The Blatant Con...

This is not an original research - something forwarded by a friend, but I believe this need to be disseminated

Last Tuesday afternoon, the White House announced that Kodak – a public company with less than $100 million in market cap (which basically means they're essentially a pension fund with a famous brand name attached) – would receive $765 million in “loans” from the US government to create a “pharmaceutical start-up” that over a period of 8 YEARS will start making pharmaceutical “supplies: (Whatever the fuck that means)

This $765 million in non-recourse, non-securitized loans for pharmaceutical supply production, given to this micro-cap company with zero experience / expertise in pharmaceutical supply production, comes from the International Development Finance Corporation (DFC), a $60 billion piggy bank that is one of many White House conduits for crony capitalism, established by the Trump administration in 2018 to replace the Overseas Private Investment Corporation (OPIC).  Emphasis on "international development" & "overseas" 🤔

On the corporate side of the con, we have Kodak Chairman and CEO Jim Continenza, who picked up 3 million shares and cheap options over the past 4-6 months. It’s Kodak board member George Karfunkel of the private equity and banking Zyskind-Karfunkel family, with his 6.4 million shares. It’s Kodak board member Philippe Katz, who owns about 4.3 million shares through at least five shell companies.  Of these shares, they were also each granted tens of thousands of shares in Kodak just over the past 60 days. In addition, Kodak granted Jim options for $1.75MM shares on Monday, the day before the announcement (and stock tripling)!!  BRAZEN & BLATANT!  Then again, when you have AG Barr to do your bidding, you're ensured any SEC investigation will be quashed quietly on the back-end (if it even occurs at all).  Jim also happens to be CEO of Vivial, a digital marketing company, which is Jim’s particular forte.  Yup he's a marketing guy...i.e. he peddles bullshit.  No background in manufacturing.  No background in biopharma. 

Based on Thursday's closing price for Kodak stock, they made about $400 million over the 48 hours post-announcement.  Let's also acknowledge the small-fry Kodak grifters who covered their tracks & tipped their buddies about the deal, sparking 1.65 million Kodak shares trading for $2+ on Monday, about 25 times the average trading volume of the prior weekin advance of the Tuesday announcement.

On the government side of the grift, it’s Donald Trump, who gets a press conference, a talking point and assuredly a kickback when he exits the presidency.  Kodak (or some private LLC of which Jim, George & Phillipe are managing members) will surely pay Trump his 20-30% cut (on the entirety of gains of course - the capital gains as well as the $765MM recourse-free "loan") in the form of a massive "consulting fee", or donate to one of his "charities" or shell corps, from which the money can of course be easily siphoned as needed).  It’s Commerce Secretary Wilbur Ross and Secretary of State Mike Pompeo, who of course "just happen" to sit on the DFC board of directors, each pocketing a favor as well as a kickback as aforementioned.  It’s Larry Kudlow, the nation's top economic adviser, who also "just happens" to be a University of Rochester alum and friend of Kodak (but of course), who pockets a BIG favor & his cut.  And where is Eastman Kodak headquartered you ask?  You guessed it - Rochester!

And it's Adam Boehler, the 41 year-old head of the DFC (he's just a figurehead of course - he does the bidding of the Board of Directors & is there to create the optics of independent governance), who will get a cushy CEO gig somewhere in the private sector once he exits government "service" 😂. So how does the head of what's essentially a government slush fund “learn” (and I quote) that a failed company with ZERO experience in pharmaceuticals “was interested in creating a start-up that could supply ingredients for pharmaceuticals”, and so – within a matter of days – advances a proposal to give that failed company $765MM American dollars...US taxpayer money...YOUR tax $$ (and mine)?  Did someone email him at lol?!!  I'm guessing he "learned" about Kodak’s "pharmaceutical start-up plans" (oh the bullshit is strong in this con) from Uncle Wilbur or Uncle Larry after they had a really interesting conversation with their good friends in Rochester.

I wonder - what evidence was proffered to Adam and the DFC board showing Kodak’s pharmaceutical start-up expertise?  Looking at Kodak’s 10-K and 10-Q, they talk about the business lines that Kodak has – Traditional Printing, Digital Printing, Advanced Film Materials & Chemicals, and a fourth category they just call “Brand” – I’m wondering where pharmaceuticals fits into this picture?!  Looking at management discussion of new business & licensing opportunities, which took place at the annual shareholders meeting on May 27th – just 8 weeks ago!! – where they talk about opportunities in “3D printing, smart material applications and printed electronics”, I can’t find a single mention of anything related to "pharmaceuticals".

Financial diabolical genius no doubt.  Surely this is the first time Jim & the Kodak gang tried implementing a scheme like this.  I say Nooooo!  Waaay back in the stone ages that was 2018, Kodak decided to reinvent itself as a crypto play, complete with a failed ICO and a Bitcoin-mining machine to boot (I shit you not - it was called the Kodak KashMiner). What did Kodak stock do?  It tripled in a week before subsequently reverting back in the weeks thereafter.  So of course Jim et. al decided it was time for another pump-and-dump scheme.

Straight theft - it's wealth redistribution from taxpayers directly into the pockets of these cockroaches.  Kodak profits by getting $765MM for free, management makes hundreds of millions in the market off this pump-and-dump scheme, AND they get to generate profits from selling whatever they manufacture (almost surely back to the taxpayers, which will pay a huge markup to ensure Kodak generates tons of profits), which then means the execs get an even larger payout for years to come!

Ladies & gentlemen, you just got jacked.  

Machine Learning Model Validation

I just came across an excellent and highly relevant piece of research "A comparison of machine learning model validation schemes for non-stationary time series data" by Matthias Schnaubelt. Features like non-stationarity, concept drift, and structural breaks present serious modelling challenges, and properly validating ML time series models requires knowing proper validation strategies.

Dr Schnaubelt writes:
Using  cross-validation  for  time-series  applications  comes  at  a great risk.  While theoretically applicable, we find that random cross-validation often is associated with the largest bias and variance when compared to all other validation schemes.  In most cases,blocked variants of cross-validation have a similar or better performance, and should therefore be preferred if cross-validation is to be used. If global stationarity is perturbed by non-periodic changes in autoregression coefficients, we find that forward-validation may be preferred over cross-validation.Within forward-validation schemes, we find that rolling-origin and growing-window schemes often achieve  the  best  performance.   A  closer  look  on  the  effect  of  the  perturbation  strength  reveals that there exist three performance regimes:  For small perturbations, cross- and forward-validation methods perform similarly.  For intermediate perturbation strengths, forward-validation performs better.  For still higher perturbation strengths, last-block validation performs best.

While some of this I intuited and used in practice, it is great that someone has thoroughly looked and analyzed the topic. If you are using machine learning in finance and want to weigh in with your experience with these or other validation strategies, please leave a comment.

Deribit Extreme Put Skew

I am watching Deribit, and 8000P expiring in 11 1/2 hours is 0.0005 bid for 100 contracts. This just ticked to be 200% vol. While we've seen these levels back in March, that was then. Either someone is really nervous about almost 1300 point drop, or forgot that they have an active order and went to sleep :)
And ... it did not last too long, I think someone was also watching this strike vol creeping up and as I was writing the post lifted all bids on the line.

Update: 7.5 hours left, and buyer is back with 600 contract bid at 250% vol. What is going on? Does someone knows something others don't?  Is someone forced to hedge margin? There certainly not many sellers left.

Update: And the contracts traded; markets @ 0.0005 x 38
Final update: Expired far far otm. 

Expiration Dates For VSTOXX, VNKY, RTSVX, VHSI

For anyone tracking all domestic and international volatility futures I put together this guide. Email me if I am missing a contract
  • CBOE: expiration is 30 calendar days before options expiration, Wednesdays, AM special opening quotation. Source.
  • VSTOXX/EUREX: expiration is 30 calendar days before options expiration, most of the time same day as CBOE, Wednesdays, settled to an average index value between 11:30 and 12:00 Central European Time. Source
  • EURO STOXX 50 Variance Futures/EUREX: One business day before the third Friday of the maturity month; settlement based on the average of the EURO STOXX 50® index calculations between 11:50 and 12:00 CET on the third Friday of the maturity month. Source.
  • RTSVX/MOEX: expiration is 7 calendar days before options expiration (which is around 15th of the month). Settled to the average index value of the evening trading session. Source.
  • VHSI/HKEX: 30 calendar days prior to the second last business day of the next month, settled to the average of the last half hour. Source, source.
  • VNKY/OSAKA: last trading day is the day preceding the day that is 30 days prior to the 2nd Friday of each month, Tuesdays. Source, source.
  • INDIA VIX/NSE: weekly contracts, expiring on Tuesdays. Source.
  • V-KOSPI/KRX: day after 30 calendar days prior to the following month's KOSPI200 options last trading day. Source.
  • AVIX/ASX: expiration is 30 days prior to the third Thursday of the following calendar month, generally day before CBOE volatility expiration; settling into the average value of the S&P/ASX 200 VIX between 11.30am and 12.00pm on that day. Source, source.

VIX - Simple and Intuitive Explanation of Volatility Index

Few years ago I published two post trying to give simple explanations and intuition behind complicated formulas used for calculating vol indexes. However few of you emailed that some charts are missing from these older posts, and for technical reasons since I could not restore them, I decided to re-created new charts from scratch, and re-write the posts. In this post I will make many simplifications and sacrifice rigor to provide intuition behind calculations. 

There are two formulas that are used to calculate vol indexes: the theoretical variance swap formula

and its practical discrete reformulation:

While these formulas may look complicated it is actually really simple if viewed in a chart. Below are 3 charts that will illustrate step by step what the formula means, and I hope will provide intuitive understanding behind the formula. For the charts below I used simulated prices of calls and puts on a hypothetical stock with time to expiration = 0.1 and 20% annualized volatility, so we should expect the volatility index  in this theoretical example to be about 20. I plot prices of calls and puts vs strike.

Let's consider just OTM options:

The higher the perceived risk, the higher volatility will cause higher options prices, and "taller" price curves on the chart. Conversely, lower prices = lower curves. The intersections of these two curves looks like a curved pyramid. Higher prices, higher vol would create taller pyramid.

The old VIX index and any other ATM / ATMF based index has a very simple meaning - it is proportional to the height of the pyramid - red line on the chart - which is just ATM price of a call or put. Approximate formula for ATM option ( call or put ) is 0.4 *  volatility * index price * √ time to expiration . The reverse of the formula is volatility  = height of the pyramid / 0.4 / index price / √ time to expiration . In our case height is 2.53, and volatility  = 2.53 / 0.4 / 100 / √ 0.1  = 0.2 or 20% , exactly the vol we were expecting. So, in summary - ATM vol is height of the curve

Current VIX formula has a slightly different meaning - which involves an extra step. First, prices are re-weighted, or multiplied by 2/√ time to expiration  / strike2 . Then the area of the new pyramid is volatility squared. 

In our case the area is 0.04, or 20% squared, just like we expected. 

In summary - old VIX / ATM vol is the height of the pyramid, and current VIX ( or VSTOXX, or other vol indexes ) are the area of the pyramid. 

Send me an email if you want a copy of excel spreadsheet with calculations.

Machine Learning for Asset Managers

Marcos M. López de Prado's new book "Machine Learning for Asset Managers" is temporarily available online. Link, download link.
Check it out!

VIX + Covid 19 Crisis = Opportunities

Anybody who’s been even remotely following the markets over the last month knows that we are living through exceptionally volatile times.

- VIX has reached an all time peak of 83, surpassing the 2008 highs

- Crude Oil VIX (OVX) has exceeded high of 220 vol ( 190 record close )

- VIX term structure went on a record inversion

- VXX has went up almost 400% in less than a month
and so on...

With this, a simple spread trade on VXX / VXZ made over 50% in the last month ( and at one point much higher )

And this extreme volatility is not about to subside - with virus still rapidly spreading and posing tremendous health hazards, peak unemployment claims announced just this morning, and increased risk of unhealthy inflation from QE Infinity, volatility is here to stay.

So how should we trade now that the "big move" has already happened? The risk / reward calculus is no longer obvious. Veteran VIX traders who have been through 2008 may have contrarian views, and consider the current regime to yield plenty more opportunities for great trades.

If you remember, in 2014 I interviewed John Hwang (ex head of VIX trading at MS) about how to trade the VIX during market crashes. Recently, I had a chance to speak to John again, and he’s confided that he’s out of retirement, trading up to 17 hours a day, and “arbing the heck” out of the curve.

So I begged him to share some of his favorite trade ideas, and how to navigate the VIX at these levels, after the vol spike… and suggested that he republish his classic book.

Well, republishing books takes a while and because trading opportunities can go away, John has agreed not only to talk about VIX again, but to do a live training webinar to discuss unique, once in a life time opportunities to capitalize in this high VIX regime both on short and long vol sides (yes, even at this level)!

The 2 hr webinar will happen this Sunday (March 29th) at 4 PM Eastern, with an exclusive Q&A session (seats limited), and I will be joining as well. If you are interested, check out this link to find out more.

Weekly market report

Wall st delivered a mixed bag of news with VIX, VNKY, and VSTOXX and their underlying markets almost unchanged. VXD - volatility index based...