Wednesday, October 24, 2018
Thursday, September 27, 2018
Your edge against the market is a product of two things: pain (failures) and boredom (research). The more of pain and boredom you absorbed, the more chances you're above the market, cause normal people do their best to escape them. #trading #investing— Alexander Kurguzkin (@mehanizator) September 27, 2018
Wednesday, September 26, 2018
Monday, May 8, 2017
Thursday, March 10, 2016
At the other hand, the same market crowd wants a premium for being exposed to market volatility.
It sounds a paradox: the market crowd wants to be paid for consistently failing to do its job of correctly pricing the assets. They want to be paid - and, actually, are paid - for the failure.
The indicator is a basket of 3 ETFs: SPY for stocks and VXX, VXZ for volatility. Each part is normalized on realized 21-day volatility.
It seems like the indicator is going down in coming months. This may be when the market stays in regimes like:
- volatility is down, VIX futures are in a steep contango, market upside as usual or narrow range like in first half of 2015 (but I must say that was quite unusual).
- stocks are falling steadily, but no significant surges of volatility, VIX futures curve is flat.
In these market regimes volatility selling with stock index hedging could be a good idea.
Wednesday, March 9, 2016
You can understand a risk as a probability to underperform some risk-free benchmark on some time horizon. And now we have a parameter here - the time horizon.
If you hold a stock portfolio, the more the time horizon, the less the chances to underperform a risk-free benchmark because most factors creating local volatility have cyclical, mean-reverting nature. The longer you wait, the less are the losses they inflict to your portfolio. They may create a local volatility, but the overall action along the time horizon may be insignificant.
For example, you may observe periodical risk-off/risk-on trends, created only by massive emotional contagions. They create volatility spikes, extreme price actions, ruining your Sharp ratio. But they are cyclical and mean-reverting on scales rarely beyond a year.
So, the simplest way to improve your return to risk ratio is to redefine your risk to exclude local volatility as a measure, and to extend your time horizon so you could ignore short-time cyclical price actions.