<p>I did a lot of arbitrage and I also relied on probabilities but I have still found myself swimming with a bunch of tails on occasion. :)</p>
<p>I was recently in a situation…not a trading situation…where I had a 99 percent chance of winning…a .999999% chance of losing x…and a .000001% chance of losing multiples of x. (I am not making up these percentages). It was a multi year deal. I decided to pay x now to end my situation which was a lot of money and might effect my future a bit. Losing multiples of x would definitely have affected my future. </p>
<p>I can do some math equations that show I should have waited to get out of my situation, but…my nerve isn’t what it used to be. I don’t want to spend any more time thinking about this because life is too short. I may be the only person in America that has done what I did to get out. I may end up in the papers. I would bet against this but it could happen. If I do end up in the papers, I doubt I will post a link. :)</p>
<p>I have done nothing wrong. Nothing illegal. I am not accused of doing anything illegal. Just got caught in a fluke. </p>
<p>I told one friend what I did. A trader. Has known me for 30 years. </p>
<p>My friend was shocked. He said, “You are an idiot. I never thought you would get out. You are one of the most logical people I have ever met. You are the last person I thought would ever get out. You cracked up”.</p>
<p>Usually, when I have gotten out of situations, I feel much better. This time…I don’t feel that great. I was primarily a mathematical trader. (Nothing complicated). This time…the math says wait it out. I didn’t wait it out.</p>
<p>Math doesn’t trump all but being able to get out of a position does - this is why I like options and specifically options on broad index etfs that trade weekly. I have roughly 25% in the market using long dated options that give me the same return as if I had 100% in the market minus dividends. Some of the rest I’ve used to buy protection for roughly a 10% correction. I also sell weekly otm puts, buy put spreads and sell lower strike spreads to pay for them. In all those put trades, I do not go for big paybacks. If I have to roll them out until the sun burns out, they are a small fraction of my assets so I don’t really get nervous. Making big bets always requires nerves of steel which I do not have.</p>
<p>We’ll see how I’ll handle a real drop in the market. I was able to stay in on IWM which I bought at around 117 before it dropped to 108 or so. I’m making certain that I have plenty of cash to go longer than I currently am if the market has a significant drop - I’ve been waiting for this just like everybody else.</p>
<p>It has been a long time since we had a 10 percent correction.</p>
<p>I was selling puts in iwm but I stopped during the last two weeks as iwm rallied. I may start again. Depends on how my brain blinks. </p>
<p>I sold puts in VZ. Several different price points and different probabilities. I was assigned on some of the puts as the 50 puts closed in the money. I am selling calls now too. Similar to rolling. I am getting older so I figure I can be long some VZ. Or roll until the sun burns out. :)</p>
<p>Warren Buffet is also long on VZ. I tend to roll my options to the next month so I won’t be assigned. But VZ has nice dividend so it literally pays to hold the stock.</p>
<p>A 90 vix may happen… 1 more time in our remaining years.</p>
<p>An 18-22 vix is a slam dunk. Going to happen many times in our lifetime.</p>
<p>What I find interesting is the complacency investors have. We are flipping from 2008.</p>
<p>Reading the threads, investors seem pretty confident stock returns are going to see them through retirement.</p>
<p>Maybe the complacency is well founded. I think the complacency is going to be tested. I don’t think I am saying anything profiund. I am just looking at history.</p>
<p>One idea that is perpetuated throughout the financial industry is to keep some cash to invest if the market drops.</p>
<p>How does that work?</p>
<p>Let’s say My portfolio is 10 percent cash and I am waiting for a 20 percent correction. We have the 20 percent correction. I buy. I saved 2 percent of my portfolio.</p>
<p>Now if you are going to need the cash, then yes, stay in cash.</p>
<p>I think the odds are against even one more time in our lifetime; for example, during the collapse of the early 2000’s, the vix didn’t even get to 50. </p>
<p>But I agree with you about complacency and the certainty that the vix will get to the 18-22 range. Indeed, I think that it is very likely that it will get to 30 and above at some point during the next few years when the market suffers some sort of shock. Don’t ask me what kind of shock or precisely when, but I think we are way overdue.</p>
<p>As I said, I would like to buy xiv when the vol hits 30. The problem is when the vol hits 30, things are going to be looking very bad. And 30 may not be a ceiling. </p>
<p>I guess we should wait until the vix actually hits 30. :)</p>
<p>I dont remember if the vix was around in 1987 but the vix would have been around 90 then. </p>
<p>I dont know about 1974, so I will ignore that. 1929 vix would have been 90. </p>
<p>So… Small data points… 90 years… Vix crosses 90 at least 3 times. Once every 30 years. At least. I am living another 37 years. I can see living thru one more of these 90 vix periods. I may have no teeth when it happens.</p>
<p>Stock is 30. Interest rates are zero. No dividends. The 60 put that expires in 3 months is trading at 35. Intrinsic value is 30. That is $5 of premium. What is the volatilty of that option?</p>
<p>With respect to the first question, are you talking about the volatility of the option as a whole or volatility of the premium. In any event, a) I think that the generic term “volatility” can be used to describe the percentage movement of a security over any period of time, but I think (although I am not sure) that it is usually described in annualized terms and b) assuming that you are talking about the volatility of the option as a whole, I would want to know how such options have typically performed over a variety of different three month periods before I could even hazard a guess.</p>
<p>The answer to the second question depends on a number of different imponderables. First, the value of xiv is determined by the value of the short term futures on the vix rather than the vix itself. Thus the percentage move of xiv is typically less than the percentage move on the vix itself, but the difference in the percentage moves varies. Second, xiv is recalculated each day, so its precise behavior when the vix moves from 12 to 30 will vary depending on the path that the vix (and thus the futures) take on the way from 12 to 30.</p>
<p>The manner in which xiv is calculated is described here:</p>
<p>The vix rose sharply in January–almost 30%.</p>
<p>I’m actually doing two different things, both of which are designed to take advantage of the fact that the futures are normally in contango while reducing or avoiding the problem of what I think is described as volatility drag. One is the constant value strategy. Let’s say you decide to devote $10,000 to this strategy, starting in January. If xiv goes up 10% during the month, I sell $1000 worth of xiv on February 1. If xiv goes down by 10% in January, I buy $1000 worth of xiv on February 1.</p>
<p>The other strategy is an intermediate term dollar cost averaging approach. Buy $1000 worth of xiv each month for 24 months. If any month’s investment doubles within the 24 month period, sell it and reinvest $1000 at the end of the 24 month perion. Otherwise, at the end of 24 months after any investment, sell or buy the number of shares necessary to bring your investment back to the original $1000.</p>
<p>Unless you are in a crazy mood, you should only invest a small percentage of your portfolio in either or both strategies. As you know, in the event of a vix spike (2011 or worse, 2008), you can get crushed over the short or intermediate term, and you have to be in a position to replenish the investment in that case. </p>
<p>“Ok, time for a rant. How can anyone who purports to be a financial advisor spout nonsense like this? Vix at 90 again?”</p>
<p>Abigail Doolittle is a frequent guest on cnbc and has been a bear from 2009 on. I love watching cnbc and could watch it all day long. Fortunately I work so I don’t have all that much time to watch. At first, I thought these people were just morons but now I believe that they’re professional comedians posing as market gurus and that’s what keeps me watching, laughing myself silly. As far as the VIX, it can happen again. I went to a talk sponsored by Schwab where the speaker was pointing out that the market behavior from 2000 - 2009 should occur once every 5250 years. He said he wasn’t that old and asked if any of us were. Some of the attendees did look that old but that’s another matter. There are a lot of people perhaps comedians, who see the worst crash of all time coming in the near future because of the actions of the fed. Who knows? I start off with the assumption that I know squat and take it from there.</p>
<p>Abigale Dolittle is on CNBC because she is really attractive. She is dumb as a brick. I can’t count the number of times she has been wrong or really wrong on major points. </p>
<p>I don’t know a Josh on CNBC. </p>
<p>There is a risk that the sunni shia holly war in Iraq will kick oil up another $15 to $20 and cause a slow down. </p>
<p>I thought the VIX etf leaked? Maybe not but if so, I wouldn’t hold it for a longer term.</p>
Similar to rolling. I am getting older so I figure I can be long some VZ. Or roll until the sun burns out. :)</p>