Alpha_Ex_LLC Profile picture
Jul 19 10 tweets 3 min read
resurrected an old tweet to share some thoughts on hedging strategies ...Elon has hands full and is in it or the long haul with regard to #TSLA, but in taking down #TWTR, even someone of his wealth can benefit from "locking in" value of shares.
the "zero cost collar" does start of Jan'21, with TSLA at 735 per share, Elon could have bought the Jan'23 expiry 530 put and fully funded the protection by selling the Jan'23 1425 call! The put protects shares 28% below 735 price then.
the call is struck so high that he'd get to realize gains in the stock 94% above that 735 level! pretty attractive! makes the big quarterly SPX collar look bad by comparison, but why? the tweet back then was based on the incredible bid to long-dated vol in TSLA.
at that time, 2 yr implied vol was >70...not at all the norm for a company with such a high market cap. this is critical for the favorable pricing dynamics in the 530/1425 collar. in this trade, Elon sells (and the dealer buys) "vega"...
this greek (not actually a greek letter but...), maps change in option price for a 1% move in implied volatility. Vega did in LTCM as they were short by some estimates 80mln USD per vol point. when 5 yr SPX implied vol ramped by 10+ points lsummer '98, LTCM was out 500mln-1bln.
in implementing a collar, Elon would have been reducing his delta risk by buying put, selling call, but also shorting TSLA vol at a very high level. it's unclear at all given his size how much of this the street could have/would have taken down.
but here are some charts to consider...first, TSLA stock versus stock +collar. second 2m realized vol with and without the collar. a good hedge reduces variability...that was accomplished here...much less vol with the collar.
next, let's look a bit more closely at option "vega". the top panel is the individual vega of each option starting on 1/5/21. the scales on the left and right side are diff. the call vega is higher than put vega on trade date.
these vegas come down as time passes and we get closer to the Jan'23 expiry. as of now, the put vega exceeds the call vega. let's also look at the evolution of the implied vol on the Jan'23 1425 call strike...that's here. it's come down a lot over time.
Elon doesn't seem like the kind of guy to hedge...but this trade would have been a pretty good risk reducer at favorable levels of implied volatility.

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More from @Alpha_Ex_LLC

Jul 1
it was 2014 when the IMF first declared the term "spillback", a warning to the Fed that its policy changes can create spillovers (in EM, for example) that then spillback into the US...with this in mind, a few charts on the dollar and rates. first, on dollar call skews-->
these are all really well bid. next, consider changes in the gold vol surface. here's 2m GLD by strike today vs begin last quarter. the call skew has gotten flattened while the put side has steepened. all told, 90/110 went from +1 to the call to +4 (vols of skew) to the put.
this is another example of bid for USD call tails. another way to look at this is correl of GLD to EURUSD. these assets share a common driving factor: the dollar. When Russia invaded Ukraine gold benefitted from flight to safety and Euro sold off...correl has now returned
Read 4 tweets
Jun 26
The book “Safe Haven Investing” makes a few main points. First, geometric compounding of returns has some unique properties, one of which is the importance of never drawing down one’s “stack” too much. This is a killer for compounding.
One implication is that safe haven investing should be implemented as a continuous discipline, not turned on/off as a function of a view on what may happen in markets. I think it’s at least worthwhile to allow an assessment of market vulnerabilities to impact the hedge sizing.
A second concept is the idea of “efficient safe haven investing. which, relative to the common notion, suggests that when implemented correctly, the hedge overlay in combination with the base portfolio can lead to more wealth over time.
Read 9 tweets
Jun 25
Teaching options is fun because there are so many real life examples to choose from. The mortgage prepayment is one of the most prominent (and valuable) examples. But there are so many more…one that we encounter each day is the choice to feed the parking meter or not…
Just considering the economics of the decision, by paying, you are buying the option to guarantee you don’t get a ticket. Is it worth it? First, let’s establish that you are short a binary option. You know in advance the ticket cost. Imagine if the amount were not known?
As a binary, we can evaluate whether the option is worth it pretty easily just based on meter fee vs ticket cost vs risk of getting caught. On this last part, of course, time matters. The quick swoop by dry cleaners takes fewer minutes than (gasp) sending a wire from the bank.
Read 7 tweets
Jun 21
Lots of discussion about the VIX and whether it’s high enough. The brightest line we can draw to explaining the level of the VIX is how options carry. And on this measure, a metric often cited is the premium of the VIX to realized.
Relative to 1m realized, scored over the last 10 years, the current premium is in a low and on some days, a very low %ile. There is a fair amount of commentary devoted to the “why” of this pricing. “Shouldn’t the VIX be higher?” has been the often asked question.
There are a few ways to answer. First, yes, if “carry matters most” (credit, calendar, concern and capital also matter) then the VIX should be higher. That is implied by the very low %ile of the current reading. Current realized is 30, and so a 35 VIX would be easy to envision.
Read 12 tweets
May 12
should the VIX be higher? maybe a little but, but it's not way out of line. the VIX is simply a "cost index" of 1m options...the cost of these options is driven by a number of factors (supply demand, calendar scheduled event risk like elections).
of all the factors, the strongest linkage is to realized vol. the magnitude of daily swings for a vol trader are like earnings for a value oriented stock investor. "gamma is the rent on theta". 1m SPX realized vol is 32. the VIX typically will clear 3-5 vols over.
what we can say is that the VIX is no longer grossly high versus other metrics. for a long stretch post-pandemic it was very high vs. 1) realized vol 2) credit spreads 3) rate vol. on the last one, the ratio of the MOVE to the VIX got up to 6.5 and is now back to 3.5.
Read 11 tweets
May 5
with all the action at the index level, today is a good day to post "10 Handy Facts About Vol"...
any favorites?
1. Implied Vol is Driven by Realized Vol. Especially true for short dated implied vol (“theta is rent on gamma”). VIX is 80% correl to 1m realized volatility. Linkage of implied to realized weakens as expiration lengthens.
2. Implied Vol Exceeds Realized Vol.  The VRP (vol risk premium) is well established in the data. In 2017, the average VIX of 11.2 was 65% higher than realized vol in the SPX.  Carry strategies driven by the vol shortfall abound across asset classes.
Read 11 tweets

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