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Alpha Exchange is a podcast series by Dean Curnutt to explore topics in financial markets, risk management and capital allocation in the alternatives industry
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Jan 20 4 tweets 1 min read
In October 2012, fresh off the 2011 debt ceiling crisis and approaching the 2013 "fiscal cliff", I hosted an investor dinner in NYC featuring Senator Alan Simpson. Turns out it was the night that Superstorm Sandy wrecked havoc. We regrouped and had the dinner a month later. An imposing figure at 6'7 with a distinctive (Wyoming?) dialect, the Senator talked about debt and the "Simpson Bowles Plan". His speech was lively, direct and peppered with salty language. The best line of his talk was "the problem is, no one knows just how much a trillion is."
Jan 10 6 tweets 2 min read
when thinking about the price of insurance, it's often useful to look at paying premium as reducing the risk of being very wrong. if I am really bullish on a stock, but also recognize that in markets, "sht happens" and I could be very wrong, best to look at the premium for a call option as a function of how wrong I might be. There is less risk of being very wrong for Colgate or Campbell's Soup than for TSLA. Same process applies to VIX options. if I buy a VIX call, while I may be betting that vol rises, I may also
Jan 5 12 tweets 3 min read
a short series on hedging by way of a trade that did occur and one that didn't but would have worked well. Comparing Mark Cuban in YHOO to Elon Musk in TSLA and then broadening to current market pricing setup. ===> In 1999, Mark Cuban famously hedged the YHOO stock he received from selling Broadcast.com. He used a zero cost collar (long put financed by selling a call). The trade saved him a fortune. The pricing of the trade was gorgeous.
Dec 20, 2022 5 tweets 2 min read
interesting to compare 2022 to other years with similar SPX realized vol. 2011 has same overall realized vol, but starkly different in other ways. here's 2011 and 2022, both around 23.5 realized vol, but giant diff in realized correlation. stock to stock correlation was much higher back then. a second notable difference is stock to bond correlation. in 2011, "risk on/risk off" was in full swing and 10y yields fell by about 150bps. This year, they have risen by roughly the same.
Dec 17, 2022 12 tweets 3 min read
no doubt a lot of discussion coming on the quarterly SPX put spread collar roll. 3835 call strike is basically ATM and the collar gamma is now 1.7bln per 1% move in SPX. it's easy to isolate, but pretty difficult to disentangle the impact of hedging this position on the market. an interesting, forward looking question is on trade structure itself. while the "strategy" calls for a put spread collar, it's worth contemplating if this is optimal for 2023. so let's review. below, the quarterly puts and their value from inception to expiry. all finished OTM.
Dec 10, 2022 4 tweets 1 min read
explaining equity vol through the "5 C's"... 1) carry generally supportive of current VIX/implied vol level. 10d realized is 22, 1m is 18. "theta hata's" might say that 5 day is just 16...fair point 2) credit...generally well-behaved. IG 30 wider since start of 2022. 3) calendar...holding vol up most are the implied action on 12/13 (CPI) and 12/14 (FOMC)...past that, beware the quiet might be worth considering into the holidays
Dec 9, 2022 5 tweets 2 min read
catalyst week is coming! the "twin terrors" (for option sellers at least) await...CPI 12/13 and FOMC on 12/14. below, showing a snapshot of implied vol by strike in $SPX options that expire 12/13. what do we see?...1) vol is very high, a function of the fact that realized vol over last 7 CPI release dates is 50%. 2) the typical "skew" is INCREDIBLY flat. for the SPX, we show a stylized line for what skew might typically look like - reflecting a higher (and sometimes much higher) implied vol for OTM puts vs ATM puts and OTM calls
Dec 8, 2022 10 tweets 3 min read
@SethLevine2 asked the question of whether the AE podcast might focus a bit much on the Fed. My answer, a bit tongue in cheek was "I just ask the questions". But I think it's proper food for thought and figured would share some views here on the topic here. First, the "remit" of stable inflation and full employment captures increasingly less of the Fed's impact. Sure, with rates high enough, you can blunt growth, shock asset prices lower and ultimately, push back on inflation. Similarly, an easing cycle is likely part of what
Nov 30, 2022 5 tweets 2 min read
we talk a lot about recent prominence of the dollar in explaining asset price movements. SPX most neg correlated to the dollar in a decade...gold and SPX most + correlated to each other because they are both neg correl to the dollar. you can also see this in FX --> implied correl between Euro and GBP highest we have seen it...reflected in relative prices of 3 options...EURUSD, GBPUSD and the EURGBP cross. below, 1m implied vols and %iles (last 3 years)...note how EURGBP vol screens much lower %ile than EUR and GBP.
Nov 20, 2022 6 tweets 2 min read
One way to think about risk is to put it in one of 4 categories. First 3 are obvious (and sometimes overlapping). Economic (asset prices respond to economy and profits); Monetary (CB’s rule the world, we’re here just to watch); Financial (positioning, vol & Minsky kind of stuff) and lastly, Geopolitical. This is a catch-all for “non-market market risks”. Debt ceiling, Fiscal Cliff, Scottish Ref, Brexit, US Election are among them. Int’l conflict as well. These can be more bark than bite but must be closely watched anyway.
Nov 19, 2022 7 tweets 2 min read
posted yesterday on the idea that investors underappreciate the value of time in an option's price. we are seduced by "cheap" looking (low price) short-dated options. conversely we forget how long and painful it can be on the short side of options that have lengthy expirations. I also posted on "20 Things to Do Before You Ask for a Price" (below, again), a check list for the sell-side option salestrader to run through in quarterbacking the price discovery process between a client and the trader. Got me thinking about an exercise I used to do with
Nov 18, 2022 5 tweets 2 min read
In 2018 I did a presentation at the U of Chicago b-school and asked by a show of hands which industries the students planned on entering after graduating. Plenty were headed to banking, consulting and private equity. "How about sales and trading?". Not a single hand went up. This part of the industry has certainly been in transition. Electronic trading is powerful. When the "GME Incident" occurred on 1/27/21, I recall looking at the screens and seeing that short-dated GME vol was 881 bid at 884 offer. "Ken Giffin, you won", thought to myself.
Nov 17, 2022 10 tweets 3 min read
there are chart crimes and there are data crimes. the breathless "the put-call ratio has spiked!" is in the data crime family. before publishing warnings on this, execute following checklist. 1) check for ex-div and put/call combo trades. a month ago a widely distributed chart showed notional of puts traded and how a crash must be coming. turns out it this was mostly a function of MMM reversal/conversions implemented around a corp action. these are high delta, high premium puts traded versus calls and stock. there is no vol or stock impact.
Nov 16, 2022 13 tweets 5 min read
"What are you implying?!" ... in derivs & asset prices, there's a series of "implied measures". Here are some: implied vol, correlation, dividends, borrow, hikes, earnings moves, default risk, distribution & inflation. Each is unique. A brief (non-comprehensive) overview follows. Implied Vol...the "filler" that equates observed market price of an option with a model derived value like Black-Scholes. We readily see stock price, strike, interest rate, div yield (storage) and expiry. Using these inputs and BS, what vol gets me to screen price? That's IVOL.
Nov 5, 2022 7 tweets 3 min read
FOMC week is behind us. First a scorecard update. The realized moves of the $SPX on days around the meeting. Over the last 6 meetings, realized vol on meeting day is 36%. There have often been large moves the following day. Realized vol day of and day+1 is also 36%. As @FerroTV pointed out, the most informative part of the presser might have been the “Bloomberg on delay” moment when a reporter told Powell the market was up in response to the statement and then asked how he thinks about that.
Oct 29, 2022 6 tweets 2 min read
some commentary out there on Fed punting 2% target and suggesting that 3-4% is "good enough"...this misses how investors view inflation...there is a helpful corollary to the VIX...last year, we argued that embedded in much of Fed’s inflation assessment was a misunderstanding of the nature of inflation time series. Like VIX, vol of inflation rises as inflation rises. When VIX gets to 40, market must assign much greater probability to the potential that it gets to 60. In a similar way, inflation isn’t the kind of asset that goes from 2 to 4% and then
Oct 26, 2022 5 tweets 2 min read
the vol of a stock on its earnings day is roughly 2-4x its vol on non-earnings days. in their greedy attempts to profit, option traders know this and make adjustments specific to the day of expiry...here's MSFT vol by expiry before and after yday's earnings Image lots of factors determine the clearing price of implied vol, but the "5 C's" is a good starting point. Carry matters most. "Calendar" is the pricing of an event we know is coming, like earnings. Sometimes the event is so big, it has large impact on even macro option pricing. Image
Oct 26, 2022 7 tweets 2 min read
Market prices are not just a result, but a cause as well. Of course prices react to “new news” (CPI, earnings, FOMC, etc) But in doing so, prices then shape outcomes. There are 3 good examples. First, when a risk-off episode gets bad enough, policymakers react. As they become financial firefighters, the puts you might own become vulnerable to their efforts to douse the flames. Success in fighting the fire is just about reducing risk premium levels and the vol you own is a main target.
Oct 23, 2022 13 tweets 3 min read
many aspects of human tendencies matter for investing. one is that we are conditioned to "over-extrapolate". For example, when we sit in heavy traffic for a long time stretch, it is challenging to envision driving at full speed again. Been there? When it rains for days on end, blue skies become difficult to imagine. In the derivatives market, when realized volatility is especially and persistently low, recency bias complicates the process of thinking about risk.
Oct 20, 2022 5 tweets 2 min read
The VVIX to $VIX ratio has taken out its low reached end of 2018 and is now below 3. What's does it mean? The ultimate low was 2 on 3/12/20 as VIX had already reached 75 but implied vol of vol hadn't fully surged yet. At 30 VIX, the low level of this ratio has little precedent. Low VVIX is market saying "30 VIX is here to stay". It's also simply following low level of realized "vol of vol". Just as realized vol is the "earnings engine" for a long option strategy, realized vol of vol is same engine for an investor owning VIX options and delta hedging.
Oct 20, 2022 4 tweets 1 min read
*Geek Alert* Implied correlation is a metric often used to compare the pricing of index options relative to options on the single stocks that comprise the index. A high IC suggests the market anticipates that stocks will move together, which often is the case during vol events. CBOE calculates a series of implied correlations on the SPX by strike. Below, the 3m 10d put IC (Bloomberg ticker: COR90D) and 3m 10d call IC (COR10D) and the spread between them. What do we observe? OTM put correlation is at a premium to OTM call correlation.