Track 08Module 3 of 58 sources
Leverage, crowding and blow-ups
Recognise the conditions that turn a good trade into a disaster: leverage, crowding and liquidity that vanishes.
Key ideas
- Blow-ups share a recipe: a strategy that earns small steady gains, leverage to make them matter, and a crowd in the same trade.
- Selling volatility pays until it does not. In February 2018 a short-volatility product lost nearly all its value in one evening.
- Liquidity is there when you do not need it. Stops do not protect against gaps.
- Ask of any position: who else holds this, and what would force them to sell?
Start hereWatch or read these first. They carry the core idea.
The Most Dangerous Hedge Fund in History
Video · Hamish Hodder · 28:47
The rise and fall of Long-Term Capital Management.
ETF 'Vol-mageddon': Lessons Learned for Investors
Video · Bloomberg Television · 2:54
The day short-volatility funds collapsed, in three minutes.
The Archegos Saga and Total Return Swaps Explained
Video · KINGCADEMY · 4:57
How hidden leverage through swaps brought down a family office.
CoreThe standard references. Work through them once the idea is clear.
Book
When Genius Failed
Roger Lowenstein
The full story of Long-Term Capital Management. The best book on leverage.
Report
BIS Quarterly Review, March 2018: the February volatility spike
BIS · 2018
The official analysis of the 2018 volatility spike and the feedback loop behind it.
Report
The market turbulence and carry trade unwind of August 2024 (BIS Bulletin 90)
BIS · 2024
The 2024 carry unwind as a case of crowded leverage.
Book
Go deeperResearch, primary sources and data for when you want the detail.
Book
Manias, Panics, and Crashes
Charles Poor Kindleberger, Robert Aliber, R. Aliber
The long history of the same mistakes.
Practice
For each open position, write the worst overnight gap you can imagine and the loss it implies. Add them up as if they happened together.
See it live
Where this leads
02.2 · Options and Options FlowVolatility: implied, realised, skew and term structureDecide whether options are cheap or expensive by comparing implied volatility with realised, and read skew and term structure as positioning.05.5 · Macro and LiquidityCycles, debt and maniasRecognise the stages of a credit cycle and the anatomy of a bubble while they are happening.