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One of these things took years to write

A full calendar around graduation means I haven’t had time to update the blog with the usual, but in lieu of research I thought I’d do a small dump here of some open browser tabs, in case you find some of these useful, too: Nemo’s Bond Crash Course – One of my resolutions for 2013 was to understand fixed income better. His recent bitcoin explainer reminded me of this bond intro. Also: @groditi, David Schawel Goldman: AUD/USD…

Volatility Clustering with Bobcat Goldthwait

Russell Rhoads draws a great analogy between volatility spikes and a famous incident in show business history: On May 6, 1994 Robert Francis Goldthwait made his mark on television history.  Better known as Bobcat Goldthwait, he chose for some strange reason to set fire to the interview chair during a guest appearance on the Tonight Show.  This incident lasted only 30 seconds or so as Jay Leno used his beverage to douse the flames.  I think what Bobcat…

Is the market reducing long-term volatility expectations?

In response to my earlier post on why options markets are being overly sensitive, Eli Mintz offered an interesting alternative explanation of the data:  @condoroptions My interpretation is more benign. I think that the market is just pricing lower average volatility long term. — Eli Mintz (@VixCentral) April 30, 2013 Here’s why this is a plausible explanation of those recent flattening periods in the VX slope. If the market is expecting lower volatility over the long term,…

Options markets are being overly sensitive

One of the most important market signals over the last five years has been the slope of the VIX futures term structure. In quiet, bullish markets, short term option premiums are significantly lower than longer-dated implied volatility; when risk scenarios roil markets, the term structure flattens and then steepens in the other direction. Changes in that dynamic have more explanatory power than many of the technical signals and chart patterns favored by directional traders. Since December 2012, however, changes in the…

When short gamma trading is your only hope

From early March through last Friday, there were really only a few ways to make any profits in the S&P 500, and looking at which strategies have been working gives us a good sense for the character of this market. First, let’s take a look at price action over this period. SPX went basically nowhere: Fig. 1. S&P 500 Index, March 6 – April 18. Source: CBOE Now, trading strategies can be classified according to the source of their risks/returns, meaning…

Nothing gold can stay

Gold is down 22% from its early October high and people are scrambling. None of the fundamental reasons supposedly favoring a continued rally in metals have proven true. Back in early February, when most banks still had price targets of $1800 or more, I reviewed the bull case for gold and found the arguments pretty weak. Fear of hyperinflation/central back activity isn’t an argument as much as a prophecy, and religion and investing don’t pair well; gold isn’t even a…

Yen Term Structure At Multi-Year Extremes

These days, it seems like every corner of the market in Japan is unusual in some way or other. We’ve recently looked at implied volatility skew in USDJPY and at the  high realized correlation between the yen and Nikkei index. Another sign of how unusual the market is acting these days can be seen in the term structure of yen implied volatility. For reference, this is what implied vol in a currency normally looks like: FXE 2…