Volatility is the enemy of most investment strategies, which generally do better in rising than falling markets. Veteran volatility trader Michael Wexler from Maple Leaf Capital explains how investors can actually profit from volatility by employing strategies that make more money in higher volatility than low vol environments. This is possible because the dislocation in the pricing of options between fair value and actual trading is greater at higher volatility levels. Historically, Maple Leaf’s funds have made money in both rising and falling markets.
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Volatility trading is not a crowded space: 99% of people buying calls and puts do have a directional view and are insensitive to the volatility component of the price. The 1% of dedicated volatility traders has therefore ample opportunities to extract value from over- or underpriced options.
Video and highlights below:
This Opalesque BACKSTAGE video with Maple Leaf Co-Founder Michael Wexler is an in-depth introduction into this uncorrelated but often misunderstood asset class, divided into the following chapters:
1. 00:24 (min:sec): 20 years of Derivatives Trading, Specializing in Volatility
Maple Leaf’s Evolution:
– 2002: Trading VIX before the index was created
– 2004-09: Expansion to multi-asset, multi strat long/short vol trading
From $4m to over $1bn with strong returns
– 2010: Focusing on liquid, exchange traded instruments as the “plumbing” of OTC is broken
2. 04:57 – Volatility Trading 101
– What is volatility trading?
– How does it work?
– What are the return drivers?
1% vs. the 99%: Why Vol trading isn’t crowded
3. 07:21 – The Structural Alpha in Volatility Trading
Typical insurance contracts are nothing other than a put
While insurance products (put protections) are always overpriced, puts and calls in financial markets are generally overpriced = structural alpha
4. 11:17 – Volatility Trading Strategies and Funds
– How do they differ?
– Shortcomings of long vol and short vol funds
5. 14:42 – How Maple Leaf is different
– Multi asset / diversified in order to survive
– The hidden risk in pure equity vol funds
– Short vol bias with long vol hedge
– Focus on liquidity and adaptability
6. 19:39 – Inside the Maple Leaf performance machine
– Trading volatility of the 50 most liquid global assets
– 1 month straddles
– purely quantitative long/short
– What “quantitative” means for vol funds: From “feel” to a clear decision tree
– The power of disassociation
7. 23:59 – Competitive Advantage – Proprietary Implied Volatility Database
– Maple Leaf built and owns probably the best implied vol database globally with 6000 assets, capturing 30 million datapoints / day:
– Allows rigorous backtesting: Do I really have good (trading) ideas?
– implementing statistically significant, objective& data-driven strategies
8. 28:41 – Risk Management: How to manage short vol
Maple Leaf’s risk rules
9. 33:40 – Corporate set up & team of Maple Leaf
Research & Idea Generation:
– Rigorous testing shows: almost all new trading ideas don’t work
– Each year, only one new strategy gets implemented
10. 37:25 – Volatile markets mean high interest from investors
Investors also realize they need greater diversification & higher returns
New investor base: High net-worth, smaller family offices
Michael Wexler is Chief Executive Officer and Co-Founder of Maple Leaf Capital. Prior, he was at Credit Suisse First Boston in London for four years establishing and managing the single stock derivative trading group and then as a proprietary trader focusing on global single stock volatility and global correlation trading. He began his career in currency derivatives with Citibank Toronto and London trading Canadian dollar options, Japanese Yen exotic options, and Dollar/Euro options for five years. Mr. Wexler graduated with distinction from the Richard Ivey School of Business at the University of Western Ontario in 1993.
Maple Leaf Co-Founder and CIO George Castrounis was previously responsible for equity derivatives trading of technology and financial sectors Credit Suisse First Boston in London. He began his career with Citibank in the Financial Engineering and the Interest Rate Derivatives area in 1995 in Toronto, then New York and London in equity derivatives.
Mr. Castrounis studied economics and graduated with distinction from the Richard Ivey School of Business at the University of Western Ontario in 1996. Mr. Castrounis and Mr. Wexler have worked together for fifteen years.