Harel Jacobson Profile picture
Quant PM. Global Volatility Trading. Python addict. Bloomberg Junkie. Amateur Boxer and boxing coach (RSB cert.) !No investment advice! Don't try this at home
CRE Profile picture Emil Cramer Profile picture Jay Profile picture Matt Connorton Profile picture 4 added to My Authors
4 May
Risk today feels bit on the soft side, and while I have literally no clue whatsoever whether this is going to develop into a sell-off today or not there are few things that worth keeping an eye on:

1. USDJPY vol has been outperforming implieds for about a week now...
when you see this kind of dynamic it's definitely a good sign for risk. wider trading range of USDJPY = more volatile USD/ TYs

2. SGD realized x2 move compared its 1m vol. We are talking about a currency that almost never moves

3. very weak HY currencies (EM, commodity G10)
4. FX vols coming of a somewhat low base, which means that gamma is cheap to own (short gamma more painful, less buffers)

5. Inflation expectations creeping higher w/ commodities but treasury yields are somewhat low
Read 4 tweets
10 Apr
While most of the people on my twitter feed are all about the next 5-10pts in ES and vanna/charm/gamma squeeze (or anything else which is the flavor of the month), very few look at a pretty big thing that can (and should) be alarming - China shadow banking
This "little" problem is something that unlike other crises, is an ongoing bubble-like train wrack that the CCP has to carefully deflate, so every few months they deleverage a bit more.

In 2015 they had to deleverage their stock market after a boom of margin retail accounts
that sent their stocks to the moon (think today's US market on steroids). After that they had to devalue their currency, which global markets really didn't like.

After that they kept on letting thousands of companies to under in a controlled way, and occasionally drained
Read 6 tweets
8 Apr
One of the biggest misconception in boxing is that the southpaw stance indicates left-hand domination (@Ksidiii should know a thing or two about that...)

Ex-soviet union coaches (Cubans are actually known for the overwhelming portion of southpaw fighters) teach from young age
boxers to fight in a southpaw stance, and I can assure you that most of them are right-hand dominant.

So you are probably asking how this is all has to do with trading, right?

Very much like in boxing, experimenting different strategies/models/market helps you develop arsenal
of tools that can become handy under different market regimes...

I'm an orthodox fighter, so my default stance a leading left hand, but I do train at least twice/week in a southpaw stance to be able working both stances. This helps me become more versatile as a fighter
Read 11 tweets
27 Mar
If you run a portfolio (no matter what you trade) the most important question you need to ask yourself is "in what situation this portfolio blows up?)

I recently took some time off the market, and besides doing a lot of housework and renovation I ran complete scenario analysis,
backtest, and stress test to my portfolio.

We tend to think that we know our strategies in-and-out and we know that in scenario X the performance will be x1 and in scenario Y the performance will be y1, but we tend to neglect the crucial part of cross effect
of the individual strategies on our entire portfolio:
1. Are there correlated strategies (either positively or negatively) ?
2. How are the greeks on the portfolio level move with respect to spot/vol? are we happy with our gamma/vega at X% move? should we mitigate some of that?
Read 7 tweets
22 Mar
Let's talk FX funding..

Today's move in $TRY is a great opportunity to talk about a rather niche segment of FX trading which is the funding cost..

Generally speaking, when we trade any FX spot (buy CCYx/ sell CCYz) the trade settles in T+2 days (except TRY and CAD who are T+1)
So if we want to keep the trade alive we need to roll the trade forward. When we roll the trade we basically borrow in CCYz and lend in CCYx. If we borrow at a lower rate and lend in a higher rate we will earn the carry (and vice versa...)
In EM, in addition to the rate differential between the key rates the market prices in additional basis in most currencies to reflect the funding risk premium of these market.

Low risk EM (CZK, ILS, PLN, CNH) will price a moderate, while premium, while market like ZAR , TRY
Read 7 tweets
15 Mar

Let's talk Realized Vol...

If there is one single most important number that we, as volatility traders, look at, it's realized vol.

The problem with realized vol is that it's one of the most biased estimators... Give two traders identical time-series and get 4 RVs

The reason this estimator is so biased is because it's highly sensitive to both sampling frequency and size (window).

Also, we can get very different result if we sample based on close-close or OHLC (open-high-low-close).


So why do we use such a biased estimator, as it tends to over/underestimate the "true" realized volatility in most cases?

Over the years I came to a realization that although possible to come up with an unbiased realized variance estimator

Read 7 tweets
25 Feb

A shift in volatility/correlation regime has been boiling beneath the surface over the last few weeks, and while many are solely focused on one market segment, my mandate of cross-asset volatility comes in handy watching this situation unfolds

Let's start by stating the obvious - the narrative right now is driven by the steepening of the yield curve (led by the selloff in long-end bonds). I will not make any argument whether this is justified or not, as I'm a very bad macro trader, but this steepening governs

the market dynamic for two reasons: 1. it correlates to forward inflation expectations (some reflexive dynamic is definitely going on there), 2. it accelerates the rotation trade in equities (and overweight growth stocks).
Read 8 tweets
19 Feb
Gamma-Theta-Vol triangle

The entire concept of volatility trading can be simplified into a triangular relationship between Vol-Gamma-Theta.

Although it might seems oversimplifying a rather complex dynamic of option trading, your realized pnl will be determined by that triangle
Let's understand how this three-way relation affects your option trading pnl...

We know that volatility determines the cost of the option, so to have a profitable option strategy we first need to be on the right side of the trade (buying cheap vol, and selling rich vol), but
once we traded the option we enter the gamma-theta phase of running the day-to-day risk of our strategy...

Our premiums (paid or received) are given at inception, and we can think of the option premium as a series of T interval straddle breakeven, so to be profitable we need
Read 8 tweets
15 Feb
What drives the $EUR?
cc @o_wutang

FX risk-on/risk-off drivers might be misleading when it comes to $EUR. While long-lasting correlations (such as the JPY,CHF/risk-off) might play role in FX drivers, the EUR correlation is probably the biggest misconception
practitioners have. imo EUR drivers are more funding related than risk-on/risk-off (if anything it's negatively correlated to equities, or positively correlated to vstoxx/vix movements).

The root of this misconception lies in the fact that traders/investors have a long
memory, and remember how EUR behaved after the GFC and through the sovereign credit crisis.

Since then, both the ECB and the European Council have done a lot to safeguard the EU (or at least kicking the can down the road), so the EUR became less risky currency
Read 5 tweets
13 Feb
Crash Course in Risk Management

My affair with quant finance began back in 2007. Back then I was a BA student who just started his first steps in the derivatives market. Needless to say that I was about to witness a defining moment in financial markets, as the GFC was just
around the corner. In 2008 I was already in my transition from the pricing side to the trading side. Although I always thought I will end up being a risk manager, my career was stirred toward trading.

I started trading (not officially though) two weeks before Lehman went
under. That period was crazy, but not because of market volatility, but because we were witnessing something that was unthinkable - banks that are unwilling to trade with each other (and betting on their peers to go under).

To understand financial markets we need to look beyond
Read 5 tweets
6 Feb

Trading lessons from the boxing gym

Anyone who has been following me for a while knows my two greatest passions are quant trading and boxing, and I often find both to have great similarities....

Over the years I've learned a lot of priceless trading lessons in the gym

and one of the most important lessons I've learned is "box your style"

When I started boxing I had a heavyweight coach. This guy was a true champion, gifted boxer, who went toe-to-toe with the bests of the best. The only problem was that I'm a lightweight boxer (135lb)
As long as I was learning the fundamentals I had not problems. Had solid foundations (punches, footwork, head movement) so I thought that I will kill it in sparring. That was when I found out my biggest flaw - my boxing style

Because my coach was a big guy his style was
Read 9 tweets
2 Feb
Basis Risk explained

Practitioners usually look at risk factors of a single underlying/portfolio (volatility, trend, VaR, etc...), but more often than not our bigger risk is a risk that we tend to overlook "Basis Risk".

In short - Basis Risk is a risk of imperfect hedge

If that sounds all to vague, let's look at a simple example : our portfolio holds short VIX-Feb and long VIX-Mar. Obviously if the SPX sells off they will both react to the move in spot VIX (as a byproduct of the spot-vol correlation), but each will react with different magnitude
The difference in the two futures' reaction function is the driver of the basis risk. even if we hold net zero position, our P&L will be affected by the dynamic of the spread between the two, hence, the position is imperfectly hedged.
Read 11 tweets
29 Jan
I said it once and I will say it again (and again...) FX options dealers tend to be lazy pricing implied correlations.... either they don't care too much (because they sit on flow) or they don't calibrate their models too often....

#NOKSEK implied 1-month trades in the mid 7s
While it realizes significantly higher. Why? because the NOK-SEK correlation is priced at 0.8. When something is priced at such a high correlation you never going to bet correlation is going to go to 1, but deteriorate
Even without sophisticated model one can see that this price action worth more than 7.5vol Image
Read 6 tweets
28 Jan
Many people claim that it's not ok that retail brokerage firms restricting trading of extremely high volatility stock, but the way I see it (and probably unpopular opinion) it shows that these firms are running a sound risk management

Anyone who traded FX when the SNB removed
the EURCHF floor can tell you what it's like when the market gaps 40% in a second. Back then FX retail brokers went bust (and FXCM actually needed a bailout to avoid insolvency).

The reason these brokers went under was that they covered the clients positions (like any good
broker should do), and when their clients hit margin calls after buying EURCHF (thinking that the SNB got their back), the account were empty, and their positions were stopped after (at least) 10% gap... .

Obviously VaR and risk scenarios didn't really capture that extreme
Read 5 tweets
28 Jan
If you are an enthusiastic @RobinhoodApp trader who is pissed that no one lets you trade options on penny stocks here is my suggestion:

1. gather a group of traders who made a killing pumping YOLO options.

2. create a pool (preferably with +$50mm AUM)
3. hire fresh-from-collage guy to keep track of your trades and make sure you get good prices/execution

4. find a prime broker that can clear listed and OTC derivatives
5. get DN (designation notice) with powerhouse dealers to trade OTC derivatives.

6. Look for niche markets (there are plenty of them outside the US equity market, FX and Rates are great for that...)

7. Start pumping your positions via options (hey, you can now even do exotics)
Read 4 tweets
27 Jan
My take on YOLO short squeeze and volatility..

I guess much has been said/written/memed about the most recent r/WSB YOLO short squeeze, and tbh have nothing really smart to add... but i'm puzzled by the pro-investment community reaction to this (namely HFs, bank sales desks
and prop traders)...

While squeezing traders position has long been a guilty pleasure of the Hedge Fund community (and few aggressive banks, with questionable motives to skew prices), everybody seem to be shocked that retail traders do that, and running a decent risk management

My best recollection of a brutal position squeeze was the $12bn JPM lost on CDX spread (aka, the London Whale)


Back in these days the entire market knew that JP's trader was, in fact, the entire position in the illiquid index (off-the-run)
Read 9 tweets
20 Jan
Liquidity, Volatility and Information Asymmetry

We tend to take many things in trading for granted, and I think that liquidity and price discovery are two things that we rarely think about, but let's imagine for a second, that we trade E-minis but we can't see realtime price
and when we call our broker, she quotes us 1% bid-ask spread...
obviously we will not be able to trade like that and make money...

This is why price discovery is crucial for practitioners (no matter whether they are large hedge funds or retail investors)...
Luckily in normal market conditions we are awash with liquidity. most liquid assets are trading at the minimum bid-ask spread, but as we all know, there are no free lunches in financial market... so you probably ask where can be the downside for the deep liquidity that we get
Read 14 tweets
13 Jan
Let's talk FX correlation...

While FX correlation pricing and trading is probably a topic for a longer post (probably somewhere down the road will do a write-up...), I think grasping the basics of fx correlation is crucial in in understanding the dynamic and effect on fx vol
so let's dive in...

the fx vol business is structured in a way that each desk on the fx vol side in in charge on a "bloc", so you have EUR,JPY,GBP, and commonwealth (AUD,NZD,CAD) blocs. Each desk is in charge of making price and running the risk of the currencies that fall under
that bloc. so far it all makes sense, right? but in FX almost any trade outside of the liquid pairs (mosly USDxxx and intra-bloc pairs, like EURGBP,AUDNZD,etc...) are essentially correlation trades, as the dealer in most cases need to synthesize the risk (vega/gamma risk) using
Read 8 tweets
12 Jan
Back-end rates vols finally start to show some signs of life....

After a very long period of flat term-structure/flat skew rates vols finally start to show some risk priced into the next few months, with steepening (as much as one can call a 0.2vol spread a steepness...)
and further steepness of the put skew (compared to pre-GA runoff)...
Given the the rates narrative has changed significantly over the last few sessions, we could see some fast-money accounts trying to chase the TY lower (either via options or via hard delta)

I like playing the put skew via spreads, as I don't see a case for an acceleration
Read 5 tweets
9 Jan
So it's the weekend and seems like the perfect time to touch on one of the most deliberated and discussed subject in option trading - the weekend effect

Any option trader knows that the weekend has some kind of strange effect on implied volatility and there is not one truth
when it comes to how we should treat the weekend in vol pricing... this is mainly b/c of the fact that option pricing uses actual days (i.e., 365.25 if we want to accurate), while in fact there are roughly 250 trading days/year (ex. weekends and holidays)
this mismatch between act days/trading days creates two effects :
1. it requires us to discount non-trading days when pricing volatility ,
2. it creates a discontinuity in price dynamic, which we should account for (weekend gap on Monday)
Read 12 tweets
7 Jan
If you want to know how FX is being driven by the move in long dated rates, you just need to look at the substantial repricing of the back end of the entire FX market (mainly EM, and few DM to some extent).

In the "post-corona" long dated rates have been sold across the world
to an historically low levels, as everybody and their mother was piling on to long duration. But.... when everybody piling to a carry trade, it almost always end in a squeeze...

And so we got a nice squeeze in EM 5y5y fwd rates , which seems to be weighting on EMFX today Image
in G10 we also see a move in the back end of the curve, but to a lesser extent... one thing I do look at is the AUD,NZD 5y5y (they High-yielders of G10), which have been moving higher since basing around mid-oct Image
Read 5 tweets