Lets talk variance

[.sigma]

There are two primary reasons to look at variance. First is to understand the flows that variance swaps create. Second is to trade related products.

Holy shxt, I just realized you are the infamous @sle

Glad you are still here dropping gems into perpetuity, not going to lie, I've studied your posts many many times and still do on a daily basis. Thanks for all the knowledge man.

 

[.sigma]

Now i'm motivated to get a discussion cooking.

Knowledge is power and I firmly believe understanding variance-swaps, vol swaps, gamma swaps etc will help the retail trader grasp what in the heck optionality is a bit better then not diving into it.

"The correct measure of deviation is variance. Volatility should be considered a derivative of variance."

I read a post where someone said if you want to bet on the direction of an underlying, a variance swap is the worst product to use. sle responded saying the opposite, that var-swaps
are great at profiting directionally, and some of the biggest traders made fortunes doing just that.

So var-swaps allow one to speculate on the magnitude of movement direct exposure.

Its interesting to note how different instruments offer different degrees of freedom vol.

@sle has liquidity for these products increased over the last few years? I'm assuming yes
as money flow is at such a high velocity. I'm pretty sure one day var-swaps wont be OTC,
and us retailers will be able to use them, also exotic options.

profitAtMaturity = varianceNotional x (realixedVolatlity2 - strikeVolatility2)

Profit is determined by the difference between the square of realized vol and the square of implied vol.

 

[Same Lazy Element]

Holy shxt, I just realized you are the infamous @sle

Infamous?

Definition of infamous
1: having a reputation of the worst kind : notoriously evil

Sounds just like me. But you're welcome.

I am heading to bed and will write something comprehensive tomorrow (no promises, sadly). The general idea is that if you can't trade variance swaps, understanding what variance players are doing will help you with a few things:
(a) what delta hedging flows will be due to large positions in variance swaps
(b) who and how will blow up when var swap positions go sour
(c) how variance swap positions/flows filter into exchange-traded products such as SPX options and VIX futures

 

[.sigma]

@Same Lazy Element dude of course you're infamous lol

Anyone who is an avid ET lurker of the back-blocks looks forward to each post by @sle

 

[.sigma]

Infamous?

Sounds just like me. But you're welcome.

I am heading to bed and will write something comprehensive tomorrow (no promises, sadly). The general idea is that if you can't trade variance swaps, understanding what variance players are doing will help you with a few things:
(a) what delta hedging flows will be due to large positions in variance swaps
(b) who and how will blow up when var swap positions go sour
(c) how variance swap positions/flows filter into exchange-traded products such as SPX options and VIX futures

Won't var-swaps also help the retailer understand the concept of volatility much clearer? I feel like knowing this knowledge could really help us out.

 

[ironchef]

I agree with your point on the markets overall non-movement. And that's interesting about the incoming pulse, this power arrives from some source and I believe its more than one. The key is to spot it before hindsight bias creeps up on you.

Unless we have insider information, few retails are capable of spotting change before it happens, perhaps best strategy is after the pulse, study its behavior, how it decays, the frequencies and trade it, be it price, vol or variance. I probably shouldn't open my mouth and make a fool of myself here.

 

[.sigma]

Unless we have insider information, few retails are capable of spotting change before it happens, perhaps best strategy is after the pulse, study its behavior, how it decays, the frequencies and trade it, be it price, vol or variance. I probably shouldn't open my mouth and make a fool of myself here.

I disagree on the insider info..

Insider's show their hand by large order flow, its up to you and the tools/metrics you use to spot it IF that even pertains to your strategy, for me it doesn't.

I like your point about the after-pulse. That might be more fascinating and tradeable than the huge move.

Observing the simple phenomenon of earnings releases.
Either spot magnifies or doesn't, and theres ways to gauge
and position yourself strategically by looking at past data.

I suggest reading @TheBigShort earnings journals, as he has
a very unique and quantitative approach and it constantly
refining his weaponry.

Lets say spot is magnified, and price gaps down -17% on earnings
for $XYZ, observings many instances, I'll notice a few ways price
will react AFTER this huge move which I call the selling climax.
The climax is usually followed by more selling pressure, which then
"exhausts" itself, and a final low is completed.

Now if we are picking bottoms here, I use a few indicators and data
to see where I believe the bottom will be. Usually this exhaustive selling
will stop abruptly at a major support/buying/voluminous price area.
Price changes hands, and demand controls direction now. And price spikes up
and will most likely fill the huge climax magnitude range, and fill the gap.

I've seen this so many times and have been trading this set up for awhile.
Its extremely hard, and no I am not picking exact bottoms because its
not only difficult, I don't need too. I use vol metrics and volume by price
to gauge where order flow is seeking current value.

But this thread it about variance.

Selling climax's are a form of variance right? Since vol and var are brothers of the same mother.

 

[tommcginnis]

Since vol and var are brothers of the same mother.

Technically, volatility is more like an asexual/incestuous offspring of various variances itself.





Sorry. Had to. An acknowledgement of those ETers whose family tree is more like a telephone pole.

 

[.sigma]

Technically, volatility is more like an asexual/incestuous offspring of various variances itself.





Sorry. Had to. An acknowledgement of those ETers whose family tree is more like a telephone pole.

Actually, isn't variance the source itself? Vol is a derivative of variance, thus variance is the mother? lol

 

[ironchef]

I suggest reading @TheBigShort earnings journals, as he has
a very unique and quantitative approach and it constantly
refining his weaponry.

I did. But most of the time I couldn't understand the logics or the calculations.