Making Money from Market Chaos | Inside the Volatility World with Kris Sidial
Nov 7, 2024
auto_awesome
Join Kris Sidial, founder of the Ambrus Group, and Brent Kochuba, founder of Spot Gamma, as they dissect the intriguing world of volatility trading. Kris breaks down long volatility strategies and the psychological hurdles traders face during market chaos. They touch on the August 2023 volatility spike and the evolving derivatives market. With insights on retail trading dynamics and the importance of tail risk hedging, this discussion is a must-listen for anyone wanting to grasp the nuances of making money amid market turmoil.
Long volatility strategies aim to profit significantly from market crashes while minimizing losses during stable market conditions.
Emotional stability and a clear plan are crucial for investors to navigate rapid price fluctuations during market volatility.
The rise of retail and institutional investors using short-dated options impacts volatility dynamics and creates new trading opportunities.
Deep dives
Understanding Long Volatility Strategies
Long volatility strategies aim to generate significant returns during market downturns while minimizing losses during calm periods. The primary goal is to make money when markets crash rather than simply serving as a hedge against losses. This approach differs from traditional tail risk hedging, where funds are typically viewed as defensive tools to offset losses in other investments. By taking advantage of the dynamics in volatilities, investors can profit from market anomalies, capitalizing on the repricing of risk that occurs in turbulent times.
Psychological Challenges in Market Crashes
Operating in environments of heightened volatility requires investors to manage their psychological responses effectively. During major market events, emotional stability is crucial, as the pressure can lead to impulsive decision-making. An example discussed was the need for traders to maintain focus when witnessing rapid price fluctuations, emphasizing that the cleaner a trader's plan is, the more they can mitigate emotional responses. Therefore, an investor's mental framework and preparation can significantly affect their success in volatile conditions.
Navigating Investor Expectations and Patience
Investor patience is a considerable challenge when engaging in long volatility strategies, especially when results do not materialize quickly. Many investors may experience 'hedging fatigue' during extended periods without a market event, leading to withdrawals or changes in strategy before the strategy has had a chance to perform. Historical context shows that successful long volatility funds often endure investor scrutiny and exits just before market downturns, highlighting the tension between short-term performance and long-term strategy effectiveness. Thus, maintaining a clear narrative about investment expectations is vital.
The modern market landscape significantly impacts the behavior and performance of options trading due to factors like the increased use of short-dated options. Retail and institutional investors increasingly employ zero days to expiration (0DTE) options, affecting how volatility reacts in the market. This shift exposes new opportunities for traders, but it also introduces complexities into the traditional dynamics of volatility trading. Evaluating how this behavior interacts with market events is essential for understanding pricing mechanisms in today's environments.
Risk Management and Tactical Adjustments
Effective risk management is paramount for long volatility funds to ensure survival and performance across different market conditions. The use of dynamic modeling to project portfolio performance under various scenarios allows managers to make informed tactical adjustments. A critical aspect of these adjustments involves determining when to liquidate positions, particularly when faced with extreme volatility shifts. This blend of quantitative analysis with discretionary insights helps mitigate risks while maximizing potential returns from market dislocations.
In this episode of Excess Returns, Jack Forehand and special guest host Brent Kochuba dive deep into the world of long volatility and tail risk strategies with Kris Sidial, founder of the Ambrus Group. Kris shares invaluable insights from his experience managing volatility-focused strategies and navigating major market events.
🔑 Key Topics Covered:
How long volatility strategies work and their role in investment portfolios
Behind-the-scenes look at managing vol strategies during market crashes
The August 2023 volatility event and what really happened
Evolution of the derivatives market and its impact on trading
The truth about market liquidity and short volatility positioning
How retail options trading has changed market dynamics
Kris provides a fascinating glimpse into how vol traders operate during market stress events, explaining how these strategies aim to deliver explosive returns during market crashes while minimizing losses during normal conditions. He also discusses the psychological challenges of running these strategies and the importance of having both quantitative and discretionary elements in volatility trading.
Whether you're an institutional investor, retail trader, or just interested in understanding market dynamics better, this episode offers valuable perspectives on an often misunderstood corner of the investment world.
SEE LATEST EPISODES
https://excessreturnspod.com
FIND OUT MORE ABOUT VALIDEA
https://www.validea.com
FIND OUT MORE ABOUT VALIDEA CAPITAL
https://www.valideacapital.com
FOLLOW JACK
Twitter: https://twitter.com/practicalquant
LinkedIn: https://www.linkedin.com/in/jack-forehand-8015094
