Bitcoin, Price / Vol Spirals and MSTR

What follows are some of my recent thoughts on a favorite topic: the interaction between option prices and the assets upon which these options are written. Specifically, I share thoughts on price / vol spirals, which come in two flavors:  a) the asset plummets and vol explodes  b) the asset surges and vol explodes. In the first, which we might call "Melt Down", the asset nears a bankruptcy cliff as vol surges. See GFC. In "Melt Up", there's typically some version of a short squeeze involved. Everyone’s trying to get their hands on the same thing all at once. And that brings us to MSTR, the bitcoin buying engine run by Michael Saylor. There are some important considerations for evaluating risk in MSTR, driven by the fascinating interaction between the stock and both the leverage ETFs and options that sit alongside it. Especially given the unique empirical and implied distribution of bitcoin, these products create powerful powerful feedback loops that ought to be understood. I hope you find this discussion interesting and useful.

Om Podcasten

The Alpha Exchange is a podcast series launched by Dean Curnutt to explore topics in financial markets, risk management and capital allocation in the alternatives industry. Our in depth discussions with highly established industry professionals seek to uncover the nuanced and complex interactions between economic, monetary, financial, regulatory and geopolitical sources of risk. We aim to learn from the perspective our guests can bring with respect to the history of financial and business cycles, promoting a better understanding among listeners as to how prior periods provide important context to present day dynamics. The “price of risk” is an important topic. Here we engage experts in their assessment of risk premium levels in the context of uncertainty. Is the level of compensation attractive? Because Central Banks have played so important a role in markets post crisis, our discussions sometimes aim to better understand the evolution of monetary policy and the degree to which the real and financial economy will be impacted. An especially important area of focus is on derivative products and how they interact with risk taking and carry dynamics. Our conversations seek to enlighten listeners, for example, as to the factors that promoted the February melt-down of the VIX complex. We do NOT ask our guests for their political opinions. We seek a better understanding of the market impact of regulatory change, election outcomes and events of geopolitical consequence. Our discussions cover markets from a macro perspective with an assessment of risk and opportunity across asset classes. Within equity markets, we may explore the relative attractiveness of sectors but will NOT discuss single stocks.