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Vol #129: May 18th, 2023
For programmers, time is three nested for-loops that run while SpaceTime exists.
For everyone else, we’re frequently surprised by the fact that almost 40% of 2023 is over or how the clock moves backwards before it’s five o’clock somewhere.
Seconds become minutes and hours; then days, years, and decades. The technical definition of this base unit is “the unperturbed ground-state hyperfine transition frequency of the caesium 133 atom”. For the purposes of this blog, it’s “one mississippi”.
It’s a highly predictable and measurable value that can be fairly accurately modeled by elementary school hide-and-seekers. For a few dollars you can strap a device to your wrist that will lose only a second of accuracy over two years - 99.999998% accurate.
But if we’re not counting explicitly, time slips away from us. A few minutes late to a meeting. A day behind on the rent. Happy Belated Birthday.
The options pricing model is as precisely calibrated as the vibrating quartz in your Casio. (Or if you’re looking for an automatic, The Rolex Index is down 24% from its March 2022 high.) In the classic Black Scholes expression, time is just a straight linear march into expiration.
“When it rains it pours” resonates because we don’t experience life linearly. There’s heteroskedasticity to both life and volatility. Even something as simple as Saturday and Sunday throw kinks into time measurements. There’s less of a chance of breaking news on the weekend, but if there is a weekend event, it’s probably big.
If you want an outstanding review of the logic behind how to model this clustering, Kris Abdelmessih recently put together a detailed resource on Understanding Variance Time. When I started, block headed market makers just asked dev for a “days ahead” feature that jimmied the clock on Friday afternoon - this is intuitive math behind why that matters.
In the markets there are many more days spent patiently watching liquidity churn than there are live fires of blazing opportunity. Coming into another light green session, the ten day realized volatility of the SPX only annualizes to 12%. That’s a snooze fest.
For traders, the best thing you can do when it’s quiet (other than eating contests) is prepare for the storm. No one’s good enough to know when or how it will happen, but it will. It’s a good time to sweep up deltas, polish your vols, and study the history books.
Today, I’m in the camp of being shocked that it’s already May 18th. But it’s also a perfect time for spring cleaning. I’ve been working on a project the past several months that I’m excited to be releasing on June 1st.
TheTape.Report is an analytics platform that helps traders identify and analyze opportunities in the equity options space. It’s a series of audits and dashboards that crunch daily options data into alerts about what’s moving, and gives the tools to dig deeper into the trade.
When I was a market maker, we were laser focused on liquidity. It was how we decided to scale our footprint and resources in and out of different trading opportunities. The LIQ Index that I’ve built for TheTape is a measure of exactly that.
Tighter markets and more volume not only deliver a better execution experience, but trades move the curve. Whether you're taking or providing liquidity, volume is interesting because it moves inputs. Every contract is going to have some effect on the overall volatility surface - buyers of downside make that skew more expensive, call overwriters cheapen upside.
As the curve changes, it moves the cheese for investors of different objectives and theses. This curve below shows how AAPL skew currently implies prices for 10 DTE options (dark green), compared to how that same curve has looked over the last 10 days (light green). If you’re bullish you can collect more premium from an overwrite, and if you’re bearish then puts are cheaper.
When I left prop trading, the most stark and immediate change was inbox adaptation. I was used to getting potentially hundreds of audits on a given day reporting on various different outliers or progress updates. I’m not quite getting that many from TheTape yet, but the concept is the same.
Whether it’s a highlight of the most Expensive Puts in a delta or time range, or a daily monitor of relative skew, I can filter my attention towards interesting movements. Once you know where to look, it’s about asking why five times. Poking holes in a thesis is an important step, so dashboards like the Stable Skew or VRP Lab let you visually compare the history and dynamics of the potential opportunity.
There’s a lot more coming for TheTape. I’ve been munging options data for eighteen years and my idea backlog has only gotten longer.
But at an incredibly predictable rate, with exactly the amount of time I expected when I dove into this, the calendar has moved forward, and it’s time to launch. As the founder of LinkedIn and PayPal mafioso Reid Hoffman has said, “If you are not embarrassed by the first version of your product, you’ve launched too late.”
Since you, my loyal readers, have stuck with me not only through a soft pitch, but also 128 different blog posts, you deserve something more than an early heads up and free trial. Subscribe before July 1st with “TILL20” and get 20% your first three months.
We’ll continue to focus on the editorial of volatility and trading here at The Till. It’s always a pleasure to hear from readers and meet new friends, so there’s no reason to change that.
Happy Trading everyone.