Skip to main content

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.

Comments

Popular posts from this blog

'CORN'y Connection

A common theme in investing is that, in the long-term, asset prices adhere to fundamentals. The road to adherence is often an irregular one, prices overshoot and undershoot along the way...but ultimately, they behave like obedient children. Sometimes though, the relationships between asset prices are hidden from the eye. Peer through the layers and one might just be able to come up with a relationship that could form the basis of a trading strategy. 'Corn'y Connection , is one such linkage... The Craze for Maize Lot of factors have driven corn (maize) prices of late. The rush of demand for et hanol has ensured that corn finally got its due. Apart from the fundamental factors of demand and supply, speculative demand for the commodity has served to increase the volatility in corn prices. Not surprisingly, corn prices have surged quite a bit (refer adjoining figure) . Along with the rise in corn prices, the 200-day historic volatility has increased significantly. Cor...

One Small Voice

Continuing in the spirit of Haphazard Linkages, I look at the consequences that a false sense of ‘progress’ has on an economy. Things may look ‘good’, but is it a true and justified reflection of the resources at a country’s disposal? Can things be made better? An economist aims for efficiency. A state where one individual cannot be made better off, without making another worse off in some way. On the 60 th anniversary of India ’s independence, patriotism and a sense of well-being abounds everywhere. People are mostly unanimous in their verdict that India had arrived and bask in glory…The Times of India headline, “60 and getting Sexier” couldn’t have captured it better. Every news channel and celebrity waxed eloquent about how much progress India had made during this time. Waxed eloquent about India ’s stupendous GDP growth…about India Shining. Did this appraisal reflect reality? Or was it just another day where patriotism oozed out of wherever anybody cared to look?...

A Scary Scry?

I feel much like the protagonist in Microsoft's Age of Empir es game; at the beginning the only rays of light shine on me and my target at the other corner of the map. I need to get to the target but there's a problem. Everything is dark out there. I don't know the way. The darkness camouflages danger but also opportunities. I don't lose if I don't move, but I don't win either. As I start moving around feeling my way, the blanket of darkness lifts gradually, revealing reality. Sometimes I hit a dead end, forced to backtrack and em bark on a new path, but at other times I get lucky and hit jackpot soon. There is a huge premium attached to action and adaptability to a dynamically evolving environment. Investing is similar in many respects. The ghost of unc ertainty lurks in the darkness at every turn in Investorville. But decisions have to be made. Often based on an incomplete, uncertain and biased perception of reality. As in the game, ones experiences are...