1 00:00:00,040 --> 00:00:03,160 Speaker 1: Hey, there are aud Loots listeners. It's Tracy Alloway. 2 00:00:02,840 --> 00:00:03,760 Speaker 2: And Joe Wisenthal. 3 00:00:04,080 --> 00:00:07,520 Speaker 1: We are very excited to announce that Audlots is going 4 00:00:07,600 --> 00:00:09,479 Speaker 1: to Washington That's right. 5 00:00:09,560 --> 00:00:11,360 Speaker 2: For the first time, we are going to do a 6 00:00:11,440 --> 00:00:16,239 Speaker 2: live public odd lotch recording in our nation's capital. That's 7 00:00:16,239 --> 00:00:19,479 Speaker 2: going to be March twelfth in Washington, DC at the 8 00:00:19,560 --> 00:00:23,360 Speaker 2: Miracle Theater and guests will be announced in the coming days, 9 00:00:23,400 --> 00:00:25,760 Speaker 2: but in the meantime you can find a ticket link 10 00:00:25,800 --> 00:00:27,680 Speaker 2: at Bloomberg dot com, slash odd. 11 00:00:27,600 --> 00:00:44,600 Speaker 3: Lots, Bloomberg Audio Studios, Podcasts, radio News. 12 00:00:46,680 --> 00:00:50,160 Speaker 1: Hello and welcome to another episode of the Audlots podcast. 13 00:00:50,320 --> 00:00:51,880 Speaker 1: I'm Tracy Alloway. 14 00:00:51,520 --> 00:00:52,800 Speaker 2: And I'm Joe Wisenthal. 15 00:00:53,159 --> 00:00:56,440 Speaker 1: Joe, as part of my preparation for this episode, I 16 00:00:56,440 --> 00:01:01,080 Speaker 1: have spent the morning on TikTok and Twitter, slash x 17 00:01:01,440 --> 00:01:03,520 Speaker 1: Instagram watching videos. 18 00:01:04,360 --> 00:01:07,560 Speaker 2: Did you find any good techniques that you are going 19 00:01:07,560 --> 00:01:11,200 Speaker 2: to employ for generating two hundred thousand dollars a year 20 00:01:11,240 --> 00:01:14,240 Speaker 2: on two hundred and fifty thousand dollars in capital by 21 00:01:14,440 --> 00:01:16,479 Speaker 2: selling short term options? You know what? 22 00:01:16,720 --> 00:01:19,080 Speaker 1: First of all, there are so many accounts that are 23 00:01:19,160 --> 00:01:25,000 Speaker 1: basically pitching trading with derivatives options. Some variation of those nowadays. 24 00:01:25,240 --> 00:01:28,120 Speaker 1: I did, to your point, find a guy a video 25 00:01:28,160 --> 00:01:31,080 Speaker 1: of a guy saying that one thousand dollars is only 26 00:01:31,200 --> 00:01:35,360 Speaker 1: nine doubles away from becoming a million, and a million. True, 27 00:01:35,480 --> 00:01:38,920 Speaker 1: a million is only ten doubles away from a billion. 28 00:01:39,440 --> 00:01:42,800 Speaker 2: So that's true too. Now, I think that sounds roughly right. Yeah, 29 00:01:42,840 --> 00:01:45,880 Speaker 2: so what's the catch? You know, someone's got to do it. 30 00:01:45,959 --> 00:01:48,480 Speaker 1: No catch, Joe, It's it's all good. We can all 31 00:01:48,520 --> 00:01:51,640 Speaker 1: be billionaires. No, I think. I think the thing about 32 00:01:51,680 --> 00:01:55,720 Speaker 1: derivatives trading nowadays is when it's started, it was very 33 00:01:55,840 --> 00:01:58,560 Speaker 1: much a retail phenomenon. It was, you know, the guys 34 00:01:58,560 --> 00:02:03,600 Speaker 1: on Wall Street bets Yo, lowing into some crazy derivatives trade, 35 00:02:03,640 --> 00:02:07,480 Speaker 1: basically buying a lottery ticket on the market. But what's 36 00:02:07,560 --> 00:02:12,160 Speaker 1: happened since then is derivatives have really gone mainstream in 37 00:02:12,280 --> 00:02:16,080 Speaker 1: various ways. So, for instance, if you look at options 38 00:02:16,120 --> 00:02:18,560 Speaker 1: like across the S and P five hundred right now, 39 00:02:18,760 --> 00:02:23,160 Speaker 1: something like sixty percent of the volume is shorter dated options. 40 00:02:23,160 --> 00:02:27,359 Speaker 1: So yeah, zero DT or one DT, which is kind 41 00:02:27,360 --> 00:02:27,960 Speaker 1: of crazy. 42 00:02:28,680 --> 00:02:31,240 Speaker 2: It's totally crazy, you know. I remember first, do you 43 00:02:31,320 --> 00:02:36,800 Speaker 2: remember Tracy early on when we started at Bloomberg, You 44 00:02:36,840 --> 00:02:39,440 Speaker 2: brought in. There was someone I forget who it was, 45 00:02:39,520 --> 00:02:41,560 Speaker 2: but there was someone from some sort of like actual 46 00:02:41,639 --> 00:02:47,120 Speaker 2: like institutional options trading research firm that came in and 47 00:02:47,240 --> 00:02:50,120 Speaker 2: did this little like mini seminar for some of the 48 00:02:50,240 --> 00:02:53,519 Speaker 2: reporters on like how to analyze options data. Do you 49 00:02:53,560 --> 00:02:55,840 Speaker 2: remember doing that you brought in anyway, But one of 50 00:02:55,880 --> 00:02:59,520 Speaker 2: his points was is that the purpose of options are 51 00:02:59,600 --> 00:03:04,120 Speaker 2: like they're largely hedging instruments. They're sort of tactically used 52 00:03:04,160 --> 00:03:09,480 Speaker 2: by institutions for very specific purposes, you know, insurance essentially, 53 00:03:09,520 --> 00:03:12,760 Speaker 2: that options sort of played this role as insurance for 54 00:03:12,919 --> 00:03:15,920 Speaker 2: specific things. And then since then I get the impression 55 00:03:15,960 --> 00:03:18,720 Speaker 2: that the world is just like totally changed. And I 56 00:03:18,760 --> 00:03:21,360 Speaker 2: think the other thing that surprised me. I would have 57 00:03:21,480 --> 00:03:24,160 Speaker 2: guessed that if we're sitting here in twenty twenty five, 58 00:03:24,440 --> 00:03:26,920 Speaker 2: that that craziness of twenty twenty one would have been 59 00:03:26,960 --> 00:03:29,880 Speaker 2: some sort of peak. Right, there is Robinhood here, Memestock, 60 00:03:29,960 --> 00:03:33,240 Speaker 2: ere et cetera. I would not have guessed the durability 61 00:03:33,320 --> 00:03:36,280 Speaker 2: of it, especially with the FED having hiked and everything 62 00:03:36,280 --> 00:03:37,320 Speaker 2: that we've seen transpires. 63 00:03:37,320 --> 00:03:40,720 Speaker 1: Since No, that's my point, right, Instead of like the 64 00:03:40,880 --> 00:03:45,320 Speaker 1: Yolo crowd basically reducing their options trading. Instead, we had 65 00:03:45,360 --> 00:03:50,680 Speaker 1: Wall Street yoloing into options trading to serve first. Okay, 66 00:03:50,880 --> 00:03:54,960 Speaker 1: So options, derivatives, they're everywhere right now, and you have 67 00:03:55,440 --> 00:03:59,040 Speaker 1: different groups of people, so institutional and retail using them. 68 00:03:59,120 --> 00:04:01,440 Speaker 1: You have a bunch of different strategies, you have a 69 00:04:01,440 --> 00:04:04,880 Speaker 1: bunch of different products that deploy them, that give again 70 00:04:05,160 --> 00:04:09,440 Speaker 1: new types of traders access. So we should talk about it. 71 00:04:09,840 --> 00:04:10,480 Speaker 2: Let's do it. 72 00:04:10,600 --> 00:04:13,680 Speaker 1: And who do we call to talk about derivatives? The 73 00:04:13,720 --> 00:04:16,719 Speaker 1: perfect guest, one man, the perfect guest. We have Ben 74 00:04:16,760 --> 00:04:20,320 Speaker 1: i for managing partner at QVR. Back with us, Ben, 75 00:04:20,520 --> 00:04:21,679 Speaker 1: thanks for coming back. 76 00:04:21,480 --> 00:04:23,440 Speaker 4: On Tracy Joe. It's so good to see you, guys. 77 00:04:23,440 --> 00:04:25,479 Speaker 4: I'm really excited about this. It's always so much fun 78 00:04:25,520 --> 00:04:25,960 Speaker 4: talking to you. 79 00:04:26,120 --> 00:04:29,040 Speaker 1: It's been a while. I have to say, maybe just 80 00:04:29,080 --> 00:04:33,279 Speaker 1: to start out with videos' favorite. 81 00:04:34,160 --> 00:04:36,000 Speaker 4: The one actually from a few days ago that I 82 00:04:36,040 --> 00:04:38,159 Speaker 4: just absolutely loved. I'm gonna I'm gonna forget her name 83 00:04:38,520 --> 00:04:40,359 Speaker 4: off the top of my head, but she's called the 84 00:04:40,360 --> 00:04:43,039 Speaker 4: she Wolf of Indian options trading and she has a 85 00:04:43,080 --> 00:04:45,800 Speaker 4: whole show. She was actually reacing me. She was recently 86 00:04:45,880 --> 00:04:48,440 Speaker 4: banned by the Indian government from you know, doing what 87 00:04:48,480 --> 00:04:51,320 Speaker 4: she's doing because she's sort of so controversial, but she's 88 00:04:52,040 --> 00:04:54,080 Speaker 4: very intimidating it. Like I like to kind of take 89 00:04:54,080 --> 00:04:56,880 Speaker 4: on these option influencers and sort of say, look, you know, 90 00:04:56,920 --> 00:04:59,240 Speaker 4: come on, guys, this isn't right. I don't know, man, 91 00:04:59,320 --> 00:05:03,120 Speaker 4: she's she's pound, you know, pounding the table about making 92 00:05:03,120 --> 00:05:06,440 Speaker 4: one hundred percent in ten minutes, you know, like guaranteed profits, 93 00:05:06,480 --> 00:05:09,280 Speaker 4: interdate options trading over and over again while like a 94 00:05:09,320 --> 00:05:11,600 Speaker 4: band plays in the background and fireworks go off. It's 95 00:05:11,680 --> 00:05:12,880 Speaker 4: like truly incredible stuff. 96 00:05:13,160 --> 00:05:17,080 Speaker 2: I'm reading an article on livemint dot com SCBI, which 97 00:05:17,080 --> 00:05:21,920 Speaker 2: I guess is the Indian regulator banning her from capital markets. 98 00:05:22,480 --> 00:05:25,160 Speaker 2: But one hundred percent in ten minutes sounds pretty good. 99 00:05:25,400 --> 00:05:28,720 Speaker 4: What's the kid, what's the cat? Well, it turns out 100 00:05:28,800 --> 00:05:30,640 Speaker 4: it's a lot better money for her than it is. 101 00:05:32,160 --> 00:05:36,080 Speaker 2: Usually Well what is Okay, that's a very extreme example, 102 00:05:36,200 --> 00:05:38,359 Speaker 2: but we all, you know, we've all seen these videos. 103 00:05:38,600 --> 00:05:42,400 Speaker 2: The modal TikTok options is influencer. What is the sort 104 00:05:42,440 --> 00:05:46,120 Speaker 2: of the gist of what they're telling viewers that they 105 00:05:46,160 --> 00:05:46,480 Speaker 2: can do. 106 00:05:46,680 --> 00:05:49,520 Speaker 4: Yeah, absolutely, I mean the things that you that they say, 107 00:05:49,560 --> 00:05:51,039 Speaker 4: you guys just kind of joked a little bit about 108 00:05:51,080 --> 00:05:53,919 Speaker 4: this earlier, but you know, make twenty thousand dollars a 109 00:05:53,960 --> 00:05:56,360 Speaker 4: month in passive income, you know, easily with only a 110 00:05:56,360 --> 00:05:57,719 Speaker 4: two hundred and fifty thousand. 111 00:05:57,480 --> 00:06:00,400 Speaker 2: What's the gist of that stor we all are very 112 00:06:00,440 --> 00:06:03,160 Speaker 2: skeptical results, But what is the basic thing that they're 113 00:06:03,200 --> 00:06:03,760 Speaker 2: saying that you. 114 00:06:03,680 --> 00:06:06,760 Speaker 4: Can absolutely achieve. The typical thing these days is they 115 00:06:06,800 --> 00:06:09,960 Speaker 4: want you to sell short data, short term options, right, 116 00:06:10,000 --> 00:06:13,280 Speaker 4: And there's various formats that might take. The really popular 117 00:06:13,279 --> 00:06:16,080 Speaker 4: stuff might be just selling puts, you know, one month 118 00:06:16,120 --> 00:06:18,400 Speaker 4: puts on your favorite stocks or on the equity index, 119 00:06:18,480 --> 00:06:21,400 Speaker 4: or maybe weekly puts or maybe zero DT puts, sort 120 00:06:21,400 --> 00:06:24,040 Speaker 4: of daily puts over and over again. Could be selling 121 00:06:24,320 --> 00:06:27,440 Speaker 4: covered calls or uncovered calls. Could be selling you know, 122 00:06:27,480 --> 00:06:29,800 Speaker 4: straddles or strangles or whatever it is. But the common 123 00:06:29,839 --> 00:06:33,280 Speaker 4: idea or the kind of they'll pack all of these 124 00:06:33,320 --> 00:06:38,000 Speaker 4: different handwavy justifications into why this is free money or 125 00:06:38,000 --> 00:06:40,480 Speaker 4: why this is really easy. You'll hear people say, oh, 126 00:06:40,560 --> 00:06:42,880 Speaker 4: ninety percent of options expire out of the money, so 127 00:06:42,920 --> 00:06:45,040 Speaker 4: it's just super easy. You just make money on all 128 00:06:45,040 --> 00:06:47,480 Speaker 4: these trades, you know, and then and then anything that 129 00:06:47,800 --> 00:06:50,200 Speaker 4: could go wrong they explain away as how it's not 130 00:06:50,279 --> 00:06:52,040 Speaker 4: really a problem. You know, Oh, well, if you sell 131 00:06:52,080 --> 00:06:53,840 Speaker 4: the put and the stock goes down, then you get 132 00:06:53,839 --> 00:06:55,360 Speaker 4: to buy the stock really cheap and the stock is 133 00:06:55,400 --> 00:06:57,000 Speaker 4: going to go back up and it's kind of fine. 134 00:06:57,240 --> 00:06:59,839 Speaker 4: Or you know, oh, you reduce your cost basis on 135 00:06:59,839 --> 00:07:01,640 Speaker 4: the stock over and over again, and then then you 136 00:07:01,640 --> 00:07:03,719 Speaker 4: get the stock for free. For all of these things 137 00:07:04,040 --> 00:07:06,479 Speaker 4: over and over again. Where at the end of the day, Look, 138 00:07:06,480 --> 00:07:08,400 Speaker 4: if you say you can sell an option, that's fine. 139 00:07:08,440 --> 00:07:10,560 Speaker 4: It's just a trade. It has a payoff profile. You 140 00:07:10,800 --> 00:07:12,760 Speaker 4: get a little bit of premium and maybe you lose 141 00:07:12,760 --> 00:07:14,320 Speaker 4: a bunch of money or maybe you don't, and you 142 00:07:14,360 --> 00:07:16,040 Speaker 4: can kind of analyze that trade the same way you 143 00:07:16,080 --> 00:07:18,560 Speaker 4: would analyze any trade. It's not free money, you know. 144 00:07:18,640 --> 00:07:22,880 Speaker 4: But the justifications and explanations and persuasiveness that goes into 145 00:07:22,880 --> 00:07:25,160 Speaker 4: this from these from these kind of influences is very powerful. 146 00:07:25,640 --> 00:07:28,920 Speaker 1: Do we have any sense of what people are using 147 00:07:29,040 --> 00:07:31,640 Speaker 1: these four And you know, one thing I hear in 148 00:07:31,680 --> 00:07:35,720 Speaker 1: particular on shorter dated options from this mostly comes from 149 00:07:35,760 --> 00:07:38,920 Speaker 1: institutional traders, but the idea that well, these allow you 150 00:07:38,960 --> 00:07:42,000 Speaker 1: to be more precise when you're hedging. This is a 151 00:07:42,120 --> 00:07:46,320 Speaker 1: tactical move versus a strategic move. But then of course 152 00:07:46,400 --> 00:07:49,480 Speaker 1: you look at something on a subreddit or something like 153 00:07:49,520 --> 00:07:52,560 Speaker 1: that and people are just basically buy lottery tickets. 154 00:07:52,840 --> 00:07:55,520 Speaker 4: Yeah, I think that's exactly right. So, you know, derivatives 155 00:07:55,560 --> 00:07:57,120 Speaker 4: have been around for a long time, and options have 156 00:07:57,120 --> 00:08:00,640 Speaker 4: been around for a long time, and they certainly enable 157 00:08:00,680 --> 00:08:04,440 Speaker 4: you to make very customized, precise bets or hedges in 158 00:08:04,440 --> 00:08:06,600 Speaker 4: intelligent ways if that's what you're trying to do, and 159 00:08:06,680 --> 00:08:09,600 Speaker 4: you know, that's super. But most of what you see 160 00:08:10,160 --> 00:08:14,720 Speaker 4: being sold on YouTube or on Instagram is much more. 161 00:08:15,080 --> 00:08:16,840 Speaker 4: You know, you should just do this all the time. 162 00:08:16,960 --> 00:08:19,280 Speaker 4: This just makes sense. This is basically free money. It's 163 00:08:19,280 --> 00:08:19,680 Speaker 4: really easy. 164 00:08:19,960 --> 00:08:21,680 Speaker 1: There's no accompanying strategy. 165 00:08:21,760 --> 00:08:24,680 Speaker 4: There's no accompanying strategy of when and why might something 166 00:08:24,720 --> 00:08:26,880 Speaker 4: like this make sense? At what price? How do you 167 00:08:26,920 --> 00:08:28,560 Speaker 4: know if it's a good trade. There's none of that. 168 00:08:28,640 --> 00:08:31,880 Speaker 4: It's just justification that somehow this is a cheat code 169 00:08:32,120 --> 00:08:34,680 Speaker 4: in markets that just lets you unlocked the infinite money, 170 00:08:34,880 --> 00:08:37,040 Speaker 4: an infinite money cheat code that lets you unlock sort 171 00:08:37,080 --> 00:08:38,200 Speaker 4: of spectacular returns. 172 00:08:38,360 --> 00:08:40,560 Speaker 2: One day, Tracy, We're going to do an episode on 173 00:08:40,600 --> 00:08:43,040 Speaker 2: the cheat code that I did find in markets, which 174 00:08:43,040 --> 00:08:44,400 Speaker 2: I have I think i've hinted it. 175 00:08:44,600 --> 00:08:46,280 Speaker 1: Wait, you found one and you're still here. 176 00:08:46,840 --> 00:08:50,400 Speaker 2: Well, the short version is, I did find a cheat 177 00:08:50,440 --> 00:08:53,680 Speaker 2: code in nineteen ninety nine. I didn't know that I 178 00:08:53,720 --> 00:08:56,000 Speaker 2: had found a cheat code at the time, and so 179 00:08:56,080 --> 00:08:57,520 Speaker 2: I was like, oh, at some point I'll pick this 180 00:08:57,679 --> 00:08:59,920 Speaker 2: back up. But in retrospect, I should have gotten all 181 00:09:00,080 --> 00:09:01,959 Speaker 2: my friends and family to go all into it for 182 00:09:02,000 --> 00:09:03,959 Speaker 2: a month. I could talk about it some other time. 183 00:09:04,040 --> 00:09:07,120 Speaker 2: I did briefly find it. Cheat coulde in the markets, 184 00:09:07,120 --> 00:09:08,760 Speaker 2: and I thought, I was like, you know, and. 185 00:09:08,720 --> 00:09:09,480 Speaker 4: He didn't tell any of. 186 00:09:09,559 --> 00:09:11,599 Speaker 2: Us, Yeah, I didn't. I was like, oh, this is 187 00:09:11,679 --> 00:09:15,080 Speaker 2: kind of cool. I made ten thousand dollars. You know, 188 00:09:15,160 --> 00:09:17,760 Speaker 2: we talk about volatility, right, and so just a very 189 00:09:17,800 --> 00:09:22,040 Speaker 2: crudely you know, they're you know, maybe higher vall opportunities 190 00:09:22,080 --> 00:09:25,600 Speaker 2: present good times because you're getting large premium or whatever 191 00:09:25,679 --> 00:09:28,240 Speaker 2: for some of the options trading, et cetera. What are 192 00:09:28,360 --> 00:09:32,440 Speaker 2: like people who find who like walk into these extremely 193 00:09:32,600 --> 00:09:36,000 Speaker 2: naive strategies, Oh, option ninety percent of the time options 194 00:09:36,040 --> 00:09:38,480 Speaker 2: expire out of the money. What does the payoff look 195 00:09:38,600 --> 00:09:40,640 Speaker 2: like for them? How many days do they how many 196 00:09:40,640 --> 00:09:42,880 Speaker 2: pennies can they pick up before they get steamrollered? 197 00:09:43,000 --> 00:09:45,320 Speaker 4: Yeah, totally. I mean, these kind of strategies again, if 198 00:09:45,360 --> 00:09:47,920 Speaker 4: you're just doing them all the time without thinking about it, 199 00:09:47,960 --> 00:09:49,960 Speaker 4: without thinking about the price, and you're just going out 200 00:09:49,960 --> 00:09:52,080 Speaker 4: like on the S ANDT for example, and selling options, 201 00:09:52,360 --> 00:09:54,160 Speaker 4: you know, most of the time these days, because that's 202 00:09:54,200 --> 00:09:56,600 Speaker 4: a crowded one way trade where lots of people sell 203 00:09:56,679 --> 00:09:59,400 Speaker 4: short dated options. You'll tend to make kind of a 204 00:09:59,480 --> 00:10:02,200 Speaker 4: little bit of money at a time, sort of choppily 205 00:10:02,400 --> 00:10:04,719 Speaker 4: for a while, and then once every you know, three 206 00:10:04,800 --> 00:10:06,880 Speaker 4: years or five years, you'll kind of get wiped out 207 00:10:07,240 --> 00:10:08,000 Speaker 4: and end up down. 208 00:10:08,160 --> 00:10:09,839 Speaker 2: You just start getting into it the day after the 209 00:10:09,880 --> 00:10:10,720 Speaker 2: wipeout exactly. 210 00:10:11,040 --> 00:10:14,000 Speaker 4: And actually that's and actually there is something to that. 211 00:10:14,120 --> 00:10:16,640 Speaker 4: Usually usually it's like a month or two after the 212 00:10:16,679 --> 00:10:18,040 Speaker 4: wipeout because you don't know if there's going to be 213 00:10:18,040 --> 00:10:20,160 Speaker 4: another big leg down or something. But there does tend 214 00:10:20,240 --> 00:10:22,959 Speaker 4: to be some excess risk premium and options markets a 215 00:10:23,040 --> 00:10:26,199 Speaker 4: little while after a big market crash that blows out 216 00:10:26,200 --> 00:10:28,080 Speaker 4: a lot of these guys and kind of causes people 217 00:10:28,080 --> 00:10:30,400 Speaker 4: to panic, that's totally true. And then that tends to 218 00:10:30,559 --> 00:10:32,800 Speaker 4: go away after another you know whatever it is year 219 00:10:32,920 --> 00:10:34,160 Speaker 4: or two years or something like that. 220 00:10:34,600 --> 00:10:37,760 Speaker 1: So just in terms of the expansion of all different 221 00:10:37,760 --> 00:10:40,040 Speaker 1: types of derivatives. I don't want to focus too much 222 00:10:40,120 --> 00:10:43,320 Speaker 1: on shorter dated options because there are some other things 223 00:10:43,440 --> 00:10:46,480 Speaker 1: out there that look really interesting. One of them is 224 00:10:46,600 --> 00:10:49,600 Speaker 1: I saw a headline float by about the University of 225 00:10:49,640 --> 00:10:54,520 Speaker 1: Connecticut's endowment dropping some of its hedge fund exposure in 226 00:10:54,679 --> 00:10:59,040 Speaker 1: favor of buffer ETFs. What are buffer ETFs? 227 00:10:59,160 --> 00:11:02,360 Speaker 4: Yep, So this is a a big new manifestation of 228 00:11:02,400 --> 00:11:06,720 Speaker 4: a relatively old popular idea. So buffer ETFs are usually 229 00:11:06,760 --> 00:11:10,000 Speaker 4: pitched as sort of defined outcomes in some sense over 230 00:11:10,080 --> 00:11:12,959 Speaker 4: some time period where they say, well, what you're trying, 231 00:11:13,040 --> 00:11:14,800 Speaker 4: what we're trying to do is give you equity exposure, 232 00:11:14,840 --> 00:11:17,720 Speaker 4: but you have protection. You have a buffer down to 233 00:11:17,800 --> 00:11:19,839 Speaker 4: say ten or fifteen percent, where you're not going to 234 00:11:19,920 --> 00:11:22,760 Speaker 4: lose money as the market goes down, and then beyond 235 00:11:22,840 --> 00:11:25,520 Speaker 4: that point you're exposed. And in order to do that, 236 00:11:25,559 --> 00:11:27,240 Speaker 4: you're going to sell an upside call. You're going to 237 00:11:27,240 --> 00:11:29,360 Speaker 4: give up some of your upside And so what this 238 00:11:29,559 --> 00:11:32,240 Speaker 4: is it's basically just a put spread caller, which is 239 00:11:32,280 --> 00:11:35,040 Speaker 4: a very standard kind of option structure. You sell a 240 00:11:35,040 --> 00:11:38,880 Speaker 4: call to buy a put spread. That is for many 241 00:11:39,000 --> 00:11:41,920 Speaker 4: many years and decades, by far the most popular thing 242 00:11:41,960 --> 00:11:45,040 Speaker 4: that a Wall Street derivative salesperson will run around trying 243 00:11:45,040 --> 00:11:47,400 Speaker 4: to pitch to their clients. It's a very easy thing 244 00:11:47,480 --> 00:11:50,600 Speaker 4: to conceptualize, I'm giving up some upside, I'm getting some protection. 245 00:11:51,120 --> 00:11:53,760 Speaker 4: They can be structured so that there's sort of zero 246 00:11:54,040 --> 00:11:57,000 Speaker 4: premium outlay where you sell a call and use that 247 00:11:57,040 --> 00:11:58,880 Speaker 4: same amount of money to buy a put. So if 248 00:11:58,880 --> 00:12:01,120 Speaker 4: you're an aggressive salesman, you call that like a free 249 00:12:01,120 --> 00:12:03,319 Speaker 4: hedge or a zero cost hedge. Of course you're giving 250 00:12:03,400 --> 00:12:04,880 Speaker 4: up upside, so you can it can be very cool 251 00:12:04,920 --> 00:12:05,480 Speaker 4: to pay. 252 00:12:05,320 --> 00:12:08,599 Speaker 2: For it, but only implicitly by some notional change that 253 00:12:08,640 --> 00:12:09,560 Speaker 2: you're not thinking about. 254 00:12:09,679 --> 00:12:12,439 Speaker 4: That's exactly right. And there's three legs to the trade, 255 00:12:12,480 --> 00:12:14,520 Speaker 4: so there's lots of bit offer spread and lots of commissions. 256 00:12:14,520 --> 00:12:16,920 Speaker 4: So salespeople and traders really like that, and they're very, 257 00:12:17,000 --> 00:12:20,400 Speaker 4: very very popular now. Buffer ETFs these days enable a 258 00:12:20,440 --> 00:12:23,000 Speaker 4: retail investor or a high net worth individual to go 259 00:12:23,040 --> 00:12:25,400 Speaker 4: and get that just by buying an ETF, you know, 260 00:12:25,440 --> 00:12:27,600 Speaker 4: with a seventy basis points management fee or whatever it is, 261 00:12:27,640 --> 00:12:30,040 Speaker 4: instead of having to, you know, be involved with Wall 262 00:12:30,040 --> 00:12:32,960 Speaker 4: Street banks or doing trading themselves. People love that. There 263 00:12:33,040 --> 00:12:35,719 Speaker 4: are very famous mutual funds like the JP Morgan one 264 00:12:35,720 --> 00:12:37,880 Speaker 4: that everybody talks about, and it's twenty two billion dollars 265 00:12:37,920 --> 00:12:40,280 Speaker 4: of assets or something like that. And now there's I 266 00:12:40,280 --> 00:12:44,120 Speaker 4: think something like ninety billion dollars of bufferytf's doing the 267 00:12:44,120 --> 00:12:46,280 Speaker 4: same kind of thing. And they're all doing something very 268 00:12:46,360 --> 00:12:48,920 Speaker 4: very similar, which is again they're selling call it an 269 00:12:48,960 --> 00:12:50,679 Speaker 4: eight percent or ten percent out of the money call 270 00:12:50,720 --> 00:12:53,199 Speaker 4: or seven percent of the money call. They're buying an 271 00:12:53,200 --> 00:12:55,800 Speaker 4: apt the money or slightly downside put and then selling 272 00:12:55,840 --> 00:12:58,440 Speaker 4: out another like a ten percent down or fifteen percent 273 00:12:58,440 --> 00:13:00,720 Speaker 4: down put to kind of give yourself this bus on 274 00:13:00,760 --> 00:13:02,720 Speaker 4: the way down. You're giving up upside on the way up. 275 00:13:03,120 --> 00:13:04,920 Speaker 1: One thing I don't get is like, why would you 276 00:13:04,960 --> 00:13:08,280 Speaker 1: prefer doing that versus just buying a bunch of equities 277 00:13:08,320 --> 00:13:11,600 Speaker 1: and maybe hedging in a more traditional way like buying 278 00:13:11,640 --> 00:13:12,360 Speaker 1: some bonds. 279 00:13:12,800 --> 00:13:15,840 Speaker 4: So this is exactly the right question. So the first 280 00:13:15,920 --> 00:13:18,160 Speaker 4: thing that you know, a derivatives person looks at when 281 00:13:18,200 --> 00:13:19,840 Speaker 4: you look at a trade like this is Okay, what 282 00:13:19,880 --> 00:13:23,200 Speaker 4: does this do to the delta the equity exposure of 283 00:13:23,240 --> 00:13:25,240 Speaker 4: your position? Right? So if you buy some equities that 284 00:13:25,320 --> 00:13:27,520 Speaker 4: is a one delta, A derivatives guys would say, it's 285 00:13:27,559 --> 00:13:29,960 Speaker 4: just a delta one position. Market goes up a percent, 286 00:13:30,000 --> 00:13:33,200 Speaker 4: you make a percent. If you trade a typical put 287 00:13:33,240 --> 00:13:35,320 Speaker 4: spread caller against that, you buy a put spread, you 288 00:13:35,320 --> 00:13:37,520 Speaker 4: sell a call, you're probably going to take that one. 289 00:13:37,600 --> 00:13:38,840 Speaker 2: Sorry. What's a put spread? 290 00:13:38,960 --> 00:13:41,000 Speaker 4: Is a posh to put? A put spread would be 291 00:13:41,160 --> 00:13:42,800 Speaker 4: you buy say the out the money put, but then 292 00:13:42,800 --> 00:13:44,560 Speaker 4: you sell a ten percent out of the money put. Okay, 293 00:13:44,559 --> 00:13:47,120 Speaker 4: So that's going to give you protection only for ten percent. Okay. 294 00:13:47,320 --> 00:13:49,120 Speaker 4: So if you do that kind of a trade, you 295 00:13:49,200 --> 00:13:51,240 Speaker 4: might take your one delta option down to like a 296 00:13:51,320 --> 00:13:53,760 Speaker 4: point six down to a sixty delta, So now you're 297 00:13:53,800 --> 00:13:56,480 Speaker 4: only participating kind of sixty percent in the movements of 298 00:13:56,520 --> 00:13:59,480 Speaker 4: the market. And if you look at how these kind 299 00:13:59,520 --> 00:14:03,000 Speaker 4: of trades perform over long periods of time, they actually 300 00:14:03,040 --> 00:14:06,120 Speaker 4: act a whole lot just like having sort of sixty 301 00:14:06,160 --> 00:14:10,480 Speaker 4: percent as much stock, right, because ultimately they're rolling these 302 00:14:10,520 --> 00:14:12,720 Speaker 4: it's not really like a buy and hold to maturity thing. 303 00:14:12,720 --> 00:14:14,720 Speaker 4: It's like they're rolling these options to kind of maintain 304 00:14:14,760 --> 00:14:17,680 Speaker 4: this kind of exposure. And if you were just to 305 00:14:17,880 --> 00:14:20,240 Speaker 4: take the counterfactual, which is why don't I just own 306 00:14:20,320 --> 00:14:22,720 Speaker 4: sixty percent as much stock? And put forty percent of 307 00:14:22,720 --> 00:14:25,400 Speaker 4: the rest in T bills. Turns out your fees are 308 00:14:25,440 --> 00:14:28,160 Speaker 4: way less and your performance is probably better. Right, So 309 00:14:28,360 --> 00:14:32,240 Speaker 4: you're doing this creative, smart sounding options thing, but actually 310 00:14:32,360 --> 00:14:33,240 Speaker 4: you're underperformed. 311 00:14:49,120 --> 00:14:52,800 Speaker 2: Are there institutions, you know, trace you mentioned the University 312 00:14:52,840 --> 00:14:58,000 Speaker 2: of Connecticut. You know, institutions have sometimes very specific needs 313 00:14:58,200 --> 00:15:02,240 Speaker 2: they need to have, like a guarantee return very long term. 314 00:15:02,400 --> 00:15:06,720 Speaker 2: They may not be optimizing for maximum returns. They have 315 00:15:06,800 --> 00:15:10,040 Speaker 2: to dole out a certain amount for student aid, whatever 316 00:15:10,080 --> 00:15:13,640 Speaker 2: it is. Are there certain types of institutions where, whether 317 00:15:13,680 --> 00:15:18,360 Speaker 2: we're talking about the buffer ETFs specifically or analogus to 318 00:15:18,440 --> 00:15:22,520 Speaker 2: that strategy, that this is, in your view, in alignment 319 00:15:22,560 --> 00:15:24,280 Speaker 2: with the institutional mandate. 320 00:15:24,560 --> 00:15:27,880 Speaker 4: So that there are cases when that's to some extent true, 321 00:15:28,240 --> 00:15:30,200 Speaker 4: at least with some kinds of derivative structures. So you 322 00:15:30,200 --> 00:15:32,520 Speaker 4: will have cases where there's like a big dispersement that 323 00:15:32,560 --> 00:15:34,240 Speaker 4: has to be made at some future date and they 324 00:15:34,320 --> 00:15:36,240 Speaker 4: want to lock in for sure the fact that they 325 00:15:36,240 --> 00:15:39,520 Speaker 4: can make that dispersement. But usually something more like an 326 00:15:39,560 --> 00:15:41,800 Speaker 4: outright put is going to be a better match for that, right, 327 00:15:41,800 --> 00:15:43,600 Speaker 4: Because the thing about the put spread or the put 328 00:15:43,680 --> 00:15:45,680 Speaker 4: spread collor is you've only got like this, say, ten 329 00:15:45,720 --> 00:15:48,440 Speaker 4: percent buffer of protection, and what if the market crash, So. 330 00:15:48,720 --> 00:15:50,760 Speaker 2: If the stock falls, or if the market falls twenty 331 00:15:50,840 --> 00:15:54,440 Speaker 2: five percent, which does happen, you're actually not protected against 332 00:15:54,440 --> 00:15:54,720 Speaker 2: all of that. 333 00:15:54,840 --> 00:15:57,280 Speaker 4: Yeah, exactly right. So this stuff really doesn't like lock 334 00:15:57,360 --> 00:15:59,800 Speaker 4: in defined outcomes to the downside. It just gives you 335 00:16:00,120 --> 00:16:03,280 Speaker 4: of some buffer of protection in exchange for some upside 336 00:16:03,360 --> 00:16:03,960 Speaker 4: that you're losing. 337 00:16:04,560 --> 00:16:06,560 Speaker 1: You touched on this earlier, but talk to us a 338 00:16:06,600 --> 00:16:10,160 Speaker 1: little bit more about the commissions and the execution and 339 00:16:10,240 --> 00:16:12,280 Speaker 1: whether or not you're getting a good deal on those, 340 00:16:12,320 --> 00:16:16,160 Speaker 1: because my sense is these all seem to be algorithmic, right, 341 00:16:16,280 --> 00:16:20,000 Speaker 1: very mechanical, So I'm not entirely sure what you're paying for. 342 00:16:20,120 --> 00:16:22,120 Speaker 4: He yeah, no, So this is a really important point. 343 00:16:22,240 --> 00:16:25,280 Speaker 4: So generally these are not always, but typically these kind 344 00:16:25,320 --> 00:16:28,960 Speaker 4: of structures exist in fairly popular, fairly liquid underlyings. Right. 345 00:16:29,000 --> 00:16:31,760 Speaker 4: This isn't like microcapstocks. This is S and P or something. 346 00:16:32,040 --> 00:16:34,160 Speaker 4: So the you know, the bid offer spreads don't look 347 00:16:34,360 --> 00:16:36,040 Speaker 4: that wide when you look at it. But you have 348 00:16:36,080 --> 00:16:38,120 Speaker 4: to keep in mind if you have a twenty two 349 00:16:38,200 --> 00:16:40,760 Speaker 4: billion dollar fund that once a quarter is rolling this 350 00:16:40,840 --> 00:16:43,360 Speaker 4: giant collar and everybody knows about it and knows exactly 351 00:16:43,440 --> 00:16:45,040 Speaker 4: what you're going to do and knows exactly when you're 352 00:16:45,040 --> 00:16:47,800 Speaker 4: going to do it, then obviously the market just moves 353 00:16:48,480 --> 00:16:50,960 Speaker 4: right ahead of you, right and everybody positions first trade. 354 00:16:51,320 --> 00:16:54,040 Speaker 1: What happened during Vollmageddon as well, very much so. 355 00:16:54,080 --> 00:16:56,720 Speaker 4: When when you have a big tray that everybody knows 356 00:16:56,760 --> 00:16:58,040 Speaker 4: what you're going to do and when you're going to 357 00:16:58,080 --> 00:16:59,680 Speaker 4: do it, they're going to position ahead of that. In 358 00:16:59,720 --> 00:17:02,320 Speaker 4: this specially in a poor liquidity environment, you know that's 359 00:17:02,360 --> 00:17:04,159 Speaker 4: going to really hurt you. Like markets can you know, 360 00:17:04,200 --> 00:17:08,280 Speaker 4: the markets can move very significantly as market makers and 361 00:17:08,359 --> 00:17:11,120 Speaker 4: arbitrazurers and volatility people sort of position for this big 362 00:17:11,160 --> 00:17:13,119 Speaker 4: trade that's coming. And so the execution you end up 363 00:17:13,160 --> 00:17:17,160 Speaker 4: getting in these trades is really poor. And usually they're 364 00:17:17,200 --> 00:17:19,920 Speaker 4: not again they're doing something very simple, very mechanical. They're 365 00:17:19,960 --> 00:17:23,600 Speaker 4: not randomizing their trades in small batches to work into 366 00:17:23,680 --> 00:17:26,720 Speaker 4: position really efficiently. They're just outsourcing execution to some agency 367 00:17:26,720 --> 00:17:29,240 Speaker 4: only broker who doesn't care at all about how they 368 00:17:29,280 --> 00:17:31,080 Speaker 4: just have to get a filled and they put it 369 00:17:31,160 --> 00:17:33,359 Speaker 4: up way over the offer side of where the market 370 00:17:33,359 --> 00:17:33,919 Speaker 4: really should be. 371 00:17:34,960 --> 00:17:38,560 Speaker 2: Are there funds that claim to do something more sophisticating, 372 00:17:38,600 --> 00:17:41,040 Speaker 2: because it does sound obvious, like all the rules are 373 00:17:41,080 --> 00:17:44,480 Speaker 2: out there, the prospectus, the mechanics, the timing, et cetera. 374 00:17:44,840 --> 00:17:48,360 Speaker 2: It does seem very I guess front runnable. Do they 375 00:17:48,359 --> 00:17:51,560 Speaker 2: have tactics or approaches to avoid what sounds like the 376 00:17:51,560 --> 00:17:52,840 Speaker 2: most obvious risk in the world. 377 00:17:53,000 --> 00:17:55,840 Speaker 4: Yeah, I mean certainly there are you know, volatility arbitrage 378 00:17:55,880 --> 00:17:58,080 Speaker 4: type of funds like ours and like others out there. 379 00:17:58,480 --> 00:18:00,879 Speaker 4: We will work with institutional clients that are trying to 380 00:18:01,080 --> 00:18:03,800 Speaker 4: do some similar kinds of things, but in an intelligent way. 381 00:18:03,800 --> 00:18:06,080 Speaker 4: And yeah, the way we execute in the marketplace is 382 00:18:06,200 --> 00:18:09,359 Speaker 4: very different, right, So we take the same objective of 383 00:18:09,400 --> 00:18:11,119 Speaker 4: the exposure we want to get, but we're going to 384 00:18:11,119 --> 00:18:13,640 Speaker 4: work into it sort of passively and secretly and quietly 385 00:18:13,800 --> 00:18:15,840 Speaker 4: in very smart ways and try to kind of get 386 00:18:15,960 --> 00:18:18,120 Speaker 4: mid market execution and have nobody know what we're doing. 387 00:18:18,240 --> 00:18:22,360 Speaker 1: And so the competitive advantage is really on the execution 388 00:18:22,520 --> 00:18:24,920 Speaker 1: side rather than the actual design of the product. 389 00:18:25,080 --> 00:18:27,280 Speaker 4: Yeah, there's probably some of both. I mean, one thing 390 00:18:27,320 --> 00:18:29,200 Speaker 4: one thing you want to do is execute really efficiently 391 00:18:29,240 --> 00:18:31,560 Speaker 4: without people knowing what you're doing. Another thing you want 392 00:18:31,560 --> 00:18:34,080 Speaker 4: to do is just know what the big flows and 393 00:18:34,160 --> 00:18:37,359 Speaker 4: big crowded trades in the market are and generally be 394 00:18:37,400 --> 00:18:40,560 Speaker 4: trying to achieve the client subjectives, but ideally by buying 395 00:18:40,600 --> 00:18:43,240 Speaker 4: something that's getting sold too much as opposed to selling 396 00:18:43,280 --> 00:18:46,400 Speaker 4: something that everybody else is selling. Right, So those two components, 397 00:18:46,400 --> 00:18:48,640 Speaker 4: that's a kind of a strategy design aspect, and then 398 00:18:48,840 --> 00:18:52,240 Speaker 4: there's just an execution implementation aspect that's again really important 399 00:18:52,240 --> 00:18:54,399 Speaker 4: and people just aren't incentivized for it. Like when you 400 00:18:54,440 --> 00:18:58,000 Speaker 4: think about these the buffer ETFs derivatives using ETFs, it's 401 00:18:58,040 --> 00:19:01,240 Speaker 4: really kind of a Wild West type of boomtown scenario 402 00:19:01,359 --> 00:19:04,440 Speaker 4: right now, right, And I would say, you know, generally 403 00:19:04,480 --> 00:19:06,760 Speaker 4: the first to market has an advantage, and it's all 404 00:19:06,760 --> 00:19:09,959 Speaker 4: about distribution and very and you know, implementation details are 405 00:19:10,000 --> 00:19:12,239 Speaker 4: very secondary. Right. The people have been really successful are 406 00:19:12,280 --> 00:19:15,119 Speaker 4: marketers and distributors hitting the street hard. They're not you know, 407 00:19:15,200 --> 00:19:17,360 Speaker 4: vall traders who are designing these things. 408 00:19:17,240 --> 00:19:20,360 Speaker 1: All the influencers. I'm just going to throw out random 409 00:19:20,760 --> 00:19:23,520 Speaker 1: derivatives products. So if you could just define them, what 410 00:19:23,720 --> 00:19:25,919 Speaker 1: is the wheel and why does it have an E 411 00:19:26,040 --> 00:19:27,080 Speaker 1: t F named after it? 412 00:19:27,359 --> 00:19:30,280 Speaker 4: Yes, this is this is fantastic. So it kind of 413 00:19:30,320 --> 00:19:33,440 Speaker 4: goes back a little bit to the mean stock options crave. 414 00:19:33,600 --> 00:19:36,639 Speaker 4: You know they're ticker. Is it? Is it w h 415 00:19:36,800 --> 00:19:37,879 Speaker 4: H E L Wheel? 416 00:19:38,000 --> 00:19:38,400 Speaker 1: Isn't it? 417 00:19:38,640 --> 00:19:40,280 Speaker 4: I think it's four letter. I think it's w h 418 00:19:40,520 --> 00:19:40,919 Speaker 4: H E L. 419 00:19:40,960 --> 00:19:43,119 Speaker 1: If you no, I think it's it's w E E L. 420 00:19:43,000 --> 00:19:47,680 Speaker 2: O w E L. That's peerless option wheel, peerless that 421 00:19:47,760 --> 00:19:51,280 Speaker 2: they put peerless, Yes, tell us about the wheel. 422 00:19:51,320 --> 00:19:53,760 Speaker 4: Yeah. So the a lot of the original mean stock 423 00:19:53,800 --> 00:19:55,440 Speaker 4: option traders who made a bunch of money in g 424 00:19:55,600 --> 00:19:58,520 Speaker 4: M and you know AMC back in the day, some 425 00:19:58,640 --> 00:20:01,560 Speaker 4: of them sort of migrated from that into getting really 426 00:20:01,560 --> 00:20:04,159 Speaker 4: interested in options selling, and in particular kind of a 427 00:20:04,160 --> 00:20:07,639 Speaker 4: strategy called the wheel, where the idea is you're going 428 00:20:07,720 --> 00:20:10,560 Speaker 4: to sell against short data options. You're gonna start out 429 00:20:10,600 --> 00:20:14,040 Speaker 4: selling cash secured puts, so you're gonna sell some puts 430 00:20:14,040 --> 00:20:15,720 Speaker 4: on the S and P or on your favorite stocks, 431 00:20:16,000 --> 00:20:18,320 Speaker 4: and then you're going to keep doing that unless the 432 00:20:18,359 --> 00:20:20,400 Speaker 4: market goes down enough that you get a sign on 433 00:20:20,440 --> 00:20:22,920 Speaker 4: that put and you take a loss. Then you long 434 00:20:23,000 --> 00:20:25,560 Speaker 4: that stock, and then you're gonna sell some calls against 435 00:20:25,600 --> 00:20:28,680 Speaker 4: it and have a covered call strategy until the stock 436 00:20:28,800 --> 00:20:31,440 Speaker 4: rallies enough that that call gets assigned, your stock gets 437 00:20:31,440 --> 00:20:33,080 Speaker 4: taken away, then you sell a put, and so it's 438 00:20:33,119 --> 00:20:35,600 Speaker 4: sort of you know, the end. The way they'll describe 439 00:20:35,600 --> 00:20:38,399 Speaker 4: this is it's almost as if it's this continuous money machine, 440 00:20:38,400 --> 00:20:40,440 Speaker 4: because all of these outcomes are good. If the stock 441 00:20:40,480 --> 00:20:42,280 Speaker 4: doesn't move, you get the premium, that's good. If the 442 00:20:42,280 --> 00:20:44,520 Speaker 4: stock goes down, you get the stock cheap, that's good. 443 00:20:44,680 --> 00:20:47,360 Speaker 1: And you're sort of you keep moving with the market, right, 444 00:20:47,400 --> 00:20:50,520 Speaker 1: and the one thing you know is the market's gonna move. Probably. 445 00:20:50,600 --> 00:20:55,199 Speaker 2: It seems like there's some assumed mean reversion here. The 446 00:20:55,240 --> 00:20:56,040 Speaker 2: cycle of life. 447 00:20:56,119 --> 00:20:58,320 Speaker 4: Yeah, there's very much like a cycle of life. There's 448 00:20:58,359 --> 00:21:01,280 Speaker 4: this idea that no matter what scenaari, there's a justification 449 00:21:01,400 --> 00:21:03,879 Speaker 4: for how anything that can happen is sort of good. 450 00:21:04,160 --> 00:21:06,000 Speaker 4: You know, the stock goes up, you made money. You 451 00:21:06,000 --> 00:21:07,320 Speaker 4: didn't make as much money as you would if you 452 00:21:07,359 --> 00:21:08,840 Speaker 4: hadn't sold the call, but you still made money. And 453 00:21:08,840 --> 00:21:10,439 Speaker 4: then if it goes down, the same thing like you. 454 00:21:10,680 --> 00:21:15,160 Speaker 4: And ultimately, what's not described in these pitches is how 455 00:21:15,240 --> 00:21:17,800 Speaker 4: this is a it's a short volatility trade. What you're 456 00:21:17,840 --> 00:21:20,760 Speaker 4: exposed to is the stock going down a lot and 457 00:21:20,800 --> 00:21:22,160 Speaker 4: then back up a lot, and then down a lot 458 00:21:22,160 --> 00:21:23,919 Speaker 4: and back up a lot. Right, Because what happens is 459 00:21:24,240 --> 00:21:26,159 Speaker 4: stock goes down a lot, you're going to lose money 460 00:21:26,440 --> 00:21:29,600 Speaker 4: on your short put. Now you're gonna get assigned the stock. 461 00:21:29,640 --> 00:21:31,160 Speaker 4: You're going to sell a call. What if the market 462 00:21:31,240 --> 00:21:33,080 Speaker 4: goes back up a lot. Well, now you didn't make 463 00:21:33,080 --> 00:21:35,600 Speaker 4: money on the reversion because you're short of call and 464 00:21:35,840 --> 00:21:38,479 Speaker 4: you're just getting chopped up by this volatility. Right. So 465 00:21:38,800 --> 00:21:42,359 Speaker 4: people love to pitch options trades in ways that don't 466 00:21:42,359 --> 00:21:46,840 Speaker 4: have anything to do with volatility, when they're inherently volatility trades, right, 467 00:21:46,880 --> 00:21:49,560 Speaker 4: they like to pitch them as you know. One of 468 00:21:49,600 --> 00:21:52,680 Speaker 4: my least favorite phrases, right is people will say, these 469 00:21:52,720 --> 00:21:56,680 Speaker 4: influencers will say, selling a put is just like having 470 00:21:56,680 --> 00:21:58,920 Speaker 4: a limit order out there in the market to buy 471 00:21:58,960 --> 00:22:01,680 Speaker 4: a stock really cheap, but you get paid for it, 472 00:22:02,359 --> 00:22:04,320 Speaker 4: So it has nothing to do with the price, has 473 00:22:04,359 --> 00:22:05,800 Speaker 4: nothing to do with it. If this is like a 474 00:22:05,840 --> 00:22:09,080 Speaker 4: good risk reward for the premium that you're getting, it's 475 00:22:09,160 --> 00:22:11,440 Speaker 4: as if you can just buy a stock for really 476 00:22:11,520 --> 00:22:13,760 Speaker 4: cheap when it goes down and you get paid for it. 477 00:22:14,200 --> 00:22:17,040 Speaker 1: Do we have any historical data on how these have 478 00:22:17,160 --> 00:22:19,400 Speaker 1: performed in the past, so most of them are new. 479 00:22:19,520 --> 00:22:23,720 Speaker 1: So I imagine we have finite information about performance. 480 00:22:24,119 --> 00:22:27,760 Speaker 4: Yeah, totally. If you look at benchmark indices for things 481 00:22:27,800 --> 00:22:30,360 Speaker 4: like call over writing or cash secured put selling, those 482 00:22:30,359 --> 00:22:31,960 Speaker 4: have been around for a very long time and they 483 00:22:32,200 --> 00:22:34,720 Speaker 4: know back tested, way way back. So there's something called 484 00:22:34,760 --> 00:22:37,280 Speaker 4: BxM index on Bloomberg that you can pull up, and 485 00:22:37,320 --> 00:22:40,040 Speaker 4: something called put put index on Bloomberg that you can 486 00:22:40,040 --> 00:22:42,560 Speaker 4: pull up for call writing and put writing. And what 487 00:22:42,640 --> 00:22:46,080 Speaker 4: you see there is it actually tells a really nice story, 488 00:22:46,119 --> 00:22:49,439 Speaker 4: which is from about nineteen ninety line going up from 489 00:22:49,440 --> 00:22:51,360 Speaker 4: about the lines going up from about and you want 490 00:22:51,400 --> 00:22:54,320 Speaker 4: to compare that to just the SMP. So from nineteen 491 00:22:54,400 --> 00:22:57,520 Speaker 4: ninety to about twenty twelve they look pretty good. They 492 00:22:57,640 --> 00:22:59,919 Speaker 4: kind of keep up on average with the SMP, but 493 00:23:00,200 --> 00:23:03,040 Speaker 4: on somewhat lower volatility with a little bit lower draw downs. 494 00:23:03,600 --> 00:23:07,919 Speaker 4: And that was really the pitch that investment consultants and 495 00:23:07,960 --> 00:23:11,520 Speaker 4: pension fund consultants started making after the credit crisis to 496 00:23:11,560 --> 00:23:12,040 Speaker 4: their clients. 497 00:23:12,200 --> 00:23:14,520 Speaker 2: Is this what made off claim to be doing some 498 00:23:14,560 --> 00:23:16,280 Speaker 2: sort of like right. 499 00:23:16,240 --> 00:23:19,040 Speaker 4: He was claiming to be doing like conversions and like 500 00:23:19,119 --> 00:23:21,760 Speaker 4: diagonal spreads and stuff, so like a little bit funkier stuff. 501 00:23:21,960 --> 00:23:23,719 Speaker 4: But yeah, he was out there saying, oh, we're doing 502 00:23:23,800 --> 00:23:25,840 Speaker 4: this kind of really cute option stuff. So this stuff again, 503 00:23:25,840 --> 00:23:28,600 Speaker 4: it it looked recent decent in this sort of back test, 504 00:23:28,760 --> 00:23:30,719 Speaker 4: and but the whole point is of you know, very 505 00:23:30,760 --> 00:23:33,920 Speaker 4: much like any back test in finance, option selling looked 506 00:23:33,920 --> 00:23:37,600 Speaker 4: good when nobody was doing it in size right, there 507 00:23:37,640 --> 00:23:39,960 Speaker 4: were it was not you know, option markets were backwater. 508 00:23:40,000 --> 00:23:41,840 Speaker 4: There were funny little things that some hedge a few 509 00:23:41,880 --> 00:23:43,800 Speaker 4: hedge funds did and a few kind of people, but 510 00:23:43,840 --> 00:23:46,560 Speaker 4: there were no giant pension two hundred million dollar pension 511 00:23:46,560 --> 00:23:49,560 Speaker 4: funds doing like option selling. And then those pension fund 512 00:23:49,560 --> 00:23:52,040 Speaker 4: consultants started writing white papers and they started pitching to 513 00:23:52,119 --> 00:23:54,840 Speaker 4: their clients' boards, and by like twenty eleven, twenty twelve, 514 00:23:54,840 --> 00:23:56,680 Speaker 4: twenty thirteen, they started to get some traction, and you 515 00:23:56,720 --> 00:23:59,320 Speaker 4: started to have you know, giant two hundred million dollar 516 00:23:59,320 --> 00:24:01,239 Speaker 4: pension funds saying sure, we'll put ten percent of our 517 00:24:01,280 --> 00:24:05,119 Speaker 4: assets and move it from equity into option selling. And 518 00:24:05,160 --> 00:24:06,920 Speaker 4: that grew and grew and grew and grew and grew, 519 00:24:07,280 --> 00:24:10,600 Speaker 4: and so what you ended up with then is volatility 520 00:24:10,680 --> 00:24:13,720 Speaker 4: term structures steepened, which means that short dated options that 521 00:24:13,760 --> 00:24:16,520 Speaker 4: were getting sold really heavily went down in price because 522 00:24:16,560 --> 00:24:20,159 Speaker 4: that's what everybody was selling. And what happened was you 523 00:24:20,320 --> 00:24:23,400 Speaker 4: see the performance then of in kind of the out 524 00:24:23,400 --> 00:24:24,919 Speaker 4: of sample period, if you want to think of it 525 00:24:24,920 --> 00:24:28,479 Speaker 4: that way, from a back test for BxM and put index, 526 00:24:28,480 --> 00:24:31,359 Speaker 4: which are the benchmarks for this kind of stuff, then 527 00:24:31,560 --> 00:24:34,360 Speaker 4: really deteriorated relative to S and P, where they sort 528 00:24:34,359 --> 00:24:37,560 Speaker 4: of had very similar risk but much less return. And 529 00:24:37,560 --> 00:24:40,160 Speaker 4: that was like, how does this actually look once real 530 00:24:40,200 --> 00:24:41,879 Speaker 4: money goes into these strategies, Because at the end of 531 00:24:41,880 --> 00:24:44,280 Speaker 4: the day, derivatives' markets are big and deep in liquid, 532 00:24:44,320 --> 00:24:46,800 Speaker 4: but they're not primary markets, right, They're derivatives markets. You 533 00:24:46,880 --> 00:24:49,800 Speaker 4: can't they're not designed for like global asset allocation for 534 00:24:49,880 --> 00:24:51,879 Speaker 4: twenty percent of the of all the money in the 535 00:24:51,880 --> 00:24:53,160 Speaker 4: world to go into selling them, right. 536 00:24:54,119 --> 00:24:56,760 Speaker 1: But this is the big debate, right to what extent 537 00:24:57,040 --> 00:24:59,880 Speaker 1: is this kind of options trading or derivatives trading action 538 00:25:00,200 --> 00:25:04,000 Speaker 1: affecting the underlying which would be the market or you know, 539 00:25:04,080 --> 00:25:07,280 Speaker 1: something like the VIX and you hear different sides to 540 00:25:07,359 --> 00:25:10,560 Speaker 1: the story. So you have some people arguing that actually 541 00:25:10,560 --> 00:25:12,760 Speaker 1: one of the key reasons the VIX has been kind 542 00:25:12,760 --> 00:25:15,920 Speaker 1: of subdued recently is because of all this short dated 543 00:25:16,000 --> 00:25:19,720 Speaker 1: trading then you have you know, entities like the CBOE 544 00:25:20,720 --> 00:25:25,320 Speaker 1: arguing for obvious reasons, perhaps that actually the gamma exposure 545 00:25:25,400 --> 00:25:28,439 Speaker 1: from the short dated options isn't that big, certainly not 546 00:25:28,560 --> 00:25:32,959 Speaker 1: big enough to move the full huge market. It sounds 547 00:25:33,000 --> 00:25:35,399 Speaker 1: like you land on the first one. 548 00:25:35,760 --> 00:25:38,800 Speaker 4: Yeah, the size of short dated options selling is very, 549 00:25:38,960 --> 00:25:41,280 Speaker 4: very large. It's very very one way, and there's different 550 00:25:41,280 --> 00:25:43,359 Speaker 4: flows in different parts of the option market, right, But 551 00:25:43,359 --> 00:25:48,160 Speaker 4: if you look at one month range options that are 552 00:25:48,200 --> 00:25:49,919 Speaker 4: not that far out of the money, call it like 553 00:25:49,960 --> 00:25:53,480 Speaker 4: twenty five delta put wing to call wing, the overwhelming 554 00:25:53,720 --> 00:25:56,960 Speaker 4: end user of that product is selling it for income 555 00:25:57,080 --> 00:26:00,600 Speaker 4: or for you know, for a asset allocation type of strategy. 556 00:26:01,000 --> 00:26:03,840 Speaker 4: And what that means is, you know, the all of 557 00:26:03,880 --> 00:26:06,720 Speaker 4: the flows on the floor for brokers and banks are 558 00:26:06,800 --> 00:26:11,000 Speaker 4: giant trades to sell constantly, and the people that are 559 00:26:11,080 --> 00:26:14,000 Speaker 4: buying them are people like us who are buying them 560 00:26:14,119 --> 00:26:16,400 Speaker 4: because they're too cheap, not because we have any other 561 00:26:16,440 --> 00:26:19,159 Speaker 4: reason to buy them. Right, So go ahead, job, No. 562 00:26:19,080 --> 00:26:21,200 Speaker 2: This is sort of where I was going to follow 563 00:26:21,240 --> 00:26:24,240 Speaker 2: on to Tracy's question. I mean, if we were having 564 00:26:24,320 --> 00:26:29,399 Speaker 2: this conversation in twenty nineteen, what are the fingerprints that 565 00:26:29,480 --> 00:26:33,320 Speaker 2: are visible in the market. Obviously, volume is clear, I mean, 566 00:26:33,520 --> 00:26:35,600 Speaker 2: but in terms of the fingerprints of when it comes 567 00:26:35,600 --> 00:26:39,199 Speaker 2: to price, what are the fingerprints of all of this 568 00:26:39,359 --> 00:26:43,760 Speaker 2: retail and now institutional money flowing into this space? And 569 00:26:43,840 --> 00:26:47,159 Speaker 2: I presume to some extent the reason you have a 570 00:26:47,200 --> 00:26:49,440 Speaker 2: business is because there are these fingerprints. 571 00:26:49,440 --> 00:26:51,560 Speaker 4: What do they look like? Yeah? Absolutely so. Taking this 572 00:26:51,680 --> 00:26:55,280 Speaker 4: example of short data options selling, for instance, the first 573 00:26:55,359 --> 00:26:57,960 Speaker 4: thing you want to look at is the relative price. 574 00:26:58,000 --> 00:27:00,720 Speaker 4: And what is that In the world of options in volatility, 575 00:27:00,760 --> 00:27:04,439 Speaker 4: it's the term structure of volatility, which means where is 576 00:27:04,760 --> 00:27:07,640 Speaker 4: implied volatility for the S and P for example, which 577 00:27:07,720 --> 00:27:10,520 Speaker 4: is one of the biggest parts of this ecosystem for 578 00:27:10,840 --> 00:27:13,480 Speaker 4: very short term options one month, two month, three month, 579 00:27:13,680 --> 00:27:16,560 Speaker 4: six month, one year. And what does that term structure 580 00:27:16,600 --> 00:27:20,280 Speaker 4: look like if you compare it to history, And what 581 00:27:20,359 --> 00:27:23,760 Speaker 4: you'll find is really in the evolution that you've had 582 00:27:23,920 --> 00:27:27,439 Speaker 4: in that post twenty twelve regime has been the volatility 583 00:27:27,520 --> 00:27:31,159 Speaker 4: term structure getting steeper and steeper and steeper, so lower 584 00:27:31,200 --> 00:27:34,080 Speaker 4: in the front and steeper and steeper kind of all 585 00:27:34,080 --> 00:27:37,600 Speaker 4: the way out to the back. And the reason for that, 586 00:27:37,680 --> 00:27:40,080 Speaker 4: again is that the front is being sold very, very 587 00:27:40,119 --> 00:27:42,960 Speaker 4: very heavily, and people who are getting put into a 588 00:27:42,960 --> 00:27:46,320 Speaker 4: lot of the front, like market makers and like volatility arbitrazures, 589 00:27:46,320 --> 00:27:48,080 Speaker 4: then have to go further out the curve to hedge. 590 00:27:48,520 --> 00:27:51,400 Speaker 4: You see that very distinctly. Another thing you can look 591 00:27:51,440 --> 00:27:55,239 Speaker 4: at is volatility risk premium, which is something you kind 592 00:27:55,280 --> 00:27:57,840 Speaker 4: of have to estimate and look at empirically. It's not 593 00:27:57,880 --> 00:28:00,640 Speaker 4: just the shape of a volatility term structure. That is 594 00:28:01,119 --> 00:28:06,240 Speaker 4: what is implied volatility relative to subsequent realized volatility. So 595 00:28:06,240 --> 00:28:09,760 Speaker 4: implied volatility is supposed to be forecasting realized volatility how 596 00:28:09,800 --> 00:28:12,760 Speaker 4: much the market actually moves, and the spread between those 597 00:28:12,800 --> 00:28:16,159 Speaker 4: two is a risk premium. If you're selling options, you 598 00:28:16,160 --> 00:28:18,840 Speaker 4: should get paid a risk premium. It's a risky, long 599 00:28:19,119 --> 00:28:21,400 Speaker 4: beta kind of thing to do, so you should get 600 00:28:21,400 --> 00:28:23,840 Speaker 4: paid some amount of money for that. In the old days, 601 00:28:24,080 --> 00:28:26,320 Speaker 4: before twenty twelve, you used to get paid a decent 602 00:28:26,359 --> 00:28:29,960 Speaker 4: amount of money for that, maybe three volatility points on average. 603 00:28:30,400 --> 00:28:33,800 Speaker 4: In the more recent years, that compresses and compresses down 604 00:28:33,840 --> 00:28:36,240 Speaker 4: to one point or half a point, and then you know, 605 00:28:36,320 --> 00:28:37,760 Speaker 4: kind of to Joe's point, that will blow out a 606 00:28:37,800 --> 00:28:40,480 Speaker 4: little bit after a major market crash for a little while. 607 00:28:40,800 --> 00:28:44,320 Speaker 1: And then you dive in exactly. Okay. 608 00:28:44,360 --> 00:28:48,120 Speaker 2: One other I think you said you die, that's actually. 609 00:28:51,040 --> 00:28:52,560 Speaker 1: Either dive in. 610 00:28:53,920 --> 00:28:54,200 Speaker 3: Okay. 611 00:28:54,200 --> 00:28:56,480 Speaker 1: One other thing I want to ask about is, of course, 612 00:28:56,600 --> 00:28:59,360 Speaker 1: multi strategy hedge funds. So we did a bunch of 613 00:28:59,400 --> 00:29:04,840 Speaker 1: episodes on these and options trading derivatives came up quite 614 00:29:04,880 --> 00:29:09,000 Speaker 1: a bit, especially in things like the dispersion trade, and 615 00:29:09,560 --> 00:29:12,680 Speaker 1: one thing sticks with me. We spoke to a guy 616 00:29:12,880 --> 00:29:15,720 Speaker 1: called I think it was Krishna Kumar. Is that right, 617 00:29:16,440 --> 00:29:19,920 Speaker 1: Krishna Kumar, and he made the point that at multistrat funds, 618 00:29:19,960 --> 00:29:23,520 Speaker 1: you're not trying to maximize long term returns. You're trying 619 00:29:23,560 --> 00:29:28,560 Speaker 1: to maximize returns per unit of time, in which case 620 00:29:29,000 --> 00:29:31,400 Speaker 1: options sound pretty good for doing that. 621 00:29:32,360 --> 00:29:34,680 Speaker 4: Yeah, that's absolutely right. So, you know, multistrats are a 622 00:29:34,760 --> 00:29:36,920 Speaker 4: very interesting business. But I think part of what you're 623 00:29:36,960 --> 00:29:39,720 Speaker 4: getting at is one thing that they do very well 624 00:29:39,800 --> 00:29:43,000 Speaker 4: from a business standpoint is they have a very short 625 00:29:43,080 --> 00:29:46,160 Speaker 4: leash on portfolio managers and on pods. They're notorious for 626 00:29:46,200 --> 00:29:48,120 Speaker 4: firing you very quickly if you start to lose any 627 00:29:48,160 --> 00:29:50,400 Speaker 4: material amount of money, and that's a risk management thing 628 00:29:50,440 --> 00:29:52,920 Speaker 4: for them, right, And so there's this idea that gosh, 629 00:29:52,960 --> 00:29:54,520 Speaker 4: I'm probably only going to be here for like a 630 00:29:54,600 --> 00:29:56,800 Speaker 4: year or two or three, So I sure better just 631 00:29:56,840 --> 00:29:58,440 Speaker 4: make a whole bunch of money as fast as I can, 632 00:29:58,480 --> 00:30:00,560 Speaker 4: and if it goes really poorly, then it goes poorly, right. 633 00:30:00,600 --> 00:30:04,400 Speaker 4: But and so you're incentivized to do negatively skewed things. Now, 634 00:30:04,480 --> 00:30:08,000 Speaker 4: the multistrats have very good risk management. They know this. 635 00:30:08,160 --> 00:30:09,920 Speaker 4: They're you know, they're not silly, So they're not going 636 00:30:10,000 --> 00:30:12,440 Speaker 4: to just let you go sell a whole bunch of options, 637 00:30:12,480 --> 00:30:14,600 Speaker 4: you know, naked and a bunch of puts and see 638 00:30:14,600 --> 00:30:17,600 Speaker 4: how that goes. But you can definitely try to do 639 00:30:17,640 --> 00:30:19,800 Speaker 4: more creative things that look a little bit more like 640 00:30:19,840 --> 00:30:22,480 Speaker 4: relative value and maybe sneak through the risk systems a 641 00:30:22,520 --> 00:30:24,720 Speaker 4: little bit better, at least in some size. You know, 642 00:30:24,800 --> 00:30:27,680 Speaker 4: Dispersion can be one of those things. Depending on again 643 00:30:27,720 --> 00:30:30,680 Speaker 4: who's looking at it and how sophisticated they are. You 644 00:30:30,720 --> 00:30:33,240 Speaker 4: can have a dispersion trade where you're buying some single 645 00:30:33,280 --> 00:30:36,920 Speaker 4: name options, you're selling a lot more index options. You're saying, look, 646 00:30:36,960 --> 00:30:40,600 Speaker 4: this is really correlation, it's not volatility. But depending on 647 00:30:40,640 --> 00:30:43,719 Speaker 4: the hedge ratio that you're using, it might just actually 648 00:30:43,720 --> 00:30:46,080 Speaker 4: be a very short ball behaving thing where you tend 649 00:30:46,120 --> 00:30:47,760 Speaker 4: to make money for a year or two or three, 650 00:30:47,800 --> 00:30:50,120 Speaker 4: but then it goes really poorly eventually, and you see 651 00:30:50,120 --> 00:30:53,680 Speaker 4: a lot of that. There's dispersions very popular in the multistrats. 652 00:30:53,880 --> 00:30:56,880 Speaker 4: You know, a year or two ago, there were many, many, 653 00:30:56,880 --> 00:30:59,160 Speaker 4: many pods at some of the big multistrats that we 654 00:30:59,200 --> 00:31:02,560 Speaker 4: all know about. Dispersion that's shrunk very dramatically because P 655 00:31:02,640 --> 00:31:05,520 Speaker 4: and L has been relatively poor. It's very cyclical. Multi 656 00:31:05,560 --> 00:31:07,600 Speaker 4: strats are a fascinating thing in that regard that the 657 00:31:07,680 --> 00:31:09,760 Speaker 4: end result to the you know, to the buyer of 658 00:31:09,800 --> 00:31:11,719 Speaker 4: the multi strat tends to be pretty good because they 659 00:31:11,720 --> 00:31:14,320 Speaker 4: cut off the tails by doing this rapid sort of yeah, 660 00:31:14,600 --> 00:31:16,520 Speaker 4: stop out of PM, but it comes with a lot 661 00:31:16,560 --> 00:31:17,480 Speaker 4: of weird incentives. 662 00:31:17,760 --> 00:31:20,480 Speaker 2: An episode that I'd love to do that will probably 663 00:31:20,720 --> 00:31:23,040 Speaker 2: that will probably never do, is talk to a multi 664 00:31:23,120 --> 00:31:27,440 Speaker 2: strat PM essentially about how they gained the risk parameters 665 00:31:27,480 --> 00:31:30,800 Speaker 2: that are imposed on them by their manager. Maybe we 666 00:31:30,800 --> 00:31:34,520 Speaker 2: could talk to a risk manager and a retired pe yeah, 667 00:31:34,520 --> 00:31:37,600 Speaker 2: and how they sort of try to find pennies in 668 00:31:37,600 --> 00:31:40,160 Speaker 2: front of steamroller strategies that will work for a year 669 00:31:40,280 --> 00:31:43,160 Speaker 2: or two before they get fired, before they're just sort 670 00:31:43,200 --> 00:31:46,800 Speaker 2: of identified as having done that all right, here's another question. 671 00:31:46,840 --> 00:31:53,280 Speaker 2: I don't get certain assets like bitcoin or micro strategy, 672 00:31:53,480 --> 00:31:56,920 Speaker 2: which is you know, an exotic wrapper of bitcoin in 673 00:31:56,920 --> 00:32:00,800 Speaker 2: some way are extremely volatile that and that's part of 674 00:32:00,800 --> 00:32:03,200 Speaker 2: the fun, I guess, like that, why is there the 675 00:32:03,280 --> 00:32:07,320 Speaker 2: appetite for even layering on more volatility? So there exists, 676 00:32:07,360 --> 00:32:11,440 Speaker 2: like you know, there's like a three x micro strategy ETF. 677 00:32:12,000 --> 00:32:15,200 Speaker 2: Who is the like customer for like, you know what 678 00:32:15,440 --> 00:32:18,560 Speaker 2: micro strategy? Just not volatile enough for me? Not enough 679 00:32:18,640 --> 00:32:22,240 Speaker 2: daily not enough daily swings here or like what's good? 680 00:32:22,280 --> 00:32:25,520 Speaker 1: Like it reminds me of remember the like multi blade 681 00:32:25,680 --> 00:32:28,480 Speaker 1: razor commercial and why we have three blades? We have 682 00:32:28,600 --> 00:32:29,200 Speaker 1: four blades? 683 00:32:29,720 --> 00:32:32,760 Speaker 2: Why why not have a ten xm micro strategy ETF? 684 00:32:32,800 --> 00:32:33,720 Speaker 2: Why stop at three? 685 00:32:33,960 --> 00:32:37,600 Speaker 4: Absolutely no, that it's it's really fascinating. My best sense, 686 00:32:38,120 --> 00:32:40,520 Speaker 4: you know, from watching Twitter and people asking me questions 687 00:32:40,600 --> 00:32:43,280 Speaker 4: is you know, there's this there's a community of people 688 00:32:43,320 --> 00:32:45,200 Speaker 4: and kind of a voice for Hey, look I've only 689 00:32:45,200 --> 00:32:47,960 Speaker 4: got twenty thousand dollars. Yeah, and I don't want to 690 00:32:48,000 --> 00:32:50,480 Speaker 4: work my job at Starbucks anymore. Yeah, how am I 691 00:32:50,520 --> 00:32:52,360 Speaker 4: going to really make it? And this idea that you 692 00:32:52,360 --> 00:32:53,760 Speaker 4: can really make it and you can kind of get 693 00:32:53,840 --> 00:32:55,560 Speaker 4: rich from only having twenty thousand dollars, and how are 694 00:32:55,600 --> 00:32:57,360 Speaker 4: you going to do that? You need as much leverage 695 00:32:57,360 --> 00:32:59,960 Speaker 4: as you can possibly imagine. Right, So cryptos and attractives 696 00:33:00,560 --> 00:33:02,400 Speaker 4: because of this, because some of the things in crypto 697 00:33:02,400 --> 00:33:05,080 Speaker 4: that you can do get one hundred times leverage or something. Right, 698 00:33:05,280 --> 00:33:07,840 Speaker 4: So if that's your benchmark, actually three x mstrs is 699 00:33:07,880 --> 00:33:12,320 Speaker 4: relatively boomer. Exactly, it's pretty boomer. But yeah, these ETFs exist, 700 00:33:12,680 --> 00:33:16,040 Speaker 4: and they're really fascinating because normally the way that a 701 00:33:16,480 --> 00:33:20,240 Speaker 4: leverage GTF works is that the ETF fishuer will do 702 00:33:20,320 --> 00:33:23,280 Speaker 4: a swap with a bank and get some get two 703 00:33:23,400 --> 00:33:25,520 Speaker 4: x leverage or get three x leverage, and it's a 704 00:33:25,520 --> 00:33:28,160 Speaker 4: fairly simple and clean thing. But no bank is going 705 00:33:28,200 --> 00:33:30,720 Speaker 4: to give you three x leverage on micro strategy, right 706 00:33:30,760 --> 00:33:34,720 Speaker 4: because the wipeout risk possibility is very is very real. 707 00:33:34,760 --> 00:33:37,160 Speaker 4: The collateral is not going to cover a massive move 708 00:33:37,200 --> 00:33:39,720 Speaker 4: down in micro strategy. And so what you would think 709 00:33:39,760 --> 00:33:41,880 Speaker 4: of is vanilla things is just a leverage GTF. It's 710 00:33:41,880 --> 00:33:44,320 Speaker 4: not a crazy derivatives thing. Actually it is, because they 711 00:33:44,320 --> 00:33:47,000 Speaker 4: have to buy call options in order to have a 712 00:33:47,080 --> 00:33:50,160 Speaker 4: risk profile that's acceptable, but generates the leverage that they need. 713 00:33:50,640 --> 00:33:53,400 Speaker 4: And so what that means is these things are really 714 00:33:53,480 --> 00:33:56,239 Speaker 4: big and they actually dominate the options market on you know, 715 00:33:56,240 --> 00:33:59,239 Speaker 4: some of these underlyings and you know, micro strategy can 716 00:33:59,280 --> 00:34:01,600 Speaker 4: go up a bunch and this huge etr this triple 717 00:34:01,640 --> 00:34:04,320 Speaker 4: levered ETF has this giant call options position that's now 718 00:34:04,320 --> 00:34:06,120 Speaker 4: deep in the money and illiquid, and it has to 719 00:34:06,160 --> 00:34:08,480 Speaker 4: go out and like roll and buy a ton more 720 00:34:08,520 --> 00:34:11,000 Speaker 4: of this of you know, call options on micro strategy 721 00:34:11,160 --> 00:34:13,759 Speaker 4: when there's very little appetite from the dealer community to 722 00:34:13,760 --> 00:34:16,080 Speaker 4: provide liquidity on that. Yeah, and it's a you know, 723 00:34:16,120 --> 00:34:16,760 Speaker 4: a big. 724 00:34:16,560 --> 00:34:20,880 Speaker 2: Mess other options on the three X micro strategy ETF. 725 00:34:21,440 --> 00:34:23,400 Speaker 4: I would actually have to check some of the leverage 726 00:34:23,640 --> 00:34:26,560 Speaker 4: some of the LeVert ETFs actually do. And yeah, we 727 00:34:26,719 --> 00:34:28,680 Speaker 4: it's kind of a running joke, right is you've got 728 00:34:28,719 --> 00:34:31,719 Speaker 4: like the you've got like the triple levered you know 729 00:34:31,800 --> 00:34:34,200 Speaker 4: et F on the thing. You've got the covered call 730 00:34:34,320 --> 00:34:36,640 Speaker 4: selling ETF on that thing. You got people running the 731 00:34:36,640 --> 00:34:39,720 Speaker 4: wheel strategy on that just in sort of an infinite 732 00:34:39,800 --> 00:34:44,080 Speaker 4: recursion of you know, option selling abyss. 733 00:34:42,840 --> 00:35:03,000 Speaker 1: Amazing just going by to options influencers. So one thing 734 00:35:03,200 --> 00:35:05,719 Speaker 1: that you see a law is not necessarily like here 735 00:35:05,800 --> 00:35:07,960 Speaker 1: is an options trade that will make you a bunch 736 00:35:08,000 --> 00:35:10,799 Speaker 1: of money. But here's how you really make money in 737 00:35:10,840 --> 00:35:14,120 Speaker 1: options by selling? Yes, how do you make money in 738 00:35:14,200 --> 00:35:17,200 Speaker 1: options by selling? Like I get the sense that it's 739 00:35:17,239 --> 00:35:19,719 Speaker 1: not just it's not just you buy a put, it's 740 00:35:19,719 --> 00:35:20,359 Speaker 1: something else. 741 00:35:20,960 --> 00:35:23,320 Speaker 4: You're exactly right. So normally, the way a derivative trader 742 00:35:23,320 --> 00:35:25,040 Speaker 4: would think about it trade is what is this trade? 743 00:35:25,040 --> 00:35:27,520 Speaker 4: What is the price, what's the upside, what's the downside? 744 00:35:27,560 --> 00:35:29,600 Speaker 4: Why should I do this trade? That's not really the 745 00:35:29,640 --> 00:35:32,600 Speaker 4: approach with options influencing. It's this idea of this cheap 746 00:35:32,640 --> 00:35:34,920 Speaker 4: code in markets, right where people just don't know this 747 00:35:34,960 --> 00:35:37,120 Speaker 4: one cool trick and I'm going to show you for 748 00:35:37,120 --> 00:35:39,920 Speaker 4: only ninety nine dollars a month, right, And the typical 749 00:35:39,960 --> 00:35:43,240 Speaker 4: pitch again is you're just going to be doing some combination. 750 00:35:43,280 --> 00:35:46,160 Speaker 4: Maybe you're selling puts, maybe you're selling calls, maybe against stock, 751 00:35:46,280 --> 00:35:49,440 Speaker 4: maybe not. And the idea is they're pitched in terms 752 00:35:49,520 --> 00:35:54,200 Speaker 4: of the premiums that you're selling are like income, and 753 00:35:54,280 --> 00:35:57,240 Speaker 4: we just talk about how much money you're making solely 754 00:35:57,280 --> 00:35:59,880 Speaker 4: in terms of how much premium you're generating from option sales. 755 00:36:00,040 --> 00:36:01,600 Speaker 4: And that's why it's like, oh, I can make two 756 00:36:01,640 --> 00:36:03,200 Speaker 4: hundred thousand dollars a year on a two hundred and 757 00:36:03,200 --> 00:36:06,800 Speaker 4: fifty thousand dollar account. But obviously that's not your profit 758 00:36:06,880 --> 00:36:09,240 Speaker 4: from the trades. You're just doing trades and you're selling 759 00:36:09,239 --> 00:36:11,120 Speaker 4: that pinion. But you might lose money. You might lose 760 00:36:11,120 --> 00:36:13,600 Speaker 4: money on those trades. Yeah, right, you're that's not income. 761 00:36:14,200 --> 00:36:16,200 Speaker 4: And you know, I get a little bit triggered by 762 00:36:16,200 --> 00:36:18,120 Speaker 4: the use of the word income with respect to this stuff, 763 00:36:18,120 --> 00:36:19,640 Speaker 4: because like, income to me is like you own some 764 00:36:19,640 --> 00:36:21,920 Speaker 4: treasury bills, right and you're making four percent and you 765 00:36:21,920 --> 00:36:24,759 Speaker 4: don't just suddenly lose thirty percent on your income thing, right, 766 00:36:24,960 --> 00:36:27,600 Speaker 4: Like it's you know, these are trades, but this community 767 00:36:27,640 --> 00:36:30,120 Speaker 4: is not expressing what is this trade, Why is it good? 768 00:36:30,200 --> 00:36:32,680 Speaker 4: When is it good, what's the price? What's going on. 769 00:36:32,920 --> 00:36:35,680 Speaker 4: It's just saying, look, you can just sell these options 770 00:36:35,680 --> 00:36:38,120 Speaker 4: and this is income, right, which is totally crazy. 771 00:36:38,280 --> 00:36:40,680 Speaker 2: So people come to you from time to time. Your 772 00:36:40,680 --> 00:36:44,120 Speaker 2: a voice of reason. When we had you back on 773 00:36:44,560 --> 00:36:46,799 Speaker 2: a few years ago, you know, people reach out like, oh, 774 00:36:46,840 --> 00:36:49,120 Speaker 2: I really want to learn more. I imagine that getting 775 00:36:49,200 --> 00:36:52,680 Speaker 2: into options is a little bit like converting to Judaism, 776 00:36:52,719 --> 00:36:55,080 Speaker 2: where the rabbi is supposed to send you away three 777 00:36:55,160 --> 00:36:58,000 Speaker 2: times and say no, just buy a S and P 778 00:36:58,080 --> 00:37:00,600 Speaker 2: five hundred index CTF. Don't do it. But and then finally, 779 00:37:00,640 --> 00:37:03,480 Speaker 2: if they keep knocking at their door, then like, okay, 780 00:37:03,600 --> 00:37:06,200 Speaker 2: maybe we'll teach you something. Where should you start? If 781 00:37:06,200 --> 00:37:08,799 Speaker 2: you're like actually serious and like you know, I do 782 00:37:08,920 --> 00:37:10,480 Speaker 2: know most of the time you're like, just buy an 783 00:37:10,480 --> 00:37:11,080 Speaker 2: ETF and. 784 00:37:11,000 --> 00:37:14,600 Speaker 4: Live your life. That's what a perfect analogy. Thank you? 785 00:37:14,920 --> 00:37:17,640 Speaker 2: Well, where would you say? We're going to get DMS? 786 00:37:17,680 --> 00:37:18,120 Speaker 4: After this? 787 00:37:18,480 --> 00:37:20,279 Speaker 2: I want to learn more about how to do it right? 788 00:37:20,440 --> 00:37:22,920 Speaker 2: Is there a way to start to learn to do 789 00:37:22,960 --> 00:37:23,319 Speaker 2: it right? 790 00:37:23,520 --> 00:37:23,880 Speaker 3: Yeah? 791 00:37:23,920 --> 00:37:26,080 Speaker 4: Absolutely. Usually the first thing that I do is I 792 00:37:26,120 --> 00:37:28,600 Speaker 4: send people kind of collect a thread that has a 793 00:37:28,600 --> 00:37:31,080 Speaker 4: collection a lot of people contributed to on good reading 794 00:37:31,080 --> 00:37:33,680 Speaker 4: material and stuff on how to educate yourself about options 795 00:37:33,719 --> 00:37:35,200 Speaker 4: and how to use them and what they are and 796 00:37:35,239 --> 00:37:36,719 Speaker 4: how to think about the risk and all this stuff. 797 00:37:36,719 --> 00:37:38,400 Speaker 4: So that's a really good kind of first thing to 798 00:37:38,400 --> 00:37:40,399 Speaker 4: do to just have some kind of clue what you're doing. 799 00:37:40,960 --> 00:37:42,919 Speaker 4: And then you know, the next thing that I tell 800 00:37:42,920 --> 00:37:45,400 Speaker 4: people is what do I think are kind of reasonably 801 00:37:45,520 --> 00:37:48,800 Speaker 4: safe uses of options that if you really want to 802 00:37:48,840 --> 00:37:51,480 Speaker 4: dedicate time to figuring this out, you might kind of 803 00:37:51,520 --> 00:37:53,600 Speaker 4: start with right, And so I'll say, look, if you 804 00:37:53,719 --> 00:37:57,880 Speaker 4: have some kind of fundamentally driven or tactically driven process 805 00:37:58,000 --> 00:38:01,040 Speaker 4: with for coming up with a view on STEF, and 806 00:38:01,080 --> 00:38:03,359 Speaker 4: you have a timing view, then sure could you use 807 00:38:03,400 --> 00:38:06,839 Speaker 4: a call spread or a put spread to express that view? 808 00:38:06,840 --> 00:38:09,200 Speaker 4: You say, oh, I really like earnings on this on Tesla, 809 00:38:09,360 --> 00:38:12,279 Speaker 4: like next week, could you buy a two week call 810 00:38:12,320 --> 00:38:14,640 Speaker 4: spread around the range where you think the stock could 811 00:38:14,640 --> 00:38:17,040 Speaker 4: trade to And you can obviously make money or lose money, 812 00:38:17,080 --> 00:38:18,960 Speaker 4: but you know exactly how much money are risking. Yeah, 813 00:38:19,040 --> 00:38:20,759 Speaker 4: it's kind of a safe thing. You're not going to 814 00:38:20,800 --> 00:38:22,520 Speaker 4: just blow up one day on that. I think that's 815 00:38:22,600 --> 00:38:25,040 Speaker 4: kind of okay. If you really need a little bit 816 00:38:25,040 --> 00:38:28,560 Speaker 4: of kind of cash efficiency or leverage, again not too crazy. 817 00:38:28,880 --> 00:38:30,880 Speaker 4: You know, you can do things like buy a combo 818 00:38:30,960 --> 00:38:32,680 Speaker 4: in the option market, or buy a call and sell 819 00:38:32,719 --> 00:38:34,759 Speaker 4: a put that give you a very similar profile to 820 00:38:34,800 --> 00:38:37,160 Speaker 4: buying a stock but are a little more cash efficient. 821 00:38:37,200 --> 00:38:39,920 Speaker 4: If you just really feel like you need fifty percent leverage, 822 00:38:40,120 --> 00:38:42,919 Speaker 4: you know, or something like that. And if you want 823 00:38:42,960 --> 00:38:45,799 Speaker 4: to be really thoughtful about options selling, you know, to 824 00:38:45,840 --> 00:38:48,440 Speaker 4: try to generate yield over time, there's ways to do that. Too, 825 00:38:48,600 --> 00:38:51,879 Speaker 4: But you really have to read up to understand how 826 00:38:51,920 --> 00:38:54,120 Speaker 4: to think about the risk award of a trade that 827 00:38:54,160 --> 00:38:55,960 Speaker 4: you're doing, not just believe there's something you can do 828 00:38:56,000 --> 00:38:58,720 Speaker 4: all the time because somebody told you it's a great idea. 829 00:39:00,040 --> 00:39:03,759 Speaker 1: Your favorite options blow up or derivatives blow up. And 830 00:39:03,840 --> 00:39:08,560 Speaker 1: I'll say I'm partial to Vallmageddon in twenty eighteen because 831 00:39:08,600 --> 00:39:11,560 Speaker 1: I wrote a lot about it, and I'm still traumatized 832 00:39:11,560 --> 00:39:14,040 Speaker 1: by the reaction of vol twit when I said it 833 00:39:14,080 --> 00:39:16,600 Speaker 1: was going to blow up when the vix was going up. 834 00:39:16,640 --> 00:39:18,000 Speaker 1: But what's your favorite? 835 00:39:18,280 --> 00:39:20,279 Speaker 4: Well, Vallmageddon is a great one. You know, you've talked 836 00:39:20,280 --> 00:39:23,040 Speaker 4: about that. Everybody everybody else has two, So I'll give 837 00:39:23,040 --> 00:39:26,000 Speaker 4: you something else. I mean, I think possibly my favorite 838 00:39:26,040 --> 00:39:29,200 Speaker 4: was was alions Structured Alpha, which blew up in twenty 839 00:39:29,239 --> 00:39:31,840 Speaker 4: twenty in March, and the reason was, you know, the 840 00:39:32,000 --> 00:39:35,440 Speaker 4: Allions is a huge sort of safe conservative firm that 841 00:39:35,480 --> 00:39:37,160 Speaker 4: everybody would look and say, oh, they would never be 842 00:39:37,239 --> 00:39:39,440 Speaker 4: doing something kind of crazy, right, because it's you know, 843 00:39:39,480 --> 00:39:41,440 Speaker 4: they're very buttoned up, they're very serious people. They own 844 00:39:41,480 --> 00:39:44,920 Speaker 4: Pimco and so they but they had these French kind 845 00:39:44,960 --> 00:39:49,120 Speaker 4: of option traders and Joe laughs. It's always there. It's 846 00:39:49,160 --> 00:39:51,719 Speaker 4: always the French. There's just something in the DNA. And 847 00:39:51,960 --> 00:39:54,480 Speaker 4: you know, they were doing something where they would effectively 848 00:39:54,520 --> 00:39:57,719 Speaker 4: they would usually sell downside put spreads. They'd sell a 849 00:39:57,719 --> 00:40:00,520 Speaker 4: put and then they'd buy back a lower strike. That 850 00:40:00,600 --> 00:40:02,160 Speaker 4: was the main They'd do a few other things like that. 851 00:40:02,280 --> 00:40:03,920 Speaker 4: Didn't think of that as like the core thing they 852 00:40:03,920 --> 00:40:07,000 Speaker 4: were doing, right, and that's kind of safeish, right, you're 853 00:40:07,000 --> 00:40:09,640 Speaker 4: getting some a credit if you're earning some premium, but 854 00:40:09,800 --> 00:40:11,839 Speaker 4: like you're supposed to know how much you can lose. Yeah, 855 00:40:12,440 --> 00:40:14,520 Speaker 4: and then but their returns were pretty good. They actually 856 00:40:14,560 --> 00:40:16,600 Speaker 4: kind of kept up with equity markets, which didn't really 857 00:40:16,640 --> 00:40:18,640 Speaker 4: make a whole lot of sense. And it turned out 858 00:40:18,640 --> 00:40:20,080 Speaker 4: the way that they were doing that was that they 859 00:40:20,080 --> 00:40:22,359 Speaker 4: were just not buying back the downside put or buying 860 00:40:22,480 --> 00:40:24,279 Speaker 4: or they were buying it back but like way way 861 00:40:24,360 --> 00:40:26,200 Speaker 4: way lower strike than they said that they were buying 862 00:40:26,200 --> 00:40:28,120 Speaker 4: it back, right, so that's obviously one way to make 863 00:40:28,160 --> 00:40:30,239 Speaker 4: more money. Kind of that sounds really bad. Yeah, that 864 00:40:30,320 --> 00:40:33,160 Speaker 4: was really bad, and they they were doing that for 865 00:40:33,280 --> 00:40:35,960 Speaker 4: years and years and they actually it's really great. There's 866 00:40:35,960 --> 00:40:37,759 Speaker 4: a whole SEC complaint about this. You can read all 867 00:40:37,800 --> 00:40:40,040 Speaker 4: the details. They had to show this to investors what 868 00:40:40,080 --> 00:40:41,840 Speaker 4: they were doing, right, because that's part of the business. 869 00:40:41,840 --> 00:40:44,480 Speaker 4: And so they had spreadsheets with all these kind of 870 00:40:44,520 --> 00:40:47,120 Speaker 4: hard coded cells and made up numbers to sort of 871 00:40:47,160 --> 00:40:49,000 Speaker 4: be able to lie to investors and say that they 872 00:40:49,000 --> 00:40:51,240 Speaker 4: were doing what they said they were doing when they weren't. 873 00:40:51,840 --> 00:40:54,560 Speaker 4: And because that's complicated to manage to have all these 874 00:40:54,600 --> 00:40:57,920 Speaker 4: big spreadsheets faking your returns and faking your risk and everything. 875 00:40:58,160 --> 00:41:00,319 Speaker 4: Then they had a word document with an eight team 876 00:41:00,360 --> 00:41:02,080 Speaker 4: points on like how to do all of the lying 877 00:41:02,120 --> 00:41:04,040 Speaker 4: and number printing for all their analysts to be able 878 00:41:04,040 --> 00:41:06,560 Speaker 4: to follow, and you know it instructions on how to 879 00:41:06,600 --> 00:41:11,800 Speaker 4: not hover the how do you structured alpha Greg Toront 880 00:41:12,120 --> 00:41:14,279 Speaker 4: and it's like, you know, don't hover your mouse over 881 00:41:14,320 --> 00:41:15,840 Speaker 4: a formula. It's supposed to be a formula, but it 882 00:41:15,880 --> 00:41:20,000 Speaker 4: is hard coded because the investor might see the stuff 883 00:41:20,040 --> 00:41:22,400 Speaker 4: like that, right, And you know, with very detailed emails 884 00:41:22,400 --> 00:41:23,960 Speaker 4: on all this kind of how to lie kind of 885 00:41:24,040 --> 00:41:26,600 Speaker 4: kind of stuff, the fun and then what happened was, 886 00:41:26,719 --> 00:41:28,600 Speaker 4: you know, obviously in March of twenty twenty, the market 887 00:41:28,640 --> 00:41:30,839 Speaker 4: went down a lot, so their fund was down much 888 00:41:30,880 --> 00:41:32,800 Speaker 4: more than it should have been because they weren't actually 889 00:41:32,880 --> 00:41:34,920 Speaker 4: buying back the insurance that they were supposed to be, 890 00:41:35,480 --> 00:41:38,239 Speaker 4: and so what do you do obviously in that circumstance, Well, 891 00:41:38,239 --> 00:41:40,000 Speaker 4: maybe you could hedge, or maybe you could kind of 892 00:41:40,000 --> 00:41:42,719 Speaker 4: come clean. What they actually did was they went to 893 00:41:42,920 --> 00:41:45,000 Speaker 4: the vix options market and they say, gosh, why don't 894 00:41:45,040 --> 00:41:48,040 Speaker 4: we just sell a massive amount of vix calls because 895 00:41:48,040 --> 00:41:50,480 Speaker 4: then when everything comes back, we'll just make that money 896 00:41:50,520 --> 00:41:52,880 Speaker 4: back and we won't have to tell anybody we lost money. 897 00:41:52,920 --> 00:41:56,680 Speaker 2: This SEC complaint is amazing. Defendants reduced losses under a 898 00:41:56,719 --> 00:41:59,920 Speaker 2: market crash scenario in one risk report send to investor 899 00:42:00,080 --> 00:42:02,959 Speaker 2: from negative forty two point one five zero five seven 900 00:42:03,040 --> 00:42:05,560 Speaker 2: four eight nine seven five five seven four seven percent 901 00:42:06,000 --> 00:42:09,840 Speaker 2: to negative four point one zero. They just removed a number. 902 00:42:09,640 --> 00:42:11,799 Speaker 4: That's rights. They just took off a decimal took off, 903 00:42:12,320 --> 00:42:14,520 Speaker 4: that's right. It was all just hard coded. They didn't like, 904 00:42:14,840 --> 00:42:17,520 Speaker 4: they didn't have some sophisticated methodology for this. They literally 905 00:42:17,520 --> 00:42:19,440 Speaker 4: just type the numbers into the spreadsheets. 906 00:42:18,960 --> 00:42:22,319 Speaker 2: Sometimes and it gets this gets to the I mean, 907 00:42:22,440 --> 00:42:24,520 Speaker 2: to be honest, you don't really even need to be 908 00:42:24,600 --> 00:42:29,680 Speaker 2: French to do that's right, Like any I could have 909 00:42:29,760 --> 00:42:31,480 Speaker 2: come up with I could have come up with this one. 910 00:42:31,520 --> 00:42:33,960 Speaker 2: I don't need to go to strategy, I don't need 911 00:42:34,000 --> 00:42:36,200 Speaker 2: to go to air call polytechnique to come up with They. 912 00:42:36,080 --> 00:42:37,880 Speaker 4: Just go to sell C six. So you just overwrite 913 00:42:37,880 --> 00:42:38,240 Speaker 4: the number. 914 00:42:38,400 --> 00:42:41,280 Speaker 2: Some people do screw up math, like some even sophisticated 915 00:42:41,360 --> 00:42:44,280 Speaker 2: traders like sometimes math is tough. 916 00:42:44,120 --> 00:42:46,480 Speaker 4: At this level. Yeah, but no, this was not sophisticated. 917 00:42:46,560 --> 00:42:49,279 Speaker 4: This was just you type over the cell. And so 918 00:42:49,360 --> 00:42:51,640 Speaker 4: what happened was they sold lots of vix calls with 919 00:42:51,719 --> 00:42:53,880 Speaker 4: the front month of exed futures at about twenty five, 920 00:42:54,560 --> 00:42:56,200 Speaker 4: and then the front month of fixed features went to 921 00:42:56,239 --> 00:43:00,640 Speaker 4: eighty five, and so they were they were liquidated middle 922 00:43:00,680 --> 00:43:04,520 Speaker 4: of March in the huge catastrophic explosion that people like 923 00:43:04,600 --> 00:43:07,920 Speaker 4: us were shown the auction and everything, and they drove 924 00:43:08,239 --> 00:43:12,440 Speaker 4: the relative price of the Vick's options and futures to 925 00:43:12,960 --> 00:43:15,160 Speaker 4: twice as high as it had ever been relative to 926 00:43:15,280 --> 00:43:18,040 Speaker 4: S and P. In this sort of spectacular implosion, you know, 927 00:43:18,080 --> 00:43:20,400 Speaker 4: they went to zero. They lost billions and billions of 928 00:43:20,440 --> 00:43:22,560 Speaker 4: dollars for you know, teachers, pensions and all this kind 929 00:43:22,600 --> 00:43:25,440 Speaker 4: of stuff in just total and utter fraud again at 930 00:43:25,480 --> 00:43:27,960 Speaker 4: a very big buttoned up place, and actually one of 931 00:43:27,960 --> 00:43:29,959 Speaker 4: the one of the funny takeaways from it was in 932 00:43:30,040 --> 00:43:32,400 Speaker 4: all of the lawsuits, you know, leons stepped up and 933 00:43:32,400 --> 00:43:34,960 Speaker 4: settled lots of lawsuits and paid investors back, you know, 934 00:43:35,000 --> 00:43:36,920 Speaker 4: all this money and cost them many billions of dollars. 935 00:43:37,239 --> 00:43:39,560 Speaker 4: And so actually, in a twisted sort of way, the 936 00:43:39,560 --> 00:43:42,680 Speaker 4: logic of investing with the big safe place actually worked. 937 00:43:42,920 --> 00:43:44,960 Speaker 4: But it wasn't because they managed the risk or had 938 00:43:44,960 --> 00:43:47,200 Speaker 4: any idea what these guys were doing, and it was 939 00:43:47,239 --> 00:43:48,680 Speaker 4: just that you could sue them and they would pay you. 940 00:43:50,480 --> 00:43:53,239 Speaker 1: Since you mentioned PIMCO, one of the interesting things about 941 00:43:53,280 --> 00:43:56,560 Speaker 1: PIMCO is, as you said, there is this perception that 942 00:43:56,560 --> 00:43:59,840 Speaker 1: they're sort of like an old school just buying bond 943 00:44:00,320 --> 00:44:04,879 Speaker 1: type fund burgers and bonds. That's right, But actually if 944 00:44:04,880 --> 00:44:08,000 Speaker 1: you look at their portfolio and talk to people who 945 00:44:08,000 --> 00:44:10,000 Speaker 1: are actually doing these trades, there are a lot of 946 00:44:10,000 --> 00:44:14,040 Speaker 1: derivatives involved. There is like Euro dollar futures and swaps 947 00:44:14,400 --> 00:44:18,279 Speaker 1: things like that. Do you see the explosion of derivatives 948 00:44:18,320 --> 00:44:21,680 Speaker 1: trading reflected in fixed income as well? Like the type 949 00:44:21,680 --> 00:44:24,120 Speaker 1: that we see in equities that we've been talking about, 950 00:44:24,440 --> 00:44:26,719 Speaker 1: is that happening in fixed income too? 951 00:44:27,120 --> 00:44:29,160 Speaker 4: Very much? So? So I actually had a little poll 952 00:44:29,239 --> 00:44:31,279 Speaker 4: I put out on Twitter the other day, which was 953 00:44:31,320 --> 00:44:33,640 Speaker 4: you know, who do you think is the best derivatives 954 00:44:33,640 --> 00:44:36,560 Speaker 4: trader of all time? And my choices were Bill Gross 955 00:44:36,640 --> 00:44:42,040 Speaker 4: of PIMCO, Warren Buffett, Who else was it? Oh Yaes 956 00:44:42,280 --> 00:44:46,239 Speaker 4: of Susquehanna and Jim Simon's of Renaissance. And everybody was 957 00:44:46,239 --> 00:44:47,840 Speaker 4: really confused because they're like, none of these people are 958 00:44:47,880 --> 00:44:49,839 Speaker 4: derivati Well, jeff yass is a derivative trade, but all 959 00:44:49,840 --> 00:44:51,600 Speaker 4: these other guys are what are you talking about, Warren Buffett? 960 00:44:51,640 --> 00:44:55,520 Speaker 4: But yeah, Bill Gross has traded more derivatives notional than 961 00:44:55,520 --> 00:44:58,520 Speaker 4: the GDP of the world. They're you know, massive traders 962 00:44:58,560 --> 00:45:00,719 Speaker 4: of things like futures. As you point out in fixed 963 00:45:00,719 --> 00:45:04,160 Speaker 4: income also, Bill Gross and PIMCO was by far the 964 00:45:04,160 --> 00:45:07,560 Speaker 4: biggest option seller in the fixed income complex for many, 965 00:45:07,560 --> 00:45:09,840 Speaker 4: many years, or tens of billions of dollars of piano. 966 00:45:10,120 --> 00:45:11,680 Speaker 4: People don't really think about this, right, They think, oh, 967 00:45:11,680 --> 00:45:14,520 Speaker 4: it's kind of boring bond stuff. But no, there's massive 968 00:45:14,560 --> 00:45:18,040 Speaker 4: involvement of you know, big sophisticated institutions in you know, 969 00:45:18,080 --> 00:45:20,520 Speaker 4: all of these spaces. So like retail investors aren't involved 970 00:45:20,520 --> 00:45:22,440 Speaker 4: in fixed income volatility because they don't really have an 971 00:45:22,440 --> 00:45:24,600 Speaker 4: instrument to do that. I mean, they could trade like 972 00:45:24,640 --> 00:45:26,799 Speaker 4: treasury futures options, but that's kind of like a weird 973 00:45:26,800 --> 00:45:29,600 Speaker 4: funk thing. They don't You don't really have listed options 974 00:45:29,640 --> 00:45:31,799 Speaker 4: that people can sell as easily. But you know, big 975 00:45:31,840 --> 00:45:33,719 Speaker 4: institutions have been involved in this stuff for a very 976 00:45:33,719 --> 00:45:34,080 Speaker 4: long time. 977 00:45:35,040 --> 00:45:37,560 Speaker 1: I guess it's probably coming. If it makes people money, 978 00:45:37,600 --> 00:45:40,160 Speaker 1: I'm sure there's going to be you could sickorize it. Yeah. 979 00:45:40,360 --> 00:45:43,040 Speaker 4: Absolutely. They made a vix for fixed income called move 980 00:45:43,200 --> 00:45:43,799 Speaker 4: mov Oh. 981 00:45:43,719 --> 00:45:47,120 Speaker 1: Yeah, yeah, yeah, Well, Ben, that was so much fun 982 00:45:47,280 --> 00:45:49,960 Speaker 1: and we so enjoyed having you back, and you're going 983 00:45:50,000 --> 00:45:52,359 Speaker 1: to have to come back on the show relatively soon, 984 00:45:52,640 --> 00:45:53,960 Speaker 1: as soon as we have a blow up. 985 00:45:54,040 --> 00:45:54,479 Speaker 3: Come back. 986 00:45:54,640 --> 00:45:54,879 Speaker 4: Yeah. 987 00:45:55,040 --> 00:45:57,799 Speaker 2: We'll definitely be calling Ben the next time there's a 988 00:45:57,800 --> 00:45:58,160 Speaker 2: blow up. 989 00:45:58,440 --> 00:46:00,640 Speaker 4: That's actually a recurring theme in our right. I do 990 00:46:00,680 --> 00:46:02,480 Speaker 4: a talk with you guys about something, and then it 991 00:46:02,480 --> 00:46:03,960 Speaker 4: blows up, and then you bring me back to talk 992 00:46:04,000 --> 00:46:04,920 Speaker 4: about how it blew up. 993 00:46:05,840 --> 00:46:06,840 Speaker 1: Consider this a warning. 994 00:46:06,880 --> 00:46:08,440 Speaker 2: Can I just this one more quick question? 995 00:46:08,520 --> 00:46:08,960 Speaker 4: Of course? 996 00:46:09,360 --> 00:46:12,160 Speaker 2: Why like you lay out these with the buffery tfs 997 00:46:12,160 --> 00:46:14,520 Speaker 2: and all this stuff, and like how really like they 998 00:46:14,520 --> 00:46:17,000 Speaker 2: don't get you what they think? Do you have a 999 00:46:17,040 --> 00:46:19,759 Speaker 2: theory for I get it for retail, the person at 1000 00:46:19,800 --> 00:46:22,400 Speaker 2: Starbucks who wants to find a way to get leverage 1001 00:46:22,440 --> 00:46:25,280 Speaker 2: on that much cash, Now, why is it so big elsewhere? 1002 00:46:26,280 --> 00:46:29,000 Speaker 4: So a big part of it is that the kinds 1003 00:46:29,040 --> 00:46:32,520 Speaker 4: of institutions involved in these type of trades are just 1004 00:46:32,719 --> 00:46:35,600 Speaker 4: are very slow moving and very backward looking, and they're 1005 00:46:35,600 --> 00:46:40,759 Speaker 4: not that sensitive to performance outside of like catastrophic events. Yeah. Right, 1006 00:46:40,800 --> 00:46:42,480 Speaker 4: So if you think of like a typical pension fund, 1007 00:46:42,719 --> 00:46:45,839 Speaker 4: it took the consultants like three years to get this 1008 00:46:45,960 --> 00:46:48,720 Speaker 4: call overwriting stuff through the board in the first place, 1009 00:46:49,160 --> 00:46:51,120 Speaker 4: and then they put on the trade that they put 1010 00:46:51,120 --> 00:46:53,000 Speaker 4: it on with a couple of managers that they like, 1011 00:46:53,080 --> 00:46:54,879 Speaker 4: and they go out to dinner with them once a year. 1012 00:46:55,280 --> 00:46:57,360 Speaker 4: It's in the it's a footnote in a long report 1013 00:46:57,520 --> 00:46:59,799 Speaker 4: on performance. And as long as it's just kind of 1014 00:46:59,800 --> 00:47:03,560 Speaker 4: my underperforming expectations, like, nobody cares if it blows up. 1015 00:47:03,560 --> 00:47:05,279 Speaker 4: That's a different thing. But this kind of thing doesn't 1016 00:47:05,320 --> 00:47:07,320 Speaker 4: really blow up, not the kind of strategies that the 1017 00:47:07,480 --> 00:47:10,000 Speaker 4: institutions are doing. Yeah, that retail is different, but you know, 1018 00:47:10,040 --> 00:47:12,759 Speaker 4: call overwriting, you know, call unlovered, call over writing doesn't 1019 00:47:12,760 --> 00:47:15,040 Speaker 4: blow up. It just underperforms in their performance. It's gonna 1020 00:47:15,040 --> 00:47:16,719 Speaker 4: take them ten years to ever decide to stop. 1021 00:47:17,760 --> 00:47:20,440 Speaker 1: All right, Ben Iffer until the next blow up. 1022 00:47:20,520 --> 00:47:23,400 Speaker 4: I guess wonderful guys, really fun. 1023 00:47:35,360 --> 00:47:36,280 Speaker 1: Joe. That was fun. 1024 00:47:36,600 --> 00:47:39,600 Speaker 2: I love talking to Ben because he's a funny, fun 1025 00:47:39,640 --> 00:47:42,080 Speaker 2: guy and also just explains things really well. 1026 00:47:42,320 --> 00:47:44,920 Speaker 1: I'm wondering, should we get the she Wolf of Indian 1027 00:47:44,960 --> 00:47:48,000 Speaker 1: options on together with Ben to fight it out. 1028 00:47:48,280 --> 00:47:51,279 Speaker 2: Yeah, let's just do just a rigorous one on one 1029 00:47:51,320 --> 00:47:54,920 Speaker 2: debate about whether you can really earn one hundred ten minutes. 1030 00:47:55,040 --> 00:47:57,799 Speaker 2: It's really funny that they actually like as a regulator, 1031 00:47:57,800 --> 00:47:59,880 Speaker 2: They're like, you have to stop this, that you have 1032 00:47:59,880 --> 00:48:01,080 Speaker 2: to get out of the market. 1033 00:48:01,239 --> 00:48:04,720 Speaker 1: Yeah. But I also think it's an important episode because 1034 00:48:04,719 --> 00:48:08,160 Speaker 1: if I was going to pinpoint one thing that has 1035 00:48:08,280 --> 00:48:12,239 Speaker 1: really changed in the market recently, it would be I 1036 00:48:12,239 --> 00:48:15,960 Speaker 1: guess a pervasive sense of short termism on the part 1037 00:48:16,000 --> 00:48:20,600 Speaker 1: of investors, and options fit perfectly into that, right, Like 1038 00:48:20,800 --> 00:48:24,600 Speaker 1: why wait ten years to make a decent reliable return 1039 00:48:24,800 --> 00:48:28,279 Speaker 1: when you can buy zero DT options and make a 1040 00:48:28,280 --> 00:48:29,359 Speaker 1: bunch of money in a day. 1041 00:48:29,560 --> 00:48:29,759 Speaker 4: You know. 1042 00:48:29,960 --> 00:48:35,400 Speaker 2: The line between investing and speculating or investing in gambling 1043 00:48:35,440 --> 00:48:38,520 Speaker 2: has always been a blurry one. Right, that's just a fact. 1044 00:48:38,960 --> 00:48:42,360 Speaker 2: But then you see things like, you know, prediction market 1045 00:48:42,360 --> 00:48:45,759 Speaker 2: platforms where you can invest, you know, make bets on 1046 00:48:46,160 --> 00:48:49,200 Speaker 2: where the FED is going to go right alongside, like 1047 00:48:49,280 --> 00:48:51,120 Speaker 2: bets on you know, who's going to win the coin 1048 00:48:51,160 --> 00:48:53,439 Speaker 2: flip of the Super Bowl and stuff. Or you see 1049 00:48:53,480 --> 00:48:56,399 Speaker 2: like Robin Hood selling futures on who's going to win 1050 00:48:56,880 --> 00:49:00,080 Speaker 2: Super Bowl football game or whatever. The line is gone, 1051 00:49:00,320 --> 00:49:03,000 Speaker 2: like it's still a spectrum, I guess, but the idea 1052 00:49:03,000 --> 00:49:05,719 Speaker 2: that there's any sort of bright line or line at 1053 00:49:05,760 --> 00:49:08,800 Speaker 2: all between the two things like there's no line anymore. 1054 00:49:09,160 --> 00:49:10,839 Speaker 1: Yeah, well, shall we leave it there. 1055 00:49:10,920 --> 00:49:11,600 Speaker 2: Let's leave it there. 1056 00:49:11,800 --> 00:49:14,960 Speaker 1: This has been another episode of the Authots podcast. I'm 1057 00:49:14,960 --> 00:49:17,880 Speaker 1: Tracy Alloway. You can follow me at Tracy Alloway. 1058 00:49:18,160 --> 00:49:21,040 Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart. 1059 00:49:21,280 --> 00:49:24,239 Speaker 2: Follow our guest Ben Eiffert. He's back on Twitter after 1060 00:49:24,320 --> 00:49:28,320 Speaker 2: a hiatus. He's at Ben Piffert. Follow our producers Carmen 1061 00:49:28,400 --> 00:49:31,759 Speaker 2: Rodriguez at Carmen Arman, dash O Bennett at Dashbock and 1062 00:49:31,840 --> 00:49:35,080 Speaker 2: Kelbrooks at Kelbrooks. For more odd Lots content, go to 1063 00:49:35,080 --> 00:49:37,799 Speaker 2: Bloomberg dot com slash odd Lots where we have a 1064 00:49:37,880 --> 00:49:40,680 Speaker 2: newsletter and a blog, and you can check out all 1065 00:49:40,680 --> 00:49:43,160 Speaker 2: of these topics twenty four to seven in our discord 1066 00:49:43,480 --> 00:49:45,399 Speaker 2: discord dot gg slash. 1067 00:49:45,040 --> 00:49:47,680 Speaker 1: Od Lots and if you enjoy odd Lots, if you 1068 00:49:47,880 --> 00:49:51,120 Speaker 1: like it when we reminisce about volatility blow ups, then 1069 00:49:51,160 --> 00:49:54,839 Speaker 1: please leave us a positive review on your favorite podcast platform. 1070 00:49:55,239 --> 00:49:58,279 Speaker 1: And remember, if you are a Bloomberg subscriber, you can 1071 00:49:58,320 --> 00:50:01,920 Speaker 1: listen to all of our episodes absolutely ad free. All 1072 00:50:01,960 --> 00:50:04,880 Speaker 1: you need to do is find the Bloomberg channel on 1073 00:50:05,040 --> 00:50:09,080 Speaker 1: Apple Podcasts and follow the instructions there. Thanks for listening.