Co-CIO of Ambrus| (Focus: Exotic Derivatives/Volatility/ Tail risk hedging )| @penn guy (Not investment advice)
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Oct 26, 2023 • 5 tweets • 3 min read
Volatility/ Derivatives 101: Tail risk hedging
WHY IS THIS DONE?
The whole purpose of a tail risk hedge is to protect a portfolio from large losses during market crashes.
1) Reduction in variance drag:
This ultimately leads to a higher geometric return over the long run. Which simply means, as you lose less money, you make more money because of the rate at which you compound returns.
2) A dollar in a crash is worth more:
When market crashes are occurring, dislocations lead to opportunities. The ability to have something in your portfolio that is generating a large return, enables you to re-invest that capital else where. Think of all the investors that had loads of excess cash when some homes were selling for 1/10th of the initial asking price during 2008. Think of how much their wealth ballooned 10 years later from that one decision to buy discounted assets.
3) Peace of mind: Poor investing decisions are generally made when investors are losing money. The peace of mind of knowing that if the market falls further, you’ll be fine, allows investors to use good judgment and seek offensive opportunities instead of being forced to play defense.
HOW IS THIS DONE
Generally speaking investors will purchase deep out of the money (highly convex) derivatives. These options are cheap in premium terms when volatility is low, but the return on them can be massive when volatility eventually erupts. Ideally, investors are looking for payouts where you bet 1 to earn 100.
Listed below is an actual example of a 2M 1delta SPY put and how it performed during March 2020.
Jul 22, 2023 • 7 tweets • 3 min read
Little follow up to the tail risk hedging thread:
As discussed previously, one of the biggest factors to buying tails comes down to the execution.
Are you able to inventory tons of units at extremely low prices to profit from the repricing of risk? (tails bought at .03… twitter.com/i/web/status/1…
Outside of the execution there is a subjective part to choosing what names and what part of the surface you play in. How can you determine which options to buy and what is actually “cheap”?
When reflecting on the Covid crash of 2020 it is well known that large institutions were short a significant amount of volatility. Systematic vol selling was in vogue and it was printing money. In hindsight, many people could not believe that everyone was short that much vol.
It was almost humorous that traders would be that irresponsibly short vol. A whole sector changed, the variance swap market dried up tremendously. You could no longer sell uncapped single-name variance. But what if I told you that there are more people short vol today than then?
Apr 28, 2023 • 9 tweets • 3 min read
THE TRUTH BEHIND 0DTE OPTIONS:
Over the last few months, we have noticed a lot of incorrect sell-side research reports and misleading headlines around 0DTE options. We took the time to dive into the data and extract what it is really saying. ambrusgroup.com/research
One of the first misconceptions is that the retail crowd is the main end user of these options.When we surveyed 10 different electronic and voice SPX market makers, that view turned out to be false. Surprise surprise, the Wealth Advisors/RIAs dominated the flow by selling options
Jan 7, 2023 • 7 tweets • 2 min read
2022 will go down in history as a year with no massive spike in equity vol. Although the S&P fell more than 20% at one point, 1M implied volatility remained muted for the most part of the year. A lot of people questioned “what happened to the $VIX?”
Nothing happened at all, it is working how it is expected to work.
If there is no short term crash, or immediate panic, 30day implied volatility won’t rise. This selloff in the broad market has been over the course of one year. Hence why, no spike in $VIX .
Dec 29, 2022 • 5 tweets • 1 min read
Majority of mainstream now catching onto the $JHEQX collar and it’s implications.
There has been this debate on Fintwit on whether it’s suboptimal to use stops.
Some question the validity of hard stops but the truth is that every good trader has a point where he will exit out of the position in order to avoid the risk of ruin.
So sure, this may not be a “hard stop trigger”.
It could be a time stop.
Ex: “This trade should have been working by now, we are three days in and I’m not seeing what I wanted to see, I’m out”.
Nov 18, 2022 • 4 tweets • 2 min read
Imo one of the most interesting things about the current Crypto debacle was how VCs, pensions, fund of funds, and HNW investors were all pretty much levered long in Crypto exposure while not even thinking about some type of hedge.
Long crypto, long projects, long yield farming, was all the same bet.
One interesting thing about the options market in ETH & BTC, was how the lowest activity was always "puts purchased" and "puts sold" was always the most active
It showed how aggressive the investor base was
Nov 13, 2022 • 4 tweets • 1 min read
Some quants give pushback on the “trading psyche” thing, but I don’t understand why. Even in automated systems there is some type of human intervention that will inevitably play a part.
It is hard to quantify exactly when a system starts underperforming it’s historical results.
You can go a really long time before you have proof that things have completely changed and the strategy is no longer good.
That opens up the question of shutting the system down or letting it run.
If a trader’s psyche isn’t in line, it can destroy this process.
I’m just curious to see what the poll results are for all the fight fans on here.
1) I think Islam’s pressure passing is too much for Charles to handle…. Lot of that open guard butterfly play usually doesn’t work against someone who is ultra tight with their pressure passing
I come from a low income housing area, so a lot of my friends and family members are still located in that community.
It is only getting harder for them to live in NY. Even with governmental support, some don’t have an extra $50 to spare on a week by week basis.
Firsthand I saw how 08 destroyed families that were already struggling…. I just can’t imagine anymore monetary constraint for the lower class right now. Whether that’s inflation continuing, or a potential recession.
Aug 10, 2022 • 4 tweets • 1 min read
I think the market is a bit overly giddy on this CPI number and it’s probably unlikely that the fed will start to ease up and take a less hawkish stance.
The increase in risk assets somewhat gives the fed the green light to be able to move more swiftly with a hawkish tone.
Inflation is one of those things that is difficult to control when it’s out the bag (Historically). I think the Fed understands this and if they have the opportunity to tame it, while not completely obliterating risk assets, it seems like a perfect scenario.
Jul 28, 2022 • 7 tweets • 2 min read
In the tail risk space you see this a LOT!
This is generally what I try to emphasize that potential clients avoid.
Avoid the funds that have ways of "shorting a concave payout, to fund a convex payout".
There is no alpha in that when done in a price insensitive manner.
So what you will see is a fund shorting a straddle and using the premium to fund way out the money puts. It sounds good until you land in the middle and lose both ways from skew not picking up.
Jul 23, 2022 • 8 tweets • 2 min read
Working with our juniors, I get to see the emotional tendencies of newer traders around strategies and their development.
It’s important to understand that where you are in the time ensemble matters a lot. U can have a great strategy and give up on it because it’s not working over a small period of time.
I’m not a fan of the strategies that you cannot explain. I understand there are some that
Jul 20, 2022 • 8 tweets • 2 min read
Junior today was inquiring about a relative value vol trade between two underlyings… I stressed the point of making sure you are tenor neutral when evaluating comparable floating strike.
Ex:
KO 1M 90%MNY trading at 23 vol
PEP 1M 90%MNY trading at 40 vol
(Cont)
As much as I hate these type of trades, if you are going to put them on, you have to make sure your dollar Vega is also neutral. If you get that wrong, the entire trade is screwed up.
I wrote a thread a while back on dollar delta and how some portfolios are viewed incorrectly.
Jul 14, 2022 • 4 tweets • 1 min read
We are looking for a new addition to the team.
Quant Researcher
Listed below are the requirements, feel free to DM me on LinkedIn or on here.
Reqs: 1) PHD or professional track record working with AI & various forms of machine learning techniques 2) Deep understanding of stochastic processes & their limitations (preferably Markov) 3) Basic understanding of mkt data (ex: Bid-ask, trade routes,regulatory designations)
Jul 9, 2022 • 9 tweets • 2 min read
I just want to say thank you to everyone that took the time to wish me a happy birthday. I’m officially an old man now.
Looking back, the only thing I can say about the last 10 years is that I’m truly grateful. Thankful to the Lord for everything that he has blessed me with.
Thankful for all of our investors that understand, believe, and trust the thesis.
Thankful for all of the partners for all the work that they put in every single day.
Thankful for my old bosses that encouraged me to set off on this journey and told me I was ready.
Jul 9, 2022 • 15 tweets • 3 min read
Recently due to the view of a “bear market” we have had inquiries from investors that would like tail risk protection.
It continues to be a niche space that not a lot of folks understand. People struggle with comprehending how to judge it & what to look for when trying to invest
It’s understandable because it’s psychologically counterintuitive to accept something that overtime should have a negative drag.
The bleed is a factor but trying to assess a tail risk fund by it’s month over month bleed isn’t a clear barometer either.
Jul 2, 2022 • 12 tweets • 3 min read
I personally believe over the last 10 years, the academic side has had a boom in trading.
All these added complexities actually take away from what the end goal is. To be honest, I don’t think I ever met a successful trader that said “the more complex the better”.
I remember during the prop days, I was actually doing well trading, first time seeing actual money. But I wanted to make more. I got so deep into trying to over optimize what I was doing. I was running all sorts of weird functionalities.
Jun 28, 2022 • 4 tweets • 2 min read
In a taxi right now, so going off of pure memory…But the interesting thing is during each of those moments EXCEPT now, vol of vol was very elevated.
Convexity can reprice very fast in certain moments so be careful thinking that “vol can’t move faster and higher with VIX at 30”
Short vol guys in a paradise with spot- vol beta reacting muted. But this notion that a vol spike can’t happen is pretty wrong.
Yes, because of the way how vol is calculated, it is harder to get that convexity with elevated vol….but markets have a weird way of trapping traders
