Kevin, glad you mention that violent rally happens in bear market. It's the same thing in SPY. When SPY jumps more than 3% in one day, it is a confirmation that we are in a bear market.
This is where I like to use put spreads. Doing it as a spread minimizes paying crazy vols outright as you're spreading one vs. the other (buying ATM or OTM and selling further OTM), and reduces your theta decay. You don't get the vega pop of outright puts, but if your alternative is shorting delta 1, then it's not much of a loss. Then on the crazy rallies, your delta goes away making it a whole lot less painful. I don't trade the asset that shall not be named, but if I did trade it from the short side, I'd take a hard look at put spreads as a risk-managed way to do it. Just my 0.02.
That's great advice Kent. And it makes tons of sense because you are actually long the gamma at the upward strike, and selling the expensive down-and-out strike. This is a good strategy for this environment.
As for the asset that shall not be named, does shorting the ETF and futures outright and then adding short calls count as a hedge?
Well, I actually respect their self-deprecating humour. That line they use about "making so much money that you will be able to get your wife's boyfriend to move out of the house" cracks me up. They are a funny bunch! Ya gotta give 'em that!
You know who has this level of conviction? @VolatilityQ who is now @ChiefQuant/@WifeyAlpha. You should get this person on the Huddle. Called the top in risk parity on 11/9: just look at $RPAR, it's dead. I've often thought about holding that short instead of longing and shorting... but God do I love the vol.
In this cycle I will try to obtain put spreads at zero cost. During the raises buying small positions in atm puts. Selling 40 delta puts with drops of two or three sd deviations and increases in volatility. And I say that I am going to try it, because in excel or python it is all very nice.
Your broader point is well taken though and should be heeded. One of my worst days was in the middle of the '08 meltdown, short a bunch of banks and financials...and they banned short-selling banks and financials. Ouch! The path to zero was not a straight line!!
I remember there was some surprise rate cut (mid-meeting) in 2001 or maybe 2002 that just ripped everything higher. If I remember right, it was like a 10% and then an 8% up. And then it just melted for months after that. It was strange because there was fear, but to the upside.
People underestimate how difficult it is to hang on to a short during a relentless bear market.
I wasn't trading in the '70s (I'm an apathetic Gen-Xer), but that Mar 2000 to Mar 2003 was a brutal grind lower. Every bear market since then has bounced in a year or less (I guess the GFC crash was a little bit longer), but I worry the BTD mentality in the next bear market is going to take a lot of people out if they expect every big rally to be "the" bounce. I do think the Fed put strike will be lower if inflation remains elevated. Bailing out the asset owners while the majority are suffering from higher food and energy prices will be a bit of an obstacle in deciding to cut rates. As you always say, it doesn't matter what I think should happen, just what I think will happen.
Kent - I think that this one will be different in that it will be in a real select group of stocks. Everything that everyone rushed into during COVID with so much gusto will be for sale for probably years. But I expect that real economy stocks can actually rally. So, it's going to look much different than 2000-2003 IMO.
That's my $0.02.
Thanks for sharing all your views. Have a great night, Kev
Good article. Selling downside puts against long puts at a higher strike works also if you sell the puts of a shorter term option. The theta can be very attractive in many cases
Peter - I am sorry, but I probably make myself clear. I think we are in a bear market in NON-PROFITABLE TECH / ARKK companies. I think the stock market as a whole, is still firmly in bull mode. So, I think we are in agreement.
I'm also putting on a position - short NQ, long RTY going into CPI day tomorrow.. what are your thoughts on using longer-dated CL contracts to offset NQ shorts as well? NQ/RTY more correlated but CL is definitely tempting.. if good idea, how would you size? I've been using IV-adjusted notional values
Hey Ricardo - you're really strapping on the correlation / relative value trades!
For me, this is the first day of a bounce in NQ - meaning this was the first day it led. I like giving it a few days before I fade the strength, so I am waiting still.
What I am really hoping for is a 20% rip higher in ARKK. I'm no longer short and everyone seems to be leaning on it. I think that thing could explode (but don't get me wrong, a year from now it's going to get halved again I think).
How far out are you going in CL? The really far-dated stuff has got a wide bid/ask and it doesn't move. Are you just talking this Christmas? Or like Dec 2023?
Hey Kev - lol, not strapping on in size yet but looking to initiate position before CPI tomorrow since I believe there’s some potential for upside surprise. Too tempting. For CL, I mostly like Dec 2023 but sometimes also 2024 if holding longer term
I am going to do some work on the correlations with those longer-term CL contracts. I am just straight out long and letting them cook. I never thought about trading them. You might have unleashed a madman now! :)
Such a great read.. love the attitude.. definitely worth a try .. I wonder how managed futures/CTA accounts would fare under this scenario, since they are essential trend followers.. ?!?!!?
Yeah, Motown lectures me what seems like every week about the folly of trying to short bitcoin. He keeps attributing it to my "youth."
Let's see what he says. He's probably out bikeriding right now. Either that, or he is in his bathrobe hanging out on his porch yelling at the kids on his lawn.
Structurally it’s much easier being long. It’s just the physics.
I wrote myself a memo a couple years back about how to be short. Readers digest version; buy one month puts after a huge squeeze. Wait 3 or 4 days and see if the sell off resumes. If it does, great. If not, sell the puts out for hopefully a small loss.
This has worked for me in the past. Your mileage may vary.
That's a good idea Alan! Especially if you believe that any upside move will be larger than should be the case. You own the upside gamma cause that's where the exciting moves will be. Thanks for sharing!
Kevin, glad you mention that violent rally happens in bear market. It's the same thing in SPY. When SPY jumps more than 3% in one day, it is a confirmation that we are in a bear market.
This is where I like to use put spreads. Doing it as a spread minimizes paying crazy vols outright as you're spreading one vs. the other (buying ATM or OTM and selling further OTM), and reduces your theta decay. You don't get the vega pop of outright puts, but if your alternative is shorting delta 1, then it's not much of a loss. Then on the crazy rallies, your delta goes away making it a whole lot less painful. I don't trade the asset that shall not be named, but if I did trade it from the short side, I'd take a hard look at put spreads as a risk-managed way to do it. Just my 0.02.
That's great advice Kent. And it makes tons of sense because you are actually long the gamma at the upward strike, and selling the expensive down-and-out strike. This is a good strategy for this environment.
As for the asset that shall not be named, does shorting the ETF and futures outright and then adding short calls count as a hedge?
A Texas hedge! :)
Congrats on the mention in Bloomberg's 5 Things Asia Edition. Happy to see a good person do well. Enjoy and appreciate all of your effort and insight.
Mark - thank you for the kind words. It means a lot. Have a great night! Kev
Selling 100-150% iVol via 1-month OTM calls to the crayon eaters seems to be working out pretty well atm (famous last words!)
"crayon eaters" could be the best line ever. :)
They call themselves that.
Well, I actually respect their self-deprecating humour. That line they use about "making so much money that you will be able to get your wife's boyfriend to move out of the house" cracks me up. They are a funny bunch! Ya gotta give 'em that!
Ack, I didn't mean this in reference to Patrick. It's just what the HFs/Professional Shorts call the whole AMC/GME/"squeeze the shorts" crowd.
I didn't realize that! I love that line. Thanks for explaining.
You know who has this level of conviction? @VolatilityQ who is now @ChiefQuant/@WifeyAlpha. You should get this person on the Huddle. Called the top in risk parity on 11/9: just look at $RPAR, it's dead. I've often thought about holding that short instead of longing and shorting... but God do I love the vol.
Thanks Faraz! I will check him out. I follow the account, but am confused as to why there are two accounts. Any idea?
In this cycle I will try to obtain put spreads at zero cost. During the raises buying small positions in atm puts. Selling 40 delta puts with drops of two or three sd deviations and increases in volatility. And I say that I am going to try it, because in excel or python it is all very nice.
Hahaha! Yeah, in excel and python, backtests *always* look nice. :)
Thanks for putting a smile on my face tonight. And best of luck! I hope it works as well in real life.
have a great night,
Kev
Your broader point is well taken though and should be heeded. One of my worst days was in the middle of the '08 meltdown, short a bunch of banks and financials...and they banned short-selling banks and financials. Ouch! The path to zero was not a straight line!!
I remember there was some surprise rate cut (mid-meeting) in 2001 or maybe 2002 that just ripped everything higher. If I remember right, it was like a 10% and then an 8% up. And then it just melted for months after that. It was strange because there was fear, but to the upside.
People underestimate how difficult it is to hang on to a short during a relentless bear market.
I wasn't trading in the '70s (I'm an apathetic Gen-Xer), but that Mar 2000 to Mar 2003 was a brutal grind lower. Every bear market since then has bounced in a year or less (I guess the GFC crash was a little bit longer), but I worry the BTD mentality in the next bear market is going to take a lot of people out if they expect every big rally to be "the" bounce. I do think the Fed put strike will be lower if inflation remains elevated. Bailing out the asset owners while the majority are suffering from higher food and energy prices will be a bit of an obstacle in deciding to cut rates. As you always say, it doesn't matter what I think should happen, just what I think will happen.
Kent - I think that this one will be different in that it will be in a real select group of stocks. Everything that everyone rushed into during COVID with so much gusto will be for sale for probably years. But I expect that real economy stocks can actually rally. So, it's going to look much different than 2000-2003 IMO.
That's my $0.02.
Thanks for sharing all your views. Have a great night, Kev
So you are finally going to go long call premium?
Hehehehe. I own call premium... in gold. :)
Good article. Selling downside puts against long puts at a higher strike works also if you sell the puts of a shorter term option. The theta can be very attractive in many cases
Hi Kev, agree with your short idea, but my work suggests it might be early. Perhaps when NQ gets to 16875 or so...
Peter - I am sorry, but I probably make myself clear. I think we are in a bear market in NON-PROFITABLE TECH / ARKK companies. I think the stock market as a whole, is still firmly in bull mode. So, I think we are in agreement.
Have a great day,
Kev
Gotcha - definitely agree with that
So, insightful. Lead the way, brother. Thank you!
Thanks Thomas! Have a great night, Kev
I'm also putting on a position - short NQ, long RTY going into CPI day tomorrow.. what are your thoughts on using longer-dated CL contracts to offset NQ shorts as well? NQ/RTY more correlated but CL is definitely tempting.. if good idea, how would you size? I've been using IV-adjusted notional values
Hey Ricardo - you're really strapping on the correlation / relative value trades!
For me, this is the first day of a bounce in NQ - meaning this was the first day it led. I like giving it a few days before I fade the strength, so I am waiting still.
What I am really hoping for is a 20% rip higher in ARKK. I'm no longer short and everyone seems to be leaning on it. I think that thing could explode (but don't get me wrong, a year from now it's going to get halved again I think).
How far out are you going in CL? The really far-dated stuff has got a wide bid/ask and it doesn't move. Are you just talking this Christmas? Or like Dec 2023?
Hey Kev - lol, not strapping on in size yet but looking to initiate position before CPI tomorrow since I believe there’s some potential for upside surprise. Too tempting. For CL, I mostly like Dec 2023 but sometimes also 2024 if holding longer term
I am going to do some work on the correlations with those longer-term CL contracts. I am just straight out long and letting them cook. I never thought about trading them. You might have unleashed a madman now! :)
Thanks! Have a great night,
Kev
You forgot Duke and Duke.
You know, that reminds me, I still have never traded OJ. I gotta come up with an excuse to put a position on...
Nice roll yield in the back months if you want to short some. Just watch for that winter frost in Florida.
I'm too much of an inflation bull to ever short a commodity. :)
Such a great read.. love the attitude.. definitely worth a try .. I wonder how managed futures/CTA accounts would fare under this scenario, since they are essential trend followers.. ?!?!!?
Thanks Ali! Yes, I think that many alternative asset classes will start to do better in this environment. Especially ones that benefit from the vol.
mtown looking forward to hearing your comment ;-)
It was that obvious? :)
Yeah, Motown lectures me what seems like every week about the folly of trying to short bitcoin. He keeps attributing it to my "youth."
Let's see what he says. He's probably out bikeriding right now. Either that, or he is in his bathrobe hanging out on his porch yelling at the kids on his lawn.
I know him too well...
Click on pic link below to see what Morris is up to:
https://1drv.ms/u/s!Av_wKZFdtnCKif5GGWu5ICTTi4zVlA?e=fNtEci
Structurally it’s much easier being long. It’s just the physics.
I wrote myself a memo a couple years back about how to be short. Readers digest version; buy one month puts after a huge squeeze. Wait 3 or 4 days and see if the sell off resumes. If it does, great. If not, sell the puts out for hopefully a small loss.
This has worked for me in the past. Your mileage may vary.
I think the key is "wait for the huge squeeze."
That's the part people have trouble with. It always looks like the bull market is set to resume and they get sucked back in.
I am not shorting anything unless it feels like I am the only one dumb enough to fade it.
Thanks for sharing your strategy and get out of the bathrobe! There are kids on your lawn that need yelling at.
Thanks Kevin! Do puts get so expensive during these major declines that they become impractical tools for shorting?
Great point. Yes, you are correct. It's just tough to make money on the short side.
I think it depends on the speed of the move. If it is a grind down then firm's short sale hedges will work and they will keep selling you more puts.
Depending on the skew you may make more money buying calls and selling the underlying delta heavy.
That's a good idea Alan! Especially if you believe that any upside move will be larger than should be the case. You own the upside gamma cause that's where the exciting moves will be. Thanks for sharing!