Election Jitters at the Peak of Volatility Mountain

Published on
November 2nd, 2020
Duration
74 minutes

Swimming with the Whales, Running with the Bulls – Live with Vincent Deluard


Election Jitters at the Peak of Volatility Mountain

Live ·
Featuring Jason Buck, Cem Karsan, and Kris Sidial

Published on: November 2nd, 2020 • Duration: 74 minutes

Pressures in the volatility market have been mounting for months, as it anticipates the upcoming U.S. Presidential election. But once that fateful event actually happens, what will the market structure in the derivatives space look like? Jason Buck, CIO of Mutiny Fund, welcomes Cem Karsan, founder and senior managing partner of Aegea Capital Management, and Kris Sidial, co-CIO of The Ambrus Group, to explore this very question. Karsan reveals his insights on how the outcome of the election will impact variables such as kurtosis and vanna flows, and he describes several ways to play these outcomes via option straddles as well as the dispersion between implied and realized volatility. Sidial shares how chaos theory and fractals shape his market framework and discloses several prudent trades such as calendar spreads on the VIX and capturing the spread between index volatility and the volatility of single name equities. A note: this interviewed was filmed Monday, October 26, 2020, the day BEFORE Tuesday’s violent sell-off and subsequent VIX spike. For extra charts, click here: https://rvtv.io/34IyqQD Key learnings: A Biden victory coinciding with Republicans' holding onto the senate represents a major risk. Correlation between S&P and the VIX may not always be negative. The convexity in the derivatives market will continue to exert extreme pressure on equities in ways few understand. Opportunities abound for the shrewd trader, such as calendar spreads, straddles, and dispersion trades.

Comments

Transcript

  • AI
    Andras I.
    2 November 2020 @ 08:06
    DISCLAIMER: I don't mean what I'm going to say in a negative way - more as precaution for people below the "god of volatility" status trying to enter the game...be very careful, don't confuse direction with speed and always consider the price of vol! One would think this environment was perfect for a long vol fund - yet... --- Mutiny Fund September newsletter (redacted for brevity's sake, nothing major omitted): September Net Performance for Mutiny Fund: • Long Volatility Series: -3.82% • Long Volatility and Stocks Series: -7.40% [...] September was an unusual, but not unexpected, month in volatility markets. Typically volatility and equity markets are negatively correlated. In September, you had a few days where VIX was up, and the market was up. You had a few days of VIX down, market down. Then you had a few mixed days, which is the more normal of market down, VIX up or market up, VIX down. That sort of moving around of correlations makes it hard for our managers to actually see and position themselves What’s the next little cycle going to look like? Is it going to be normalized? Is it going to be some of this weird behavior? [,,.] We would expect that maybe five out of 10 times when we see a month like this for our managers to actually perform well as volatility is moving around and it can be a target-rich environment, but September wasn't one of those months. It's worth reiterating that the long volatility series is built such that anything less than a negative 10% down move in the S&P can be viewed as mostly noise. It’s very difficult and prohibitively costly to cover those moves. [...] Once you start getting into a negative 20% move, that’s what we want to see really, a pickup in our long volatility series. At those negative 30 to 40%, that’s where hope to accelerate into that move and more than cover the moves in equity markets." --- Now the October results: Estimated October Net Performance for Mutiny Fund • Long Volatility Series: -5.22% • Long Volatility and Stocks Series: -7.31% Surely, even though Mutiny Is a black swan fund, they would do anything they could to not look negative - which is not easy, even in a month with crazy vol and the biggest drawdown since the last black swan (which was a white swan but either way) in March.
    • JB
      Jason B. | Contributor
      2 November 2020 @ 20:36
      Andras, I’m obviously biased, but I’m not necessarily seeing your point. VX futures were up 2.83% this month, you may be looking at VIX index which is non-tradeable. S&P down -3% in October doesn’t count as a black swan event. I am very open to criticism, but I believe we are doing our job, waiting for a true risk off event.
    • AI
      Andras I.
      2 November 2020 @ 23:57
      Jason, I was hoping (disclaimer and all) you wouldn't get offended but when you imply various things I never mentioned (not doing your job, October as a black swan, VIX vs VX futures misunderstanding), that would suggest otherwise. I do understand and respect your mandate and also appreciate what you guys are doing for education. You asked what the point was: In a choppy regime where a specialised vol fund with well experienced and respected managers seems to be struggling, the growing number of retail/hoodie/dumb investors need to be warned, especially with the recent popularity of options trading/vol space, especially when everyone is screaming about "an election vol event" - it's just easy to not do the leg work and get sucked in. That's all.
    • JB
      Jason B. | Contributor
      3 November 2020 @ 01:11
      Hey Andras, thanks for writing again! It’s the vagaries of texting as always 🤦🏻‍♂️. I actually read your comment charitably as a caveat emptor. I was just trying to clarify a few points, where I didn’t understand or obviously misunderstood the points you were trying to make. My apologies if it came off as aggressive or defensive, which was not the intent, I need to improve my laconic nature which tends to show better in person than in text form.
    • MD
      Matt D.
      3 November 2020 @ 04:11
      Hi Andras, Curious what you mean by always consider "the price of vol"? Cheers.
    • CM
      Cory M.
      3 November 2020 @ 18:44
      Totally cool that Andras asked a question I'd been wondering about and that Jason replied and then Andra replied just as I might have. Simpatico. Now to look up "laconic.".... "Man of few words", I see. Maybe so for you, Jason, but the power is only stronger that way.
    • AI
      Andras I.
      5 November 2020 @ 02:56
      Just wanted to thanks to Jason about a new article called "October Performance Commentary". A masterclass in vol and adds a lot of depth to the interview, confirming the difficulties I was trying to warn about in my less than sophisticated way. Hope you don't mind sharing like this (disclaimer on the bottom): https://mailchi.mp/35e80b28aa92/the-tortuga-times-mutiny-update-and-nassim-talebs-portfolio-now-12971302?e=f2d99ad30f
    • JB
      Jason B. | Contributor
      9 November 2020 @ 04:53
      Andras, You would also probably like our podcast which you can find on our site or any podcast player.
  • CM
    Cory M.
    3 November 2020 @ 18:41
    Just outstanding. I'll never be a shark like you three, but totally fascinating. Jason's best interview ever (just the right balance of contribution and query). The viewer comments, as usual, are also great.
    • JB
      Jason B. | Contributor
      3 November 2020 @ 22:57
      Thanks Cory! Obviously all the sharktelligence comes from Cem and Kris!
  • JB
    Jamie B.
    2 November 2020 @ 11:14
    That's what I love about RV. Just when you think, "Ok I'm starting to get this stuff". You go and drop a video like this to humble me and make me realise just how much more there is to uncover and what an exciting prospect that is. Thank you!
    • CM
      Cory M.
      3 November 2020 @ 18:42
      This comment is so awesome that giving it a thumbs up is not enough. Thanks Jamie B.
  • TR
    Thomas R.
    3 November 2020 @ 13:28
    Great conversation. Appreciated Cem’s MM perspective. Wonderful content.
  • MO
    Master O.
    2 November 2020 @ 09:08
    Sorry to say this, but this thinking that if we get a Biden presidency with a Republican senate that ii equates to a no fiscal spending is bit myopic in my view. It would be lovely if both guests can reply to my comment. So the narrative of that the the Republican senators will derail Biden's fiscal spending, but if Trump was president there is no issue of spending. So are the Republicans bunch of "crazy/stupid" people? The facts are the following: 1) There is no more growth coming from the private sector because it is highly indebted. 2) States are also highly indebted so the can't spend too including Republican states. From what I read Republican governors are lobbying their Republican senators hard to spend. Lots of Republican districts are hurting and this is politically untenable for the Republicans. 3) All pension funds private and public and individual are fully invested and vested in the stock market. Can you imagine if this stock market goes down how politically dangerous for Republicans not to act to support the economy and hence the stock market. Like it or not the US economy is highly financialized and cannot afford the government of not doing a big fiscal spending. 4) If the US federal government does not do a fiscal program it might risk the US getting into a deflationary spiral that might get out of control. I think lots of these Republican senators care about their personal portfolios. 5) From what I read the FED has explained to both the Republicans and Democrats what the risks are of not doing a fiscal spending is, and the FED is going to fully support the spending via monetization. 6) The US is entering a "great power competition" with China and needs to spend on infrastructure and Tech to win the technology race and bring also lots of what is deemed to be critical manufacturing back to the States. This requires the government paying the companies to bring it back and build it onshore like what Japan is currently doing. 7) Big US fiscal spending with it current account deficit is dollar negative and emerging market currency positive which is what the world needs to bring back growth globally. Not to mention the US needs to debase its currency to alleviate the burden of debt. 8) Can you imagine what the politics will look like if ordinary citizens are getting hurt while the Republicans do nothing. All you need is someone screaming "You bailed out the fraudsters JP Moragan, Citi etc in 2008 and you are not bailing us out!" I am afraid the entire USA is becoming too big to fail! So please explain to me what do you assume the Republicans are a bunch of "trouble makers" to a Biden presidency? I am not accepting this narrative. This seems to me is a case of recency bias. Just because they did it to Obama does not mean they will do it to Biden. Different players with a much different circumstances. The only push back I see from the Republicans is the green projects of the Democrats not the rest of the fiscal spending program.
    • CK
      Cem K. | Contributor
      3 November 2020 @ 06:12
      Thank you for taking the time to write a note here. I agree with most of what you say, in terms of why stimulus is needed. I want to be clear, I am in no way partisan and nothing said in the conversation was intended to be. The scenario of a Biden Presidency with a Republican Senate producing significantly smaller stimulus is something that is currently expected by almost every insider that I have spoken to on capital hill. It is not an opinion. It is important to consider that what is often best for America as a whole is not better politically for one party. The republican senate, if faced with a potential Trump loss, is struggling with how to separate their identity from his, when the electorate has become so tribalistic and identity politics driven. They feel they must set themselves in opposition to a Biden administration at all cost, as that is what they feel their constituents most universally respond to. This is why stimulus was not passed preelection despite Trump's overwhelming support for a deal as big as Democratic leadership's. McConnell has already shown his hand here. As has Ted Cruz here: https://t.co/tp7FHqXPM6 and many others. Again, this was not intended as a political statement. I am sorry that you interpreted as such. These are the political plans and current posturing of the republican party and its likely short-term effects.
    • DG
      David G.
      3 November 2020 @ 08:34
      Maybe I'm just a cynic, but if I can argue over stuff that I know is a non-starter for the other side, and I'm the other side and I could easily offer common ground relief and argue about green stuff and whatnot later yet choose mot to, maybe I can create the illusion of stimulus hopes sooner rather than later, so that the market moves to the beat of our drum and creates an environment of expectations and let downs, that our friends can front run.
  • JS
    John S.
    3 November 2020 @ 04:59
    Way above my pay grade!
  • JY
    John Y.
    3 November 2020 @ 03:38
    Jason Buck keeps hitting from the three point line. Another awesome piece in the vol space. Incredible guests... thank you I learn every time I watch JB’s interviews. Thank you!
    • JB
      Jason B. | Contributor
      3 November 2020 @ 04:06
      Thanks John, it’s obviously the guests!
  • MD
    Matt D.
    3 November 2020 @ 04:06
    This was brilliant. Great guests, timing perfect too. Is there a simple way to understand the VIX reflexivity dependency on time? Often for recursive functions, they can reach steady state, or cycle, or in some cases chaos (like Kris mentioned) or divergence. This would be in the top 2 say for practical/educational RV in my opinion. Excellent. Thanks.