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...

The market "elephant" metaphor

I've had this stewing for a while, and it once again came to a head when I got in a twitter argument culminating in "real capitalism has never been tried"

 

I run into these conversations a lot, either viewing or participating, ultimately dealing with "real socialism/capitalism/ X" has never been tried, addressing something as a fiscal/monetary policy ONLY, or some other type of "no true scotsman" argument when related to markets/economics.  

The biggest recurring frustrations I see, specifically in market/econ/trading podcasts (and tell me if this sounds familiar):

• "I want to talk about SPX catalysts/ trades coming up this week, WITHOUT BEING POLITICAL"

• "I don't want to get into the Fed POLITICALLY, but lets discuss the fomc bulletpoints"

• "Without talking about the POLITICS of MMT, lets look at this gold chart..."

Thus comes the Elephant metaphor- 

I see a world of people specifically setting out to put on the blindfold:

• Looking at valuation fundamentals without acknowledging the global liquidity/monetary regime

• Talking about pure political power/influence and not the real dollar amounts/paper trail flows behind it.

• Never following incentives all the way up the chain in any policy/financial structure. 

 So when we talk about liquidity, those are the tusks, "fundamentals" are legs, political influence on these markets are ears...

I just don't have a name for the whole elephant... the system? I don't think that reflects the specificity I'm trying to get at. 
In the meantime just remember when you see an article on any of these bulletpoints, it is not looking at the whole.  Any micro-level inefficiency is explained by at the macro level.

Let me know if you have a catchy name... once there is a name, the ease of understanding soon follows...
Until then, we are dealing with the whole elephant...

A Nat Gas/ wheel trade Odyssey

I thought I would share a little trade example of my "premium over everything" life philosophy: a nat gas trade which started out as a short put after it got crushed from the huge late 2018 rip which notably wiped out Optionsellers.com --->
"It was a rogue wave.... I wake up every morning trying to steer the ship..."
That was a case study in itself, where he liquidated all client funds before spot was even at or near his short call strike prices.

Back to $UNG... anyway after that rip and drop, here you see spot around ~$22 which was a multi year low/ semi support if you believe in that, and where I got in with the first short put .. the 21.5p for 33c , which was my target range of 15%+ annualized premium, and an additional ~4% downside to breakeven, already at extreme lows.
 While this is an actual underlying/commodity, this is going in with the short VIX mindset/ short premium at least.

Well it turned ugly quickly!



Over the next ~month we went from $22 to $18.50, a nice ~20% bloodbath..

And here is where a live example of the clenched wheel strategy comes in.  Again, for trades like this always leg in, giving the option to lower your basis as it murders you like the above.  The green lines are the short puts, from the trade date spot to the option expiration date and strike.

I was assigned several tranches from 21.5 down to 19, getting the average cost around $20 by July

Once I've averaged down til the July range, you see the orange lines for short calls, to start lowering the basis on my assigned stock position.  (some of these were 1 lots, some bigger, I just wanted to give the feel of trajectories)

The final rightmost short calls you can see targeting my avg assigned stock price which was only 19.50/ $20, meaning the last big rip up was unnecessary for breakeven, but a welcome kick in the face from the fates nonetheless.

All in all, a grueling ~1% profit over 4 months on a 20% bloodbath underlying...

The most important thing being I didn't need the last rip, every trade is centered around the assumption in no move for you in the underlying.
This applies to $UVXY short call spreads/condors, very close ATM covered calls on dividend underlyings, or ITM covered calls.

LIFE NEVER GOES MY WAY, so trade like it!  Maybe this philosophy isn't for everyone, but it works for my mix of nihilism, fatalism, solipsism, simulation theory-ism, and if you believe in "late cycle."

I hope this was worth it for at least one of you! I'm trying to be the change I wish to see in the world- post bad trades, many adjustments, perseverance! 99% of financial interviews are just ignoring the guest's last missed prediction and moving on... That isn't real life!  The wheel trade is the grueling metaphor for the actual grind.

The Epstein Vol Crush

THIS IS EVERYTHING I AM TALKING ABOUT

The Short VIX of non market events, we have an upcoming tail risk/volatility and just like that - faded and forgotten. Please bookmark and come back in 1, 3 , or 6 months and I hope it expands your view of how close market short vol compares to LIFE short vol.

Two components:

FADED-
The immediate vol spike:  For this week, "EPSTEIN ""APPARENT"" """SUICIDE""" "-
Oh no, everything is unraveling, our system is on the brink of collapse!  I can't believe this can be happening in 20xx!
12 hours later: Wow wasn't that news crazy? Look at these great memes people made about it! But seriously this is crazy!
1 week later: WE NEED TO MAKE GUNS ILLEGAL! Jeff who?

Does this sound familiar? because the last Epstein vol spike was "global pedo elite sex ring, its all unraveling! Drone footage of the island" , and the 24hr news cycle washes it away on the next weekly shooting/ political gaffe etc.

(Just the continuous front month /VX chart for this year but useful to visualize the news cycle hype of non-market VIX events)


FORGOTTEN-
The much longer term trend of the biggest political scandals and events which are out of the public eye due to the 24hr news chop- much like the up and down chop of leveraged $UVXY lends to its long term massive decay- 100 + 10%, then -10% = 99
On a macro level, the recent "suicide" is just part of the previous cycle's faded-> forgotten, namely another branch of potential evidence into the last few decades of  the Clinton dynasty is clipped, now to be filed for the future as conspiracy just like Northwoods, Paperclip, Tonkin, etc.  Additionally, this decade all data is centralized, digital and hashtagged, (for ease of search, but for $GOOG ease of search and destroy)

So what is there to do while our world crumbles in indifference?  I didn't come to you without hope, as there is a trade here!:

As I wrote earlier this year, on the "safe" tranche of fading political risk trades (No Trump impeachment, no Hillary, Huma, Don Jr, Kushner charges), all signs point to the continued decay of this market, almost exactly like a short VIX option position.
Furthermore, news like today only emboldens my thesis that these kind of tail risks for corrupt figures to go down is gated by so many different layers of defense inside legal, illegal, and market systems that the prediction markets are still mispriced.
Unfortunately Predictit didnt have an Epstein suicide market directly, but what a proxy the Clinton market is!

"The next one will do it"

"Why does the US spend more on military than every other country?  We could solve world hunger or health care"

 You may have run into this discussion personally, or seen it ad nauseum on political shows, debates, etc

To that I would say "Ok, which country do you want to have the highest military spending: US, China, or Russia?"

The responses usually trickle off from there, but some of the time the lightbulb moment occurs, "oh yeah, there will always be a biggest military spender... there will always be a reserve currency...,_____ will be the industry leader..."

Most importantly- those things won't wait for you to decide which is the most moral/infallible possible version.  Those at the top of industry, government, and emergent technologies know that if they hesitate -for even understandable reasons-  

the next one will do it

Perhaps the biggest cause of this system is the reality of living in a world with long term (multi-generational) cause/effects, but ultimately governed by short and intermediate term interests.

"Why can't we just govern/vote/plan based on long term interests?"

All metrics/incentives are based on short term results:
-House/Senate/even executive re election on 4 year cycles- any promise longer than that scope MUST take a back seat to reelection efforts, otherwise any longer term goal by definition won't happen.
-CEO compensation based on quarterly numbers- industry leaders MUST plug leaking holes, even when they create a larger problem down the road. If they don't, they will be replaced by someone with an immediate leak plugging plan, even if it is inferior in the long term- the next one will do it
-Smaller industry goals based on who can be 1st to market, deliver fastest and cheapest (737 programmers)

If you are presenting a long term goal/plan in any industry, you must present a better cost/timetable than someone presenting a "do it now" approach, and if you or they don't, - the next one will do it



1.US Politics
Trump-
Policy-wise, Trump really hasn't been that far outside of the ordinary as he has sprinted back to the center from his campaign positions, so the biggest "next one will do it" component of his position is the branding/marketing.  Since 2016 as I've said before, the heavy duty twitter/social media campaigning he has done has locked in trajectory for US and world politics (of both parties), where now if you aren't tweeting a response to every single issue/event, then you are left behind by an opposition who is. (of the same or opposite party)  Furthermore, you will be left behind by algo/data in search/ news feeds, etc, and every campaign manager/party knows this, meaning both parties are locked into twitter spamming, even if they realize it will hurt their long term brand. There won't be a long term for them if they don't twitter spam and blast visibility in the short term.

Democrats-
The oversimplification of Bernie et al. offering free stuff in exchange for votes misses out on the trajectory we are looking at. They might be aware (or not, who knows) that if they aren't the one campaigning for everything free, basic income, etc, then the next one will do it.
They might intuitively understand that they are facing a race to the bottom, so there really is no alternative for their platform as long as they are being corralled into the unanimous hand raising positions.  Given that internal competition and trajectory of their party platform, there is no short or intermediate term incentive to not campaign on free stuff, no matter how ineffective it is for them long term.

2.World Politics
Greek Austerity-

There is probably an example of this in every Eurozone country but the Tsipras / Varoufakis saga was so eye-opening a few years ago, and even though Varoufakis is an all in liberal, I still point to several of his quotes on crypto, etc.  When Tsipras was faced with austerity measures to sign for further IMF funding, Varoufakis ultimately resigned/was fired for going against the grain saying "this is mathematically impossible" to repay/ work out.  The short term incentive of immediate funding takes precedence over the long term reality that "running a country this way is mathematically impossible."  Like clockwork, he was replaced with a "the next one will do it" yes man who went along with a repayment plan to further destroy Greece.   

3.US Markets
Fed-
This comes back to the original "biggest military" question. A similar type of person will want to audit/end/abolish the fed!
"what do you want to replace it with?" uhh .. gold? BTC?
Ok, so which country do you want with a central bank controlling the world reserve currency, because they will not all simultaneously agree on gold/BTC- if you end the Fed, the next one will do it.
So do you want a Chinese/Russian Fed? The ECB/IMF negative rate show? Those are the "next ones" ...
TSLAQ-
This is mostly an aside/ highlight of the 'industry leader..' intro, but Elon is a pretty clear example currently and will definitely be in hindsight of literally saying anything to make it from investor call to earnings to call , etc.  In back to back reports he has off the cuff changed the scope of the company from cars to insurance to robotaxis, where a different executive would just stick with their current sinking ship.  He intuitively understands the value of  wildly overpromising to keep momentum, otherwise some competition with less to lose would.  He is "the next one will do it" in comparison to established auto makers who want to test safety and AI longer, and he is rewarded with temporary stock rips.  We shouldn't blame him either, because if he didn't, the company would be dead- He has literally one path so in a game theory sense he is playing correctly.

4.World Markets
There is a lot of overlap between world 'politics' and 'markets' but one current bulletpoint is the trade war production 'shift' from China to surrounding countries.
The main consensus is that most production is still happening/shipping from China but the shipping is being faked from Vietnam/ others to circumvent tariffs.  The main point from the Chinese perspective is that some companies will take on the risk of faking shipping because there is a risk premium there, and if you don't, you risk losing your business to the next one who will do it.  If there is an exploitable corner of a market, ultimately someone will try to squeeze out the last drop of risk premium, and as long as that competition exists, it will force more to compete with that risk/pricing.



There are about another 80 bulletpoints you could put in each of these sections, but at least as a dusting overview I needed to yell on this, it feels completely under reported/discussed the the macro cause/effect politics/market universe we are in. 
Seemingly bad/self destructive decisions are unavoidable because short term incentives can always be marketed by your competition.

PredictIt/ politics short VIX trades follow up

We do have some actual equity/bond movement this month so in addition to the long duration short VIX + ~1mo duration short puts on VIX and long TLT, I did want to give a PredictIt macro update-

The 1st recap and most important- the Trump 2019 impeachment market- 

The Barr/Mueller statements appear to have added a good amount of volatility to this market, ultimately what we want as short VIX traders- to fade it.  As of writing this and within the last week the Trump "no" impeachment trade went from ~80c to ~70c which is quite a move, but seems to be holding at the ~70c area as a 'support' in a technical sense. 

 Again I genuinely feel this was mispriced back at 80c, and have been able to average down to about ~74c.  I do foresee it holding in this range and not 'vol crushing' immediately as the Dem/left platform is pretty locked in on 'impeachment' as a talking point. (note it repeated at every town hall event and twitter post after the Mueller conference- by every main Dem except Pelosi/Schumer)  This has the echo effect of now not repeating the impeachment line/ position is not a Dem option given that so many are already on that side.  (if you recall the black lives matter vs all lives matter part of the 2016 Dem primary debates)
Ultimately this cooks in a higher permanent risk premium for the rest of the year, as I posted earlier on twitter showing keeping the pricing flat for a month pops the annualized ROC by a couple percent.  So overall, an even better entry now, and a 'grin and bear it' hold if you are in.

2.- The other 'short VIX' Justice dept markets-

The rest of the 'indictment, charges, etc by 2019' markets are acting much closer to the short VIX time decay model I mentioned last month, the main ones being:
-Hillary 
-Huma
-Don Jr
-Kushner

All slowly creeping up from the 84->88 range on average.

The higher risk tranche would be:
-Comey
-McCabe
-Brennan (coming soon according to PredictIt twitter)

Again I would strategically want to max that first group before Comey and friends, in the same way you want govt/investment grade before junk bonds, assuming all are mispriced and you don't strictly need to reach for yield.

Send me your thoughts on twitter!

Taking the plunge: a 'new' "short VIX" Market

I finally did it, took the plunge and signed up on PredictIt

I've been wrestling with this for a while because of my two main conflicting forces : expected value vs the macro dream of short VIX, prediction markets, a much more liquid/expanded future of markets.
On the EV front nothing has improved, PredictIt still has a 5%  rake on wins based on your cost basis and a 5% rake on withdrawal, making it an effective Hotel California, but ultimately it is the only way to get exposure to non equity 'short VIX' markets which I've been blogging about for 2 years: the conceptual 'real life' volatility of events and fading unexpected outcomes.

Delving in: How is trading politics a short VIX trade?

 I actually don't see this as a partisan/political trade at all, rather getting exposure to the mechanics of government regardless who is in the House/Senate/executive. (and possibly international election markets as well, but I think those are more correctly priced)

Lets take one of the most traded (on volume) bets on the board:

Will Trump be impeached by year-end 2019?

As of posting this the line is at 21c yes/ 79c no (forgive the screenshot timing mismatch) meaning being long the "no" at an avg. price of 79c would be worth $1 at "expiration" on Dec 31 2019,  a (21/79)~ 26.5% ROI (before the death rake) in ~7 months, which is ~42% annualized. 

Already I've inserted the phrase "expiration" so I've somewhat played my hand, but if you don't see where I'm going with this:

We are looking at essentially a short premium/ theta decay trade where there is a 21c option premium burning from now until Dec 31. (logically with 1 month or 1 day til expiration, the trade should be at 99c no/ 1c yes, as you can see several other 1 DTE political/election trades appear on the site)

The crux of the issue however: Why is this an obvious no? (a winning long 'yes' at 21c is 927% AROC) 

Well, #1 if you care about option markets/sports betting, the overall direction is that it is a no given the spot price- the issue is how correctly priced it is, how much theta we are looking at ,etc.

(#1.1- why is this different from Trump having 1% chance to win the night before the election? - those were polls, not prediction markets/ skin in the game)

#2 lets look at the historical trends of 2/45 POTUS getting impeached, if you are in the 'spherical vacuum' of picking colored marbles out of a bag, that is a 4% which is closer to what I would assume this market should be priced at.

#3 the real meat of the assumption- the layers of government/bureaucracy/politicization we are looking at that create a 'status quo' buffer.  Politics broadly is about little victories and compromises, meaning set the goal post of impeachment, then shift that to 

-better mid term election numbers

-more twitter followers

-more campaign contributions

Which become a somewhat measurable 'smaller victory' and shift away from the red tape nightmare and optics of losing a majority vote on impeachment.

#3.1 the counterplay of IG Horowitz/FISA 'legal action' etc coming the other way, politically it might make sense to have an effective truce effectively adding to that status quo buffer.

A few more points on this trade specifically:

-Compare this to "Will Trump be impeached in his first term?"

 Which has spot 'no' at 72c for a Jan 20 , 2021 expiration (21% AROC- literally half the 2019 trade for an almost identical market direction/assumption)

-Compare to 'trump GOP candidate', 'trump 2020 winner', which have him at 2x the next place. If that is where the line on those markets are, then a >20% chance of impeachment vote seems fundamentally mispriced as a reflection of the incentives of the house and senate to conform to their constituent status quo.

-Compare to world election markets currently up: Netanyahu indicted, Nigerian pres re election, pope vacancy- All with lines in the <10c range which seem much more correctly priced given that you are trading a massive upset. Compare that to the .90 delta equity options when get hit all the time!

Now looking toward other/broader PredictIt trades

The trump 12/31 impeachment is just one example with some pretty clear numbers, but is by no means the end of the short VIX/ theta decay I'm looking at.

Some others that come to mind:

Hillary facing charges by 12/31 ~ 15c

Huma facing charges by 12/31 ~15c

Both have a very similar short VIX structure to the Trump impeachment trade, despite them being polar opposites politically- which is why I prefaced these trades as non political.  We are looking at fading a historically unlikely and status quo buffered move, with a defined duration / AROC.  The Trump version of it is just a little more juiced, but I'll probably add on positions in all of them.

Lets look at some cons:

 So we have gone over this as a semi uncorrelated market to equities with some actual ROI numbers, fairly tight markets (better than many equity options) and most importantly a small enough total market to not get insta zapped by big bank algos(thus the mispricing) but obviously it took me a while to bite the bullet because of some big problems:

-Insane, unbeatable rake: 5% on profits and 5% on withdrawal. That is some live poker, 2/20 fund manager level of unbeatable, so you basically need trades like the trump 42% AROC to even think twice.

-Inconsistent markets- as we are entering election season we have a lot of new trades coming up, and specifically under trump with the nonstop legal backdrop on the whole presidency, we probably won't have this kind of impeachment risk premium going forward.  This ties into the "AROC" issue, as these 'impeachment/ by end of term' trades are 1 time, and thus bad for an AROC model like compounding dividends or rolling option premium monthly.  Unfortunately we need some way to quantify things, so we have a trade, risk ,and duration, so there you are.

-Counterparty risk- here is a big one, PredictIt is pretty much the only one in this space, with a few sports betting sites touching US election/primaries, but nothing with the depth of the justice department investigations, world politics.  We are already looking at withdrawal 30 day type issues and who knows what kind of regulatory/ liquidity issues could spawn.

-Size - lets call this .5 because due to the above counterparty risk, you should probably stay small anyway, but there is a total position size cap, which is good in some cases as it keeps big fish out and keeps potential mispricing.

-All or non trade- Yes this is basically just sports betting, where you win or lose all at expiration, you can't sell a call against your position/ flatten your deltas, / lower your cost basis, so ultimately I think of it like a vertical spread where at entry you are looking at a max premium win or max loss, take it, and move on to the next trade. This ties into sizing above, as sizing/ risk management is half of vertical spread/ leverage trading.

Lets start here for now, I've got a lot more to add in terms of discussing the current trades, upcoming trades as they are added to the site , as well as such prediction markets being a big part of my future vision of markets.

Stay tuned!

The QUIET New Deal

"Wherever I am, there is also... a leafblower"

I have a proposal for all Green New Deal liberals - without even immediately discounting the 'no planes' / full remove fossil fuels , $100T annual global policy change.  As a self identified 'conservative' MMTer , I can't go to the well of 'that spending isn't feasible, how will you pay for it!' etc

I just have one preface and THEN we can go there.

NO LEAFBLOWERS.

If you are a liberal/green new deal politician or supporter, I want ALL LEAFBLOWERS gone from your district before you even start going off on how will manage changing the fossil fuel global economy. Some even have gas in them, so it should be step 1 on your crusade anyway.  What is greener than having leaves everywhere and no deafening power consumption 24/7?

As someone living in the liberal ground zero epicenter Fukushima/Chernobyl Los Angeles, the Green New Deal probably has the most support here and yet we still have 12hrs of leafblowers per block everyday.

This is my #QUIETNEWDEAL

If you are debating with a green new deal liberal and they won't interact on the budget/fiscal policy/incentives etc axis, simply shift the Overton Window to "I agree with you, why can't we solve this tiny subsection of your problem 1st, to prove you are right?" I'm trying to help you out!

I'm waiting for the day we can finally meet a liberal legislator/ governor and say "wow, you've gotten leafblowers and noise pollution out of your district, dealt with the fiscal and social policy/ incentive scope of that. Great, now you can present the full logic for your global green new deal"



As usual I expect zero rebuttals or even responses.
Also VIX down of course.

The 2018 short VIX Odyssey

As usual I try to avoid "trade journaling" but this felt like a broader 'proof of concept' from the last few months-

 

      If you can remember back to the far left here, just before the 2018 3 month sell off AKA the "December Glitch" I was selling call spreads at the 40 short strike with ~6month duration. 
As if in a cartoon, UVXY almost instantly 2-3x'd against me, thus began my 10 year Trojan war...






Since September, I added on more to the short position and sold puts/ put spreads against it to flatten deltas, some getting back off for a scratch, some a small loss (note the huge drops back in 2019)

Ultimately that brings us back to this week, almost exactly at expiration with UVXY returning home to Penelope at 39.xx ...

Since I'm not a pure fentanyl rush gambler, I've been slowly taking off some of the short call lots for a scratch or small loss as we approach expiration , while flattening deltas with short puts, basically reducing crash/spike risk as we almost return home. (Its more thematic to fight the cyclops in the middle of the journey than to get bludgeoned right back at your doorstep)

So basically we have a 6 month scratch trade, this isn't what you point back at to clarify genius... this isn't going 100x leverage on your student loans to buy penny stocks/crypto and 20x, so who cares?

The point is the inevitability of the short VIX complex mechanically, and even a very bad trade can be managed/ flattened, but ultimately saved with duration at the beginning. 

Takeaways/ Going forward- 1yr duration

In hindsight I was happy I stayed more conservative with the 6mo trade into those Oct/Dec spikes, while some of the short vol crowd were putting on the 'traditional' ~45 day premium trade.  I did a lot of backtesting in the last year before the UVXY leverage rebalance, and was looking at the 6mo to 1yr duration, and especially now with the deleverage I would lean to the longer duration to offset the weaker decay.

I'll wait for another vol pop to re add long duration positions (we've been vol crushing for a week now), but to eyeball a trade with UVXY spot at ~40, the 1yr 40/45 call spread looks about 33% ROIC, which should be very good for a conservative annual trade.

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.

Dissecting the Janet 'Lower for Longer' post

Two main bulletpoints from this last week or so:

• The Janet "Lower for Longer" quote which is from her Brookings institute blog post. (Please read)
• The Artemis Capital "Water in Markets" post which was from July but is all over the place on twitter recently. Again, also please read and watch the intro video from David Foster Wallace's commencement speech. 

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...