Thursday, December 15, 2011

Future vol

Hmm... pricing in a 30-50% chance of huge vol due to euro credit crisis? If you're sure it's going to happen, some 6-12 month vol swaps might be a good trade. Any experts want to comment? (Are there better instruments for this?) How much further can Merkozy kick the can down the road?

On the volatility of volatility

A pro sez to me: "Vol is totally mispriced right now. Lots of funding requirements in the new year."


Ken Condon said...

No expert here but like to think I possess some common sense. Meanwhile Samuelson has painted a no win grim scenario in a recent article. I am still befuddled how in the hell Germany and France when along with the EU idea in 1999. At the time it made little sense to me (floating currencies would have been infinitely better) so how and why did it make sense to them? Tigers don’t change their stripes.

silkop said...

Looking at it from the EU, I see a never-ceasing stream of anti-European propaganda originating from the British/American (the official "finance press") supported by fringe local media (a few outlets with a tin-foil hat, gold bug, nationalist slant). Maybe it's designed as a diversion from US own domestic problems (debt level, anyone?), a sort of new cold war or a desperate last effort to save the USD. This provides ample opportunity for the US financiers to buy low the oh so risky-trashy European assets and to force out previous owners into some silly "safe" investments. A huge relief rally after a miraculous solution for this whole manufactured "crisis" wouldn't come as a big surprise to me (we had an unannounced one after the 2008 "catastrophe"). This would benefit bankers and politicians foremost, but also serve to calm the overall public, while all the grim "world end" scenarios would really benefit noone (not even the shorties, in the medium term). So have your pick which outcome is more likely. Maybe common sense rather than higher maths is called for in this case.

Ken Condon said...

I would agree that the US has serious fiscal problems silkop and a totally dysfunctional government. But they do have the best government money can buy. Meanwhile- do you seriously think the current EU problems are “manufactured”? Is there a nefarious cabal involved that stands to gain from this?

5371 said...

Crowds are prone to bear manias, as well as bull manias.

Carson Chow said...

Suppose I believe that the ECB will not act as lender of last resort and Euro will die. What should I be buying or selling?

Dan Gonzalez said...

Salut Steve, I have been reading the blog for a few months now and I can finally add a bit to the conversation. Yes there are better alternatives to swaps if you believe volatility will increase:

-Call options on the VIX. Plain vanilla call options on the VIX, problem is that the longest maturity for those is only 6 months.   (options exp. in may 2012 ) 
-Call options on the VXX. The VXX is a rather strange ETN that was issued by Barclay's early in 2009;to make a long story short, its value moves along with the volatility. If you are betting on something happening within the next 6-12 months, you should take a look at the options expriring on jan 2014.The problem here would be Barclay's solvency in the face of extreme volatility. 

LondonYoung said...

Buy property in Spain financed with a local EUR mortgage (assuming you have access to the rights of an E.U. citizen).  Ultimately this crisis is about people in Southern Europe who don't want to pay their debts.  If you become one of them, you'll participate in the relief.

Carson Chow said...

Spain was running a surplus prior to the financial crisis and Germany benefited from transfer of payments from the south after the Euro was created. It's more like Germany won't acknowledge it reaped benefits as well and the ECB doesn't want to act like a central bank. It feels we're back in Sommerville again doesn't it?

Ken Condon said...

LY-you had mentioned this Spanish real estate suggestion in a previous post from  several months ago. All I can think of or envision, is beauty, warm sun, lively women, the sound of musica, and the taste and aroma of a paella crackling in the pan (supplemented by a mighty fine vino) while viewing the Atlantic and the setting sun. Damn you!

I have been to Spain- many years ago. The memory still lingers. If one were to decide to go there “for good” and purchase said real estate per your suggestion, where would the best place be? On the southern coast crowded with hotels and Germans, or the northern one? There is Portugal too to consider-aside from the little Spanish sliver to the north. Portugal has a mighty fine direct sun setting western exposure, good surf, and very friendly people.

At least they had that many moons ago when I had the very good fortune to visit there. And most of Europe for that matter.

LondonYoung said...

Carson - ROTFLMAO thinking about "the tire people".

LondonYoung said...

Most people I know buying in Spain are going for the "foreigner friendly" areas serviced by the airport at Malaga.  Personally, I have had better experiences around Barcelona where being able to speak Spanish is a bit more important.

As Carson says, Spain was running a surplus before the crisis so I like title to land there better than in Portugal whose post-crisis finances I am less confident in.  Many people forget the deep ties Iberia has to the New World.  They share this with the UK and Ireland, but not the rest of Europe.  It makes a big difference to the culture, IMHO.
My key point on real estate is to try to escape the "money illusion".  Obvious trades like shorting bonds are subject to losing your borrow, and buying bonds is subject to being defaulted on.  But buying land and art?  That's enjoying life.

Barton Biggs "War, Wealth and Wisdom" is a good book on this topic.

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