How the LAIF option strategy capitalized on the "black swan" of volatility
Mikhail Portnoy
Sep 27, 2024The extraordinary volatility jump on August 5 played an important role for our LAIF strategy. The fact is that such a "black swan" is both a severe stress test for option strategies and an opportunity to gain superprofits.
What happened
August began with a sharp drop in major stock indices. On August 5, the third trading day of the month, the NASDAQ-100 index opened 9.2% below the July close, and the S&P 500 index opened 6% below the July close. This panic opening was accompanied by an even more panic surge in volatility. This was preceded by a 12% drop in the Japanese market, which opens earlier than the American one. As a result, even before the start of main trading on American exchanges, the VIX volatility index soared to 65 (a 181% increase from the previous trading day), which was the largest one-day volatility jump in the 31-year history of this index. After decreasing by another 2% during Monday, the indices turned around and rose for the rest of August, fully recovering all the losses by the end of the month. As a result, the S&P 500 index closed August up 1.8%, and the NASDAQ-100 index ended the month with a gain of 0.2%.
The LAIF strategy not only successfully passed this stress test (unlike many option funds that suffered significant losses that day), but also earned investors more than 2% in absolute terms in one week, recording the best week in the strategy's history. And for the entire month, the LAIF\FLAG fund brought investors an average of 2.6%, which is also a record result.
Why it matters
For us, the managers, August was important not so much for the superprofits, but for the opportunity to show our investors in practice that the LAIF strategy is reliable enough to withstand even such a complex stress test as an unprecedented volatility jump of the underlying asset.
In conclusion, we would like to draw your attention to the fact that the results for August (-0.11%) of one of the benchmarks we compare the LAIF strategy with — the BarclayHedge Option Strategies Index — are preliminary, as at the time of this report, only 14 out of 24 funds included in the index have reported. We assume that the final figure for August will be significantly worse, as many funds that have not yet reported are likely to show losses. For example, we know that one of the funds included in the index, but has not yet submitted a report on its results to the BarclayHedge database, lost almost 40% on August 5.
Thus, August also provided an opportunity for the LAIF strategy to show how it stands against competitors.
