Black Swan Trading in the age of Volatility

We are living in an uncertain world - Global pandemic, money printing, job losses, recessionary economies and rising markets. By some accounts the corporate world has gone through a few years worth of technology driven transformation in the past 5 months. What this means is that a lot of businesses are growing exponentially and an equal if not more are likely to disappear. If you’ve been involved in the financial markets for a few years, you would have seen charts of how index constituents have changed every decade. 

All of us agree that the pandemic whether a white swan or black, is a once in 100 years event. I am also convinced when Nassim Taleb says that we’re just getting started and the world is likely to be an extremely volatile place in the coming years. For practically every such event on the negative side we have had warnings from the likes of Nouriel Roubini and Raghuram Rajan but I imagine it is easier to pretend that nothing bad is going to happen and carry on. There have been Tesla bulls and bears and those who claim that anything that’s not online will be a second class stock. What this all means is that there is going to be a lot of volatility Lets see how the numbers pan out

As we can see from the chart above, there are only a few days where the NSE Nifty50 has seen large swings of over 200 points. Taking a deeper look at the number of such changes

Points Change in 1 day	2018	2019	2020(8 months)
>200	7	6	34
>300	0	3	19
>400	0	2	10
>500	0	1	7

 2020 has definitely been an extremely volatile year and may look like an exception but I suspect it won’t be one. I’ll probably do another post later on by taking a broader look at other benchmark indices in the Indian markets such as the Bank Nifty and the Sensex over a longer time period. The idea is to focus on benchmarks where we have a liquid options market. 

We’ve so far associated black swans with negative events and market crashes and that may not be necessarily true. Let’s look at the split of count of the direction of such movements 

>200 points	2018	2019	2020(8 months)
Positive change	2	4	15
Negative Change	5	2	19

If you’re an options trader or someone familiar with the option greeks, you will realise that these movements would have played havoc with volatilities and option prices especially for Deep off-the-money options. So how does one profit from or protect themselves from such movements.While there are gazillion articles and books available that claim to teach you about fundamental analysis, technicals, options trading or anything else that may catch your fancy the internet seems to draw a blank when it comes to black swan investment strategies. There are a few articles on Nassim Taleb and Mark Spitznagel that mention buying deep-OTM options using coupon payments or barbell strategies but nothing serious.

I intend to explore through this blog the sustained application of buying deep-OTM options in Indian capital markets and learn about options trading and track performance of my positions real-time along with additional insights. While I hope to make some money, the immediate objective is to get my feet wet and I intend to take extremely small or the minimum allowed position in this experiment.