Continuing with the Indexing Blackpill

 I wanted to follow up on my last post, going more specifically into the Index/Passive structure, mostly from Michael Green's work I've been following- put much more eloquently and completely:

https://www.youtube.com/watch?v=x-rJciYZmi0

https://www.youtube.com/watch?v=6SVEaK7eDNk

https://www.youtube.com/watch?v=L_8IBc6Euqc

https://www.youtube.com/watch?v=sMwg6fqseP0

In the wake of every market commentator yelling "it can't keep going up, P/Es are 1000, this is the biggest bubble of all time, etc" at some point we have to look for something more quantitative.  Unlike the yelling, Green's analysis is mathematical/mechanical:

Does Vanguard/Fidelity/'passive' get inflows? (any work retirement plan, heavily covered by lobbyists)

Then-> buy  (at any price)

IF (clients get redemption/ outflows)

THEN-> sell (at any price)

This is it. This is flows>fundamentals (or flows are fundamentals if you will). Note the largest market force does not have qualifiers/conditions (if(interest rates>x), if(SMA<x), if(P/E<x))

This feels like a revelation, where you watch the 'scientific community' looking up to the stars- "well, Zeus must be throwing those lights around, how can that one keep moving that way!"  Then Galileo walks in and just measures the movement with trigonometry... 

Like walking into 1400AD with an astronomy textbook, looking at markets now with flows as the main lens feels like my other favorite metaphor "this is water".

Now lets address the issue with the Fed/ raising target inflation issue, as the last of the "macro" commentators are pointing to the massive inflation era we are going to hit, which will be good for commodities, gold etc:

In the above structure of Vanguard as forced buyers/sellers- does SPY behave differently from a commodity? If industry requires raw materials to build/ oil to move etc, they are forced buyers at any price (with a lot of options structures/contracts locking in rates over time).  Vanguard is an industry that requires buying a certain commodity at any price to fulfill its mandate- the commodity is just SPY...

This is important enough to put in my pantheon of market blackpills:

1. Petrodollar/ US reserve currency status- vs "why is our military budget the biggest in the world? why can't we just spend all that on healthcare and daycare?"

2. Warren Mosler / "descriptive" MMT which shows the structural accounting of why debt ceilings don't matter in the midst of decades of goldbugs yelling about it.

3.Index/Passive flows

(a close 4th is the Jeff Snider Eurodollar system, that might go under US reserve currency for now)

So given this, what do we do? I'm even more committed to the ratio structure I described in my last post-

1. Targeting the biggest movers in the tech/call skew/meme bubbles with liquid options

2. Looking for spreads that are fading another 10%+ upside weekly move, with enough strikes to allow further legging in to higher spreads.

3. The ratio spread allows the potential theta to double as the spread moves 'against' you, while financing potential long legs to hedge/ scratch out of the week.

4. no downside risk/vega. 

(This is the most important part about the structure. From Green's work, the passive % of market control exacerbates both upside and downside moves, meaning the "sell at any price" component listed above implies crazier crashes/ V rallies.  In this spread structure I'll be getting burned on outsized continuations after rips up, but the important part about this is I will be making adjustments on green days when the market is working.  If you have the downside risk, your adjustments on crashes will be potentially when bid/asks are a mile apart or worse the market is not working- depending on your broker)

What scares me even more is Green's work on showing the decreasing to potentially negative alpha of short option strategies, leading to a potentially darker blackpill: the only approach to this market is long vol / long straddles.  (If you are more interested, please go through the above clips which include some slide decks)  

I'm not mentally ready for pure straddles yet, primarily from the mechanics of not having adjustments to make, and not being able to model any ROI based on some theta.   Who knows, I might eventually take the final pill and delete my twitter as the name has me locked in...

Let me know your thoughts on twitter-

Option approaches to this market

 In the last few weeks a few themes have been hitting me:

• "passive bubble" - noticing a resurgence in discussions on the indexing % of market- tweets,
  
  realvision, other youtube
• TSLA, AAPL , others ripping- specifically having crazy skew numbers in the options, ie TSLA weekly strikes going to 2x spot
• Other constant discussions on tail risk/ general portfolio construction- ie bonds having no place in a 'retirement' portfolio 

In the journey to constantly be reevaluating, I'm meditating on how to approach this market, and create option structures that make sense.  As I've said before, I'm not a 'long stock' person, as there is no way to model annualized roi or risk, and no adjustments to make.  On top of that, as I'll get into, I don't think 'long stock' as a structure makes sense in the current index controlled market.

In addition to "no long stock," I'm increasingly getting away from short puts in the big liquid underlyings, as I don't think the risk structure matches how index controlled markets work.

As almost any passive/index mechanics video will go into, Vanguard/Fidelity et al. are forced buyers or sellers at any price, meaning the characteristics of the large liquid underlyings (FANG) are "grinding/shooting up" or "crashing down". 

 The passive flow dynamic doesn't really allow for a "grinding down" in the FANG/ large caps as there is a constant wave of forced buyers, and sudden liquidity events.  As many will lament a lack of "price discovery," i'm looking at if from a purely mechanical angle: I don't think the current large caps structural movement matches short strangles/condors or even short puts.  Short puts have to be constantly rolled up into decreasing vol premium, and keep the same downside risk.  Strangles have the same downside, and almost more often are burned to the upside gamma.

Yes, there are other ETFs like non US EWW EWZ EEW, etc that are potentially better structures for pure short strangles, given the passive flows, but those are not a main focus of mine.  Those don't have the same upside call buying/ gamma squeezing, and overall have way less tail skew making certain spread structures unavailable. In a correlations =1 Feb/March scenario, those strangles wouldn't help.

Given the "grinding up/crashing down" structure mentioned above, the main structures I'm looking at are call ratio/ calendars.  Depending on the underlying/skew, I'm looking at either long verticals and a short call further out to finance it, or a longer dated long call vertical, with shorter term short calls against it.

For example a recent $TSLA position:

Trade on Aug 17th

+2 Aug 21 1990 call ~12.27

-2 Aug 21 2000 call ~11.48

-1 Aug 21 2300 call ~2.59

for a total credit 1.01, with no downside risk.

(I ended up taking it off for another ~1cr, so basically doubled the credit in 2 days as it moved up. Little did I know this could have hit the max profit by that friday...)

The point of this structure is to flatten out the damage as these crazy skew stocks move against you, and actually add on the chance of a higher win in specific cases.  Selling a normal single call and taking the higher credit would be a bloodbath all the way up to expiration.

In many cases when the 2 or 3rd day is way against you on a short single, this version would let you get out at a profit at that point, and potentially roll the strikes up to keep going safely.

As a final aside on this structure, I've been wrestling with the pursuit of convexity since Feb/March, when I took off some long vol hedges very early for a few hundred profit, which would have later gone up to ~20k.  When the option structure is pure short 1 option, with no ratio component, there is no chance to have outside good events, only crazy damage against you.  This $TSLA spread kept properties of the single short option, while giving multiple paths including a crazy max profit which my psychology wouldn't even allow to materialize, but nevertheless is there in the background.  I plan for annualized ROI based on the minimum credit only, but still have a chance to wake up to a bigger win.

This structure only works in the high skew and specifically high notional price stocks, a space which curiously enough is shrinking this week with the TSLA and AAPL splits.  When the notional price is lower, the spread section of the trade is about the same, with the single leg credit being much smaller, and not able to compensate the spread.  I'll have to look at these chains post split, but after that we probably only have AMZN and GOOG to look at.

A trade from the 2nd structure in MSFT:

on Aug  10

+1 Sep 18 215c ~5.84

-1 Sep 18 220c ~4.24

for total debit ~ 1.60

then

-1 Aug 14 220c ~.34

giving the whole trade a potential $5 spread for 1.26

Then as each week went on, i'm selling close to the 220 strike for the week, or hopefully a little higher, to lower the cost of the $5 spread to almost 0 or a credit.

This trade has more downside, but is possible in the lower skew/ lower notional price stocks.

The core idea is the same though, I'm getting potential to access the "grinding up" characteristic of the large cap/ passive stocks, while lowering or eliminating the "crashing down" liquidity events.

On a day to day PnL level, this eliminates the large moves from short options going against you, even if the total spread will be a loser, the long vertical flatten out the damage.  

These are 2 samples that I really think harness the structure of dealing with passive right now, more than boomer 'long stock + long puts', or a blend of several long "uncorrelated" underlyings.  

These structures are meant to harvest the current market structure, up until the next major shift or liquidity event, at which point we are not blasted by that downside move, and can re access at our leisure as the data comes in.

I am just constantly blasting my blood pressure seeing "professional" market idiots with the "well I certainly wouldn't long OR short X here, it could definitely still go up a ways, but will obviously crash at anytime... I think there are much better opportunities in Y (which has non existent options and has been flat with long deltas only)" 

That is what markets are, making an assumption and picking a structure, trading profitability for probability.  

Let me know on twitter!

Surviving TSLA

Just a vignette on the importance of sizing and adjustments-

The week started like any other- "oh 5 more $tsla autopilots blow up and kill a children's hospital"
"ooh the 1 week 2 delta calls are still juiced"

June 25th..  a quaint time when $tsla was in its infancy under 1000.. the nightmare begins with the Jul 2 1200 call for .96cr

June 29th..  Jul 10 1360 calls still juiced at 1.20cr, we can fade another 30% rip in the next week right?

June 30th.. rips to 1100.. things are heating up.  bought  Jul 2 1170/1180 call spread for .94db, a pretty cost effective way to move my breakeven out to ~1210

July 2nd.. expiration day- rip over 1200, and looked like it was holding at perfection ~1190.. a 2nd pop over 1200 spooked me , closing original 1200 short and the call spreads

• bought 1200 back at 9.75 (879 loss)
• sold  1170/1180 call spread @ 8.80 (786 win)

And now needed to flatten the next week out-  bought Jul 10 1320/1340 call spread @ 1.55db and 1.85db  to flatten deltas going into the 1360, giving us an actual profit range from 1340 - 1360

And of course i'm a degenerate and also sold the Jul 10 1700 call .94db since we are so vertical.. (did I learn my lesson at any point here?)

July 6th.. casually ripping through 1300, the 1360 main short looks treacherous.. I added probably the biggest cost adjustment ever here, bought Jul 10 1350/1500 call spread @19.20, basically swapping the uncovered strike from 1360 to 1500, flattening deltas but actually adding downside risk.  Now my profit zone is around 1340 to 1500.

July 8th, middle of the week,not even expiration.. we had 2 days of $tsla basically 'stabilizing' at ~1400.. we found a fair market price!  It looks like almost all theta came in, putting me green on the whole position. I waited a few hours seeing if I could get any theta, and did the responsible thing and took off the main positions.

• sold the shifted 1350/1360 , bought back the 1500c 
• closed the long 1320/1340  @ 15.05cr

With all this, locked in a profit on the Wednesday before expiration.  I looked over to my trusty double barrel shotgun with mouth attachment.. "not today friend"

After doing my weekly $tsla bedside prayer "Dear god, if you see me through my $tsla options this week, I promise I'll never short again", I thought this might be the final one, we are entering such astronomical insanity that it probably should double next week given some higher dimensional geometry/analysis.

All that being said, did I learn my lesson?  Well shortly after closing the main positions.. next week caught my eye , Jul 17 going up to 2100c for 2.16cr...

I don't plan to just list option trades all the time but given the $tsla action this week I almost wanted to journal for myself as in a vacuum without planning,correct sizing, or adjustments, the 'opening' trades would have been:

• Jul 2 1200c .96 -> 9.75 (10x against me)
• Jul 10 1360c 1.20 -> 43.09 (35x against me)

These would be absolute undisputed suicide numbers, optionsellers.com highlight reel stuff.

The most important part about surviving such insane shipwrecks... keep sizing correct!  Survival is because you had a plan going in, surviving doesn't mean you can go back in next week twice as hard. Its not like weightlifting/ progressive overload. Yes account sizes go up and overall size increases, but percentage sizing should stay flat or go down!

Long Dystopia!

I read and recommend Dan McMurtrie's (@supermugatu) recent investor letter, which laid out a few macro points on affordable housing and other political macro themes which I agree with, and some portfolio positions that I agree less with. (although he is coming from a more pure value/balance sheet perspective)

It got me thinking about really crystallizing my own macro views, as I do a lot of yelling about "life short VIX" to random people in the crosswalk or grocery checkout, but something is lost in translation when saying this is just short $UVXY.  There is a lot more nuance that I'm trying to convey about global capital flows (fed, petrodollar), mass crowd psychology (social media, censorship), and blanketing tech structures(FANG, AWS), to the point where "short $UVXY" is an admittedly lazy way to congeal my worldview.

Ultimately my macro ideas will have to be more granular with some sectors, while keeping the long theta wrapper around positions.  (ie. when I say "long" an equity I'm more referring to 'not short', and preferring to stack my downside risk there, while maxing ATM vol and theta - collars, diagonals with short call just OTM with low duration)

So what is the macro idea besides "short VIX"?  I've been trying to simplify it as much as I can, and I've put together: Long Dystopia

What is "Long Dystopia?"  

This stems from my original short "life" VIX articles on political risk/disruption being overpriced, as well as true institutional, structural change being a lot further away or impossible than you might think.  At the top level this involves increasing Fed control of the market, and less and less to be done about it.  Just below that in equities, it sees continued snowballing at the top due to network effects, and no 'return to value'/ free market competition.  More specifically on that, Long Dystopia is short antitrust, as we have seen in the last few years of senate hearings on tech and banking that our government regulators don't even understand the industries they are charged with regulating.   

This is different from a pure "winner takes it all"/ momentum type philosophy because of the mass layer of social control/censorship built into these network effects, where I'm projecting a true end state, instead of just TA price action.  Gen Z and beyond are born into a world after the permanent Pavlovian like button is embedded into every  service they use.  A future site/service on employment/hobbies/relationships/government/politics won't even have context without the giant likes/followers/sub count.  Jack Dorsey even let this slip in the Twitter senate hearing that they didn't realize how warping the large LIKE counter would have on behavior.  Ultimately this social media wrapper on every site/service the future will use enforces a layer of social compliance that I think is truly mispriced.  Furthermore, since this "user" (DAU/MAU) monetization model is required for VC funding/earnings/guidance, these systems which neurologically lock users in will remain mandatory.

Along with social media engineering,  where users are somewhat passively along for the ride, the increase in active censorship limits the information equivalent of price discovery (which I know is a big line in the sand for the ZeroHedge crowd).  What were previously huge scandals will now not even be a tick on stock price and other metrics, as we will not even have the language of dissent.  Please take this time to look into the research on language informing thought. Unlike the previous image of the conspiracy theorist being dragged away by the deep state screaming to get the truth out, we will have a next generation where its just more comfortable to retweet the narrative and be surrounded by the warm blanket of establishment likes.

So is this just long FANG? Not necessarily, although there is large overlap with any core infrastructure service that supports this ecosystem and has impossibly high replacement costs (AWS, Google search, etc).  I'm not assuming an absolute blanket long tech as there is a possibility that Twitter, et al might cycle out of consensus social favor, as well as real costs/earnings mattering for DAU etc metrics in the absence of an absolute monopoly (which some of these are right on the edge of).  A social influencer can move around their web presence, but as long as that is all layer 2 on top of google algos/AWS infrastructure. 

"Long Dystopia" is looking for structures that create so many monetary/logistical/psychological/regulatory moats that they can't even be pictured absent from the foreseeable future.    

So for an example, here are my thoughts on long Visa ($V):

As a background, please read this great history and current income analysis, which I won't regurgitate but gets into the projected revenue on transactions keeping up with inflation and the projected increase in online/digital transactions.  As an addendum to the above "Long Dystopia", I would also note that it is "short cash".  (At a physical and inflationary level)

With that, my big takeaway is that this could be a better way of expressing my short crypto/blockchain macro view since 2017.  The fact the $1t behemoth Apple is content to put their Apple pay card onto the Visa infrastructure is the biggest bulletpoint you need for the moat I'm talking about.  Short crypto/blockchain is effectively long traditional payment processing, existing network effects and regulatory structures. 
If the precedent is set that any new flashy payment system can exist, bring in revenue and new users, as long as it is layer 2 on Visa/Mastercard, then how can an even smaller service than Apple make the argument to stray from the pack? 

When turning this into the actual trade idea, remember "long Visa" to me is "picking my downside risk here vs SPY, etc. A sample trade with $V recently around $200 would be the 205 covered call w <1mo duration, rolling, + further OTM puts (collar), or a diagonal- several month out deep 90 delta ITM call, plus rolling short calls ~atm.  (Note $V does have a dividend if you want to use the capital req to hold shares)



Anyway I hope that gets the ball rolling and gears turning on other ideas for "Long Dystopia" stocks, commodities, or ideas.  Let me know on twitter! (the censorship platform which is part of my macro thesis)

Short VIX'ing the Coronavirus

What a month- I've been in some 'low vol' calendar positions in SPX, moving strikes by the skin of my teeth, ultimately trying to stay in the game with 0 IV rank, and getting what I asked for with a ~25% UVXY pop.
I'm just waiting on the last day or so of theta and ideally getting out of these positions to move into a more midrange/short strangle vol setup.

I'm specifically waiting for the next ~1-2 weeks on the long term UVXY entry opportunities due to the timed 'incubation' period on the current Coronavirus.  If there was a wait and see moment for an underpriced tail risk, I think this could be a textbook case.  Again as I posted last time, the structural changes in UVXY might have permanently dropped the 1yr duration position value, so I would be more cautious in picking entries.   

With all that being said, and semi anticipating a further VIX spike going into this month, (and into March due to Fed/Treasury liquidity) this is one of the exact type of examples of the"life short VIX" thesis I muse about.  A chance to short a "world is ending" fear event, which these days is good for a ~16 VIX.  

  

Trades while waiting for VIX and a poker metaphor-

A little update while waiting for a vol pop as I closed out of the long duration UVXY shorts from this last year...
First a little context and my clickbait "THE ONE CHART THAT SCARES ME"

 This is 1yr rolling % change for UVXY going back to ~1yr after inception (so we can have 1yr rolling data points)

What scares me is that little tip there in 2018, meaning for the 1st time in this product, the 1 year rolling decay couldn't offset a vol spike (which is pretty significant given the average decay is ~80%). The main factor here is the deleverage of the ETF from 2x to 1.5x, while the same time period had the Feb 5 2018 vixtermination.  Its hard to split up how much of each factor contributed to this chart, and if they are multiplicative. (leveraged on the VIX spike, and deleveraged on the way down) 
A future vol spike will have the benefit of equal leverage on the way up and down, although that will cause the product to more closely resemble VXX 1 year rolling.

Because of the uncertainty around this, as well as the possibility of mid spike leverage changes by the funds, I still don't think we can have a constant 1yr+ duration rolling short UVXY position, so I want to wait for some amount of spike before re adding the position.

With that context, what am I doing now?

Given the mid/low VIX range at ~12/13 and SPX IVR at 0-10 this last month, I have been very active with short term calendars (~7dte/21dte) to keep a low delta/positive vega and long theta position on while waiting for a big vol move.  I've specifically been trying to take them off at 5-10% profit or at a loss when theta goes negative.

  And here is my poker metaphor for these trades-

2 types of "I've got you"...

1. I have the nuts, just salivating to see what you will bet, or if I can get a check raise.  The sense of skill is from how much can I win in this hand- trapping, etc

2. I am defending... I know from the opponents betting pattern/ranges that they probably have the nuts/ top of their range and they are salivating to see how much they can get from me.  The real skill/strategy is from seeing if I can get a free card in this hand, do everything to not get trapped and lose the minimum. When they finally bet and you insta-fold, you both know that even though you 'lost' the hand, you got them.  As the defender you more correctly assessed both hands and took their big spot that would normally be a big % of their winning session.

With these short term, at the money SPX calendars I'm specifically trying to get small wins and losses, just flip the weighted coin as much as I can.  If you are primarily used to short options/ spreads and rolling the other side/ rolling for duration, it might be harder to mentally click over to at the money delta/theta adjustments to be most capital efficient.  Ultimately I'm trying to be conscious of that 2nd bulletpoint of poker which gets lost in the 'win the maximum' $TSLA meltup we have been in.  

Impeach trade blowup, Elephant metaphor

Well we did it, another blowup in the vein of 2/5/18 (not in notional value, but in the conceptual "well what was that?" aesthetic)

For Vixtermination I specifically made  a flowchart:

Where long SVXY right at that exact moment was the only real way to get popped in the long duration short VIX system.
Again, we have a similar setup of "Trump impeached vs trump in office" vs similar trades where the outcome is the same (dismissed in the Senate) but one exact trade blows up. 

Well I fucked this one up again- I truly couldn't foresee them going this far on 0 evidence, running back the 3rd or 4th impeachment vote of the year and finally tipping the vending machine over.  And for all the distressed liberals "HE REALLY SHOULD BE IMPEACHED AND DESTROYED" - there are infinite legitimate articles ie. executive order ban on bump stocks, executive order on hate speech-
He was sworn in on the oath to uphold and protect the constitution, and is making literal executive orders against the 1st and 2nd amendment - which no one is disputing/ hiding/obfuscating. Yet they went forward with the most vague impeachment articles that were thrown out by every legal scholar.

I'm getting back to short VIX as this ties into my broader market/elephant metaphor-
All these actions are interlinked with fake trade deals/ tax rate policy and thus liquidity.

If the closest actions thus far to removing Trump (the tax cuts/ 'we need lower rates/ bigger bubbles') president and trying to force in a Warren/Bernie 'we need to blow up wall street' candidate is good for SPY all time high, then what is the point? Its 100% liquidity (Fed 500b by Jan)

Is this what the permabears sound like? "there is no real market, no actual price discovery:
Is there no real government? If 1 party controlled house and senate, then what stops this process going to completion and invalidating the executive branch?

I guess I'm a little tense as my short VIX deltas have dwindled this year so I guess I'm not full capitalizing on the elephant path we are on.  Even going into the year with the core thesis that nothing happens, its getting a little fucked even for me.

So do we just throw it all to the wind and go 100% all in SPY and just give it up?  There is no political mechanism to stop the Fed pump so why even try to flatten deltas. This is not coming from a permabear that is all in short- I'm just trying to hit that theta and see if we can even stay inside a 1-2 std dev rip, not a vertical line rip.
My only concern is when the vertical line capitulation kicks in and the max short pain points get hit is when we get the reversal, but again its only temporary until the Fed can re pump.  The most maddening thing about this though, is any "all in SPY" boglehead can't even articulate 1% of these back end processes that are key to their thesis, they just point to a straight vertical chart.


I'm still not quite there, I'll still be trudging through on the low delta, maxing theta plan.  Who knows, maybe we might get a single year this decade inside 1 std dev.

Please tweet me, refute any of this...