Wednesday, January 02, 2019

Seeking What Again?

When someone states: "I am a seeker of truth."  Your response must be: "What do you mean?"

To seek the truth of a matter is sensible enough.  What is the meaning of seeking "the truth"?

Of course, in the spiritual circles, "the truth" is the "supreme truth".  That truth, which is already written about in various scriptures.  And to experience or realize it on one's own is the quest.

But that is a misguided journey.  A seeker must start his quest not by first fixing an esoteric destination, but by discovering answers to very normal questions about the world.  Is it not strange that those who have little grounding in history, logic or science claim to know about the deepest mysteries of the brain, consciousness and the origins of life.

If you must seek, seek.  But seek the truths about what is all around you.

To seek the truth about how criminal trials work.

To seek the truth about how crony capitalism operates.

To seek the truth about climate change.

To seek the truth about large corporations and their aims.

To seek the truth about history.

To seek the truth about gender dynamics.

To seek the "supreme truth" is a narcissistic journey of feeling a psychological high.  A better truth to seek might be: what is driving me to this spiritual goal and how valid is this goal?

If you know your conclusion at the start of your quest, you are not really a student.  You are trying to confirm something whose validity you have taken on faith.

By all means be a seeker, but if you are seeking "the truth", a better label might be "a sucker".

Tuesday, January 01, 2019

Games People Play

In a modern casino, you are offered a choice of ways to lose money.  Each way has slightly different odds, all favoring the casino.  The various games provide you with an illusion of control.  You think that your playing that game somehow tilts the odds.  Your entire history, your life and circumstances, your perspective on your fate and destiny, all compel you into thinking that the next card dealt to you is going to be a face card.

In this post, I will tell you about a slightly different collection of games people play.

If a few people have a business idea, they try to sell that idea to lenders who can then lend them some money to invest for their business.  In the old times, getting a loan from a wealthy institution or individual was pretty much the only way to raise capital.

Many centuries ago, smart people came up with the idea of raising money from the general public.  So, they sold "bonds" to the public promising to pay them back.  The general public bought these bonds in the hope of a good return on their investment.

A few centuries later, smarter people came up with the idea of issuing "stock" to the general public.  While the bonds promised a fixed rate of return, the "stocks" offered a variable rate, depending on the profits of the business.  Such variable payouts were called dividends.  In effect, stocks were a ownership-sharing and profit-sharing mechanism.

A few decades later, dividends were thought to be a dated idea and many companies issued stock with no expectation of dividend payouts.  The stockholders, despite having a so-called "vote" in the company affairs, had no way to force the company to share its profits with them.  But oddly, they still continued to buy the company stock in the hope that they could sell them to someone else for a higher price.

An example of such a stock is GOOG, the stock ticker symbol for Alphabet, the company which runs Google.

So, GOOG is the symbol of a stock traded on the various "stock exchanges" in the US.  A single GOOG stock, or share, currently trades for around a thousand dollars.

GOOG is a certificate promising you some kind of ownership in the Alphabet company, though if you ask a Google shareholder what his ownership entails, you might not get any real answer.

Now a series of Matryoshka doll-like financial instruments was created from this notion of a hazy ownership of a public company.

Some even more smart people thought that instead of offering single stocks, maybe they should offer a basket of stocks.  They created stock indexes, which comprised tens or hundreds of stocks and the price of the index was a weighted sum of its constituents.

One such index is the S&P 500 Index, owned by the Standard and Poor Global Corporation, which has, interestingly though, 505 individual stocks from the United States in its composition.

You can't just buy or sell this index, but you can buy or sell a mutual fund which "tracks" this index.  Such mutual funds are called "passive", because they just mirror the index portfolio and don't do any stock picking or decision-making.  One such mutual fund is VOO, the Vanguard S&P 500 Index fund.

You can buy or sell a mutual fund share, but you can't "trade" it.  You can buy it from Vanguard, or sell it back to Vanguard but people somehow wanted to buy and sell from/to each other.

So, exchange traded funds, or ETFs were created.  One of the flagship ETFs is SPY, the State Street Global Advisors run S&P 500 Index ETF.  The ETF mirrors the value of the S&P 500 Index throughout the trading day, and you can buy or sell it on a stock exchange without involving the State Street folks.

But people don't just want to trade, they want to speculate.  And they want to speculate big.  Buying or short-selling the SPY ETF is a bet about the future, but it requires a lot of money and offers only linear returns.  People want to bet with "leverage".  A share of the SPY ETF is around $250.  So if you buy 100 shares, you have to put up $25k.  And if there is a 1% change in the S&P 500 Index in one week, you make $250.

That is clearly not exciting enough.  You want to bet on the 1% upward move and maybe make $5k on an initial investment of $25k.  And likewise, risk losing $5k if the move is in the other direction.

So, there exists the "Futures" market.  You can buy or sell an S&P 500 Index Future contract which is a bet that the index will rise or fall by a certain amount during a certain time-frame.

Also available is the buying or selling of Options, which is similar, but is available for individual stocks instead of just indices.

But obviously that's not enough for a good casino.  We need more games.

People came up with a new index, called VIX, which tracks the "implied volatility", or the ups and downs of the S&P 500 Index.  This volatility number is what is used to price the options.

You can't trade VIX, but you can trade VIX futures.  That is, you can bet on whether the implied volatility itself will rise or fall during a certain time frame.

We are just getting started.

Trading VIX futures is cumbersome.  So ETNs (Exchange Traded Notes) were created for speculators to trade in VIX futures.  One such ETN is called UVXY, run by the ProShares company, which supposedly mirrors 1.5 times the changes in near-term VIX futures.  Just mirroring the index is so boring, so it "levers" up the funds and tries to offer an amplified movement based on movement in the VIX futures.

But people want to bet on the change in volatility itself.  There are indexes which track the volatility of volatility.  An example is VVIX: the volatility of volatility index.  That tracks the implied volatility in VIX futures options.

You can bet on VVIX by buying or selling options on a VIX ETN like UVXY.

So, for someone who is trading options in UVXY, here is what is going on:

He is trading in options on a levered ETN tracking futures on an index of volatility of a large ETF which comprises of public-traded stocks of major corporations in the United States.

That's it.  Simple.  Ha.

There were such speculators in February 2018, who had bought into or had bullish options on the reverse VIX ETN called XIV.  That month, unfortunately for them, VIX jumped from 10 to 50 in the matter of a week.  The spike was so sudden and massive that from that day on, XIV became a verb rather than a noun.  XIV blew up and turned almost to zero.  People speculate (!) that the spike in VIX was actually caused by the ETN liquidation itself.  When a fund blows up now-a-days, it is said to be XIV'ed.

But you might think that investing in stocks is for chumps.  You are a smart one, and want to trade in commodities.


In the olden times, people used to buy gold.  It was, and probably is, a precious metal which you hope will preserve its value, unlike fiat money or a stock certificate.  You might want to challenge this assumption, though.

But fine. You want to buy gold.  That's not easy.  You have to go to a goldsmith, and figure out ways to store the gold.

That's indeed cumbersome.  Instead, you can buy shares of a company or an ETF which buys and stores gold for you.  One such big ETF is GLD, run again by the State Street company.

But buying gold, or a gold ETF, is for investors.  Traders want to trade, and trade big.  They want to speculate on the price of gold, which somehow is correlated with the USDJPY exchange rate, and with inflation, and the Fed funds rate and the dot plot which is somehow supposed to an indicator of inflation, and with a "risk-off" sentiment.  I won't explain these terms, but the curious will be able to find out on their own.

Okay, so the speculators can choose to buy Gold futures or GLD options.

That's probably only mildly exciting for a daring speculator, as we can guess.

Gangsta speculators in gold trade in gold mining companies.  One such company is NEM, the Newmont Gold company.

But gangsters want to raid many gold mines at one go.  So gold miner indices are created.  The big ones are GDX, and its cousin, GDX Junior (GDXJ).  GDX has major gold miners, GDXJ has the minor ones.

If you ask me whether one can trade options in GLD, GDX or GDXJ, but Of Course My Man!

Or you can trade in levered ETFs like NUGT or DUST (very appropriately named, in my opinion).  NUGT offers 3 times the return on GDX, and DUST offers negative 3 times the return on GDX.

People think the gold miner index itself mirrors three times the return on gold.  So NUGT probably moves 9 times the movement in gold.

But that's STILL not exciting enough for a go-big-or-go-home speculator.

A Niederhoffer trades in options on NUGT.  Which offer a 100x leverage on NUGT, which offers a 3x leverage on GDX, which probably offers a 3x return on gold, which itself depends on some hazy factors for its pricing.

Those who've channeled Dostoevsky's Alexei Ivanovich won't be feeling exposed enough unless their leverage is at least 900x.

To give you an idea of the stress such speculators go through: a 1% move in gold can wipe out a 900x gold speculator, or make him a millionaire.  And gold moves 1% every other day.

There are others who think gold is too boring, and they invest in "energy": oil or natural gas.

Here is what happened a month or so back in natural gas.

One day, as many speculators were asleep, a weather bureau issued a note asserting that the 2018 winter was going to be very severe.

Natural gas is used for heating indoor spaces, so its price shot up around 20% in a single day.  Almost unprecedented in its history.  A what's called a six-sigma event.

The natural gas bears went bankrupt and worse.  A hedge fund called "" went belly-up and issued an advisory that its clients not only had gone bankrupt, they may actually owe money at this point.

The bulls were very happy.  More bulls piled into this move, thinking that such a move will proceed in the same direction and that natural gas will become even more expensive.

Overnight, for an inexplicable reason, natural gas prices crashed 20%.  Another six-sigma event.

The bulls went bankrupt.

Such are the games people play.