couple thoughts for all the friends of Karen in this thread
-- it's hard to dispute that there is positive expectation in selling risk premium and the more assymetric the p&l profile, the bigger the premium. If you have the ability to stomach the assymmetric return, you have an advantage and can be a liquidity provider to the instutitional players that are forced to keep an eye on their return metrics (e.g. a down 5% week would not bother a retail investor, but it could get an institutional PM fired).
-- keep your eye on the two "L". Most risk premium sellers (in any form, S&P options, CDS, OTR spreads) lose money not because they are wrong, but because they get greedy and either sell too much (Leverage) or sell it too cheap (Level). If you can work out the limits and general risk management approach to handle the leverage and can figure out how to price the risk, you can control the two "L"s.
-- Divesification is your friend. You are always better off underwriting idiosyncratic instead of the systematic risk, but you need to understand why this lunch, while not free, looks cheap. You can hedge the book by buying vix options or spx options or some sort of etf options. Modelling gets more complex but the results are nicer.
-- In an ideal world, you could do what I do, find very rich risk premiums and hedge them with cheaper risk premiums. I have probably done better for my employers then Karen did for her investors, making money even in the hard years. It's a lot of work, though.
-- it's hard to dispute that there is positive expectation in selling risk premium and the more assymetric the p&l profile, the bigger the premium. If you have the ability to stomach the assymmetric return, you have an advantage and can be a liquidity provider to the instutitional players that are forced to keep an eye on their return metrics (e.g. a down 5% week would not bother a retail investor, but it could get an institutional PM fired).
-- keep your eye on the two "L". Most risk premium sellers (in any form, S&P options, CDS, OTR spreads) lose money not because they are wrong, but because they get greedy and either sell too much (Leverage) or sell it too cheap (Level). If you can work out the limits and general risk management approach to handle the leverage and can figure out how to price the risk, you can control the two "L"s.
-- Divesification is your friend. You are always better off underwriting idiosyncratic instead of the systematic risk, but you need to understand why this lunch, while not free, looks cheap. You can hedge the book by buying vix options or spx options or some sort of etf options. Modelling gets more complex but the results are nicer.
-- In an ideal world, you could do what I do, find very rich risk premiums and hedge them with cheaper risk premiums. I have probably done better for my employers then Karen did for her investors, making money even in the hard years. It's a lot of work, though.
