volatility

Posted on Oct 28, 2020 by Robot James
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You've probably noticed that there's a US election on the horizon. This is an event of known uncertainty: a "known unknown" in the now immortal language of Donald Rumsfeld. In trading, we sometimes observe marginal pricing inefficiencies around these "known unknowns". For example, ahead of  stock earnings announcements or significant economic or policy announcements, we tend to find: more significant trend effects (auto-correlations in asset returns) enhanced risk premia (the returns to holding risk positions tend to be higher, on average, perhaps as a premium for taking extra risk) implied volatility tends to become expensive (post hoc vs subsequent realized volatility.) What does this mean for stocks ahead of the coming US Election? In our new Robot Wealth Research Lab - one of our members, Ben, has analyzed stock index return patterns ahead of an election. With the limited data available, he finds evidence of significant excess returns to holding the SPX index for the 5 days before the US Election Day. These excess returns tend to reverse in the 10 days following the election day. Using: US election dates scraped...

Posted on Sep 16, 2020 by Robot James
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This is a review of Positional Option Trading by Euan Sinclair.  Trading books set a low bar for the reviewer. 99% are full of facile feel-good advice (don't fight the trend, always use a protective stop). The 1% that are useful tend to either be dry technical treatments (quants who don't trade), or sporadically helpful insights from traders who make money but don't know why (traders who don't quant.) This book is a practical book by an experienced trader who writes clearly about what works, and why it works. The first edition of Euan Sinclair's Volatility Trading was a revelation for me as a trader. It's a book written for the professional options trader. I was spreading futures when I read it and had barely traded an option contract. But it was an absolute revelation to me. Why? Because it did something much more valuable than teach me about volatility: it taught me how to think about trading. Euan's trading process and mental model of the market comes through strongly in this book. Reading this book will change the way...

Posted on Apr 30, 2020 by Robot James
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In the eye of the recent storm, with VIX up over 50, many traders were looking to "short the VIX" using products like TVIX. “Surely it's going to coming back down?” Well yeah, it will, eventually, but that doesn't mean that you can profitably short VIX products. First, some basics… What is VIX? VIX is a benchmark index for SPX volatility. It shows the SPX options market's expected value of volatility over the next 30 days. You can think of it as “What does the SPX options market think SPX volatility will be over the next 30 days?” Technically it is calculated based on the 30-day variance swap and then converted to a volatility calculation. So the VIX index is just a mathematical calculation… you can't trade it. So what can you trade? VX Futures The CBOE lists VX futures which settle to the cash value of the VIX index at their expiration date. For example, the 20 May VX contract settles to the value of the VIX index on 20 May. (Give or take… there are a few technicalities...