black swan event how heavy are we in brazil jim morrison at the end what would you do to hedge
your portfolio in an emergency a few of the moves i'm already making here's what taylor mason did
buying long dated fix calls welcome everybody welcome thanks for coming you've read all our
stuff and the biggs appears again later in the show how we avoided the xiv liquidation by selling
our vix positions two weeks before everybody else did when a complex financial instrument appears
twice in a tv show you know it's become part of the financial landscape you guys have asked to
learn more about it to really understand the vixen volatility index and its use cases today we're
going to look back at the history of volatility in financial markets starting in the 50s when maths
enter the financial world in 1952 markovics a future nobel prize winner introduces volatility
as a proxy of risk in his modern portfolio theory it's realized our historical volatility
something we can measure it's the degree of variation of the price over time we take this
for granted today but volatility is not risk if the price goes up fast like tesla in october
it's volatile but not risky it's great that proxy is however a cornerstone of modern finance then in
the 70s theory became applicable in practice with the black Scholesmerton model which we often call
the black Scholes model sorry Merton in 73 three academics introduced a way to price options with
formula based on volatility it's derived from brownian motion which is used for particle physics
but it's no longer the realized volatility instead it is implied volatility volatility that's looking
into the future the model is a perfect blend of theory and practice and it's still widely used
today it triggered the boom in option trading and derivatives then in 1992 volatility becomes
visible with the vix implied volatility is very useful to investors it gives them a way to assess
their market environment yet it was impossible to follow until the introduction of the vix by the
chicago boards of options exchange cboe and that's the index that the media refers to all the time
the cboe volatility index that's the vix for short which we then always explain is the fear gauge
because it tends to rise whenever investors are freaking out and that's exactly what happened
last week it's very popular yet it is just a calculation derived from the price of listed
options you can do anything with it except watch it so why would people want to trade the vix the
reason is intuitive if you look at this chart when the s p drops the vix goes up so the principle
of having decorated assets is a fundamental proposition of modern portfolio theory where
you say i pick two decorated assets i build an efficient frontier and my portfolio sharp
ratio will increase so looking for hedges looking for ways to diversify your portfolio
is something very fundamental in the principles of portfolio investment but you'll have to wait
until 2004 for the weeks to become tradable with futures and options it's billionaire mark
cuban who asked goldman to trade the vix in order to hedge his fortune team at goldman
modified the biggs formula to create a tradable futures contract and over the years it's become
a tremendous success and that's the reason why taylor could buy their long-term calls on the vix
our newly redeployed funds are affected in dozens of different ways but would that actually be a
good hedge let's take the example of november 2021 there was a sharp correction in the s p 500
as expected the vix went from roughly 80 to over 30 so a move of almost 100 up so if you could hold
10 percent of that in your equity portfolio that would be a great hedge but you can't what you can
do if your hedge fund for example is buy long dated calls like tailors and i couldn't find a
historical pro call prices but i see the long-term futures went from 25 to 27 and that's the first
challenge of the vix the river you're trading the futures not the spot and they don't move in
the same way the second challenge is what you will typically find is that the future curve of the vix
is in contango i e the shorter data are trading below the longer dated ones you're buying high
and you're selling low you're selling load the future and you're buying high the second month
anyway that didn't stop wall street from building products available to a larger public and in 2009
the first vix exchange traded notes appeared everyone could trade the underlying as simply as
funds and shares with products that became well known such as the vxx again it
doesn't trade the spot that's a very important difference that you can see in the performance
now i'm showing the splits here because it has done five reverse splits since inception
to keep that price from bleeding down to zero because that's exactly where it goes
but on a split adjusted basis it launched at a price of over a hundred and two thousand dollars
and as of making this video now it is below 17 down 99.9 percent since inception so if it
goes down all the time why not short it so you then could argue that the contango of the vix
lends itself perfectly to inverse leverage etf and that's the strategy axle rod is referring to
how we avoided the xiv liquidation by selling our vix positions two weeks before everybody else did
on the mix this etf existed which was the xiv the problem with this inverse leverage is everything
is fine until the contango collapses the fix exploded the front future moved significantly
faster than the second month this is actually not an isolated case i also participated
in the launch a quick closure of a volatility related product in my time the vix is very
tempting on the surface for an equity investor looking for a hedge but you can't hold it in
the long run long or short it's an instrument that you can only trade but you can't invest in
if you want to invest in the long run though you can try wealthy hood it's a smart personalized and
commission free way to become your own wealth manager it makes investing easier and fun you
can trade out for free with virtual money first by following this link and experimenting for yourself
now if you want to trade the fix i've got the feeling that those that trade it professionally
are only trading the curve itself more than the direction of a specific future but i'm really not
an expert so remember seek education and diversity and subscribe to this channel thanks for watching