Interestingly enough, the largest vol events did not come from a cheap smile or a rich smile. The smile always was in an area that signified "not too rich" "not too cheap" on a historical lookback. Why is that ?
Here's the reality, the largest blowups come from two-way price action, not directly from one way flow. What the heck does this mean?
Lets take cov-19 for example. Positioning on the street was one sided as there were a ton of hidden basis risk with vol sellers.
But it wasn't like we woke up one day and there was some big blowup. What people fail to realize is that there was a lot of two way price action that helped accelerate the move.
This means that people were happy to sell vol initially when the move started happening.
In hindsight it is easy to say "yeah that was a mistake". But at the time a lot of people actively believed that the catalyst would pass over easily and this was another layup at selling "rich" VRP.
The large blowups always come from the two sided catalysts that leads to stubborn positioning due to heavy conviction on the trade.
It is very rare that guys are completely caught off guard. Its more so those events that can be subjectively viewed.
A catalyst that leads to a small dislocation often traps a lot of other agents as they try to play it. Ex: Long only guys look at it as "buying the dip", stat arb guys are trying to play the reversion back to a 1 sigma move, and vol guys are trying to harvest the fat VRP
Its the two sided price action that comes from a subjective catalyst that can be the deadliest. That is where the psyche behind other agents tend to matter the most. Because when limits are being tested, it just takes one fund to tap out before they create a domino
effect that starts to force others to tap out as well.
Strictly from a trading standpoint, once the headlines begin with the "world is coming to an end" I generally enjoy starting our monetization process of shorting some vega.
The headlines that demonstrate the potential to be subjective in terms of positioning are the ones that interest me the most. You will always have one agent that tries to bully the dislocation, and if that guy ends up puking, long gamma guys are in for a big payday.
Psychologically it is always the area where the market discounts the potential distribution of outcomes. I love the tails on a catalyst that is in motion where you hear people screaming "that could never happen","no way that deal doesn't go through", "no way it falls 5% in a day"
In a market that is so interconnected, our group is so focused on buying cheap tails on names that have positional imbalances because we believe that realized correlations carry the heaviest "spikeability" more so now than ever.
But strictly from am absolute trading standpoint the tails are most appealing when you get a catalyst behind the vol, and people immediately start discounting that outcome mixed in with high conviction positioning.
Every once in a while the bully at the table catches a bad break on the river, the only difference between poker and markets is that when that bully takes a hit in markets, he brings the other players down as well.
Dammit, I retweeted the wrong thread....this is the one I was referring to
When I was a kid trying to get a gig on Wall Street a lot of firms pushed me to the side. But there was one firm that really believed in me, encouraged me and played a big role in my development (even though I never worked there).
This firm is First New York. I am fairly familiar with the culture and the type of traders they push out. Lots of core solid cold blooded killers such as @moreproteinbars and others.
But there was one trader’s story that just always stood out to me. If you guys ever read the last Market Wizards book, the story of Jimmy Balodimas is an extremely unique one.
Balodimas was a trader at FNY who was profitable for years trading an extremely difficult strategy.
”I love being long convexity but it would be better if it came cheaper. We are left trying to be creative using the vol surface or relative value relationships where we can”
Bingo !
The time to be long outright vol are on those days where vol of vol is getting destroyed and nobody wants to touch it. When you are faced with these environments (rising vol) it becomes much more difficult to structure things with value.
Having potential investors and trading friends reach out to hear my thoughts on current market state. I thought it would be helpful to share with you guys.
I hate engaging in the fear mongering nonsense, especially with the Evergrande situation being such a "hot topic" 🙄
anyways, there def was some impact from a positional standpoint going into Opex. This coupled with the fact that people are fearful about the knock on effects of the defaults in China are clearly moving markets but I personally believe there is something more relevant brewing.
The debt ceiling vote has a larger impact directly on the U.S and seems to be something a lot of folks are overlooking.
Yellen came out over the weekend stating that the Treasury's cash balance will be insufficient as of October.
Idea generation is so important. I believe the best forms of alpha stems from regulatory / structural / legal implications.
I believe that the understanding of these factors and the changes that come along with them lead to alpha.
Understanding things like TRACE reporting is crucial when you are trying to identify agents and the moves they are making.
This market has become so complex. Betting a stock will fall because it has bad earnings is just a rookie’s playbook.There is no direct edge in those plays
Can you think about the recent changes in the microstructure that would be impactful to the overall picture.
Most vol guys understand this but there seems to be this disconnect with the rest of the world.
It’s frustrating to see the sell side reports printing that “skew is rich”, “tails are rich”.
Ok..... relative to what ?
Sure if you want to run a 20 year look back and show me that tails are priced rich compared to prices in the early 2000’s, 90’s, etc sure. Great.... but that is not the same market as the market in 2021. This market is completely different.
The microstructure, the regulatory implications, the sentiment, the participants, the agent’s role, even the assets etc. It is a completely different market.
We have seen this market move a few pct in a matter of a few hours. It is a completely different beast.