I’m not done with QQQ’s …two more things to consider

  1. The options market gets the odds wrong too.
  2. Friday was an extraordinary day for qqq’s. So what could Monday look like?

The implied volatility on the ATM , essentially, Nov 150 QQQ’s closed out it seems at 16 vol.

What does that mean?

Over 1 year, those options priced the annualized 1 std deviation of the qqq’s as 16% for the year.

If the QQQ’s were to go up 16% over 256 trading days, the annualized return that would have worked out to be a daily gain of 0.063%. But it just did 20% of the annualized implied return according to the options market in 1 day!

Friday’s move, therefore, was much larger than the so-called standard estimate and much larger than what the daily price returns of the QQQ’s normally were for the last year.

 

However for historical context in that last say 2 years, the below are the best and worst days of the  QQQ’s.

Screenshot 2017-10-28 21.31.21

+5.04% on April 26tgh 2015. That came after it had dropped significantly 5 calendar days prior.

Screenshot 2017-10-28 22.07.07

you can see in the above volatility chart how that might have looked. Indeed, it was an especially volatile time it would have seemed altogether.

 

I am doing some other work and research on volatility so my ideas are not completely fully formed yet but what certainly possible is that Monday or next week could be volatile. The odds of the QQQ’s going up or down another 2.9%, Monday might as well be 50/50. They are at least equally probable. There is no mean reverting cap.

There is evidence to suggest that due to the structure of the long options it could be skewed to up.

What however is more interesting is to consider perhaps the persistence or antipersistence of the time series. I am not convinced such an idea is that relevant but it is an old one and one I never really embraced since I never heard many people actually speak of it. That measure is the Hurst exponent.

In any event, the fact that the 2.91% moved happened is way outside of the pricing estimate of the options market for a daily move since 2 standard deviations or the 95% probable move, would have been, based on that particular option closer to .13%.  In other words, this move according to traditional theories of portfolio optimization and option pricing would have deemed the move possible.

It also means however that the options were underpriced for their risk.

It is flaw Fischer Black all well knew. Low volatility options are underpriced. High volatility ones tend to be overpriced.  So Hurst or no Hurst, this is no academic surprise.

Yet this sort of price series is a lesson for Tesla investors.

When the real implosion (explosion for the happy folks) happens, should one see Tesla drop 10 or 20 percent one day, what will it do the next day? It is 50/50 that it goes up or down that same amount the next day. It could be a free fall.

How would the market markers in the options market price that free fall? what will the panicked investors do?

This is why I say the market will eat itself in a free fall. What are the odds…I don’t know…obviously it might never happen, but I am expecting it to. But it is the same dynamic in a sense that has allowed Tesla to become bigger than GM and what created it in the monstrosity of a cash burner in the first place.

 

 

 

 

 

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