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A Tiny Hedge Fund Made 8,600% on a Vix Bet

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Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#71

Post by dsacco »

pmoriarty wrote: post #28
ajeet_dhaliwal wrote: post #15

Earlier quoted context omitted.

Do you write software? I don't get trading and I want to. I get programming. If you understand both that's great. I even took one masters course (as part of my bachelors degree) in financial mathematics about options, future, derivatives etc. but it didn't click at the time. I have funds to invest but every time I look into getting into I cannot bring myself to do it because I cannot stop my brain thinking it's gambl…

"Without insider knowledge I don't understand how I could beat the market short term." This is my own conclusion as well. Well, either that or luck. This goes double for long-term success. As the disclaimers say, past performance is no indication of future results.

> This goes double for long-term success. As the disclaimers say, past performance is no indication of future results.

Past performance is no guarantee of future performance, but it should absolutely be an indicator. Unless you view success in trading as a purely stochastic process, consistently beating the market is a strong signal that it can be done again in the future (by definition). If you do believe success in trading is a purely stochastic process, the disclaimer becomes moot in the “indicator” form or “guarantee” form because such a position is antithetical to trading in the first place.

To be more precise, if we're going to engage in deliberate trading at all, it's only productive to do so if we operate under the assumption that performance is random.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#72

Post by mrchicity »

branchless wrote: post #44
bequanna wrote: post #41

Earlier quoted context omitted.

Remember, not everyone participating in the financial markets is simply speculating. Indeed, many market participants are hedging their business operations, future production/consumption of physical commodities, etc. So, when a speculator takes the opposite position of someone looking to hedge risk value is created for the hedger. Sure, it's not necessarily tangible, but it isn't nothing.

Agreed, but there is a huge, huge amount of people doing very little of value. All the games with low latency and the rules for order placement could be changed to greatly simplify and stop the race to ever-lower latency. I work in it, it's a total waste of resources. Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy?

Why's it a waste? Low latency traders facilitate risk transfer in thousands of instruments at razor thin margins using automation. They keep prices efficient through arbitrage or predictive modeling. Even during extreme market stress I can trade SPY in my brokerage account within a penny of its true value. If the S&P 500 index futures or the S&P 500 stocks move, someone will update the price of SPY instantaneously.

You want them competing with each other. To win they have to make the tightest price before a competitor, which either lowers their margins or requires them to bring new information to the market sooner.

If you accept that markets require intermediaries to bridge liquidity gaps in time, place, and product, then high speed traders are far less wasteful than the firms they replaced. Consider this: In 2000 Goldman Sachs bought Spear, Leeds & Kellogg (SLK), a large NYSE dealer. SLK employed 2500 people and earned over a billion dollars annually. That's one firm on one exchange. Each market had thousands of men in jackets yelling at each other, making a much bigger spread on transactions, and giving less accurate pricing.

Today there are a couple thousand people involved in low latency trading across all markets/firms and the entire industry makes a few billion dollars a year. Teams with a handful of quant researchers make markets in every listed stock globally.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#73

Post by minimax »

1024core wrote: post #47

ELI5: what is the correlation between $VXX and $XIV ? Over the past 2 years, they moved in tandem but opposite directions. But when $XIV crashed, $VXX didn't go back to the corresponding price.

The XIV is (was) meant to track the daily inverse of (roughly) the same underlying index as VXX. So a 10% up day for the index should be 10% up for VXX and 10% down for XIV. Now we can plug in rough approximations for Monday 2/5 and Tuesday 2/6.

The underlying index was up something like 90%. So VXX up 90% and XIV down 90%. Next day the index goes down 25% so VXX down 25% XIV up 25%. The two day returns for VXX will be 1.90 * .75 = 42% up and the two day returns for XIV will be 0.10 * 1.25 = 87.5% down. You can see how the daily tracking blows out the tracking over longer terms (just 2 days in this case). Since the VIX moves had been relatively small on a day to day basis, it sort of looked like they tracked each other on inverse terms over longer periods but it was just an illusion.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#74

Post by dsacco »

pedrocr wrote: post #43
ajeet_dhaliwal wrote: post #15

Earlier quoted context omitted.

Do you write software? I don't get trading and I want to. I get programming. If you understand both that's great. I even took one masters course (as part of my bachelors degree) in financial mathematics about options, future, derivatives etc. but it didn't click at the time. I have funds to invest but every time I look into getting into I cannot bring myself to do it because I cannot stop my brain thinking it's gambl…

But do you want to invest or do you want to trade? If what you want is to invest your objective should be to get the average of the market as cheaply as possible not beat it. Here are two articles to help you with that: For the rational part: https://web.stanford.edu/~wfsharpe/art/active/active.htm For the emotional part: http://awealthofcommonsense.com/2014/02/worlds-worst-market-... And if you need a good source fo…

> But do you want to invest or do you want to trade?

This is a false dichotomy.

First, just semantically speaking: investors "invest" in hedge funds that engage in speculation via trading strategies across a continuum of risk profiles. Hedge funds take their capital from "investors"; they typically have "Chief Investment Officers", and their traders execute trades in order to fulfill investment goals for clients according to fund-specific "investment mandates."

Second, by actual meaning: investing does not refer only to "value investing", which is substantially what you're referring to. Investors are, in the abstract, people who seek a positive return on their capital relative to another benchmark, where that benchmark is typically parameterized by risk, percentage return and liquidity. Trading is an activity in the service of investing, and a trading strategy is the execution of an investment thesis. The principles that allow for positive returns in value-based investing and index investing broadly generalize to other areas of investing, and essentially map to the concepts of arbitrage and (mis)priced assets in the abstract. Just as you can get invest your capital in real estate or young startups, you can invest your capital in trading strategies.

Whether or not it's wise to pursue a self-managed trading strategy (or seek others to manage one for you) is a completely separate topic; my point here is to emphasize that we're doing a conceptual disservice in education (and an abuse of well-accepted terminology) if we act as though trading and investing are different concepts. A much better way to frame your point here is to use terminology such as "passive investing" versus "active investing."

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#75

Post by anonu »

ajeet_dhaliwal wrote: post #15
anonu wrote: post #12

In trading and the markets, you can beat the drums of war for as long as you want. At some point you will be vindicated. Then everyone will look back at you and think "genius!". Ultimately, timing is everything. I can tell you markets will be X in Y time. Within reason, there's a good chance it will happen. Question is just "when?" The problem with strong views is whether they can be maintained. Being short in a risi…

Do you write software? I don't get trading and I want to. I get programming. If you understand both that's great. I even took one masters course (as part of my bachelors degree) in financial mathematics about options, future, derivatives etc. but it didn't click at the time. I have funds to invest but every time I look into getting into I cannot bring myself to do it because I cannot stop my brain thinking it's gambl…

Trading successfully is conceptually simple: buy low, sell high. Finding these patterns is what's tough.

First you need to figure out what your investment horizon is. Microseconds or years? Or somewhere in between?

If you're good at programming there's a good chance you'll be attracted to the shorter time horizons (high frequency trading). At a longer time horizon your risks are different and so are the programming skills you need. Generally you'll need to be able to apply statistics and probability to what you're looking at. Look up Kelly criterion.

One of the best things to look at on any time horizon is liquidity differentials. Try to find two things that should be the same thing from a price or risk perspective, but trade with different volumes.

In the ETF space an example of this is the ETF versus it's basket. Or leaders and laggards within a specific sector.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#76

Post by prklmn »

mrchicity wrote: post #72
branchless wrote: post #44

Earlier quoted context omitted.

Agreed, but there is a huge, huge amount of people doing very little of value. All the games with low latency and the rules for order placement could be changed to greatly simplify and stop the race to ever-lower latency. I work in it, it's a total waste of resources. Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy?

Why's it a waste? Low latency traders facilitate risk transfer in thousands of instruments at razor thin margins using automation. They keep prices efficient through arbitrage or predictive modeling. Even during extreme market stress I can trade SPY in my brokerage account within a penny of its true value. If the S&P 500 index futures or the S&P 500 stocks move, someone will update the price of SPY instantaneously. Y…

How much of that is simply splitting pennies and front running slower traders? Is that truely creating value? Seems like they’re siphoning value to me.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#77

Post by [deleted] »

pjc50 wrote: post #59
justaguyhere wrote: post #45

Earlier quoted context omitted.

I feel the same. I can understand programming, business etc - anything that involves creating something of value and exchanging it for something else of value with money as the medium. Two things that I never understand are - high end art market (a single painting is worth hundreds of millions of dollars, really?) and stocks. How is stocks not gambling? What exactly is being created here? It is just gambling and spec…

Stocks are an entitlement to a future income stream, created by a the real business of the company being invested in. It's just that there's a lot of levels of indirection.

[deleted]

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#78

Post by skellera »

justaguyhere wrote: post #45
ajeet_dhaliwal wrote: post #15

Earlier quoted context omitted.

Do you write software? I don't get trading and I want to. I get programming. If you understand both that's great. I even took one masters course (as part of my bachelors degree) in financial mathematics about options, future, derivatives etc. but it didn't click at the time. I have funds to invest but every time I look into getting into I cannot bring myself to do it because I cannot stop my brain thinking it's gambl…

I feel the same. I can understand programming, business etc - anything that involves creating something of value and exchanging it for something else of value with money as the medium. Two things that I never understand are - high end art market (a single painting is worth hundreds of millions of dollars, really?) and stocks. How is stocks not gambling? What exactly is being created here? It is just gambling and spec…

Most people don't look further than the stock price and if they like the company. In that case, it is gambling. People think they don't have to spend any time and they should get a good return.

Like Peter Lynch says, most people spend more time deciding on what refrigerator to buy than the stock they're buying. If you spent as much time researching a stock as you do a house, you'd probably do much better in the market.

Stop buying stocks only because someone told you to or because you like the company.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#79

Post by dragontamer »

JumpCrisscross wrote: post #64
dynamodispatch wrote: post #55

Earlier quoted context omitted.

> I used to make equity derivative markets. By market, I was referring to the stock market. Also, are you claiming to be a market maker? > About thirty minutes after CNBC said something about something, a tsunami of idiotic Charles Schwab and friends order flow would hit our systems. It absolutely moved prices. It doesn't take 30 mins after the news breaks for stocks to move. And the move is usually orchestrated by t…

> I was referring to the stock market. Also, are you claiming to be a market maker? I used to be a market maker of stock options, amongst other things. > It doesn't take 30 mins after the news breaks for stocks to move When it comes to markets, test every assumption. In reality, information diffusion is unpredictable and heterogenous [1]. This is due to, in part, the "effects of limited attention in at least part of…

Options are great, even for individuals. The main issue is that everything is in size 100 lots, so a huge number of stocks are simply "too big" for me to regularly use options on as an individual.

If I were to do something like sell a put option on AAPL ($156.41 at the moment) would be $15641 into a single stock that I may have to put up. I'm closer to ~$5000 per trade as an individual, its not like I have as much money as those banks or hedge funds. In short: I'm only really able to buy and sell options on shares with $50 or lower prices. At least with my relatively conservative trading style.

But still, selling puts is a cool way to be "paid to be forced to buy a stock", and if you're worried about missing the upswing, you can always sell a put (at the money) + buy a call out of the money. Such a trade benefits from the volatility of the market, and is still strictly safer than owning the stock outright.

I mean, I'm a long-term buy-and-hold investor. Selling puts + buying a FOMO out-of-the-money call option is a really good trade most of the time. Given the tradeoffs and the decisions I've made on my portfolio. It basically allows me to benefit from market volatility.

Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet

#80

Post by skellera »

defo_nonconvex wrote: post #60
hyencomper wrote: post #39

Earlier quoted context omitted.

Benjamin Graham's The Intelligent Investor elucidates the principles of value investing as opposed to risky gambling. This is a book recommended by Warren Buffett too.

I tried to get through this, but after one or two chapters it seemed really dry, and somewhat outdated for current markets. I've read dry material on financial markets before, but jeez. Did you actually learn much from it? If anyone wants to post a tl;dr summary, it would be appreciated.

Like the other guy said, if you need a TLDR for learning stocks, maybe it's something you shouldn't be getting into.

It's a dry book yet still one of the most recommended out there. There's a reason for that. You aren't going to learn the market in a day.

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