Mar 23, 2017

What Matters for Bitcoin

The other week SEC rejected bitcoin ETF application, causing a sharp decline in bitcoin exchange rate. However after a few days market quickly recovered to pre-decision levels, near all-time bitcoin highs. I offer you some reasons why this is not surprising to me.

Of course if ETF were to be launched that would add significant allocation to bitcoin, and raise the prices. However even at this point in time there are plenty of convenient, completely legal and legitimate ways to purchase bitcoins. ETF would only add a convenience factor, however with a cost of trusting third parties - which would not be the case if you were to buy and store bitcoins directly.

Second, a number of financial instruments tied to bitcoin already exists (see this article for a comprehensive list) and if one is adventurous enough to allocate to bitcoin, one if probably ok with doing it outside of conventional US-ETF framework.

However what set bitcoin prices lower over the last weekend was a dispute of sorts about future of bitcoin - the bitcoin core vs bitcoin unlimited. I am not a specialist, but will try to explain it to the best of my understanding. Imagine you have a software upgrade that is not compatible with the previous version - that is pretty much the issue. The switch is called "hard fork" - hard meaning not compatible. The split in version is somewhat like a split in a political party - it is subadditive: two best scenarios for the value of bitcoin are if everyone stays with core, or if everyone switches to unlimited. The worst scenario is 50/50 split, where two separate incompatible ledgers coexist. I find this nonlinear behavior to be very interesting.

At this point about 11% of nodes have switched to unlimited according to coin dance. I will be writing more about this as the situation progresses.

Mar 9, 2017

End of an Era

Interactive Brokers Group, owner of Timber Hill, announced that they will be phasing out their options market operations (link). This is a really a pivotal announcement, that one of the oldest and most established derivatives market making operators is calling it quits. Other options market makers are not doing great either - earlier KCG announced that they are 'shuttering' their options market making business, and from what I hear other firms PL (DB, MS, Citadel) have been stagnant in the last 4-5 years.

IB mentioned that they are not exiting proprietary trading completely " The Company intends to continue conducting certain trading activities in stocks and related instruments." but I really don't understand what exactly are they going to do. Is there a special dividend in the near future for IBKR? Another part of the announcement is re-balancing of GLOBAL with almost doubling of USD share. Is this a good move to be purchasing dollars at multi-year highs? Only time will tell ...

KCG will also continue options trading, although not market making, and I have not hears of any other players exiting the field.

What does it mean for the market? Will spreads widen, or skews become more volatile? Will other market makers step in and profit from the gap? Or maybe there was really no gap - maybe Timber Hill will disappear with a whimper? If you have any predictions please share them in the comments!

Oct 31, 2016

Quick Analysis of Market-Implied Election Day Volatility

This is a quick note on market vol implied by SPX options for this year’s U.S. presidential election on Nov 8. Calculating implied event vol, for example for stock options over quarterly earnings announcement day, is commonplace and trivial, but in this election, for the very first time we have an opportunity to analyze the event with unprecedented granularity.

Before 2016, options expirations were available just once per week, typically on Fridays. This year CBOE launched SPX options expiring on Mondays and Wednesdays, allowing us to calculate implied volatility over the 48 hours from the close of Monday, Nov 7 to close on Wednesday, Nov 9. Since voting will take place on Tuesday, Nov 8, the results will probably be tallied to statistical certainty by the close of trading on Wednesday, barring the like of 2000 election debacle.
Looking at options data I calculated table below.

ContractFromUntil (Expiration)Implied Move
SPX.XO10/31/201611/2/20161.20%
SPX.XO11/2/201611/4/20161.16%
SPX.XO11/4/201611/7/20160.85%
SPX.XO11/7/201611/9/20162.17%
SPX.XO11/9/201611/11/20161.22%
SPX.XO11/11/201611/14/20160.79%
SPX.XO11/14/201611/16/20161.08%
SPXPM.XO11/16/201611/18/20161.10%
SPX.XO11/18/201611/21/20160.72%
SPX.XO11/21/201611/23/20160.93%
SPX.XO11/23/201611/25/20160.45%
SPX.XO11/25/201611/28/20161.09%
SPX.XO11/28/201611/30/20161.12%

As expected, the 48-hour period over election day shows the highest implied forward vol of 2.17%, about twice what we would expect for non-election trading period. Alternatively, we can say that market expects about 1.31% election event vol, and “regular” volatility of 0.79% per day. I realize that it is annualized vol of just 12.72%, which is much smaller than VXST but my number is the average through the end of November and by construction excludes election vol .

Also, today (at the time of writing) markets are higher, and vol indexes are higher - this is not surprise as VIX will rise into the election simply on "closer jump" effect.

Oct 17, 2016

SAR Volatility Arbitrage Is Having A Great Year

Numbers for September are in and SAR Volatility Arbitrage fund (from Zurich-based Systematic Absolute Return AG) is having a fantastic +8.13% return for September, bringing their YTD return to +36.34%. Firm's website describes the strategy as follows.
SAR Volatility Strategies (“VOLS”) are SAR’s newly developed, model-based and fully automated short-term systems, trading S&P 500 Index volatility. SAR VOLS combines long and short volatility momentum and volatility arbitrage strategies within balanced portfolios to provide protection against volatility spikes and market sell-offs, plus steady returns. 
Somewhat slim on details, I assume they trade mostly VIX futures or VXX. Congratulations, guys!