This story begins in a small town called Canowindra, a charming small town located in the Central West region of New South Wales, Australia. Located approximately 320 kilometers west of Sydney, the capital city of New South Wales. It is part of the Cabonne Shire, a local government area, and is known for its rural setting.

The town has a rich history, and its name is of Aboriginal origin, possibly meaning "a home" or "camping place." Canowindra has historical buildings and a streetscape that reflects its heritage. The town is known for its well-preserved 19th-century architecture, including historic buildings such as the Royal Hotel, the Canowindra Hotel, and the Trading Post. St Edward's Catholic Church, built in 1886, is another notable heritage structure.

The houses in the town have roofs clamped with red bricks and slanted to fend off the occasional monsoon rains. Housing a population of only 10,000, the town has a close-knit community where most would know on first name basis. There was a corner café, a pizzeria, a central park and a community space hosting various kind of sports activities, enough to keep the town buzzing, busy and benevolent.

In April every year the town bustles with foreign tourists and renowned balloon flight operators as it hosts the annual Canowindra International Balloon Challenge. This event attracts hot air balloon enthusiasts from around the world. The sight of colorful balloons floating over the town and its picturesque surroundings is a major highlight. I have fond memories of seeing rainbow-colored balloons in the air, awestruck by the serenity and variety of the view, but also fascinated by the science behind these balloons.  I’d get up early during the festival days, pack my two tuna sandwiches from my mother and go to the park to look for balloons with much amazement and awe.

My favourite part of the annual challenge was the Cabonne Community Balloon Glow. In which, about 15-20 hot air balloons will inflate just after sunset and then light up like giant 20-metre-high lightbulbs and then synchronize their lights to a mix of the best music over the last 20 years.  A spectacle not to be missed.

My best friend at the time named Cuddle, my teddy bear, was a constant spectator with me for each year’s balloon challenge. Cuddle came into my life from as long as I can remember given to me by my late grandparents. Since then, I have brought him everywhere from trips to the neighborhood festival even to overseas and the one I distinctly remember, the longest journey ever to the Santa Claus Village Lapland in Finland.

It was a long 2-day journey from Canowindra to Lapland. We first drove in our old Hyundai Tuscan SUV for about 3.5hrs to Sydney to catch an overnight flight to Helsinki via Singapore. My dad had planned to stay overnight in Singapore at one of his friends’ places and do a little tour of the lion town.

Singapore was lit up brightly with Christmas lights with crowds everywhere – an unseen sight in our small town. Orchard Road, a must-visit lifestyle destination in the country was transformed into a festive wonderland boasting of bright lights, enchanting decorations, endless music, and holiday cheer galore. There was also a reality projection on the wall of the Hilton Hotel and Christmas tunes played in the background. We took the red bus tour the next morning, awed by the architectural marvels of the Marina Bay Sands, enjoying rides at the Sentosa island including the thrill of the cable car and watching polar bears in the Singapore Zoo despite the island’s tropical climate. People thronged to watch the bear ‘Lele’ – the country’s first giant panda cub as was soon to be separated from mother Jia Jia to be transferred to China as part of some diplomatic love making between the countries.

Next day we boarded the SQ flight to Helsinki. I was fully prepared for the long 26-hr journey having downloaded 3 movies from my dad’s Netflix account and bought 5 packets of cup noodles– my favourite dish from Singapore. I took the window seat, put on my headphones on and stretched my legs to prepare for the journey. We reached Helsinki at 5 AM and I was deep into my sleep. My parents woke me up and we checked into the hotel. We had 2 days to kill in the city before boarding the Artic train to the Lapland. 

Helsinki, the capital of Finland, is a vibrant city with a mix of modern and historic attractions. The town boasts a UNESCO World Heritage Site, Suomenlinna is an 18th-century sea fortress located on an archipelago. A perfect place to explore historic walls, museums, and enjoy scenic views of the surrounding sea. We also visited the Cathedral, located at the Senate Square and is known for its neoclassical architecture. And finally in the evening we went to the Market Square, located on the waterfront, a bustling market for find fresh produce, local crafts, traditional Finnish foods, and a place to get taste of local atmosphere.

I kept cuddle on the side of my pillow. Suddenly, I felt Cuddle had come alive– the moonlight reflecting glintingly from its forehead, eyes sparkling, and felt his eyes were blinking. I felt like the Cuddle was on the cusp of exhibiting a range of emotions, including joy, sadness, excitement, and curiosity adding an emotional depth and a human-like dimension to its character. I could feel the excitement and sensation in my senses in what lies ahead.

One day while on a stroll in the market with Cuddle in my arms, I felt a sudden sensation on my right arm. I thought it was a spider and I cried loduly, but only to find that it was a look-alike of Cuddle. Exactly same hair, skin color, eyes, and ears. Although I had read in one of the wimpy kid diaries that every human has upto seven look alike in the world on planet Earth, but I didn’t imagine that would be the case with bears.

I picked up the other bear and while I was staring at it, I saw a girl rushing towards me. I figured out it was her bear, so I extended my arms to pass her willingly. She thanked me amicably. She told me her name was Angie and her bear was ‘Puddle’ which brought a broad smile to our faces, and we decided to share an ice-cream. I noticed a badge saying “Eradicate Poverty” on Puddle’s neck and asked her to tell me more about it.

With much enthusiasm, she said that Puddle is on a mission to eradicate poverty. I asked her what is poverty? Angie said in lot of places around the world people, small or big, living without access to basic needs like sanitation or nutrients. ‘Huh, that sounds strange? In our town that’s not possible’. ‘My father buys me chocolate every Friday and Sunday is my Pizza Day’. Angie smiled and said let me explain to you in a practical way, she grabbed my hand and pushed the badge on the Puddle’s body. Suddenly, there was darkness in front of my eyes and I felt suffocated. I wanted to scream but I couldn’t – I had lost my voice and I fainted eventually.

When I opened my eyes, I couldn’t believe. I was in the middle of the city bustling with people with sounds of horn piercing through my ears. I started coughing and was felt out of desperation I cried. Suddenly Angie came up to me and said, “Welcome to Mumbai”. “What is the kayos all about?”, I asked. She said that I have been time transported to this place so that I can understand what poverty means. I told her, I have no interest whatsoever in furthering our conversation and wanted to go back to my parents, but she assured me that I’ll be totally safe, and it will be all over in the next 20 mins. Not sure why, but I agreed especially as in my mind my parents had told me that they will be back in 30 mins from an uncle’s shop.

Angie said look around what you see? I could see a building which looks like a shopping mall with several adverts of things to buy like food, clothes, diamonds etc. Angie asked, “what you see on the other side”. On the other side, there were several restaurants serving authentic Mumbai food like Vada pav, pav bhaji etc. I didn’t know but suddenly all these food items which I never heard in my life and what they meant, came to my mind like I was very much part of this ecosystem having grown up here. 

Angie asked me to hold her hand and we walked to a traffic signal. On the signal I saw large number of vehicles clobbered pressing horns in desperation to move. And then I saw two women holding infants on their arms and taking rounds from one vehicle to the other. I asked who they were, as it was quite unsafe to be taking an infant, let along an adult, in the middle of the road where vehicles were waiting to fire up as soon the signal turns green.

Additionally, she looked depressed, engaging in begging, or struggling to make ends meet, can reflect the harsh realities of urban poverty in India. Mumbai, despite being the financial capital of the country, is also home to stark socio-economic inequalities. We left the sight quickly and went to a nearby café but the sight could not leave my heart and Angie could see I was perplexed with many unanswered questions in my head.

Angie then sat down and explained to me what the possible outcome of the scene could be and what it can tell us about poverty:

1. Economic Disparities in Urban Areas

• Mumbai has some of the richest individuals in the country living alongside some of the poorest in sprawling slums or on the streets.
• The image of a woman at a signal may reflect the inability of economic growth to reach all sections of society, leaving vulnerable groups behind.

2. Gendered Dimensions of Poverty

• Women often face greater challenges in escaping poverty due to gender inequality, lack of access to education, and fewer economic opportunities.
• Single mothers, widows, or abandoned women may find themselves particularly vulnerable to poverty and homelessness.

3. Rural-Urban Migration

• Many individuals migrate to Mumbai from rural areas in search of a better life but end up in informal or low-paying jobs, unable to afford housing or basic amenities.
• Women, in particular, may accompany their families but struggle to find stable employment, leaving them reliant on precarious means of survival like begging.

4. Lack of Social Security

• Limited access to social security schemes or insufficient implementation of welfare programs leaves many urban poor without a safety net.
• Women often lack documentation, education, or awareness of government schemes designed to assist them.

5. Cultural and Social Stigmas

• Women in poverty are often more visible at signals or public spaces because they may find it harder to secure employment in patriarchal settings. In many cases, they may be forced to take up begging to sustain themselves or their families.

6. Children and Intergenerational Poverty

• If the woman has children with her, it highlights the cycle of poverty that is hard to break without adequate access to education, healthcare, and livelihood opportunities.

7. Lack of Affordable Housing

• The high cost of housing in Mumbai often leaves the poor homeless or living in slums with substandard conditions.

The descriptive nature of Angie’s tone was irritating but highly appreciated as I could understand various dimensions of a situation.

But the obvious question is how we fix it to which see said Scenes like this underscore the need for:

• Better social safety nets for women and marginalized groups.
• Access to education and employment for the urban poor.
• Affordable housing and healthcare facilities.
• Awareness programs to reduce stigmatization and exploitation.

Such images serve as stark reminders of the structural challenges that perpetuate poverty, particularly in urban areas like Mumbai.

Trading Volatility with options - Long straddle

 

This blog explores the idea of using Straddle to benefit from times of higher volatility What Is a Long Straddle?

A long straddle is an options strategy that involves purchasing both a call option and a put option with the same strike price and expiration date. Typically, these options are bought at-the-money (ATM), meaning the strike price is close to the current price of the underlying asset.

Figure: Long Straddle Payoff

The beauty of a long straddle lies in its nature as an implied volatility (IV) play. By holding both a call and a put option, you are positioned to profit from an increase in IV, regardless of the direction of the market movement. As IV rises, the value of both the call and put options increases, allowing you to profit as long as the market anticipates significant price movements. The key is the rise in volatility, regardless of the price direction.

Why Focus on Scheduled Events?

Market volatility often spikes around scheduled events like the FOMC meetings because of the uncertainty and anticipation they generate. Traders are often unsure about the outcomes of these events, leading to increased buying and selling activity. This heightened activity drives up implied volatility (IV), which in turn increases the value of both call and put options. For example, let’s consider the FOMC meetings, which are closely watched by market participants. The Federal Reserve’s decisions on interest rates and monetary policy can have profound effects on the financial markets. In the days leading up to these meetings, traders typically become more cautious, hedging their positions and speculating on potential outcomes. This caution and speculation lead to a rise in IV, making the days before an FOMC meeting an ideal time to deploy a long straddle strategy.

Why Not Predict Event Outcomes?

One might wonder why we don’t attempt to predict the actual outcome of events like FOMC meetings. The answer lies in the unpredictability of market reactions. Even if you correctly anticipate the Fed’s decision, the market's reaction might not align with your expectations. For instance, the market might have already priced in a rate hike, and a seemingly "correct" prediction might lead to a muted market response. Instead of trying to predict the outcome, the long straddle strategy focuses on profiting from the market's uncertainty. By entering the trade before the event and exiting before the outcome is announced, you sidestep the risk associated with trying to predict market direction and focus solely on capturing the volatility.

Constructing the Long Straddle Strategy Around Events

The effectiveness of a long straddle strategy hinges on two main factors: timing the entry and timing the exit. Both of these are crucial when dealing with event-driven volatility.

Timing the Entry:

The entry point is critical because you want to enter the trade when IV is about to rise but hasn't peaked yet. If you enter too early, you might face time decay (theta), which erodes the value of your options. If you enter too late, you might miss the IV rush altogether. For scheduled events like FOMC meetings, research and backtesting have shown that IV typically begins to increase around two weeks before the event. Therefore, entering a long straddle approximately 14 days before the event allows you to capture this pre-event volatility surge.

Figure: Long Straddle Entry

For instance, if an FOMC meeting is scheduled for July 31, you would set up your long straddle around July 17. At this point, you would purchase both an ATM call and an ATM put option with the same expiration date. The goal is to position yourself to benefit from the increase in IV as the market starts pricing in potential outcomes of the meeting.

Timing the Exit:

Exiting the trade is just as important as entering it. The day of the event is typically marked by high uncertainty, leading to a peak in IV. However, once the event passes, much of this uncertainty is resolved, and IV tends to drop sharply. This phenomenon, known as "volatility crush," can quickly erode the value of your options. To avoid the impact of volatility crush, you can exit the trade one day before the event. Continuing with our example, if the FOMC meeting is on July 31, you would exit the long straddle on July 30. This timing allows you to capture the peak in IV without getting caught in the post-event volatility decline.

Figure: Long Straddle Exit

Backtesting the Strategy

As with any trading strategy, backtesting is crucial to understanding how a long straddle might perform under different market conditions. By backtesting against historical data, particularly around previous FOMC meetings or other scheduled events, you can refine your entry and exit rules, optimise strike prices, and better understand potential risks and rewards.

Figure: Trading Signals

In the above plot, when the signal is 1, deploy a long straddle, and when it is 0, exit the position. Pros The strategy has the potential to earn income regardless of whether the underlying security increases or decreases in price. The strategy may be useful when major news is anticipated but it's uncertain in which direction markets will take events. Investors may mitigate potential losses or downsides by hedging their investment rather than entering just a single-direction trade. Cons The underlying security must be volatile. Straddle positions are often unprofitable without substantial price movement. The investor is certain to purchase an option and pay a premium for a contract it will never execute. The strategy isn't suitable in all market conditions or for all types of securities because it relies on volatility.