Even though we are hedged and balanced, today was a down day for us. July is historically the most volatile month, and this one was no exception. They say it has gone on that way for 22 years straight. It's almost like a bunch of people are on holiday or something, and their replacements have been selected purely to safeguard their job security. NGas, Oil, Gold Miners hedges led the losing way. China, Small Caps, Twenty Year Bond Hedges, and NASDAQ were off a bit. Volatility 1+2, S+P, and Silver were the big winners but not big enough. Financials and Emerging Markets were also up notably today.
The Gold Miners hedges are also getting wacky, but they have returned in the past from anomalies. The derivative portion is getting stressed as it gets further from the spot strike on each side and expiration approaches in a week. From now on it should behave like a weekly option but with more liquidity.
Now it is the weekend and I can read my favourite Romance novel, "Options, Futures, and Other Derivatives." Chapter 35, Derivative Mishaps, is where I am now... Hopefully in there... Not Here! Our natural gas hedge is but one minor one of these types of mishaps born of lousy liquidity. One of the opposing counterparties gotta pony up, and they have been taken to the limit. We got our cash already from both sides, whereby the winner will take some, but not all. Our securities are advertised to be exactly opposing to avoid an LTCM type crunch; We are waiting to see any liquidity imbalance effect. Perhaps these articles themselves are in a Metalgesselschaft crunch of forward roll costs, or defaulting clients. If caught in such a pickle, one could always defer their personal risks using options and or futures such as in a parallel market, which is what we try to do. We remember the old gentleman at the Chinese Smorg; He got one of everything!
Notice the pinstripes are vertical, not Horizontal, as many a sore loser proposes. Yeah, throw the Ref in jail, that'll help matters. Especially when he, or worse, she, gets out. ;)
<3
<3
Update Thursday, Jul 10:
What a crazy day. The S+P was in the tank down to 1952.8 to open, and we were down over $60 million waiting for options to update. We stuck to our guns though, and sold Gold Miner Hedges, big losers, and some UVXY Calls after the Volatile peak. Natural Gas wouldn't let us add anything, showing N/A on all July Options. Pity. Then the inevitable bungee snap happened with us on board... Wheeeeeeee! It shot back through zero like a homesick angel with us tagging along for the ride. I am just waiting for the close to show our booty for the day. Siver and Small Caps are down. NatGas is not trading any more I think.
Silver grew out of balance, so rebalancing is in order. The balance is -AGQ
- 1.05 * ZSL now. It is hard to tell after hours as it shows the LAST numbers, but they are adjusted a bit after hours. I used those adjusted numbers.
The Brazilian took 86 Cupcakes I baked out of 88, leaving us two. <3 
Update Wednesday:
Today is unusual in that there was a sharp opening rise, followed by a drop back to zero, then a second rise again that is selling off at 10:45 Central, 1.5 hrs into trading. Gold Miners, Volatility 1 (but not 2), Crude Oil, Nat Gas, Russia, and our S+P 500 hedge are losing. The options can't keep up as VVIX wobbles in the upper 70's. It is a hedging weakness (strength), as it presents several opportunities to sell (enter) during imbalances from option anomalies, regardless of where the market is. Patience will be the key as the wild moves can't continue for long before Brokers have all the money in commissions. We traded nothing so far as our objective is long term with minimal management.
Instead it is like watching a train wreck where the default is to keep away. But we could hop on where any of those squeaky wheels are if we have capital to put to work. This is how banks brokers do it with your cash and they live off of it. No matter what rate you are getting, they can clobber it in the long run, and cover their obligation to you with pocket change.
It closed down, giving up most of yesterday's gains. Gold Miners were hardest hit as they hit Nuggets, meaning middle east war, followed by Oil hedges. Emerging markets went back into their hole. Natural Gas was up the most for the day, with many others posting minor gains.
Overall the hedges have the effect of a short straddle, but now very wide due to time decay. Perhaps the long straddles would have won in those specific losing categories for short times today, but generally it is not volatile enough for them to work long term. Overall, it is well nigh impossible.
The different Profit and Loss numbers are from a bug in the analysis software as it does not pass the correct Greek totals for some hedges, but not all. It is also unable to get the sign of the Greek effect overall for bear and bull underlying stocks, leading to the entire graph moving with the S+P Price in the middle. We can make that mistake work for us as it obscures the truth of the matter. The Greeks establish the exaggerated convexity of the curve for one. I imagine the Government uses this software to assess Bank Risk so they are completely in the dark, they think we are sweating bullets, and that is a good thing.
Oh yes, the Brazilian left me a bill for 88 cupcakes. Turns out he has a sweet tooth. <3
Update Tuesday Close:
Another down day on the S+P to SPX 1963.76. Silver and Miners lost in the AM, so added to Gold Miners. Added a new 20 Year Bond hedge. Small Caps lost all day so rebalanced them a bit at the end. More of the same old. Too many winners to list.
The Brazilian returned the Cupcake I left him last night, which grew to 3 Cupcakes. As of this writing, two are left. I guess that's his Vig.
After the close, all the ASK prices are set high so it is tough to do an analysis, but you can use the LAST numbers instead. There are 10 days remaining until July Expiration on all these options. As predicted, the effect is exponential as Expiration approaches, where half of them expire worthless allegedly. I feel a bit guilty because I sold them; Kinda like being a Yugo dealer.
As for the other ones, they aren't doing that well either. We will have to start a promotional sales pitch, and offer free lollipops or balloons for the kiddies. Maybe stuffed toys. Believe it or not, people still line up to buy the things. I guess any Yugo is better than nothing when you have places to go and things to get done. They all want me to go broke so I don't feel THAT bad. We will have a whole new batch to sell 'em next month too. Maybe that is when I will don the barrel, or just waddle back home naked. The nosey lady next door would have a stroke, which might be another plus.
Some hedges have both sides In The Money depending on where the sweet spot was to put them on. We will see what happens, and what action if any we will have to take. Then the whole deal starts over again with a new month of fresh options. We like to keep them on a short lease to take advantage of the exponential decay before we calendar roll, diagonal, or just pay them out. If Volatility comes back with a vengeance, we may roll then to take full effect of the volatility premium too.
Update Monday Close:
There was a slight downward correction ending at 1977.65. It took back the previous wild melt ups to a normal condition, or trend line. NGas GASL 4.5 GASX lost large with the options ASK's all at $4.90 on GASL appeared like the market maker took off on vacation. The Brazilian BRZU BRZS came for his 2 million, but I raided it first, leaving him a couple bucks for a cupcake. It isn't worth the hassle with this dipping happening daily. Tried a rebalance on Crude Oil and Small Caps as they lagged.
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