Hedge fund manager, derivatives and volatility. Oathbreaker paladin and Elden Ring princess bodyguard. Anti-fascist. Personal account.
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Feb 4 • 9 tweets • 2 min read
All right people had a lot of good ideas here, but it's a diagonal put calendar, short slightly downside near term puts, long a lot more of deeper out of the money long term puts, delta neutral!
Let's walk through a bit of the logic here. This is clearly not a single vanilla option, you have multiple reversals of convexity. Notable features:
- delta rising to the upside at an increasing rate to about +4% and then at a decreasing rate above
Feb 4 • 17 tweets • 3 min read
Okay the people asked for a trade sizing discussion. I'll mostly stick to giving my perspective as an institutional derivatives manager, which is different from the thought process of an individual trader but hopefully interesting.
Our starting point is that any point in time we have several different strategies or trades active and we need to think about how to size them relative to each other and how big to size the portfolio overall.
Feb 2 • 14 tweets • 3 min read
Okay. Time to talk about the path dependence of options.
Trading volatility using options is very different than using volatility swaps and variance swaps. With the latter, you buy vol at 20, if it realizes 21 you make 1 vega (with a little convexity in the case of variance)
Options, on the other hand, have a gamma/theta profile that depends on the distance of the underlying from the strike price. As the underlying moves further away from the strike, gamma and theta fall, and you pick up some higher order risks like vanna and volga.
Feb 2 • 20 tweets • 5 min read
The people wanted to talk about risk management in derivatives, as per the poll. As the quoted tweet implies, this is a little more involved than Greeks.
The key thing about derivatives portfolios is that they are exposed to a variety of risk factors (implied volatility, realized volatility, skew, dividends, wings, etc.) and those risk exposures can be highly nonlinear. So intuition from vanilla portfolio management is not enough.
Jan 31 • 12 tweets • 3 min read
Okay the people want managing short-dated options positions. This is generally a PITA because short-dated options have a very unstable risk profile: the Greeks change as they approach expiration and become extremely sensitive to spot and vol moves.
Couple of irritating scenarios every volatility arb trader has dealt with.
1) Managing a short position coming into expiration, stock is swinging around like crazy near the strike. You have an 80 delta hedge on, then spot blasts through your strike to 20 delta, then back
Jan 30 • 11 tweets • 2 min read
Linking the correct answer here and then will try to explain a bit. This is different from the replication of var(SPX) by trading options on SPX -- because VIX options are already options related to the volatility of SPX
All right, Harvest/UBS YES! Who doesn't love an iron condors blowup?
This is a story about how supposedly safe derivatives overlays for retail and HNW equity portfolios blew up spectacularly in December 2018, causing massive investor losses, lawsuits galore and SEC actions.
Harvest Volatility Management and UBS YES ("Yield Enhancement Strategy") ran simple option overlays on client equity portfolios, in which they sold iron condors (out of the money put spreads and call spreads at the same time) to "harvest" option premium.
Jan 28 • 19 tweets • 4 min read
Okay, margin in derivatives has a strong lead so we'll go with that.
In most asset classes, you have a certain amount of cash, you use them all to buy assets, maybe you keep some cash in reserve, or maybe you borrow money from a broker to get leverage. Derivatives are different
When you do a listed derivatives trade, you need a certain amount of collateral (margin) in your brokerage account to support that trade.
When you do an OTC derivatives trade, you post a negotiated amount of initial margin to the bank you traded with.
Jan 27 • 21 tweets • 4 min read
Ok, third place in the poll was a dispersion trading explainer, and today is a perfect markets day for it.
Dispersion/correlation trading in equity volatility is trading volatility on an index against volatility on the components of that index.
In ordinary delta-1 equity, if you trade an index against the weighted average component singlenames, you have a perfectly hedged trade, by definition.
Volatility doesn't work like that. If you have a portfolio of stocks, the diversification effect dampens its volatility.
Jan 26 • 19 tweets • 4 min read
Okay. In second place, the people wanted VIX Basis. Again, don't say I didn't warn you.
The VIX basis relates to spread trades between VIX futures (and sometimes options) and SPX forward volatility. See my thread on the Parplus and Ronin Capital blowup.
A bit of background. First, VIX Index itself is a calculation for the fair strike of a 1-month variance swap on the S&P 500 (with a few peculiar conventions but let's ignore that for now).
Jan 25 • 17 tweets • 3 min read
The people want skew trades. Very well. Don't say I didn't warn you.
A skew trade is one that isolates the difference between volatility at different strikes. Often downside calls versus upside puts, but doesn't have to be (e.g. could be put ratios).
Let's take the simple example of a risk reversal (long downside put, short upside call). You might be roughly flat volatility initially. However, if the underlying price falls, you get closer to your put strike and further from your call strike, and you get long vega and gamma
Jan 23 • 12 tweets • 2 min read
Many people thinking along the right lines here.
Couple of things. First, it's quite hard to measure the "real world" distribution, so you have to be wary of things like your estimates of tail probabilities diverging from implied probabilities.
No one has any clue whether the probability of some particular variant of Armageddon is 0.01% or 0.1%, there are not enough occurrences of tail events to tell you that and anyway the world is nonstationary and changes over time.
Jan 23 • 12 tweets • 2 min read
okay! some people knew about this in the replies but many didn't.
the massively important thing here is that Buffet and team negotiated NO VARIATION MARGIN on these 10-15 year European put sales! literally unheard of and will never happen again
normally if you do some long-dated trade like this because you like the terminal payoff, it can still be very painful because the trade can move against you (like in 2008) and you have to post huge collateral against your mark to market loss
Jan 22 • 15 tweets • 3 min read
Okay. I'll take this one from the perspective of an institutional HF manager. (1/n)
First off, this advice is applicable in most cases, but there are exceptions like Rokos or ExodusPoint etc where a manager is so famous they raise billions of dollars immediately. If you are that, you don't need my advice on Twitter.
Jan 22 • 15 tweets • 4 min read
Okay, by popular demand for the ongoing series of derivatives blowups, LJM Partners, liquidated the morning after February 5, 2018 after they lost over $1 billion (> 80%) on teeny put selling.
LJM managed > $1.3 billion in mutual funds like LJM Growth & Preservation Fund. They had a strong track record selling puts, with only one down year since inception in 2006, and average returns between 9-18% depending on the aggressiveness of the vehicle.
Jan 21 • 4 tweets • 1 min read
Top equity derivatives trading strategy call this morning
- Trump headlines going to dominate price action but lack of day-1 tariffs and potential lack of universal tariffs are a stabilizing force
- Street is very long gamma and see realized vol suppression locally
- Deep tails are hard for the street to sell here, they're looking to be protected
- Market seeing an unwind of popular Trump trades: crypto, TSLA, equity shorts in tariff-sensitive markets
- Don't see Trump as the bullish factor that many others do
Jan 21 • 24 tweets • 5 min read
Covering a few more of the famous blowups from 2020 since people keep asking. (1/n) institutionalinvestor.com/article/2bsx55…
JD Capital was a victim of the short S&P 500 variance, long everything else variance trade that I wrote about the other day. They had shuttered a previous fund managing over $1 billion after a 40% loss in 2008.
After all the derivatives blowup stories, many asked about Parplus and Ronin Capital.
Ronin Capital was a proprietary trading firm on the CME. Parplus spun out of Ronin in 2017, having developed VIX basis strategies there, and Ronin's partners owned a large stake in Parplus.
Ronin provided Parplus with technological, legal, compliance, risk and human resources support, and Parplus effectively functioned as a hedge fund within Ronin.
Jan 19 • 36 tweets • 7 min read
Okay, InfinityQ. This is one of my favorites. As blatant as Allianz Structured Alpha but in the exotic derivatives space, fraudulently overvaluing its portfolios by over a billion dollars, including in retail-oriented mutual funds (where they held Level 3 exotic derivatives!)
InfinityQ was originally a trading strategy run by James Velissaris within billionaire David Bonderman's family office (founder of TPG). I don't know the backstory behind how a private equity mogul decided to start running in-house exotic derivatives trading?
Jan 19 • 33 tweets • 5 min read
Okay, we're on to cross-region variance.
If you're a derivatives portfolio manager trading OTC, your sales coverage constantly sends you volatility pair trade ideas, long one thing and short another.
For example, buy Russell variance and sell S&P 500 variance.
Reminder, variance swaps pay off proportionally to the square of realized volatility at maturity. Variance swaps are traditionally quoted in vega notional but that is converted to variance units at trade time.
Jan 18 • 27 tweets • 5 min read
Your next-highest poll vote was for the 2020 dividend futures implosion. Friday night storytime.
In the quoted thread I explained a little about what dividend swaps/futures are, but the focus of that story was about the risks of accumulating a massively outsized position in the market, not as much about the specifics of dividend risk
