Comments
Transcript
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AHFantastic piece, thanks
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MTI have no real issue with the content here, but found this piece disappointing, not because of what they have to say, but rather what they didn't say and what was left out, therefore I would suggest this was yet another unbalanced view point of trading short Options/ short Volatility, focusing on the risks only with no mentioned of the opportunities. I sometimes wonder if RV have their own compliance issues with the type of speaker, type of strategies they're able to discuss & present on this platform? Short premium, short volatility discussions have been conspicuous by their absence on RV since I became a sub 5 years ago. Taken direct from the transcript " ….you're going to have this pattern of, I make money, I make money, I make money, I make money and then I have a huge loss…" "… it wipes out a lot of your gains.." At this point I now start to disagree. Certainly upon a violent move higher in Volatility, the short volatility option trader will look at his P&L and see losses, in my own case back in Feb/March those losses were sufficiently high to "get the heart pumping" however when talking of losses there are TWO types of loss. 1./ marked loss with an open position 2./ realized loss upon closing a position. We need to consider if there any particular option strategies that are easier to keep open for longer, making it easier to avoid a panic reaction thereby increasing the chances of waiting until the storm passes. Fully appreciating volatility contracts to the mean over time is the fundamental basis upon which short premium, short volatility strategies are built and hence work really well over time. The commentary by Brett & Michael strongly implies the short vol option trader is left entirely defensive, he loses big and that's it! No, not always! When one sees large 'Marked' losses it is NOT a fore gone conclusion that existing short premium, short vol option positions will for certain lead to an eventual 'huge' realized loss. It interesting to note defined risk option positions have the potential to move to max loss much quicker than undefined naked risk positions. To anybody not educated on the value of short premium, short volatility options 'undefined' risk strategies have a multitude of different methods and strategies to defend and adjust, risk (vega) reduction mechanics, directional exposure reduction mechanics all providing viable opportunities to keep 'marked loss' positions open for a period of time until the impact of VIX at 80 passes. There are great many more defensive moves available with undefined risk over defined risk. With defined risk positions, e.g. directional spreads, Condors etc when an outlier move occurs defined risk pretty much go to max loss instantly and the only choice then is to wait it out until expiry, you might get lucky. With undefined risk, it's a lot different, roll puts up, roll calls down, roll out in time, re-centre strikes etc, all is possible as long as the cumulative $ value of the Credits received total up to more than the Market price to close out the position, all the while one can collect additional $$ credits the undefined risk position can be left open so avoiding panic and a realized loss. As a minimum if not able to close out for a profit with the aforementioned, a significant reduction in the size of eventual realized loss over the initial 'scary' marked loss is very much attainable. You need to have sufficient Capital to weather the storm, AND most importantly the value of the underlying stock should not be so high that one is constantly worrying about the risk of being assigned stock you can't afford. Keep size small should be a constant mantra. The above all said, irrespective of what markets, what strategies and methodologies one uses to participate in markets, whatever is your personal preference the ONLY viable $$$ cost effective strategy to protect against large realized losses is SIZE. Keeping position size small is imperative. All the bad news stories in circulation always come down to size, people get too big. I also always ensure my Portfolio is set up directionally short (short delta) which is a drag on P&L performance but does offer a level of protection when the VIX shoots dramatically higher, it certainly provides a window of time to 'control the heart beat' then move onto making best use of a variety of adjustment techniques available. Portfolio risk management, the understanding of risk in mathematical, statistical, % probability terms is a skill that can be learnt by anyone willing to put in the time e.g. a simple example of risk management, at any one moment knowing IN REAL TIME what is a portfolios directional exposure expressed by Beta Weighted metric against the S&P we know if the S&P moves by +/- % then a portfolio P&L will move by +/- $$$$. Lastly, while this piece is about risk of outlier moves, movement in the VIX on a constant basis necessitates those with short premium positions to be always aware of the below listed metrics in their portfolio so at to be best placed to respond when necessary as follows: 1./ How much $$ EXTRINSIC value in the Portfolio, and is that level appropriate for size of Capital within an individual's account? 2./ Is the $$$ value of +'ve Theta (another representation of risk) appropriate for the size of Capital available in an account. 3./ Is the ratio of directional portfolio exposure (I prefer negative Delta) verses +'ve $$ Theta appropriate for amount of spare/unused Capital available. 4./ Is the ratio of portfolio Delta:Vega appropriate for Capital held. 5./ Lastly and most important, a short premium, short volatility option positions, are most exposed to risk as Expiry date approaches e.g. in particular Gamma Risk. A simple way to take this risk off the table: either close or roll out in time at approx 3 weeks prior to expiry, 3 weeks prior to DTE.
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TBYeah this was a good talk Max. I am a retail trader and I got something out of it; I know very little about the hedge fund world.
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DSMr. Wiethe: You made a correct decision to include this presentation on RVTV. Risk, correlation, and sizing are especially important area in understanding the derivative markets. IMO initial opposition shows we need more emphasis on risk management not less. This can be done within interviews and more directed interviews. In time, more subscribers will understand how important this presentation was for all of us. Knowing what we do not know is wisdom. DLS
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SMI read through the transcripts thrice but I still cannot find much value in this video. For me the problem is not the subject, i am definitely interested in how institutions manage risk but these guys kept talking about how institutions "dont" manage risk. Also, in general since this remote stuff has begun it seems to me people come up with much lesser charts/slides/data for these talks/discussions. Last year people like Milton Berg, Kyle Bass brought a lot of real data/charts to their videos which is interesting and informative. On the other hand people like Druckenmiller, Ollari and Russell Clark brought details from their vast experience to the table and again that kept me interested. This definitely felt like a waste of time even though i only read the transcripts.
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CRThese are the kinds of guy whose firm goes bust and they spend a year trying to hash out what exactly happened. Typical square head thinkers: they went through financial post-secondary to get their "risk manager" designation-meal-ticket. The smarter of them get their own firm going to provide "risk management" services to the umpteen million financial services companies who only exist because Wall St. dictates terms to the White House not the other way around. Re-institute Glass-Steagall and these guys become bank managers and this conversation is about the vagaries of merchant banking vs retail.
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MCOverall, a very good honest video: thumbs up. They know what they are talking about and give a very realistic picture about things happen. People at AIMCO were definitely not as they are currently protreyed in the media. nb: risk consultancy is not the panacea. Ask Hartford, ING, SwissRe, and co. who took bil. USD losses in 2008 on Variable Annuities incorrect modeling/hedging, though they had external risk consultants (not going to name them) that designed or validated their risk management, but with no skin in the game.
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MdGuys I’m sorry but seriously if the topic is too complicated or “esoteric” for you then just skip on to the next video. RV provides so much incredible content of all different types and levels you should be able to find something for you regardless. Don’t be so arrogant as to expect Real Vision to spoon feed you exactly the type and “level” of content specifically tailored for you - push yourself every now and then to try and learn something. If you’re too tired / lazy / uninterested then just move along - I mean come on these guys really are doing a great job, stop being so entitled!
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MC"The Head of the Risk Management should not report to the Head of Trading"... . Pre 2008, at "Investment Bank X", the Head of Risk Management bonus was indexed on the PnL of the trading desk. Guess what happened... (and I am sure it was quite common a situation at the time... ). Post 2008, pendulum effect, it's the other way around. In a lot of -not well managed- sell side places, Risk Management is so powerful it will prevent any business without consideration for the risk associated.
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MCGoing through the middle of the video. It's good, but some points made seem incorrect: capped varswaps. Capped varswaps are not the natural product. They first appeared and traded much later after varswaps were already a commoditized product. Actually capped varswaps are not a natural product. They indeed started to appear more and more post GFC 2008: often interdealder market now trade varswaps with a cap strike at 2.5x fair strike (so for a usual market regime varswap strike ~20%, this gives a cap strike at 50%). This wasn't the case before. Anyway, there was no market capped vs uncapped varswaps, until low yield environment started to push some buyside (hello Canadian Pension funds) to agressively take tail risk and capped vs uncapped varswaps in quest for yield.
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AAI always want to learn. Nothing is too esoteric for me. My complaint is that I learned nothing. They had a nice discussion. Smart, both of them. But I learned nothing. For example they could have talked about esoteric volatility signals for the general market. They did nothing of that sort. So thumbs down.
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NDWithout heeding to deteriorating fundamentals start of 2020 (and some would even say started back in late 2018 and through 2019), and grossly underestimating the coronavirus reaching the shores of US, a pullback was inevitable in the US markets. Look, am no PhD or a smart hedge fund manager (i am just a retail guy sitting in a remote village in a poor part of Asia), but how could these "smart guys" from the Street, did not see it back in Feb 2020? Sure there are lots of events that could be black swan - like a war in South China sea for e.g. - but these guys get paid to manage those risks, right? (billions of dollars in AUM fees, profits)
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MWI believe on of the main reasons guests come on RV and other financial media in general is to reach other pros. Many of those people the guests are trying to reach really enjoy these types of interviews. So, this interview and esoteric interviews like keeps around the viewers that the contributors actually want to reach. The CNBCs of the world make up for it with total eyeballs but we go a completely different route. When I go and book people what gets them to say yes to a small paywalled platform is the professional finance subsection of the audience that we have cultivated over years of delivering this type of content. It is a delicate balance to try and serve both audiences but each side benefits form the other. Without the scale of retail, the business would fail and the pros would get nothing. Without the pros, no one would care about reaching a handful of retail investors and booking great guests would be difficult. I think of it like a complex ecosystem where removing one link in the food chain can have devastating unexpected effects.
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BCSo RealVision has two subscription levels - basic and advanced. It would make sense that basic level investors are interested in basic topics and advanced subscribers are interested in more advanced topics. This interview on risk management at the hedge fund level is a bit esoteric for basic level investors. Several of your recent topics have been similarly esoteric. Please provide more basic topics in this subscription level and leave the more advanced topics for the higher priced subscription.
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DSExcellent discussion. I learned a lot. This is the deepest end of the pool. The most important lesson for me is not to dive in. If you did not know this, then this discussion will help you understand why. Do I really need to know how to put on a reverse iron albatross spread? No. If I were on the board of a pension, however, I would like an outside “intelligence officer” to tell me if we are and/or should be using it. It is embarrassing that RVTV even needs to explain why this interview is important. This would be a great presentation to give to any pension board, so they know what the risks can be. They cannot fulfil their responsibilities by just trusting in-house teams. RVTV provides many videos. Please to not dummy down all of them to my level. Thanks. DLS
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MWNot too many comments and mixed reviews in terms of 👍/👎. I booked Brett and Michael and I'm interested in any feedback or questions you have. Consider this thread an Ask Me Anything (about this piece).
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TPMy favorite part "They had good risk management." Thanks for the laugh, RV.
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RNI really enjoy the risk management discussions. I would love to see a conversation on how retail investors with the limited products available to them could implement better risk management processes, including what Nitul said about cross-asset volatility. I believe most retail investors don't understand the mix that they actually carry and they separate their portfolio outlook to only what they have in their trading account. That is one thing RV has taught me as a retail investor to do over the years and it has really helped my returns and risk management.
Chapters
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Putting March in Perspective
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Casualties of the "Black Swan"
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The Rise of Vol Trading and Variance Swaps
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Risk Management: One Size Does Not Fit All
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Skill vs Luck: The Importance of an Unbiased Assessment of Risk and Returns
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The Short Vol Suitability Debate
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Be Surprise Averse, Not Risk Averse
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The Risk Management Paradox: You Can't Always Get What You Want
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Are Blow Ups Inevitable?