An update on this trade in case anyone is interested. The position is now up 1500%. I also have another position which is up 2300% (it’s a deeper out-of-the-money put, which I realized would be an even better idea after seeing a Facebook post by Danielle Fong). For proper calibration I should mention that a significant part of these returns is due to chance rather than skill:
VIX (a measure of stock market volatility priced into options) was unreasonably low when I bought the puts (apparently because traders got used to central banks rescuing the stock market on every downturn), meaning the put options were underpriced in part due to that, but I didn’t know this.
Russia decided not to cooperate with Saudi Arabia in lowering oil production, in order to hurt the US shale oil industry. This is not something I could have reasonably predicted.
I also didn’t predict that the CDC would bungle their testing kits, and the FDA would delay independent testing by others so much, thus making containment nearly impossible in the US.
Another reason for attributing part of the gains (from betting on the coronavirus market crash) to luck, from Rob Henderson’s newsletter which BTW I highly recommend:
The geneticist Razib Khan has said that the reason the U.S. took so long to respond to the virus is that Americans do not consider China to be a real place. For people in the U.S., “Wuhan is a different planet, mentally.” From my view, it didn’t seem “real” to Americans (or Brits) until Italy happened.
Not only have I lived in China, my father was born in Wuhan and I’ve visited there multiple times.
It feels like your background should be attributed differently than things like the Saudi-Russian spat, or the artificially deflated VIX. In Zvi’s terminology this is an Unknown Known; it isn’t as though you weren’t updating based on it. It was merely an unarticulated component of the prior.
Have you sold those put options by now? Looks like the Fed and Treasury 6 trillion stimulation package boosted the market a lot. I had similar put position which dropped significantly during the past 2 days of Market rally. Do you think it is still good to hold the put options?
I did sell some of the puts, but not enough of them and not near enough to the bottom to not leave regrets. I definitely underestimated how fast and strong the monetary and fiscal responses were, and paid too much attention to epidemiological discussions relative to developments on those policy fronts. (The general lesson here seems to be that governments can learn to react fast on something they have direct experience with, e.g., Asian countries with SARS, the US with the 2008 financial crisis.) I sold 1⁄3 of remaining puts this morning at a big loss (relative to paper profits at the market bottom) and am holding the rest since it seems like the market has priced in the policy response but is being too optimistic about the epidemiology. The main reason I sold this morning is that the Fed might just “print” as much money as needed to keep the market at its current level, no matter how bad the real economy gets.
One explanation is that the deeper out-of-the-money put (which remains out-of-the-money) benefits from both a fall in the underlying security and an increase in VIX. The shallower out-of-the-money put (which became in-the-money as a result of the market drop) benefits from the former, but not so much from the latter. Maybe another way to explain it is that the deeper out-of-the-money put was more mispriced to begin with.
Not 100% on this but I suspect the in the money puts start to be dominated by the inherent value so you have to pay for that in the money portion of the option price. The out of the money put is pure volatility.
An update on this trade in case anyone is interested. The position is now up 1500%. I also have another position which is up 2300% (it’s a deeper out-of-the-money put, which I realized would be an even better idea after seeing a Facebook post by Danielle Fong). For proper calibration I should mention that a significant part of these returns is due to chance rather than skill:
VIX (a measure of stock market volatility priced into options) was unreasonably low when I bought the puts (apparently because traders got used to central banks rescuing the stock market on every downturn), meaning the put options were underpriced in part due to that, but I didn’t know this.
Russia decided not to cooperate with Saudi Arabia in lowering oil production, in order to hurt the US shale oil industry. This is not something I could have reasonably predicted.
I also didn’t predict that the CDC would bungle their testing kits, and the FDA would delay independent testing by others so much, thus making containment nearly impossible in the US.
Another reason for attributing part of the gains (from betting on the coronavirus market crash) to luck, from Rob Henderson’s newsletter which BTW I highly recommend:
Not only have I lived in China, my father was born in Wuhan and I’ve visited there multiple times.
It feels like your background should be attributed differently than things like the Saudi-Russian spat, or the artificially deflated VIX. In Zvi’s terminology this is an Unknown Known; it isn’t as though you weren’t updating based on it. It was merely an unarticulated component of the prior.
After today’s crash, what are you at now?
Up 2600% and 5200%. ETA: Now back down to 2300% and 4200%.
Have you sold those put options by now? Looks like the Fed and Treasury 6 trillion stimulation package boosted the market a lot. I had similar put position which dropped significantly during the past 2 days of Market rally. Do you think it is still good to hold the put options?
I did sell some of the puts, but not enough of them and not near enough to the bottom to not leave regrets. I definitely underestimated how fast and strong the monetary and fiscal responses were, and paid too much attention to epidemiological discussions relative to developments on those policy fronts. (The general lesson here seems to be that governments can learn to react fast on something they have direct experience with, e.g., Asian countries with SARS, the US with the 2008 financial crisis.) I sold 1⁄3 of remaining puts this morning at a big loss (relative to paper profits at the market bottom) and am holding the rest since it seems like the market has priced in the policy response but is being too optimistic about the epidemiology. The main reason I sold this morning is that the Fed might just “print” as much money as needed to keep the market at its current level, no matter how bad the real economy gets.
Why are deeper out-of-the-money puts better here? Have been scratching my head at this one for a while, but haven’t been able to figure it out.
One explanation is that the deeper out-of-the-money put (which remains out-of-the-money) benefits from both a fall in the underlying security and an increase in VIX. The shallower out-of-the-money put (which became in-the-money as a result of the market drop) benefits from the former, but not so much from the latter. Maybe another way to explain it is that the deeper out-of-the-money put was more mispriced to begin with.
For a given dollar notiional investment, you are buying more vega with deeper OTM puts (or just more contracts).
Basically the same as why getting things correct on 10 20-to-1 bets pays more than getting a 1-to-1 (even odds) bet.
Not 100% on this but I suspect the in the money puts start to be dominated by the inherent value so you have to pay for that in the money portion of the option price. The out of the money put is pure volatility.