I'm sure he did use options here and there, but it was the overuse of leverage that blew him up. The smart use of options as part of a hedging strategy might have saved him.

Simons, and Renaissance in general, does not rely on purely option trading.

Consider this...no billionaires have ever been created by strictly trading options. Options are a tool to use as part of a larger financial strategy. The long term outcome of purely option trading ends in you fighting other degens for space next to a Wendy's dumpster.

Well that's the source of volatility isn't it? Some people get it, some don't, and they fight it out in the markets. The spectrum of "smart money" still follows the Gaussian distribution curve. Quiescent markets then converge on the reversion to the mean. Along the way, volatility is the mother's milk of the quant arbs, quietly vacuuming up the nickels and dimes of the frenetic who won't miss them.

Kind of depends, some banks need the liquidity to satisfy withdrawals or anticipated withdrawals. Many that are withdrawing are buying short term treasuries or putting it in money markets and that does have an effect on shorter duration bonds. As you move out the yield curve, look at the unprecedented whipsawing of the 2-year treasuries, the 10 year hasn't been as violent. The 10 year is what impacts the mortgage rates. Business loans are in the middle and that's where the fed wants to extinguish demand to reduce the money supply and quell inflation. It isn't an exact science and throw in the lag effect and you can see how mistakes can be made on the upside and the downside.

It's a $400 billion dumpster fire extinguisher. It isn't particularly inflationary since it is unlikely this bank liquidity replenisher will result in banks making more loans and expanding the money supply.

I'd have to understand the covenants better but at first blush, it would seem these CoCos are time bombs that could very well make a bad situation worse. If holders now know they can get gutted and not just take a haircut, their first impulse would be to convert to common (dilutive) then dump their shares, thus contributing to a downward equity spiral which might spook depositors and a bank run picks up steam. Sure, the CoCos give taxpayers some bailout protection, but as you say, central banks now have to jump into the breach to help with liquidity. So unless I'm missing something, a rethink of these CoCos as contributors to Tier 1 capital should be in order.

I just read Goldman's note that added more color regarding these so-called "CoCos", and you are correct, they were not the usual type bonds and could be gutted in this circumstance. My conclusion was also correct in that it will now be harder for banks to build their capital base using these types of bonds. Given this event, as Goldman puts it, "will likely lead to a reduced appetite for AT1 bonds and credit spreads will balloon". Or as another analyst put it, "AT1 bonds will now be put in the "bank junk" category and will have to compete with the rest of the high yield corporate market".

These CEO's of which you speak, may have shit on themselves if they want to end up at another bank. The problem is that by disrespecting the capitalization stack whereby bond holders had precedent over equity holder, a convention that had been a given for over 100 years, it will now make it harder for Banks to build a capital base by issuing bonds. This in turn will either make lending more expensive for borrowers or reduce the profitability for banks going forward. This was a terrible precedent.