Sunday, 12 July 2009

Long Volatility theme follow-up

One cannot prove an investment idea or theme 'right'. A better way is to take an idea and try to falsify it as much as possible. The 'best' investment idea/theme then is the one that best withstands the test of falsification. Lets see how the "Long-Volatility-Around-Elections" trade played out....

Volatility exploded and how! Through the election months of April and May-2009, market participants grew increasingly nervous on the election outcome, resulting in a volatility spike.

Volatility nearly doubled in the space of around two months. Long-volatility trades (straddles/strangles) worked out beautifully. Indeed some Long Straddles/Strangles nearly trebled in two months. While it is nearly impossible to time entry and exits to perfection, this theme would have resulted in an indecent return anyway!

Another addition to my Investment History notebook!

Time to stick my neck out. Where do we go from here? I can't see any significant volatility-expansion/compression story in the horizon. Is it time to go home? Not necessarily. Trending markets offer their own set of opportunities. But I have always found it tougher to take a call on market direction than to take a call on volatility.
...While its extremely tempting to do an "I-told-you-so", I see every investment idea/theme as a hypothesis that retains its credence till a structural shift renders the hypothesis obsolete. Then its time to formulate a new hypothesis and put it to the test!

Cautionary statement: There is immense risk of capital erosion in options trading. I strongly urge readers to steer clear of speculative activity.