Keep Calm and Sell Options
Week Ending Oct 18
It is vacation week here at Digital Gamma. So all of the hard work is on hold. Instead of getting actual, hard data in the form of the chartbook, it is just me running (writing?) off at the mouth.
Going back long years to the turn of the century, I traded stock options at the PCX. Around that time, the European banks were divesting themselves of the Barbaric Relic (that’s gold) and sent its price spiraling lower and lower. As the days turned into months of the relentless selling, one of the traders in the MSFT would repeat “Gold is the new silver.” I feel the same way when I look at ETH vol. I’m so old I can remember thinking that 55-60 vol in BTC was a reasonable buy. Now I can do that in ETH. ETH vol is the new BTC vol.
I’m not going to come out and say “sell options” because this is not trading advice and furthermore, it is not a good idea to just naively buy or sell options. That said, it is worth considering that there is a second order naive strategy which is to buy vol when it is in the lower quart-/quint-/dec- ile and sell it when it is the corresponding upper. The good news is that volatility is a mean reverting asset — but over the long run. Over the short run, option prices tend to not properly represent extremes. Or, more vernacularly, when vol is cheap: sell it. The other aspect is that the volatility surface right now is interesting and presents opportunity. For instance, term structure is fairly steep: 2 week vol is about 6 vols under 6 week vol. The idea here is to avoid a naive position that could get caught in a big move and instead construct something that both leans toward your preference (movement or not) with some positive expectation.
Because you just don’t know:
What I’m reading, watching, listening to:
This week’s Genesis Volatility Weekly. Greg gets it done earlier in the week than me so I get to cheat and read his (great) stuff. At risk of sounding like Meg Ryan in When Harry Met Sally, “yes, yes, yes!” (I’ll be honest and say idk how this rates on the NSFW scale. It is not awful and it is famous, so …)
I’ve been noodling on this for days now. Without question, I love the analogy of JP Morgan’s balance sheet as the “liver” of the financial system (collecting all of the questionable credits & problems). Honestly, it rambles a bit. I do think it is worth a bit of rumination even if all you get out of it is that the banks are a bit of a canary in the coalmine (American idiom for advance warning of bad things).
Shane Pinto. I’m a hockey fan mainly because my son played and, actually, still does. He played youth hockey with Shane a couple of years. The difference is that Shane is doing it for Ottawa at a high level rather than men’s league. As my son put it, “he gets to play on the ice with Claude Giroux and Derek Brassard. Guys we grew up watching!” I’m not in touch with Shane so this is not about my connection but I spent plenty of time around his family back in the day. We all want to hear about how good people make good in the world. This is one of those times. So if you are watching hockey and you see Shane, know that you are seeing the real thing.
Tell me (how) I’m wrong,
DISCLAIMER: Do your own research. Nothing herein is investment or trading advice. All information here is given on a best efforts basis and there is no guarantee of accuracy. Digital Gamma or the author may or may not have positions in the assets or their derivatives mentioned herein.
Thanks for reading Don't Take My Word for It (Digital Gamma Blog)! Subscribe for free to receive new posts and support my work.