Friday, October 13, 2017

A fuller Short VIX portfolio

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

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

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

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

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

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

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

Friday, September 29, 2017

Is finance derived or discovered?

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

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

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

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

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

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

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

Tuesday, September 12, 2017

Namaste and mechanics thoughts

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

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

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

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

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


Friday, August 11, 2017

the emotions in my Janet relationship

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

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

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

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

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

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

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

Wednesday, August 2, 2017

the lance armstrong risk metaphor



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


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

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


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

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

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

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

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

Some discussion for the pre-rebuttals:

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

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

But steroids are illegal!

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

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

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



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

Tuesday, July 11, 2017

Short VIX ramblings on free will, freedom, the cave, and a little more Crypto


So I was catching up on some Boethius the other day, the whole reconciling divine omniscience and free will which is pure stupidity, but it spurred me to resume rambling on the nature of freedom and how that goes into our short VIX pocket-

I would argue on a more macro level that more freedom equals more volatility.  This is before even getting into S&P options/ black scholes and actual VIX, but the human concept of volatility- wider standard deviations for actual events, higher chances for corner case probabilities.  Lets look at an even simpler example- Checkers vs Chess:

On turn one you have 7 possible Checkers moves, whereas Chess has 20, and grows exponentially to 400 possibilities on White's 2nd turn, including the possibility of a turn 2 win.  To me that is real world volatility- more options, more chance for advantage and loss.

Lets mosey back to finance and markets, where macro freedom trends can now inform our market view. 

Do you see the total space of finance/economics to be growing freer or more constrained?  

I think this is a legitimate two sided discussion with arguments for each side, and that is why we have counterparties.  The ultimate point, however, is that if you think the universe that is finance and markets is on the trajectory of constraint, then that would lend to short volatility as fewer options and less freedom would lead to less total market action and movement which should be visible in the options prices and thus the VIX.  Furthermore, actual implementations such as market breakers, capital controls, etc all put us ever so slightly on that constraining trajectory. 

One important bulletpoint to insert at this point is the argument that if we go the China route of full capital control and the market fully collapses leading to higher volatility.  I agree that we would have higher volatility, but if it is high enough that the USD collapses, then no other boring S&P investments matter anyways!

I'm bringing some of this up due to the recent action in cryptocurrency and the ICO explosion with potential SEC oversight/regulation.  Going back to my 1st article on Bitcoin, asking the Bitcoin original purist/ libertarians if Bitcoin even can do what it sets out to (anonymous/decentralization), I again bring up the shadow of government on the areas where the blockchain code ends and enforcement begins- at the exchanges, ICO companies, and services.  You may disagree but I think the last few months of action show that the original vision of crypto has been lost, and the bulk of the silicon valley new investors don't remotely care about the anonymity and decentralization, instead caring about and even using words like "governance."  That right there should be the glaring warning light and death blow if you didn't see it before.

Ok ok this is about the actual VIX though-  
The point of the crypo contraction and oversight is that we got a glimpse of what expanding economic/financial freedom would look like, and that door got slammed in our face, almost from within the crypto community before government has truly stepped in.  Kudos to Janet and the rest of SPECTRE as they realized they would only need to take action if it didn't implode internally first.
A blockchain can definitely exist, but there will be no real disruptive freedom attached to it, and thus it will just be less efficient than a central database.  More importantly, the ideological crushing of this outlet to more freedom and options will in a small way contain some price action in actual markets (either to the upside with AMD, NVDA cards now that mining payout will theoretically go lower, or to the downside in that a possible disruptive technology was neutered and markets will chop along as usual.)

Crypto is just one example here, who knows what will come next but the point is the systems are already in place (central banks, US military) that can crush innovation if it truly has the potential for disrupting the financial status quo (if those new industries don't implode internally first)

I've been going in circles just muttering but the real takeaway here is my last point "if they don't implode internally first" and to me that is an issue of human nature.  For a technology or idea to be freeing, it has to let go some amount of security- and on a human nature level I think this is something that will almost never happen, and why Janet et al. can just sit on their hands and wait for these things to blow up. 

People don't really want freedom.  The original idea of an anonymous/decentralized crypto meant real freedom for the few believers, but as it reaches larger adoption, people will give up every drop of freedom the second something goes wrong.  "The exchange took my money, ETH dropped by 50%, my transaction isn't going through, call the SEC!"  This goes way past crypto into every other area where government regulation just multiplies like slime in a little petri dish- net neutrality, driverless cars, recreational drones.

If you agree that it is in human nature to cooperate, and ultimately give up freedom for security, then it follows there will be that slight amount of fewer options, which ultimately bleed into financial markets and prices, and ultimately the VIX.

Just a reminder- YES there still will be corrections and crashes. I am talking about a long term trajectory and core position which will ride out the storm of volatility.  Prices will always go up and down, but if there is even one less far corner option, then that price movement is that 1 cent less exaggerated.

Yes- this is all dark, we are somewhat going back into Plato's cave year by year while we swipe on instagram on our iphone 10's all day.  As investors, the least we can do is factor in these macro issues into our core position and make a few bucks as we are on the way to our North Korea work camp gulag tombs singing And the land of the freeeeee



Monday, July 3, 2017

Praying for Janet!

Queen Janet is down today! But just like Conan she will return!

"Federal Reserve Chair Janet L. Yellen was treated at King Edward VII hospital in London over the weekend for a urinary tract infection. She was admitted Friday and released Monday. She is returning to Washington, D.C., and expects to resume her schedule as planned this week.
Chair Yellen was in London for an event Tuesday, June 27, at the British Academy and stayed in London for a brief vacation with her family."

All the markets, they cannot sever us.  If I were fully leveraged and you still printing for life, I'd come back...
...back from the pit of hell to print at your side!