Wednesday, November 28, 2018

Short VIX bulletpoints for November

So much happening and I'm mired in the vortex, the morass at work with barely time to create my usual C-/D+ quality content ie:
Anyway, rather than super ramble here are some short VIX bulletpoints:

China rules out UST selling in trade war
- was probably a non factor anyway but just another glimpse at the back end where the USD hegemony really cant come down from normal conditions and China, etc know it-

Pelosi renewed as speaker
- "the definition of insanity...etc etc" anything that is gridlock-ish or 'status quo' lends to the short VIX macro idea that as long as government is pretty split and sprinting toward the middle/moderate
(thought its hard to label her moderate left), then we have an environment where there is less political tail risk. (Despite Trump appearing to be the tail risk boogeyman, he has been pretty moderate, especially in his reversal on fed policy)



Powell's speech
Possibly the fed "blinking," although along with 10yr coming back from the 3.2% peak to ~3%, this
speech and current normalization set the course for a gradual decline.  Again, in my sense "bullish" is just avoiding meltdown, a flat/choppy sideways market is 'bullish' for a short premium/ covered call, OTM short VIX plan.

Wednesday, September 19, 2018

Dissecting the Janet 'Lower for Longer' post

Two main bulletpoints from this last week or so:

I only saw the "lower for longer" quote in the context of allowing longer bull runs to "make up" for bear markets, etc. which was laughed at all over finance twitter.  I finally got around to reading the full post which had a lot more horrific meat to it than the 'lower for longer quote' had on the surface.  Again this all falls into the short VIX macro thesis from previous posts on the unstoppable force of central banks, etc.

The horror starts in this section:

The FOMC should consider a number of approaches
  •  Longer term asset purchases
  • Interventions to directly target longer-term yields (Similar to BOJ's yield curve control approach)
  • Negative nominal interest rates
  • Raising inflation target
  • Adopting price or nominal GDP targeting 
  • "I have argued that asset purchases worked and should remain in the Fed's toolkit"
To be fair she semi walks this back in "seeing considerable disadvantages with each of them" but why even mention the FOMC 'considering' these things?  It reminds me of the Annie Hall joke:

"Right now it's just a notion, but I think I can get the money to make it a concept, and later turn it into an idea"

This whole post comes back to the macro short VIX / long equities concept that Janet posts like this are the bullish case.  Bulls and bears can agree that the Fed doesn't know what they're doing and econ concepts don't apply to the Amazon era, and they're probably right, but that doesn't change the mechanical fact of markets being augmented by policies/ideas like this- a theoretical buyer of last resort, a force whose only job is to stabilize USD with more theoretical resources than every other trader/algo/fund combined because they set monetary policy, they control the parameters of the game.  Everyone else is just a player in the game.  Yes the whole thing can blow up like every past civilization but in that corner case the opposite trade will have no payout either, the game ends and all your internal game expertise ends with it.  



Tying into this was the "Water in Markets" post above, which articulates part of this bear case being the liquidity crisis that will destroy the market, and yes I agree there is a definite liquidity crisis- I don't even think that is arguable given the price, volume, and spreads in February.  That being said they have to contend with such statements about liquidity sources of last resort which happened in 2008, and what they want their "crash" to look like.  What ceiling do they want on SPX? IE if their option position is looking for a 50% decline for their 100x return, what if they get more than they wished for, if the liquidity crisis fully blows up the USD and their 100x payout is worth nothing?  So if you want a 'constrained' crash just for P/E and every 'value' metric to go back to a unanimous 'buy' range, just for SPX to go back up, then how is that different from just being long SPX now, like the passive funds they are worried about. 
The water metaphor goes to yell at the liquidity-oblivious passive funds (and they are), without pointing out the point that their 'target crash' dream is its own 'water' and they don't want to splash too far out of that where the USD ends.  They don't really want to reconcile true 'end state' behavior in a math/limit/series sense.   
That being said the "water in markets" and the original DFW speech are both fairly high level and appreciated, but even then they don't go on to address the hole in their argument, which is kind of unavoidable. Once you use the "reality as water" metaphor/argument, then you also kind of have to reconcile the theoretical "water" of your worldview, which is in this case a bigger crash/repricing, but not TOO big! Then that would be a bigger pond to splash out of.

Any rebuttals from anyone? Assuming I'll just lose another few followers...

Wednesday, September 5, 2018

The TWTR hearing and FANG resilience

I should have made more notes during the $FB hearing, beside general shock, but now watching the $TWTR show I have to go off a little because its so entwined with the macro thesis.



A blueprint for senate hearings:
Senator: I'm going to be very tough on you, here is a softball question with no technical specifics in it.
CEO: First of all thank you all so much for inviting me. We have a lot of work to do together and we know we can do better.
Senator: What was the result of (some glaring free speech, antitrust, insane revenue, privacy/data issue), can you explain what happened there?
CEO: Thank you so much for your question.  I don't have all the specifics of that right now but I'll will get back to my team so we can get that to you.
Chair: The gentleman's time has expired. Thank you again for coming to speak with us. Can I get a selfie with you after lunch?

You can probably go back in the last few years to the Wells Fargo, joint airline, FB, and TWTR hearings, and I'm forgetting several others that were all like this.  Maybe 1 senator pretended to act tough, but usually with a completely unrelated question.  Additionally you have the half of the room who are giving gushing support and have even further unrelated questions/comments.

The real point of this is that there is no aftermath.  Every company can go back to business as usual, which is what short VIX is- business as usual is flat or decreasing risk premium.  More importantly, the longer there is no aftermath, and this precedent is more and more established, then it makes it easier for CEOs to follow the above script and wait for the issue to blow over, til the next school shooting grabs the Senate's attention like a cat with 2 different laser pointers.

Going more specifically to TWTR today and FB recently, it was clear that the Senate and congress have literally no idea what is going on with the scope of how FANG runs the country and planet.  Senators were asking if they were embedding notifications that a closed account was Russian, while meanwhile every big data/social media analysis is showing the addictive design of these services, which is arguably rewiring how kids(the next generation) think.
For "freedom of speech/hate speech" issues they go directly to "what are you doing to block X" without any mention of even understanding the point of freedom of speech.
Some notes from today's TWTR hearing:
  • I was almost sure that a month or so ago Twitter was denying any kind of shadow ban/ throttling users, and today Dorsey was proudly saying how they greatly hide/throttle content/users they don't like.
  • Senator Harris vs Sandberg asking about a specific .004% revenue figure for the ads linked to russian posts, almost presses her on saying how they have no metrics/no idea on how to list this despite having a number to 3 decimal places, then just drops it. (the above script of "thank you our time has expired") 
  • Senator King vs Sandberg asking about user rating/credibility rating attached to accounts, probably missing the fact that they will be crying against China's version of a social credit score in some upcoming hearing.  This tied in with Dorsey questioning the importance of likes/followers as the primary incentive metric.  This was a really telling point as the people with the data internally are trying to show how warping these incentives actually are, yet it was lost on every senator who just went down their index cards.
Getting at more the financial structure/backdrop of these companies, again it seems like the Senate is not even mentally equipped to get at the scope of how vertically integrated and dominant Amazon et al. are.  I would love a poll of congress and senate to see how many of them are even aware of what Amazon Web Services is and the the scope of hosting.  The more the Senate hearings are mired in 'what is free speech' and smaller concepts that they still can't wrap their head around, the longer the underlying vertical structures can grow unfettered, so by they time they have the Amazon hearing, you will probably have all of the government's data on AWS.

Comically, the closest 'discussion' to the Amazon scope is from liberals who are only discussing the tangential issue of worker wages/subsidies
and are missing the point that little band aid type bills don't address the core issue that if Amazon is that big, and government has to come to them for data, it is basically entwined with government in a way on top of the normal lobbyist structure.  I've posted before that separation of corporation and state is this century's "church and state", and from hearings like this its clear that lawmakers arn't even aware of the corp/gov overlap.

So what does this have to do with short VIX?
I think every one of these incompetent hearings is bullish for FANG and thus short VIX. (note here in the short premium sense, "bullish" is just that it will hold up or be within a st dev on the downside so that selling puts or vix call spreads is the best strat. I'm not looking to reach for 10x trades)
The end state of capitalism is one company, so hearings like this that don't speed bump that set the seeds for the continuing snowball/network effect into these services and thus global  investment into these companies.

Any questions?




Monday, June 11, 2018

Visualizing the end of USD

With FOMC, North Korea meeting, G7 trade issues buzzing on the hashtags, I wanted to present a thought experiment:
What would be the actual path/logistics/mechanics of USD ending as the reserve currency?
You may have seen this type of chart here and there (most commonly with Bitcoin being the next bar surpassing USD), with the assumption that Russia or China would be the next bar? If not, who?

In the same way that the end state of capitalism is a single company which absorbs any theoretical competition, there is a kind of macro capitalism where a country/economic system (namely the most liquid/deepest/free-est) has the potential to absorb other systems just based on that liquidity.  A way bigger picture way to think of this is the end state of capitalism anywhere being a single company everywhere, in the sense that private industries/ government entwine to where the line is blurred or indistinguishable.

The first theoretical path is war, external challenge, etc.  I just don't see how true nation vs nation war can exist anymore.  The level of mutually assured destruction/ mutual deterrence must almost cap at some point, and now the entire focus is on diplomatic paths to reducing nukes (except for the US, a coincidence?)  Additionally, with the amount of nukes/ drone strikes, cyber attacks, we have entered the full Pyrrhic victory zone where any war would end the future concept of currency or 'economy'.  In practical terms as we are looking for an investment thesis, no alternative investment would matter anyway in this scenario so its almost something to disregard when comparing ROI on different country exposures, etc.

The next path to consider is the type of internal degeneration that would lead to some currency crisis.  While I agree on every indicator that all assets are garbage, subprime auto loans, etc going back through the roof, household debt, I think the doom and gloom articles disregard how bad the alternatives are.
I think back to the Network scene of "no countries, only corporations," and it is more true everyday how entwined the global economy is.  The current "trade/tariff war" will just cyclically lead back to opening up trade again, probably spurring equities to all time highs.  In this way I really don't think "internal collapse" can be represented in the same way that has come up before with the collapse of past civilizations.  As US "debt" is held by most of the world, and an equal web of debt swaps going the other way, there is a similar mutually assured destruction in the credit sense as the above missile example.  All this means that an "internal collapse" really can't happen in isolation, there is no true "internal" anymore.  The global financial system is "too big to fail," with USD sitting at the top.

Additionally, lets think prophylactic-ally, what is the point of having the most military spending and biggest military stationed the heaviest around the world, if only to let it all go if the USD is challenged?  If such a deployment keeps the USD/ petrodollar supremacy, then it almost transcends the notional price required for it.  Its like a meaningless purchase inside a game going outside its own scope, in a monopoly game "hey I'll give you $100 Monopoly bucks for the game itself."

Anyway, given just these points, how can we even visualize China/Russia taking the reins?
-It would start with an end to the petrodollar, which
  • Will be defended to the end by the above military
  • Can potentially be replaced by the next mandatory resource (electricity? other element?) with a similar USD agreement
-It would require either system to fully reinvent to allow more liquidity and market depth than US markets, which they haven't even tried (Chinese daily govt intervention in markets, Oligarchic business control in Russia)
If we have learned anything from the crypto show, its that liquidity is the true metric of usage, seeing actual usage shift from BTC to Monero as a response to a need for function was eye opening when compared to the initial thesis of the value proposition of the longest chain.  Even security takes a back seat to liquidity in this sense.


There is probably another hour to go on this (the end of revolutions, no single castle to attack, 100% cashless economy) but the quick takeaway is that the combination of a global digital economy and the technological level of warfare seem to prevent the end of USD, because USD is really across borders, and reflective of the entire global monetary system.

Thursday, May 24, 2018

Spotlight post on Longfin CEO

Hi again all-
Short Vol can been pretty much cruising since 2/5, again such a shame that you would be right in every product except the inverse ones. UVXY is around 11 as of writing this which was pretty close to where your short call strikes could be going into Feb. Again its all about duration, theta vs gamma, so going forward I'm trying to lean more to the lower gamma vs higher theta.
In the other trades I'm trying to add some short TLT delta on these pops, on 5/23 and 5/24 so far.

For today though, I wanted to share with everyone the glorious case study that is the Longfin $LFIN CEO, Venkat Meenavalli.

 I was talking to someone at work about crypto (they're a crypto bull and I was trying to put my flashlight on the path for them) and I was reminiscing about this LFIN CEO interview on CNBC last year which was just incredible. 

He came on the show to explain how his newly listed company was buying his own subsidiary company with a 'blockchain' component, the stock spiked and as he was explaining how crazy the valuation was it was tanking in real time.  Just an incredible moment to be alive.

Anyway, I was furiously trying to search youtube to find that original video, and when searching for "LFIN CEO, CNBC, etc", the only thing coming up was a new video on the same program from this year, where he goes on again after the company share price lost 90% and was being investigated by the SEC.

I'm not even sure which order to suggest watching them in , but

Here is the FIRST and SECOND.



Again I'm really trying to not just post trade journals, even though those are the Twitter posts that get follows and posts like this guaranteed lose follows.  I started writing these blogs to share with the few of you what really hits me in finance and markets, and this just seemed like the exact kind of thing I set out to talk/yell/muse about.  I really think these are the kind of clips that will be amazing historically, like the Greenspan "I  was wrong", everything interview in the dotcom era, etc. 

Let me know if anyone reads these and cares for these 'highlight' posts, basically the kind of thing I would be jumping back and forth from conversationally when talking about crypto, markets ,etc.




Monday, February 26, 2018

Post 2/5 thoughts and metaphors

With almost a month of normal VIX action, I think I'm just about past all the 2/5 chest pain and mega blood pressure,  all the really bad SVXY spreads got assigned/exercised, now its just like 3rd person looking at an event historically, resuming full 'namaste' mode.

The main vindication is that from the UVXY/ VXX spreads with enough duration, those will probably be fine with some rolls, so the idea of shorting VIX even at the lows in the right product with enough duration is fine!  This really was an XIV issue, not a true short VIX issue, even if that sounds odd.  The whole thing felt like a forex stop hunt, which is why as short premium people we don't even have the inkling to feel the forex jumps.  The issue here is that it was like a stop hunt on an entire product.

One of the blogging issues in the aftermath is that there just isn't much to say now- there was a big hit and now we just gotta grind back up.  (Sorry if I've been a little quite but I'd rather not spam the same thing over and over).  I got some great prices on short VXX put spreads just after the spike to flatten deltas on the slow VIX grind back down, but even a week later that insane premium came in by a lot so going forward there will be way less decay on the "long" VIX side.  Either way I think going forward I'll be leaning toward the 'soft cap' short VIX iron condor with the VXX short put spreads as the slight yield boosting hedge as opposed to another asset class like bond or metals strangles.

On the emotional side of trading I just don't think I should be 'hedging'/ boosting yield with other asset classes because I get a tranquility from VIX, we understand it as an asset class and a human concept, and the same can't be said for bonds/commodities.    



Given the whole SVXY blowup (why couldn't I be all VXX/UVXY short call spreads), I've just been thinking of it as the car crash metaphor, the kind of hit we signed up for, and that makes us a better trader in the future and a more complete human being.
In high school, one of the earliest kids to get a driver's license and car was a bit reckless and did get in some accidents, but one thing he just said jokingly stuck with me-
I think someone was discussing that some parent wouldn't want him picking up their daughter or something in his car since he had an accident, but his retort was "no dude you definitely want a driver who has been in a bunch of big crashes, they are much safer"
(you have to picture it with a boisterous sarcasm. He had a huge trunk subwoofer in his 4runner in ~10th grade and was an all around character)

I've been thinking about this lately and in the scope of all kinds of risk, and it is a bit of a joke but I think some kinds of risk you really need to experience, or else no amount of info on paper will make it real.  Even if I had all my positions in UVXY and didn't take such a hit then in the future I still might  not have the clarity I got from this experience.


Takeaways:
  • Short VIX works! XIV didn't
  • Grinding it back up this year with soft cap iron condors on VXX/UVXY
  • Just hedging with the short premium on the 'long VIX' side of the condor (I think I'm over metals/bonds), also can potentially use some of that premium on additional OTM long VXX calls to flatten out spikes slightly.  (This is mostly about the psychology of the strategy and short VIX, bond yield uncertainty is scarier to me than VIX spikes)
  • Life is suffering, but this is what we sign up for, otherwise why even wake up if you are just going 100% SPY


 

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.  

Conditions/issues:
-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?