AMA: Volatility arbitrage PM

After a brief chat with the local Gods (Patrick and Andrew), I thought I would host an AMA for anybody interested in the life of a hedge-fund volatility trader.

Brief background:

  • Undergrad: abroad so by definition a non-name school :) probably can be described as a double major in math and CS
  • Grad School: PhD in something or other quantitative, lot's of math and lot's of coding
  • Prequel to PMery: 15 years as an exotic derivatives market-maker, departed at director-level.
  • Summary: I am not very smart, but I can lift heavy things.

I guess post your questions and I'll answer what I can.

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Comments (112)

Feb 6, 2018

Can you please explain in layman's terms what's been going on with vol products in last several days?

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Best Response
Feb 11, 2018
jec:

Can you please explain in layman's terms what's been going on with vol products in last several days?

LOL, yeah, I guess I could. I am surprised someone did not write a good article about it yet.

A whole bunch of retail investors thought that selling volatility was a great idea. After all, they make money every day, what's not to like?

Initially they were shorting VXX (which is an ETF that buys a weighted mix of 1st and 2nd VIX futures). Eventually CS came out with XIV and, a bit later, Proshares issued SVXY. Both of these are (or, in case of XIV, was) "inverse volatility ETFs". Essentially, the ETPs are replicating the opposite position of what VXX has - a weighted basket of 1st and 2nd future with average maturity of 30 days. The mechanics are such that the fund manager holds cash and shorts futures to achieve the exposure. Since we literally had zero vol last year, these things became wildly popular, with multiple yards of NAV. More importantly, the futures positions that they held constituted a meaningful portion of the total open interest.

The way rebalance process works, the fund has to sell VIX futures when VIX futures are down and buy VIX futures when VIX futures are up. I guess you can see what's wrong with that picture. On Monday, VIX futures spiked intra-day causing what can be described as "event" in these ETPs. Essentially, if the weighted average between the two futures spikes above a 100%, the fund could lose more than the cash cushion they are holding. To protect themself from such an event (especially for XIV, which has the rebalance process contractually defined), they built in a trigger allowing them to redeem the note should they intra-day NAV cross a pretty low threshold. That's what happened intraday and, since they had to cover, they drove the futures even further. That awesome spike in the front two futures at the close? That was them.

The end result - from Friday, the two funds lost well over three billion. XIV is getting delisted. A bunch of people were long these things on margin, so they owe their brokers money. In short, BOHICA.

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Feb 7, 2018

$3 billion. Someone's losing their job. Great explanation !

Feb 7, 2018

What are your thoughts on how XIV traded on Monday? Why do you think price collapsed in mostly after hours trading, and was there a narrow window to short XIV around an hour before close on Monday? If so, why didn't anyone take that short position, and if not, what was stopping them from doing so?

Feb 11, 2018
Asymmetric:

What are your thoughts on how XIV traded on Monday? Why do you think price collapsed in mostly after hours trading, and was there a narrow window to short XIV around an hour before close on Monday? If so, why didn't anyone take that short position, and if not, what was stopping them from doing so?

Borrow was impossible to find, so that's why the prices started to diverge a fair bit from the intraday NAV. Fun day, for sure, and a good one for some of us.

    • 1
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Feb 7, 2018

Thank you. I'm trying to understand how the hard to borrow concept mechanically works. I found this presentation online, but the math is a little over my head.

https://www.math.nyu.edu/faculty/avellane/Lecture1...
Any book suggestions for someone with a traditional investment banking background?

Feb 11, 2018
Asymmetric:

Thank you. I'm trying to understand how the hard to borrow concept mechanically works.

It's pretty simple. The way the market is set up, to sell the stock short, you need to first borrow it from someone.

For example, if I think IBM is overpriced and want to short it. I go to some old lady that has it in her brokerage account and borrow the stock (well, IRL i got to her broker). He lends me the stock, I pay him something for that service - now I can sell IBM in the market and deliver it to the buyer.

Now, imagine a situation where there are a lot of people that want to borrow stock and not enough lenders (or, for some reasons, it's been restricted). Well, the stock is not going to sell-off as much as it "should". That's what people call "hard to borrow" - it causes some really interesting things in the market, like short squeezes.

    • 3
Feb 7, 2018

Apologies for the continued questions, but I'd like to dig a little deeper into the rationale behind why the market is set up this way.

Why does my broker have to locate the shares before I am allowed to short? Why is it structured so that it's not like a future/forward contract on the future value of the share price?

Given how the way the structure works right now, I understand that if there is a lot more people wanting to enter the short and not enough borrow available, that might cause price to not catch up to intrinsic value (same for buys and vice versa). Can you explain a bit more about why borrow is sometimes restricted?

Thank you for the insight.

    • 1
Feb 11, 2018
Asymmetric:

Apologies for the continued questions, but I'd like to dig a little deeper into the rationale behind why the market is set up this way.

Why does my broker have to locate the shares before I am allowed to short? Why is it structured so that it's not like a future/forward contract on the future value of the share price?

Given how the way the structure works right now, I understand that if there is a lot more people wanting to enter the short and not enough borrow available, that might cause price to not catch up to intrinsic value (same for buys and vice versa). Can you explain a bit more about why borrow is sometimes restricted?

Thank you for the insight.

I have to run to my gym session but the general idea is that you don't want people to sell things they do not own. I'll write a more complete explanation later tonight.

Feb 7, 2018

Thanks dm100. Bumping for OP - I understand the risks of using margin, and the difficulty of shorting that can result when there is not enough borrow in the market. What I'm trying to figure out is why don't people just lend more shares (at presumably more attractive rates) when shares are hard to borrow?

Feb 11, 2018
Asymmetric:

Thanks dm100. Bumping for OP - I understand the risks of using margin, and the difficulty of shorting that can result when there is not enough borrow in the market. What I'm trying to figure out is why don't people just lend more shares (at presumable more attractive rates) when shares are hard to borrow?

Well, there numerous technical reasons (for example, borrow might be segmented across multiple brokers), but there is a fundamental reason for people to avoid lending shares. If I own a stock as a long-term play, why would I want to lend it to someone who's aim is to drive the price down. That's especially true for holders that have an activist-type interest.

In most cases, though, there are simply too many people looking to borrow stock vs the number of shares outstanding. You can easily have crazy borrow rates in those situations, well upwards of 100% per annum.

Feb 10, 2018

Asymmetric,

Sorry if others have already addressed this as I did not bother to traverse the rest of the thread. Anyway, shorting a stock, or a surrogate for volility such as the VIX (or inverse XIV) requires one to have a mixed-margin account (actually, you could implement the trade with a short-margin acct only, but typically if you're into shorting positions, you're also interested in going long positions as well). Hence, what I typically see are mixed-margin accounts.

Shorting a position means that you go out on the open market and borrow shares to sell short. For instance, if you think T is going to fall from $38/share to 20, you sell the shares short at $38. If/when T falls to a value that is low enough to make the move, you then buy the shares back at the lower price. The delta between what you borrowed the shares at, and where you buy them back is your profit/loss.

I had a margin account for a number of years, but found it to be too cumbersome to really make it effective for me. Plus, I got hit with a house margin call one time for nearly $20k. I made it up over time, but my foray into trading on margin was less than stellar. I made some money, but it wasn't worth the extra hassle, and getting hit with a house call or a margin call can really screw up an investment plan. Plus, fees and interest make the required ROI even higher in order to justify having the account.

Anyway, that has been my experience with margin accounts. It does give you the opportunity to borrow up to 50% of the value of your margin acct to buy more of a position than the money you have available, but if you make the wrong call, it gets ugly very quickly.

Feb 9, 2018

I don't think retail can cause moves like these. Its got to be algo driven.

Array
Feb 11, 2018
traderlife:

I don't think retail can cause moves like these. Its got to be algo driven.

What are we talking about here? Short squeezes? They are almost always driven by leveraged, non-systematic players - so by definition not algos (though algos might join the move as a momentum play) and not retail since their access to leverage is very limited.

XIV was largely held by retail but moves had nothing to do with either retail or algos. More holistic answer is that Monday was essentially a short squeeze (short VIX futures), made worse by rebalancing of the leveraged products. Retail investors were the ones left holding the bag.

Feb 9, 2018

I disagree. Simply isn't enough retail money on vix products to cause a 350 snp point crash. 4th fastest crash from highs since 1890.

The market is setting records for low and high vol the last 3 years. That is algos. This isn't a vix or snp thing. It's across markets.

Array
Feb 11, 2018
traderlife:

I disagree. Simply isn't enough retail money on vix products to cause a 350 snp point crash. 4th fastest crash from highs since 1890.

Let's see what the data says:

  • If you look at the tick data for Monday, VIX futures were leading the action (lead/lag correlation in N-second bars is a good tool for that, I did that study Monday night).
  • Between the two leveraged vol ETPs, the futures rebalance was something like 30% of the open interest.
  • Fraction of trades on TAS was unusually high on Monday, which indicates a lot of benchmarked trader participation
  • Net dealer positioning in high strike VIX puts are also short, so they had to hedge their gamma on the highs
  • VIX futures spiked as much as they would for a 15% crash (at the futures settle), while spooz only moved 4%.

The above suggest that first of all, most of the VIX trading was non-algorithmic, it was rebalancing by a bunch of risk managers (ETPs, option dealers etc). It also suggest that there definitely is an argument for the tail wagging the dog. Was there a bit of programmatic selling in S&P? Of course, people have algos that trade relative SPX/VIX movement, trade momentum, etc. However, I can't see why you would say that it was primarily driven by non-humans.

traderlife:

The market is setting records for low and high vol the last 3 years. That is algos. This isn't a vix or snp thing. It's across markets.

No opinion on that, to be honest. I have to point out, however, that
* record highs and record lows in vol over last three years is probably false, especially if long-term history is taken into account. We certainly saw higher realized vol during the financial crisis and I S&P has realized lower volatility through the years.
* statements like "Nth fastest decline" are a bit misleading for a variety of reasons. First of all, what is the exact definition? Also, liquidity and the rates of information transfer in the markets are so much higher today. To have a correct approach you should probably normalize this decline in the fraction of annual volume terms or something like that (e.g. % decline over % ADV).

PS. I am not trying to argue (as common on the internet) to prove myself right and to prove you wrong. This is an interesting question that has some bearing on many things we do in the market, so both of us should be interested in actually coming up with the most likely hypothesis.

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Feb 9, 2018

I'm more of a macro trader. Something is accelerating these moves.

The value of stocks didn't suddenly swing 12% in 3 days. The Vix doesn't jump 5 times in 3 days. The only new information the market received was inflation might be an issue. A lot of that is coming from algos that are good at lowering volatility but then flip and raise volatility.

That seems like algo trading to me. Even the rise in inflation is a sign the global economy is improving. So there are positive fundamentals to that too.

I understand market panics and margin calls, but humans don't trade like this.

Personally don't think vix alone was enough to cause this. I think it's algos that can trade faster than humans react to events. Without the algo element scaring off human traders I think the correction would have been slower and maybe ended at 2700. That would have given real money time to absorb the flows. Algos speed up the process and force leveraged money into margin calls before real money is capable of absorbing the flows.

If I had to guess snp is back above 2700 next week. 2750 feels like a fair value to me because the economy is doing well and interest rates haven't risen that much.

FWIW it also opened up a lot of relative value. If this was fundamentally driven I don't see why banks sold off. Higher rates are good for them. And a strong global economy really benefits a bank like citi. Safety stocks have actually popped some. A good relative value trade might be long banks short utilities as the margin calls dry up.

Array
Feb 11, 2018

Yes, it's obvious that we look at life from different perspectives, which makes this conversation especially interesting. My thoughts are as follows (I like the numbered format to keep shit systematic):

  1. I think initial equity selling was driven by the rates sell-off, however minor it was. The risk parity guys had to act, then insurance supply kicked in. You can think of them as "programs", I guess, because a lot of them have a pretty restrictive mandate in terms of inventory.
  2. Monday was definitely a pure technical day, small selling in spooz turned into a VIX buying festival. Did algos participate? For sure (heck, my algos did :P ).
  3. The main culprit on Monday was a multi-billion XIV/SVXY complex, IMHO, but as always, it turned into a proper shit-show. Simple calculations are as follows. A regular day beta for 1x leveraged VIX product was about 4-4.5. Since VIX was up 60% mid-day, the notional multiple is 2x the percentage change, which makes the "effective notional" for the SVXY/XIV complex alone about 3.5bn * 1.2 was responsible for about 17 bln of S&P selling. Arbs (algos?) were selling on the back of VIX futures move, VIX futures were moving more because of the selling. Rinse the shit off, repeat.
  4. These days, because of everyone executing via screens, it's hard to differentiate proper algos from humans "getting shit done", so it's hard to tell. I have a feeling that the last few days were liquidations for a few funds, judging by a few tell-tell signs. Let's see what we hear about the health of the fund community in the next few days.
  5. If you consider that last year the market was up over 20% while realizing 6% (so like 3-standard deviation event), it's totally normal for small things to spook the participants.

Who knows, obviously. Personally, I think it would be perfectly OK for the market to shake things up a little, some risk premium is healthy. I would also not be surprised if this is a sign of some underlying problem that we can't think about outright - those things are usually obvious in the hindsight.

Feb 9, 2018

I think it was systemically driven. We haven't had a 3% correction in a long time. So there may have been a lot of leveraged folks playing the market with a 3% stop out.

I agree everything is digested faster on screens. The issue is how fast things happen scares real money. So you lack the fundamental forces to balance the market while margin calls are happening. And it takes time for them to enter the market. I think algos just speed everything up.

2015 was the last time we crashed like this. The main similiarity was the fed talking about 3 rate hikes. I think this time is different with the global economy much stronger and closer to full employment. But the rate hikes fears definitely bring this out.

I do think you are seeing a lot more moves like this. And I think it's algo driven. We had the I believe third biggest rate move after the election. And that was with the wrong candidate getting elected. Something is causing vol to be really low most of the time then causing 3 day vol spikes. Seems like algos. I can't thibk of a human who would buy stocks at 2850 and 3 days later sell at 2600 unless a major event occurred.

FWIW I don't think this move indicates a major event in play. I don't see anything. Stocks are up a ton but I think they are up because things have been too cheap. The only real event that crashes stocks is a federal reserve mistake. Powell isn't as good as yellen, but his views seem similar enough to me.

Array
    • 1
Feb 11, 2018
traderlife:

I think it was systemically driven. We haven't had a 3% correction in a long time. So there may have been a lot of leveraged folks playing the market with a 3% stop out.

This certainly makes sense, and the Fed-related tantrum does "ring a bell". I just think a proper attribution is very hard. Unless, of course, you are the federal government and looking for someone to blame :)

Feb 9, 2018

I'm more of a macro trader. Something is accelerating these moves.

The value of stocks didn't suddenly swing 12% in 3 days. The Vix doesn't jump 5 times in 3 days. The only new information the market received was inflation might be an issue. A lot of that is coming from algos that are good at lowering volatility but then flip and raise volatility.

That seems like algo trading to me. Even the rise in inflation is a sign the global economy is improving. So there are positive fundamentals to that too.

I understand market panics and margin calls, but humans don't trade like this.

Personally don't think vix alone was enough to cause this. I think it's algos that can trade faster than humans react to events. Without the algo element scaring off human traders I think the correction would have been slower and maybe ended at 2700. That would have given real money time to absorb the flows. Algos speed up the process and force leveraged money into margin calls before real money is capable of absorbing the flows.

If I had to guess snp is back above 2700 next week. 2750 feels like a fair value to me because the economy is doing well and interest rates haven't risen that much.

FWIW it also opened up a lot of relative value. If this was fundamentally driven I don't see why banks sold off. Higher rates are good for them. And a strong global economy really benefits a bank like citi. Safety stocks have actually popped some. A good relative value trade might be long banks short utilities as the margin calls dry up.

Array
Feb 11, 2018

@traderlife @Mostly Random Dude Interesting discussion here, thought I would add my 2 cents.

Momentum algos can certainly cause some moves to accelerate, but the big picture here is not just people shorting the vix, there are plenty of traders and funds that have made a huge amount of money selling options on SPU's... When you're selling calls and puts at the all-time lows, and stocks melt up 8% the first month of the year, you are feeling lots of pain rolling your strikes up. At the same time, you have some huge funds with some massive short strikes on in the fixed income space, also from the all time lows in volatility. What happened next was a predictable rotation in stocks and bonds, with some huge selling interest crushing bond interest, and causing yields to surge to recent highs. When you're short gamma and moving around this much, you end up taking a lot of pain, and at a certain point, you're going to get the shoulder tap from either management, or prime brokers. This is where "humans dont trade like this" goes out the window. You have to get out, liquidity goes out the window, and the more you take off your position, the further you end up pushing it against you.

So think about a fund that is short puts on an equity index from the all time lows... a big rotation out of stocks causes a few decent sized down days in a row.. at a certain point.. you cant fight the short gamma..

Apr 27, 2018

@traderlife @Mostly Random Dude @econometricks

Ancient thread I know but I've been lurking around the forums for a bit past few days and this is an interesting one

I think you nailed it, the difference in perspective is probably from traderlife not having traded gamma before (or at least not thinking from that perspective, not really sure what you've traded before). Haven't personally encountered one of those moves before but I've heard a few stories about traders being short gamma and blowing up (cnh devaluation lol) to the point where you can't even stop loss cause there's suddenly no price on the market

When you have short vol in that large size the squeeze from gamma stop losses just throws things "out the window" as you put it. And oh you probably go out the window as well

Feb 12, 2018

i just love the tone of your reply...so very rare to see an educated person taking a calm and educational perspective to a forum post...well said sir. if i could, i'd buy you a beer.

just google it...you're welcome

Feb 12, 2018

what exactly does a volatility trader trade? just VIX futures? you probably also trade options...on what underlying? If so, Are you more often long or short options? What is your bread and butter structures that you watch and trade?...i'm assuming there are a few things that you track and trade more than other things.

its common knowledge that most options expire worthless...so i'm assuming that you are not just buying puts or calls and making directional bets on the underlying...so what is your strategy?

just google it...you're welcome

Feb 11, 2018
want2trade:

what exactly does a volatility trader trade?

Well, bond traders trade bonds, stock traders trade stocks, so it's obvious that volatility traders trade volatilities, right? :)

The way the hedge fund business works, a portfolio manager is given a mandate which specifies what to trade and the accompanying risk parameters. Mine is to trade volatility products across all assets classes. Also, the expectation is that net-net I will be mostly neutral in terms of overall exposure. A the moment, I trade equity vol (VIX futures and options, ETF options, various corporate products), bond vol (options on bond futures) and FX vol (in options on FX futures). I try not to touch stuff that's highly contextual since it's easy to get fucked (e.g. I don't trade oil futures options). I also avoid trading OTC, since it's a pain to execute and could be tricky to get unwind.

The general idea is that if you are trading volatility via options, the idea is that you buy or sell an option accompanied with a delta hedge. That gives you exposure to the "volatility" (well, it's more complex, but that's beyond the scope here). My stuff is mostly systematic, but I don't really have a strong short or long volatility lean. So, I try to more or less balance exposures in my portfolio so a day like yesterday would not hurt.

    • 2
Feb 6, 2018

Whose fucking idea was it to securitize a reverse volatility index? Like, why does that exist in the market and why would anyone, ie, Credit Suisse, want to hold hundreds of millions of dollars worth of it over the long-term? Isn't it kind of certain to fuck you over at some point?

    • 1
    • 1
Feb 11, 2018
LReed:

Whose fucking idea was it to securitize a reverse volatility index? Like, why does that exist in the market and why would anyone, ie, Credit Suisse, want to hold hundreds of millions of dollars worth of it over the long-term? Isn't it kind of certain to fuck you over at some point?

I am sure it felt like a great idea when it was pitched and it certainly made a fair bit of money of the providers. I can't recall what the management fee is (or was, in case of XIV), but it was in 10s of bps and when you have NAV in yards, its adds up.

There certainly is some risk to the ETP provider - when the retail client buys the inverse vol ETP, the provider becomes long vol. So the provider sells futures as a hedge but if the futures are up a lot, they get progressively short gamma as they near the knock-out level. Thats why these knock-out floors were built in, so they can unwind their futures positions before it takes down the house. Pretty sure Monday felts a bit scary, but in the final round, it's the retail clients that were left holding the bag, as expected (sad but that's the way of the world).

    • 3
Feb 7, 2018

This might be a stupid question but could you explain why getting short gamma is a bad thing? Is it because the losses from theta will be greater than gain from gamma so producing a net loss?

Feb 11, 2018
DeltaDecay:

This might be a stupid question but could you explain why getting short gamma is a bad thing? Is it because the losses from theta will be greater than gain from gamma so producing a net loss?

There is no such thing as a stupid question. If you are short gamma in options, you are collecting theta but get hurt in large move. In case of a hedger, besides the convexity component, what short gamma does is it forces you to buy more as the underlying asset is moving up and sell more as the underlying is moving down. You can see how that can be a problem if you have a large position.

Feb 7, 2018
Mostly Random Dude:
LReed:

Whose fucking idea was it to securitize a reverse volatility index? Like, why does that exist in the market and why would anyone, ie, Credit Suisse, want to hold hundreds of millions of dollars worth of it over the long-term? Isn't it kind of certain to fuck you over at some point?

I am sure it felt like a great idea when it was pitched and it certainly made a fair bit of money of the providers. I can't recall what the management fee is (or was, in case of XIV), but it was in 10s of bps and when you have NAV in yards, its adds up.

There certainly is some risk to the ETP provider - when the retail client buys the inverse vol ETP, the provider becomes long vol. So the provider sells futures as a hedge but if the futures are up a lot, they get progressively short gamma as they near the knock-out level. Thats why these knock-out floors were built in, so they can unwind their futures positions before it takes down the house. Pretty sure Monday felts a bit scary, but in the final round, it's the retail clients that were left holding the bag, as expected (sad but that's the way of the world).

Yeah, the moral of the story here is that there was massive wrong-way risk for the XIV investor, since it was all but certain that, when sh1t hits the fan, the issuer would be almost mechanically pushing their own product into liquidation.

    • 3
Feb 11, 2018
Martinghoul:

Yeah, the moral of the story here is that there was massive wrong-way risk for the XIV investor, since it was all but certain that, when sh1t hits the fan, the issuer would be almost mechanically pushing their own product into liquidation.

Actually, if I were to sell volatility in my PA, these ETPs are a smart way to go because of the defined loss. So there is that, right?

Feb 7, 2018

There is that, for sure... I am just suggesting that this "zero floor" doesn't come for free.

Feb 12, 2018

Because CS isn't holding the burden after everyone gets fucked?

I present to you, Tidjane Thiam: https://www.cnbc.com/2018/02/07/credit-suisse-defe...

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Feb 6, 2018
My Name is Jeff:

Because CS isn't holding the burden after everyone gets fucked?

I present to you, Tidjane Thiam: https://www.cnbc.com/2018/02/07/credit-suisse-defe...

So they essentially handed a loaded gun to investors to play Russian Roulette with and charged them some management fees in exchange for loading the ammo for them.

Feb 12, 2018

I believe that's the case.

Banks. And dumb investors who likely invested in BTC at the peak

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Feb 11, 2018
My Name is Jeff:

Because CS isn't holding the burden after everyone gets fucked?

I present to you, Tidjane Thiam: https://www.cnbc.com/2018/02/07/credit-suisse-defe...

"We are providing a service" (c) I have heard this before, I think...

If the very same investors had short put positions the outcome would have been similar. The main "service" was making the short vol trade so easy to do.

Feb 12, 2018

The way I see it, crises are formed by tempting people into trading shit they don't understand (and which the facilitator doesn't either). Crypto, MBS, portfolio insurance, short volatility ETPs, are all the same shit in different toilets.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

    • 1
Feb 11, 2018
My Name is Jeff:

The way I see it, crises are formed by tempting people into trading shit they don't understand (and which the facilitator doesn't either). Crypto, MBS, portfolio insurance, short volatility ETPs, are all the same shit in different toilets.

The culprit is almost always the access to leverage. Silly risky behavior caused crazy financial crises well before financial innovation.

Apr 27, 2018

I've read somewhere that Jane street and a few other guys (can't remember which exactly) that I'd normally think were really sharp players were some of the major buyers of this thing though (like xx%) size large, but they were mostly hedged in something else. These aren't the type of people who get suckered into selling options for easy premium. Do you have any idea what they might be doing? Doesn't seem like some sort of market making/ short term arb strategy either given the kind of sizes they were doing

Feb 11, 2018
jiggiewiggie:

I've read somewhere that Jane street and a few other guys (can't remember which exactly) that I'd normally think were really sharp players were some of the major buyers of this thing though (like xx%) size large, but they were mostly hedged in something else. These aren't the type of people who get suckered into selling options for easy premium. Do you have any idea what they might be doing? Doesn't seem like some sort of market making/ short term arb strategy either given the kind of sizes they were doing

A lot of people were running large positions in XIV and SVXY because of the discount/premium to NAV and hedging in VIX futures, from what I've heard. It must have hurt.

    • 1
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Feb 6, 2018

Thanks for doing this!

  1. You mention you have a coding background, what types of languages or software do you use? Are many of your tools proprietary to your shop?
  2. You mention a background of exotic market making, but you avoid OTC/bilateral execution. Certain shops can have an axe to grind on various names/indices, why avoid that source of liquidity? Counterparty risk not worth it?
  3. What type of exotic instruments did you trade back in the day?
  4. Do you have a standalone strategy in it's own vehicle or are you part of a multistrat for a larger fund? Do you just speculate on vol or do you have a risk overly/hedging function at your shop as well?

Lot of questions, feel free to cherry pick what you feel like responding to. Thanks for the time.

    • 1
Feb 11, 2018
StatArb:

Thanks for doing this!

  1. You mention you have a coding background, what types of languages or software do you use? Are many of your tools proprietary to your shop?
  2. You mention a background of exotic market making, but you avoid OTC/bilateral execution. Certain shops can have an axe to grind on various names/indices, why avoid that source of liquidity? Counterparty risk not worth it?
  3. What type of exotic instruments did you trade back in the day?
  4. Do you have a standalone strategy in it's own vehicle or are you part of a multistrat for a larger fund? Do you just speculate on vol or do you have a risk overly/hedging function at your shop as well?

Lot of questions, feel free to cherry pick what you feel like responding to. Thanks for the time.

Thank you for numbering the questions :)

  1. Most of my coding is in python. I used to do a lot of R, but migrated to python over the years. For stuff that's more latency-sensetive, I use C++. Truth is, I am a crappy programmer and I could improve there. Most people solve this problem by hiring someone.
  2. Ah, the layoff business. In some types of trades, being a layoff counterpart for dealers is a profitable business. In most cases, however, it's the type of stuff that I would not touch with a barge pole. For example, recently, a lot of banks were short high strike skew in VIX and were looking to lay off this risk :)
  3. You name it, I traded it. From simple DOP/UOC barrier options to knock-out forward variance swaps to multi-year variable annuity hedges. It's less fun than it sounds.
  4. I am a part of a multi-strat fund. That's all I do, mostly vol arb and dabble in stat arb, as the two kinda compliment each other. No hedging/risk mitigation, even though it seems like a few vol traders I know have this type of role and like it a lot.
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Feb 9, 2018

Why do vol arb and stat arb compliment each other?

Feb 11, 2018
LaNoob:

Why do vol arb and stat arb compliment each other?

I should have phrased it better. They do compliment each other somewhat, but it's also a blurry line between the two. Stat arb strategies improve the "quality" of delta hedging by injecting some alpha into the process. Then there is a risk offset component - many stat arb strategies tend to do better in directional volatile markets when volatility arbitrage strategies could be hurting. But also the research techniques used are similar enough that sometimes while looking for vol trades you stumble onto ideas to implement in delta one space.

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Feb 12, 2018

Rates are rising, so lets zoom in onto bond vol.

Lets say you think bond vol will increase, so you buy OTM puts on bond futures (maybe the 145 strike on ZBH8), and then go long some % delta hedge of actual bond futures to make you delta neutral. You are now long gamma, and more importantly, theta (time decay will bleed against you). How do you immunize against the theta bleed?

just google it...you're welcome

Feb 6, 2018

A 1x10 put spread

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Feb 12, 2018
Macro Arbitrage:

A 1x10 put spread

i may not be an options trader....but i know this is not helpful...

just google it...you're welcome

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Feb 6, 2018

i'm not really an options trader either... but one can't negate theta bleed in vanillas without setting offsetting positions or reaching out for exotic structures.

Feb 11, 2018
want2trade:

How do you immunize against the theta bleed?

You don't, you are hoping that you predicted volatility that you gamma gains will exceed your theta losses. To quote a swaps trader (she is a perpetual source of inappropriate quotes) I used to work with, "if you expect something from a date, you should be willing to pay for dinner". On the portfolio level, the idea is that if I buy risk premium in one form, I try to sell it in another form.

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Feb 9, 2018

Would you want to do exotics market making again?

Feb 11, 2018
LaNoob:

Would you want to do exotics market making again?

No way. The lifestyle benefits of being on the buy side are significant and the pay (while more volatile) is probably better.

Feb 9, 2018

Has the market making business changed since you were doing it?

Feb 11, 2018
LaNoob:

Has the market making business changed since you were doing it?

Business changed a bit (fewer people actually want exotics now). From the employment perspective, people are getting paid less and risk controls are tighter.

Feb 7, 2018

Could you elaborate a bit more on the areas you like to play in?

For example do you do much cross-asset stuff? (I know a guy that likes to 'borrow' FX smile in JPY 3-5 year and 'lend' that in rates smile.)

Feb 11, 2018
setarcos:

Could you elaborate a bit more on the areas you like to play in?

For example do you do much cross-asset stuff? (I know a guy that likes to 'borrow' FX smile in JPY 3-5 year and 'lend' that in rates smile.)

Equity (index, ETFs and single name) and FX are my bread and butter. Occasionally I do something in bond vol, but it's been pretty boring for a long time so I wasn't that involved lately. I have a pretty restrictive bogey in terms of risk metrics (e.g. Sharpe ratio) so that's reflected in the products I trade and the types of strategies I prefer. It's all systematic and mostly automated.

Since I restrict myself to the listed products, my maturity horizons are pretty short and I don't really do the type of stuff you describe. It's a tough business unless you're plugged into the flows and it's easy to get run over. My primary reason for staying away is that most of these trades are explicitly or implicitly short risk premium. Like the trade you describe is primarily driven by PRDC risk and can be very painful to hold when the going gets tough. It's the same reason I don't get involved in volatility layoff business.

Feb 7, 2018

Thanks for doing this.

How do you measure your total risk? VaR? Some other way?
I'm so used to just thinking of AUM and then levered AUM

Feb 11, 2018
roversam:

How do you measure your total risk? VaR? Some other way?

Management uses VaR, even though I personally think that is not the best way.

I am pretty risk-averse, especially a fair share of my compensation re-invested into the fund. Since this is a marathon, not a sprint, it's better this way. So, for my personal use, I look at a whole bunch of things - from name and geographic concentrations to a few types stress-tests and such stuff.

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Feb 8, 2018

I have been trading vol in a couple asset classes (Eq Index, Commodities, occasional bond ETF). 2017 was so easy it and I was conservative but it paid off this week I got through this VIX spike a couple percent positive even though I was short volatility (not by much and not during the worst of it). I currently work at a FI asset manager creating software for PMs but would like to spend more time trading options.

Do you think it is possible to make a living trading your own money or are the resources of large firm necessary? I don't have the typical target pedigree so I don't think any one would take me on as even an analyst.

Any other advice you think is relevant?

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Feb 11, 2018
LeadingIndicator:

Do you think it is possible to make a living trading your own money or are the resources of large firm necessary?

It's not about resources, it's about the capital. A realistic return on capital for a market-neutral strategy is 9-12%. Out of that you want to set some aside to offset inflation and an occasional bad stretch. Assuming 100k in annual spending, you need 2-3 million of capital to comfortably trade your own money for a living.

LeadingIndicator:

I don't have the typical target pedigree so I don't think any one would take me on as even an analyst.

I know a fair number of people that made it into various asset management firms without a proper pedigree. The real question is what do you bring to the table that other people do not have.

Feb 8, 2018

Thanks for doing this, I am a Interest Rate Option MM in a well known prop shop. Few questions:

  1. Can you elaborate little bit more of your strategies? Is is delta neutral (do you buy straddles or calls)? Do you trade vega or gamma? For single underlying, do you only trade variance strips or do you also trade skew, calendars, params, etc. For multiple underlyings, do you hedge/spread one product with another (e.g. long gold vol and short treasuries vol?) How long is your holding period? How systematic/quantitative is your strategy? (
    Are there any manual inputs? For example, do you ever buy vol because you think Italian Election is going to realize more than what you think without a good estimation how much it will?)

Totally fine if you are not allowed to answer those, but I am curious to see how another vol guy looks the market.

  1. Do you trade OTC or listed options?
  2. What kind of background are you guys looking if you hire an new/experienced guy?
Feb 11, 2018
QWEigniteR:

Totally fine if you are not allowed to answer those, but I am curious to see how another vol guy looks the market.

Well, I get it but no :/

QWEigniteR:

2. Do you trade OTC or listed options?

Listed products only. I also dabble in various forms of statistical arbitrage, to compliment my vol trading (they are naturally complimentary).

QWEigniteR:

3. What kind of background are you guys looking if you hire an new/experienced guy?

It's an interesting question. In order of decreasing importance - personality (which is the toughest), ability to think out of the box, IT skillset, quant skill-set, market knowledge. So it could be anyone ranging from a fresh PhD to a guy with a few years of experience. As I mentioned elsewhere, I've been having a tough time hiring people lately so for now I gave up :(

Feb 7, 2018

How about a guy with IT skills and loads of enthusiasm :p

Feb 11, 2018
DeltaDecay:

How about a guy with IT skills and loads of enthusiasm :p

When I spoke about personality, I was primarily referring to not-an-asshole aspect of it. Somehow, finance is full of smart, enthusiastic people who are bona fide assholes

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Feb 8, 2018

For someone starting out as an options market maker, what does the path look like to moving to a hedge fund? Is it possible to make a direct jump to the right type of fund?

Thanks a lot for your expertise!

Feb 11, 2018
Tryna Trade:

For someone starting out as an options market maker, what does the path look like to moving to a hedge fund? Is it possible to make a direct jump to the right type of fund?

It really depends on what you define as a market maker. Are you an electronic OMM, a SNO trader on a dealer desk, an index trader? Each one would have different "exit strategies", I'd guess.

Feb 9, 2018

Could you please explain a bit more about what each of electronic OMM, SNO trader and an index options market makers would bring to the table? Whilst I can see that obviously electronic OMM would involve programming, I dont see how the job role of each of them differs. Further, I'm not quite sure what each of them could exit to?

Also has it got tougher to exit from being a market maker due to regulations making the job different to say 10 years ago? I believe that may differ desk by desk now

Feb 8, 2018

Technically I'm an electronic OMM, but I also run liquidity taking (rather than liquidity providing) strategies.

Feb 11, 2018
Tryna Trade:

Technically I'm an electronic OMM, but I also run liquidity taking (rather than liquidity providing) strategies.

Well, give a couple years and look for the right spot. Feel free to PM me so we can discuss in detail.

Feb 9, 2018

trading vol is only fun when premiums are fat and the you can sell it all day long
usually right after a catastrophe. Buywrites are my personal favorite. Otherwise
buying vol is a sure way to the poor house 9 times out of ten. It's very difficult
to time. People that say they timed it well, just ask them how much premium
they pissed way in the years prior. Think of vol trading like trading credits you
buy credits / sell vol when markets in utter turmoil and the sell credits and do
nothing in vol as markets rally.

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Feb 9, 2018

What do you mean by trading credits?

Feb 9, 2018

Credits = corporate bonds. Fixed income. Basically, volatility is like a yield, higher vol = higher yield to a seller of vol. Similar to credits....lower bond prices = higher yields. Buy low sell high.

Feb 9, 2018

So Credit/Government bonds (and options) cant be that much fun right now with yields so low.

Feb 7, 2018

How do you structure your buywrites? At what strike and implied vol does it make sense for you in this current environment?

Feb 11, 2018
ryan81181:

trading vol is only fun when premiums are fat and the you can sell it all day long
usually right after a catastrophe. Buywrites are my personal favorite.

That's not the type of vol trading I do, my mandate is to do relative value in volatility across assets. It's a harder game but it does not lead to the "poor house" as much as outright positioning in volatility can (and eventually does, for a lot of people). I rarely take non-systematic positions (this Monday was a notable exception) and I almost always never get naked long or naked short (in risk-premium terms) unless it's a day-trade.

Feb 9, 2018

I would have thought relative value was still directional in something, so not sure how it doesnt lead to the "poor house" as much?

Feb 11, 2018
LaNoob:

I would have thought relative value was still directional in something, so not sure how it doesnt lead to the "poor house" as much?

Well, it really depends on your definition of "directional". If you are structuring your position to be neutral with respect to some factors, you are still exposed to everything else. Let's say I am short S&P volatility and long VIX volatility- if I select a ratio properly, I will be neutral to the market volatility and will only be exposed to the difference in the two volatilities (plus a plethora of idiosyncratic risks) which is what I want. The idea is to have a book of such strategies, each with some positive expectation.

Now, in general, these types of strategies do better in volatile markets because there are more dislocations and (most of the time) cost of execution relative to the absolute levels of volatility is also lower.

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Feb 7, 2018

So how does someone learn about statarb and volarb? Is it something that you only understand by gaining screen time / doing a PhD on such a topic or are there books on these too?

Also can someone invest mostly in bonds and use the interest gained to buy OTM puts and calls on a security for cheap to profit from a movement in the underlying asset in any direction? Well yes the notional amount has to be very large to generate significant amount of income from bonds to invest into buying OTM options but theoretically is that possible? Or will such a strategy just bleed too much money?

Also would love to hear your thoughts on Nicholas Nassem Taleb and his theories.

Feb 7, 2018

I'm not an options expert by any means, but you should look into put-call parity and possibly use that as a base for how to think about options.

OTM puts and calls on a security are cheap because of market expectations of future volatility of the stock; if they're cheap, it's because the market does not believe that those options are likely to be worth anything anytime soon.

If you want to profit from a move in the underlying asset in any direction by buying calls and puts, what your inherent assumption is that the market implied volatility of the asset is too low, and that realized volatility will be higher. As assumptions go, being long vol and long black swan events is not the worst thing to be; it's just that your payoffs are large but unlikely, and you'll bleed money until you reach that payoff.

That's all I think I know. I'm interested in hearing what people who do this for a living have to say.

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Feb 11, 2018
DeltaDecay:

So how does someone learn about statarb and volarb? Is it something that you only understand by gaining screen time / doing a PhD on such a topic or are there books on these too?

Most quant trading ideas are fairly simple, it's the implementation that's tricky. Best way to learn something like that is by doing it and, in big part, by "apprenticing" with the right person.

DeltaDecay:

Also would love to hear your thoughts on Nicholas Nassem Taleb and his theories.

I skipped the bonds + puts and went straight to the meat of things (cause that's what his fund was doing). Taleb is an interesting character and has certainly written some entertaining books. This said, I don't think his writing is consistent with his money making ability. Is that bad? Not really, not everyone who writes about finance has to be a good trader.

Feb 9, 2018

I'm a college senior majoring in Math and I signed an offer to work at a bank on their FX team next year (possibly options after the rotational year, possibly not options). What should I be doing over the course of the next five years if eventually I want to be a volatility PM?

Feb 11, 2018
1738Street:

What should I be doing over the course of the next five years if eventually I want to be a volatility PM?

Date a lot of women (or men, whichever is right for you), exercise, eat good food and otherwise enjoy life. Do that even if you don't want to be a volatility PM :)

On a serious note.

(a) After the initial "sponge period", you are going to be disappointed - most people on the sell-side have little clue on how to extract alpha. Also, do not mistake your flow for alpha - that happens to dealer-side traders a lot. Be very objective - e.g. if you run a prop book on the side, make sure to put trades there at realistic bids/offers.

(b) Try to gleam more about what your clients do. Record when they trade and how they quote. Try to figure out how they make their decisions, when did they take, when they passed. Go to client meeting and listen to what they ask, that might give you a clue on what they do. Try to hang out with those people socially, you'd be surprised what you can learn over a beer. Even if you learn nothing, they might want to hire you eventually :)

(c) Read research, from your field and from other fields. The more you read, the more you will be able to leverage.

(d) Try to move to the buy-side relatively early on. It's a different skillset. Your best bet at eventually becoming a good PM yourself is working for a good PM.

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Feb 9, 2018
Mostly Random Dude:

(a) After the initial "sponge period", you are going to be disappointed - most people on the sell-side have little clue on how to extract alpha. Also, do not mistake your flow for alpha - that happens to dealer-side traders a lot.

(d) Try to move to the buy-side relatively early on. It's a different skillset. Your best bet at eventually becoming a good PM yourself is working for a good PM.

As someone whos not sure what you mean by flow, Im not sure how it can be mistaken for alpha.

Is it common for people to move from the buyside to sellside?

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Feb 11, 2018
LaNoob:

As someone whos not sure what you mean by flow, Im not sure how it can be mistaken for alpha.

Imagine this. Some dude quotes markets for clients and is making money hand over fist. He will usually claim to have a deep understanding of the underlying market and value in it. In reality, he's combining some inside knowledge of what the clients are doing with the edge he takes out of execution, while his risk-taking usually has negative value. However, it's a difficult thing to admit that "it's the seat not the skill" and a lot of people delude themselves. Once such a person lands on the buy side, he's a payer of transaction costs and completely unaware of the flows. That's why the failure rate for sell side people who moved on the buy side is so high.

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Feb 13, 2018

Any tips for someone wanting to move to the buy-side early on (from a sell-side vol/macro desk)?

Feb 11, 2018
slippery:

Any tips for someone wanting to move to the buy-side early on (from a sell-side vol desk)?

That's a very broad question. It really depends on the asset class, desired type of trading, what type of buy-side etc.

Feb 13, 2018

Hmm... I'll split into 2 cases here so you can give some specific color:

  1. Junior on a sell-side rates/fx desk (maybe swaps or vanilla fx options) looking to do quant/RV macro on the buy-side.
  2. Junior on a sell-side vol desk (FX exotics) looking to do vol-arb on the buy-side (working for someone like you would be the ideal exit here).

Hope that's enough detail

Feb 11, 2018
slippery:

1. Junior on a sell-side rates/fx desk (maybe swaps or vanilla fx options) looking to do quant/RV macro on the buy-side.

@Martinghoul would be able to give you much better color on that one, I believe.

slippery:

2. Junior on a sell-side vol desk (FX exotics) looking to do vol-arb on the buy-side (working for someone like you would be the ideal exit here).

First of all, working for someone like me is NOT an ideal exit. In fact, it's a very sucky option :) However, your best bet is to try to talk to clients as much as you can to get noticed. Good people are, unsurprisingly, hard to find - if you impress someone they will give you a job.

PS. Also, see my musings above regarding learning about alpha

Feb 7, 2018

Belatedly: I don't think it's a good idea to make such a transition early. If you want to do it, I would echo what MRD said.

Feb 12, 2018

@Mostly Random Dude
@Martinghoul

for you 2 guys...i've been working on a stat arb rates strategy on my own, and i'm ready to take it to the buyside, as a PM...but i'm not currently at a large shop...no ability to talk to clients. How can i "interview" to get a seat? I could send my trade ideas to somebody who would be able to understand them (for example, a butterfly on the treasury curve...this is mostly an intraday strategy...basic jist....the yield curve gets distorted when viewed from a set of factors that i think can be arbed...happens almost every day...most times reverts with a few hours). I can't get past the gatekeepers at the pod funds like millenium...but i think if i could interview with an actual rates trading PM who could make a hiring recommendation, they would see the value of what i can do. Any ideas?

just google it...you're welcome

Feb 7, 2018

I honestly don't know how to respond to your question...

I think some sort of "networking" effort is your best bet, but I appreciate that it's tough to do it when there's not that much opportunity.

Feb 7, 2018

What books have become an essential part of your reading list? Also any book that has influenced the way you think about the markets?

Feb 11, 2018
DeltaDecay:

What books have become an essential part of your reading list? Also any book that has influenced the way you think about the markets?

I am not going to lie, I have not really read anything financial in years. Most books about finance, no matter what level, are written by people that don't really play the game themselves.

If you are just started, there are a couple books that are worth reading (besides Kama Sutra, that is). Stuff written by Euan Sinclair and Rob Carver is pretty good.

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Feb 7, 2018

Thanks for the reply. I am reading Euan Sinclar currently and will look into Rob Carver.

Feb 12, 2018

Thank you for doing this. One simple question.

For someone who wishes to end up in your position, a Volatility Arb PM, would you recommend that he gets the sell-side market making experience, say 4 years worth?

Feb 11, 2018
Nijikon:

Thank you for doing this. One simple question.

For someone who wishes to end up in your position, a Volatility Arb PM, would you recommend that he gets the sell-side market making experience, say 4 years worth?

Sell side experience is helpful, for sure. You might not learn much about alpha, but you will get some broad exposure and get to play with a product in depth.

Feb 12, 2018
Mostly Random Dude:

Sell side experience is helpful, for sure. You might not learn much about alpha, but you will get some broad exposure and get to play with a product in depth.

Sorry for sounding pedantic. Which is better:

a) 1yr Masters in Finance, 2yrs of sell-side experience

b) 3yrs of sell-side experience

I have a target school STEM degree.

Feb 11, 2018
Nijikon:

Sorry for sounding pedantic. Which is better:
a) 1yr Masters in Finance, 2yrs of sell-side experience
b) 3yrs of sell-side experience

(b). Experience > more school. The only reason to go back to school if you are already in the industry is if you need to actually learn something. In case of quant trading, you should be able to learn everything on your own.

Feb 12, 2018
Mostly Random Dude:

(b). Experience > more school. The only reason to go back to school if you are already in the industry is if you need to actually learn something. In case of quant trading, you should be able to learn everything on your own.

Thanks for the insight. I've been struggling with my decision to be back to school. It seems like whenever I am thinking of applying, I always get more responsibilities, new opportunities. One thing I may regret is not having that "Masters stamp" when sitting across investors. Then again, a "Realized Sharpe 2.0" is a more credible stamp.

I actually do spend weekends in the library working through Markov Chains and Regularization texts. I can really absorb the concepts if I do them consistently and slowly.

Feb 13, 2018

So say you go to a top options MM shop out of school, and you do well. What kinds of things would convince you to leave that position to go to a vol hedge fund? How different is the way you look at solving problems and creating trading opportunities?

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Feb 11, 2018
Reliefpitcher470:

How different is the way you look at solving problems and creating trading opportunities?

Very different. As an MM you think mainly about providing liquidity and quickly locking in positive expectation. It's a hustle, your risk limits are pretty tight and your trading horizons are pretty short. Volatility arbitrage is more about lower sharpe but higher capacity strategies. I do have some higher frequency types of things but that's an exception not a rule.

Reliefpitcher470:

So say you go to a top options MM shop out of school, and you do well. What kinds of things would convince you to leave that position to go to a vol hedge fund?

Variance is higher at a hedge fund, but expected value is also higher. If you are making 7 figures as an OMM, I would not move, however.

    • 1
Feb 14, 2018

Hi Mostly Random Dude. Thanks for doing this. I'm an analyst on a sell-side macro volatility desk. I've been curious to ask a few questions to someone such as yourself:

  • Do you think there is positive expected return from selling "volatility", or does it only appear that way because tail risk is difficult to observe? Is the answer different for short gamma, short vega, or selling vol swaps?
  • What sort of IT investment is needed to trade volatility on the buyside? Can you buy risk and other systems off the shelf or do you have to build them in house? (I realize the answer may be different for someone such as yourself who's more systematic)
  • When you were a market maker, did you trade cross-asset vols like you do know? If not, how did you develop that skill?
Feb 12, 2018
gjk:

* What sort of IT investment is needed to trade volatility on the buyside? Can you buy risk and other systems off the shelf or do you have to build them in house? (I realize the answer may be different for someone such as yourself who's more systematic)

I'm also interested in the answer to this. I can understand that the proprietary technology would come from the banks. But having worked in two sub US$1b HFs, I always thought it was more efficient to buy the IT set up from third party vendors. In both HFs, they hired an IT team to do it.

If I had to start a HF from scratch, I'll hire 1 CTO, buy the IT set up and have him manage the programs. Instead of hiring like 4 IT staff.

Feb 12, 2018

really depends on what you need/want to do. Calculating the greeks has been solved.

just google it...you're welcome

Feb 12, 2018
want2trade:

really depends on what you need/want to do. Calculating the greeks has been solved.

Definitely not FO. I was referring to IT infrastructure for BO systems and maybe even trade execution. In my previous set ups, I noticed that 3 to 4 programmers were hired for customized PnL reports, trade booking, risk monitoring.

For my strat, say mid-frequency, any asset, I would focus hiring solely on FO staff. They'll fire a buy / sell XXX at XXX signal. Anything after that would be done by third party vendors, with 1 or 2 staff managing the systems.

For sure, I'll have the C# / Python people modeling the statistical stuff.

Feb 11, 2018
gjk:

* Do you think there is positive expected return from selling "volatility", or does it only appear that way because tail risk is difficult to observe? Is the answer different for short gamma, short vega, or selling vol swaps?

I think pretty much every risk premium is structurally rich. Selling it, however, could be a career-ending trade, so it's not the smartest thing to do. To quote my old boss (RIP), selling risk premium is a bit like sleeping with strangers - feels good while you doing it, but there is a distinct chance you are going to regret it.

gjk:

* What sort of IT investment is needed to trade volatility on the buyside? Can you buy risk and other systems off the shelf or do you have to build them in house? (I realize the answer may be different for someone such as yourself who's more systematic)

I do all my calculations on an abacus, seems to be working so far. Some of the stuff I do is fairly execution-intensive, so I use an in-house system. However, there are commercial systems out there that would do it for you and plenty of HFs use them. This said, from what I've seen they are not cheap (so savings over building something in-house are marginal) and the moment you step outside of their boundaries of the system you are kinda fucked.

gjk:

* When you were a market maker, did you trade cross-asset vols like you do know? If not, how did you develop that skill?

My first two jobs were in fixed income and later I switched to equities. Also, I was running a very large hybrid exotics book at one of my jobs. So I did have a cross-asset exposure before I started.

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Feb 7, 2018
Feb 12, 2018

just google it...you're welcome

Feb 11, 2018
Feb 9, 2018
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Feb 11, 2018