VOL02: Past, Present, & Future Volatility ft. Noel Smith
Top Traders Unplugged
How to Price Options on the Volatility Surface
The next strategy I want to talk about is bond valar. You're modeling the IV surface on the tenure and looking for overpriced and underpriced opportunistic trades. So when you are making markets, you have to come up with a theoretical value of the thing. But the hardest part is coming up with a good theoretical value.
Today Jason Buck is joined by Noel Smith in the second of our series on Volatility. Topics discussed include: the benefits of ensemble investing, the predictability of market volatility, how certain market environments fool investors into thinking they are better than they really are, allocating between different strategies during different market environments, why nothing beats having ‘skin in the game’, balancing judgement calls versus algorithmic calls, pairs-trading VIX & bonds, determining when an asset is cheap or overpriced, and some thoughts on what might happen if markets enter a ‘stagflationary’ environment.
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In this episode, we discuss:
- Ensemble investing and its benefits
- Whether market volatility can be predicted ahead of time
- The ways in which the markets can catch investors off-guard
- ‘Dialling’ into and out of strategies
- How Noel’s experience in prop trading and pit trading has helped him today
- Finding the balance between judgement calls and algorithmic signals
- Noel’s VIX and bonds pairs trade
- Assessing the current real value of an asset
- How to approach investing during a ‘stagflationary’ environment
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Episode TimeStamps:
00:00 - Intro
02:06 - Why should somebody add volatility strategies into their portfolio?
03:20 - Do you think that volatility is quite predictable around benign market periods?
04:12 - How do you apply your prop trading background to volatility strategies in general?
05:13 - Did the days of pit trading leaving a big impression on you?
06:28 - Why use ensembles?
07:33 - How do you allocate between strategies during different macro environments?
09:37 - How do you balance judgement calls versus algorithmic calls?
11:38 - How do you think about the timing of adding and removing volatility protection?
15:01 - Where did you come with the idea to pairs trade VIX and bonds?
19:28 - Is there a volatility risk premium?
21:14 - Tell us a little more about your ‘vol-arb’ strategy?
26:28 - How are you determining if something is cheap or overpriced?
27:53 - Do you put more weight on liquidity flow data as opposed to other fundamental data?
30:32 - Can you describe your ‘dispersion’ strategy and elaborate on dispersion trades for those who haven’t heard them?
34:30 - Can you describe your ‘dispersion’ strategy and elaborate on dispersion trades for those who haven’t heard them?
39:33 - How do you think about past, present and future volatility?
41:46 - How do you approach correlations across different timeframes?
43:24 - Dispersion trades seem to go in and out of fashion, do you feel that your strategies run dispersion trades when they’re popular only?
46:38 - Do you dial into and out of strategies rather than switching allocations?
48:11 - Tell us more about the ‘bond vol-arb’ strategy
51:01 - Tell us more about the ‘macro-bats’ strategy
57:42 - What do you think will happen if markets enter a stagflationary environment?
01:03:39 - How would you combine your ensemble investments into a wider portfolio?
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