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if you are levered 10 to 1 and the stock has an implied vol of 10% you only need a 1 SD move to eat all your capital. Viacom is now at 60% implied vol so they c
by freebee4567 6y ago
if you are levered 10 to 1 and the stock has an implied vol of 10% you only need a 1 SD move to eat all your capital. Viacom is now at 60% implied vol so they could get those losses with a position as small as $10 billion.
- lordnacho 6y agoThat implied vol is annualized. It follows a square-root law, so that daily is something under 4% (60/sqrt(trading days)).
- chrisgp 6y agoJust curious, is that still true if your model of daily returns isn't gaussian? If prices have intermittent shocks (Ornstein-Uhlenbeck, etc) is the daily vol much higher?
- lordnacho 6y agoVol is a parameter in a model as well as an observed statistic. Naturally you can have jump models as well that have other parameters, but normally when we talk about it we mean the observed stat, with a standard normal implied when discussing it. Weirdly I've not often had a conversation where someone talks about alternative models, even though people do use them.
- dcolkitt 6y agoTo be fair, Archegos hedged their beta exposure with short index futures. The implied vol includes both the beta vol and the idiosyncratic vol. A hedged position should be a lot less vol than being naked long.