Seeking Alpha

Michael Williams

View as an RSS Feed
View Michael Williams' Comments BY TICKER:
Latest  |  Highest rated
  • VIX: What Is It, What Does It Mean, And How To Use It [View article]
    Krystof Huang,

    I will try to answer some of your questions.

    ------------

    "Does the VIX partly explain the apparent discrepancy between expectation and reality for those who buy options to create equity leverage...?"

    >Not necessarily. Remember the VIX is extrapolated from the SPX options implied volatility. It is NOT calculated from the statistical volatility of the SPX. VIX just reflects the relative premiums of the SPX options based on supply and demand. Frequently it will be over or undervalued compared to the SPX statistical volatility.

    ------------------------


    "Options tutorials routinely point out that by buying in-the-money with various strike prices, options easily create 10x to 15x leverage. And that this is one of the most popular reasons that many traditional investors, like me, are initially attracted to options. However I also came across some articles stating that research has shown this to be a myth, because the average option buyer performs less well than the buy-and-hold investor..."

    >Options are a leveraged product. The leverage is created by rate of change of the options DELTA. This leverage is created by the second derivative, known as GAMMA. Because the option contains a leverage component, doesn’t mean that it will make more or less money vs. the buy-and-hold investor. It all depends on several factors, such as: Time to Expiration, Premium over Parity, and the strike price relative to the stock price. To say it “the average option buyer performs less well than the buy-and-hold investor” is a rather broad and sweeping generalization. I would focus on the WHAT, WHEN, and HOW, rather than accepting generalizations as facts.

    -----------------


    "Meanwhile, tutorials also always explain how "implied volatility" increases the spread between fair value and market prices. So they say, buy option positions with low IV and sell with high IV. But they are rather vague about how to do that. Now if I understand correcttly, it seems that IV = VIX more or less. So maybe we can just go to Finance.Yahoo, ask for the ^VIX index, and see if it is a good day to buy or a good day to cry?"

    IV represents Implied Volatility, this term can be used with any option, it is not limited to just the VIX. It is important to remember there are THREE different volatilities:

    1. Statisical Volatility. This is the undisputed volatility of the underlying assets over a given period of historical time. In simple terms, it just how the underlying moved – it is just a fact. It is very important to remember that just because it HAD a particular statistical volatility does NOT mean it WILL have the same in the future.

    2. Implied volatility (IV). This is the volatility of the underlying asset based on how the options are priced. It has nothing to do with how the underlying actually moved or how it will move. It is derived from the price of the options (premiums), based on order flow (buyers and sellers). It is not right or wrong; it is just what he current market is indicating. It is frequently wrong and sometimes VERY wrong.

    3. YOUR volatility. You know what the statistical volatility is; it is just a mathematical fact. You know what the current implied volatility is; this is based off the current options price. The question is what do YOU believe what volatility SHOULD be. You then compare YOUR volatility to the IV and determine whether the IV is too high or too low. This will determine if you feel the options are FAIRLY priced or not.

    ------------------

    "Then in the "comments" here, Mr. Williams explains that a high VIX affects both puts and calls, somewhat regardless of whether the maket is falling or climbing. Well, if I understand correctly, this makes a lot of sense and potentially explains a lot. Because obviously, the best time to buy options is puts at the beginning or calls at the end of a market decline."

    Volatility does not know market direction. It is simply the measurement of the premiums in the option price. What you are referring to is DELTA trading (or directional trading) using options. Nothing is wrong with that, but it seems you are using Volatility (or the VIX) to determine your directional trading bias. This is different than volatility trading.

    ----------------

    "However every time there is an itty-bitty drop, some people start buying puts to cover their positions. The more the drop, the more people pile in, and the higher the premiums go. So the VIX probably does not predict the market, any more than the market predicts the market, but it just reacts to consumer trends in the same way. You can say the low VIX expresses complacency, but you can also say the high S&P expresses complacency. When in fact, every market peak is just naturally created by over-optimism which is another word for complacency."

    I was not trying to imply that a high or low VIX was necessarily an indication of market direction, but rather an indication that options were either over or under price relative to the market condition. In the current geo-political environment I believe the VIX at 12 or lower is underpricing potential volatility. The market is complacent and is NOT concerned about big moves in the market (up or down). However, it is true that when referencing very low IV (VIX or otherwise) is connected with a market top, as an overly high IV (VIX or otherwise) is connected to a market bottom. However, the reality is that volatility does not KNOW direction; it is a calculation or RANGE (up or down). A highly volatile event could be a huge move higher in the market, just easily as a huge move lower. The question is – were the options priced correctly based on the huge move.

    -----------------------


    "And therefore perhaps we cannot expect consistently leveraged gains from options-buying...? The premium prices may eat up the gains...? Because premiums are the highest at precisely those times when buyers would have made the most.... and precisely because the option-writers need to protect themselves..? To make consistently leveraged gains with options, it might be necessary to switch to option-writing when the VIX is high...?"

    Correct, however don’t fall into the trap of only being an option seller vs. buyer. Different conditions call for different strategies. Selling an option can bring losses, just as easily as buying options.

    The old saying on the trading floor was, “A Front-Spreader [seller of options] dies a quick death. A Back-Spreader [buyer of options] dies the slow death of a million small cuts.”

    ----------------------

    I hope this helps, it is kind of hard to go into a full dissertation on derivatives in the comment section.

    Thanks for your post.
    Apr 1 12:44 PM | 1 Like Like |Link to Comment
  • The Low Volatility Story In Pictures [View article]
    Have you looked at the options implied volatility on these two products? It would be interesting to note which implied volatility is more accurate to it's statistical volatility. That would be helpful information, as it might be worth being long the underlying in one and the options in another (or sell them).
    Mar 25 12:08 PM | 1 Like Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    The "you are wrong" approach to discourse means that you are unwilling to hear my view, unwilling to accept a different view, or just don't have the anything to justify your case. Regardless, I will try to clarify my point, if you care to be objective.

    Because a inflation rises at an alarming rate and the government's only option is to print more to pay of debt, doesn't mean the "goal" of the government was to create hyperinflation in the first place. Because when a government's debasement hits an accelerated rate, they government is no longer in control (unless through force as seen in Germany.)

    A big part of German's problem at the time was the additional tax (debt) via the Treaty. There is a great book written on the subject: "When Money Dies: The Nightmare of the
    Weimar Collapse."
    http://bit.ly/13I2kir

    One problem with internet/form responses, is that frequently people respond as if everything should be taken literally and sarcasm usually goes unnoticed. I also notice this is also frequent among my co-workers in which English is their second language. Of course I realize that my short responses may have been mis-interpreted, for that I apologize. I think in general terms we agree. The "game over" came well before the realization of "hyper inflation".

    The "game over" remark was more sarcasm, not to be taken literally. It is a figure of speech. Once a nation reaches a point in which it sees no other alternative than to continue to print money because it has run out of other options, it is usually "game over". Meaning that the game of printing money to solve problems is no longer working as they have hit an inflection point of hyper-inflation. The problems that lead to hyperinflation were already long in the tooth.

    Usually at this stage, especially import nations, their money is no-longer accepted in trade. This causes the currency to "break", meaning that the nation has to convert their currency to another form for a medium of exchange. This further exacerbates the inflation rate.

    I would recommend another good and thought provoking book, which you may enjoy: New Deal in Old Rome - here is a free PDF version (It has recently been reprinted) http://bit.ly/ZAz4qH

    Hope that clarifies my view a little better.
    Mar 11 12:39 PM | 1 Like Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    GreenRiver,

    While I do appreciate the sarcasm, like I mentioned in a previous post in this thread, your comment aims at the "either or" camp scenario. You act as if ANYONE that buys gold, must ONLY be buying gold.That is an assumption on your part and you know what they say about assumptions.

    You don't seem to understand WHY I purchase gold and silver. It is NOT an investment, it's future savings against eroding dollar value. In fact I would rather have it NOT go up fast, since I have a fix dollar I purchase (about net 15% per month). So I buy less quantity of gold and silver when it goes up.

    One would think that gold would rise at the rate of the CPI or even the pre-1990 CPI, however that has not been the case (unfortunately for people like me - because we are buying less quantity).

    Ironically gold has done far better than the market, without the volatility in the last 10+ years. Not that I want it to, I would rather have the market do better since that is were the bulk of my liquid investments are (long and short).

    Again, the market is an investment - my gold and silver savings. There is a huge difference.

    My goal has always been to have little to no debt, while building hard asset value. Hard asset value is property, gold, silver, and other intrinsic value items. The revenue to build my little hard asset empire is from INVESTMENTS in the market, bonds, private equity, etc.

    While I leverage my investments, I would never do that with my hard assets/savings. I can risk losing money in the market, I can't risk loosing my savings or my home.
    Mar 10 08:39 AM | 2 Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    GreenRiver,

    While that maybe true with the retail community, many of the clients I work with and partners are gold and silver buyers as well. However, they are far removed from the "doomsday peppers" or "end of the world" type people.

    The extremes and those that yell the loudest always get the most attention. However, in my humble experience, including my family, have always saved - owning property outright, buying gold and silver, and are just generally net SAVERS rather than spenders.

    As I mentioned before, it reminds me of the extreme and loud voices you hear in the GOP, Democrats, Far Left, Far Right, Tea-Party, Occupy movement. It only takes a few people banging the drum on some extremism that makes anyone else's opinion seem just as silly or foolish.

    I believe a more reasonable approach is one of both saving and also coming to terms with "it maybe improbable, but not impossible."

    My Great-grandfather, grandfather, and my father have all saved gold and silver (just accumulating it, never worrying about price or thinking it as an investment). Just storing it and passing it on from generation to generation as an alternative method of saving. The same with property, they never take out a mortgage or loan against property - always looking to pay it off. It is just a general concept of wealth building with saving intrinsic value. My family and I was raised never by gold or a house because you are SPECULATING, you buy it to STORE intrinsic value and save over time.

    For my clients and partners, we purchase gold every month as part of a bigger savings plan. However, that is a far cry from thinking the world will end.

    Again - my fear is that we will see inflation like in the 1970s and the gold is just a modest hedge against such an event. I hope we don't, but I would rather be prepared.

    I still have coins from my Great Grandfather, I hope to pass them on to my son and eventually Great Grand son.

    My son, 9 years old, is already saving silver coins when he can. But he also has a bank account and puts his allowance in there as well. Teaching well rounded savings and the value of money is important.

    Just sayin' not all of us gold buyers are doomsday-world-end-nut...
    Mar 8 04:36 PM | 1 Like Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    GreenRiver,

    It is not an either or belief. Just because one person purchases gold and silver (as I do), doesn't mean I expect the end of the world. I certainly don't. However, I do expect that inflation could get as high or higher than it did in the 1970s. It is THAT concern, not a "walking dead" scenario of doomsday which I am concerned about.

    I find that critics of those that buy gold usually take an extreme view of them, much like the Democrats vs. Republicans. Why can't there ever be a degree of moderation?
    Mar 8 12:41 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Teutonic,

    I have a sad feeling we must trust in "hope" and have "faith" and must choose to ignore the math. However, in the end we can't avoid math.
    Mar 8 12:20 PM | 1 Like Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Alex,

    While I agree that that creating "inflation" maybe a goal to pay down debt, but I don't believe that "hyperinflation" is the "goal" of any government. Because when you reach that point - well it is pretty much game over.

    Correlation does not prove causality. How you connect the France occupation to strikes to wage increases as the cause which created the "goal" of "hyperinflation" is a rather radical interpretation of events as to the cause.
    Mar 8 12:19 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Freecmorgan,

    So you take one sample out of all of them to show a dumpy 2nd run movie theater is only $3. Sure entertainment is better, but it doesn't change the fact if you want to see a NEW RELEASE movie in 1990 and 2013 the price is radically more expensive.

    Also noted that you completely ignored the food, gas, energy, and other daily need costs and zeroed in on a movie ticket only.
    Mar 8 12:14 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Teutonic,

    Wages and salaries are the main drivers of any inflation is true, ONLY in a closed society.

    It is possible to have inflation based on trade, now more than ever as our nation is a net import nation. If our currency devalues against a large exporter to our nation, it is very possible to have PRICE inflation.

    We also can see inflation ramp up over night from a national default, as we did recently in Iceland with a 50% inflation rate (currency devalue) practically over night.

    Inflation can come in many forms.
    Mar 7 10:06 PM | 2 Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Alex,

    You should read about the Weirmar Republic. You can have hyperinflation without wage inflation.

    I own gold, buy it every month, but I do NOT want it to go up. I want it to go DOWN, because I want to buy more. I do not look at GOLD as an investment, but rather a long-term finite store value. Alternative savings account. One that I hope I never would need.

    People buying gold for a hedge should NEVER at it as an investment.

    Either buy gold because you think it will go up and is a good investment.

    OR

    Buy gold as a store value and you want it to go down in order to increase your holdings.

    You can't have it both ways and that is probably my biggest argument with the goldbugs.
    Mar 7 10:03 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Jake,

    We are already using gold and silver as money, have you not seen the 1,000s of WE BUY GOLD stores dotting every corner.

    Additionally, the fastest growing banking system in the US is pawn shops.

    Exchanging silver and gold back into any domestic fiat currency is the easy part. Making sure you have it before it is needed is that hard part.

    Barter system never works beyond a very small village. The reason is that you may have the cow for milk, but if you want food, the guy that wants to trade the food may need meds, and the med guy may need ammo, and the ammo guy may need milk. Currencies through out history has been the only successful method to exchange services and goods for a set value. However, a FIAT currency is really a faith currency. One needs to have faith in it, because it has no actual intrinsic value.
    Mar 7 09:55 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    Bricki,

    You shouldn't take ANY reports from ANY nation at face value. However, the best advice ever given was by Woodward's source "deep throat" - whom told him just "follow the money!" Woodward did and we all know where that led.

    So follow the money, do the math, and judge by the action (not words) and you get to the truth more often then not. As per China, regardless of what they say (or not) - one only has to look at the holdings and the participation (hence follow the money) and you quickly see that why the Fed is printing.
    Mar 7 09:53 PM | Likes Like |Link to Comment
  • Leonard Melman: Are You Prepared For Hyperinflation? [View article]
    The other option is to do nothing and have trust in the full faith and credit of our government. I am not saying it is hard or may face difficulties, however that should not stop you.

    My grandfather kept gold and silver and so did his father, even in the 1930s when the government made holding it illegal. However, no one came to their house to take it.

    While I agree, it maybe improbable, but not impossible. I would rather have something than to trust in "hope".
    Mar 7 04:15 PM | 2 Likes Like |Link to Comment
  • Apple Bulls: Has David Einhorn Ever Heard Of Steve Jobs? [View article]
    Well it seems that Seeking Alpha is not accepting "Options" strategy articles anymore. However, after reading this article I decide to post it anyway as an insta-blog post. I would like to know your thoughts.

    http://seekingalpha.co...
    Mar 7 04:01 PM | Likes Like |Link to Comment
COMMENTS STATS
67 Comments
98 Likes