Charts and More Charts
Why This Cannot Continue
So, this trader cannot see how the markets can continue to trade, based on pure conjecture, as it’s a one way bet. Nobody can quantify this,as it’s based on the ‘projections’ of infection, so we’ll leave that alone. The charts say it all. Twitter followers may, however, have seen stream of Tweets (Scott @ScottJo34110219 ) relating to: https://www.investopedia.com/terms/v/varianceswap.asp
Risk variance swaps are a gamble on daily volatility. Traded ‘over the counter’- (OTC )So the counterparty could be a bank or other institution. The Tweet relates to this: http://docs.sbossu.com/bossu-strasser-guichard-varswap.pdf
Maths genius needed. So, you thought options were complicated? Point is- looking at the above charts- how could anyone possibly trade this? How can you hedge? Anyone remember the first TV computer game Pong? Google it. The Tweet goes on to explain how markets get moved violently towards end of day- the tail wagging the dog. ( We have always said derivatives run the markets). Traders of these positions can incur exponential profits and losses. Party A says “volatility will barely budge, I win”. Party A now has a problem. We trade only ETPs- exchange traded products- simplified for dullards like myself. However, as such complexities start to unravel from playing Pong at 200 mph, it is hard to see how things can continue. Smarter people than me(that’s 98% of the world!) may be at variance with this view.
What can I say? 6300/6150/6000 Put butterfly – we could close out for the tiniest loss (1?) as it is now 1,000 points in the money. Trading, if you must, with butterflies is safe. So long as you buy. The current market can make mind-numbing moves, as we’ve seen. How if you got caught with this puppy* at expiry and you’d sold it? You’d take a 150-12 hit. This trader receives frequent smug emails from the- ” Only mugs buy options ” crowd. We suspect they are unwell now, but wish them no harm. However, each generation of traders produces the self proclaimed Masters of the Universe. Sadly their story always ends the same way.
I am refraining from making specific recommendations, but, butterflies are a safe game, if you feel you must trade. Should you think about buying and selling spreads in combination, so long as your strikes are equivalent, you can ensure losses are limited to premiums paid. Here’s an example: Buy the 5200/5100 put spread for March -pay 35.5. Sell.… 4900/4800 March put spread for 20.
Logic of the trade- you could make (100-15.5) max. Thus, the most you could lose (35.5-20) max. Traders like us might find these positions hard to get placed as the market moves ± 20 points in a second. You could try ‘one contingent on the other’ orders. We would thus be trading a butterfly with a hole in the middle. Our profit range is quite wide, but who the heck knows- we could be back at 6000 next week. Providers of ‘liquidity to the market’ may donate some or all profits to charity, to salve the guilty conscience.
*We have never researched selling butterflies the risk/reward is generally quite ugly.You would also have to meet margin. Data miners might want to have a look into this- if it makes 2% per month, it may be manageable. However it would need a very high success rate, and rigid rules for exit when in loss. Further thoughts are available at one penny a pop.