>Wow, NASDAQ canceling trades. Hope you don’t get screwed timo >http://www.reuters.com/article/idUSTRE6456QB20100506 How are they going to cancel trades. Will you now have securities that you sold put back into your account? What if someone took the money out of their account today? This is ludicrous. I really hope no one gets screwed on this.
T + 3 for settlement. They have time to sort through the madness. Whether it is fair is another story.
djpetway Wrote: ------------------------------------------------------- > >Wow, NASDAQ canceling trades. Hope you don’t get > screwed timo > > >http://www.reuters.com/article/idUSTRE6456QB20100 > 506 > > How are they going to cancel trades. Will you now > have securities that you sold put back into your > account? What if someone took the money out of > their account today? > > This is ludicrous. > > I really hope no one gets screwed on this. I was trading back in December 2004 when the German 5 year bond tanked 200 ticks in 5 minutes due to a human error. The Eurex exchange cancelled every trade beyond 60 ticks. That decision though was made right away after the market was temporarily closed.
The mistaken order must have triggered an enormous number of stop-losses, which then cascaded the price down. Then high frequency trading algorithms must have detected a trend and started selling. Would value algorithms have picked up the slack? Hard to say. Possibly. A lot of value investing is done at a slower speed than the high frequency momentum algorithms. Also, many risk managers in value would probably have incorporated some checks that say, “stop and think if you have a 10 standard deviation buying event.” The interesting question is what happened to push the prices back up so quickly. Yes, someone made a mistake and wants to buy it back. So maybe it’s Citi just repositioning its position. But the increase in volatility certainly makes people reevaluate their risk. The enormous risk that a 1000 point move indicates, coming less than 2 years after a 777 point move must make people re-evaluate their risk exposures. That’s two black-swan events in 2 years. Options premiums must be up all over the place, and others will be needing to take risk off the table. The equilibrium value of the market will almost certainly be lower than where it was before because of this, although how long it will remain near that value remains to be seen. The market has been a bit frothy for the past week or two. This is likely a catalyst for people to re-evaluate. Another interesting thing to consider is how many institutions simply *need* to be invested in the market because they don’t see any other way to improve their long-term returns. CFA studies say “don’t take more risk to get more returns if you aren’t able to stomach it,” but I think the career risk is so bad for some that they are wiling to chance it. Anyway, I am still comfortable with my long TIP, Long Gold and Short S&P index. We shall see.
Question for you Bchadwick, what would make you change your bearish outlook on S&P. Jobs growth? The european situation contained? It seems that earnings were great this past quarter althought I believe the numbers are a bit fudge when we consider the interest rates and government stimulus that has taken place over the year. Also I could never be long gold, It just seems like the most philosophical trade in the world to me. What does gold actually do for someone? Although it is the oldest currency in the world, as a commodity it really has no value, in an apocalyptic scenario owning guns and ammo would seem more profitable.
I understand the concern about gold. My gold position is about loss of confidence in virtually all major fiat currencies. USD, EUR and JPY all look dismal. USD strength is a “best of the worst” issue. What’s the alternative? CND and AUD can pick up the slack, but just aren’t deep enough markets. CNY isn’t really deep or convertible, and it’s a problem that the government is authoritarian. BRL is also not large enough to replace the big three currencies. Long commodities might be useful, except commodity performance is linked to their demand, and that is linked to economic growth. Gold is historically an alternative to fiat currencies. It is linked to economic growth in that jewelry demand for gold increases in good times. But I see central banks eying their gold supplies more carefully. So I understand the Warren Buffet argument about Gold, but I see that the macro political economic environment is supportive of a directional bet in Gold. It is true that in a major crisis like Sep-Oct 2008, people might sell gold to rebalance into other things or to take profits, but I see people running to it over the medium to long term. Why short the market? I just don’t see where the long term growth is coming from. To some extent, I guess large cap companies, so the S&P 100 might benefit from global growth, but we still don’t know how much of global growth is driven by selling junk to US consumers who are no longer as able to consume. I sense that there has been price increase on relatively low volume, which means that these levels don’t generate a lot of firm convictions. We have gotten some growth out of inventory restocking and we have some from stimulus. Both of those are waning over time. Will consumers pick up the slack? It appears that the consumer has started, but where is the income for this coming from? Employment really needs to pick up and we need to see viable new industries forming in the developed world and the US. We are massively productive in the US, but what are we productive *at* exactly? For a decade, it has been getting Chinese goods into US consumer hands by lending consumers money that has been underwritten by the Chinese lending to the US government (and therefore keeping rates low). Tax increases are also looming as the Bush tax cuts expire. I think it is necessary for them to expire, but there is no doubt that this will weigh on disposable income and be a drag on markets. So where is the upward momentum coming from? I think it’s a lot of people who just feel the NEED to be in the market, and it becomes a self-fulfilling prophecy. TIPS? At some point we are likely to be fighting inflation, and so TIPS seem sensible to me. There is an embedded put option in TIPS if you own the bond, so in deflation it tends to resemble an ordinary treasury. Anyway, I know that this isn’t a 100% watertight argument, but I think it is a reasonable and defensible one. Obviously, a good macro bet always has some kind of risk control or stop loss mechanism in place.
No investment thesis is water tight unless you have inside info. I appreciate the post.
jbaldyga Wrote: ------------------------------------------------------- > numi Wrote: > -------------------------------------------------- > ----- > > Seems like a great time to be holding some VXX > and > > VXZ, esp. to hedge equity exposure. Too much > > instability in the financial sector and > > international political climate right now; > > volatility futures near 52-week low; and > personal > > thesis that markets will continue to be rocky > for > > a while at least in the short/mid-term. > Thoughts? > > > these are a slow death if you don’t time it > exactly. i know from experience, sold out of VXZ > late last year. the tracking error is huge. interesting – could you please elaborate? would appreciate your perspectives as you’ve been following these a lot longer than i have.
numi Wrote: ------------------------------------------------------- > jbaldyga Wrote: > -------------------------------------------------- > ----- > > numi Wrote: > > > -------------------------------------------------- > > > ----- > > > Seems like a great time to be holding some > VXX > > and > > > VXZ, esp. to hedge equity exposure. Too much > > > instability in the financial sector and > > > international political climate right now; > > > volatility futures near 52-week low; and > > personal > > > thesis that markets will continue to be rocky > > for > > > a while at least in the short/mid-term. > > Thoughts? > > > > > > these are a slow death if you don’t time it > > exactly. i know from experience, sold out of > VXZ > > late last year. the tracking error is huge. > > interesting – could you please elaborate? would > appreciate your perspectives as you’ve been > following these a lot longer than i have. well for a given VIX move, you tend to get only a fraction of that in return on one of these ETNs. I think it’s due to negative roll yield, but I’m not positive. Actually I think these could be useful once the fear hits (assuming it doesn’t abate quickly) for a retail investor, but I died a slow death waiting for a selloff to hit late last year and finally gave up. I’d definitely stay away from a longer term hold because of the tracking error. could still have some legs right now though. i’m a victim of the snake-bitten bias so i’ll pass.
So it sounds like options on VXX or the regular VIX is a better way to go. You’ll still face option time decay, but at least it’s a known quantity up front and you can calculate risk/return.
So it sounds like options on VXX or the regular VIX is a better way to go. You’ll still face option time decay, but at least it’s a known quantity up front and you can calculate risk/return.
I’m writing as many VIX calls as I can to suckers that don’t understand how options are priced/work in REAL markets(not in financial models)… Oh shit my order was filled…
bchadwick Wrote: ------------------------------------------------------- > So it sounds like options on VXX or the regular > VIX is a better way to go. You’ll still face > option time decay, but at least it’s a known > quantity up front and you can calculate > risk/return. a friend told me to buy SPY puts, not the same but similar exposure
I guess buying options AFTER a vix spike could slam you on the price increase from volatility. Add to this the fact that the options might already be in the money and that VIX will drop as fear passses… if you are expecting a spike, be sure you buy your options before.
timotimo Wrote: ------------------------------------------------------- > I’m writing as many VIX calls as I can to suckers > that don’t understand how options are priced/work > in REAL markets(not in financial models)… > > Oh my order was filled… Can someone smarter than me explain this? He’s writing calls, I understand, which means he’s selling them and collecting some proceeds. The people buying the calls are expecting an increase in volatility (i.e. increase in VIX, I believe). If volatility goes way up, that’s bad news, right? So is timo thinking expectations of higher volatility are overblown? And, yes, I passed all three levels of the CFA program and I should know this stuff cold, but my job is in a totally different ball of wax.
itstoohot Wrote: ------------------------------------------------------- > > a friend told me to buy SPY puts, not the same but > similar exposure VIX is directly derived from SPX option prices so he is correct in one respect (as implied volatility reflected in SPX options goes up, VIX goes up). However, simply buying SPY puts still exposes you to time decay. VIX is irrespective of time. So even though VIX may be going up due to implied volatility increases, you may still lose money on your SPY puts due to time decay. Buying longer dated options can decrease the exposure to theta but increases cost and doesn’t completely eliminate the problem. I would think creating a synthetic in VIX options (Buy call, sell put w/ same strike price) would be a good way to get direct exposure.
Well, I think he thinks that the spike is over, and therefore implied volatility will be extra high, and so the premium will be high, so it makes sense to sell to people who are scared. This does presume that they don’t have a good reason to be scared. VIX is an underlying security that behaves differently from a stock. A stock should rise over the long term as the company makes a profit. The VIX should mean revert to some stable level reflecting how scared people are and how volatile the market is over time. It may make sense to write call options for something that mean reverts, since if it is extra high, the chance is more than 50% that it will go back down to more historical levels, particularly if you think that the freaky stuff from yesterday is just a blip and not the sign of something more systemic. It is picking up nickels in front of a steamroller, though, and the guy is toast if he is assigned (assuming he hasn’t bought even higher strike calls to cover his butt).
frisian Wrote: ------------------------------------------------------- > timotimo Wrote: > -------------------------------------------------- > ----- > > I’m writing as many VIX calls as I can to > suckers > > that don’t understand how options are > priced/work > > in REAL markets(not in financial models)… > > > > Oh my order was filled… > > > Can someone smarter than me explain this? He’s > writing calls, I understand, which means he’s > selling them and collecting some proceeds. The > people buying the calls are expecting an increase > in volatility (i.e. increase in VIX, I believe). > If volatility goes way up, that’s bad news, right? > So is timo thinking expectations of higher > volatility are overblown? > > And, yes, I passed all three levels of the CFA > program and I should know this stuff cold, but my > job is in a totally different ball of wax. VIX is like a rubber band, the more you stretch in out the more force it will snap back. Moreover, the more you stretch it the more force you need to keep it stretched… And since the VIX Options like almost Options which act like sponges, they soak up information (in the case of VIX, volatility) very fast, this is strange since they are so thinly traded(for some reason people think high volume is needed for correct prices(this is true, however the VIX is based on the SPY options, which is based on the SPX index which is based on 500 stocks that need to meet volume requirements(I think)). There is great profit to be made when options are miss-priced so they rarely are(some of the most skilled math nerds are behind option trades…).
>There is > great profit to be made when options are > miss-priced There’s a difference between mis-priced (when you can leg butterflies for a credit or short vertical spreads for more than the difference between strikes for example-never really happens due to computerized arbitrageurs), and a spike in prices due to a spike in increased volatility. They are not currently mis-priced. You just believe they are rich due to your belief that there will not be follow through selling/panic that forces the vix even higher. Nothing wrong with that, and i don’t disagree, but there’s a difference between making a bet based on a point of view and exploiting a mis-pricing.
AnotherLurker Wrote: ------------------------------------------------------- > >There is > > great profit to be made when options are > > miss-priced > > There’s a difference between mis-priced (when you > can leg butterflies for a credit or short vertical > spreads for more than the difference between > strikes for example-never really happens due to > computerized arbitrageurs), and a spike in prices > due to a spike in increased volatility. They are > not currently mis-priced. You just believe they > are rich due to your belief that there will not be > follow through selling/panic that forces the vix > even higher. Nothing wrong with that, and i don’t > disagree, but there’s a difference between making > a bet based on a point of view and exploiting a > mis-pricing. There is a reason why Merton and Scholes won the prize and it was to eliminate mis-pricing. However, mis-pricing don’t exist because you can make insane profits if they did. EMH reading doesn’t apply to deep out of the money options, at least I don’t think it does( I still have trouble grasping how they can have value at all, it’s like magic). Here is where I will leave this, as I doubt most people would grasp abstract math(including myself lol). Google Derivative Pricing, for more info also while I wasted time composing this the VIX has dropped to 34.48 and the options I sold are profitable and Timotimo scores again…what is the saying about fools and markets?