Monthly Archives: December 2015

Skew Vega

Skew Vega is the exposure of an options portfolio to a change in the implied vol skew, e.g. change in the risk reversal level. While teaching my daughter trigonometry, I realized that using some basic trigonometry, I could easily calculate the Skew vega in the case where there is no functional form (parameterized) volatility surface. Here is a simple and elegant model to calculate the skew vega

Calculating Skew Vega model

Factors detrimental to growth of options in India

The Indian options market is touted as a very large, liquid options market. The reality however is that the Indian options market is extremely skewed with a vast majority of the liquidity and volumes only in NIFTY options. The single stock options market remains without depth and liquidity and has not grown as would be expected from a mature market.
Stock options are a very important tool for both investment and portfolio hedging and are actively used by investors and market participants globally. Access to stock options enables investors to mitigate stock specific risk as opposed to simply broad market systematic risk by the use of Index options.
The lack of growth of stock options in India can be partially attributed to certain regulatory factors. This paper discusses these factor and offers suggestions on change.

I presented this paper to SEBI via a brokers association in India as well as discussed this with the exchanges several years ago.  However nothing came of it. I do expect this will be resolved in the years to come.

The full paper can be viewed here:

Factors detrimental to the growth of Stock options for hedging and investing


On Wisdom

If wisdom is innate, then by definition, everyone is “wise” – just too different extents based on our knowledge, experience and how we have used both of these to gain wisdom.

So when it suggested that we ask ourselves the question, “…what would a wise man or woman do…,  it begs the question,  how do you define “a wise man or woman”.   If wisdom is innate, then the original question could really be “…what would  I do..”

Since there is no objective and definitive measure of “a wise man” how can we even begin to think of what a wise man would do.  You can get a Phd in Physics and you will be a expert in Physics – this is objective.  But wisdom is relative and omnipresent, if it is truly innate – so the question of what would a wise man of woman do is somewhat impossible or thus redundant.

I have also heard the saying “… everyone is born a genius..”   My interpretation of that has been that every child is born with the ability to learn, to grow, to achieve – given the right nurturing, environment etc.   So if wisdom is innate, then the realization and exposure of that internal wisdom in us, requires the learning from our life experiences.   But one could make the same argument for courage and love.  So why wouldn’t those be considered innate? Or is there some definition of the threshold of stimulation that is required to bring these out in us – which defines which are innate.  The lower the threshold, the more innate?

We often hear about “..a wise old man..”.  That should not be confused with an intelligent person or one with a lot of expertise or knowledge in one or many areas.  Wisdom come from experiences that we learn from and which make us a “better” human being.  The wisdom to discern right and wrong, good or evil, meaningful or meaningless, ethical or unethical and so on.  We are not taught these, they are developed from our experiences and thus the view that wisdom is innate.  But then would the lack of these experiences at any point mean that wisdom is not possible at that point?  Then maybe Locke is right is saying that when we are born we are like a clean slate, a blank canvas.   But maybe wisdom is still there – like white light of the blank canvas. Our experiences over time bring out the colors and vividness on the canvas – but it all started from the existence of an innate wisdom.

On Education

ONE of the several traits, and arguably the most important one, that sets humans apart from the animal kingdom, is our desire for knowledge.   Humans have always had the insatiable need to learn about and decipher the world around them.  The result of this is why we have houses with heating and air conditioning, the reason we can travel by air, the reason we have electricity, the reason we have conquered many disease, the reason we have cell phones and the internet, the reason we have functioning societies and legal frameworks,

Thus we must not belittle the value of learning.   Our schools provide the foundation of such education and learning to prepare us to explore and learn new things as we go through life.  While many children feel that school subjects are pointless and a bore, they actually all have a reason and a purpose.  The sciences help us understand and explain the world around us, the mathematics gives us a sense of order and objectiveness, social studies help us understand society and where we came from and how we got here, languages give us the ability to communicate better with those around us.

Education and learning thus should always be given a priority and importance in your life.  That being said, you may not like every topic or subject you are asked to study, but the only way for one to know what is interesting is to be exposed to many subjects.   The world is extremely complex, and various fields of learning are constantly overlapping and interacting with each other.  Psychologists sometimes need the logic of math; scientists need the philosophical insight and the businessman needs to understand cultures and traditions.  Thus exposure and learning of many subjects is important at the school level.

Obviously there are other traits which set us apart as humans – such as our desire to be creative in music, arts, writing etc and our ability to appreciate this creativity.  No other animal creates varieties of songs and music, shapes and forms, expressionism etc.  And thus the exploration of the creative side is also important.  There are others like the philosophical and the physical side as well.

All these go hand in hand and are not mutually exclusive and the exploration or emphasis on one should not compromise the other.   As we grow, we may tend to focus more on one area of the other and sometimes there may be limitations preventing us from exploring some of these areas – but as human beings we must try not to consciously ignore any of these traits during our lives.

So make sure learning and education remain a priority – make sure you give them their due and your best effort and attention.   If you make learning a part of your life, then you will not see it as a chore or a bother – it is just natural.

In search of the best Vegetarian Dumplings in NY

The best vegetarian dumplings I ever had were in Jersey City at a small basement shop on Grove Street called Ducky’s & Dumplings.  The owner made all the food fresh on demand and the handmade vegetarian dumplings were incredible (as were the scallion pancakes).  But unfortunately the flooding from Sandy took out this restaurant.

So I decided to look for a replacement for my desire of vegetarian dumplings.

Note however that my reviews are limited to vegetarian dumplings.  Some of these places may have other food and dumplings that are far better or worse – but I only care about their vegetarian ones.


My search started in Chinatown.  I figured if you want dumplings, that should be the place to go.  There are many small, local noodle and dumpling restaurants in Chinatown and vegetarian dumplings are fairly common.  My criteria was approximately 8 dumplings within $10.  Unfortunately I had to skip the real local restaurants as all the menus and signs were in Chinese and no one in those restaurants spoke any English!

My first restaurant was these details Tasty Dumpling on Mulberry Street.  The name is right – but unfortunately everything stops there.  Typical self-serve type place that is extremely inexpensive.  For $3.50 I got 8 steamed vegetarian dumplings.  But even that was too much to pay for them.  They were extremely “doughy” and very light on the filling, which itself had a lot to be desired from as it was essentially cabbage chopped up.  They tasted like steamed dough balls that just stuck to my mouth. On top of that the soy sauce and hot sauce on the table was extremely watered down.   Definitely do not waste your time at this place

The next week I visited Vanessa’s on Eldridge Street off of Grand. Vanessa’s is extremely busy, with a constant flow of customers  – mostly tourists, mixed in with a few preppie couples from Soho and many hipsters  – but surprising very few Chinatown locals.   This is probably because of Vanessa’s digital footprint – it appears in most internet food sites and has received very good reviews – and deservedly so.  The vegetarian dumplings were green in color due to the spinach infused whole wheat dough,  the filling was a tasty mixture of cabbage, carrots, mushrooms, ginger and some herbs like coriander – and they did not skimp on the filling, The dough was consistent and boiled to the right consistency.  Despite the long wait, watered down soy and hot sauce, I was quite happy with my $4 for 8 dumplings

A few days later, while walking in midtown, I came across Hibachi Dumpling Express on 6th avenue. Fairly new, clean looking place was quite inviting.  So I decided to try their dumplings.  Unlike the vegetarian dumplings in Chinatown, they offered potstickers, i.e. pan fried dumplings.  However making good potstickers is an art.  They have to be panfried just the right amount with care to make sure they are well cooked all around.  While they smelled and looked good and were cheap – they were terrible.   One side was burnt while the rest was under cooked.  The filling was mediocre.  I ended up throwing away most of them.   They clear have not mastered the art yet.

Back to Chinatown.  This time to a Dim Sum and Tea Parlor called Nom Wah on Doyers Street, a tiny lane off of Chatham Square. This was a nice sit down place with table service.  The selection of teas was awesome, but most of all, the service was incredible. Very welcoming with an old school attitude. They made a mistake and under billed me, so when I pointed it out, they thanked me and said “on the house!”.   And their dumplings?  Excellent.  While a little more expensive ($4 for 3), they were noticeably larger.  Made from a tapioca wrapper and filled with a mixed vegetable filling, they were definitely the winner so far.  Topped off with a nice cup of tea made for a delightful and inexpensive meal.

One more stop in Chinatown – Prosperity Dumpling on Eldridge off of Canal.  Tiny hole in the wall, but extremely popular, with people standing outside eating – possibly because of how cheap their food is.  But their vegetarian dumplings had a lot to be desired from – very similar to Tasty Dumplings mentioned above – and right with them in the do not bother category.

Well, time to try some other areas.  I hear of some good places in Sunset Park, Brooklyn – but that’s a bit of a hike for me – so hopefully I will get out there one day.

Volatility surfaces for risk and OCC portfolio margin

Calculating the current implied volatility of an option or the entire options chain of listed options is quite straightforward. However the use of these implied volatilities in risk measurements has varying implications.  This article studies how different volatility surface methods can result in very different stress risk calculations for an equity options portfolio. Furthermore is shows the impact on portfolio margin calculations. Several years ago, Customer Portfolio Margin was introduced for equity options positions.   The margin calculations are performed by The Options Clearing Corp (“OCC”) using their TIMS methodology. The methodology is stress test based, where each underlying is shocked by various percentage moves, typically about 8% for indices and 15% for single stocks.  The worst case loss for each underlying is calculated and aggregated using some aggregation logic.

Since it is stress test based the implied volatility surface used to perform the simulations plays an important part in the results.  For many years the OCC followed a methodology of cleansing options closing prices to ensure no arbitrage conditions occurring and they employed certain volatility surface corrections to ensure reasonable stress tests.However in mid 2014 the OCC changed their methodology, and the volatility surfaces are no longer smoothed.  The result of this has been deterioration in the portfolio margin results in some cases.  The margin requirements for many deep out the money options jumped dramatically, simply due to the implied volatility used for them bring exorbitantly high.  Lack of smoothing retains the “kinks” in the volatility surface in the stress calculations – resulting in many cases where further out of the money options have greater margin requirement than strikes closer to the money.  Thus certain long call or long put spreads were actually being assessed as requiring margin, which should never be the case. Such irregularities in the portfolio margin calculations are disturbing as many firms rely on the accuracy and consistency of the calculation from the OCC.

Link to the full research article is below

Volatility surfaces for Risk and OCC margin

What Ails Market risk management – March 2008

I wrote this article back in early 2008, before the financial crisis.  It appeared in Wilmott magazine in April/May 2008.

The article explores some of the shortcomings in the market risk analysis practice at most financial institutions.  It presents several ideas on how to improve the actual process of producing market risk numbers.  It is focused on the practical aspects of market risk managemen


Looking back at this article in the post-2008 world,  it highlighted several issues that really came to light after the crisis – in particular the use of too short a historical lookback for VaR and stress tests, the importance of the outliers in a VaR PL distribution (now use of CVaR is common)  and the need to incorporate more risk factors.

The link to the article is below:

What ails market risk management

Inherently Dirty?

Early in the morning on a warm Sunday seemed the perfect time to go for a walk on Juhu beach in Mumbai, before the city woke up and masses of humanity overcame everything.  Besides a few young kids playing cricket on the beach before their 10am curfew, I am essentially alone.  I stand still, looking at the ocean, behind me the beautiful grounds of the Theosophical society. It should be the perfect place to get a moment of peace away from the hustle of bustle of Mumbai. But try as I may, my gaze kept coming back to the trash strewn all over the beach – modern human trash of bottles, plastic, old clothes, food wrappers – just carelessly left behind by the beach visitors the day before.

Walk anywhere in most Indian city, and you will finds trash everywhere.  Whether it be a working class colony or a street of multi-million dollar apartments.

Are Indians just inherently dirty?   That is hard to believe. Visit most people’s home, whether rich or poor, and they are kept neat and clean – swept and mopped almost every day.

While visiting a friend in a posh suburb of Mumbai, I noticed a food wrapper had fallen on the ground. His father just casually pushed the wrapper with his feet over the edge of the balcony and let it fall to the ground below.

If the wrapper is trash for your apartment floor, then why isn’t it trash for the ground below.  Herein lays the crux of the issue.

Indians in general have a very different relationship with the environment outside their homes compared to western countries.  One’s home is a sanctuary, but outside is essentially free for all and individuals do not seem to have any sense of responsibility to it – it is someone else’s problem.  In the West it would not be uncommon to see people volunteer to clean up their community on weekends. I have seen groups of people picking up litter from the side of the street on weekends.  When little league baseball season starts, dozens of ordinary people, some quite well to do, will get together and clean up the fields, picking up trash, raking, mulching etc. – creating a clean, beautiful, safe outdoors community environment for their kids.  This would never happen in India.  Public spaces are dumping grounds, as long as you cannot see it from your home, it is ok.  Cleaning it up is the responsibility of the government, municipality or someone else.

India has had tremendous economic growth in the last decade and a half.  However can a society truly progress with a callous attitude towards its environment?   Can true living standards be raised without care of the community and public spaces around us?  Is it real progress if we live in nice million dollar apartments and houses, but outside there is trash, dirt and an unhealthy environment?  My friends in India take exception to this and point out examples of some clean areas – but the fact that the clean areas is the exception rather than the rule, says it all.

The irony is that the Indian culture refers to Mother earth with reverence and in song and literature the soil of our land is glorified.  Yet for all its talk, the reality is that in India we have no issue disrespecting mother earth and throwing our trash on her face.