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Benn Eifert 🥷🏴‍☠️ Profile picture
@bennpeifert
Aug 27 • 6 tweets • 2 min read • Read on X
Good morning. I'm on a posting break but everyone is sending me this so just a brief explanation. 🖤

The headline is correct, but the implications are not. The VIX complex is very expensive on a relative basis right now and hedge funds are short it against other vol exposures.
VIX basis to at the money forward S&P volatility is very high, so volatility hedge funds are short VIX futures and long S&P forward volatility and variance against it
The VIX term structure is very steep (extremely high roll-down and volatility risk premium) so hedge funds are short it and short delta against it or long other volatility exposures against it
This is kind of like when everyone says "HEDGE FUNDS ARE SHORT BITCOIN" but actually they are just long spot versus short futures in a funding arbitrage trade
In many cases hedge funds will be short the VIX complex via put options, put spreads and put ratios which have limited loss in the event of a market crash and volatility spike; no catastrophic risk exposure
TL;DR don't read positioning headlines and believe you know anything about what sophisticated hedge funds are doing

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More from @bennpeifert

Benn Eifert 🥷🏴‍☠️ Profile picture
Aug 19
Okay. I promised a quick thread on put/call parity after that poll yesterday, even though typically I like to stick to topics that aren't well covered in the public domain.

We'll start with the basic idea and then talk about nuances that make it not quite true (esp. for retail).
Put/call parity describes the fact that, if you can go long or short the underlying, whether an option is a call or a put doesn't really matter, it just affects its delta, or sensitivity to the underlying (which can be adjusted by holding a position in the underlying!)
In particular, the simple version of put-call parity says that owning the stock hedged with a long put option with strike K is effectively identical to owning a call option with strike K and holding the present value of K in cash.
Read 11 tweets
Benn Eifert 🥷🏴‍☠️ Profile picture
Aug 14
The people wanted a covered calls / option selling mega-thread, a one-click response to all the charlatans out there trying to farm retail investors.

Systematically, blindly selling options is a BAD IDEA. Underperforms owning equities by a lot. Let's go through why and how.
Okay. The starting point here is flows. Before 2010 or so, options markets were sort of a backwater. Risk premium was relatively high, so if you backtested simple option selling strategies like covered calls or cash-secured puts, they looked pretty good (see PUT INDEX, BXM INDEX)
Then pension fund consultants started to write white papers and pitch "equity like returns with lower risk via option selling" to their massive clients. And by 2012, tens of billions of dollars of institutional money started to flow into benchmark-oriented option selling...
Read 29 tweets
Benn Eifert 🥷🏴‍☠️ Profile picture
Aug 9
Funny (?) health care story. Stomach had been hurting for a few weeks. Got on a plane from LA to SF and all the sudden got way worse, like 9/10. Went straight to the ER after landing, threw up all over the place. Got blood tests and CT scan, morphine got pain to 7/10.
Doctor came by, said the scan showed nothing and he was discharging me, I should work on my diet. I said whoa hold on, like can you talk me through what could be going on here, this is the worst pain I've ever had, what can you rule out?
He wouldn't spend more than sixty seconds talking to me, just left and discharged me immediately. The nurse advised that I could just check right back in, so I did. Second doctor kindly went over the test results, explained that they couldn't see anything dangerous yet -
Read 8 tweets
Benn Eifert 🥷🏴‍☠️ Profile picture
Jun 18
Worth noting that the vix basis (spread of vix futures over S&P at the money forward vol) is at the high of its ranges of the last few years (barring the brief weird day last August) Image
In the pandemic it went as high as 15 but that was because there were insane massive short VIX call positions (Allianz Structured Alpha, etc) that got liquidated in the middle of a massive selloff
The VIX complex is typically used by volatility tourists, because it's simple to trade volatility with the click of a button without knowing what an option is

So elevated basis typically means outsized hedging flows by non-specialists
Read 4 tweets
Benn Eifert 🥷🏴‍☠️ Profile picture
Jun 12
A few people have asked for this so I'm creating a thread-of-threads about hedge fund blowups to make those stories easier to find. Please if there are any I forgot go ahead and link them for me. First one is a general thread about 2020 pandemic blowups:
Next up we have InfinityQ, an epic fraud in exotic derivatives:
LJM Partners, who levered up like mad to keep making money during the volatility crush of 2017 and doctored their risk reports to hide it:
Read 7 tweets
Benn Eifert 🥷🏴‍☠️ Profile picture
May 27
1. Lehman. Wells Fargo prop lost hundreds of millions of dollars on converts, bond basis and levered loans. Head of the desk went to the board and asked for $4 billion in balance sheet to buy everything in sight, got it, because Wells was in good shape. Better lucky than good.
2. August 2011. Had nice EURUSD and USDJPY volatility positions that helped the fund put up a good month. We added to bond basis, converts and levered loans. I sold CDS IG versus buying S&P volatility, that was choppy and the CIO covered it before it converged. But...
I shorted VXX calls in my PA after the initial volatility spike. The position got mangled by persistent backwardation and subsequent volatility spikes. I met the first and second round of margin calls and got 90% liquidated on the third. RIP, lessons learned
Read 10 tweets

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