WEBVTT - This Is How Derivatives Trading Swallowed the Entire Market 0:00:00.040 --> 0:00:03.160 Hey, there are aud Loots listeners. It's Tracy Alloway. 0:00:02.840 --> 0:00:03.760 And Joe Wisenthal. 0:00:04.080 --> 0:00:07.520 We are very excited to announce that Audlots is going 0:00:07.600 --> 0:00:09.479 to Washington That's right. 0:00:09.560 --> 0:00:11.360 For the first time, we are going to do a 0:00:11.440 --> 0:00:16.239 live public odd lotch recording in our nation's capital. That's 0:00:16.239 --> 0:00:19.479 going to be March twelfth in Washington, DC at the 0:00:19.560 --> 0:00:23.360 Miracle Theater and guests will be announced in the coming days, 0:00:23.400 --> 0:00:25.760 but in the meantime you can find a ticket link 0:00:25.800 --> 0:00:27.680 at Bloomberg dot com, slash odd. 0:00:27.600 --> 0:00:44.600 Lots, Bloomberg Audio Studios, Podcasts, radio News. 0:00:46.680 --> 0:00:50.160 Hello and welcome to another episode of the Audlots podcast. 0:00:50.320 --> 0:00:51.880 I'm Tracy Alloway. 0:00:51.520 --> 0:00:52.800 And I'm Joe Wisenthal. 0:00:53.159 --> 0:00:56.440 Joe, as part of my preparation for this episode, I 0:00:56.440 --> 0:01:01.080 have spent the morning on TikTok and Twitter, slash x 0:01:01.440 --> 0:01:03.520 Instagram watching videos. 0:01:04.360 --> 0:01:07.560 Did you find any good techniques that you are going 0:01:07.560 --> 0:01:11.200 to employ for generating two hundred thousand dollars a year 0:01:11.240 --> 0:01:14.240 on two hundred and fifty thousand dollars in capital by 0:01:14.440 --> 0:01:16.479 selling short term options? You know what? 0:01:16.720 --> 0:01:19.080 First of all, there are so many accounts that are 0:01:19.160 --> 0:01:25.000 basically pitching trading with derivatives options. Some variation of those nowadays. 0:01:25.240 --> 0:01:28.120 I did, to your point, find a guy a video 0:01:28.160 --> 0:01:31.080 of a guy saying that one thousand dollars is only 0:01:31.200 --> 0:01:35.360 nine doubles away from becoming a million, and a million. True, 0:01:35.480 --> 0:01:38.920 a million is only ten doubles away from a billion. 0:01:39.440 --> 0:01:42.800 So that's true too. Now, I think that sounds roughly right. Yeah, 0:01:42.840 --> 0:01:45.880 so what's the catch? You know, someone's got to do it. 0:01:45.959 --> 0:01:48.480 No catch, Joe, It's it's all good. We can all 0:01:48.520 --> 0:01:51.640 be billionaires. No, I think. I think the thing about 0:01:51.680 --> 0:01:55.720 derivatives trading nowadays is when it's started, it was very 0:01:55.840 --> 0:01:58.560 much a retail phenomenon. It was, you know, the guys 0:01:58.560 --> 0:02:03.600 on Wall Street bets Yo, lowing into some crazy derivatives trade, 0:02:03.640 --> 0:02:07.480 basically buying a lottery ticket on the market. But what's 0:02:07.560 --> 0:02:12.160 happened since then is derivatives have really gone mainstream in 0:02:12.280 --> 0:02:16.080 various ways. So, for instance, if you look at options 0:02:16.120 --> 0:02:18.560 like across the S and P five hundred right now, 0:02:18.760 --> 0:02:23.160 something like sixty percent of the volume is shorter dated options. 0:02:23.160 --> 0:02:27.359 So yeah, zero DT or one DT, which is kind 0:02:27.360 --> 0:02:27.960 of crazy. 0:02:28.680 --> 0:02:31.240 It's totally crazy, you know. I remember first, do you 0:02:31.320 --> 0:02:36.800 remember Tracy early on when we started at Bloomberg, You 0:02:36.840 --> 0:02:39.440 brought in. There was someone I forget who it was, 0:02:39.520 --> 0:02:41.560 but there was someone from some sort of like actual 0:02:41.639 --> 0:02:47.120 like institutional options trading research firm that came in and 0:02:47.240 --> 0:02:50.120 did this little like mini seminar for some of the 0:02:50.240 --> 0:02:53.519 reporters on like how to analyze options data. Do you 0:02:53.560 --> 0:02:55.840 remember doing that you brought in anyway, But one of 0:02:55.880 --> 0:02:59.520 his points was is that the purpose of options are 0:02:59.600 --> 0:03:04.120 like they're largely hedging instruments. They're sort of tactically used 0:03:04.160 --> 0:03:09.480 by institutions for very specific purposes, you know, insurance essentially, 0:03:09.520 --> 0:03:12.760 that options sort of played this role as insurance for 0:03:12.919 --> 0:03:15.920 specific things. And then since then I get the impression 0:03:15.960 --> 0:03:18.720 that the world is just like totally changed. And I 0:03:18.760 --> 0:03:21.360 think the other thing that surprised me. I would have 0:03:21.480 --> 0:03:24.160 guessed that if we're sitting here in twenty twenty five, 0:03:24.440 --> 0:03:26.920 that that craziness of twenty twenty one would have been 0:03:26.960 --> 0:03:29.880 some sort of peak. Right, there is Robinhood here, Memestock, 0:03:29.960 --> 0:03:33.240 ere et cetera. I would not have guessed the durability 0:03:33.320 --> 0:03:36.280 of it, especially with the FED having hiked and everything 0:03:36.280 --> 0:03:37.320 that we've seen transpires. 0:03:37.320 --> 0:03:40.720 Since No, that's my point, right, Instead of like the 0:03:40.880 --> 0:03:45.320 Yolo crowd basically reducing their options trading. Instead, we had 0:03:45.360 --> 0:03:50.680 Wall Street yoloing into options trading to serve first. Okay, 0:03:50.880 --> 0:03:54.960 So options, derivatives, they're everywhere right now, and you have 0:03:55.440 --> 0:03:59.040 different groups of people, so institutional and retail using them. 0:03:59.120 --> 0:04:01.440 You have a bunch of different strategies, you have a 0:04:01.440 --> 0:04:04.880 bunch of different products that deploy them, that give again 0:04:05.160 --> 0:04:09.440 new types of traders access. So we should talk about it. 0:04:09.840 --> 0:04:10.480 Let's do it. 0:04:10.600 --> 0:04:13.680 And who do we call to talk about derivatives? The 0:04:13.720 --> 0:04:16.719 perfect guest, one man, the perfect guest. We have Ben 0:04:16.760 --> 0:04:20.320 i for managing partner at QVR. Back with us, Ben, 0:04:20.520 --> 0:04:21.679 thanks for coming back. 0:04:21.480 --> 0:04:23.440 On Tracy Joe. It's so good to see you, guys. 0:04:23.440 --> 0:04:25.479 I'm really excited about this. It's always so much fun 0:04:25.520 --> 0:04:25.960 talking to you. 0:04:26.120 --> 0:04:29.040 It's been a while. I have to say, maybe just 0:04:29.080 --> 0:04:33.279 to start out with videos' favorite. 0:04:34.160 --> 0:04:36.000 The one actually from a few days ago that I 0:04:36.040 --> 0:04:38.159 just absolutely loved. I'm gonna I'm gonna forget her name 0:04:38.520 --> 0:04:40.359 off the top of my head, but she's called the 0:04:40.360 --> 0:04:43.039 she Wolf of Indian options trading and she has a 0:04:43.080 --> 0:04:45.800 whole show. She was actually reacing me. She was recently 0:04:45.880 --> 0:04:48.440 banned by the Indian government from you know, doing what 0:04:48.480 --> 0:04:51.320 she's doing because she's sort of so controversial, but she's 0:04:52.040 --> 0:04:54.080 very intimidating it. Like I like to kind of take 0:04:54.080 --> 0:04:56.880 on these option influencers and sort of say, look, you know, 0:04:56.920 --> 0:04:59.240 come on, guys, this isn't right. I don't know, man, 0:04:59.320 --> 0:05:03.120 she's she's pound, you know, pounding the table about making 0:05:03.120 --> 0:05:06.440 one hundred percent in ten minutes, you know, like guaranteed profits, 0:05:06.480 --> 0:05:09.280 interdate options trading over and over again while like a 0:05:09.320 --> 0:05:11.600 band plays in the background and fireworks go off. It's 0:05:11.680 --> 0:05:12.880 like truly incredible stuff. 0:05:13.160 --> 0:05:17.080 I'm reading an article on livemint dot com SCBI, which 0:05:17.080 --> 0:05:21.920 I guess is the Indian regulator banning her from capital markets. 0:05:22.480 --> 0:05:25.160 But one hundred percent in ten minutes sounds pretty good. 0:05:25.400 --> 0:05:28.720 What's the kid, what's the cat? Well, it turns out 0:05:28.800 --> 0:05:30.640 it's a lot better money for her than it is. 0:05:32.160 --> 0:05:36.080 Usually Well what is Okay, that's a very extreme example, 0:05:36.200 --> 0:05:38.359 but we all, you know, we've all seen these videos. 0:05:38.600 --> 0:05:42.400 The modal TikTok options is influencer. What is the sort 0:05:42.440 --> 0:05:46.120 of the gist of what they're telling viewers that they 0:05:46.160 --> 0:05:46.480 can do. 0:05:46.680 --> 0:05:49.520 Yeah, absolutely, I mean the things that you that they say, 0:05:49.560 --> 0:05:51.039 you guys just kind of joked a little bit about 0:05:51.080 --> 0:05:53.919 this earlier, but you know, make twenty thousand dollars a 0:05:53.960 --> 0:05:56.360 month in passive income, you know, easily with only a 0:05:56.360 --> 0:05:57.719 two hundred and fifty thousand. 0:05:57.480 --> 0:06:00.400 What's the gist of that stor we all are very 0:06:00.440 --> 0:06:03.160 skeptical results, But what is the basic thing that they're 0:06:03.200 --> 0:06:03.760 saying that you. 0:06:03.680 --> 0:06:06.760 Can absolutely achieve. The typical thing these days is they 0:06:06.800 --> 0:06:09.960 want you to sell short data, short term options, right, 0:06:10.000 --> 0:06:13.280 And there's various formats that might take. The really popular 0:06:13.279 --> 0:06:16.080 stuff might be just selling puts, you know, one month 0:06:16.120 --> 0:06:18.400 puts on your favorite stocks or on the equity index, 0:06:18.480 --> 0:06:21.400 or maybe weekly puts or maybe zero DT puts, sort 0:06:21.400 --> 0:06:24.040 of daily puts over and over again. Could be selling 0:06:24.320 --> 0:06:27.440 covered calls or uncovered calls. Could be selling you know, 0:06:27.480 --> 0:06:29.800 straddles or strangles or whatever it is. But the common 0:06:29.839 --> 0:06:33.280 idea or the kind of they'll pack all of these 0:06:33.320 --> 0:06:38.000 different handwavy justifications into why this is free money or 0:06:38.000 --> 0:06:40.480 why this is really easy. You'll hear people say, oh, 0:06:40.560 --> 0:06:42.880 ninety percent of options expire out of the money, so 0:06:42.920 --> 0:06:45.040 it's just super easy. You just make money on all 0:06:45.040 --> 0:06:47.480 these trades, you know, and then and then anything that 0:06:47.800 --> 0:06:50.200 could go wrong they explain away as how it's not 0:06:50.279 --> 0:06:52.040 really a problem. You know, Oh, well, if you sell 0:06:52.080 --> 0:06:53.840 the put and the stock goes down, then you get 0:06:53.839 --> 0:06:55.360 to buy the stock really cheap and the stock is 0:06:55.400 --> 0:06:57.000 going to go back up and it's kind of fine. 0:06:57.240 --> 0:06:59.839 Or you know, oh, you reduce your cost basis on 0:06:59.839 --> 0:07:01.640 the stock over and over again, and then then you 0:07:01.640 --> 0:07:03.719 get the stock for free. For all of these things 0:07:04.040 --> 0:07:06.479 over and over again. Where at the end of the day, Look, 0:07:06.480 --> 0:07:08.400 if you say you can sell an option, that's fine. 0:07:08.440 --> 0:07:10.560 It's just a trade. It has a payoff profile. You 0:07:10.800 --> 0:07:12.760 get a little bit of premium and maybe you lose 0:07:12.760 --> 0:07:14.320 a bunch of money or maybe you don't, and you 0:07:14.360 --> 0:07:16.040 can kind of analyze that trade the same way you 0:07:16.080 --> 0:07:18.560 would analyze any trade. It's not free money, you know. 0:07:18.640 --> 0:07:22.880 But the justifications and explanations and persuasiveness that goes into 0:07:22.880 --> 0:07:25.160 this from these from these kind of influences is very powerful. 0:07:25.640 --> 0:07:28.920 Do we have any sense of what people are using 0:07:29.040 --> 0:07:31.640 these four And you know, one thing I hear in 0:07:31.680 --> 0:07:35.720 particular on shorter dated options from this mostly comes from 0:07:35.760 --> 0:07:38.920 institutional traders, but the idea that well, these allow you 0:07:38.960 --> 0:07:42.000 to be more precise when you're hedging. This is a 0:07:42.120 --> 0:07:46.320 tactical move versus a strategic move. But then of course 0:07:46.400 --> 0:07:49.480 you look at something on a subreddit or something like 0:07:49.520 --> 0:07:52.560 that and people are just basically buy lottery tickets. 0:07:52.840 --> 0:07:55.520 Yeah, I think that's exactly right. So, you know, derivatives 0:07:55.560 --> 0:07:57.120 have been around for a long time, and options have 0:07:57.120 --> 0:08:00.640 been around for a long time, and they certainly enable 0:08:00.680 --> 0:08:04.440 you to make very customized, precise bets or hedges in 0:08:04.440 --> 0:08:06.600 intelligent ways if that's what you're trying to do, and 0:08:06.680 --> 0:08:09.600 you know, that's super. But most of what you see 0:08:10.160 --> 0:08:14.720 being sold on YouTube or on Instagram is much more. 0:08:15.080 --> 0:08:16.840 You know, you should just do this all the time. 0:08:16.960 --> 0:08:19.280 This just makes sense. This is basically free money. It's 0:08:19.280 --> 0:08:19.680 really easy. 0:08:19.960 --> 0:08:21.680 There's no accompanying strategy. 0:08:21.760 --> 0:08:24.680 There's no accompanying strategy of when and why might something 0:08:24.720 --> 0:08:26.880 like this make sense? At what price? How do you 0:08:26.920 --> 0:08:28.560 know if it's a good trade. There's none of that. 0:08:28.640 --> 0:08:31.880 It's just justification that somehow this is a cheat code 0:08:32.120 --> 0:08:34.680 in markets that just lets you unlocked the infinite money, 0:08:34.880 --> 0:08:37.040 an infinite money cheat code that lets you unlock sort 0:08:37.080 --> 0:08:38.200 of spectacular returns. 0:08:38.360 --> 0:08:40.560 One day, Tracy, We're going to do an episode on 0:08:40.600 --> 0:08:43.040 the cheat code that I did find in markets, which 0:08:43.040 --> 0:08:44.400 I have I think i've hinted it. 0:08:44.600 --> 0:08:46.280 Wait, you found one and you're still here. 0:08:46.840 --> 0:08:50.400 Well, the short version is, I did find a cheat 0:08:50.440 --> 0:08:53.680 code in nineteen ninety nine. I didn't know that I 0:08:53.720 --> 0:08:56.000 had found a cheat code at the time, and so 0:08:56.080 --> 0:08:57.520 I was like, oh, at some point I'll pick this 0:08:57.679 --> 0:08:59.920 back up. But in retrospect, I should have gotten all 0:09:00.080 --> 0:09:01.959 my friends and family to go all into it for 0:09:02.000 --> 0:09:03.959 a month. I could talk about it some other time. 0:09:04.040 --> 0:09:07.120 I did briefly find it. Cheat coulde in the markets, 0:09:07.120 --> 0:09:08.760 and I thought, I was like, you know, and. 0:09:08.720 --> 0:09:09.480 He didn't tell any of. 0:09:09.559 --> 0:09:11.599 Us, Yeah, I didn't. I was like, oh, this is 0:09:11.679 --> 0:09:15.080 kind of cool. I made ten thousand dollars. You know, 0:09:15.160 --> 0:09:17.760 we talk about volatility, right, and so just a very 0:09:17.800 --> 0:09:22.040 crudely you know, they're you know, maybe higher vall opportunities 0:09:22.080 --> 0:09:25.600 present good times because you're getting large premium or whatever 0:09:25.679 --> 0:09:28.240 for some of the options trading, et cetera. What are 0:09:28.360 --> 0:09:32.440 like people who find who like walk into these extremely 0:09:32.600 --> 0:09:36.000 naive strategies, Oh, option ninety percent of the time options 0:09:36.040 --> 0:09:38.480 expire out of the money. What does the payoff look 0:09:38.600 --> 0:09:40.640 like for them? How many days do they how many 0:09:40.640 --> 0:09:42.880 pennies can they pick up before they get steamrollered? 0:09:43.000 --> 0:09:45.320 Yeah, totally. I mean, these kind of strategies again, if 0:09:45.360 --> 0:09:47.920 you're just doing them all the time without thinking about it, 0:09:47.960 --> 0:09:49.960 without thinking about the price, and you're just going out 0:09:49.960 --> 0:09:52.080 like on the S ANDT for example, and selling options, 0:09:52.360 --> 0:09:54.160 you know, most of the time these days, because that's 0:09:54.200 --> 0:09:56.600 a crowded one way trade where lots of people sell 0:09:56.679 --> 0:09:59.400 short dated options. You'll tend to make kind of a 0:09:59.480 --> 0:10:02.200 little bit of money at a time, sort of choppily 0:10:02.400 --> 0:10:04.719 for a while, and then once every you know, three 0:10:04.800 --> 0:10:06.880 years or five years, you'll kind of get wiped out 0:10:07.240 --> 0:10:08.000 and end up down. 0:10:08.160 --> 0:10:09.839 You just start getting into it the day after the 0:10:09.880 --> 0:10:10.720 wipeout exactly. 0:10:11.040 --> 0:10:14.000 And actually that's and actually there is something to that. 0:10:14.120 --> 0:10:16.640 Usually usually it's like a month or two after the 0:10:16.679 --> 0:10:18.040 wipeout because you don't know if there's going to be 0:10:18.040 --> 0:10:20.160 another big leg down or something. But there does tend 0:10:20.240 --> 0:10:22.959 to be some excess risk premium and options markets a 0:10:23.040 --> 0:10:26.199 little while after a big market crash that blows out 0:10:26.200 --> 0:10:28.080 a lot of these guys and kind of causes people 0:10:28.080 --> 0:10:30.400 to panic, that's totally true. And then that tends to 0:10:30.559 --> 0:10:32.800 go away after another you know whatever it is year 0:10:32.920 --> 0:10:34.160 or two years or something like that. 0:10:34.600 --> 0:10:37.760 So just in terms of the expansion of all different 0:10:37.760 --> 0:10:40.040 types of derivatives. I don't want to focus too much 0:10:40.120 --> 0:10:43.320 on shorter dated options because there are some other things 0:10:43.440 --> 0:10:46.480 out there that look really interesting. One of them is 0:10:46.600 --> 0:10:49.600 I saw a headline float by about the University of 0:10:49.640 --> 0:10:54.520 Connecticut's endowment dropping some of its hedge fund exposure in 0:10:54.679 --> 0:10:59.040 favor of buffer ETFs. What are buffer ETFs? 0:10:59.160 --> 0:11:02.360 Yep, So this is a a big new manifestation of 0:11:02.400 --> 0:11:06.720 a relatively old popular idea. So buffer ETFs are usually 0:11:06.760 --> 0:11:10.000 pitched as sort of defined outcomes in some sense over 0:11:10.080 --> 0:11:12.959 some time period where they say, well, what you're trying, 0:11:13.040 --> 0:11:14.800 what we're trying to do is give you equity exposure, 0:11:14.840 --> 0:11:17.720 but you have protection. You have a buffer down to 0:11:17.800 --> 0:11:19.839 say ten or fifteen percent, where you're not going to 0:11:19.920 --> 0:11:22.760 lose money as the market goes down, and then beyond 0:11:22.840 --> 0:11:25.520 that point you're exposed. And in order to do that, 0:11:25.559 --> 0:11:27.240 you're going to sell an upside call. You're going to 0:11:27.240 --> 0:11:29.360 give up some of your upside And so what this 0:11:29.559 --> 0:11:32.240 is it's basically just a put spread caller, which is 0:11:32.280 --> 0:11:35.040 a very standard kind of option structure. You sell a 0:11:35.040 --> 0:11:38.880 call to buy a put spread. That is for many 0:11:39.000 --> 0:11:41.920 many years and decades, by far the most popular thing 0:11:41.960 --> 0:11:45.040 that a Wall Street derivative salesperson will run around trying 0:11:45.040 --> 0:11:47.400 to pitch to their clients. It's a very easy thing 0:11:47.480 --> 0:11:50.600 to conceptualize, I'm giving up some upside, I'm getting some protection. 0:11:51.120 --> 0:11:53.760 They can be structured so that there's sort of zero 0:11:54.040 --> 0:11:57.000 premium outlay where you sell a call and use that 0:11:57.040 --> 0:11:58.880 same amount of money to buy a put. So if 0:11:58.880 --> 0:12:01.120 you're an aggressive salesman, you call that like a free 0:12:01.120 --> 0:12:03.319 hedge or a zero cost hedge. Of course you're giving 0:12:03.400 --> 0:12:04.880 up upside, so you can it can be very cool 0:12:04.920 --> 0:12:05.480 to pay. 0:12:05.320 --> 0:12:08.599 For it, but only implicitly by some notional change that 0:12:08.640 --> 0:12:09.560 you're not thinking about. 0:12:09.679 --> 0:12:12.439 That's exactly right. And there's three legs to the trade, 0:12:12.480 --> 0:12:14.520 so there's lots of bit offer spread and lots of commissions. 0:12:14.520 --> 0:12:16.920 So salespeople and traders really like that, and they're very, 0:12:17.000 --> 0:12:20.400 very very popular now. Buffer ETFs these days enable a 0:12:20.440 --> 0:12:23.000 retail investor or a high net worth individual to go 0:12:23.040 --> 0:12:25.400 and get that just by buying an ETF, you know, 0:12:25.440 --> 0:12:27.600 with a seventy basis points management fee or whatever it is, 0:12:27.640 --> 0:12:30.040 instead of having to, you know, be involved with Wall 0:12:30.040 --> 0:12:32.960 Street banks or doing trading themselves. People love that. There 0:12:33.040 --> 0:12:35.719 are very famous mutual funds like the JP Morgan one 0:12:35.720 --> 0:12:37.880 that everybody talks about, and it's twenty two billion dollars 0:12:37.920 --> 0:12:40.280 of assets or something like that. And now there's I 0:12:40.280 --> 0:12:44.120 think something like ninety billion dollars of bufferytf's doing the 0:12:44.120 --> 0:12:46.280 same kind of thing. And they're all doing something very 0:12:46.360 --> 0:12:48.920 very similar, which is again they're selling call it an 0:12:48.960 --> 0:12:50.679 eight percent or ten percent out of the money call 0:12:50.720 --> 0:12:53.199 or seven percent of the money call. They're buying an 0:12:53.200 --> 0:12:55.800 apt the money or slightly downside put and then selling 0:12:55.840 --> 0:12:58.440 out another like a ten percent down or fifteen percent 0:12:58.440 --> 0:13:00.720 down put to kind of give yourself this bus on 0:13:00.760 --> 0:13:02.720 the way down. You're giving up upside on the way up. 0:13:03.120 --> 0:13:04.920 One thing I don't get is like, why would you 0:13:04.960 --> 0:13:08.280 prefer doing that versus just buying a bunch of equities 0:13:08.320 --> 0:13:11.600 and maybe hedging in a more traditional way like buying 0:13:11.640 --> 0:13:12.360 some bonds. 0:13:12.800 --> 0:13:15.840 So this is exactly the right question. So the first 0:13:15.920 --> 0:13:18.160 thing that you know, a derivatives person looks at when 0:13:18.200 --> 0:13:19.840 you look at a trade like this is Okay, what 0:13:19.880 --> 0:13:23.200 does this do to the delta the equity exposure of 0:13:23.240 --> 0:13:25.240 your position? Right? So if you buy some equities that 0:13:25.320 --> 0:13:27.520 is a one delta, A derivatives guys would say, it's 0:13:27.559 --> 0:13:29.960 just a delta one position. Market goes up a percent, 0:13:30.000 --> 0:13:33.200 you make a percent. If you trade a typical put 0:13:33.240 --> 0:13:35.320 spread caller against that, you buy a put spread, you 0:13:35.320 --> 0:13:37.520 sell a call, you're probably going to take that one. 0:13:37.600 --> 0:13:38.840 Sorry. What's a put spread? 0:13:38.960 --> 0:13:41.000 Is a posh to put? A put spread would be 0:13:41.160 --> 0:13:42.800 you buy say the out the money put, but then 0:13:42.800 --> 0:13:44.560 you sell a ten percent out of the money put. Okay, 0:13:44.559 --> 0:13:47.120 So that's going to give you protection only for ten percent. Okay. 0:13:47.320 --> 0:13:49.120 So if you do that kind of a trade, you 0:13:49.200 --> 0:13:51.240 might take your one delta option down to like a 0:13:51.320 --> 0:13:53.760 point six down to a sixty delta, So now you're 0:13:53.800 --> 0:13:56.480 only participating kind of sixty percent in the movements of 0:13:56.520 --> 0:13:59.480 the market. And if you look at how these kind 0:13:59.520 --> 0:14:03.000 of trades perform over long periods of time, they actually 0:14:03.040 --> 0:14:06.120 act a whole lot just like having sort of sixty 0:14:06.160 --> 0:14:10.480 percent as much stock, right, because ultimately they're rolling these 0:14:10.520 --> 0:14:12.720 it's not really like a buy and hold to maturity thing. 0:14:12.720 --> 0:14:14.720 It's like they're rolling these options to kind of maintain 0:14:14.760 --> 0:14:17.680 this kind of exposure. And if you were just to 0:14:17.880 --> 0:14:20.240 take the counterfactual, which is why don't I just own 0:14:20.320 --> 0:14:22.720 sixty percent as much stock? And put forty percent of 0:14:22.720 --> 0:14:25.400 the rest in T bills. Turns out your fees are 0:14:25.440 --> 0:14:28.160 way less and your performance is probably better. Right, So 0:14:28.360 --> 0:14:32.240 you're doing this creative, smart sounding options thing, but actually 0:14:32.360 --> 0:14:33.240 you're underperformed. 0:14:49.120 --> 0:14:52.800 Are there institutions, you know, trace you mentioned the University 0:14:52.840 --> 0:14:58.000 of Connecticut. You know, institutions have sometimes very specific needs 0:14:58.200 --> 0:15:02.240 they need to have, like a guarantee return very long term. 0:15:02.400 --> 0:15:06.720 They may not be optimizing for maximum returns. They have 0:15:06.800 --> 0:15:10.040 to dole out a certain amount for student aid, whatever 0:15:10.080 --> 0:15:13.640 it is. Are there certain types of institutions where, whether 0:15:13.680 --> 0:15:18.360 we're talking about the buffer ETFs specifically or analogus to 0:15:18.440 --> 0:15:22.520 that strategy, that this is, in your view, in alignment 0:15:22.560 --> 0:15:24.280 with the institutional mandate. 0:15:24.560 --> 0:15:27.880 So that there are cases when that's to some extent true, 0:15:28.240 --> 0:15:30.200 at least with some kinds of derivative structures. So you 0:15:30.200 --> 0:15:32.520 will have cases where there's like a big dispersement that 0:15:32.560 --> 0:15:34.240 has to be made at some future date and they 0:15:34.320 --> 0:15:36.240 want to lock in for sure the fact that they 0:15:36.240 --> 0:15:39.520 can make that dispersement. But usually something more like an 0:15:39.560 --> 0:15:41.800 outright put is going to be a better match for that, right, 0:15:41.800 --> 0:15:43.600 Because the thing about the put spread or the put 0:15:43.680 --> 0:15:45.680 spread collor is you've only got like this, say, ten 0:15:45.720 --> 0:15:48.440 percent buffer of protection, and what if the market crash, So. 0:15:48.720 --> 0:15:50.760 If the stock falls, or if the market falls twenty 0:15:50.840 --> 0:15:54.440 five percent, which does happen, you're actually not protected against 0:15:54.440 --> 0:15:54.720 all of that. 0:15:54.840 --> 0:15:57.280 Yeah, exactly right. So this stuff really doesn't like lock 0:15:57.360 --> 0:15:59.800 in defined outcomes to the downside. It just gives you 0:16:00.120 --> 0:16:03.280 of some buffer of protection in exchange for some upside 0:16:03.360 --> 0:16:03.960 that you're losing. 0:16:04.560 --> 0:16:06.560 You touched on this earlier, but talk to us a 0:16:06.600 --> 0:16:10.160 little bit more about the commissions and the execution and 0:16:10.240 --> 0:16:12.280 whether or not you're getting a good deal on those, 0:16:12.320 --> 0:16:16.160 because my sense is these all seem to be algorithmic, right, 0:16:16.280 --> 0:16:20.000 very mechanical, So I'm not entirely sure what you're paying for. 0:16:20.120 --> 0:16:22.120 He yeah, no, So this is a really important point. 0:16:22.240 --> 0:16:25.280 So generally these are not always, but typically these kind 0:16:25.320 --> 0:16:28.960 of structures exist in fairly popular, fairly liquid underlyings. Right. 0:16:29.000 --> 0:16:31.760 This isn't like microcapstocks. This is S and P or something. 0:16:32.040 --> 0:16:34.160 So the you know, the bid offer spreads don't look 0:16:34.360 --> 0:16:36.040 that wide when you look at it. But you have 0:16:36.080 --> 0:16:38.120 to keep in mind if you have a twenty two 0:16:38.200 --> 0:16:40.760 billion dollar fund that once a quarter is rolling this 0:16:40.840 --> 0:16:43.360 giant collar and everybody knows about it and knows exactly 0:16:43.440 --> 0:16:45.040 what you're going to do and knows exactly when you're 0:16:45.040 --> 0:16:47.800 going to do it, then obviously the market just moves 0:16:48.480 --> 0:16:50.960 right ahead of you, right and everybody positions first trade. 0:16:51.320 --> 0:16:54.040 What happened during Vollmageddon as well, very much so. 0:16:54.080 --> 0:16:56.720 When when you have a big tray that everybody knows 0:16:56.760 --> 0:16:58.040 what you're going to do and when you're going to 0:16:58.080 --> 0:16:59.680 do it, they're going to position ahead of that. In 0:16:59.720 --> 0:17:02.320 this specially in a poor liquidity environment, you know that's 0:17:02.360 --> 0:17:04.159 going to really hurt you. Like markets can you know, 0:17:04.200 --> 0:17:08.280 the markets can move very significantly as market makers and 0:17:08.359 --> 0:17:11.120 arbitrazurers and volatility people sort of position for this big 0:17:11.160 --> 0:17:13.119 trade that's coming. And so the execution you end up 0:17:13.160 --> 0:17:17.160 getting in these trades is really poor. And usually they're 0:17:17.200 --> 0:17:19.920 not again they're doing something very simple, very mechanical. They're 0:17:19.960 --> 0:17:23.600 not randomizing their trades in small batches to work into 0:17:23.680 --> 0:17:26.720 position really efficiently. They're just outsourcing execution to some agency 0:17:26.720 --> 0:17:29.240 only broker who doesn't care at all about how they 0:17:29.280 --> 0:17:31.080 just have to get a filled and they put it 0:17:31.160 --> 0:17:33.359 up way over the offer side of where the market 0:17:33.359 --> 0:17:33.919 really should be. 0:17:34.960 --> 0:17:38.560 Are there funds that claim to do something more sophisticating, 0:17:38.600 --> 0:17:41.040 because it does sound obvious, like all the rules are 0:17:41.080 --> 0:17:44.480 out there, the prospectus, the mechanics, the timing, et cetera. 0:17:44.840 --> 0:17:48.360 It does seem very I guess front runnable. Do they 0:17:48.359 --> 0:17:51.560 have tactics or approaches to avoid what sounds like the 0:17:51.560 --> 0:17:52.840 most obvious risk in the world. 0:17:53.000 --> 0:17:55.840 Yeah, I mean certainly there are you know, volatility arbitrage 0:17:55.880 --> 0:17:58.080 type of funds like ours and like others out there. 0:17:58.480 --> 0:18:00.879 We will work with institutional clients that are trying to 0:18:01.080 --> 0:18:03.800 do some similar kinds of things, but in an intelligent way. 0:18:03.800 --> 0:18:06.080 And yeah, the way we execute in the marketplace is 0:18:06.200 --> 0:18:09.359 very different, right, So we take the same objective of 0:18:09.400 --> 0:18:11.119 the exposure we want to get, but we're going to 0:18:11.119 --> 0:18:13.640 work into it sort of passively and secretly and quietly 0:18:13.800 --> 0:18:15.840 in very smart ways and try to kind of get 0:18:15.960 --> 0:18:18.120 mid market execution and have nobody know what we're doing. 0:18:18.240 --> 0:18:22.360 And so the competitive advantage is really on the execution 0:18:22.520 --> 0:18:24.920 side rather than the actual design of the product. 0:18:25.080 --> 0:18:27.280 Yeah, there's probably some of both. I mean, one thing 0:18:27.320 --> 0:18:29.200 one thing you want to do is execute really efficiently 0:18:29.240 --> 0:18:31.560 without people knowing what you're doing. Another thing you want 0:18:31.560 --> 0:18:34.080 to do is just know what the big flows and 0:18:34.160 --> 0:18:37.359 big crowded trades in the market are and generally be 0:18:37.400 --> 0:18:40.560 trying to achieve the client subjectives, but ideally by buying 0:18:40.600 --> 0:18:43.240 something that's getting sold too much as opposed to selling 0:18:43.280 --> 0:18:46.400 something that everybody else is selling. Right, So those two components, 0:18:46.400 --> 0:18:48.640 that's a kind of a strategy design aspect, and then 0:18:48.840 --> 0:18:52.240 there's just an execution implementation aspect that's again really important 0:18:52.240 --> 0:18:54.399 and people just aren't incentivized for it. Like when you 0:18:54.440 --> 0:18:58.000 think about these the buffer ETFs derivatives using ETFs, it's 0:18:58.040 --> 0:19:01.240