Lets talk variance

sle, this reminds me of open interest for options on single-names, kind of. Pin risk of some sort.

I've been utilizing wing-spreads a lot lately (ATMF put flies usually) on single-names and sometimes on index or ETF's.

But when I'm in the option chain, I do glance at the OI for different strikes, to gauge where other contracts are being traded at.

I also use volume by price, which IMO is an amazing "indicator", one of the few indicators I actually use when trading, it gives a good gauge on what prices have the most activity.

When you say "if theres a large outstanding var-swap position in the market" do you mean at an a specific strike level? Or multiple? I'm not even too sure if variance-swaps have strikes? I'm assuming they do though.

Could a retailer structure butterflies around this short-term trade opportunity around the close you speak of on the SPX?

Cheers

 

Thanks for this feedback! I found the clearing data, very interesting stuff. I have to try and learn some more R to wade through it.

Can I throw some follow up questions at you? Really excited to learn more.

What specifically makes this a retail appropriate strategy? Is it because the volume on the futures drops after the cash close and we're trying to close the trade after cash close (less liquid market)? If there were an exploitable edge, would this be an example of a small structure edge that would permit us to eat some of the dealers' or MM's lunch?

There seems to be some triggered, programmatic trading at specific time intervals before the cash close. Should that be considered in the analysis or eliminated? I'm not sure how to isolate.

Is there any relevance to the divergence between the cash and the futures @ EOD? I note some weird divergences, but not clear on what they mean. When that occurs, I notice soem sizeable continuation and reversions in those cases.

Finally, there seems to be occasions where this is ripe to happen (big difference between afternoon trading and previous close), but completely fizzles out. From my prelim look at the clearing data, the SWAP volume doesn't look like it changes hugely between one day to the next.

What skills does this require for a retailer to get a good handle on what's going on?

 

The best thing you can do you for yourself is to read and follow Nassim Taleb

 

I have been for many many years my friend. Thanks though.

 

Respectfully, if you understood it. You wouldn’t be asking such questions. Read the technical work that relates to statistics by Nassim.

 

I can kind of understand The Black Swan, Fool By Randomness but the mathematics? Too mathematical for me to comprehend.

Any suggestion what I can do other than go back to school?

 

well obviously lol

but I’ve been reading the works of nassim for years bro... doesn’t mean I understand the shit lol

 

hes talking more dynamic hedging math.. which imo I don’t think you need to know.
The basic algebra stuff yeah but idk about PDE’s and such.

look up Nassims paper “Silent Risk” and look at those damn equations smh lol

 

What does Taleb have to do with understanding variance swaps?

PS. pretty sure he left the market before var swaps were a thing, too

 

i thought the same.

he thinks I need to understand Taleb’s concepts to understand variance.

also I want to make this clear. I’m not really trying to understand the math behind these things. Doesn’t mean I won’t, I’m just saying it’s not my motivation.

I just want a better overall understanding of what variance is, and variance swaps, and how to understand volatility and it’s relations.

if variance swaps are a way to play pure vol, that peaks my interest. Doesn’t mean I’ll trade the damn swaps, but having an understanding of them could benefit my own trading method in the future.

And variance swaps aren’t it, I look at all advanced derivative theory with a grain of salt.

I’m pretty sure I’ll never need to know what Volga is, but knowing that Vega convexity exists and how to apply it to understand the mechanics of optionality wont hurt ya.