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Logica Capital August 2020 Commentary: Scaling S&P Puts And Calls

Logica Capital August 2020 Commentary: Scaling S&P Puts And Calls



Logica Cap

Logica Capital commentary for the month ended August 2020, discussing scaling S&P puts and calls from their portfolio.

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Logica Absolute Return - Up/Down Convexity - No Correlation

Logica Tail Risk - Max Downside Convexity - Negative Correlation

August 2020 Performance*

Logica Absolute Return -1.30%

Logica Tail Risk -2.66%

S&P 500 +6.98%

VIX +1.95 pts

Year To Date Performance*

Logica Absolute Return +19.68%

Logica Tail Risk +19.88%

S&P 500 +9.65%

*Returns are Gross of fees to illustrate strategy performance.

Logica Absolute Return Fund, LP returned -1.41% (net) for August 2020

Logica Cap

Jump up and down and I'll sing and I'll shout I got two left feet, I got two left feet- LZ7, 2017

S&P Puts And Calls: It’s Hard to Go Solo at a Swinger Party

This month was yet another record-breaking month for option volumes and the dynamic we discuss in our recent whitepaper, “Let’s Talk About Skew, Baby!”, was not written with total disinterest for our portfolios.

One of the mechanisms Logica uses to defray the cost of being long options (both calls and puts) is a proprietary take on the “gamma scalping” often deployed at dealer desks, which relies on the consistent element of short term mean reversion in the market. Broadly speaking, the natural “noise” of price movement, as the market expands and contracts from side to side while attempting to move its way along a trend creates opportunities for “scalping” those swings. As we illustrate in simplistic terms in our presentation, our process scales in and out of positions in S&P puts and calls by reducing or adding in the over-bought (sold) direction of the local market movement:

While the math is fairly complex, the resulting behavior is expressed as a modulation of the number of contracts that Logica will hold on either side of our “trading” portfolio (composed of S&P index puts and calls). From an implementation standpoint, after we sell, we expect a brief market retreat to give us the opportunity to use an ensuing day to be able to repurchase a fraction of the calls we sold at lower prices. Concurrently, as the market moves higher (lower), each call (put) contract we continue to hold becomes more valuable (gaining both market value and delta) which somewhat offsets the profit taking and incremental capital spent on puts (calls) on the “other side” of the straddle.

In a quantitative system, we necessarily must build our models to reflect “expected” behavior, and this month was anything but expected. If we were to imagine the above graph as a binomial tree, the most frequent outcome is that an up day is followed by a down day. Using the history of US stock markets, roughly 25% of the time we would expect four up days in a row without a meaningful reversal (to reload). 5% of the time, we might expect 17 days in a row without a significant reversal. August 2020 had 20 consecutive days in a row without the opportunity to reload.

If we represent the resulting positioning for Logica graphically, our respective Put and Call loadings for August look less than ideal. Unfortunately, the continuous uplift in August meant that we carried too few calls during a month where the S&P rocketed upwards by nearly 7%, resulting in losses due to our concurrent full put load (which resulted in a short tilted straddle).

S&P Puts Calls

Compounding the challenges this month, our stock selection model for our single stock equity calls did not outperform the S&P 500, which was drawn upwards largely on the back of a few technology names from a much publicized single-stock call option buying bonanza. While we believe we have successfully identified the mechanism for this behavior in our whitepaper, our methodology is not designed to capture this rare dynamic. As a result, our combined Upcapture modules underperformed the S&P 500 in a manner that is unusual except for major reversals.

And finally, the challenging dynamic was rounded out by a somewhat surprising drawdown in our macro overlay as all three components (rates, dollar and gold) experienced negative months for the first time in over three years. While the macro modules are an active area of R&D, we do not view this underperformance as indicative of a structural change, especially as each one was well within its acceptable boundary.

While we are not pleased by our performance this month, certainly in the context of the opportunity set, we emphasize that LAR is designed to exhibit zero correlation with the S&P500 over time while delivering positive absolute returns. In a month where numerous aspects of our portfolio performed worse than expected, these results are (unfortunately) within tolerance for our approach. Hopefully, we are our own toughest critics.

“You got me where you want me

I ain't nothin' but your fool

Ya treated me mean

Oh you treated me cruel”

- Aretha Franklin, 1967

Well If Our Strategy Wasn’t Working, Who Was?

Another month, another record-breaking decline in the unemployment rate as small businesses continue to indicate near record levels of difficulty in filling job openings. Full confession – this makes almost zero sense.

In July the NBER released a report detailing the impact of COVID-19 on small business:

“The number of active business owners in the United States plummeted by 3.3 million or 22 percent over the crucial two-month window from February to April 2020. The drop in active business owners was the largest on record, and losses to business activity were felt across nearly all industries… Continuing the analysis in May and June, the number of active business owners remained low - down by 15 percent and 8 percent, respectively… The loss of 3.3 million active business owners (or 22 percent) was the largest drop on record. When conditioning on working roughly two days per week or four days a week, the losses are even larger (28 percent and 31 percent, respectively). Total hours worked by all business owners dropped by 29 percent. Although incorporated businesses are more growth-oriented and stable, they experienced a drop of 20 percent from February to April 2020.”

These horrific results are echoed in the initial increase in unemployment, but oddly the recovery in the unemployment rate and the apparently aggressive search for employees are not echoed in a new survey introduced by the Census Bureau in response to COVID-19 induced data uncertainty. The weekly Business Pulse Survey “complements existing US Census Bureau data collections by providing high-frequency, detailed information on the challenges small businesses are facing during the Coronavirus pandemic as well as their participation in federal programs such as the Paycheck Protection Program.”2 Unfortunately, the survey was not continuous from May to current (leave it to the government to decide continuous data series are overrated), but trends do not seem to have shifted meaningfully. The data does not match the improvement shown in headline unemployment, with more business reporting reductions in employment every week than increases. It is tough to see how the unemployment rate falls under those conditions:

Likewise, another “real-time” survey from the Dallas Fed suggests that the employment rate (not the unemployment rate) has barely recovered from the late March lows. Instead of the 6.2% improvement shown by the BLS, this would suggest that employment has only risen by 1.2% and has trended flat to down since June:

All of which is a long-winded way of saying, “We have no idea what is going on and anyone who claims to know is deceiving themselves.”

This point is broadly echoed in an important post by Felix Salmon in August:

“…other aspects of the recession, like the unemployment rate or national GDP, are foundational statistics upon which multi-trillion-dollar decisions are made. Never in living memory have those statistics been less reliable.” 4

We will not know much of the true data for 2020 for several years to come and the echoes of 2020 uncertainty will influence data for the next several years due to seasonal adjustment factors, etc. This complicates discussions of whether markets have diverged from “fundamentals” and makes risk-taking increasingly… risky. Fortunately, we remain positioned with our straddles that create the potential for returns in either direction.

Business Update - Logica Absolute Return Offhsore Fund

Logica will be introducing an offshore version of the Logica Absolute Return Fund in the next few months. If you are an offshore eligible investor currently in our onshore vehicle, we will be reaching out to gauge interest in transferring. If you are a new investor interested in our offshore vehicle, please contact Steven Greenblatt for subscription documents.

Logica Strategy Details

Note: We have comprehensive statistics and metrics available for our strategies, but only include a select few to highlight what we believe is our most valuable contribution to any larger portfolio.

If you would like to learn more about our strategies, please reach out to Steven Greenblatt.
If you would like to speak with Wayne or Mike on their views on Hedge Funds/Investing/Trading and trends they see shaping the industry, please contact Steven Greenblatt at or 424-652-9520.

Follow Wayne on Twitter @WayneHimelsein

Follow Michael on Twitter @ProfPlum99

The post Logica Capital August 2020 Commentary: Scaling S&P Puts And Calls appeared first on ValueWalk.

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Bitcoin price must break $31K to avoid 2023 ‘bearish fractal’

BTC price needs to recoup some more key levels before ditching longer-term bearish risk, the latest Bitcoin analysis says.



BTC price needs to recoup some more key levels before ditching longer-term bearish risk, the latest Bitcoin analysis says.

Bitcoin (BTC) held above $30,000 at the Oct. 23 Wall Street open as analysis said BTC price strength could cancel its “bearish fractal.”

BTC/USD 1-hour chart. Source: TradingView

BTC price preserves majority of early upside

Data from Cointelegraph Markets Pro and TradingView followed BTC/USD as it hovered near $30,700, still up 2.5% on Oct. 23.

The largest cryptocurrency made snap gains after the Oct. 22 weekly close, stopping just shy of $31,000 in what became its highest levels since July. 

Now, popular trader and analyst Rekt Capital is keen to see the $31,000 level break. 

“Bitcoin has Weekly Closed above the Lower High resistance to confirm the breakout,” he commented alongside the weekly chart.

BTC/USD annotated chart. Source: Rekt Capital/X

Rekt Capital argued that BTC/USD could disregard the bearish chart fractal in play throughout 2023 next. This had involved the two year-to-date highs near $32,000 forming a doubletop formation, with downside due as a result.

Specifically, Bitcoin requires a “breach” of $31,000 in order to do so. 

More encouraging cues came from the True Market Deviation indicator from on-chain analytics firm Glassnode.

As noted by its lead analyst, Checkmate, on Oct. 23, the metric, also known as the Average Active Investor (AVIV) profit ratio, has crossed a key level.

Bitcoin’s True Mean Market price (TMM) — the level that BTC/USD spends exactly 50% above or below — is now below its spot price, at $29,780. 

“Have we now paid our bear market dues?” Checkmate queried, describing TMM as Bitcoin’s “most accurate cost basis model.”

Bitcoin True Market Deviation (AVIV) chart. Source: Checkmate/X

Institutions awaken in “Uptober"

Analyzing the potential drivers of the rally, meanwhile, James Van Straten, research and data analyst at crypto insights firm CryptoSlate, flagged the potential approval of the United States’ first Bitcoin spot-price-based exchange-traded fund (ETF).

Related: BTC price nears 2023 highs — 5 things to know in Bitcoin this week

While not yet awarded the green light, a U.S. spot ETF is being treated as an inevitability after legal battles resulted in regulators losing sway.

“The potential approval of a spot ETF for Bitcoin has spurred a significant increase in bullish inflows in the crypto market,” Van Straten wrote in an update published on Oct. 23.

He noted that Glassnode data shows inflows via over-the-counter (OTC) trading desks spiking since late September.

“In addition, the Purpose Bitcoin ETF, with its holdings of approximately 25,000 Bitcoin, has observed consistent inflow throughout the past month. Even though these inflows might not be termed as ‘large,’ they denote a positive market sentiment,” he continued.

“This uptick in inflows across various platforms indicates an optimistic market response to the potential approval of a Bitcoin ETF, bolstering the overall landscape of digital assets.”
Bitcoin transfers to OTC desk wallets. Source: CryptoSlate/Glassnode

The largest Bitcoin institutional investment vehicle, the Grayscale Bitcoin Trust (GBTC), continues to see a lower discount to the Bitcoin spot price, having already seen its smallest negative margin since December 2021.

This stood at -13.12% as of Oct. 23, per data from monitoring resource CoinGlass.

GBTC premium vs. asset holdings vs. BTC/USD chart (screenshot). Source: CoinGlass

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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California bill aims to cap crypto ATM withdrawals at $1K per day to combat scams

A new legislative investigation found some crypto ATMs charging a premium as high as 33%, while a few ATMs had limits of up to $50,000.



A new legislative investigation found some crypto ATMs charging a premium as high as 33%, while a few ATMs had limits of up to $50,000. California legislators have proposed a new bill titled “Digital financial asset transaction kiosks,” calling for a cap on crypto ATM withdrawals of $1,000 per day in light of growing scams. Additionally, starting in 2025, the law would limit operators’ fees to $5 or 15% (whichever is higher). The bill, if approved, would come into effect on Jan. 1, 2024. The bill was introduced after legislative members visited a crypto ATM in Sacramento and found markups as high as 33% on some crypto assets compared with their prices on crypto exchanges. On average, a crypto ATM charges fees between 12% and 25%, according to a legislative analysis. Government officials also found ATMs with limits as high as $50,000, prompting them to take regulatory measures to curb such high premiums and withdrawal limits. There are more than 3,200 Bitcoin ATMs in California, according to Coin ATM Radar. Democratic State Senator Monique Limón, who co-authored the proposed legislation, said the “new bill is about ensuring that people who have been frauded in our communities don’t continue to watch our state step aside” when there are real issues happening. Another provision of the bill would require digital financial asset businesses to obtain a license from the California Department of Financial Protection and Innovation by July 2025 Crypto ATMs are a popular way for people to exchange cash for their choice of cryptocurrency but have become a hub for scams and exploits because of the nature of transactions (i.e., hard cash). Unlike bank and wire transfers, each transaction leaves less of a trail. Related: CoinSmart president says crypto taxes are a ‘little bit more favorable’ outside US Some residents have recently been caught up in such scams, where the scammer persuades the victim to go to a nearby crypto ATM and deposit cash for the crypto of their choice. Some of those affected by ATM scams have lauded the bill and said the low transaction limit would give victims time to realize if they are being duped, reported the LA Times. On the other hand, crypto ATM businesses said the new bill would harm the small operators who must pay rent on their ATMs. The operators noted that the bill fails to address the core issue of the fraud and instead takes a punitive path focused on a specific technology. They warned such a move would shudder the industry and hurt consumers while doing nothing to stop bad actors. Magazine: Bitcoin is on a collision course with ‘Net Zero’ promises

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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