Now there's a name from history. Their business model, selling lots and lots of out-of-the money options and collar trades, is one that people seem keen to replicate in crypto space. Profitable when volatility low, goes bang dramatically when it spikes.
A great trade if you can get enough leverage that someone else is on the hook for much of the downside risk, as LTCM managed.
Also, their famous trade was not actually selling volatility through writing options, but sla convergence trade in government bonds (short the most liquid one, which trades at a premium, get long a very similar bond which has the same cashflows but does not benefit from being blessed with the "most liquid" status). The crypto equivalent here is probably being long stablecoins, though even the best stablecoins have orders of magnitude less backing than Treasuries.
Actually, some proportion of LTCM's portfolio was actually selling volatility on equity options. If I recall this unit accounted for about ~20% of the losses. I think about another 15% came from linear equity arbitrage, mostly long-short positions on cross-listed stocks. Like you said, the bulk was fixed income arbitrage.
It was actually pretty internally controversial when LTCM started selling options in the last year or two before its cratering. The core thesis of the firm was pure arbitrage, where the risk was inherently capped. When the more aggressive faction started pursuing "statistical arbitrages", positions that could lose money but tended not to when repeated long enough, the old-school vanguard from Salomon revolted. Ironically both the pure arbitrage and statistical arbitrage positions got crushed in 1998.
But there's literally no upside to holding stablecoins? By design they don't appreciate, they pay no interest or dividends, they track underlying inflationary currencies like USD, and have a non-zero chance of going boom and becoming worthless.
They're not perfectly stable. The issuer guarantees you something about them: maybe that you can redeem it for $0.95 today (perhaps phrased as $1 minus fees), or $1.0 in a year. So the price will fluctuate a little below $1, based on interest rates, creditworthiness of the issuer, and simple supply and demand. This is exactly like a bond.
The trade is to buy the stablecoin at $0.96 and wait for a chance to sell it at $0.995. Your investment thesis is that someone else is selling at $0.96 not because the issuer is going bust, but because they need the funds for something else.
