It becomes apparent that the model approximation breaks down as expiration approaches towards the end of July Options today. ES futures have risen 10 handles after trading in a 16 handle ($) range overnight. The model using CBOE's chosen software says we are down $179 Million before options even open. It also shows that options won't expire for three days too. What do you want to bet it isn't even close? I suppose we will see. That is what we have been waiting for; exposing the nature of model projection inaccuracies.
In related news, there is lots of market chatter about the alleged shooting down of the passenger jet over Eastern Ukraine by Russian rebels. I suppose Russia is reporting that Ukrainians shot it down as well. The black box and the missile launcher have been reportedly taken to Moscow for
It takes over 5 minutes to settle down, but the model was only off by about $200 million bucks. Back to the drawing board for starters, but isn't that a little too convenient? I'm sure the margin call mail robots were working overtime. You can see why CBOE likes it, warts an' all. Now it's up nearly $30 million.
After 1/2 hour, natural gas grabbed over 20 million in a second. It was up 33 million. I guess others are recreating Amaranth with their
1 hour in and the natural gas grab has almost been recovered. Basically avoid those natural gas hedges as there is corruption there that they are still trying to sort out even 9 years after the fact. You could say our whole hedge strategy this month was simply counterbalancing that. Skid them, Brazilians, Chinese, with a few others, and the numbers look much better. Of course, you don't know until you hold these things open for the duration.
It's almost lunchtime in NY... no, wait it's only 11? Let's see how things are going before they let the interns loose for their 2 hour lunch...
Silver, Emerging, and Financials are down with Natural Flatulence in
Now it is lunch for the rest of us. The Red Liner in Chief is giving a toughly worded speech. They better pull out of the Ukraine or he'll.... he'll Give Another Speech!
Meanwhile in sticks and stones world, things keep rolling on square wheels. Usually by now I would have looked at rolling all this stuff to August Expiration to take advantage of higher volatility, and that is how we got all these numbers in the first place. However, if a strategy is market neutral and hedged, that would be speculative. Many hedges have fallen because of speculation by hedgers. I guess you could construe a rolling strategy to minimise roll losses as speculation. We should be able to jump on anywhere or any time. If we let these expire without a roll, we will lose a weekend of time decay for sure though. Instead we can load up with dry powder to overlap it.
OK, put August hedge starts on for S+P 1+2, Volatility 1+2, Silver, Gold Miners, as they were the best of breed and correlated well so far. Oil, UnNatural Gas, Bonds, China, Brazil, Emerging and Russia have been fired for poor performance overall, which is a pity since they are vying to be the New Superpower. Super Corruption too; they'll do just fine. Instead of speeches, their actions speak louder than words. That is a double good because I doubt that they are very articulate. It is 13:45 in Old New York, the former king of the hill:
Still piling on hedges in the Volatility 1+2, S+P 1+2. In an hour and a half it will theoretically be all cash otherwise. Great for a nice feeling, but lousy for taxes. We will get it all; invested again over the next month I imagine. It says I made 77 orders and have 77 fills so far. I just put them on at the default so we don't speculate the roll.
It cost us, but all of our trades usually start off down as it must make up the spread and/or roll cost. That's the cost of doing bidness.
And that is a wrap! Next month, a new and improved version. I'd like to say Peace, but as everyone in the hedge world knows, it means you have to maintain both sides of the trade to make it work. <3
Thursday:
Off to a positive open. In only 2 hours of wild S+P action, after a precipitous drop, I took another snapshot. It shows the predicted larger effect as options near expiration in about 28 hours:
Much has been said about Maximum Pain at option expiration, but if we are on the opposite side, will it be maximum pleasure as our Fo0lean Algebra predicts, or will they also exact pain from themselves? I guess we will have to see.
Yesterday they said we should get out of all this Financial Engineering "Stuff." I hate to break it to them, but it is YOU genius's (genii?) that dealt this mess! Have a double helping of your own "Stuff!" lulz More perplexing, I know you will all be back next month for another heapin' helpin' of your own "Hospitality!" Talk about sour grapes... and it is a long 35 day VIX cycle this time.
Financial Engineering won't cause the crisis any more than gasoline was involved in all car accidents, so it may have caused them. Really Bad Financial Engineering might have been involved too, but they don't make a distinction. It is just that they never asked me to mark the papers... until now. We gotta get rid of all this gasoline "Stuff." Fuel was involved in most train wrecks. People were too. Let's get rid o' people!
3 hours in and it is mixed on the S+P. It has been to 1981 and 1966 today so far. But I digress. Russia tried getting rid of people. Didn't work. They're gonna try again; All Abooooard! Just leave all your Stuff with Uncle Vladimir first. And after that came reports they have shot down a passenger jet in east Ukraine. But the hedge holds. 5 hours in...
Now there is another clawback happening as close approaches on our hedges with Gold Miners, Volatility 2, Nat Gas, Bonds, Russia and Small Caps giving back a large chunk. I guess it is related to Ukraine tensions, but who knows? Where we stand, the S+P has given back a week of gains, and VVIX is near 90. By usual standards, this would be a major correction, and we will have to see how the hedge holds up.
Volatility 1, Gold Miners, and Nat Gas have taken the largest hits. Volatility appears to be the hedging Achilles Heel as much of the day has been given back. S+P ranged 1982-1955.5 so 26.5 handles. That is a big range. We will be lucky to get anything out of that as there is blood on the carpet everywhere else. 17 minutes after the close and it is still settling out...
It had actually been negative, but they are still haggling it out. Maybe better (or worse) luck tomorrow. 30 million in an hour and a half doesn't seem that market neutral, but we have to hang in there. One day left, but try as they might, they aren't going to shake us. They tried to LTCM us. Fail! I see ES futures have recovered a bit. At expiration tomorrow, all expiring Greeks also go to zero or 1 depending if they are out of the money, or in. Let the chips fall where they may. All our options are Type "C," meaning cash settled. T'will be interesting. Looks like American Greed is on again... Why didn't they hedge?
<3
Wednesday:
We started with a precipitous drop on VIX SOQ day. It would have been a good time to get on board though. By lunch...
Maybe next month. Even though we did predict this on the weekend from the model forecast, maybe it is like a broken clock being correct twice a day. Hedges are not supposed to behave that wildly, but it is the uncertainty of the underlying option valuations as expiration approaches. It is also the reason they split VIX and other Option expiration dates apart.
It is also a source of market inefficiency, a constant source of income for our hedges against that. It is not like they are going to snap their fingers and cure that for now. After all, they have been advocating for more market efficiency since before the computer came on the scene.
So how's that for excitement? It doesn't get much better than this though, literally. Tomorrow, same Bat Time, same Bat Channel.
Tuesday:
Janet Yellen is giving a press conference, or should I say the Politicians are grandstanding at the FOMC. That is always good for some excitement in the otherwise pretty dull hedge world. First there was the Greenspan Put, then the Bernanke Put, and now the Yellen Put quenching the flames of Volatility. Schumer of all people shows his understanding of Economics 101 by blathering about Inflation and Full Employment. The Market nosedives. The hedgers cheer safely out of earshot in boiler rooms somewhere.
Janet mentioned Student Loan debt. Says the kids can't afford a home, and they are having trouble picking schools. Here's a hint, kids: Don't pick the ones where the teachers spend the entire time telling you it is someone else's fault to deflect the blame. The shifty weasel job market is crowded already.
Looks like the Fed chit chat has helped out by lunchtime. The VVIX is up around 81 for rolling out those July VIX contracts. There is no August though, only showing September VIX. Another all too "Convenient" bug? Janet shocked 'em saying that the Market is Overvalued. Well, duh, Ya Think? I guess the assembled Genii had to be told about the Elephant in the Phone Booth. For me the real knee slapper was that Inflation is only 1.78%. It could be since they do not account for food and fuel, both jumping more like 20% recently.
It is almost like you need a hedge fund to keep abreast of inflation. Oh well, here is the close after it has settled down...
I added another S+P 500 hedge using 2x underlying ETF's with an August expiration. There were no August VIX options to add, although there are VXQ4 futures that they are based on. Ya win some, ya lose some. Just win more! lulz
But anyways, we're just killing time until the NSA and IRS implode on each other. It's like one now has the tyrant government's former most powerful weapon blackmailed over a couple incredibly sto0pid e-mails. If we don't hear about 'em soon, that means the biggest blackmailer at NSA is in charge. They've already had Teleprompturd by the sideburns ever since he insisted on keeping his Blackberry.
Monday:
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| From http://www.amazon.ca/Getting-Job-Hedge-Funds-Inside/dp/047022648X |
Monday morning has seen an astonishing opening, but let's see what happens as we continue our LTCM trainwreck simulation, albeit with different underlying securities that simply did not exist in 1998. We are not alone; JWM tried a re-do, but finally succumbed in July 2009. Think we have Natural Gas troubles, ever hear of Amaranth? One loss can wreck your whole great record.
We have realized a weekend of Theta gains and a nearly ten point SPX climb at the open. We do not want an LTCM ending of course. Like LTCM, we do have our eggs in a lot of baskets. It's not like there is a book to follow such as , "Highly Leveraged Hedge Funds for Dummies." But several things are different now. We have better correlated pairs, more liquidity, and better efficiency of markets with widespread electronic trading and clearing. We don't have the Asian Financial crisis component, but there may be a Russian component as it looks like they also want to reinvent the square wheel. We don't want to scare you; Rather; you should be assured that we even know about all these different kinds of Hedge Fund disasters.
China, Russia, Emerging, Silver, and Financials were down, so we took advantage to rebalance them for the drift of the underlying ratio. If the pairs are balanced, a loss points to an Arbitrage opportunity as we expect the pairs to snap back to balance. We expect that such a move will revert to center eventually with a higher degree of certainty than is normal. Hey, it's better than nothing! How did it work out for you the last time you walloped the S+P 500? lulz Of course Theta keeps ticking throughout, and becomes a larger component as first VIX Expires tomorrow for July, then July Options for our securities on Friday.
By Mid Day Monday, it has recovered slightly from recoiling to $30M. Gold Miners were a large part of this from their decline and rebalance for Drift on Friday. By no means are we out of the woods yet. We are using about $2.073 B margin as opposed to $4 B of LTCM when it was clobbered. We have to rebalance because our underlying securities Ratio is not a constant as is assumed by lesser practitioners, and there is no way to really automate that in our crude model.
And now the close. Remember VIX Expiration tomorrow at the close with the SOQ Wednesday Open.There is a larger effect as we approach expiration, and from what we see so far, it has gone our way. Not every day one can get 2.267% off the stack and live to tell the tale, and as long as it is bigger than our typical downsides. Plus we had a weekend to add to it.
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