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

Book review: In the Long Run we are all Dead

In the Long Run we are all Dead: A Macroeconomics murder mystery The US economy faces a deep recession, raging inflation and an impending run on the dollar. President Wedik likes economics as much as a fish likes land. Should he listen to the Keynesians, who favour government intervention or the Monetarists, who favour market fundamentalism?

Unable to decide, he delegates the tough decision to his Chief of Staff, Admiral Harcourt Green. Green laboriously goes through the process of coming up with an economic policy package...only to be mysteriously murdered on D-day. Details of the economic package dies with him...
Something has to be done soon to avoid an economic collapse. What? How?
Who committed the murder? And why?
The murder story could probably have been constructed better but the crux of the book is economics! Recommend it to those looking for a light read on macroeconomics without running the risk of drowning in jargon.
In this delightfully light read, Wolfson & Buranelli, weav…

Napoleon’s Lucky Generals: "I know he's a good general, but is he lucky?"

With most market participants making money this year, the timeless quote by Napoleon in the subject line rears its head, once again. Regular non-readers know the wonderment I have on the impact of luck on investment outcomes.
The markets have been on a tear (sure you didn’t notice), and my mailbox/chat is seeing two polarized stances. On one side is the Bullish Apology. Where market participants pre-emptively share justifications for continued strong markets everywhere. This group exhibits hyper optimism, using recent history as the periscope through which to peer at and gauge the future. 
The second, and potentially, the more interesting group, is the Bubble Babble crowd. This group looks askance at the rallies, and deems things a bubble. This year has given this group a great polarizer. Bitcoin. A tiny bit know much about it. Most know a bit about it; yet there is a growing supply of those sharing their two coins, calling Bitcoin a bubble.
Both groups share certain characteristics. The…

Mind Of The Market - I : Pavlovian Conditioning, Paradoxes & The Psychology Of Herding

In what should evolve into a multi-part series, Mind of the Market will endeavour to peer under the hood of the largest laboratory of human psychology in the world; the financial markets. Where frigid numbers and emotive participants spar enthusiastically in an elaborate and often bewildering drama-in-motion. Where apparitions and reality merge so finely as to be mostly indistinguishable. Where paradoxes and circular relationships reign supreme, frequently, and fervently, questioning the very essence of rationality and cause-and-effect.
Part I addresses the dynamics of Pavlovian Conditioning and market participant response to stimuli in investment decision-making. Intriguing paradoxes and the behaviour of asset prices - a cause (and consequence) of market participant response - is considered concomitantly. Finally, the psychology of herding closes Part I.
Pavlovian Conditioning and Asset Price Behaviour When Ivan Pavlov discovered his lasting contribution to humanity - Classical Condi…