In this thread, Malcolm tries to figure out whether there's an stock option he can trade to make money iff the UK strain fucks shit up hard. Was messaging a friend who knows a few things about finance, & I figured what the hell, might as well just tweet about it. #GarageDoorUp
Trying to find an option trade that pays off if the UK covid strain hits
23 tweets · January 2021 · 50 likes · 0 retweets · read on Twitter
I would like to find a way to make $2-5k turn into: <$100 if the UK covid strain turns out to be a nothingburger >$20k if the UK covid strain causes a huge 4th wave in the USA and elsewhere 11:06 my understanding is that is broadly possible using put options, but I don't know how
(my situation: - Canada - some money in WealthSimple but not on their trading platform, and don't otherwise have any investments (although for awhile I was set up on... Scotia iTRADE) - have some crypto, if that somehow helps )
One issue is that I'm not exactly sure what would move in the markets if the UK strain fucks shit up (4th wave, everyone sick). I'm interested in that question (reply to this tweet with ideas) but I don't want to get lost trying to figure that out at this phase.
Here's VIX, the volatility index, over the last 5 years. All-time high is initial covid shock, latest spike was just before election. Suppose I think that if UK strain fucks shit up, VIX will go above 40 sometime in the next 5 months. What do I do with that?
One thing ofc I could do is just straight up buy VIX, I think. But that wouldn't 5× my money even if the spike is way larger. Somewhat higher-leveraged option would be to buy a call on VIX I guess? not sure exactly how that works, would love a lil example
even higher-leveragedly, in principle I could find another trader who thinks that VIX is not going cross 40 and is happy to sell me 50 [somethings] each worth $100 if VIX crosses 40 [by some date] and worth $0 otherwise, for like $10 apiece (though how do I find out how much?)
okay now I'm on yahoo finance for VIX options and I'm seeing this: strike price is... relevant! I think I vaguely know what's going on here? But this graph is only for like, tomorrow, and I want something that spans like 4-6 months.
Now got this chart which has a date of May. Before buying I'd obviously double-check that means what I am guessing it means (that I could exercise the option anytime until May). (idk where I picked up the jargon "exercise the option"—I've barely traded except a lil crypto)
Ok let's take the lowest blueish line on the left. Afaict, this is telling me that for about $5, I could be the proud new owner of the option to sell a VIX for $25. So my master plan is: 1. buy one for $5 2. then VIX hits $25 3. I buy VIX for $25, sell for $40, net $10 = 2×!
Okay that's pretty cool. Can we do better? I'm fine with higher risk. $4 for $30 call... that's... $6 profit on $4 I think, which is worse. $8 for $20 call... $12 profit on $8... same as previous $12 for $15 call... that's $13 profit on $12... slightly above 2×
Okay, so I could basically double my money here, assuming (A) UK covid strain or something else actually causes VIX to hit 40 (B) I've got the balls to actually exercise the options at the right time.
Ofc, if VIX hit 50, some of the above trades become much better (not sure which is new best—can whip up a quick spreadsheet; surely there are apps for this)
Okay, this spreadsheet helps with situational awareness... one thing it highlights is that if I were thinking it would cross 55, then I'd make more money buying a higher strike option, presumably because the options themselves are just way cheaper at those prices?
In other words, those options are way cheaper because fewer people think it's going to hit that price. That makes sense. Riiiiiiight, and what this really affects is the *ratio*. I can get twice as many $35 calls as $24 calls for the same amount of money.
I'm not certain, but the overall shape of these options suggest to me there isn't a 10× or nothing trade to be made on VIX hitting 40. The $30 call though would be 1.5× at 40, 2.75× at 45, 4× at 50... and 9× at 70 (which was the previous all-time high)
The reason why I care about 10×ing rather than just 2×ing is that even doing this sort of investment is itself a large investment of time, I don't have that much money that I'm game to completely lose, but losing/gaining a few thousand dollars doesn't make a big difference to me.
I am perhaps unusual in this regard but also I want to be clear that "losing/gaining a few thousand dollars doesn't make a big difference to me" is relative: it's on the scale of the difference it would make to me (and the world) for the UK covid strain to fuck shit up hard.
so it's like, both of these situations feel like ones I can be glad in: - "oh god shit has hit the fan really bad but also now I have an extra $20-50k" - "I lost $2-5k but the shit and fan are at ease and not entangled"
You can see this as kind of a grand hedge, or something. I didn't do this last March despite confidence, because I still mostly felt like I could do something about the situation and didn't want to feel like I was rooting for disaster. bet I considered:
Still lots of unknowns here, but I enjoyed this experience of thinking out loud. Oddly enough, this is an interesting experience of twitter actually *improving* my focus on something!
Anyway, for now I'm just going to let all of this investigation I just did simmer, both in my personal cerebellum and in the lovely distributed consciousness that is twitter. Share thoughts!
(Further reading re "how fucked are we?" with a rather strongly worded title.) lesswrong.com/posts/CHtwDXy6…