1/x I think most people look at IVol as a simple mean reverting fxn...They think when IVol is low it’s smart to own it & be hedged & when it’s high it’s smart to sell it...& although there is undeniably a mean reverting process at work, what most don’t understand is that for the
2/x most part over the longterm(since 1990), if you follow this process, you will get into big trouble... Other than a handful of high vol spikes w/ forced buying, when vols are low (think smoothed VIX of <17) it‘s historically, in risk adjusted terms, the most profitable to sell
3/x In effect, the risk adjusted returns of selling vol look like a big “U”, with a handful of highly profitable stressed extreme vol circumstances, paired w/the overwhelming majority of low vol occurrences representing the profitable tales, and the middle range (think VIX 17-30)
4/x representing the less profitable/more risky outcomes. What this effectively means is that for overwhelming majority of the data (with the handful of extreme vol circumstances removed)the relationship between IVol & Risk Premia is inverted. This is counterintuitive to most.
5/x So, now for the obvious question...Why is this?Most studies I’ve read center around the low intrinsic market risk factors in low vol periods & a floor to implied vol in low regimes.& though both these factors clearly have merit, i‘d argue the low risk factors themselves are
6/x themselves examples of low risk premia. My experience tells me, as we saw in 2017 (& I explain in my recent pinned tweet), it is more a fxn of the reflexivity of vol.When IVol is low, markets are inherently stable,& it takes time & sustained RVol to turn liquidity dynamics &
7/x loosen up the market, so it can experience more dramatic shocks. We saw this loosening up of vol on the back of time & sustained rVol which ultimately opened the door for 2020, just as we saw the moves in 2007 open the door for 2008-9 to occur.
8/8 So, if you are new to the game, be aware, a 25 VIX may seem rich historically & be tempting to sell. But history tells us it is ironically, one of the most profitable times to play from the long side.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Cem Karsan

Cem Karsan Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @jam_croissant

17 Sep
1/x When I had my vol market making firm, the best trades were always to trade with the smart directional players. You almost always wanted to avoid the retail directional flow. This may seem counterintuitive. Why would you want to trade against the smart directional players?
2/xWhen a good directional player buys deltas, as a MM, you sell them their soft deltas & hedge w/the underlying.Therefore, Generally, your exposure wins when they do.& when they come to take a profit & you have the added benefit of flow pushing the trade in your favor as well.
3/xhistorically w/retail the opposite is true on 2 fronts. Not only are they generally directionally wrong, forcing you into poor positioning with the underlying, but they don’t sell at a loss. They just keep repeating the same losing trade at worse & worse levels....
Read 4 tweets
16 Sep
1/x A little Pre-VIX Print SOTU: What we know:
-The Markets are still technically very weak, as they have been unable to recapture 20 day, despite significant Vanna/Charm flows past 1.5 weeks
-little retail or institutional capitulation & Short interest @ extremes
2/x-Index Vol structurally compressed due to recent Low rVol during high Sep OpEx decaying away in front of lower expiries behind. -VIX exp often marks low in vol & end of Vanna flow market support
3/x -low Sep VX rolling off & higher event Oct VX front month, naive demand in VIX complex for already rich post event vol could shift Vega higher.
-Street broadly short vol dispersion (extra long in indexes, short in names)
-Fundamental election risks looming under Biden sweep
Read 5 tweets
14 Sep
1/x Alright time to revisit this from a week ago, as well. I don’t think I have to tell anyone how well this one worked out... Another great example of how important it is to understand dealer positioning! The question now is will this Vol compression into a down market continue?
2/x This is a tough question. I would suspect through Wed (Fed) it will... But it‘s important to note that IVol & skew have both dramatically declined in the last week to levels that are simply too low given the technical picture. Our spot here in the market Is not historically
3/x a natural resting place. We are below 20 day &1 stdev down on 20 day. This is no man’s land. This market will either retake the 20 day soon & find itself on solid footing that could push being momentum back to the highs, or (more likely) roll over below recent support of 3300
Read 4 tweets
14 Sep
1/x Alright, if you haven’t read @choffstein most recent piece, do it. & if you have, go read it again. It speaks to a concept that I‘ve been preaching for 4+ years now. & if you’re involved in fin markets, even tangentially, I don’t think there‘s a more important topic right now
2/x The main thrust of the piece points, rightfully so, to 1) Federal reserve liquidity & a) The moral hazard that it causes (due to the fed put) & b) the scarcity of opportunities that it creates.These 2 pressures drive massive market wide compression of risk premia by way of
3/x forcing participants to move up the risk curve, increasing carry trades & the leveraged selling of convexity. The net effect of this is to move all risk from local variance, to the tails. As Corey, is fond of saying , ‘risk cannot be destroyed, only transformed’.
Read 11 tweets
8 Sep
1/x A couple of important notes from Vol-landia today:
1) Fixed strike $SPX vol imploded today w/straddles -$21 to -$32 across OpEx. Given size/speed of $SPX move & technicals this was extreme.Vol compression accelerated into close w/$5-$7 decline post-equity close on market lows
2/x Much like buying felt forced into the close at the top. This selling was beginning to feel forced. 2) skew declined considerably w/1 std dev put wing -$3, 1 std dev call wing +$1. But coming off high levels, it feels more fairly priced now. 3) maybe most importantly,
3/x There was a major break in price change for Vol post 11/4. With straddles 11/20 on back -$16-$17, where as 11/4 (Election Day)was only -$7. this post election Vol has been insanely high due to fear surrounding a disputed election/constitutional crises post election.
Read 4 tweets
12 Aug
@pat_hennessy @Isa90495157 @Reveretrading @SqueezeMetrics 1)Yes. I agree. To me it seems like common sense. If you are buying puts, you are buying them for a spec or a hedge, especially in the US where the skew is significantly higher than the rest of the world and historically caries a significant risk premium. There is lots of analysi
@pat_hennessy @Isa90495157 @Reveretrading @SqueezeMetrics 2) that basically shows that 90%+of HF ‘alpha’ can be explained by short put exposure. Every quant, prop, and HF I know has some version of the high sharpe/ negative tail trade on with some tail cutting trigger built in. Why wouldn’t you, especially if the Fed has your back.
@pat_hennessy @Isa90495157 @Reveretrading @SqueezeMetrics 3/This is mostly anecdotal evidence, but in the absence of empirical evidence, I have been trading these markets as a major player for decades & my ML models definitely see the flow. My view is the market is increasingly a series of leveraged carry trades, Harvesting risk premium
Read 4 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!