•June 2, 2013 • Leave a Comment
Volatility has really made a comeback but it pales to the volatility seen in Japan. Here is a look at the Nikkei volatility index versus VIX:
I don’t look often at relative comparisons from international asset classes on a daily basis. Perhaps I should as it seems like quite an attractive relative value trade. US investors could sell EWJ vol and buy SPX vol. My bias has always been to short volatility on pops and I am taking this opportunity to do the same. New volatility products such as VIX and VXX options can allow one to short volatility in a risk defined structure. I am using a combination of front month ratio put spreads, ratio calendar spreads, and hedged with long outright far month VIX options. It sounds like a complicated position but it is actually quite easily manageable and I actively trade the various legs. Volatility pops such as these are scary but they offer EXCELLENT opportunities in the aftermath. One just needs to survive the pop and that’s the whole trick to shorting volatility IMO.
•April 24, 2013 • 2 Comments
Readers should know by now I am a fan of short volatility strategies in a risk defined manner. Despite having defined risk, the P&L on adverse volatility event can be quite substantial! Last week we saw an explosion of IV and RV that we haven’t seen in awhile:
10 & 30 Day RV and ATM IV in SPY
My P&L gyration was wild to say the least. My position was short SPX OTM puts hedged via short SPY. During the 40 handle sell off on Monday I was selling SPY all day and doing an OK job of hedging, not great but negative P&L I could handle. Then as news of the Boston explosion came out, VIX and IV exploded and my negative P&L basically multiplied by about 5x in the last half hour. My equity curve looked like a disaster, almost wiping out ALL my gains YTD in the strategy:
YTD Vol P&L to 4/24/13
This is MtM DAILY P&L, something you probably won’t see at any hedge fund and certainly not on a CTA Monthly performance schedule. Most funds only report End of Month, or perhaps End of Week P&L which can hide these daily gyrations. It may be considered unscrupulous however a big portion of the P&L is the end of day mark. Which as you can see, quickly reverted the next trading day. So does it make sense to present to outside investors who might panic? Luckily my investors sit very close by and I was well within my (newly expanded) risk limits. That’s also a partial explanation for the magnitude in dip relative to previous months, my position size was larger due to increased capital. Additionally, this only represents P&L in one strategy, the draw down in overall P&L was much less pronounced. Interestingly enough, the last time I had capital boosted was right before last summers’ European crisis, something to consider for the future!
The market rebounded nicely and I was able to make new equity highs reasonably quick. In fact, had i not hedged at all, I would have been flat the SPX position the very next day! The end result, despite what I consider a C+ grade in hedging via SPY, a small bounce in market was all that was needed to regain all lost equity. Considering the magnitude of the move, ~40 handles in S&P and ~50% movement in VIX, the amount of loss relative to my risk limit (not even 40% of allowable limit was hit) I consider it a pretty decent job. My “risk” model is still positive and I will continue to trade SPX, VIX, VXX accordingly:
Still LONG biased for now
•March 22, 2013 • 3 Comments
The FT had an interesting article on Bruno Iksil with some excerpts from IM’s and emails in the days before the Whale Fail trade collapsed. It’s interesting to me from a trader standpoint to see how others deal with risk management problems and how large institutions actually ‘manage’ the risk. While there have been a lot of articles on the relative lax oversight, including to my surprise, using excel as the primary pricing and risk management tools, I thought the chart posting their daily P&L was intriguing to a short volatility trader such as myself. It’s a pretty good representation of how a short gamma position looks like when it goes bad:
Look at how the P&L really gets wild at the end of March and into April. There’s been a handful of times in my limited trading experience that I’ve been in a similar position (although I can only wish I had anywhere near the magnitude) Luckily there are methods to have limited risk and long gamma positions which profit from short volatility!
•February 7, 2013 • 5 Comments
I am a big fan of shorting volatility as a strategy. There are many traders who are deathly afraid of what they deem “naked” risk and these traders are the same that tend to buy lots of weekly options or to buy options with no regard to the price they pay for the option. I believe there are ways to both “time” volatility and to trade short with defined risk. It’s not to say I always have defined risk positions but I am very vigilant in my positions when I do!
It’s been discussed and researched to death the positive expectancy of selling OTM index vol, or ATM straddles, or Var Swaps so I won’t bother going into that detail. I did however come across some interesting performance data from some CTA’s that are far more explanatory then a random white paper.
I am not affaliated nor do I endorse any of these funds. I’m not sure why i feel it’s necessary to have a disclaimer but there it is
One of the most common pitfalls and criticisms of short options CTA programs tend to be they make great money until they blow up. And many did in 2008, a CTA program called Zenith comes to mind. But there are others that survived, one of the above funds actually traded throughout most of 2008 and delivered positive returns. It is also easy to see the difference in short vol returns in different regimes. These funds are on the relatively small side as far as funds go, between 50-100MM AUM though this should encourage most of us except for a small few, that this strategy is liquid and scalable. I’ll include links for my own reference in the future and yours of course though the site may require registration:
•January 1, 2013 • Leave a Comment
It’s that time of year again and I’ll keep the structure similar to 2011:
Note – All numbers are after fees. Rather large commission fees I would add….
- I ended the year in the green thanks mostly to a successful risk arb in NXY that hit in December.
- Volatility Trading was a bright spot in the book and despite some Draw Down during the summer euro crisis, the remainder of the year was excellent. I wrote more about the specifics of the performance here:
- I received a capital bump for 2013 with a proposal for further capital dependent on Q1 performance. We will be moving into new offices as well shortly which should have some pretty nice perks.
- Although the year ended in the green, it was only marginal in that direction. Not only that, it all occurred at the end of the year and with a large amount of volatility.
- Numerous portfolio allocation decisions proved to be quite poor at certain periods of the year. It’s my goal in 2013 to do more of what works and less of what doesn’t.
- While Risk Arbitrage and Volatility Trading were profitable, Statistical Arbitrage and Discretionary Stock picking delivered a negative return. In particular, TSO – VLO spread, JAKK tender offer, and some other “special situations” that didn’t work out contributed to the losses. As any good trader has done, I’ve thoroughly gone through the losses and it basically boiled down to position sizing. Losses are a part of the business but these represented large outlier losses.
•December 30, 2012 • 2 Comments
The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.
Here’s an excerpt:
4,329 films were submitted to the 2012 Cannes Film Festival. This blog had 16,000 views in 2012. If each view were a film, this blog would power 4 Film Festivals
Click here to see the complete report.
•December 9, 2012 • 2 Comments
“At the current time a risk arb spread in Nexen is causing me some large short term pain!” – October 27, 2012
That was the last line from my last post. Since then I continued to hold or add to one of the most volatile risk arbitrage spreads I’ve ever seen. Deals have blown up and I’m grateful, or perhaps lucky, that I haven’t been involved in a deal break. I’ll spare the details as I posted profusely on Twitter. Luckily the deal passed it’s biggest hurdle and the deal spread will converge significantly. Although the deal is not technically complete yet, it still requires CFIUS approval, I will likely be out of most of my position at that point. I do want to review some thoughts:
1) I underestimated the realized volatility of the stock. The stock initially traded quite appropriately in the month or two following the initial announcement. It was during this time that I began accumulating my position of short puts and long common. This seemed like a good idea at the time till the Petronas/Progress delay in mid October. From that point on the stock was never the same, moving over .50 or 1.00 a few times. In my current seat, I am highly sensitive to mark to market P&L and had to justify my position a number of times to the risk manager. That was not fun.
One can see from the chart there were multiple opportunities to enter at very good prices and actively trade the stock. I was reticent to do much trading, only selling common on downdrafts to manage P&L. I am sure this cost me a good sum of money. I justified holding on to the full position by asserting the Implied Probability of the deal was too low or that positive news could come out any day. I was trying to make back large losses AND making a large profit; said another way I was emotionally compromised in the position at that time.
In retrospect, the call spreads and options reflected similar odds to the underlying price. Rather then being influenced or trying to trade the common on an intraday basis, this might have been a much better structure given my environment and recommended to most people to use these to speculate on the deal closing.
2) Risk Arb deals are loaded with noise and there is always someone who knows more then you. Panics and sell offs occur in most risky deals, offering opportunities. Rather then sit for months in a position and be frustrated by daily gyrations, the stock offered a chance to get in at better prices with only about an hour of holding time. An important point to remember as I forgot this lesson after trading the MMI/GOOG deal which similarly offered opportunities.
This was a very big deal on multiple fronts and grateful for all the assistance I received during the course of the position. I risked a lot more then capital on this one and hopefully can reap the benefits shortly.