Meme Stonk Money Machine (Patreon)

There's a few little arbs sitting between prediction markets.

You can buy the Trump to win the Republican nomiation for $0.71 on Polymarket and Trump to lose for $0.26 on Predictit.

If Trump wins, your Polymarket bet pays out $0.29, and you lose $0.26 on the Predictit bet, netting a profit of $0.03

If Trump loses, Your Predictit bet pays out $0.74, and you lose $0.71 on the Polymarket bet, netting a profit of $0.03

Unfortunately with Predictit's massive transaction costs, that EV is actually closer to $0.01

If you were to hold it to settlement, it probably wouldn't beat holding the risk free rate.

There's also almost no liquidity at those prices, which means you can't make any good money the pure arb.

However there are a few slightly better arbs on here (notice the Ron DeSantis lines between the two exchanges) that might be worth your time.

I've been monitoring these spreads a little, and it seems like by trading them and waiting for the lines to be repriced (instead of holding them to settlement for the pure arb) you could make some money.

The actual risk here is really the opportunity cost of the spread not closing fast enough, which means your money is locked there earning below what t bills would pay you.

Watching these for the past few weeks, I think the spreads are volatile enough to where you could actively trade them.

Essentially waiting for the spread to get large enough to where buying/selling it beats transaction costs, waiting for it to revert, and doing that continuously.

You could probably even do this on your phone when you're on the bus, while driving, at a funeral, etc.

Selling Meme Stonk Options

I had a trade last year in AMC, GME, and BBBY that minted.

I remember my PNL being practically a straight line up and to the right.

It kinda imploded in the end, but only because of my stupidity (not because it was a bad trade). I know this, because I found out later there were other good traders doing the exact same thing.

Anything with the crazy momentum, circulating on internet forums, and in the meme communities tends to have overpriced options.

Vinfast ($VFS) is one example of this kind of stock.

The company just went public via SPAC a month ago, had a crazy +100% tear to over a 200 billion market cap, and has subsequently collapsed back down to Earth.

While the opportunity to make a generational fortune is probably gone, I think there still might be a good opportunity here.

Implied volatility in these meme stocks tends to stay high for a longer time than it should.

• IV - White
• 10d RV - Yellow
• 30d RV - Orange

The chart above is a plot of VFS implied volatility against historical 10 and 30 day realized volatility.

Keep in mind that realized volatility is calculated based on a rolling 10, 20, 30, 60, 180, etc, window.

That means the reason the 10 and 30 day realized volatility appear higher than implied is because the parabolic price movements from before have yet to drop out of the calculation.

instead of using a 20d RV calculation, sometimes in these meme stonks I like comparing the implied daily move with the recent realized daily moves instead.

All of the complicated volatility forecasting models are based on the idea that today's volatility is probably gonna be close to whatever yesterday's was anyway lol.

Even if you wanted to do a GARCH model or somethin, you need a lot of data points for the MLE to actually fit it.

And even if we had prior data for VFS, those data points would probably be worthless anyway. It would be like using data from GME before the squeeze to predict what volatility was going to be in the future. It doesn't work, because the regime has changed.

That's a complicated way of saying, I just do the dumbest thing ever and somehow it usually works. I'm guessing there's alpha in being the first moron to trade this stuff.

We can see the close expiration VFS options have an implied volatility of about 96%

A rule of thumb for calculating the daily implied move is dividing the implied volatility by the square root of the number of trading days in the year.

96 / (sqrt(252)

or

96 / 16 (the square root of 252 is basically 16)

6

VFS options are implying the stock to move 6% per day for the life of the option.

I usually just look and see if the stock has moved less than that each day over the last few days. If it has, I'll sell direction neutral option structures.

These quasi-meme stonks also tend to have negative drift, which means you probably want to be slightly short delta.

Depending on whether puts or calls have tighter spreads, I'll sell, and then under or overhedge with the underlying.

For example, if I sell a VFS call, that position is short volatility and short delta.

I make money if the stock goes down, and lose money if it goes up.

However because the main edge in this trade is coming from the difference between implied and my forecast of realized volatility and not what direction the underlying goes, I don't want all of that directional risk.

After all, If VFS goes up a lot, my short calls are going to kill me.

Instead, let's say I sell a 60 delta call. I'm now short 60 delta.

• -1 VFS call = -60

Net Delta = -60

If I were to buy 60 shares, my short call and long shares would cancel out, making the position direction neutral (and thus just a volatility bet).

• -1 VFS call = -60
• 60 VFS shares = 60

Net Delta = 0

However, I don't want to be perfectly delta neutral. I know these meme stocks tend to drift down over the long run. I want to be slightly short the stock.

In order to get this exposure, I only buy 50 shares. This leaves some residual short delta exposure in the call I sold.

• -1 VFS call = -60
• 60 VFS shares = 50

Net Delta = -10

If that doesn't make sense, just shorting the ATM straddle/iron condor gets you 80% of the way there. I was just selling ATM iron condors (or butterflies technically?) on GME and AMC and that shit was printing with over a 2 sharpe.

Other Tips

• I sell the 7-10 dte over and over again. This is what I did with the OG meme stocks. The longer dated options are less risky, but the variance premium tends to be concentrated in the closer expiration options. The edge is usually bigger there.
• DO NOT be a dumb fuk like me and try to top tick spikes in implied volatility. This will hurt you. Bad. This is how I originally blew up a good bit of the profit from this trade. The primary driver of meme stocks is momentum, which means if you're selling options, losing money is usually followed by losing more money. You want nothing to be happening. When stuff starts happening, betting on mean reversion will destroy you.

I've been able to pull some money out of this trade over the past 2 weeks. Hopefully it keeps working.

Portfolio Update