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I’m as far from “experienced derivs trader” as you could be but this sounds like selling uncapped vs capped variance ie you are short tails in return for carry.https://twitter.com/bennpeifert/status/1482727232317493253 …
Vega notional is $1m so variance notional is $1m/(2 x strike) and the PM was trying to make variance notional x (short strike^2 - long strike^2) which is around $1m on the trade (easier way to get there is 2 x vega notional x difference in strikes I think).
The realized vol after two 15% days is more or less 100% so the loss on the uncapped is about $333m (33,000 x 100^2 and the gain on the capped is about $50m (33,000 x 36.5^2 because the cap is 2.5 x 14.5) for an overall loss of $283m, that sounds insanely high so it’s possible
that I’m off by a factor of 12 (because it’s monthly not annual) or maybe I forgot to properly account for the remaining life of the swap or something, like I said not actually a derivs trader let alone an experienced one.
Obvious follow up question is who is going to create the on-chain version of this to bring uncapped variance swap selling in crypto to retail? APYs would be insane.
Carry neutral is n+1 variance short. Tattoo it to your chest as needed to remember.pic.twitter.com/BMvwFKmrpn
Matt Damon is wrong, actually. Fortune does not favor the brave. The brave pay for the smarter’s beach house renovations in vega vertical moments. All the smarter must do is sit at the poker table long enough.
I could get about as far as 'dayum my man lost a metric fuckton of money'.
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