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.

Friday, November 3, 2017

Is Janet really gone?

 Donald! There's somebody here that you simply MUST meet! Now am I pronouncing this right? Mr... Janet .. al ...Ghul?
You're not Janet al Ghul- I watched her term expire..
But- Is Janet al Ghul immortal? Are her models.. supernatural?

Or cheap parlor appointments to conceal your true identity, Janet...

Surely a man who spends his nights scrambling between hating big ugly bubbles and feeling very honored at all time highs wouldn't begrudge me dual mandates...

Anyway as usual the venn diagram overlap of the people who care about Janet/fed balance sheet/rates/VX and people who remember the Batman Begins party scene is probably under 1, so another post another 5 followers lost.  For the rest of you though (the less than 1), I think the Jay Powell appointment is pretty good for the short VIX crowd in the sense that he basically is Janet, just without the face that works with every move poster (so I don't know what I'm going to do..)

Here was an overview of some of his quotes per policy and this is as Janet as it gets among the other fed chair "candidates"

 The broader theme we come back to is again the SPECTRE/ League of Shadows in the sense that its clear change was never an option, whatever rhetoric from any side is the loudest and most distracting won't impact the true gears of the system which seem to be much lower longer term interest rates and thus cheap money/ increasing equities/ contracting VIX futures.  When a drastic or even slight change in the Fed's direction isn't possible in this environment where candidate Trump called out my baby Janet, then I don't know what you are hoping for if you really think this ship can change course.

So Ben, Janet, Jay, it really doesn't matter.  The concept of Janet is immortal, the League of Shadows will always return. 

Tuesday, October 31, 2017

"What's the problem?" theory

Here is some more of the macro/life view on short vix and how to apply it to the rest of your life and our world-

I call it "what's the problem" , which I guess can be expanded to "what's the problem" theory.  It is entwined with the short vix assumption that everything is overblown and implied volatility is overstated in all events, but it is a little more nuanced in that it applies to the thousand seemingly ridiculous structures we see daily:
We are in the 'everything bubble' - equities, bonds, crypto, real estate, the Fed has basically admitted they don't understand inflation (or more realistically refuse to admit the effects of QE), and all the bears will lament every nuke threat leads to new S&P all time highs-
 Yes it seems odd or unintuitive, but just step back and ask "whats the problem?"

I used to be mad at "bubbles" or waste, government burning money on anything and everything, but that is just the paradox of thrift.  As long as the money velocity keeps going, all that burning money is just other people's paychecks and that is just the economy.  Its a big organism and as long as it keeps moving, whats the problem? S&Ps are at all time highs, just like they have been for many points in the last century, the fiat money system based on target inflation is designed to increase.  The numbers always go up in the long run, unless they fully crash, at which point USD won't matter in any investment structure you have.

On a more micro econ note- what about the individual people that make up the insane masses, when they trainwreck through their life making insane destructive and stupid decisions?  I used to be mad at how they somehow turn out alright but now that is just like watching nature.  Bad decisions are good for the economy- they create opportunity and counterparties, which create velocity.  What if no one bought a new iphone every year, what if everyone was responsible? How would we have a consumption based economy if anyone could budget?  How would you have entire services like Geek Squad if everyone could plug in a cable?

What is the stupidest thing you've seen this week/month/year?  Now step back and really think "whats the problem?"  Who is the counterparty, where is this adding velocity to the money supply? Oh, now I get it!  

A case study from the other day- I was at an intersection with one of those huge digital "500,000 smoking deaths this year" billboards with the numbers incrementing.  Whats the problem?
We have:
- the smokers, they are buying some service they want
- the tobacco company making money, creating jobs (the #1 buzzword America loves)
-the billboard company with a client
-the tobacco/cancer/statistics research company putting their work out there,
 and thousands of idiots like me to comment on the whole mess.
 So really what is the problem?  Yes people will die but they would die some other way anyway, and if you try to save people one way you just end up killing someone else.  I'll have a whole different article later on the purpose of death for all the time values to money.  Whoever you think is the "bad guy" probably thinks the same right back at you.
The point is that things like this are what make up the economy and the machine of it to keep going.  These are what the jobs numbers come from, (which we love so much), its not people fulfilling some ultimate destiny, its just people getting checks to do stuff all day that may or may not even have value.  Some jobs negate each other like opposing lobbyists.  BUT, as long as that keeps the money velocity going, what's the problem?

The current global economy is the result of thousands of years of tiny economic experiments, and we are left with this monster.  Its full of insane people and decisions, but those things mean its still moving, and if there is any stupidity left then there is opportunity.  I think I'm mostly acclimated to the insanity, which is part of the short VIX thesis- people acclimate and that implied volatility is overstated.

Oh well, another rambling, 5 more followers lost.  I hope this sparks something in someone out there.  We are on countdown to see if I lose my Janet so I'll have to be strong as ever to really take my own medicine, and if she leaves... *slow tears from my eyes*... whats the problem....?

Friday, October 13, 2017

A fuller Short VIX portfolio

There is a whole risk spectrum to short VIX which a lot of these twitter idiots either ignore or absolutely refuse to understand which I've touched on before.  Short VIX isn't 100% of buying power in selling naked VIX calls, although I suppose that is the purest form to do.  (I'm not that crazy even though I see other twitter guys going all in portfolio margin)  The point is short VIX is exposure to the mechanics of VX futures converging to spot, and you can layer that exposure into your portfolio at 2 levels: product/strategy choice and % allocation.
  At the strategy choice level, I have dabbled across a few things including long XIV, short SVXY puts, SVXY verticals, short VXX call verticals, and now I'm touching on buying UVXY put spreads to get that extra decay. 
The main reason behind this switch is tweaking the full portfolio from:

-Short VIX exposure (~40-50%) plus cash to buy dips if the short VIX positions are tested,
-Higher yield short VIX exposure (~15%) plus uncorrelated positive premium positions (~50%) plus cash to buy dips.  Higher yield being closer to the money, going from SVXY to UVXY shorts.  We are trying to get a similar monthly premium with a lower max drawdown for the edge cases, making the cash position more effective.  With the way VIX products decay, you are either up or REALLY down, so unlike many products, it might make more sense to be closer to the money so the premium from most of the time better compensate the huge spikes down.

Here is a correlation sample of the main products I'm working with, going back ~8 years (to GDXJ inception):
(I'm using SPY as the baseline as my short VIX strategy is basically long SPY like Boglehead idiots just with more leverage/ multiple decay components)

Even if you are bearish on bonds given the macro Yellen show (which I semi agree with), this is still a short VIX portfolio 1st, so I am fine with having these uncorrelated positions to XIV because that is my main macro assumption.

I've been doing ATM TLT covered calls and very close ATM GDXJ diagonal/poor mans covered calls to create some kind of hybrid mega dividend.  I touched on the psychology of the ATM covered call in a previous article in that I'm trying to get the best downside breakeven and in this setup I'm trying to have the premium be the primary driver so that annual gain is the most easily modeled .

Is there a point here? Basically short VIX can be the core of a full portfolio which is complemented by a big cash position and uncorrelated underlyings to buffer the swings a bit. (Remember we are trying to create that poker cash game slow grind up)
Given the low spot VIX with my current short VIX allocation between 10-15%, if we have the overnight termination event wet dream that the bears can't stop about on twitter that will WIPE OUT ALL VIX SHORTERS, then hey, I'm down 15% and will probably have some insane pot odds to get back into new short vol positions.  Furthermore if we do have the nuclear winter, the uncorrelated positions should hold some value and a 'benchmark' portfolio of 100% SPY might be even worse.

I don't know why I even bother because we'll never hear a reasonable response from these people so I guess this is more for the one person out there that wants to join the discussion on tweaking short VIX portfolios to reduce the insane swings, or maybe someone that is trying to add a little short vol to their current portfolio.

Friday, September 29, 2017

Is finance derived or discovered?

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

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

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

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

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

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

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

Tuesday, September 12, 2017

Namaste and mechanics thoughts

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

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

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

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

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