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Showing posts from November, 2018

An Early Look Back at 2018

2018 hasn't been a good year for volatility funds.

In February there was a feedback driven catastrophe in the implied volatility space. The details are less important than the result. A lot of volatility funds lost more than 30% in the month and one of the largest funds lost over 80% in a day.

The last few months have also been tricky. Equity markets have been more volatile than expected, but the bigger problems have been in the commodity space. In particular, crude oil and natural gas have been, to quote a very experienced trader, "****** unbelievably ****** insane! Like ****! Seriously dude. ****!". And you may have seen a sad youtube video where a hedge fund manager tearfully apologizes to his clients for losing all of their money due to the "rogue wave" in the natural gas market.

I'm not dancing on anyone's grave. I hate to see a business fail and I hate to see investors lose money. But there are also some important lessons here.


February emphasized …

Mid-term Elections

Mid-term elections are not usually very memorable affairs. The voter turnout is much lower than for presidential elections (since 1960, voter turnout has averaged around 40% versus 60%). It seems likely that voter interest is atypically high this year, but that isn't the point of this post.

What I want to know is, "How do mid-terms affect volatility?" It is generally true that volatility declines after scheduled events like this. It has been shown to be true for presidential elections, but it also applies to crop reports, earnings announcements and big economic releases. My guess was that mid-terms also produce a similar effect. The average voter might not be interested, but volatility prices are set by the marginal volatility trader not the average voter.

Vix data only goes back to 1990. This isn't a particularly large sample, but it does cover some significant political issues including two gulf wars, the Lewinsky affair, a disputed election and the tea party forma…