Alpha_Ex_LLC

Charts referenced in most recent pod: “The Market Disregards Correlation” Apple: podcasts.apple.com/us/podcas… Spotify: open.spotify.com/episode/772…

10's and futures?

things you don't want: be on the cover of a magazine as a superhero and have your company nicknamed "The Central Bank of AI". here are $NVDA drawdowns >15% since 2018 and the ratio of that DD to the SPX DD over same period. chart uses a price of 160 for today. ratio is 11.6 and DD is 33%.

VIX June 170 Calls traded for 11 cents. (FOMC meets 6/9/27!)

Ford (BBB-, 49b market cap) vs NVDA (AA, 4T market cap) CDS comparison

Fun Fact: on 11/11/11, the VIX closed at 30. Eurozone Sovereign crisis and all.

Two option trades can carry similar upfront premiums but have very different carry and Greeks. On 9/30, 79k of the $TLT 11/30 expiry 83 calls were bought, paying 37 cents. The trade got the direction of rates correct, but the vol very wrong. When I saw the trade go up, I thought, given the very elevated rate vol backdrop and the expectation that vol would come in considerably should rates go lower, there was a better trade. The Nov 30th 80-83 1x2 call spread cost 33 cents to put on. Your expiry break-even of 86 in the TLT would require the 20 year UST rate to fall all the way back to 5.03 at expiry from 5.67 on 9/30. Below, the side-by-side of the two trade structures. The 20y UST yield is 26bps lower than it was on trade date. And the VXTLT has fallen from 18.3 to 13.7. The passage of time and decline in vol have hurt the outright call. The 1x2 trade construction logic has, so far, played out well --> spot up, vol down.

$NVDA 15% drawdowns vs. the ratio to SPX drawdown during same time frame. Since 2018. No 30% DD in NVDA with this high a ratio to the SPX DD as the current one.

Latest episode of the podcast features Meredith Whitney, Founder and CEO of Meredith Whitney Advisory Group. Meredith describes an increasingly divided consumer economy in which banks primarily serve prime and super-prime borrowers, while other households turn to earned-wage access products and pawn lenders to meet basic needs. She explains why the strength of bank credit metrics can obscure the stress facing those who are no longer able to borrow from traditional institutions. We talk about the trade-offs households make as energy and grocery costs rise, and why those pressures may be moving further up the income distribution. Apple and Spotify Podcasts, YouTube Video: axpod.com/podcast/meredith-w…

Time to update the “six stressors” in markets …the “Seven Deadly Sins” —-> Concentration Valuation Correlation Duration Inflation Polarization Fornication

Hi Claude....How many times has the VIX fallen by 20% and NVDA 5% on same day?

geek alert.... there's "vol", "vol of vol"...and dare I say it..."vol of vol of vol"... good god. In simpler terms: "the variability of implied vol on VIX options" ...that's vol of vol of vol. and by at least one count, this has reached a record...below, the 1m realized vol of the VVIX. higher than Volmaggedon, the Covid Crash, the Aug'24 VIX event, the Tariff Tantrum. In the last month, the $VVIX has had up moves of 18.7%, 14.2% and 49.3% (Thursday, 11/5). It also had a 15.8% down day (11/4). the surge last Thursday drives a tremendous proportion of the overall 1m realized vol. when it comes to vol, "big moves matter most." in markets, p/l is about prices. we talk about vol only because it can be a shorthand for prices. if you move the implied vol (VVIX) on a 1m $VIX straddle up by 20%, you move the straddle price up by the same amount. if you move the implied vol input down by 20%, the straddle price declines by 20%.

TLDR: Thursday could easily be an appetizer for more to come. If financial market prices are previewing a slowdown in the capex that is the machinery not just for equities and credit but for the real economy, more correlation and downside is coming. Since 1990, there are 46 days in which the SPX has fallen by 4% or more. Almost half – 21 of them – came from the GFC. Covid adds 9. The other “crisis events” – Asian in 1997, LTCM in 1998, and the Eurozone crisis in 2011 – account for 6 more. Adding them up, 36 of the 46 down 4% days have occurred during a period that is referred to as a “crisis”. On my podcast, Kevin Warsh told me, “if you’ve seen one financial crisis, you’ve seen ONE financial crisis.” It’s a clever way of saying that each of the episodes cited above were unique in origin and also unique in the firefighting tools utilized by policymakers to douse the financial flames. “Crisis” seems to be shorthand for “the government had to do something”. The other 10 big ones? Among them are the day the market opened after the September 11th terrorist attacks. The telco bust in 2002. China’s FX re-peg in 2015. Volmaggedon in 2018. You don't get a 4% down move in the SPX without both very high single stock vol and high correlation. The stocks have to move down a lot and move down together. But...amidst the carnage, 73 (14%) of the stocks in the SPX were up on 11/5. Below, a scatter plot below that shows the 4% down days since 1990 and the number of stocks that were up on each of them. 11/5 ranks high up there in terms of number of stocks rising. The day after "Liberation Day" - 4/3/25 - saw a 4.8% decline in the SPX with 95 stocks higher. One part of my framework for thinking about market risk is to categorize the origins as economic, monetary, financial and geopolitical. I would argue that the tumult of the past week is mostly financial with a dose of geopolitical. On the last part, the Blue Tsunami couldn't have helped the risk appetite that has been a big driver of this incredible market run. But it's mostly the "setup" and the conditions of crowding that played a big role. When risk exposures are too similar and concentrated and leveraged, the odds of a correlated unwind increase quite a bit. If the SPX is a 15 vol asset, we just experienced a 4SD move. And as Ace Rothman said in Casino, "it could not happen, it would not happen." Who did it? The market did. This could easily be an appetizer for more to come. If the financial market prices are previewing a slowdown in the capex that is the machinery not just for equities and credit but for the real economy, more correlation and more downside is coming.

gold is a lot of things...it's often called an inflation hedge and sometimes a deflation hedge. I don't think it is either. but it is a "different" asset and outside of a true "run" scenario like Nov'08 or Mar'20, gold is pretty durable to big SPX shock days. here's a table of GLD perf on SPX down 4% days, excluding the GFC and Covid. the average is up 80bps.

50% up moves in $VIX since 2000

a reminder: buying insurance costs money. GEICO won't sell you car insurance for free, and Goldman Sachs won't sell you market insurance for free. there are trades and strategies that may act like positive or neutral carry hedges for periods of time - duration from 2007 to 2020 - but that's not insurance.

Lots of commentary and some incredible looking charts on the low correlation / high rotation regime in which we live. The behavior of the pod shops and long/short equity strategies that are implemented largely market neutral but with a good deal of leverage and run with very tight stop outs is often cited as a factor. I think you can model out the trading activity in the context of how a dealer would hedge an outperformance option. Suppose a dealer sold an investor an option on the outperformance of asset A over asset B. If the trade is struck ATM, there's no initial hedge. Suppose A rallies relative to B. The dealer needs to buy delta in A and sell in B. That's a correlation dampening impact. Suppose the option is in the money and the dealer's hedge has left him/her long shares in A versus short B. If A declines, the dealer needs to sell A and buy B. Again, the impact here is to sell one, buy the other, reducing the extent to which they move together. There aren't actual outperformance options trading in the market of any size, but the pods are essentially manufacturing them through their trading. The tight stop is kind of like option premium being put at risk. If the trade moves against you, you've got to reduce quickly, especially because you have so much leverage on. That reduction is all about the rotation we marvel at. How does it break? First, the leverage does appear substantial. If the cost of or availability of that financing is disrupted, that can matter, quickly. Second, correlation assumptions. Never, ever trust correlation! When you backtest strategies that are contingent on the risk offset coming from especially low correlation, they enable your sizing to get larger, sometimes to a substantial degree. LTCM famously had the "on the run / off the run" trade on in USTs in enormous size because the net risk of that position (based on history) was near zero. If these pod portfolios are really similar on both the long and short side (ie hedge fund hotels), they use lots of leverage, and their "reaction" functions are similar, you could wind up with a large issue if the correlation breaks. If we should learn one lesson from episodes of disruption in markets it is that we underestimate "sameness" and think our portfolios are move diversified than we really are.

It was a pleasure to have Bruce Darringer, Founder and CEO of BSD Strategic Advisors, on the podcast. Our conversation is about risk management, but not simply the risk of prices moving against you. As Bruce makes clear, an investment firm is a complex institution, and market stress has a way of exposing weaknesses everywhere at once. We use the GFC and Covid as specific examples of how a firm needs to be prepared well in advance of a shock in order to not just make it through but to capitalize on it. Apple: podcasts.apple.com/us/podcas… Spotify: open.spotify.com/episode/1Jr… YouTube: youtu.be/GD09t89a6xA?is=Sn1U…

TLDR: c’mon just read it. :) “Volitics” is a term I’ve used since the US debt ceiling crisis in 2011 to describe the collision of politics and market vol. As US politics has become more polarized, and with the concerns that outcomes would be contested, the market began pricing a “hump” in the SPX vol curve, differentiating significantly between the price of options that expired just before and just after the 2020 and 2024 Presidential elections. These macro days of great consequence were also priced into the Scottish ref (2014), UK Brexit (2016) and French election (2017). Of course Brazil is the most recent example. Short dated options get bid up on “event risk premium” in the same way a termstructure can become deeply inverted ahead of a corporate earnings announcement. Outside of event risk, inversions result from a spike in realized volatility. The table illustrates this by showing buckets of 1m realized volatility on the SPX and the average spread between the front (UX1) and second (UX2) VIX future. The 2020 and 2024 elections stand out. In 2020, the front (Sep) VIX was 6.5 below the second (Oct) VIX. That’s a huge contango and was because Oct expired to 1m SPX options that would catch the election as a catalyst. In 2024, the front VIX (Oct) was 1.8 over the second VIX (Nov) even though realized vol was quite low. This unusual inversion at such a low realized vol was because investors were willing to buy the election risk premium. I’ve been arguing that - while these are midterms and not a Presidential contest - the market has not sufficiently priced two potential channels of disruption. First, the potential that a Dem win can have highly negative impact on market sentiment, especially at a time when the AI theme is being re-underwritten. Governor’s races are especially important to watch. And second, the Trump DOJ has been putting a lot of effort into various ways to contest the results. The market has priced little disruption. Ratings agencies have cited eroding "governance" on the US front in addition to the unsustainable debt stack in their negative commentary on US sovereign debt. They'll be watching this time.

Claude outperforming

What’s worse?