Democracy is a random gamma-generating machine

Thu, May 17, 2012 | Jared Woodard

Market Commentary

A few weeks ago, his thoughts about the world were of no consequence to anyone outside of Greece. Now, the leader of one of Greece’s political parties can move markets with a strong word or two. Democracy is a random gamma-generating machine.

Alexis Tsipras is the leader of Syriza, the anti-austerity party that finished in second place in Greece’s election on May 6. Syriza is expected to finish in first place in the upcoming June 17 election. On Wednesday, Tsipras described fiscal austerity as a “disease” that will destroy Greece and the rest of Europe if left unchecked, and was widely quoted as accusing Merkel and the European leadership of “playing poker with the lives of the people.”

He could say much more. Tsipras could, for instance, make it clear that Syriza would only join a government contingent on sweeping debt forgiveness and bank recapitalization, or he could begin pushing explicitly for an exit from the euro and strict capital controls. Alternatively, he could co-opt popular anger and try to champion a modest revision to the austerity agreement already in place with the EU and IMF.

Any such statements could move markets. In the jargon of options, Tsipras is a one-man long straddle: he could go either way, and could generate large market swings in either direction. But it’s not just about the direction (the delta). The politics are so precarious right now that a hint of a move will be self-reinforcing, meaning that there is a lot of gamma inherent in the situation.

This time last month, Tsipras and Syriza did not have this kind of economic power, this market-moving optionality. It was granted by the people. Democracy is not always the anodyne, neutered political arrangement that it seems to be. Some political philosophers have argued that there is even a natural tension between capitalism and democracy – that the needs of the people as expressed in the ballot box will often conflict with the inhuman preferences of capital. Politics in Greece are an example of that tension: where the Troika is seeking to reduce volatility in whatever way they can, the Greek people are buying gamma while they can.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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