX downside is still OK yield for the year.

Any thoughts friends?

Saturday, December 23, 2017

Knowledge as a VIRUS metaphor

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

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

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

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

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

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

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

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

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

Tuesday, December 19, 2017

2017 Recap

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

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

Thoughts for next year, Macro thoughts for the future-

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

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

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

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

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

Friday, December 8, 2017

Wisdom arb, BTC, everything as a derivative

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

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

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

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

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

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

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

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


Wednesday, November 15, 2017

Waste.. or compost?

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

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

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