Global Macro Trading Journal

"For example, during the mid-2000s, financial conditions failed to tighten even as the Federal Reserve pushed its federal funds rate target up from 1 percent to 5¼ percent. Conversely, at the height of the crisis, financial conditions tightened sharply even as the Federal Reserve aggressively pushed its federal funds rate target down toward zero. As a result, monetary policymakers need to take the evolution of financial conditions into consideration. For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation. "

https://www.newyorkfed.org/newsevents/speeches/2017/dud170626
 
Nasty bear trap BTC and ETH. These things really looked like they were done for, then it just rips $250 like it was nothing

upload_2017-6-27_20-0-8.png
 
I have been reading some academic papers for my put buying research and it confirms my backtests, OTM put buying loses money but it appears to also hurt risk adjusted returns as well. So it looks like I wont need to buy data as this seems to be consistent across the papers.

Yet I don't necessarily think this means that buying puts have negative expected value nor that they hurt risk adjusted returns. The data that is used in these backtests is way too short and the data is way too unstable to make any certain statements. The whole thing is dominated by the size and frequency of outliers so you change those and the conclusions are completely different (especially when talking about risk adjusted returns, maybe they continue to lose money but they might improve risk adjusted metrics, this could easily have been the case had the US had a bad 10-20 year strech in its stock market ). To derive conclusions about whether options are consistently overpriced or properly priced off a peaceful 30 stable US bull market is simply absurd, especially with regards to way OTM puts

In his book Spitznagel talks about how he likes put buying as a tactical tool to be used when the tobin Q is high. He even creates a backtest that uses a model to derive option returns going back a century (whether the model is right, I have no idea)

upload_2017-6-28_11-15-5.png


When the Tobin Q is high (4th quartile) he finds an edge in being long S&P and long super OTM puts (30% bellow the index). The folks at Tasty Trade (with their shitty backtests that use 2004-2016 data) would probably hate to see that chart
He finds value in using put buying as a tactical tool. This can probably be combined with other criterias like sentiment, macro picture, gut feel , etc.
And to me this is the conclusion, put buying should be used as a tactical tool not as a systematic strategy
 
So there was that discovery that 87 wasn't even that bad for put sellers

"It is somewhat surprising that period (b), which includes the October 87 crash, was not
the worst month for selling puts – in fact, it was only the forth worst after periods (a), (c),
and (e). Even though the decline in the underlying was the largest (-14%) over period (b),
puts were selling at unusually high prices at the beginning of the period (as evidenced by the
corresponding ATM volatility in Table 3). The market was very volatile and put premiums were
high because the S&P 500 had already fell substantially in the previous month. In periods (a),
(c), and (e), the returns in the underlying were less dramatic (-11%, -10%, -9%). However, they
happened after relatively calm periods, when puts were inexpensive by historical measures."

Given that 87 wasn't even that bad, the implication to me is that somewhere in the future, there will be something worse than the US has experienced so far because what happened so far, could easily have been a 'good' sample. Maybe it will be an 87 type crash but coming from a period of low IV (say a -15% crash with a starting VIX of 10 or a just a gigantic crash of -30/40% off a typical VIX of 15, say on a nuclear strike on US soil) but one thing is for sure, one day there will be a new record (in terms of losses to put sellers) and people looking at backtests will miss out on that fact. If they set risk according to those backtests, then they will be really in trouble
 
Having said all that, options is not really my speciality, I'm still forming my views on that. At this point I can see both sides of the debate. I do think writing options have its place in a portfolio, also I can see buying them making sense. At this point I would say both of them should be used tactically when conditions are right, systematically doing one or the other (as some Tasty Traders seem to do) doesn't strike me as smart
 
The most interesting options paper I read so far is this one
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1519274
http://www.fields.utoronto.ca/av/slides/08-09/finance_seminar/broadie/download.pdf

It talks about how, for instance, put options are simply levered short plays on the index, so its supposed to lose money (like any short position would) over a sample that has a positive equity premium. They do some adjustments to take into those factors into account (to control for them) by using models to predict what put returns would look like. And the results is that the historical US experience is not enough to draw any strong conclusion from

upload_2017-6-28_14-4-15.png
 
Also I did a bit of digging to find the most extreme % changes on a monthly basis for the S&P Composite (total return)

upload_2017-6-28_14-41-4.png


First thing that jumps out is that the idea that markets 'don't crash up' is debunked, a 17%, 19%, 28% or 51% monthly positive return sure looks like an upside crash to me. Second, there are a lot of instances of large monthly drops, as a matter of fact 2.5% of the sample of monthly returns are drops of -10% or more. 7.2% are of drops of -5% or more. 10% of the sample are -4.2% drops or more
 
During my research I also run into a paper by Taleb that raises an interesting point

upload_2017-6-28_17-16-14.png


upload_2017-6-28_17-15-9.png


https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075

So he says that people making markets in this stuff try to have as neutral book as possible, this suggests that they don't really know how much risk is involved so they try to be risk neutral (if there was some easy money beyond making the spread, you would think they would try to capture). I recall an interview by Sosnoff from Tasty Trade with Sheldon Natenberg where Sosnoff kept trying to get Natenberg to say that its ok to be directional yet Sheldon would not budge, he wanted to be neutral and 'if we had a big directional exposure in our firm, that means someone made a mistake'. So this is all interesting information that needs to be taken into account
 
You must log in or register to reply here.
Back
Top