Crypto 2020-Dec

The recent rally in crypto got me thinking of whether to close for gains now or let it run further. One of the more important developments is the availability of options, which allow us to further calibrate our payoffs.

I still maintain that predicting the mid-term trajectory of crypto is impossible, as I think it is dependent on a critical mass of buyers. The allure of investing in crypto is in its bubble-like returns - that is one thing that people are looking to diversify into (or for new generation investors just starting out, it is the only thing worth looking for).

But we can look at history and glean general characteristics of past bull and bear. Why might this work? Because most people will do just that. There are no fundamentals - just the decisions of the masses in a feedback loop.

Bear markets have generally been a price process reflecting slowly dying hopes and lots of struggle (look at the post-2017 bear - you can almost feel the pain of investors as each upward move gets progressively weaker). This makes for a problem with hedges using Puts, because ideally we want downward moves to be violent and unanticpated in a midst of a calm / uptrend. But uptrends tend to inflate the premiums as well, due to the bubble-like movements. This is different than stock indices where a steady uptrend generally makes premiums cheaper.

Bull markets have generally been exponential runs, but end violently before giving way to the slow downward trend. Given the strength of the current rally and history, I think (a) not much left in this move before the next minor bear, and (b) will not be a violent bear; making hedging a bit problematic because I have to buy a longer dated hedge. Reason why I think it will not be like the first bull (of 2017) is because some people have learnt their lesson, so the bubble will not be as strong as before – I think that the first bubble in any market is the strongest, and then people learn, leading to more tempered expectations, and thus more tempered actions and reactions.

Of course, I can be wrong and perhaps somehow some even more perfect storm of euphoria enables it to surge beyond expectations (again). Which is why I think on balance, the best strategy is to buy some Puts - at least enjoy some upside and it also acts as a Put on your psychological turmoil that is the regret of missing out on a huge beyond-expectations move.

For some reason that I've yet to investigate, crypto futures are trading in contango, making ATM options cheaper for downside protection, which furthers the case for buying Puts.

The January Effect – Update

Here's an update on the January Effect.

Apr Nov Dec Jul still stands out as superior months. The equity curve is also much smoother.

Price Return (from 1950)

Month TotalReturn(%) CountMonths AvgReturn(%) StdReturn(%) Sharpe
Apr 115.61 71 1.628 3.85 0.42
Nov 112.23 70 1.603 4.09 0.39
Dec 104.93 70 1.499 3.25 0.46
Jul 81.20 71 1.144 3.88 0.29
Jan 76.73 71 1.081 4.73 0.23
Mar 75.00 71 1.056 3.55 0.30
Oct 57.51 71 0.810 5.32 0.15
May 17.78 71 0.250 3.69 0.07
Jun 8.20 71 0.116 3.46 0.03
Aug 1.79 71 0.025 4.57 0.01
Feb -2.21 71 -0.031 3.63 -0.01
Sep -33.34 71 -0.470 4.32 -0.11


Total Return (from 1989)


Month TotalReturn(%) CountMonths AvgReturn(%) StdReturn(%) Sharpe
Apr 70.78 32 2.212 3.87 0.57
Nov 67.98 32 2.124 3.95 0.54
Dec 49.30 31 1.590 3.53 0.45
Jul 48.25 32 1.508 3.82 0.39
Oct 43.36 32 1.355 4.92 0.28
May 42.20 32 1.319 3.74 0.35
Mar 38.71 32 1.210 4.09 0.30
Jan 21.74 32 0.679 4.27 0.16
Feb 7.00 32 0.219 4.31 0.05
Jun 1.70 32 0.053 3.40 0.02
Sep -6.54 32 -0.204 4.59 -0.04
Aug -8.30 32 -0.259 4.64 -0.06

Other useful info:

Data below uses the total returns.

Heatmap showing 20-day average and total returns (in bps) from entering at a certain date. Gives a sense of historically where it has been good to enter - and since we are looking at January effect of a holding period of about 20-days, we want to see if entering in late Dec or early Jan would show up as green.

In this case we see that it does not - rather it was better to buy in the later half of Jan.

The reason why October shows up as so green is because it has historically been a bad month, so buying after a Sep crash (see pink section in mid Sep indicating a crash to be somewhen early Oct), would yield a good Oct 20-day return.

This can also be used for short term holdings: to buy in Mar Apr or Oct Nov Dec and hold for 20 days.

The Great Rotation of 2020

The power of narratives shown - one news of the vaccine and the markets get overturned. It is a dramatic reversal of what was seen as the Covid play from April onwards: go for tech stocks, gold, safe currencies; shun energy, airlines, hotels, small caps, value.

In this chart below from, the assets that are part of the narrative can be clearly seen. Base case, this might pretty much be a good glimpse into which assets would continue to see inflows when the recovery progresses. Keep an eye out, and track their correlations as further vaccine / recovery news (good or bad) are released.

On balance, I think the skew is in favour of good news, seeing as to how the markets responsed to this piece of news, while being able to shrug off record-breaking case numbers. Therefore, though risky, I would take this spike as the start - not as the start of the recovery, but rather the start of the narrative that would see continued support of these assets on every piece of good news.

Chart from

Trading the 2020 Elections

I was busy trading the elections I didn't have time to post, but since now there's a short breather before the final results are out: here's a summary of things I did.

Firstly I went long the index; I suspected that indices were just treading water as people were wary. As confirmation, once the air cleared on who was likely to win, the market rallied. This happened twice - once when Trump took Florida, and then again when Biden came into the lead.

I did this through a vertical OTM bull spread. Vertical because I don't want to pay the excess implied vol premium. OTM to maximize the risk-reward, since I am expecting a significant upside.

I also implemented a bullish seagull position when SPY was at 333, closed on Thursday as it was pretty much near peak profit.

Option Qty Exp Strike Open Close PNL
Call 1 11/6/2020 333 6.26 17.63 11.37
Call -1 11/6/2020 350 0.46 2.86 -2.40
Put -1 11/6/2020 320 3.04 0.03 3.01


Secondly I saw an opportunity in the odds. This happened after Trump effectively took Florida. Short of predicting the winner (had a bias towards Biden), these odds are simply too high for the current count which is pretty much 50-50 and at best 60-40.

But since I could not place wagers on this opportunity, I looked for a proxy and found one in the USD. Remarkably, the USD moved in sync with trump odds. Sometimes there's no economic reason for it, but could simply be the prevailing narrative i.e. what the market believes, and that is good enough for a trade for as long as the market continues to subscribe to the narrative.

I took the position in the major currencies against the USD and closed it out easily when odds turned back to 50-50 and held a bit more for speculation that Trump would lose. As mentioned, I was not predicting a Biden win as much as I was predicting a reversion to the 50% mark (i.e. predicting that the winner for this election is not so clear cut YET) - this is a trade that had a minimum of 1:1 risk-reward, and a maximum 1-4 ratio, not easy to find.

On a side note, the S&P followed this trajectory too, moving down as Trump win odds decreased, suggesting that the markets could be pricing in certainty vs uncertainty of outcome, not simply the outcome.

Investing for 2020 Q4

Everything here is just my view / opinion. It's not rigorous but more of a thought process.

Here's a rough sequence of events

Virus under control / vaccine -> Reopening of businesses -> Recovery of battered industries (hotels, airlines, recreation) + Inflation -> Recovery of their stock -> One more leg up in the general stock market


For US stocks, there will eventually be a rebound and it's just a matter of when. In the meantime we just have to be patient. Staying long in the index, no need for downside protection, loading up slowly on battered stocks. Tech and growth remains a long, as I don't imagine them going down later when the economy recovers.

The end of growth and the resurgence of value? Maybe. There will definitely be a rise in the stocks that have been held down by the virus. On a relative basis, value should outperform growth even if momentarily. But growth won’t be too bad either assuming some growth companies can take advantage of the opening up. So just buy both.

Unsure of opportunities / no strong conviction for other regions, but within EM, China stands out as the best bet.

I therefore believe that there will be a time of a reviving business cycle and economic expansion that will take equity to new heights. Stocks may be risky now but as long as you have holding power, it's probably better to just hold. Don’t judge the market by where it is now because it can still go higher - if it can be this high when the virus is not dealt with yet, how much more would it be when it has?

Bonds, Gold, Inflation

Limited upside for bonds and gold.

Bonds (UST) have not much upside from here less a worsening state of events, have to monitor it and get out when inflation starts to pick up. It's still necessary to have as part of some volatility buffer for now. 

Gold has been driven by real yields, but as the recovery starts, nominal yields will rise, and there will be less need to hold gold. So both gold and USTs will suffer.

The usefulness of gold is if inflation picks up but nominal yields still don't. Not sure what would create this scenario.

Betting on inflation is somewhat overlapped with betting on a recovery. 

Not much opportunities I see in credit spreads / corp bonds.

I see a better alternative to gold in crypto. Bitcoin has secured its place as the poster child, and 'relative value' crypto plays so far has not played out well - i.e. crypto, ever since its crash, has been in momentum mode - the strong coins get stronger, and the weaker ones never really catch up.

VIX and Volatility

Volatility selling may be a way to get in for the medium term. The VIX is not expected to be going down swiftly, so shorting VIX itself will not work (current contango is probably not worth the risk). To harvest vol, you have to actually sell options.

The longer term view on equities - greater stability

Ever since 2008, the Fed has been more responsive to help the economy, and this feeds into the markets. I do believe that we will see greater stability in the business cycles and in asset prices, so it's not wise to keep worrying about a crash and miss out on all the effects of the wiser Fed.

They have managed to keep inflation in the range they want, and are more worried about deflation, so there's a skew towards equities being supported.

The trend towards passive investing also helps cushion volatility as funds rebalance.

All these help to make the markets more stable for the foreseeable future (till other factors start playing bigger roles).