macrocephalopod

Sunday morning experienced derivatives trader interview question. (Read the footnotes.) The PM is on vacation and you're watching the book. You notice an odd line item in the booking system that looks like it is just two 1-month S&P variance swaps.https://twitter.com/bennpeifert/status/1264542177574584320?s=20 …

One long, and one short, $1 million vega notional each. The long has a strike at 14.5 and the short has a strike at 15. Their vegas are almost identical and they show ~0 in the 95% VaR your system produces. There is a tag in the notes field on the long that says "2.5x cap".

They have been in the book for two weeks; S&P close-to-close realized volatility has been 10% over that period.

Just before the bell on Tuesday, some crazy headlines start hitting about early warning systems alarming for a nuclear attack incoming to Hawaii. Markets explode and S&P closes -15%.

Turns out to just have been a systems glitch in the early warning system; futures recover quickly, and S&P prints back up +15% the next day.

What trade did the PM have on? How much money were they trying to make on the trade? Can you estimate the inception to date PNL on the trade after the moves?

Bonus question: where did the flow behind this trade originally come from and how did it evolve?