We entered a short volatility trade on Friday in the CurrencyShares Euro Trust (FXE). My expectation was that the G20 “by any means necessary” backstop would prevent a dire outcome this week in the event of a Syriza victory in Greece. We didn’t see that thesis tested because the New Democracy win means the focus has shifted toward the formation of a coalition government. That hasn’t been a cause for celebration this morning, though, as European stocks are lower and Spanish yields are above 7%.
I like the positions we have in place but I won’t be adding to them today. I still think it makes sense to lean to the short volatility side in stocks given the calendar for this week. With a VIX close below 20, we may put on a VIX futures term structure trade later this week.
In the meantime, here are some things that caught my attention today:
- Liuren Wu, “A New Framework for Analyzing Volatility Risk and Volatility Risk Premium in Each Option Contract” - Wu and his frequent coauthor, Peter Carr, are two of my favorite finance geeks, so their stuff is always a must-read.
- Germany founded on a debt jubilee - the conventional wisdom these days is that the European crisis is all the fault of debtor countries who “borrowed beyond their means.” That couldn’t be more wrong: Germany’s export-dependent economy would be much weaker if not for everything it’s been able to sell those peripheral countries. And despite Germany’s modern image as an austere, “responsible” bastion of fiscal seriousness, this article explains that after World War II, Germany’s 300% debt-to-GDP did not crush the country into permanent oblivion because the U.S. Marshall Plan was effectively a debt jubilee, a clearing away of unpayable debt. You know, precisely the sort of policy that Germany now wants to block at all costs. [h/t Merijn Knibbe]
- Mark Spitznagel, “The Austrians and the Swan: Birds of a Different Feather” – Spitznagel, Nassim Taleb’s most famous protege, seems to be breaking from the swan-monger. I’m not much of a fan of Taleb, or of Austrian pseudo-economics, but Spitznagel’s thoughts on tail risk and hedging make for interesting reading in spite of the kooky politics.