Official Shiny Things thread Episode V, The Empire Strikes Back

[Shiny Things]

OK, I got nerd-sniped and wanted to see how this looks if I structure it up. Just eyeballing it, and handwaving a ton here based off the closes this afternoon, SPY closed at $549, and you could buy the 20Jun25 SPY 550/590 risk reversal for basically zero (you'd pay, like, 60 cents). Long SPY with capped downside, capped upside, you get the dividend yield, and it's completely liquid.

Alternatively, in synthetic space, using the SPX options that are open right now: you could buy the 18Jun25 5525/6000 call spread for about 268 ticks, stick the cash equivalent in a year bill at 5%, and there you go - you get long SPX, you're protected below 5525, and you participate all the way up to 6000 (about 9% upside from where we are now).

Structuring this stuff was my job a decade or so back, it's fun to know I haven't lost my touch.

Bonus fun question, and this is Options Structuring 301 stuff, so don't worry if you don't get it: you'll notice the SPX structure gives you more upside participation than the SPY structure (8.5% vs 7%). But there's no free lunch in options structuring, and you're giving up something in return for that increased participation. What might you be giving up?

 

[SpeedingBullet]

It's been awhile since I've seen you.. or rather, I rarely come in here in the first place... but anyways... @Shiny Things ... welcome back!

 

[BBCWatcher]

So you’ll do worse than the S&P 500 about half the time, and you’ll only do better than the S&P about one-quarter of the time.

Maybe worse. The S&P 500 index will rise over time if only due to inflation, and the way the hedge is designed it's a "ratchet" that, on average, will trail behind (currently ~1.5% behind). And there's a 47 basis point expense ratio differential, a significant headwind. So the only way MAXJ beats its underlying (IVV) is if the trailing hedge becomes both relevant AND so relevant that it overcomes the 47 basis point headwind. That's a strange bet!

That said, I wonder if Blackrock isn't clever enough. Maybe somebody could create an ETF with a more reasonable expense ratio (BMW 5 Series instead of Lamborghini?) and with lower cost downside hedging. It'd be like MAXJ except that the downside hedge would only kick in when there's a 10% or greater decline in the S&P 500 Index. The cost of that hedging strategy would be relatively tiny, and from a marketing point of view it just might work. (I still wouldn't recommend it if I'm being honest.)

....Hey Shiny, you want to start an ETF company? Imagine the possibilities:

• Protection Correction 500 ETF (hedged from -10%)
• Protection Recession 500 ETF (hedged from -20%)
• Protection Depression 500 ETF (hedged from -50%)

Plus Global Stock, NASDAQ 100, and other variants in the new, exciting, and rhyming Protection family of exchange-traded funds from the market experts at HWZ Investments, Inc.

Let's go!

Want to bet on the S&P going up? Just buy an S&P ETF!
Worried that stocks will go down? Just buy a bond instead!
Want a fixed-income product? Just buy a bond instead!
Want to bet on the S&P going up, but you don’t want to take as much risk? Just… buy less of the S&P! Buy half of what you’d normally buy.

Yup, and none of these choices require MAXJ's higher expenses or tax unfriendliness.

I’m gonna be that guy: these particular options will actually work fine under all circumstances short of an asteroid flattening NYC.

Point taken. But after only 248 years the U.S. Supreme Court decided the President is a monarch, exactly the opposite of the nation's core founding principle. An asteroid still seems unlikely but....

 

[Shiny Things]

It's been awhile since I've seen you.. or rather, I rarely come in here in the first place... but anyways... @Shiny Things ... welcome back!

G'day g'day! I'm still around occasionally, though my Actual Job has been getting in the way lately; you'll find me in the US travel threads as well, usually raving about how great the road-trips are over here.

That said, I wonder if Blackrock isn't clever enough. Maybe somebody could create an ETF with a more reasonable expense ratio (BMW 5 Series instead of Lamborghini?) and with lower cost downside hedging. It'd be like MAXJ except that the downside hedge would only kick in when there's a 10% or greater decline in the S&P 500 Index. The cost of that hedging strategy would be relatively tiny, and from a marketing point of view it just might work. (I still wouldn't recommend it if I'm being honest.)

....Hey Shiny, you want to start an ETF company? Imagine the possibilities:

• Protection Correction 500 ETF (hedged from -10%)
• Protection Recession 500 ETF (hedged from -20%)
• Protection Depression 500 ETF (hedged from -50%)

Plus Global Stock, NASDAQ 100, and other variants in the new, exciting, and rhyming Protection family of exchange-traded funds from the market experts at HWZ Investments, Inc.

This would be such a good moneyspinner... if everyone weren't already doing it! Buffer ETFs are really having a moment lately: companies are pumping out variations of them like there's no tomorrow, and they're coming up with more and more creative versions of them with higher and higher fees.

From a quick crank through ETFDB, I'm finding (and I'm not listing tickers here because I don't want to encourage them):

• An ETF that buys 95/70 put spreads and sells calls to fund it, so if 2008 happens and the market drops by half, you lose your protection and you're back on the rollercoaster;
• An ETF that buys 100/90 put spreads, and sells 100-strike calls, so the actual risk is "you have no equity exposure except you're short 90% puts", and charges 85bps for the privilege;
• An ETF that holds nothing but other buffer ETFs, charges an extra 20bps for the privilege, and has a billion dollars in AUM.

I genuinely think that any investment advisor that puts their clients in these things should have their license yanked.

Matt Levine has a great pejorative for buffer ETFs: he calls them "boomer candy" in the most recent Money Stuff podcast.

 

[snowblaze]

SPY closed at $549, and you could buy the 20Jun25 SPY 550/590 risk reversal for basically zero (you'd pay, like, 60 cents). Long SPY with capped downside, capped upside, you get the dividend yield, and it's completely liquid.

I presume this means selling call at 590 and buying put at 550?
Can share more how this works? Don’t quite understand how to profit from such trade.

 

[Shiny Things]

I presume this means selling call at 590 and buying put at 550?
Can share more how this works? Don’t quite understand how to profit from such trade.

Sure. The idea behind a collar (we called them risk reversals in FX-land, equity folks tend to call them collars) is usually that you’ll buy them to hedge a long stock position, not as a profit-making trade themselves.

If you owned SPY and wanted to hedge yourself against it going down, you’d buy the collar - buy the 550 put, sell the 590 call. On expiry day, here’s what happens:
* If SPY is below 550, you’d exercise the put, and sell the stock at 550;
* If SPY is between 550 and 590, you’d do nothing;
* If SPY is above 590, the call would be exercised against you, and you’d sell the stock at 590.

Handwaving a little, this approximately works out to “you’re protected against the stock dropping below 550, in return for giving up any upside above 590”. And if you think of a risk reversal / collar as protection, trying to lock in an existing profit instead of trying to juice additional profit, it’ll make a lot more sense.

 

[BBCWatcher]

This would be such a good moneyspinner... if everyone weren't already doing it!

Yes, but HWZ Investments, Inc. would offer even cooler fund names and ticker symbols.

Buffer ETFs are really having a moment lately: companies are pumping out variations of them like there's no tomorrow, and they're coming up with more and more creative versions of them with higher and higher fees.

Fabulous.

I wish the "target date" ETFs had gotten some traction.

Matt Levine has a great pejorative for buffer ETFs: he calls them "boomer candy" in the most recent Money Stuff podcast.

From a marketing point of view it makes a lot of sense.

 

[SpeedingBullet]

@Shiny Things could I pick your brilliant mind on basis trade for BTC?

Is the basis trade for BTC entirely risk-free or are there risks I’m not seeing? One I can think of is counterparty risk if another exchange blows up. I think annualized returns on the spread is slightly higher than US Ts at the moment. Assuming no leverage here

Does the mechanism work the same as FX basis trading for NDF currencies? New to this.

 

[Shiny Things]

@Shiny Things could I pick your brilliant mind on basis trade for BTC?

Is the basis trade for BTC entirely risk-free or are there risks I’m not seeing? One I can think of is counterparty risk if another exchange blows up. I think annualized returns on the spread is slightly higher than US Ts at the moment. Assuming no leverage here

Does the mechanism work the same as FX basis trading for NDF currencies? New to this.

MEM-'RIES

oh god I remember the good days of the BTC cash-and-carry trade when it was paying truly insane amounts, the high print was north of 12% annualized for a synthetic dollar depo (buy BTC, sell physical-settled futures forward). Unfortunately, nothing good ever lasts, and those days are looong gone.

Anyway, I'm gonna assume you're doing a regular cash-and-carry (long physical BTC, short futures as a hedge); if that's not right, let me know. You've got three big risks off the top of my head:

1) Settlement risk—if you do this trade in cash-settled futures space, you run into a spicy little settlement problem (you know exactly what I'm talking about if you've slung NDFs—when the trade settles, your hedge disappears but your underlying physical position doesn't). So you need to price in a little extra slippage risk for getting out of the position.

2) Counterparty risks—you're not dealing with CME Clearing here, you're dealing with some of the trashiest names on the planet. Binance? OKX? Bitfinex? Yuck yuck yuck. And if you do trade at the CME to get the better counterparty credit risk, then you can't cross-margin between your futures and your physical.

3) Mark-to-market risk—this is the big one. You're short an instrument that requires daily mark-to-market payments, so if BTC screams higher, you'll have to pay away industrial amounts of money on the short futures position, but you won't be able to monetize the long cash position.

(The existence of coin-margined futures on the crypto-native exchanges makes this actually quite a bit easier to manage, though, so it's not as big a risk as it would be in a USD-margined market. Imagine if you were slinging copper futures and you were able to post copper as collateral!)

 

[DevilPlate]

Experts here.....
is Prof Hanke correct about the M2 money supply growth of 6% translates to 2% inflation?

 

[d5dude]

MEM-'RIES

oh god I remember the good days of the BTC cash-and-carry trade when it was paying truly insane amounts, the high print was north of 12% annualized for a synthetic dollar depo (buy BTC, sell physical-settled futures forward). Unfortunately, nothing good ever lasts, and those days are looong gone.

Anyway, I'm gonna assume you're doing a regular cash-and-carry (long physical BTC, short futures as a hedge); if that's not right, let me know. You've got three big risks off the top of my head:

1) Settlement risk—if you do this trade in cash-settled futures space, you run into a spicy little settlement problem (you know exactly what I'm talking about if you've slung NDFs—when the trade settles, your hedge disappears but your underlying physical position doesn't). So you need to price in a little extra slippage risk for getting out of the position.

2) Counterparty risks—you're not dealing with CME Clearing here, you're dealing with some of the trashiest names on the planet. Binance? OKX? Bitfinex? Yuck yuck yuck. And if you do trade at the CME to get the better counterparty credit risk, then you can't cross-margin between your futures and your physical.

3) Mark-to-market risk—this is the big one. You're short an instrument that requires daily mark-to-market payments, so if BTC screams higher, you'll have to pay away industrial amounts of money on the short futures position, but you won't be able to monetize the long cash position.

(The existence of coin-margined futures on the crypto-native exchanges makes this actually quite a bit easier to manage, though, so it's not as big a risk as it would be in a USD-margined market. Imagine if you were slinging copper futures and you were able to post copper as collateral!)

12% return for a basis trade is insane...

 

[BBCWatcher]

is Prof Hanke correct about the M2 money supply growth of 6% translates to 2% inflation?

At constant money velocity, with per capita real GDP growth of about 4%, plus several other important assumptions.

The professor is a bit of a crank, though. Calling for a constitutional convention is pretty silly. There’s never been one since the original Constitution was drafted. Also, even if you want to balance the federal budget it simply can’t be done primarily with budget cuts. The math just doesn’t get you there even with draconian cuts (which themselves would be contractionary and cut tax revenues to some degree). Even the Peter Peterson Foundation (the “deficit scolds”) thinks most of the deficit has to be closed via taxes, and their patron is not a fan of taxes (to say the least).

It’s kind of funny that the professor is protesting that the media reports are incorrect. The media reports are correct. Donald Trump really is advocating the policies the host discussed.

Professor Hanke missed one crucial reason why fiat currencies are valuable: you must pay taxes in the local fiat currency. And if you don’t pay your taxes then a government can grab your assets, garnish your income, and/or imprison you.

 

[DevilPlate]

At constant money velocity, with per capita real GDP growth of about 4%, plus several other important assumptions.

The professor is a bit of a crank, though. Calling for a constitutional convention is pretty silly. There’s never been one since the original Constitution was drafted. Also, even if you want to balance the federal budget it simply can’t be done primarily with budget cuts. The math just doesn’t get you there even with draconian cuts (which themselves would be contractionary and cut tax revenues to some degree). Even the Peter Peterson Foundation (the “deficit scolds”) thinks most of the deficit has to be closed via taxes, and their patron is not a fan of taxes (to say the least).

It’s kind of funny that the professor is protesting that the media reports are incorrect. The media reports are correct. Donald Trump really is advocating the policies the host discussed.

Professor Hanke missed one crucial reason why fiat currencies are valuable: you must pay taxes in the local fiat currency. And if you don’t pay your taxes then a government can grab your assets, garnish your income, and/or imprison you.

Im only interested in his money supply theory.

according to him, let say M2 money supply growth of 4% would result a zero inflation rate.
Zero M2 growth would be deflationary….

 

[BBCWatcher]

according to him, let say M2 money supply growth of 4% would result a zero inflation rate.

If money velocity is constant, and per capita real GDP is growing at about 4%, plus some other important assumptions, yes. He talked about one of those important assumptions: allowing enough time for lag effects. Another important point discussed in the video is global demand for the currency. If other countries start using the currency then that effectively alters M2.

Zero M2 growth would be deflationary….

Eventually, and subject to very important assumptions, yes, that’s what he’s saying.

The reason the Fed doesn’t pay much attention to this equation is because the “important assumptions“ are violated all the time. For example, money velocity dramatically slowed in the Global Financial Crisis.

The U.S. Federal Reserve (with an important assist from fiscal policy) look like they’ve pulled off the near miraculous “soft landing,” or at least they didn’t spoil it. What’s actually happened up to this point has exceeded my expectations.

 

[SpeedingBullet]

MEM-'RIES

oh god I remember the good days of the BTC cash-and-carry trade when it was paying truly insane amounts, the high print was north of 12% annualized for a synthetic dollar depo (buy BTC, sell physical-settled futures forward). Unfortunately, nothing good ever lasts, and those days are looong gone.

Anyway, I'm gonna assume you're doing a regular cash-and-carry (long physical BTC, short futures as a hedge); if that's not right, let me know. You've got three big risks off the top of my head:

1) Settlement risk—if you do this trade in cash-settled futures space, you run into a spicy little settlement problem (you know exactly what I'm talking about if you've slung NDFs—when the trade settles, your hedge disappears but your underlying physical position doesn't). So you need to price in a little extra slippage risk for getting out of the position.

2) Counterparty risks—you're not dealing with CME Clearing here, you're dealing with some of the trashiest names on the planet. Binance? OKX? Bitfinex? Yuck yuck yuck. And if you do trade at the CME to get the better counterparty credit risk, then you can't cross-margin between your futures and your physical.

3) Mark-to-market risk—this is the big one. You're short an instrument that requires daily mark-to-market payments, so if BTC screams higher, you'll have to pay away industrial amounts of money on the short futures position, but you won't be able to monetize the long cash position.

(The existence of coin-margined futures on the crypto-native exchanges makes this actually quite a bit easier to manage, though, so it's not as big a risk as it would be in a USD-margined market. Imagine if you were slinging copper futures and you were able to post copper as collateral!)

Man what an insane trade it was!! I think now the high print of >10% p.a. only comes in spikes once every 3 months or so. The last few spikes were the big bull runs in BTC this year, then it slowly dies down to well below UST yields. Started happening this year, was snooping around here. Although I fired up the bloomie today, using the HS function and comparing the Generic CME BTC Fut vs Spot BTC, the spread wasnt THAT wide. Granted, I might not have been comparing apples to apples.

Good assumption, I don't have much data for now, a good buddy of mine that's running a web3 VC fund is launching a new sub-fund that will focus primarily on the BTC and ETH basis trade so I was wondering about the risks. Figured you're literally the best person to ask. The head of this fund was a trader at pretty successful HF who then cofounded another fund, both of which I shall not name as Singapore's too small but the track record's there, I just needed to gain more knowledge on this space as it's pretty esoteric to me. Just trying to understand the mechanics of how this will run and if there are obvious landmines.

I'm assuming for 1), they will have that automated but I still think there'll be a little slippage, but is the BTC/ETH market liquidity way deeper than traditional NDF basis trades? Will this help reduce slippage somewhat?

For 2), so to mitigate counterparty risks they're thinking of doing some structuring but the details are still TBD, they're figuring this out vs dealing direct with CME. I'm going to hazard a guess it's going to have to be some kind of swap arrangement?

On 3), I assume for a Fund, there will be some mechanism to manage the carrying costs of the short position? Maintaining sufficient liquidity in case of a sudden widening of the basis spread (am I using the right term here?). I'll try to get more info

 

[snowblaze]

Sure. The idea behind a collar (we called them risk reversals in FX-land, equity folks tend to call them collars) is usually that you’ll buy them to hedge a long stock position, not as a profit-making trade themselves.

If you owned SPY and wanted to hedge yourself against it going down, you’d buy the collar - buy the 550 put, sell the 590 call. On expiry day, here’s what happens:
* If SPY is below 550, you’d exercise the put, and sell the stock at 550;
* If SPY is between 550 and 590, you’d do nothing;
* If SPY is above 590, the call would be exercised against you, and you’d sell the stock at 590.

Handwaving a little, this approximately works out to “you’re protected against the stock dropping below 550, in return for giving up any upside above 590”. And if you think of a risk reversal / collar as protection, trying to lock in an existing profit instead of trying to juice additional profit, it’ll make a lot more sense.

thank you for teaching me. May I also ask you , when you mentioned that ‘If SPY is below 550, you’d exercise the put, and sell the stock at 550’… then I would be earning from this trade?

An example if it drops to 500, then I would earn 50 per contract (100 shares). At the same time, I still can hold my existing S&P shares.

 

[Shiny Things]

Although I fired up the bloomie today, using the HS function and comparing the Generic CME BTC Fut vs Spot BTC, the spread wasnt THAT wide. Granted, I might not have been comparing apples to apples.

Yeah, there's a little bit of quirkiness here. The CME basis usually trades a lot tighter than the basis on the crypto exchanges, either for market-structure reasons (different positioning in CME vs Binance basis, and the prop shops aren't big enough to close the arb), or because "we'd rather face CME than some sketchy crypto exchange run by three blokes who are all on the Interpol Red Notice list".

My usual quick-and-dirty source for this stuff is bitcoin futures info dot com, which I know sounds like an SEO wheeze but I swear it's real.

Good assumption, I don't have much data for now, a good buddy of mine that's running a web3 VC fund is launching a new sub-fund that will focus primarily on the BTC and ETH basis trade so I was wondering about the risks.

One thing that raises a flag for me is that pivoting from VC to slinging-STIRs is a textbook case of style drift. Not necessarily a red flag, but definitely a yellow flag. Maybe a chartreuse flag.

I'm assuming for 1), they will have that automated but I still think there'll be a little slippage, but is the BTC/ETH market liquidity way deeper than traditional NDF basis trades? Will this help reduce slippage somewhat?

They're similar orders of magnitude of liquidity. Market makers are surprisingly active on the big crypto exchanges—certainly I'd rather be trading buttcoin or methereum than, say, IDR or PHP NDFs.

For 2), so to mitigate counterparty risks they're thinking of doing some structuring but the details are still TBD, they're figuring this out vs dealing direct with CME. I'm going to hazard a guess it's going to have to be some kind of swap arrangement?

Wait, that's worse...? If they're trading on swap, they're taking the swap counterparty's risk instead of the clearinghouse's risk. They should just suck it up and take the exchange clearinghouse's risk.

On 3), I assume for a Fund, there will be some mechanism to manage the carrying costs of the short position? Maintaining sufficient liquidity in case of a sudden widening of the basis spread (am I using the right term here?). I'll try to get more info

Nah, this is the specific risk they're taking - they can't manage it away. Like any basis trade or carry trade, the risk is that the basis moves against them and they get stopped out. (Sure they could trade unlevered in coin-margined futures, which minimizes the risk of getting stopped out, but then why pay them a management fee?)

thank you for teaching me. May I also ask you , when you mentioned that ‘If SPY is below 550, you’d exercise the put, and sell the stock at 550’… then I would be earning from this trade?

Sort of. The collar would hedge your losses on the underlying stock.

An example if it drops to 500, then I would earn 50 per contract (100 shares). At the same time, I still can hold my existing S&P shares.

Most US equity options are physical-settled - so you'd sell your SPY at 550, then have to re-buy it (at 500) if you wanted to maintain the position.

 

[MrClubbie]

Yeah, there's a little bit of quirkiness here. The CME basis usually trades a lot tighter than the basis on the crypto exchanges, either for market-structure reasons (different positioning in CME vs Binance basis, and the prop shops aren't big enough to close the arb), or because "we'd rather face CME than some sketchy crypto exchange run by three blokes who are all on the Interpol Red Notice list".

My usual quick-and-dirty source for this stuff is bitcoin futures info dot com, which I know sounds like an SEO wheeze but I swear it's real.


One thing that raises a flag for me is that pivoting from VC to slinging-STIRs is a textbook case of style drift. Not necessarily a red flag, but definitely a yellow flag. Maybe a chartreuse flag.


They're similar orders of magnitude of liquidity. Market makers are surprisingly active on the big crypto exchanges—certainly I'd rather be trading buttcoin or methereum than, say, IDR or PHP NDFs.


Wait, that's worse...? If they're trading on swap, they're taking the swap counterparty's risk instead of the clearinghouse's risk. They should just suck it up and take the exchange clearinghouse's risk.


Nah, this is the specific risk they're taking - they can't manage it away. Like any basis trade or carry trade, the risk is that the basis moves against them and they get stopped out. (Sure they could trade unlevered in coin-margined futures, which minimizes the risk of getting stopped out, but then why pay them a management fee?)


Sort of. The collar would hedge your losses on the underlying stock.

Most US equity options are physical-settled - so you'd sell your SPY at 550, then have to re-buy it (at 500) if you wanted to maintain the position.

it seems that trump has been bought out by crypto bros
should we buy some in case he wins?

 

[SpeedingBullet]

Yeah, there's a little bit of quirkiness here. The CME basis usually trades a lot tighter than the basis on the crypto exchanges, either for market-structure reasons (different positioning in CME vs Binance basis, and the prop shops aren't big enough to close the arb), or because "we'd rather face CME than some sketchy crypto exchange run by three blokes who are all on the Interpol Red Notice list".

My usual quick-and-dirty source for this stuff is bitcoin futures info dot com, which I know sounds like an SEO wheeze but I swear it's real.


One thing that raises a flag for me is that pivoting from VC to slinging-STIRs is a textbook case of style drift. Not necessarily a red flag, but definitely a yellow flag. Maybe a chartreuse flag.


They're similar orders of magnitude of liquidity. Market makers are surprisingly active on the big crypto exchanges—certainly I'd rather be trading buttcoin or methereum than, say, IDR or PHP NDFs.


Wait, that's worse...? If they're trading on swap, they're taking the swap counterparty's risk instead of the clearinghouse's risk. They should just suck it up and take the exchange clearinghouse's risk.


Nah, this is the specific risk they're taking - they can't manage it away. Like any basis trade or carry trade, the risk is that the basis moves against them and they get stopped out. (Sure they could trade unlevered in coin-margined futures, which minimizes the risk of getting stopped out, but then why pay them a management fee?)

Thanks a lot!

I'm now wondering why don't I just do it myself then instead of paying fees for the same risk? Although I don't think I have access to Binance here in S'pore to do this trade, my Gemini certainly doesn't allow for that, leaving me with... uhh... coinbase and Kraken. So out of laziness I bought ID28 instead. I'll continue reading up

 

[snowblaze]

Most US equity options are physical-settled - so you'd sell your SPY at 550, then have to re-buy it (at 500) if you wanted to maintain the position.

Sir thank you. I went to read up more on options and how it works. Can I ask u further on this Collar.


In the earlier example below. Would you know in what circumstances should someone just exercise the put option (or auto exercise when it expire)? And in what circumstances would I sell the put contract (which I believe should be of a higher value) and earn the difference?

I can only think of 1 circumstance when I would not exercise the put option and that is if i do not have own 100 shares. Thank you

If you owned SPY and wanted to hedge yourself against it going down, you’d buy the collar - buy the 550 put, sell the 590 call. On expiry day, here’s what happens:
* If SPY is below 550, you’d exercise the put, and sell the stock at 550;
* If SPY is between 550 and 590, you’d do nothing;
* If SPY is above 590, the call would be exercised against you, and you’d sell the stock at 590.