Tail hedging for degenerates. Image
For most of my time, I just thought of tail hedging as the "cost of entry".

A "ticket to the dance" if you like.

You can't predict what happens in the tails - so pay up to cover them & go play hard in the peak of the bell curve, where your tools and models are most valid.
If you're a good trader, you'll tend to find that your highest expected return opportunities appear after massive moves.

Disconnections happen when others risk models are flashing red and they are FORCED to trade (rather than want to).

You want dry powder for these times.
You can't predict the tails, so just get them covered and concentrate on the games you can win at.

"Getting it covered" = buying OTM options.

Other approaches such as short trend-following will *probably* pay off when you need it, but might fail.

That isn't good enough here
One of many trade-offs for the trader.

- best opportunities are in chaos
- chaos doesn't happen very often
- in benign times, easiest way to make money is carry-like stuff that incinerates your buying power just when you want it most

Tail hedging doesnt solve this, but helps

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More from @therobotjames

20 Sep
Steal ideas, not implementation.

I see you, with your "small but beautiful" pot of capital, trying to make it bigger.

A🧵on easy games, stealing ideas, and not competing in games you don't need to compete in.

First, the Market Gods give no prizes for difficulty.

So, to start with, you'll want to play the easiest, most reliable, hardest-to-screw-up, least-dependent-on-skill games you possibly can.

See linked thread:

Second, the Market Gods give no prizes for originality.

So you want to know what traders who are taking the game seriously are doing. (Especially with their own money.)

Proprietary trading firms
Hedge fund prop capital
Serious solo traders
Hedge funds

Read 21 tweets
20 Sep
We recently looked at VIX Futures and why they tend to trade at a premium to the VIX index most of the time.

How might you apply this understanding?

Let's discuss how you might think about a systematic VIX carry trade based on these concepts.

In the original thread we noted:
- you can't trade VIX
- so there's no market mechanism to stop it from being predictable
- but VIX futures do trade and their price incorporates where the market thinks VIX is likely to go

If the market thinks VIX is going to go up, the futures will likely already be trading at a premium.

Sellers won't sell low if it's likely to go up.
Buyers will be happy to buy higher if it's likely to go up.

Read 24 tweets
19 Sep
If you weren't there, you have no idea how disgustingly decadent pre-GFC sell side finance was.

Whatever you imagine x10.
Silicon Valley is amateur hour choirboy stuff in comparison.
Need a burner account to share stories 😂
Read 5 tweets
14 Sep
Why do VIX Futures trade at different prices to VIX?

Derivatives can be complicated, but the answer to this question is not.

If you understand how the market prices risk then you'll know a lot without needing to know a lot.

Let's walk through it. 🧵👇

Pull up a chart of the VIX index.


If you're an experienced trader, you'll recognize immediately that this is not a thing you can trade.


Cos it wouldn't look like that if people could trade it.

Cos, just by eyeballing the time series chart, you can tell VIX is very predictable:

- It stays about the same in the short term
- But if it's low it's more likely to go up
- And if it's high it's more likely to go down
- It has a floor under which it's unlikely to go lower

Read 25 tweets
4 May
My focus recently has been on the crypto markets.

I don't have all the answers.

But I thought it would be useful to ramble a bit about the experience of entering a new market.

My perspective here is professional trading, but the concepts are valid for individuals too

First, you've got to work out whether it's worth expending time, effort, and money in a new market.

There's an opportunity cost associated with looking at and implementing new things.

So you put together some "high-level business case" to see if it stacks up

This can be tricky because you don't know what you don't know.

So you seek out people who are doing it and ask them to share some of their experiences.

If you are serious, people will generally be very happy to talk to you. This game isn't as secretive as you might think.

Read 16 tweets
28 Apr
In the "win-lose" games of active trading, your "edge" comes from:
- Buying from someone too cheap
- Selling to someone too expensive

At least on average.

To do this, you need to know who you are playing against.

🧵on "edge", where to find it, and how you can compete 👇

If you are a market maker, it is relatively clear to understand who you are trading against.

If you're a positional trader, it is perhaps less clear.

On a trivial level, you're probably trading with a market maker.

But understand that "the market line" is set by the supply/demand pressures of other aggressive traders.
- End users (wealth mgmt, retail)
- Aggressive prop traders doing short term risky arbs
- Informed positional traders with pricing models + (maybe) info advantages

Read 24 tweets

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