Comments
Transcript
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MTI've made a number of comments on this particular video (refer thread below) the very first of which I expressed a negative bias, not because the idea of long vol isn't tempting, it's very tempting, however in practice difficult in the extreme to achieve. Whilst Mr Himelsein and Mike Green are talking an interesting talk, they offer no supporting 'mathematics' whatsoever, nothing of substance was disclosed which left me with the thought "this is a Sales Pitch". I will acknowledge this subject matter has engaged me like no other on RV to the point I've spent the best part of two weeks trying to work out how this could be implemented in practice. Now my ideas from two weeks working on my own with limited computing resources would not even scratch the surface in intellectual terms bearing in mind the assumed resources that Logica could bring to bear, so my ideas of how to actually 'mechanically' trade a long Vol portfolio in a consistent manner will not compare well with Mr Himelsein's, but that said with every one of my own thoughts and theories every time I hit the same brick wall that I believe makes the whole idea, certainly for retail traders, no matter how talented or knowledgeable, impossible to achieve in practice. That brick wall is TRADING COMMISSIONS. In the video, Mr Himelsein appears to suggest himself it's necessary to constantly trade/adjust his long volatility portfolio e.g. adjusting options up, down, rolling out etc. I believe it would be necessary to trade so frequently that commissions incurred would make the whole thing pointless for a retail trader. I use three brokers, and for derivatives do of course always use the one with the lowest commissions i.e. Options: $1 per contract to open, $ zero to close. I believe this is the lowest of any 'retail' broker out there but even at this level, with all of my approaches any theoretical long vol trading profits are wiped out by commissions over time. The only 'cost effective' solution to protect against 'tail risk' is to firstly limit one's size in individual positions within a portfolio and strictly limit how much capital is deployed at any one moment in time.
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DDWow, I somehow managed to miss this one at the time and only found it through the subsequent interview. This is great!
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RADid anyone else take a pic of the books on the coffee table to try to see the titles lol? My 30 secs of effort didn’t yield good results. I even told my computer to “enhance” but it didn’t listen. Another informative Mike G. Interview!
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LAuseful insights !
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MSWayne is fantastic. An endless resource of trading wisdom.
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JKIf I had to choose between my RV subscription and my Netflix subscription... I'd keep my RV subscription.
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RGWhat is more important, trading intuition and experience or mathematical formality? I have a background in chemistry but trading is what I want to obsess about these days? Do I double down on discretionary or do I go back to school to learn the jargon? Thank you!
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DSThe world is a little crazy when a hedge fund looses 23% of its portfolio in Argentine bonds. Argentina is a great country, but it is not known for bond stability. Could they have hedged a single exposure like this? If so, what would the approximate cost of the hedge be? Just general information. I am not looking to trade. DLS
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RTQuality stuff!
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RMMike Green is the real vision MVP
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SLI see Mike Green, I watch Mike Green.
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MTThere is temptation here to think most interesting BUT conspicuous but it's absence is any supporting mathematical/statistical probabilities for me to express a final viewpoint good or bad. Right now I have a negative bias but I'll remain open minded if Mr Himelsein would like to share at least some factual statistics validating the approach. If long vol. were to be shown to have a strong statistical chance of being a viable strategy we could all stop right now with our different approaches, and everyone would jump on board. Without knowing the math behind it this content is not useful at the present moment. Bearing in mind 'volatility' is to all intents and purposes a math equation I think it reasonable to submit a request herewith 'show me the math' please? I would suggest to be useful, we need a takeaway more rigorous than 'very interesting, seems to make sense' so let's jump on board. History, over many years is littered with 1000's of people, newsletters, books saying 'hey when vol. is cheap, buy it' but making this work, consistently over time is really difficult in all but the shortest of time frames e.g. 3-5 days and even then it's no better than 50:50 shot. In the hope that Mr Himelsein will respond, the following are but a few of the questions I hope might be derived from any possible response. * What size of VIX move and how frequent would such moves be required in order to make a long vol. portfolio profitable over time? * What is the statistical/probability % chance of such moves happening? * Long vol. positions will be expensive to implement, have you done any studies of how a portfolio with long vol within, might have performed if the capital to implement long vol had instead been used for more 'traditional' strategies, i.e. I'd like to understand your success rate. * What is the % probability your long vol strategies will produce profits? * Before deciding to implementing long vol. strategies for real, over what time frame did you back test and how many occurrences ( # trades) did you use? What was the average VIX over back tested period? * How often in the last 10 years, did the optimal VIX level produce a good entry point? * What bullish option strategies worked best, e.g. long straddles, long call spreads, short puts? What's the back tested win rate for each one? * How frequent on a yearly basis since 2009 has holding a long vol positions within your portfolio added performance value? How frequent have you seen big wins and how often have you seen big losses, what was the net outcome? Incidentally, in my portfolio I have a predominance of undefined risk, short premium option positions, using the most highly liquid underlying's only. At a portfolio level I always try to maintain portfolio negative deltas (i.e. portfolio is nearly always directionally short) as a near term 'hedge' against a volatility spike. At a simple level I try to hold twice as much positive Portfolio Theta (daily $ decay) as my portfolio negative deltas' i.e. 2:1 ratio. I have rules for how much positive Theta, how much negative Delta and how much total Extrinsic value within my portfolio to hold for different ranges of VIX and different levels of capital available to deploy.
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NRCongrats to all those involved in the production of this interview. This quality interviewer, this quality guest and this quality discussion is why I subscribe to Real Vision. Don’t stray from this quality goddammit, stay in this path.
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SDI found this discussion really intriguing. Not only do both guys know an awful lot about trading vol' but I ran a Hedge Fund that was always long vol' between 2002 and 2010 so I have faced the challenges Wayne speaks of. The problem with being long vol is twofold- the biggest problem is the burn, every day nothing bad happens you lose money and that's most of the time. How much loss is acceptable? The second one is, when vol starts to soar, when do you get out? Buying Vix at 10 and selling at 20 is great, but if it goes to 90 you get fired by your investors. Buying at 10, not selling at 20 and seeing it go to 9 also gets you fired. These are extremely hard problems to solve. As others observe Wayne Himelsein solves the burn problem by 'trading', which if he can do it consistently he really is a genius but it's not a route for the average trader, or anyone mortal I suspect. For most of us Long Vol means a budget for loss if the bad things don't happen.
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SAWhat was that?!? I have no idea what was said in this video.... This guy claims to be this genius making money out of long vol which nobody else has made work with any consistency in a repeatable fashion. 35% of options expire worthless and 10% are exercised. In other word, long vol is a trade with 65-90% odds of not working out. The timing has to be incredible. Maybe he is that guy that can time these 10-20% of the time when vol is spiking but so what? I am not any smarter for it today. I just know there is a guy that has discovered the Long Vol Golden Goose because "the waves speak to him". Good for him! Too bad the waves don't speak to me :-(
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VSI've had capital in two absolute return vol funds for about 12 months now and the return has been -10% or so, despite a few bursts of VIX in the 20's and one brief stint in the 30's. Would be keen to hear how well others' have been able to monetise last 12 months vol but from experience.
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DSThere is a wealth of information in RVTV library of videos. I just listened to Jerry Haworth's video "Protecting Against Portfolio Disaster." Excellent volatility discussion. DLS
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REWell done as always, Mike. You find the most interesting people with whom to have a conversation.
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CBIf it has Mike Green in it, you know I'm giving that thumbs up!
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AJA fantastic discussion, as ever, however there is no discernible action to be drawn from the video in terms of how one might seek to protect from shifts in the volatility regime. The ‘bleed’ is mentioned at a high level although I suspect this could have been expanded upon without necessarily giving away any intellectual property.
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PPI couldn't take anything practical from this. All seemed very academic to me, despite him saying he trades this system.
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MEMike Green is very smart & knows the market real well. He should let the guest talk more.
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VSGents after trading for 53 years -the question is why can you do worse the longer you trade? The answer which was not mentioned is things can materially change. When i started in 1966 the dow went up 4 years and down 5 years from 1966-1974 ... i became a great short trader but from 1982-2000 their was one minor down year. In other words the risk is in govt and technology (the advent of S&P 500 futures in 1982) changing the way markets work.
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JFThis is another fantastic piece from Mike and my current all-time RV favorite. Thank you!
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AMAnother great discussion. But the positioning of Mike's coffee cup takes away from the elegance and stability of the white three legged table.
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JHThis was superb. Thanks, Mike and Wayne.
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TTGreat interview. I would like a little more color on how the portfolio is constructed to reduce cost of carry. Of course, that is the recipe for the "secret sauce" . . .
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WBInteresting conversation. I would like to make the point that options lose a lot of their convexity once you start hedging gamma. Especially when vol is really low. At low vols options have more gamma and their delta changes much more rapidly. Once a 20d option goes to 100d and you've hedged all the gamma, if the move continues you get zero add from it. That's typically a situation where you've made good money but you won't realize the full benefit of having protection for a prolonged selloff. I was a market maker trading index options for a long time. This is how we managed long volatility positions. Constantly hedging deltas and trying to not leave too much premium on the table. What got interesting was how and when you chose to hedge the gamma. Some would hedge at levels, some at End of Day, some not at all. In my experience there was no systematic way that worked great overtime. Personally, I always hedged a gap down on the open and hedged the close. In my mind you wanted to hedge gamma when the real flows were hitting the mkt because that was when you could get a reversal. Fun conversation. Thanks
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RMMike, always interesting. I wish you would do a video on some examples. What puts do you like; what strikes do you like; what time frame; when do you roll, ... . Put some grit on the theory for us. Bring it home. Maybe that’s a small part of what more you can do. Thanks.
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DSExcellent interview. Thanks. DLS
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PBI loved this interview! It gives me hope that computers alone (blind systematic) cannot beat the human trader with computer/math models.
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BADoes Logica offer any tail risk products for retail investors?
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KDExcellent interview thank you. I wondered how that student's career is going?!
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SSThis was fantastic. Would love to hear more from Wayne soon, and Michael is always great.
WAYNE HIMELSEIN: It became clear to me that while there are many exposures in asset classes, volatility is what everybody's invested in at the end of the day.
There's nothing like experience and being a trader and doing it discretionarily for many years. That understanding that led me to build the logic around the phase shift was because of my experiences as a trader versus if you read the textbooks, volatility is mean reverting. Well, not always.
To me, '08, at the end of the day, was a short vol trade gone wrong. Therefore, my position is, don't worry about what's going to happen, just be long vol.
MIKE GREEN: Mike Green for Real Vision. I'm here in Los Angeles, we're going to sit down with a friend of mine, Wayne Himelsein, who runs Logica. Like me, Wayne is very focused on the idea of how to generate positive profitability from long volatility in this environment. He's taken a really systematic approach to how to deconstruct a profitable trading strategy around a long volatility approach. It's very unique and I really look forward to getting some insight from Wayne in terms of how he's looking at the world, how he's thinking about how he can positively protect his clients' portfolios without running too much of a carry cost.
Mike Green. I'm here in Los Angeles, with Wayne Himelsein of Logica. Logica is a hedge fund that is focused primarily on-- at least as I think about it, tail risk dynamics. Mostly, where you and I have bonded in the past is talking about the underlying dynamic of buying volatility. Not truly tail risk, but trading volatility. Can you briefly just described to me what Logica does and what your primary focuses as a strategy? I know you have a background that I'd like to get into right after you give me that.
WAYNE HIMELSEIN: Yeah, rather than a hedge fund, I think it could be that but we're more of a cost and R&D shop. Logica was started with the focus of building strategies with quantitative thesis or mathematical thesis. It was my background, and that led to a couple of strategies and market neutral portfolio and long only portfolio. Then one of them, as you mentioned, is the volatility portfolio volatility trading. We-- I'd say got into that very quickly because the other side of every other strategy is negative skew and volatility being the risk.
In building a bunch of strategies over, not just when I started Logica, but in my prior life in being a quant for 15, 20 years before Logica was started, it was the clear realization that whatever strategy was built, had, at the end of the day, exposure to volatility. That was the shared pain of everyone. It became clear to me that while there are many exposures in asset classes, volatility is what everybody's invested in at the end of the day. Therefore, we got really dedicated and focused on building a strategy to take advantage of volatility, both-- in the beginning, it was a hedge to the other stuff we were doing.
We had a market neutral portfolio, and we knew that it could consistently pump out a certain return profile, but it had negative skew. I had this positive output, but my risk, again, was volatility. Therefore, building the vol strategy next to that meant that the two together could be a more stable portfolio. In doing that, I realized that the real beauty wasn't the other stuff, it was the volatility itself, or managing around volatility, because that's what, at the end of the day, everybody needs. That's the grand exposure that we all live with.
MIKE GREEN: Well, you've created a way that you're able to profitably trade from a long vol position, which is similar to many of the arguments that I've made around what I think are the appropriate strategies going forward. Real Vision viewers have heard this over and over again. Have these opportunities always existed in the market, do you think, to trade from a profitable standpoint to be long volatility, or do you think this is somewhat a temporal feature of a market in which people are increasingly, not just implicitly being short vol.
Buying equities or building a skyscraper, doing any form of investment has a short vol component to it. You're anticipating that the future looks an awful lot like the past and didn't have a discontinuous break associated with it. Historically, tail funds, or funds that have traded long volatility have experienced negative continuous returns, so they've had negative results. That's not been your experience with Logica.
WAYNE HIMELSEIN: Right. Yes. The question being is, is it temporary, or is it a sign of the times or if it was possible?
MIKE GREEN: It can be skill or it can be skill in the right environment.
WAYNE HIMELSEIN: Absolutely. Could be or both. I'd say my-- let me separate it, it might be a better environment in-- to your point, there's more short vol exposure these days than there ever has been so in the drive for yield, everyone's getting short vol, and more and more so. In the buy the dip market of the last 10 years, why not get short vol every time S&P drops, short some out of the moneys and capture that IV crush. Sure, that's been something that investors have been rewarded with over the last many years so they continue doing it and the amounts are getting larger. I agree with that.
That said, I don't believe particularly that that's the benefit that we have. Our skill set and my background is a trader. I started my career in the mid-90s as a prop trader, I learned my trading skill. My first model I built was a trading model. I still run it today. I still benefit from that that trading know-how.
For me, the ability to trade long vol was to really infuse the trading skill on top of volatility. You think of it as a thought experiment. If one is a trader-- and what does it mean to be a trader? I'll just use a very simple terminology, it means that you're pretty good at buy low, sell high. That's the skill. You could trade anything.
If you give a trader and you tell a trader, you can only trade tech stocks. If you told me that, what would I do? I'd bring up some charts, I'd look at Google and Netflix and I'd start seeing their levels and their price volume, behavior and characteristics, and from my experience, I figured out some good points to buy or sell and stop losses, et cetera. A trader can trade.
I took that same construct and just said, well, what if I constrain myself and I only could trade volatility, I could only trade long options? I'm not allowed to trade any stocks or indices, I can only trade S&P puts. Where would I buy and where would I sell? How would I do that? That was the original thinking, which said that if you have trading alpha, why not do that on long vol products or long vol instruments?
With that, began the research. Soon over time, we realized that we could make more money be long volatility more of the time, by scalping by trading to keep that position profitable. I hope that makes sense, or that answers your question.
MIKE GREEN: It does. And it also speaks, I think, to the particular situation that we're in, where I would argue that the retreating liquidity conditions in the market, whether that's a function of passive penetration, i.e. a higher propensity for stocks to move with positive correlation on any form of extreme move, which creates positive convexity to the vol surface now created both melt-ups and meltdowns.
People tend to focus way too much on the meltdown dynamic, but under those conditions, it exists in both directions. One of the unique things that we're seeing is a very significant rise in realized correlations, both up moves and down moves. That type of environment actually goes very well with that, because what you're really doing is you're trading gamma. You're not really trading volatility.
WAYNE HIMELSEIN: Now, we're scalping gamma.
MIKE GREEN: How do you think about that in a world in which more and more strategies are effectively selling gamma? The underlying dynamic of I want to sell weekly variants or weekly puts is that they have a negative expected return and if I do it more and more and more times, probability leans in my favor. That's the traditional approach to it, certainly looking at the historical databases, but it doesn't seem to be borne out in today's markets.
We're seeing more and more dynamics in which realized volatility-- we're certainly seeing this now, where the realized variants or realized volatility premium is failing to deliver. Does that affect the way that you think about pushing your positions or as you think about analyzing-- the fact that there are more and more people on the other side of it, does it change the way you think about the trading style, or are you primarily using the historical tools, and then modifying it with your trading instincts?
WAYNE HIMELSEIN: I think I haven't thought about that so much. What I can say instinctively, is that all that could do really is improve our ability to trade. Why would I say that? Sounds good. But besides for that is, at the end of the day, when people, when the masses are getting short, they have to cover and everybody's got their risk controls and their stop losses at some point. When there's that squeeze, there's going to be that further push up. As a trader, you like that.
You'd like the melt-ups, and meltdowns, you like that, because there's bigger bands to trade. If anything to me, as to your point, people are selling the shorter dated paper to get their portfolio looking Vega neutral, but at the same time, it's not because one little move and it's all out of whack. They're synthetically creating the safety for themselves, which is not really there. They're doing that to hedge probably some other larger portfolio that it's facing off to.
I know that at the end of the day, all that positioning is going to have to be rejiggered when something really bad happens. That means I'll have more trading opportunities. That's in my mind, I haven't seen that play out. I've seen it a little bit, bigger moves, but trading is betting on a mean reversionary process. There are swings or undulations in markets and in this case, in volatility and so the bigger those swings are, the more gamma you can scalp during the swing. I'm going to like that.
MIKE GREEN: Well, I'm also going to push back a little bit because while you come from a very quantitative space, your trading is largely discretionary in nature. You're not slavishly devoted to 3% decline, therefore I buy or 3% up move, therefore I sell. Am I correct in that?
WAYNE HIMELSEIN: It's a mix. You're right, it's discretionary, but my discretion is very systematic. I don't know what it means to be fully discretionary. My discretionary approach has a rule, always has rule. I think if we talk simply about a trade, getting into any trade, whether it's an option or an equity or an index, before I get in, I know where my stop, where my level is, I know where potentially a profit target or trailing stop, I have that all in my head. It's a rule based discretion.
Yes, sometimes you get into position and it moves in a certain direction and I had a feel for where it would go but there's so much more volume in a move than you expected that now you're going to give it more space. The discretion is, I'll say a bending of rules, is in itself, just another rule that if you get in and this and this takes place, then you have a new rule set. What I've done in the vol trading approach, over these many years, over the last 4 or 5 years, what we've done as a firm is build those rules, that discretion, into a systematic approach.
At this point, therefore, it's not discretionary. What we're doing is we're trading it, we're following this system, which originated from a trading instinct. Then when we see things in the market, I'm in the markets every day, and I'm watching this thing trade, and I'm thinking, what would I do here? Does our model, our system now align with the decision I would have made given that we've programmed it into a structure?
When I see that it does, I'm like okay, that's exactly what I would do. My rule set is working the way I would trade it. When I see that it's not or something different, then we go back to the R&D table and we bring up the mathematics and we start looking at why is this not exactly what I feel like I would do? We do some more testing and that might be a tweak that's infused into a later iteration of the model. It's not a change that will happen that day. I won't discretionarily say, oh, you know what,