One of the biggest misconception in boxing is that the southpaw stance indicates left-hand domination (@Ksidiii should know a thing or two about that...)

Ex-soviet union coaches (Cubans are actually known for the overwhelming portion of southpaw fighters) teach from young age
boxers to fight in a southpaw stance, and I can assure you that most of them are right-hand dominant.

So you are probably asking how this is all has to do with trading, right?

Very much like in boxing, experimenting different strategies/models/market helps you develop arsenal
of tools that can become handy under different market regimes...

I'm an orthodox fighter, so my default stance a leading left hand, but I do train at least twice/week in a southpaw stance to be able working both stances. This helps me become more versatile as a fighter
In my trading I run systematically my bread-and-butter trades, which I've been trading for many years. These strategies produce the vast majority of the PnL, and they account for about 70-80% of my total portfolio
But...

I leave some portion of my risk limits to experimental trades. Obviously all trades go through the usual back-testing, analysis, etc... , But at some point we need to have skin in the game, and we must run the day-to-day risk.
This is where the trading part of the strategy comes to play... Running your strategy "live" reveals a lot of information that often we don't see in the back-testing/analysis phase (TC, intraday drawdowns, different market dynamics).
One example that I like to use when emphasizing the importance of running experimental strategies is my past experience with FX Correlation Swaps (@salr_nyc probably saw them back in the early 2000s).

When I traded them about 10yrs ago there were many "opportunities" out there
the thing is that many of them were just optically appealing (as they are based on WM/Reuters 4pm Fixing, which were rigged at the time)...

Furthermore I didn't understand the size of leverage/exposure until I started trading them
When you trade a corr swap you have multiple implied variance (not vol) exposures (two ccy pairs + cross pair). Add to that the realized correlation exposure, and you get a product that is almost impossible to be hedged with vanilla option
(and don't get me started about dynamic hedging of both ccy pairs, or unwinding cost with accounting for realized corr, etc..)

My point... It's important to experiment new strategies/trades, but these strategies should consume a small portion of the overall portfolio until
you conclude that they work as they designed to (or validated against back-tested results).

Sizing is the key factor whenever you introduce new strategy.

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More from @VolQuant

27 Mar
If you run a portfolio (no matter what you trade) the most important question you need to ask yourself is "in what situation this portfolio blows up?)

I recently took some time off the market, and besides doing a lot of housework and renovation I ran complete scenario analysis,
backtest, and stress test to my portfolio.

We tend to think that we know our strategies in-and-out and we know that in scenario X the performance will be x1 and in scenario Y the performance will be y1, but we tend to neglect the crucial part of cross effect
of the individual strategies on our entire portfolio:
1. Are there correlated strategies (either positively or negatively) ?
2. How are the greeks on the portfolio level move with respect to spot/vol? are we happy with our gamma/vega at X% move? should we mitigate some of that?
Read 7 tweets
22 Mar
Let's talk FX funding..

Today's move in $TRY is a great opportunity to talk about a rather niche segment of FX trading which is the funding cost..

Generally speaking, when we trade any FX spot (buy CCYx/ sell CCYz) the trade settles in T+2 days (except TRY and CAD who are T+1)
So if we want to keep the trade alive we need to roll the trade forward. When we roll the trade we basically borrow in CCYz and lend in CCYx. If we borrow at a lower rate and lend in a higher rate we will earn the carry (and vice versa...)
In EM, in addition to the rate differential between the key rates the market prices in additional basis in most currencies to reflect the funding risk premium of these market.

Low risk EM (CZK, ILS, PLN, CNH) will price a moderate, while premium, while market like ZAR , TRY
Read 7 tweets
15 Mar
1/n

Let's talk Realized Vol...

If there is one single most important number that we, as volatility traders, look at, it's realized vol.

The problem with realized vol is that it's one of the most biased estimators... Give two traders identical time-series and get 4 RVs
2/n

The reason this estimator is so biased is because it's highly sensitive to both sampling frequency and size (window).

Also, we can get very different result if we sample based on close-close or OHLC (open-high-low-close).

medium.com/swlh/the-reali…
3/n

So why do we use such a biased estimator, as it tends to over/underestimate the "true" realized volatility in most cases?

Over the years I came to a realization that although possible to come up with an unbiased realized variance estimator

aip.scitation.org/doi/abs/10.106…
Read 7 tweets
25 Feb
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).
Read 8 tweets
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
Read 8 tweets
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
Read 5 tweets

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