Standard options selling strategies have been huge winners
for the past 5 years, generating, perhaps, as much as 30-50%
per year. These funds have been the top performers in the
hedge fund industry. Selling puts in a rising market into
volativity spikes is most profitable. Now these funds
comprise, perhaps, as much as 1/3 of total 1.6 Trillion hedge
fund pool.
While such a huge pool of leveraged liquidity normally
contributes to market stability and lack of volativity, we've
seen what happens when just 1 bln. (LTCM) of these leveraged
bets go
soar. Now, I'm afraid, the threshold is a lot lower, which,
perhaps, explains the sudden tankage the market took back in
February after 3pm, after only a moderate decline, and
the record lack of volativity we've seen in recent years.
LTCM-like strategieas are standard in the world of finance,
with only a minor variation (shape of volativity smile) for a
particular brokerage firm or a hedge fund, which, perhaps,
might explain why we see such strong spikes in the futures
market, without involvement of conspiracy theories - they
all follow the same signals.
Now, I'm afraid, the risk is for a very large BK decline,
in case we enter the "tail" of the probability distribution,
at which point all such bets will have to unwind.
I'm afraid, that threshold could lie around just a 2% decline
(a day) nowadays, but that's just a wild guess based on what the market
did on Feb. 27.
Just my 2c. |
