1/n

A shift in volatility/correlation regime has been boiling beneath the surface over the last few weeks, and while many are solely focused on one market segment, my mandate of cross-asset volatility comes in handy watching this situation unfolds
2/n

Let's start by stating the obvious - the narrative right now is driven by the steepening of the yield curve (led by the selloff in long-end bonds). I will not make any argument whether this is justified or not, as I'm a very bad macro trader, but this steepening governs
3/n

the market dynamic for two reasons: 1. it correlates to forward inflation expectations (some reflexive dynamic is definitely going on there), 2. it accelerates the rotation trade in equities (and overweight growth stocks).
4/n

The inflation-rates dynamic caused a massive rally in commodities, which translated into a significant overperformance of commodity-export economies (High-beta EM and DM) over "safe haven" economies. This turned into a correlation break between risk-on/risk-off proxies
5/n

like AUDJPY and equities. Obviously as correlation deteriorates the FX hedges become worthless...

The most striking development in vol space imo is the MOVE/FX vol/Equity direction dynamic, which is a total mess (as yields are on the move, pun intended).
Historically speaking, MOVE is negatively correlated to equities returns (i.e. rises as equities turn south). over the last few weeks equities and rates decorrelated, and FX vols (both realized and implied) seem to have been based, and have been grinding higher since
6/n

few "right tail" events (given the low vol, high gamma phenomena) in FX (like the rapid decent of CHF and JPY) have taken place lately, and this can only lead me to think that we've seen the low in FX vol for the foreseeable future (until rates settles or pull back)
6/6

Looking at the market as a whole i feel that there is no f*cking way this doesn't end in complete catastrophe, as policy makers are running very low in ammunition to calm the market nerves...

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More from @VolQuant

19 Feb
Gamma-Theta-Vol triangle

The entire concept of volatility trading can be simplified into a triangular relationship between Vol-Gamma-Theta.

Although it might seems oversimplifying a rather complex dynamic of option trading, your realized pnl will be determined by that triangle
Let's understand how this three-way relation affects your option trading pnl...

We know that volatility determines the cost of the option, so to have a profitable option strategy we first need to be on the right side of the trade (buying cheap vol, and selling rich vol), but
once we traded the option we enter the gamma-theta phase of running the day-to-day risk of our strategy...

Our premiums (paid or received) are given at inception, and we can think of the option premium as a series of T interval straddle breakeven, so to be profitable we need
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15 Feb
What drives the $EUR?
cc @o_wutang

FX risk-on/risk-off drivers might be misleading when it comes to $EUR. While long-lasting correlations (such as the JPY,CHF/risk-off) might play role in FX drivers, the EUR correlation is probably the biggest misconception
practitioners have. imo EUR drivers are more funding related than risk-on/risk-off (if anything it's negatively correlated to equities, or positively correlated to vstoxx/vix movements).

The root of this misconception lies in the fact that traders/investors have a long
memory, and remember how EUR behaved after the GFC and through the sovereign credit crisis.

Since then, both the ECB and the European Council have done a lot to safeguard the EU (or at least kicking the can down the road), so the EUR became less risky currency
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13 Feb
Crash Course in Risk Management

My affair with quant finance began back in 2007. Back then I was a BA student who just started his first steps in the derivatives market. Needless to say that I was about to witness a defining moment in financial markets, as the GFC was just
around the corner. In 2008 I was already in my transition from the pricing side to the trading side. Although I always thought I will end up being a risk manager, my career was stirred toward trading.

I started trading (not officially though) two weeks before Lehman went
under. That period was crazy, but not because of market volatility, but because we were witnessing something that was unthinkable - banks that are unwilling to trade with each other (and betting on their peers to go under).

To understand financial markets we need to look beyond
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6 Feb
1/x

Trading lessons from the boxing gym

Anyone who has been following me for a while knows my two greatest passions are quant trading and boxing, and I often find both to have great similarities....

Over the years I've learned a lot of priceless trading lessons in the gym
2/x

and one of the most important lessons I've learned is "box your style"

When I started boxing I had a heavyweight coach. This guy was a true champion, gifted boxer, who went toe-to-toe with the bests of the best. The only problem was that I'm a lightweight boxer (135lb)
As long as I was learning the fundamentals I had not problems. Had solid foundations (punches, footwork, head movement) so I thought that I will kill it in sparring. That was when I found out my biggest flaw - my boxing style

Because my coach was a big guy his style was
Read 9 tweets
2 Feb
Basis Risk explained

Practitioners usually look at risk factors of a single underlying/portfolio (volatility, trend, VaR, etc...), but more often than not our bigger risk is a risk that we tend to overlook "Basis Risk".

In short - Basis Risk is a risk of imperfect hedge

1/x
If that sounds all to vague, let's look at a simple example : our portfolio holds short VIX-Feb and long VIX-Mar. Obviously if the SPX sells off they will both react to the move in spot VIX (as a byproduct of the spot-vol correlation), but each will react with different magnitude
The difference in the two futures' reaction function is the driver of the basis risk. even if we hold net zero position, our P&L will be affected by the dynamic of the spread between the two, hence, the position is imperfectly hedged.
Read 11 tweets
29 Jan
I said it once and I will say it again (and again...) FX options dealers tend to be lazy pricing implied correlations.... either they don't care too much (because they sit on flow) or they don't calibrate their models too often....

#NOKSEK implied 1-month trades in the mid 7s
While it realizes significantly higher. Why? because the NOK-SEK correlation is priced at 0.8. When something is priced at such a high correlation you never going to bet correlation is going to go to 1, but deteriorate
Even without sophisticated model one can see that this price action worth more than 7.5vol Image
Read 6 tweets

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