Shorting Volatility In The Midst Of Fear

All hell seemed to break lose last week, as the S&P recorded it’s worst week since the GFC back in 2008.

Yup, that’s the worst week ever in more than a decade, which also means that the sharp and rapid drop would’ve taken most market participants by surprise. Many newbie or less experienced investors would be caught in a web of emotions (mainly fear), as this is something they’ve never experienced before.

The indices dropped ferociously every single day for the entire 5 trading days of the week, and with almost every major global index being sharply down, many investors would’ve found their fortunes severely decimated within the mere span of 5 days.

DJIA dropped 12% within the week, and the 10 year treasury yields dropped to a record low, as the flight to safety came back with a vengeance

Already, globally, we are seeing negative forecasts popping up, with many forced to revise their previously, ridiculously optimistic views. Here in SG, it’s already forecast that Q1 would experience a contraction at -0.6%.

So yeah, in summary, it’s not a pretty sight.

In response, the volatility index (VIX) went ballistic within the week, reaching it’s highest since 2011.

925) VIX

With this, I’ve just initiated short positions on volatility, selling calls on VIX derivatives.

In essence, the thinking behind this is not difficult to understand.

Market’s fear of unknown and uncertainty grows exponentially. When we try to extrapolate our emotions further out into the future, it’s usually a poor estimate of what actually transpires.

This means that when we are pessimistic, the reasons and rationale for being pessimistic are usually very much true in the short term, but further out, they tend to be overly pessimistic.

Yannis Couletsis of Credence Capital is doing something similar:

“The director at Credence Capital, the volatility-trading arm of KM Cube Asset Management with 150 million euros ($164.2 million) under management, is betting that the fear gripping global markets will prove short-lived. He’s selling options to anxious investors who have sent the price of the derivatives soaring in an attempt to shield themselves from further pain.”

“The logic behind the strategy is received wisdom among derivatives traders but a puzzle to the uninitiated. It’s known as the volatility-risk premium, or the tendency of investors to demand higher compensation for future uncertainty compared with what actually comes to pass.”

““We are confident in our system’s signals,” he said. “Volatility is mean-reverting in nature. All our indicators signaling short-vol positions are still on.””

Only difference is that TTI is not so heroic to put 65% of my portfolio to work doing this.

It’s going to be a very reasonably small position.

As long as the indices don’t drop another 12% within the next week, I’d be alright.

Premiums for all puts have obviously gone ballistic in the past week, and accordingly, the premiums for VIX derivatives have gone ballistic as well.

Shorting VIX derivatives with costly, very much expensive puts is a fool’s game to me, so shorting naked calls is the way to go.

Aside from the erosion of time premiums being a MOS, I’m betting that we don’t experience yet another 15% decline in the next week, and another 15% decline in the week after. Cos afterall, nothing goes down in a straight line. (except in cases of fraud)

I’d also state that in the midst of all this fear, I’ve already started adding to long positions, as per the plan previously:

TTI’s Top 5 Generals

New, trial portfolio is down YTD, just like the main portfolio, and probably just like almost everyone else, but I’m optimistic as some parameters that I’m tracking are looking strong.

Will likely post quarterly updates when the time comes.

Good luck to all.


  1. Interesting to read your thoughts.
    I have followed the markets closely especially in the past 2 weeks. During Thursday and Friday I opened my first short positions in US stocks.
    Generally, my trading is 90% TA based and I won’t speculate much in macro tendencies. But in this case, it seems to me that no immediately good news can come up – a vaccine not being close (I assume) – and bad news can continue to come out. In particular, I focused on no US deaths yet, reckoning that the first deaths will further the panic.
    But again it’s not my usual domain in trading, and it’s just speculations.


    1. Hi Simon

      US premarket futures are red right now, as I type out this reply, so it may jolly well turn out as you described.
      My volatility shorts are currently in the money cos of the mini rally towards the end of Fri, but that may change very rapidly in a single day.
      Aside from shorting volatility, Ive also started selling some stock puts, so Im inherently long.
      I think at the end of the day, its all abt the time frame, it could be very much red for a bit longer, before we have a recovery, which would suit both of us just fine.
      So, good luck!



    1. Hi YJ,

      Since this is a concentrated portfolio, (I’m talking about the new trial fund that I just funded in Feb), I’m concerned about the volatility and the risk adjusted returns. Not just the returns itself.
      So I’m tracking stuff like the Sharpe ratio, to see if the returns are simply the result of taking on huge risks. So the higher the sharpe ratio the better.
      Also, I’m limiting the amt of leverage that I can utilize. Any leverage is currently due mostly due to forex.
      For eg, I sold puts for Tencent, which is in HKD.
      If the options get assigned, I don’t really want to have to swap SGD to HKD or USD to HKD to take up the position, esp not right now since SGD is weak, so I’d be borrowing HKD to get the Tencent position.
      So stuff like that. That’s the leverage I’m using. Just for forex.

      So for example, I just checked, the new fund is down YTD something like -10%+, whereas during the same time frame, SPY is down -5%++
      (that’s when I checked, it’d be different now after last friday)
      Initially, I was a bit puzzled, cos none of the options that I’ve sold are doing that badly, but it turns out that it’s mostly cos of forex.
      I started out with $100k SGD in this new fund, but I’ve kept the funds in SGD, I don’t really want to convert to USD right now.
      But USD has rallied very strongly against SGD recently, and since my fund is denominated in USD, Interactive brokers takes the SGD position as a “forex position”.
      So accordingly, there’s “forex losses” that’s unrealized. (Since SGD has weakened a lot against USD)
      If I calculate my returns in constant currency terms, it’s not that bad.
      So this is wad I mean by tracking some of these parameters.



  2. Dear TTI,

    I have been a long time lurker of your blog. Your in depth posts as well as interesting positions indeed make you stand out from the other bloggers. One of my favorite articles was The Big Short: Where are my millions when you talk about shorting the VIX. Everytime the market gets irrational and faces a huge downtrend, I imagine a smile on your face.

    That post got me reading more about options. But one thing I cannot accept is using naked shorts instead of buying puts outright. I understand from implied volatility how much difference it would make. But the risk that comes from a naked position seems quite scary. How do you manage that?


    1. Hi
      Problem with buying puts is that you need to be early enough.
      If you start buying when the markets exhibit a sharp downturn, the premiums wouldve skyrocketed by then.
      Sure, you might still make a gd return if the downturn is sharp enough, but theres an uphill to climb.
      I dont like those odds.

      Selling naked calls put the time premium advantage in your hands.
      The buyer has to pray hes right…
      And within the validity of the option too

      I keep my naked positions relatively small.
      Also, if things look to be spiralling outta control, you can always just buy the shares on the market and your naked call short immediately becomes a covered call



  3. Hi TTI,

    i am thinking to use CPF OA to invest in local bank stocks like UOB, DBS or should i use the money to invest in STI ETF instead?

    because i think in times of crisis like this, financial stocks tend to have the runway to grow compared to STI etf.

    just curious what you think if you were me? i am in my thirties, and should have a long term time horizon.


    1. Hi Isaac

      I’m not really a fan of SGX listed stocks, because when there’s a rebound, and there will be one eventually, the recovery will certainly be much much stronger in the major global exchanges such as the US and HK.

      But if your question was 1 between STI ETF vs the local banks, my personal preference would be the banks.

      Right now, as I type this, STI ETF is at levels last seen in sometime in May 2009.
      In other words, if you were a “buy and hold” investor, you’d have seen almost 11 years of capital gains disappear in the past 3 weeks.

      That’s really sad. Unfortunately, when WB advocated a buy and hold, he certainly didn’t have STI ETF in mind. Our local market is too small, and the companies that make up the index are the usual heavyweights, with little variation.
      More importantly, they are all mainly SG focussed and our small market means you don’t have the hyper explosive growth of some of the global companies.
      Companies like Apple, Visa, Broadcom, Agilent Tech, really exploded prior to the current meltdown.
      Their playground is a global one.

      Even amongst the 3 local banks, I’d go look into which 1 has the most exposure to the local property sector, as well as the O&G companies.
      Despite the massive drop in the oil prices, I don’t think it’s wise to try to bottom pick. I think O&G as an industry, will continue to face headwinds, and continued declined in a “long tail” manner. i.e. gradual decline over a loooong period.
      It’s been over a decade since we had the massive oil price hikes. I don’t think we’d be seeing that again anytime soon.
      So I’d look into which of the banks has the greatest exposure to O&G and avoid that bank.
      Local property loans too, would be another factor. If this crisis leads subsequently, to mass retrenchments, then you’d expect more property defaults coming up.
      So best to keep an eye on the amt of exposure to the property sector.

      Lastly, I’m not too sure if you should be using CPF OA for investments.
      You said you’re in your 30s, you might need your OA for future stuff like buying your house etc.
      So do consider that.



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