Wednesday, October 14, 2015

Trading Volatility and The Future of Human Evolution (VIX; VXX; XVIX; XXV)

As noted about 18 months ago:
An Awful Lot of People Are Shorting Volatility (VIX; VXX; XVIX; XXV)
I'm starting to wonder if Izabella likes posting on volatility because, in addition to talking to Chris Cole who is pretty sharp, the ETP symbols read like Roman numerals? 
As to the headline, I mean "awful lot" in both the colloquial and the literal. 
From FT Alphaville:

The shadow convexity risk in the machine (and the VIX)

Every so often Chris Cole, of Artemis Capital, perhaps one of the deepest and most provocative thinkers in the volatility trading space, graces us with a rare glimpse into his imaginarium. 
His latest publicly available research report offers this: 
The Prisoner’s Dilemma is the most important paradigm for understanding shadow risk in modern financial markets at the pinnacle of a multi-generational debt cycle unparalleled in the history of finance. 
In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict a great tower of civilisation that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilisation we are now at a cross-roads.Today we have the highest living standards in human history that co-exist with an ability to destroy our planet ecologically and ourselves through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever. 
We take that to mean the computer age has forced us into an unnatural state of human cooperation which is both precarious as it is efficient, and equally capable of being deployed for good as it is for bad, or of de-settling the system as much as improving it. 
Or as Minsky once wrote, it’s stability that proves to be the greatest source of instability. A phenomenon Cole likes to attribute to the presence of shadow convexity in the system. 
So, while in game theory a single-minded strategy is supposed to be the best strategy because cooperation is costly, cooperation can manifest if and when a positive or negative feedback loop is to be had which overrides that cost, but whist destabilising the system. 
Like Minsky, Cole sees the financialisation and leveraging of the system in the modern era as having increased everyone’s propensity for cooperation because we now all have a vested interest in defending the paper-contracted distribution system we have created. This in itself is an inherent risk. Worse than that, because the market now knows central banks will defend this precarious cooperative state at any cost, there’s arguably a new scale of self-reflexivity that’s been added into the system — the mother of all feedback loops, if you will....
...MUCH MORE, including some potentially very profitable insights.

Meanwhile, writing at Victor Niederhofer's Daily Speculations is Mumbai's Trader-Philosopher:

 I read a few days ago on a website that no more evolution is possible beyond the human form, until consciousness is worked upon. I interpreted that nature kept forcing a biological evolution & brought us into human form and hereon for remaining relevant in the continuing evolution, for improving the lot within this and the next live(s), one will have to raise the envelope of one's consciousness. 
If I connect this idea to another idea that we cannot let people press the wrong switches in our being, causing either morbid fear or fatal attraction, then I have a combined thought that for my evolution to continue I have to de-activate the wrong switches in my consciousness such as outside of me other forces cannot trigger them. Only inward flow of intelligence into any action or thought switch has to activate any. 
This leads me to a thought that if God is the supra-intelligence design that Governs this Universe and every Universe, then there is a tendency for the human world to keep becoming more and more vigorous, intense in the stimuli each next generation will keep getting. The one effective in a world that will have more and more intense stimuli are then going to be those who are stronger in the face of such stimuli. The same way that progressive resistance training builds the muscles on our body, progressive resistance training to information stimuli may develop Emotion Intelligence. 
More information, more TV channels, more internet, more books, more facilities, more attractions & eventually more frustrations and at an increasingly faster speed is the trend within this life. To evolve and become more effective than others is a goal of the process Darwinian Evolution, then each life we get is a preparation for the next one is one view. To be given birth in a much faster, more enticing, more opulent world one might be then actually getting eligibility by effectively training received in a lesser / simpler / easier world to respond less and less to external attractions and frustrations....MORE
While I attempt to synthesize these concepts, here's a 1992 Mack Daddy beat:

From The Mercenary Trader:

Baby Got Black (Swan)
(With apologies to Sir Mix-a-Lot)
I like… fat… tails and I cannot lie
You vol sellers can’t deny
When a hot trend breaks with a well-timed stop
and a great big black swan pop you get
Paid… P&L year gets made
‘Cause you noticed that trade was packed
Buncha mean reversion suckers got jacked

Oh baby I wanna get lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those carry trades just don’t faze me!...MORE
See also:
Aaarrrggghhh: I Can't Get Matthew Klein's Song Out Of My Head

A couple other Cole/Kaminska productions:
April 2012
April 2011

There are others I don't instantly recall, use the 'search blog' box if interested.