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,
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.