black swans trading
- The so-called black swan event is improbable, unpredictable and catastrophic
- The Russian invasion of Ukraine was a black swan event
- New options trading book by Julia Spina from tastytrade offers ideas on black swan event trading
Ironically, the unlucky investor’s guide to options trading avoids luck. “When you get into the casino, the only way you’ll come out with more than you started with, or even the same amount for that matter, is to get lucky. The house has a statistical advantage for each game. They do not depend on luck. The players are the ones who rely on luck. What options allow traders to do is build strategies with statistical advantage so, like the casino, they no longer have to rely on luck for long-term success,” says book author Julia Spina, podcast host and research analyst.
The book, written by Tom Sosnov, was first released on February 23. It offers retail traders everything from the basics of options to building custom strategies based on quantitative thinking, rather than relying on luck.
During its launch, the world watched the Black Swan event unfold.
The Russian invasion of Ukraine is now approaching its third week. What began on February 20 as a “special military operation” spread into a full-scale invasion. The conflict appears set to continue for the foreseeable future – possibly weeks and months.
The fallout from Russia’s invasion of Ukraine is being felt all over the world’s financial markets. bonds, goodsAnd encryptionAnd FXAll stocks witnessed seismic movements in recent days.
We spoke with book author Spina about what options traders should know about black swan events, the other developments and ideas that shape options trading and investing. Highlights follow.
DFX: Former Wall Street Trader and Author Nassim Nicholas Taleb popularized the term “black Swan“ It happened – How do you see them? Effecta job options traders?
Julia Spina: The way we approach the Black Swan events in the book and how I see them personally is that they are inevitable and unpredictable. Assuming that black swan events will occur, and if we assume that they are unexpected, options traders always need to consider this risk when trading, even if these events are highly unlikely. We keep transaction sizes small so that when a black swan event occurs, the potential impact on our portfolio is minimized. Once a black swan event occurs, and volatility is high, then premium sellers and options traders can effectively take advantage of these conditions.
Historically, the extrinsic risks of options traders actually tended to be higher when market volatility was low and conditions were stable. This is due to the huge losses that it drives unexpected Periods of market volatility, rather than big price movements once volatility has actually risen. This is why high market volatility actually tends to be a favorite of short traders. During these periods of extreme volatility, Premium prices can be much higher, and option prices can be much higher; When you sell options contracts in highly volatile conditions, you can also raise significantly more capital.
DFX: Do you see the Russian invasion of Ukraine as a black swan event?
youth: certainly. We can see from the fluctuations across the market that investors did not expect this struggle. It’s been almost exactly two years since the COVID pandemic rocked the markets in the sell-off of 2020.
DFX: It started in March 2020 when the S&P 500 was down 34% in a few weeks, and the other indices were down?
youth: Nobody really saw that coming. There were early talks about a pandemic in China. When the epidemic reached the United States, it was VIX It rose from 15 to an all-time high (more than 80) in less than a month. The impact on the markets was unprecedented. A lot of premium sellers were hurt during this volatility expansion because they I was overexposed when market volatility was low and relatively stable. It is an example when we talk about trading options, keeping the trade sizes small in relation to your account size is the most effective way in which you can mitigate a black swan event.
DFX: Volatility, as measured by VIX The index has been extreme in recent weeks – is this a reliable gauge of where the market is headed?
youth: VIX is around the 34th handle. It could have gone up to 80, it could have gone up to 60, or even 120. Although we can anticipate changes in the market due to geopolitical events, we cannot consistently predict what will happen. For example, the market has responded to the Russian-Ukrainian conflict much differently than it has to the COVID pandemic. VIX could continue to increase and reach new heights as a result of this conflict and sanctions, or peace could be reached tomorrow. There is no fixed way to predict the future, and investors can protect themselves from this uncertainty by maintaining a well-diversified portfolio and reducing concentration in a particular company, sector or market.
VIX chart as of 3/9/ 22; Source: tastyworks
DFX: What’s the next Black Swan?
youth: THis view is very personal, but if I had to guess, I think this specific event – Russia’s invasion of Ukraine – would be a long-term event compared to, say, the 2020 sale, which only lasted for a month or two. That’s because Russia is so tied to commodities, and the major global economies, many of which are now imposing sanctions on Russian commodities, are dealing with some form of inflation.
Considering Russia’s role as a major exporter of oil, natural gas, wheat and industrial mineralsAnd I could only see making this experience of inflation significantly worse, which could have long-term consequences for global economies.
DFX: I Came Into Options Trading In An Unaccustomed Way – Talk About Experiences That Prepared You To Understand, And To Trade In
youth: My first exposure to video game trading was in the sixth or seventh grade. There is a game called Runescape and around 2007, they added the Grand Exchange where you can buy and sell items. The price dynamics of these items moved just like the stock price. You can buy low, sell high, and place limited orders.
DFX: Runescape is a fantasy game organized around the Middle Ages Kingdoms, regions and cities with economies, wars and other disasters?
youth: Yeah. Game developers will slow down the circulation of the item in the economy, and its prices will increase. Or they may saturate the game with a certain item and its price will collapse. It was shockingly similar to the financial markets when there were geopolitical tensions around events like the elections. You obviously don’t have options in Runescape, and that’s what makes the financial markets different, but it’s also more interesting. Instead of trading the price trend or the item itself, you are actually trading the insurance on that item.
DFX: How did you go from playing video games as a teenager to trading options?
I have been interested in trading since I was young, but I didn’t actually pursue these interests until I was growing up. When I went to college and studied physicsAnd Mathematics and computer science, you’ve really learned how many of these concepts have a very broad applicability, especially when you understand how to analyze data. If you know the source of your data and if you understand how to analyze and interpret it correctly, you do not need to be an expert in a particular field to be able to draw conclusions from it. Once I understood this concept and started experimenting with financial data and signals, I was drawn to it almost immediately.
I was drawn to options because they have so many strategic capabilities. When you buy a stock, the stock will go up or down, you don’t really have much control over that probability distribution, over the risk-reward profile. With options, you have more control over the probability distribution of a deal. You can make money whether the underlying price goes up, down or stays within the neutral range.
DFX: What kind of role models have inspired you along the way?
youth: I’ve worked in male-dominated industries throughout my career – female female colleagues were hard to come by and female models were even rarer. I have noticed that the chronic lack of female participation in certain fields (physics, engineering, finance, etc…) often discourages women from pursuing these fields, not because of a lack of intelligence or motivation, but because of a lack of relativism. Many of us have had a mentor, historical figure, author, content creator, or online community who inspired us to pursue a more in-depth discipline because of the personal connection. It’s hard to develop an interest in a field if you can’t relate to anyone in it. Trading is competitive, it’s strategic – I think more women would be interested in trading if they found people they identifiedy With. The meThe Internet is allowing a very small number of women in finance to share their ideas and experiences and reach other women like never before. I am very optimistic that these emerging personalities will inspire more women to enter the market and take control of their finances.
DFX: Any advice for female traders or anyone interested in options in this volatile environment?
1. Use small positions: For people who are considering experimenting with options, it is very important to keep the trade sizes small. Options are leveraged instruments, so their swings are much more dramatic than a non-leveraged position; However, leverage is really powerful if you know how to use it. For example, you can have the same exposure to risk and reward as a stock position with much less capital. However, the drawback is that you need to be very aware of the position size and the potential risks of the position.
2. Choose a strategy that matches the market environment: Understand the risks of a position before you start trading. The “correct” strategy really depends on the individual, but one strategy that could be suitable for this type of market is an iron condor. It is a risk neutral and directional strategy that takes advantage of the underlying trading in a certain range, through the expiration of the options contract. It consists of a short vertical sell spread and a short vertical call spread in a single transaction, at the same expiration. It is a defined risk strategy and you know the potential loss of a position before you enter into it.
3. Options beginners should stay away from stocks: If you are just starting out, stay away from stocks. Instead, stick to ETFThey are well diversified assets and are less sensitive to sector and corporate factors. Examples including SPY, GLD, or TLT. Less expensive ETFs, such as SLV or GDX, may be more suitable for smaller accounts. Any of these ETFs are generally less volatile than investing in, say, Facebook, GME or Tesla.
Read more about women in finance And options traders.