1
00:00:10,680 --> 00:00:13,840
Speaker 1: Hello, and welcome to another episode of The Odd Lots Podcast.

2
00:00:13,920 --> 00:00:15,280
Speaker 1: I'm Tracy Alloway.

3
00:00:15,000 --> 00:00:16,280
Speaker 2: And I'm Joe Wisenthal.

4
00:00:16,680 --> 00:00:18,040
Speaker 1: Joe, do you know what's coming up?

5
00:00:20,560 --> 00:00:21,800
Speaker 2: The Odd Lots pub quiz?

6
00:00:22,079 --> 00:00:25,600
Speaker 1: That's true? Also Valentine's Day?

7
00:00:25,800 --> 00:00:27,800
Speaker 2: This a little bit later on. What else? What else

8
00:00:27,840 --> 00:00:28,400
Speaker 2: do you have in mind?

9
00:00:28,560 --> 00:00:32,280
Speaker 1: Do you do you celebrate the anniversary of Vollmageddon.

10
00:00:33,040 --> 00:00:34,120
Speaker 2: Do I celebrate it?

11
00:00:34,280 --> 00:00:34,480
Speaker 3: Yeah?

12
00:00:34,640 --> 00:00:37,000
Speaker 2: I mean who doesn't. No, I don't celebrate it. But

13
00:00:37,120 --> 00:00:40,960
Speaker 2: that was such a formative moment. So that was February when.

14
00:00:40,880 --> 00:00:43,800
Speaker 1: Was the twenty eighteen six year anniversary.

15
00:00:43,960 --> 00:00:46,880
Speaker 2: That was one of our first like really good episodes

16
00:00:46,920 --> 00:00:48,920
Speaker 2: where we sort of had a good We talked about

17
00:00:49,040 --> 00:00:53,360
Speaker 2: what blew up the short vall etf XIV. I feel

18
00:00:53,360 --> 00:00:55,280
Speaker 2: like we go back through our history. That was like

19
00:00:55,280 --> 00:00:56,400
Speaker 2: an important episode.

20
00:00:56,480 --> 00:00:58,480
Speaker 1: Wait, don't say that was one of the first good ones,

21
00:00:58,480 --> 00:01:01,600
Speaker 1: because we're doing this for your years before twenty eighteen.

22
00:01:01,960 --> 00:01:04,040
Speaker 2: You're right, We've had many good I think that was

23
00:01:04,080 --> 00:01:07,119
Speaker 2: like a it was a highlight. It was a highlight.

24
00:01:07,200 --> 00:01:11,399
Speaker 1: Okay, yes, okay, Well, I do in fact celebrate the

25
00:01:11,440 --> 00:01:14,319
Speaker 1: anniversary of Valmageddon because I always enjoy going back to

26
00:01:14,520 --> 00:01:17,680
Speaker 1: tweets around that time, because there are a lot of

27
00:01:17,760 --> 00:01:21,840
Speaker 1: volatility traders on social media who have very strong and

28
00:01:21,880 --> 00:01:25,560
Speaker 1: often erroneous opinions, and one of the opinions they were

29
00:01:25,920 --> 00:01:31,240
Speaker 1: holding around January twenty eighteen was that everything was fine. Yeah,

30
00:01:31,319 --> 00:01:35,840
Speaker 1: shortfall was this perpetual money maker, no issues with the

31
00:01:36,000 --> 00:01:40,400
Speaker 1: two volatility exchange traded notes that eventually ended up blowing up,

32
00:01:40,720 --> 00:01:43,679
Speaker 1: one of which was XIV, as you pointed out, and

33
00:01:43,760 --> 00:01:47,639
Speaker 1: I remember tweeting things in January of twenty eighteen, stuff

34
00:01:47,760 --> 00:01:51,800
Speaker 1: like if the VICS curve inverts, which was about to happen,

35
00:01:52,280 --> 00:01:55,920
Speaker 1: this would be an absolute disaster for XIV, and I

36
00:01:55,960 --> 00:01:59,400
Speaker 1: had a bunch of people pushing back complaining about the

37
00:01:59,440 --> 00:02:02,920
Speaker 1: axis on my chart, and lo and behold, about a

38
00:02:02,920 --> 00:02:06,360
Speaker 1: week later, XIV not only blew up, but was dead

39
00:02:06,440 --> 00:02:09,000
Speaker 1: within a couple of days and actually royaled the market

40
00:02:09,080 --> 00:02:09,560
Speaker 1: as well.

41
00:02:09,639 --> 00:02:14,080
Speaker 2: I remember there it was very popular XIV, this vehicle,

42
00:02:14,160 --> 00:02:17,880
Speaker 2: and there was a sound intuition about it, I think,

43
00:02:18,040 --> 00:02:21,080
Speaker 2: which is that you know, is this basically betting against

44
00:02:21,080 --> 00:02:23,720
Speaker 2: the VIX And you start with the assumption that Okay,

45
00:02:23,760 --> 00:02:30,359
Speaker 2: people systematically and perpetually overpay for downside protection. Understandable people

46
00:02:30,400 --> 00:02:34,280
Speaker 2: pay for insurance and so you can harvest that premium

47
00:02:34,320 --> 00:02:37,480
Speaker 2: basically by taking the other side, and that by and large,

48
00:02:37,800 --> 00:02:40,240
Speaker 2: shorting VALL is a sort of like a good way

49
00:02:40,280 --> 00:02:43,120
Speaker 2: to a way that people super charge their returns and

50
00:02:43,160 --> 00:02:45,840
Speaker 2: look like a core thing is that when we talk

51
00:02:45,880 --> 00:02:48,639
Speaker 2: about VALL, I think like we are mostly in life shortfall.

52
00:02:48,720 --> 00:02:51,919
Speaker 2: Anyone who owned stocks for a long period or any

53
00:02:51,919 --> 00:02:55,160
Speaker 2: period is SHORTVALL, where sort of like VALL is bad

54
00:02:55,240 --> 00:02:58,640
Speaker 2: for portfolios, et cetera. So like when we talk about

55
00:02:58,800 --> 00:03:02,600
Speaker 2: specifically shorting VALL though, then that's where it gets interesting.

56
00:03:02,800 --> 00:03:05,080
Speaker 1: Yeah, So this is one of the things that I

57
00:03:05,240 --> 00:03:09,600
Speaker 1: find very remarkable about our current moment, which is that

58
00:03:10,360 --> 00:03:13,359
Speaker 1: you know, shorting VALL post the two thousand and eight

59
00:03:13,400 --> 00:03:17,200
Speaker 1: financial crisis became a very popular strategy because you had

60
00:03:17,240 --> 00:03:19,960
Speaker 1: low interest rates, so people wanted to pick up yield

61
00:03:20,120 --> 00:03:23,480
Speaker 1: wherever they could. Yeah, you also had central banks out

62
00:03:23,520 --> 00:03:27,280
Speaker 1: there in the market literally crushing volatility, So you knew

63
00:03:27,320 --> 00:03:29,560
Speaker 1: that there was the put that sort of existed over

64
00:03:29,600 --> 00:03:31,840
Speaker 1: the overall market, so why not try to monetize it.

65
00:03:32,160 --> 00:03:35,840
Speaker 1: There wasn't a lot going on up until twenty eighteen,

66
00:03:36,040 --> 00:03:39,480
Speaker 1: so it made sense to bet on nothing, basically on

67
00:03:39,880 --> 00:03:43,480
Speaker 1: things not happening. But what I find really fascinating about

68
00:03:43,520 --> 00:03:47,680
Speaker 1: the current moment is we seem to be seeing a

69
00:03:47,760 --> 00:03:51,200
Speaker 1: return of that short volatility trade. So you and I

70
00:03:51,240 --> 00:03:55,240
Speaker 1: have discussed on this podcast these shorter dated options, one

71
00:03:55,360 --> 00:04:00,240
Speaker 1: or zero dated options becoming incredibly popular, absolutely exploded voting

72
00:04:00,360 --> 00:04:03,560
Speaker 1: in terms of volume. There's other types of derivatives that

73
00:04:03,600 --> 00:04:07,240
Speaker 1: are also becoming more popular. And yet when I look

74
00:04:07,280 --> 00:04:09,720
Speaker 1: around at the market, it seems like there is so

75
00:04:09,880 --> 00:04:12,880
Speaker 1: much potential for one off events. You know, the FED

76
00:04:13,000 --> 00:04:16,760
Speaker 1: is hiking rates, we have geopolitical risk, as you know

77
00:04:16,839 --> 00:04:20,000
Speaker 1: we always talk about, joke about on this show, supply

78
00:04:20,160 --> 00:04:24,239
Speaker 1: chain disruptions. The chance of one off events actually happening

79
00:04:24,279 --> 00:04:28,080
Speaker 1: seems greater than ever, and yet shorting fall is popular

80
00:04:28,200 --> 00:04:31,159
Speaker 1: and measures of aall itself remain pretty low. The VIX

81
00:04:31,240 --> 00:04:34,600
Speaker 1: is pretty low, the volatility of the VIX index, the

82
00:04:34,720 --> 00:04:37,120
Speaker 1: VVIX is really low. So I think we need to

83
00:04:37,240 --> 00:04:41,800
Speaker 1: ask why is shortfall back, and why is it particularly

84
00:04:41,839 --> 00:04:44,800
Speaker 1: popular at this moment in time, and what does it

85
00:04:44,920 --> 00:04:46,200
Speaker 1: mean for the wider market.

86
00:04:46,560 --> 00:04:47,120
Speaker 2: Let's do it.

87
00:04:47,440 --> 00:04:49,480
Speaker 1: I am very happy to say that we do, in

88
00:04:49,520 --> 00:04:52,280
Speaker 1: fact have the perfect guest. We're going to be speaking

89
00:04:52,320 --> 00:04:55,279
Speaker 1: to Chris Sidel. We've had him on the podcast before.

90
00:04:55,360 --> 00:04:58,520
Speaker 1: He is the co cio of Ambrose Group, and he

91
00:04:58,640 --> 00:05:00,960
Speaker 1: is now officially one of my favorite guests ever because

92
00:05:00,960 --> 00:05:04,200
Speaker 1: he brought us donuts. And if I sound more energetic

93
00:05:04,320 --> 00:05:06,520
Speaker 1: than normal, it's because I'm currently on a sugar rush.

94
00:05:06,520 --> 00:05:08,680
Speaker 1: And also I'm talking about volatility and you took us

95
00:05:08,720 --> 00:05:11,680
Speaker 1: in this morning. I did not, although you tried to

96
00:05:11,720 --> 00:05:13,359
Speaker 1: get me on. Can you imagine if I had a

97
00:05:13,400 --> 00:05:15,240
Speaker 1: donut ends in at the same time.

98
00:05:15,880 --> 00:05:16,520
Speaker 2: That would be bad?

99
00:05:16,640 --> 00:05:18,960
Speaker 1: Okay, Chris, thank you so much for coming back.

100
00:05:18,880 --> 00:05:20,919
Speaker 3: On odd Lots. Thank you so much for having me.

101
00:05:21,360 --> 00:05:22,320
Speaker 3: So when we.

102
00:05:22,279 --> 00:05:27,159
Speaker 1: Talk about short volatility, you know, Joe and I discussed

103
00:05:27,160 --> 00:05:29,400
Speaker 1: it a little bit in the intro, but what is

104
00:05:29,440 --> 00:05:32,760
Speaker 1: the expression of going short volatility?

105
00:05:33,440 --> 00:05:37,560
Speaker 3: Yeah, the expression of going short volatility is taking a

106
00:05:37,600 --> 00:05:43,560
Speaker 3: bet that the normality will continue, right, So effectively, if

107
00:05:43,600 --> 00:05:47,239
Speaker 3: you are betting on long volatility, you are pretty much

108
00:05:47,360 --> 00:05:50,279
Speaker 3: betting on the abnormality taking place.

109
00:05:51,240 --> 00:05:53,560
Speaker 2: So, I mean, I said it in the beginning, but

110
00:05:53,600 --> 00:05:56,800
Speaker 2: I sort of think that most life and investing is

111
00:05:56,839 --> 00:06:01,440
Speaker 2: implicitly short. Well, if you have spy in your retirement account,

112
00:06:01,440 --> 00:06:04,039
Speaker 2: then you know you think it's just generally going to

113
00:06:04,040 --> 00:06:06,880
Speaker 2: go up very time. That is normal. That is so

114
00:06:06,920 --> 00:06:09,960
Speaker 2: as you but per your definition, that is an implicit

115
00:06:10,080 --> 00:06:15,120
Speaker 2: short volatility. How does it get expressed in the options market?

116
00:06:15,160 --> 00:06:18,360
Speaker 2: And or maybe a question is why do people make

117
00:06:18,440 --> 00:06:21,600
Speaker 2: that bet in the options market rather than just going

118
00:06:21,640 --> 00:06:23,799
Speaker 2: the implicit route of being long risk assets.

119
00:06:24,480 --> 00:06:28,240
Speaker 3: Yeah, because I think it's something that generally pays off

120
00:06:28,279 --> 00:06:31,320
Speaker 3: the majority of the time. Within the spread as to

121
00:06:31,400 --> 00:06:34,360
Speaker 3: how you can trade it, there's this embedded risk premium

122
00:06:34,960 --> 00:06:37,320
Speaker 3: that I mean, sure people could argue that there's an

123
00:06:37,360 --> 00:06:41,360
Speaker 3: equity risk premium as well, but the expression towards how

124
00:06:41,440 --> 00:06:44,920
Speaker 3: you apply this, whether it's short s and p puts,

125
00:06:44,960 --> 00:06:50,240
Speaker 3: short mixed calls, short variant swaps, it has a tendency

126
00:06:50,400 --> 00:06:53,960
Speaker 3: to win the majority of the time, and this expression

127
00:06:54,560 --> 00:07:00,000
Speaker 3: lulls market participants into very poor habits of expressing the training.

128
00:07:00,480 --> 00:07:03,680
Speaker 3: Imagine you have taken a trade and you're going to

129
00:07:03,720 --> 00:07:06,760
Speaker 3: win ninety percent of the time, and when the trade

130
00:07:06,800 --> 00:07:10,960
Speaker 3: is working against you, you're adding more size and you're

131
00:07:10,960 --> 00:07:15,200
Speaker 3: adding more conviction. Over the course of years, when the

132
00:07:15,280 --> 00:07:18,320
Speaker 3: trade is beginning to work against you, you have a

133
00:07:18,360 --> 00:07:21,280
Speaker 3: tendency to believe that this is just another one of

134
00:07:21,320 --> 00:07:25,559
Speaker 3: those cases right, It's like being rewarded for buying the dip.

135
00:07:26,120 --> 00:07:28,240
Speaker 3: If you do it over and over again, you're going

136
00:07:28,320 --> 00:07:32,320
Speaker 3: to feel this conviction towards it. But in short volatility terms,

137
00:07:32,840 --> 00:07:36,400
Speaker 3: eventually it catches up and it all goes wrong at once.

138
00:07:37,120 --> 00:07:41,679
Speaker 1: Yeah. The journalistic euphemism that was usually deployed is picking

139
00:07:41,760 --> 00:07:45,040
Speaker 1: up pennies in front of a steamroller. Right, So why

140
00:07:45,080 --> 00:07:47,880
Speaker 1: don't you talk to us about the numbers that you're

141
00:07:47,920 --> 00:07:51,120
Speaker 1: seeing in the market. We say, shortfall seems to be

142
00:07:51,280 --> 00:07:54,200
Speaker 1: back and bigger than ever. What are the actual figures

143
00:07:54,280 --> 00:07:54,760
Speaker 1: around that?

144
00:07:55,400 --> 00:07:58,400
Speaker 3: Yeah, So I think it's important for listeners to have

145
00:07:58,440 --> 00:08:01,160
Speaker 3: a little bit of an understanding of my background and

146
00:08:01,440 --> 00:08:04,280
Speaker 3: why it is we track these numbers. So I was

147
00:08:04,320 --> 00:08:07,080
Speaker 3: a prop trader on two different desks camera securities in

148
00:08:07,160 --> 00:08:09,840
Speaker 3: Xanthis Capital, and then I went to a large Canadian

149
00:08:09,880 --> 00:08:12,160
Speaker 3: investment bank. I spent three and a half years there

150
00:08:12,200 --> 00:08:15,040
Speaker 3: and most of my time was spent trading exotic derivatives.

151
00:08:15,240 --> 00:08:17,600
Speaker 3: Then myself and a couple of my partners who are

152
00:08:18,240 --> 00:08:21,720
Speaker 3: XCTC excitadel guys, we got together and we said, hey,

153
00:08:22,120 --> 00:08:26,640
Speaker 3: we could run this carriy neutral tail restrategy, which effectively

154
00:08:26,800 --> 00:08:31,080
Speaker 3: when volatility is exploding, it's going to have this massive return.

155
00:08:31,640 --> 00:08:34,120
Speaker 3: But when markets are dormant, we use a lot of

156
00:08:34,280 --> 00:08:38,439
Speaker 3: short term proprietary trading to be flat. So you'll have foundations,

157
00:08:38,679 --> 00:08:42,440
Speaker 3: high networked individuals, family offices that will use something like

158
00:08:42,480 --> 00:08:44,120
Speaker 3: this as a hedge in their portfolio.

159
00:08:44,320 --> 00:08:44,480
Speaker 1: Right.

160
00:08:45,280 --> 00:08:49,080
Speaker 3: Because of that, we need to understand the derivative market

161
00:08:49,120 --> 00:08:54,440
Speaker 3: microstructure and also the ecosystem, understanding how certain agents in

162
00:08:54,440 --> 00:08:58,640
Speaker 3: that ecosystem are participating with one another. So over the

163
00:08:58,720 --> 00:09:01,160
Speaker 3: last year, would start to come up in the data

164
00:09:01,440 --> 00:09:05,920
Speaker 3: was that the short volatility trade was coming back in

165
00:09:06,280 --> 00:09:10,000
Speaker 3: huge size. So when you think about the SMP complex,

166
00:09:10,240 --> 00:09:15,360
Speaker 3: in the VIX complex, the net short VEGA notional today

167
00:09:16,080 --> 00:09:19,680
Speaker 3: is two times higher than when it was during January

168
00:09:20,000 --> 00:09:22,840
Speaker 3: of twenty eighteen, which was the month right before VALLMA,

169
00:09:22,880 --> 00:09:23,240
Speaker 3: get it.

170
00:09:23,440 --> 00:09:26,760
Speaker 1: This is when we're going to have to define vega.

171
00:09:27,679 --> 00:09:29,839
Speaker 1: We should just do all the Greek letters, just cut

172
00:09:29,840 --> 00:09:31,680
Speaker 1: them out of the way right now, but vega.

173
00:09:32,120 --> 00:09:37,480
Speaker 3: Yeah, So in VALL terms, right, think one point of

174
00:09:37,520 --> 00:09:42,040
Speaker 3: a VALL move and how much you'll make or lose. Okay, right,

175
00:09:42,160 --> 00:09:46,000
Speaker 3: So if your net long a million bucks of vega

176
00:09:46,760 --> 00:09:50,000
Speaker 3: and volatility moves up one vall point you'll make a

177
00:09:50,000 --> 00:09:54,880
Speaker 3: million bucks vice versa. Right, So what that's saying today

178
00:09:55,080 --> 00:09:58,640
Speaker 3: that number the netting short exposure is two times higher

179
00:09:59,040 --> 00:10:02,640
Speaker 3: than where it was during January of twenty eighteen, which

180
00:10:02,679 --> 00:10:06,720
Speaker 3: is right before vallom again. Additionally, and I sent you

181
00:10:06,720 --> 00:10:09,719
Speaker 3: guys this chart from Morning STARU, which is such a

182
00:10:09,840 --> 00:10:14,360
Speaker 3: crucial chart in my opinion. These derivative income generating funds,

183
00:10:14,600 --> 00:10:18,240
Speaker 3: the AUM in these have increased by over ten x

184
00:10:18,840 --> 00:10:24,600
Speaker 3: since January twenty eighteen. Right, that's another sort of fact

185
00:10:24,679 --> 00:10:26,800
Speaker 3: that's pretty insane to think about.

186
00:10:27,000 --> 00:10:29,520
Speaker 1: What's the definition of a derivative income fund?

187
00:10:30,040 --> 00:10:32,640
Speaker 3: Yeah, so it's the same thing as to what we

188
00:10:32,640 --> 00:10:34,320
Speaker 3: were talking about at the beginning of the pod, where

189
00:10:34,320 --> 00:10:53,360
Speaker 3: we said different expressions towards harvesting these volatility versus premium traits.

190
00:10:56,280 --> 00:10:58,600
Speaker 2: It's intuitive to me why there was so much interest

191
00:10:58,720 --> 00:11:03,280
Speaker 2: in these income generating deriative strategies during the ZERP years

192
00:11:03,559 --> 00:11:06,120
Speaker 2: when you couldn't just generate income by going out and

193
00:11:06,160 --> 00:11:08,600
Speaker 2: buying a government bond. But now you can get five

194
00:11:08,640 --> 00:11:11,400
Speaker 2: percent or whatever. So why is the like, why do

195
00:11:11,480 --> 00:11:14,719
Speaker 2: people go to the exotic route for income generation when

196
00:11:14,720 --> 00:11:17,640
Speaker 2: they are very plain, vanilla things that actually pay yield

197
00:11:17,679 --> 00:11:18,240
Speaker 2: these days.

198
00:11:18,800 --> 00:11:21,920
Speaker 3: I think twenty twenty one is a year that will

199
00:11:21,920 --> 00:11:26,160
Speaker 3: go down in the derivative history books because what happened

200
00:11:26,200 --> 00:11:29,640
Speaker 3: during that year was you had a slew of new

201
00:11:29,720 --> 00:11:38,120
Speaker 3: mandate additions between large foundations, pensions, rias, endowments, mainly because

202
00:11:38,120 --> 00:11:40,439
Speaker 3: of what transpired in twenty twenty. You had a really

203
00:11:40,440 --> 00:11:42,920
Speaker 3: big ball move in twenty twenty, and then also in

204
00:11:43,040 --> 00:11:46,480
Speaker 3: Q one of twenty twenty one, you had the whole

205
00:11:46,640 --> 00:11:49,520
Speaker 3: Meme Stock sort of debacle. So if you were a

206
00:11:49,600 --> 00:11:53,839
Speaker 3: large institution that did not have exposure to derivatives and

207
00:11:53,840 --> 00:11:56,600
Speaker 3: that type of mandate, you almost looked at as archaic

208
00:11:56,720 --> 00:12:00,400
Speaker 3: in a way, right, So at that time, a lot

209
00:12:00,400 --> 00:12:02,920
Speaker 3: of these institutions said we want we want to start

210
00:12:02,920 --> 00:12:07,400
Speaker 3: trading options. Simultaneously, what was going on was the exchanges

211
00:12:07,480 --> 00:12:10,880
Speaker 3: started listing more and more tenors, right, so you started

212
00:12:10,920 --> 00:12:14,920
Speaker 3: having seven days till expiration options, five days till expiration,

213
00:12:15,120 --> 00:12:20,600
Speaker 3: zero days till expiration, and a lot of the consultants

214
00:12:20,640 --> 00:12:25,760
Speaker 3: at these larger institutions started realizing, well, back in the day,

215
00:12:25,840 --> 00:12:28,360
Speaker 3: if we wanted to sell a twenty percent out the

216
00:12:28,400 --> 00:12:31,920
Speaker 3: money SMP put, we have to wait one quarter to

217
00:12:32,040 --> 00:12:37,280
Speaker 3: collect five bucks in premium terms. Right today, we could

218
00:12:37,320 --> 00:12:42,200
Speaker 3: sell a zero DT option for fifty cents and do

219
00:12:42,280 --> 00:12:44,520
Speaker 3: that twenty times over and over and over. And what

220
00:12:44,559 --> 00:12:48,679
Speaker 3: this does on paper is that it changes the path dependency, right,

221
00:12:48,840 --> 00:12:52,320
Speaker 3: so you really won't get hurt for one little thing

222
00:12:52,360 --> 00:12:54,000
Speaker 3: happening at the end of the month or the end

223
00:12:54,040 --> 00:12:58,079
Speaker 3: of the quarter. The problem with that is that on

224
00:12:58,200 --> 00:13:01,480
Speaker 3: paper it looks like that, but when you run certain

225
00:13:01,520 --> 00:13:05,800
Speaker 3: correlations you realize that you're still taking the same exact trait.

226
00:13:06,040 --> 00:13:09,240
Speaker 3: Because if you wake up tomorrow and you say balls

227
00:13:09,240 --> 00:13:11,640
Speaker 3: are up five ball points across the wall surface and

228
00:13:11,679 --> 00:13:14,880
Speaker 3: the term structure, you're going to realize that seven days

229
00:13:14,960 --> 00:13:18,559
Speaker 3: till expiration option and the one month till expiration option

230
00:13:19,200 --> 00:13:21,559
Speaker 3: are both going to be negatively impacted.

231
00:13:22,400 --> 00:13:25,120
Speaker 1: Maybe this is a good chance to talk about the

232
00:13:25,200 --> 00:13:30,119
Speaker 1: ecosystem of the options world. So, setting aside the derivative

233
00:13:30,280 --> 00:13:33,680
Speaker 1: funds which are buying these things, someone is also selling

234
00:13:33,720 --> 00:13:37,400
Speaker 1: them the options. Usually the market makers are the dealers,

235
00:13:37,440 --> 00:13:40,840
Speaker 1: So what is the role of market makers in this process?

236
00:13:40,920 --> 00:13:44,800
Speaker 1: And then also I'm curious how cheap it is to

237
00:13:44,880 --> 00:13:48,000
Speaker 1: go short volatility in general now, because this was also

238
00:13:48,040 --> 00:13:51,440
Speaker 1: a hallmark of the twenty tens, which was it was

239
00:13:51,440 --> 00:13:54,320
Speaker 1: pretty cheap to do these trades, right, and so that

240
00:13:54,480 --> 00:13:56,920
Speaker 1: was also another part of the appeal, like why not

241
00:13:57,160 --> 00:13:59,560
Speaker 1: just pick up a little extra yield for not that

242
00:13:59,640 --> 00:14:00,000
Speaker 1: much more?

243
00:14:00,960 --> 00:14:04,679
Speaker 3: Right? So, in the ecosystem, the market makers play a

244
00:14:04,800 --> 00:14:08,680
Speaker 3: very unique role because if you look at some of

245
00:14:08,720 --> 00:14:12,000
Speaker 3: the data that some cell side research doesthks put out,

246
00:14:12,120 --> 00:14:16,199
Speaker 3: it's not really entirely correct because a lot of these

247
00:14:16,240 --> 00:14:20,760
Speaker 3: deaths like to take a certain narrative, but that positioning

248
00:14:20,920 --> 00:14:23,880
Speaker 3: changes day by day with these market makers. So it's

249
00:14:23,880 --> 00:14:27,960
Speaker 3: not to say that at every single day their long

250
00:14:28,000 --> 00:14:31,400
Speaker 3: gamma or short camera. It's at certain moments where that

251
00:14:31,440 --> 00:14:36,960
Speaker 3: positioning becomes unbalanced and can really create that more cascading

252
00:14:37,000 --> 00:14:42,520
Speaker 3: effect in cheapness and richness in volatility terms. We're seeing

253
00:14:42,720 --> 00:14:46,080
Speaker 3: one of the lowest levels of tail exposure that we've

254
00:14:46,120 --> 00:14:49,200
Speaker 3: ever seen, huh. And this is something that is really

255
00:14:49,200 --> 00:14:55,080
Speaker 3: surprising because everybody understands you shouldn't sell teals. That was

256
00:14:55,120 --> 00:14:59,640
Speaker 3: something that people learned in two thousand and eight, twenty eighteen,

257
00:15:00,000 --> 00:15:05,000
Speaker 3: twenty twenty. Yet that exposure keeps making its way back

258
00:15:05,040 --> 00:15:08,920
Speaker 3: into the market and right now forward skew that like

259
00:15:09,280 --> 00:15:12,400
Speaker 3: thirty days out skew and I'm not trying to get

260
00:15:12,440 --> 00:15:16,520
Speaker 3: super esoteric with the VALL terminology, but just that type

261
00:15:16,520 --> 00:15:22,520
Speaker 3: of WINGI exposure has been oversupplied over the last let's

262
00:15:22,560 --> 00:15:24,600
Speaker 3: call it six to nine months.

263
00:15:24,800 --> 00:15:28,440
Speaker 2: Wait, sorry, just to be clear, there is not currently

264
00:15:28,680 --> 00:15:33,360
Speaker 2: a lot of people buying de facto tail insurance right now.

265
00:15:33,400 --> 00:15:34,440
Speaker 3: Correct, not at all.

266
00:15:34,480 --> 00:15:37,120
Speaker 2: It's weird. I mean, I guess on some level, I'm

267
00:15:37,280 --> 00:15:41,480
Speaker 2: surprised because right like things seem crazy, and there's wars

268
00:15:41,520 --> 00:15:43,880
Speaker 2: going on, and people are concerned about what the Fed

269
00:15:43,960 --> 00:15:46,480
Speaker 2: is going to do, and the economic environment is uncertain,

270
00:15:46,480 --> 00:15:49,320
Speaker 2: and the political environment is uncertain. On one level, it

271
00:15:49,320 --> 00:15:51,480
Speaker 2: feels like it would be an environment that would be oh,

272
00:15:51,520 --> 00:15:53,560
Speaker 2: I want to grab tails, I want to buy insurance.

273
00:15:53,920 --> 00:15:55,920
Speaker 2: On the other hand, the stock market is at all

274
00:15:55,960 --> 00:16:00,600
Speaker 2: time highs volatility is low. Clearly, just looking at financials,

275
00:16:01,000 --> 00:16:03,680
Speaker 2: this is not a market environment in which many people

276
00:16:03,760 --> 00:16:05,800
Speaker 2: seem particularly concerned about very much.

277
00:16:06,120 --> 00:16:09,880
Speaker 3: Well, why would you buy tails up? Think about this,

278
00:16:11,040 --> 00:16:13,760
Speaker 3: It's been four years since the last real fall move.

279
00:16:14,280 --> 00:16:18,600
Speaker 3: So in the face of rising inflation, in the face

280
00:16:18,680 --> 00:16:22,440
Speaker 3: of a declining SMP in twenty twenty two, in the

281
00:16:22,480 --> 00:16:25,840
Speaker 3: face of a mini banking crisis, in the face of

282
00:16:25,920 --> 00:16:28,680
Speaker 3: all those things, you've been able to sell vall make money.

283
00:16:29,000 --> 00:16:31,560
Speaker 3: This is why. So some of the data that we

284
00:16:31,680 --> 00:16:36,120
Speaker 3: track is like US equity short ball hedge funds that

285
00:16:36,200 --> 00:16:40,880
Speaker 3: AUM has grown six times since twenty eighteen. Why would

286
00:16:40,880 --> 00:16:45,120
Speaker 3: that AUM grow because those funds are doing insanely well

287
00:16:45,320 --> 00:16:48,320
Speaker 3: because you've been able to sell volatility left and right

288
00:16:48,840 --> 00:16:51,720
Speaker 3: and really just get away with it. A generic straddle

289
00:16:51,760 --> 00:16:56,640
Speaker 3: selling program, like without having any sort of true quantitative input,

290
00:16:56,720 --> 00:16:58,960
Speaker 3: you just wake up every day and sell straddles has

291
00:16:59,000 --> 00:17:02,480
Speaker 3: made money handle for FIST over the last four years.

292
00:17:03,200 --> 00:17:07,040
Speaker 1: Could it be the case you mentioned the shorter tenors

293
00:17:07,119 --> 00:17:09,880
Speaker 1: that are now available, and this has been a much

294
00:17:09,920 --> 00:17:14,280
Speaker 1: discussed point among market commentators, the impact of zero and

295
00:17:14,560 --> 00:17:19,119
Speaker 1: one day options ODT and one DTE. Could it be

296
00:17:19,160 --> 00:17:23,119
Speaker 1: the case that people are buying less tail risk exposure

297
00:17:23,760 --> 00:17:29,240
Speaker 1: or extreme downside protection in favor of maybe hedging themselves

298
00:17:29,320 --> 00:17:31,920
Speaker 1: on a day to day basis with the shorter dated options.

299
00:17:32,080 --> 00:17:35,879
Speaker 3: So what we're seeing is that during certain events that's

300
00:17:35,920 --> 00:17:40,919
Speaker 3: the case. However, that doesn't take away for the reach

301
00:17:41,240 --> 00:17:44,919
Speaker 3: that you have in that thirty day exposure because when

302
00:17:45,000 --> 00:17:49,040
Speaker 3: you look at the volume across the VIX complex, and

303
00:17:49,080 --> 00:17:52,120
Speaker 3: you look at the volume traded in that thirty day exposure,

304
00:17:52,200 --> 00:17:55,760
Speaker 3: it's still heavy. It's still there. So people that are saying, well,

305
00:17:56,040 --> 00:17:58,880
Speaker 3: nobody's going to hedge with thirty day options anymore because

306
00:17:58,920 --> 00:18:01,760
Speaker 3: they're hedging with zero DP so the vics won't go up,

307
00:18:02,000 --> 00:18:06,879
Speaker 3: that's really a bad view. And there's one real point

308
00:18:06,920 --> 00:18:09,280
Speaker 3: that I'll bring up that will push back on that

309
00:18:09,480 --> 00:18:12,480
Speaker 3: in a pretty large way. If you are an institution,

310
00:18:12,760 --> 00:18:16,520
Speaker 3: a multi billion dollar institution, and tomorrow, god forbid, there's

311
00:18:16,560 --> 00:18:19,600
Speaker 3: a geopolitical event, are you going to hedge a multi

312
00:18:19,600 --> 00:18:23,480
Speaker 3: billion dollar book with zero DT options. There's no way

313
00:18:24,200 --> 00:18:28,240
Speaker 3: any sophisticated fund is going to realize, well, I probably

314
00:18:28,280 --> 00:18:30,800
Speaker 3: need to extend my duration on that hedge, so that

315
00:18:30,960 --> 00:18:34,520
Speaker 3: reach for one to let's call it three month old

316
00:18:34,720 --> 00:18:38,440
Speaker 3: will always be there. It's just that in the recent environment,

317
00:18:38,880 --> 00:18:41,520
Speaker 3: again over the last four years, that has not been

318
00:18:41,520 --> 00:18:44,199
Speaker 3: the case because we really have not been met with

319
00:18:44,320 --> 00:18:47,760
Speaker 3: a catalyst that has tested the broad market just real.

320
00:18:47,680 --> 00:18:50,000
Speaker 2: Quickly going back to a short straddle trade, which are

321
00:18:50,080 --> 00:18:52,000
Speaker 2: very popular or it has been a big money maker.

322
00:18:52,000 --> 00:18:55,440
Speaker 2: As you said, that's just betting that markets won't move much,

323
00:18:55,600 --> 00:18:57,720
Speaker 2: but selling a call and selling a put at the

324
00:18:57,720 --> 00:19:00,119
Speaker 2: same time. Implicitly, it's just like you're just betting that

325
00:19:00,200 --> 00:19:01,920
Speaker 2: things basically stay in a neuro range.

326
00:19:02,000 --> 00:19:02,840
Speaker 3: Correct, you're selling.

327
00:19:02,920 --> 00:19:07,320
Speaker 2: Yeah, how did shortvall make money in twenty twenty two

328
00:19:07,359 --> 00:19:08,720
Speaker 2: when the stock market.

329
00:19:08,480 --> 00:19:11,480
Speaker 3: Was going down? That was the main point of twenty

330
00:19:11,520 --> 00:19:14,439
Speaker 3: twenty two. If you were a VALL trader, and you

331
00:19:14,440 --> 00:19:16,360
Speaker 3: don't need to take my word for it, you could

332
00:19:16,359 --> 00:19:19,480
Speaker 3: look at how well shortfall funds did in twenty twenty two,

333
00:19:19,600 --> 00:19:22,640
Speaker 3: really because there was not a pickup in equity fall

334
00:19:23,080 --> 00:19:27,520
Speaker 3: and a lot of people misunderstand this because rates VALL moved,

335
00:19:28,480 --> 00:19:31,720
Speaker 3: fx fall moved. It was almost like every fall in

336
00:19:31,800 --> 00:19:36,040
Speaker 3: every aspect move except for US equity VALL. So when

337
00:19:36,119 --> 00:19:38,080
Speaker 3: you look at and you can look at just the

338
00:19:38,160 --> 00:19:42,080
Speaker 3: VIX to begin with, right, nix is a great representation

339
00:19:42,160 --> 00:19:44,240
Speaker 3: of something like that because it's variance right, So it's

340
00:19:44,280 --> 00:19:47,000
Speaker 3: really VALL squared. SMP fall squared is going to give

341
00:19:47,000 --> 00:19:51,840
Speaker 3: you VIX. So SMP thirty implied. VALL always stayed in

342
00:19:51,840 --> 00:19:54,560
Speaker 3: that range from like twenty to I believe the high

343
00:19:54,600 --> 00:19:58,560
Speaker 3: end was like thirty something. It's really difficult to get

344
00:19:58,800 --> 00:20:02,359
Speaker 3: VALL to move up when you have a lack of

345
00:20:02,680 --> 00:20:07,159
Speaker 3: realize move and panic that's coming in. So a slow

346
00:20:07,240 --> 00:20:11,200
Speaker 3: grind down every day, going down one percent, half a percent,

347
00:20:11,600 --> 00:20:15,040
Speaker 3: two percent, that's not really going to get people panicking

348
00:20:15,440 --> 00:20:17,119
Speaker 3: to bid for that insurance protection.

349
00:20:18,840 --> 00:20:22,439
Speaker 1: Let's go back to the sort of worst case scenario

350
00:20:22,840 --> 00:20:26,240
Speaker 1: that you were touching on earlier. But just before Christmas,

351
00:20:26,440 --> 00:20:29,240
Speaker 1: I think it was like a Wednesday or a Tuesday,

352
00:20:29,440 --> 00:20:31,320
Speaker 1: there was a sharp drop in the S and P

353
00:20:31,440 --> 00:20:35,320
Speaker 1: five hundred, and this kicked off a wave of speculation

354
00:20:35,880 --> 00:20:40,120
Speaker 1: about the degree to which shorter dated options had exacerbated

355
00:20:40,160 --> 00:20:44,040
Speaker 1: that fall into the close. And the thinking here is that, well,

356
00:20:44,040 --> 00:20:46,679
Speaker 1: when stocks start to move down like that, all the

357
00:20:46,720 --> 00:20:50,160
Speaker 1: market makers have to go out and hedge their exposure,

358
00:20:50,280 --> 00:20:53,080
Speaker 1: and so you can get this sort of doom feedback

359
00:20:53,119 --> 00:20:56,439
Speaker 1: loop in the market where stocks keep going down because

360
00:20:56,440 --> 00:20:59,280
Speaker 1: dealers have to hedge the fact that stocks are going down.

361
00:21:00,119 --> 00:21:03,120
Speaker 1: Walk us through that dynamic, and then how much are

362
00:21:03,160 --> 00:21:06,280
Speaker 1: you actually seeing an impact in the wider market from

363
00:21:06,440 --> 00:21:09,360
Speaker 1: these shorter dated options on a day to day basis.

364
00:21:09,600 --> 00:21:13,480
Speaker 3: Yeah, So we wrote a paper early on in twenty

365
00:21:13,520 --> 00:21:16,240
Speaker 3: twenty three. They got a lot of attention. Surprisingly, it

366
00:21:16,320 --> 00:21:22,399
Speaker 3: got attention from regulators and central banks, and I think

367
00:21:22,960 --> 00:21:25,840
Speaker 3: when some of the regulators reached out to us, it

368
00:21:25,960 --> 00:21:30,479
Speaker 3: was because they understood as well just how severe a

369
00:21:30,520 --> 00:21:34,040
Speaker 3: certain situation can end up being, and they want to

370
00:21:34,080 --> 00:21:37,080
Speaker 3: collect data on that as well. So when you talk

371
00:21:37,119 --> 00:21:41,080
Speaker 3: about zero DT, it usually falls into two camps. You

372
00:21:41,119 --> 00:21:45,720
Speaker 3: have Camp A that says, oh, no, nothing's going to happen.

373
00:21:46,520 --> 00:21:49,400
Speaker 3: The positioning off sets one another, this is not a risk.

374
00:21:49,760 --> 00:21:53,000
Speaker 3: And then you have Camp BE that says this is

375
00:21:53,000 --> 00:21:56,320
Speaker 3: going to create a massive catastrophe. This kind of stuff, right,

376
00:21:56,359 --> 00:22:00,200
Speaker 3: this is a black Swan event, And I don't think

377
00:22:00,240 --> 00:22:01,119
Speaker 3: either or are true.

378
00:22:01,440 --> 00:22:01,640
Speaker 1: Right.

379
00:22:02,280 --> 00:22:06,840
Speaker 3: This becomes a problem when dealers are hedging their exposure

380
00:22:06,920 --> 00:22:09,800
Speaker 3: in a high ball environment. So what ends up happening

381
00:22:09,920 --> 00:22:13,560
Speaker 3: is during normal conditions, when you have most of the

382
00:22:13,560 --> 00:22:16,680
Speaker 3: flow that's leaned to sell these shorter data and options,

383
00:22:16,960 --> 00:22:21,199
Speaker 3: that is stabilizing to the broad market. However, when volatility

384
00:22:21,240 --> 00:22:24,400
Speaker 3: is going up and these end users are not only

385
00:22:24,440 --> 00:22:27,960
Speaker 3: closing their position but opening new ones, that puts dealers

386
00:22:28,080 --> 00:22:31,320
Speaker 3: under pressure where they now need to hedge their exposure

387
00:22:31,359 --> 00:22:34,680
Speaker 3: and reflexively that could drive the asset price lower or

388
00:22:35,160 --> 00:22:39,560
Speaker 3: instant cases higher as well. So in this situation, it's

389
00:22:39,640 --> 00:22:44,200
Speaker 3: not really a case of the SMP going from zero

390
00:22:44,240 --> 00:22:47,080
Speaker 3: percent on the day to down five percent. It's what

391
00:22:47,119 --> 00:22:49,760
Speaker 3: does this look like if the SMP is down five

392
00:22:49,800 --> 00:22:53,000
Speaker 3: percent and then could escalate to down ten percent. The

393
00:22:53,119 --> 00:22:56,040
Speaker 3: second point to that that I'll bring up, and this

394
00:22:56,080 --> 00:22:59,280
Speaker 3: is a very valid point. If you are a hedge

395
00:22:59,280 --> 00:23:02,919
Speaker 3: fund or or an asset manager, you understand that the

396
00:23:03,040 --> 00:23:07,600
Speaker 3: larger primes are concerned with trading with their clients trading

397
00:23:07,600 --> 00:23:11,160
Speaker 3: this stuff because of the lack of visibility around certain

398
00:23:11,200 --> 00:23:14,399
Speaker 3: intra day margin requirements. So if you're a hedge fund,

399
00:23:15,480 --> 00:23:19,520
Speaker 3: you have a certain EMS that may be outsourced somewhere else.

400
00:23:20,720 --> 00:23:24,040
Speaker 3: It's just like an execution management system, right, So you

401
00:23:24,119 --> 00:23:27,760
Speaker 3: might be trading somewhere else and those positions are settling

402
00:23:27,800 --> 00:23:30,480
Speaker 3: at the end of the day. The PB is not

403
00:23:30,640 --> 00:23:33,640
Speaker 3: really able to see that. So if those positions go

404
00:23:34,280 --> 00:23:36,800
Speaker 3: against you, you may be on the hook for certain

405
00:23:36,880 --> 00:23:43,199
Speaker 3: exposure that is not accurately assessed for That's really the

406
00:23:43,240 --> 00:23:45,120
Speaker 3: second Yeah, that's the second problem there.

407
00:23:45,160 --> 00:23:47,480
Speaker 1: I have so many questions already, but I do think

408
00:23:48,000 --> 00:23:50,080
Speaker 1: this is actually an important point, which is that in

409
00:23:50,119 --> 00:23:53,280
Speaker 1: a lot of the commentary on shorter dated options and

410
00:23:53,400 --> 00:23:58,040
Speaker 1: zero TTE, there's an implication that it's all these stupid

411
00:23:58,040 --> 00:24:01,199
Speaker 1: retail traders who are using these things. And you know,

412
00:24:01,240 --> 00:24:03,240
Speaker 1: people talk a lot about Wall Street bets, and it

413
00:24:03,359 --> 00:24:05,840
Speaker 1: is true that you can find some out there stories

414
00:24:05,880 --> 00:24:08,879
Speaker 1: about people on Wall Street bets losing and also making

415
00:24:08,920 --> 00:24:11,600
Speaker 1: money on shorter dated options, But a big portion of

416
00:24:11,640 --> 00:24:17,080
Speaker 1: this is huge institutional ostensibly sophisticated investors.

417
00:24:17,160 --> 00:24:19,000
Speaker 2: I'm glad you brought that up, because actually this brought

418
00:24:19,040 --> 00:24:22,159
Speaker 2: me back to something that I wanted to return to,

419
00:24:22,480 --> 00:24:26,439
Speaker 2: the sophisticatid investor. Talk more about what happened in twenty

420
00:24:26,480 --> 00:24:29,960
Speaker 2: twenty one with the introduction of these mandates, because I

421
00:24:29,960 --> 00:24:33,040
Speaker 2: do think that feels like a very important element that like,

422
00:24:33,320 --> 00:24:35,800
Speaker 2: we can always talk about market environments and we are

423
00:24:35,840 --> 00:24:39,040
Speaker 2: in a high wall environment or a high rates environment

424
00:24:39,160 --> 00:24:42,560
Speaker 2: or a low rates environment, but if the allocation is

425
00:24:42,640 --> 00:24:45,640
Speaker 2: going to change and new products exist, we see how

426
00:24:45,680 --> 00:24:49,080
Speaker 2: that affects the market. What specifically were these decisions that

427
00:24:49,160 --> 00:24:51,800
Speaker 2: were made where these big institutions felt that they had to,

428
00:24:51,880 --> 00:24:54,879
Speaker 2: like tell us a little bit more about some of

429
00:24:54,920 --> 00:24:55,480
Speaker 2: these decisions.

430
00:24:55,600 --> 00:24:59,080
Speaker 3: Yeah, so think of twenty twenty. Twenty twenty was a

431
00:24:59,200 --> 00:25:02,879
Speaker 3: year that option trading did very well on both sides.

432
00:25:03,000 --> 00:25:06,159
Speaker 3: Hedging programs did very well. And then also when the

433
00:25:06,200 --> 00:25:11,120
Speaker 3: market rebounded, certain stock replacement programs did extremely well. When

434
00:25:11,160 --> 00:25:15,360
Speaker 3: twenty twenty one came Q one and the memestock craze hit,

435
00:25:16,240 --> 00:25:19,399
Speaker 3: that was almost like the nail in the coffin, where

436
00:25:19,480 --> 00:25:24,960
Speaker 3: you had certain investors and boards that started pounding on

437
00:25:25,000 --> 00:25:28,440
Speaker 3: the door and saying, why are we not exposed to options?

438
00:25:28,600 --> 00:25:31,639
Speaker 3: Because look, everybody's making money, not in the sense that

439
00:25:31,720 --> 00:25:34,639
Speaker 3: they want exposure to MEME stocks, but they're saying, hey,

440
00:25:35,160 --> 00:25:38,359
Speaker 3: we should have long call tech exposure, you know, or

441
00:25:38,400 --> 00:25:43,800
Speaker 3: we should have vultility risk premium harvesting programs. And ultimately

442
00:25:44,320 --> 00:25:47,800
Speaker 3: that put a lot of pressure on certain consultants. It

443
00:25:47,880 --> 00:25:51,520
Speaker 3: put a lot of pressure on certain teams. But as

444
00:25:51,560 --> 00:25:55,639
Speaker 3: I said, simultaneously, when the exchanges began listing more and

445
00:25:55,680 --> 00:26:01,080
Speaker 3: more tenors, people started realizing that, well, idly, we probably

446
00:26:01,119 --> 00:26:05,679
Speaker 3: want to engage in these volatility risk premium harvesting programs

447
00:26:05,720 --> 00:26:09,280
Speaker 3: because look, if this is what the S and P

448
00:26:09,400 --> 00:26:11,840
Speaker 3: is doing, look how much more we can make by

449
00:26:11,880 --> 00:26:15,600
Speaker 3: selling Vault. And now the path dependency has completely changed,

450
00:26:15,600 --> 00:26:18,920
Speaker 3: so ideally this becomes an easier trade for everybody.

451
00:26:19,760 --> 00:26:22,400
Speaker 2: Tracy, now I am reminded it's so funny all these

452
00:26:22,440 --> 00:26:24,159
Speaker 2: things I forgot from that time. But there was like

453
00:26:24,200 --> 00:26:26,879
Speaker 2: that big thing with like soft Bank, because you know,

454
00:26:27,359 --> 00:26:30,920
Speaker 2: a massive buyer of just like long call options. Yeah,

455
00:26:30,960 --> 00:26:33,840
Speaker 2: on tech Is. If it weren't already exposed enough to

456
00:26:33,920 --> 00:26:36,600
Speaker 2: tech Beta, they also bought a bunch of call options

457
00:26:36,600 --> 00:26:38,000
Speaker 2: on tech Stock got to double down.

458
00:26:38,240 --> 00:26:41,840
Speaker 1: Now, I do find it remarkable that they're like everyone

459
00:26:41,880 --> 00:26:45,360
Speaker 1: thinks Wall Street bets and that retail craziness was sort

460
00:26:45,400 --> 00:26:48,280
Speaker 1: of people trying to imitate Wall Street, But now we

461
00:26:48,359 --> 00:26:51,959
Speaker 1: basically have Wall Street trying to imitate the retail crowd

462
00:26:52,040 --> 00:26:54,400
Speaker 1: and the sort of yolo mindset of let's just try

463
00:26:54,400 --> 00:26:56,560
Speaker 1: to make as much money as possible on a sort

464
00:26:56,600 --> 00:26:59,840
Speaker 1: of in as short an amount of time as possible.

465
00:27:00,400 --> 00:27:03,040
Speaker 1: I want to go back to the impact on markets,

466
00:27:03,080 --> 00:27:06,879
Speaker 1: and I take the point about the doom loop scenario,

467
00:27:06,960 --> 00:27:09,600
Speaker 1: although as you say, you don't think it's as bad

468
00:27:09,720 --> 00:27:12,320
Speaker 1: as you know, getting a sort of Black Shoals esque

469
00:27:13,000 --> 00:27:17,720
Speaker 1: kind of crash. But one thing I guess I don't

470
00:27:17,800 --> 00:27:21,199
Speaker 1: quite understand in this argument is people are not going

471
00:27:21,280 --> 00:27:24,840
Speaker 1: to keep doing the same stuff if the market is

472
00:27:24,960 --> 00:27:28,080
Speaker 1: falling significantly. So if someone has a put that went

473
00:27:28,240 --> 00:27:31,639
Speaker 1: up five hundred percent, they're probably going to sell some

474
00:27:31,760 --> 00:27:35,040
Speaker 1: of it, right, So if you have people selling puts,

475
00:27:35,160 --> 00:27:38,879
Speaker 1: then wouldn't that bring in buying from the market makers,

476
00:27:38,920 --> 00:27:43,080
Speaker 1: which could actually stabilize the market in that scenario.

477
00:27:43,520 --> 00:27:48,600
Speaker 3: No, No, So when an end user is short the put,

478
00:27:48,960 --> 00:27:53,840
Speaker 3: the market maker is effectively long the put, right, So

479
00:27:54,160 --> 00:27:56,760
Speaker 3: at that time, if they're long the put, they're going

480
00:27:56,840 --> 00:27:59,440
Speaker 3: to be long the underlying on the other side, so

481
00:27:59,560 --> 00:28:03,160
Speaker 3: long stop. It changes when the end user is now

482
00:28:03,840 --> 00:28:07,000
Speaker 3: long the put, that puts the dealer short the put.

483
00:28:07,280 --> 00:28:09,919
Speaker 3: If they're short the put, that's bullish, which means that

484
00:28:09,960 --> 00:28:13,760
Speaker 3: they now need to sell the underlying on the other side. So,

485
00:28:15,240 --> 00:28:17,080
Speaker 3: and this is where this comes into like a second

486
00:28:17,160 --> 00:28:20,520
Speaker 3: order effect. Naturally, if the end user is selling this,

487
00:28:21,200 --> 00:28:25,480
Speaker 3: the market maker is stabilizing this. When that position starts

488
00:28:25,520 --> 00:28:27,879
Speaker 3: to move against them, what's the what is the end

489
00:28:27,920 --> 00:28:30,000
Speaker 3: user going to do? They're either going to close off

490
00:28:30,000 --> 00:28:32,800
Speaker 3: that position, right, or they're going to close it off

491
00:28:32,840 --> 00:28:34,600
Speaker 3: and then take more of the other side. So they're

492
00:28:34,640 --> 00:28:36,440
Speaker 3: going to say, Okay, we're closing this off and maybe

493
00:28:36,440 --> 00:28:37,800
Speaker 3: we're going to bat on long volatility.

494
00:28:37,920 --> 00:28:38,760
Speaker 1: Oh I see, okay.

495
00:28:38,960 --> 00:28:42,680
Speaker 3: That is when the market maker begins to get put

496
00:28:42,760 --> 00:28:46,640
Speaker 3: under pressure. And just to be clear, this has existed

497
00:28:47,560 --> 00:28:51,000
Speaker 3: since derivatives started trading. I think people think that gamma

498
00:28:51,040 --> 00:28:54,200
Speaker 3: heaging is something that came about six years ago. That's

499
00:28:54,200 --> 00:28:55,960
Speaker 3: not the case. If you were a market maker in

500
00:28:56,000 --> 00:28:59,160
Speaker 3: the early two thousands in the nineties, you realized that, hey,

501
00:28:59,200 --> 00:29:02,520
Speaker 3: this is how we hedge of a derivatives book. So

502
00:29:03,440 --> 00:29:07,160
Speaker 3: that second order effect only becomes more relevant because the

503
00:29:07,200 --> 00:29:12,080
Speaker 3: sheer size of what you're trading is so much larger.

504
00:29:12,160 --> 00:29:15,400
Speaker 3: So now you have back in the day, you had

505
00:29:15,400 --> 00:29:19,320
Speaker 3: twenty market makers. Today you have four, right, four main

506
00:29:19,440 --> 00:29:22,040
Speaker 3: market maker or let's go it, five that really control

507
00:29:22,120 --> 00:29:23,520
Speaker 3: the flow in the US equity mark.

508
00:29:23,400 --> 00:29:26,040
Speaker 2: These are really big bank trading desks.

509
00:29:26,320 --> 00:29:27,840
Speaker 1: Are these not just banks?

510
00:29:27,880 --> 00:29:30,880
Speaker 3: Not just banks? I probably I'm not going to name them,

511
00:29:30,920 --> 00:29:31,320
Speaker 3: but like.

512
00:29:31,400 --> 00:29:32,959
Speaker 2: Well, just like what are the nature of these, like

513
00:29:33,040 --> 00:29:33,800
Speaker 2: the four or five?

514
00:29:34,160 --> 00:29:36,720
Speaker 1: I'll whisper to them to you after the show, but

515
00:29:36,760 --> 00:29:39,240
Speaker 1: I don't wait, we could I mean, we have no

516
00:29:39,360 --> 00:29:44,960
Speaker 1: limitations on market Yeah, okay, so people like JP Morgan, Citadel,

517
00:29:46,680 --> 00:29:47,400
Speaker 1: that kind of thing.

518
00:29:47,720 --> 00:29:51,120
Speaker 2: So just big trading shops, yeah, okay, so some bank

519
00:29:51,160 --> 00:29:53,320
Speaker 2: but not necessarily bank, yes, okay.

520
00:29:53,480 --> 00:29:58,680
Speaker 3: Yeah, So going back to the numbers right index option

521
00:29:58,760 --> 00:30:03,920
Speaker 3: trading has grown two times since twenty eighteen, and equity

522
00:30:03,920 --> 00:30:06,760
Speaker 3: option trading has grown almost two and a half times

523
00:30:06,800 --> 00:30:10,800
Speaker 3: in totality. So when you think about the concentration risk here,

524
00:30:11,280 --> 00:30:14,360
Speaker 3: you have less market makers and more options being traded.

525
00:30:14,680 --> 00:30:18,400
Speaker 3: So of course it's natural to think that those market

526
00:30:18,400 --> 00:30:22,520
Speaker 3: makers will get caught all sizes on positioning, especially when

527
00:30:22,560 --> 00:30:26,160
Speaker 3: the end user is so dogmatic in their application of

528
00:30:26,200 --> 00:30:41,760
Speaker 3: this shortfall trade.

529
00:30:43,160 --> 00:30:47,280
Speaker 1: You know you mentioned was it ems earlier? What is

530
00:30:47,400 --> 00:30:52,800
Speaker 1: the underlying risk management architecture for managing these positions? Because

531
00:30:53,560 --> 00:30:56,680
Speaker 1: it has to be there must be so many numbers

532
00:30:56,720 --> 00:30:59,920
Speaker 1: involved with this, and like the values are constantly changing,

533
00:31:00,120 --> 00:31:03,520
Speaker 1: so things like gamma and delta are changing along with

534
00:31:03,600 --> 00:31:06,680
Speaker 1: the market. And if you are one of the market makers,

535
00:31:07,240 --> 00:31:10,520
Speaker 1: I can only imagine all the different exposures you have

536
00:31:10,640 --> 00:31:12,440
Speaker 1: at any one point in time that you are trying

537
00:31:12,440 --> 00:31:15,320
Speaker 1: to calculate in real time as well, how do people

538
00:31:15,400 --> 00:31:16,120
Speaker 1: actually do it?

539
00:31:16,840 --> 00:31:21,360
Speaker 3: So if you are a sophisticated vall arbitraasure, you will

540
00:31:21,440 --> 00:31:25,680
Speaker 3: have certain in house systems that monitor certain second order

541
00:31:25,760 --> 00:31:30,920
Speaker 3: Greek exposure like vallavall right spot moves in gamma exposure

542
00:31:31,160 --> 00:31:34,400
Speaker 3: van A exposure. Very few people in the world who

543
00:31:34,440 --> 00:31:37,600
Speaker 3: need to care about that. You know, for the most part,

544
00:31:38,040 --> 00:31:41,360
Speaker 3: if you are an RIA or even like a macro

545
00:31:41,400 --> 00:31:44,600
Speaker 3: hedge fund that's trading options, you're probably going to be

546
00:31:44,640 --> 00:31:47,920
Speaker 3: on like a certain bank platform, and that's going to

547
00:31:47,960 --> 00:31:51,240
Speaker 3: be okay, right, because you really don't need to care

548
00:31:51,280 --> 00:31:54,440
Speaker 3: about second order Greek exposure. But if you are more

549
00:31:54,440 --> 00:31:58,040
Speaker 3: so a dynamic ball shop, those things become more important.

550
00:31:58,800 --> 00:32:02,080
Speaker 3: I think when you're thinking about the problems of an

551
00:32:02,120 --> 00:32:04,800
Speaker 3: ems and how that translates to something like this, and

552
00:32:04,800 --> 00:32:08,680
Speaker 3: then also the applications of shortfall, really you have to

553
00:32:08,760 --> 00:32:12,960
Speaker 3: understand that the majority of the world and how they

554
00:32:13,000 --> 00:32:16,880
Speaker 3: trade is not like a sophisticated ball shop. It's like

555
00:32:17,080 --> 00:32:20,960
Speaker 3: an RIA that's going to wake up and say, hey,

556
00:32:21,000 --> 00:32:24,160
Speaker 3: we need to make fifty basis points every month, so

557
00:32:24,360 --> 00:32:27,520
Speaker 3: sell these options, and if the position begins to move

558
00:32:27,560 --> 00:32:31,080
Speaker 3: against them, they're gonna say, oh well great, sell some more,

559
00:32:32,000 --> 00:32:34,800
Speaker 3: and then it moves against them. Sell some more, and

560
00:32:34,840 --> 00:32:38,080
Speaker 3: then it moves against them, and then maybe they'll capitulate

561
00:32:38,080 --> 00:32:41,880
Speaker 3: the position. So it's not really the bulk of the

562
00:32:41,920 --> 00:32:45,720
Speaker 3: world is not really dynamically trading these things. They're more

563
00:32:45,760 --> 00:32:50,360
Speaker 3: so dogmatically taking a one sided view on this, and

564
00:32:50,360 --> 00:32:51,880
Speaker 3: that's why you get those ball blow ups.

565
00:32:52,000 --> 00:32:56,840
Speaker 2: Yeah, who is longfall these days? Because you know, again

566
00:32:56,920 --> 00:32:59,680
Speaker 2: in my mind, I just think, you know, very my, very.

567
00:32:59,640 --> 00:33:02,400
Speaker 1: Root of my theoretically they should net right, the amount

568
00:33:02,400 --> 00:33:04,600
Speaker 1: of people shortening ball should be offset by the amount

569
00:33:04,640 --> 00:33:06,400
Speaker 1: of people going to And.

570
00:33:06,400 --> 00:33:08,400
Speaker 2: Also I just think like, if I had a lot

571
00:33:08,400 --> 00:33:11,360
Speaker 2: of money, I would want to take out some insurance

572
00:33:11,760 --> 00:33:13,600
Speaker 2: against some sort of law. But if the people with

573
00:33:13,680 --> 00:33:16,160
Speaker 2: the money, even them, are sort of like sort of

574
00:33:16,400 --> 00:33:21,400
Speaker 2: changing their strategies, is there anyone who's structurally long vall

575
00:33:21,640 --> 00:33:24,400
Speaker 2: in there in parts of their portfolio or like the

576
00:33:24,440 --> 00:33:25,680
Speaker 2: sort of the hedging aspect.

577
00:33:26,040 --> 00:33:29,680
Speaker 3: Yeah, So for what we do, it's called carry neutral

578
00:33:29,680 --> 00:33:33,800
Speaker 3: tail risk hedging, and this is more so a tactical approach. However,

579
00:33:34,240 --> 00:33:38,640
Speaker 3: the majority of what you call strategic or solutions based

580
00:33:39,520 --> 00:33:43,320
Speaker 3: long ball or tail risk hedging has done insanely poor

581
00:33:43,520 --> 00:33:46,120
Speaker 3: over the last three to four years. It's been right,

582
00:33:46,160 --> 00:33:51,600
Speaker 3: it's been obliteration. And we're you know, we're pretty outspoken

583
00:33:51,680 --> 00:33:55,120
Speaker 3: that those type of applications don't work. Because what you'll

584
00:33:55,120 --> 00:33:57,880
Speaker 3: see at an asset management firm, they'll say, okay, great,

585
00:33:57,960 --> 00:34:00,200
Speaker 3: you have if you're a family office, you have five

586
00:34:00,240 --> 00:34:03,240
Speaker 3: hundred million dollars in equities, Let's take one percent a

587
00:34:03,320 --> 00:34:07,200
Speaker 3: year and allocate it to some long fall and then

588
00:34:07,520 --> 00:34:10,080
Speaker 3: over the course of years you realize that, well, that's

589
00:34:10,080 --> 00:34:12,880
Speaker 3: really destroying my portfolio. I can't just lose a percent

590
00:34:12,920 --> 00:34:18,399
Speaker 3: a year. That's why you're seeing more sophisticated institutions go

591
00:34:18,719 --> 00:34:22,920
Speaker 3: or lean towards tactical defensive hedging as opposed to the

592
00:34:22,960 --> 00:34:26,520
Speaker 3: solutions based defensive hedging, because those just really do not

593
00:34:26,600 --> 00:34:29,879
Speaker 3: work over the long run. So you just can't wake

594
00:34:29,960 --> 00:34:31,960
Speaker 3: up and say, yeah, I'm gonna buy a put and

595
00:34:32,000 --> 00:34:33,400
Speaker 3: just keep rolling it and rolling.

596
00:34:33,160 --> 00:34:35,520
Speaker 2: It right, That eventually costs a lot of money.

597
00:34:35,560 --> 00:34:37,359
Speaker 3: Exactly Who are the.

598
00:34:37,280 --> 00:34:42,360
Speaker 1: Big winners from the explosion in shortfall and derivatives in general?

599
00:34:42,400 --> 00:34:45,359
Speaker 1: I have to imagine that the CBOE would be in there,

600
00:34:45,440 --> 00:34:48,440
Speaker 1: given that they're the ones selling the shorter dated options.

601
00:34:48,480 --> 00:34:51,640
Speaker 1: Maybe some of the market makers who's making tons of

602
00:34:51,680 --> 00:34:52,279
Speaker 1: money from this.

603
00:34:53,920 --> 00:34:58,160
Speaker 3: Yeah, so definitely the exchanges are doing quite well. Market

604
00:34:58,239 --> 00:35:02,120
Speaker 3: makers generally do quite well when you have big ball environments.

605
00:35:02,280 --> 00:35:05,319
Speaker 3: For the most part, it's important to note, and I

606
00:35:05,360 --> 00:35:08,160
Speaker 3: think that this goes over a lot of it goes

607
00:35:08,160 --> 00:35:10,120
Speaker 3: over a lot of people's heads when they're going through

608
00:35:10,120 --> 00:35:16,879
Speaker 3: the research. Se Bow is incentivized to make sure that

609
00:35:16,960 --> 00:35:21,440
Speaker 3: the data that they're showing you is pretty right. So

610
00:35:21,480 --> 00:35:24,359
Speaker 3: Sebow's never really going to come out and say, hey,

611
00:35:24,680 --> 00:35:27,360
Speaker 3: all these options traded is a hazard because it just

612
00:35:27,400 --> 00:35:29,160
Speaker 3: goes against what they're trying to do as a business.

613
00:35:29,200 --> 00:35:31,520
Speaker 3: And for what it's where I like the guys at SEBO,

614
00:35:31,760 --> 00:35:35,160
Speaker 3: respect them clearly doing extremely well from a business standpoint,

615
00:35:35,239 --> 00:35:38,320
Speaker 3: But yeah, the exchanges are doing quite well. Market makers

616
00:35:38,360 --> 00:35:41,400
Speaker 3: are doing quite well. But when whenever you're reading research

617
00:35:41,520 --> 00:35:46,200
Speaker 3: or data about these options or zero DT, it's important

618
00:35:46,239 --> 00:35:47,920
Speaker 3: to take it with a grain of salt. When you're

619
00:35:47,920 --> 00:35:50,359
Speaker 3: getting the research from people who have been doing well.

620
00:35:51,440 --> 00:35:54,239
Speaker 2: I just have one more question, and it kind of

621
00:35:54,239 --> 00:35:56,440
Speaker 2: goes back to what I was saying, like, how you

622
00:35:56,480 --> 00:36:01,200
Speaker 2: know I understood the value of in come generating strategies

623
00:36:01,239 --> 00:36:03,520
Speaker 2: through derivatives, particularly in the zurb era when there was

624
00:36:03,600 --> 00:36:06,400
Speaker 2: not many sources of just sort of like income. You know,

625
00:36:06,520 --> 00:36:10,080
Speaker 2: the market complexion is obviously changed quite a bit because

626
00:36:10,239 --> 00:36:13,920
Speaker 2: although now you know there's yield, but also like traditional

627
00:36:14,040 --> 00:36:18,320
Speaker 2: like sort of natural hedges in the market don't work anymore.

628
00:36:18,320 --> 00:36:20,040
Speaker 2: So if you had you know this, the old sixty

629
00:36:20,080 --> 00:36:22,440
Speaker 2: forty portfolio, at least for a while, was like terrible

630
00:36:22,480 --> 00:36:24,560
Speaker 2: and so like this idea like, oh, a hedge by

631
00:36:24,560 --> 00:36:26,600
Speaker 2: having a little bit along here and long here, and

632
00:36:26,719 --> 00:36:29,200
Speaker 2: they do differently like that doesn't work. How has that

633
00:36:29,800 --> 00:36:34,000
Speaker 2: changed the vault trading business, These sort of reversals of

634
00:36:34,040 --> 00:36:37,480
Speaker 2: some long standing just sort of correlations of bread and

635
00:36:37,520 --> 00:36:38,240
Speaker 2: butter assets.

636
00:36:38,480 --> 00:36:41,239
Speaker 3: Yeah, I think it's it's for the good of the

637
00:36:41,239 --> 00:36:46,759
Speaker 3: ecosystem because I think it is cycled out. The bad managers,

638
00:36:47,200 --> 00:36:50,680
Speaker 3: the managers who have not been able to navigate this

639
00:36:50,840 --> 00:36:54,759
Speaker 3: environment have been really taken to the woodshed, And I

640
00:36:54,760 --> 00:36:58,120
Speaker 3: think that's important. You need a healthy cycle out of

641
00:36:58,160 --> 00:37:02,879
Speaker 3: those bad products and those bad managers, because look, everybody's

642
00:37:02,880 --> 00:37:06,319
Speaker 3: a hedge fund these days. Everybody manages some sort of

643
00:37:06,400 --> 00:37:10,640
Speaker 3: assets these days, and the reality is that that alpha

644
00:37:10,719 --> 00:37:15,640
Speaker 3: doesn't exist everywhere. So when you have poor products, after

645
00:37:15,719 --> 00:37:19,200
Speaker 3: a while, people start realizing just how poor they are,

646
00:37:19,719 --> 00:37:22,480
Speaker 3: and then those participants get cycled out. So I think

647
00:37:22,520 --> 00:37:26,040
Speaker 3: it's healthy that this sort of stuff has come to light,

648
00:37:26,480 --> 00:37:29,880
Speaker 3: because yeah, you shouldn't just be able to put somebody

649
00:37:29,960 --> 00:37:33,279
Speaker 3: in some generic put buying program you charge twenty five

650
00:37:33,320 --> 00:37:36,160
Speaker 3: basis points and you know five percent CENTI fee on that.

651
00:37:36,160 --> 00:37:37,279
Speaker 3: That doesn't just jibe. Well.

652
00:37:38,080 --> 00:37:40,719
Speaker 1: I have one more question, which is, how do you

653
00:37:41,280 --> 00:37:46,719
Speaker 1: prove that the explosion and options is having an impact

654
00:37:46,840 --> 00:37:50,560
Speaker 1: in the market, because so far, the observable pattern that

655
00:37:50,640 --> 00:37:52,920
Speaker 1: I have seen is that something like a December twenty

656
00:37:52,920 --> 00:37:57,160
Speaker 1: first happens where the market falls. JP Morgan publishes a

657
00:37:57,200 --> 00:38:00,600
Speaker 1: note saying part of this was because of short dated options,

658
00:38:00,640 --> 00:38:03,520
Speaker 1: and then the CBOE comes out and says, no, no, no,

659
00:38:03,520 --> 00:38:05,440
Speaker 1: we didn't see any evidence of that, and you have

660
00:38:05,520 --> 00:38:10,200
Speaker 1: all this polarized commentary. It feels like in something as

661
00:38:10,239 --> 00:38:14,200
Speaker 1: mathematical as options trading and finance, we should be able

662
00:38:14,239 --> 00:38:17,320
Speaker 1: to point to concrete evidence, but we are still having

663
00:38:17,320 --> 00:38:19,640
Speaker 1: this debate about the overall impact. So what do you

664
00:38:19,719 --> 00:38:21,920
Speaker 1: look at to prove that this is happening.

665
00:38:23,040 --> 00:38:25,440
Speaker 3: So the way how we trade is literally a second

666
00:38:25,520 --> 00:38:28,680
Speaker 3: by second basis, and I think unless you're trading like that,

667
00:38:29,239 --> 00:38:32,560
Speaker 3: you won't be able to have a good picture as

668
00:38:32,600 --> 00:38:35,920
Speaker 3: to what's going on. So we have certain agency desks

669
00:38:36,120 --> 00:38:39,560
Speaker 3: and market makers that cover our flow, and you talk

670
00:38:39,640 --> 00:38:41,560
Speaker 3: to these guys, you go out to eat with them,

671
00:38:42,080 --> 00:38:45,479
Speaker 3: you build relationships with them, and there's an ongoing joke

672
00:38:46,120 --> 00:38:49,760
Speaker 3: that we have with one of them, and they say, listen,

673
00:38:50,239 --> 00:38:55,719
Speaker 3: every time volatility spikes, we have five clients that will

674
00:38:55,719 --> 00:38:58,080
Speaker 3: come in and fight with each other to sell it.

675
00:38:59,360 --> 00:39:03,480
Speaker 3: They are jumping over one another to sell volatility. Now,

676
00:39:03,920 --> 00:39:06,640
Speaker 3: it's hard when you don't have that color or you're

677
00:39:06,920 --> 00:39:11,920
Speaker 3: only seeing a price on screens, But when you understand

678
00:39:12,000 --> 00:39:17,040
Speaker 3: the ecosystem and what's transpiring under the hood, it paints

679
00:39:17,200 --> 00:39:21,520
Speaker 3: a cleaner mosaic to understand that we've only seen one

680
00:39:21,560 --> 00:39:26,680
Speaker 3: side of the equation, which is yeah, volatility being stabilizing

681
00:39:26,920 --> 00:39:31,120
Speaker 3: and just not really performing endorment markets. But there will

682
00:39:31,120 --> 00:39:35,080
Speaker 3: come a day when there's a catalyst that pushes this

683
00:39:35,120 --> 00:39:39,040
Speaker 3: thing through. And it's very similar to like Vallmageddon, where

684
00:39:39,719 --> 00:39:44,279
Speaker 3: everybody who was trading vault during that time understood the

685
00:39:44,360 --> 00:39:48,239
Speaker 3: exposures were baked into the etpis, and then after it

686
00:39:48,280 --> 00:39:51,480
Speaker 3: occurs they'll say, oh, yeah, it was so obvious. Didn't

687
00:39:51,520 --> 00:39:55,759
Speaker 3: you know that everybody was short volatility in the ETPs H.

688
00:39:55,760 --> 00:39:58,000
Speaker 1: I swear to god, it was not obvious to everyone.

689
00:39:58,080 --> 00:40:00,160
Speaker 1: Chris sid You'll thank you so much again for me

690
00:40:00,200 --> 00:40:03,680
Speaker 1: back on all thoughts that was a fantastic explanation of

691
00:40:03,880 --> 00:40:06,080
Speaker 1: you know, a pretty technical change in the markets, but

692
00:40:06,160 --> 00:40:07,480
Speaker 1: an important one. So thank you.

693
00:40:08,520 --> 00:40:09,799
Speaker 2: Yeah, that was great, Thank you so much.

694
00:40:22,560 --> 00:40:25,440
Speaker 1: Joe. That was so good. That was really interesting. I

695
00:40:25,440 --> 00:40:29,520
Speaker 1: have a joke. It's not as good as Chris's joke,

696
00:40:29,560 --> 00:40:30,879
Speaker 1: though maybe I shouldn't tell it.

697
00:40:31,280 --> 00:40:33,279
Speaker 2: Tell it, tell it, tell it.

698
00:40:34,000 --> 00:40:37,560
Speaker 1: What is a risk manager with a science degree at

699
00:40:37,760 --> 00:40:41,840
Speaker 1: a large market maker say when he wants a salary increase?

700
00:40:45,800 --> 00:40:47,720
Speaker 1: Tell me he asks for a Gamma raise.

701
00:40:48,400 --> 00:40:49,520
Speaker 2: That's good. Yeah, it's good.

702
00:40:50,520 --> 00:40:51,959
Speaker 1: That's good, Gama raise.

703
00:40:52,000 --> 00:40:52,359
Speaker 3: It's good.

704
00:40:52,360 --> 00:40:56,239
Speaker 1: It's good for Gamma raise. I'll work a workshop.

705
00:40:57,480 --> 00:40:57,560
Speaker 2: No.

706
00:40:57,680 --> 00:41:02,239
Speaker 1: I thought that was really interesting. He's sort of Chris crystallized. Oh,

707
00:41:02,400 --> 00:41:05,440
Speaker 1: Chris crystallized something in my head which was about the

708
00:41:05,480 --> 00:41:09,719
Speaker 1: exact mechanism of the feedback loop. Because I had assumed

709
00:41:09,840 --> 00:41:13,400
Speaker 1: that as the market moves around, like people are lessening

710
00:41:13,520 --> 00:41:16,000
Speaker 1: their exposure, but as he put it, like the thing

711
00:41:16,040 --> 00:41:19,319
Speaker 1: they're doing to lessen the exposure can also lead to

712
00:41:19,440 --> 00:41:22,640
Speaker 1: market maker behavior that is not ideal. In the stock's

713
00:41:22,680 --> 00:41:25,640
Speaker 1: going down, everyone scrambling all together a scenario.

714
00:41:26,000 --> 00:41:27,719
Speaker 2: Yeah, I thought that was very interesting. I also just

715
00:41:27,719 --> 00:41:31,000
Speaker 2: thought like the sort of big picture if you have

716
00:41:31,040 --> 00:41:36,800
Speaker 2: a lot of money, you just cannot buy insurance trivially.

717
00:41:36,880 --> 00:41:38,600
Speaker 2: It's not like he's like, oh, I'm just gonna like,

718
00:41:38,760 --> 00:41:40,839
Speaker 2: as you pointed out, like you know, you take one

719
00:41:40,880 --> 00:41:43,720
Speaker 2: percent of your assets a year and roll it into

720
00:41:43,760 --> 00:41:46,840
Speaker 2: some fun that supposedly is going to deliver major returns

721
00:41:46,880 --> 00:41:49,840
Speaker 2: every time there's a pandemic or some major thing, like

722
00:41:49,880 --> 00:41:53,040
Speaker 2: you're just gonna lose too much money that way. And

723
00:41:53,120 --> 00:41:54,719
Speaker 2: so then the idea of like, okay, well, like these

724
00:41:54,760 --> 00:41:58,320
Speaker 2: institutions take the other side and see opportunities in shorting

725
00:41:58,400 --> 00:42:01,680
Speaker 2: vall and so you sort of see how how this

726
00:42:01,800 --> 00:42:04,280
Speaker 2: trade can just get so large on one side.

727
00:42:04,400 --> 00:42:07,440
Speaker 1: I also like the point that, okay, this is not nothing.

728
00:42:07,680 --> 00:42:10,920
Speaker 1: It's not a trivial evolution of the market. But at

729
00:42:10,920 --> 00:42:14,280
Speaker 1: the same time, it's not a black Monday black shoals

730
00:42:14,520 --> 00:42:16,799
Speaker 1: reducts where this is going to lead to like a

731
00:42:16,880 --> 00:42:19,480
Speaker 1: massive crash because at the end of the day one

732
00:42:19,560 --> 00:42:22,440
Speaker 1: day options expire. At the end of the day, the

733
00:42:22,560 --> 00:42:26,560
Speaker 1: options are ended. The end day options end. Okay, I

734
00:42:26,560 --> 00:42:26,799
Speaker 1: need to.

735
00:42:26,800 --> 00:42:29,759
Speaker 2: Work that work, thank you, But there's something there.

736
00:42:29,800 --> 00:42:32,000
Speaker 1: But no, I like that point. I thought it was

737
00:42:32,000 --> 00:42:34,840
Speaker 1: a very clear description of the ecosystem. Yeah, and it

738
00:42:34,960 --> 00:42:38,520
Speaker 1: is amazing to me, given everything that's sort of gone on,

739
00:42:38,760 --> 00:42:42,719
Speaker 1: how much the vault trading environment has changed, because you

740
00:42:42,719 --> 00:42:46,520
Speaker 1: would have thought after twenty eighteen, after the wildness of

741
00:42:46,600 --> 00:42:49,800
Speaker 1: the post pandemic period, that things would have gone in

742
00:42:49,840 --> 00:42:52,120
Speaker 1: the other direction, but nope, no.

743
00:42:52,280 --> 00:42:55,279
Speaker 2: And also we knew because of you know, we took

744
00:42:55,400 --> 00:42:59,839
Speaker 2: in twenty twenty one. We talked a lot about retail obviously,

745
00:43:00,600 --> 00:43:02,960
Speaker 2: but it really is telling and then that fell off,

746
00:43:03,320 --> 00:43:05,280
Speaker 2: and then you know, you could see, you know, Cibo

747
00:43:05,440 --> 00:43:07,600
Speaker 2: as a stock kind of peaked at the end of

748
00:43:07,640 --> 00:43:10,000
Speaker 2: twenty twenty one for a while and then fell and everything.

749
00:43:10,320 --> 00:43:14,600
Speaker 2: But obviously there's just so much more than retail. And

750
00:43:14,680 --> 00:43:16,360
Speaker 2: so when we're talking, you know, I think if people

751
00:43:16,400 --> 00:43:18,960
Speaker 2: hear zero day options or any of these options, you know,

752
00:43:19,000 --> 00:43:20,640
Speaker 2: they just sort of think about people like on their

753
00:43:20,680 --> 00:43:24,240
Speaker 2: apps gambling. But the idea that it's not necessarily gambling,

754
00:43:24,280 --> 00:43:27,960
Speaker 2: but there's sort of like very dynamic intentional hedging participation

755
00:43:28,080 --> 00:43:30,280
Speaker 2: in these markets from big money is pretty astounding.

756
00:43:30,360 --> 00:43:33,399
Speaker 1: Sometimes it is gambling though, and there's gambling all right, well,

757
00:43:33,880 --> 00:43:36,640
Speaker 1: at the end of the day, one day options expire,

758
00:43:36,760 --> 00:43:40,239
Speaker 1: that's what it is. But the conversation and the controversy

759
00:43:40,280 --> 00:43:43,160
Speaker 1: over them certainly does not. It goes on forever.

760
00:43:43,560 --> 00:43:44,120
Speaker 2: Sounds good.

761
00:43:44,160 --> 00:43:44,840
Speaker 1: Shall we leave it there?

762
00:43:44,960 --> 00:43:45,640
Speaker 2: Let's leave it there.

763
00:43:46,000 --> 00:43:48,800
Speaker 1: This has been another episode of the All Thoughts podcast.

764
00:43:49,080 --> 00:43:52,280
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.

765
00:43:52,040 --> 00:43:54,160
Speaker 2: And I'm Jill Wisenthal. You could have followed me at

766
00:43:54,160 --> 00:43:57,279
Speaker 2: the Stalwart. Follow our guest Chris Sidiel, He's at CA

767
00:43:57,600 --> 00:44:02,400
Speaker 2: sid I. I Hello our producers Kerman Rodriguez at Kerman

768
00:44:02,560 --> 00:44:06,200
Speaker 2: armand dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks.

769
00:44:06,600 --> 00:44:10,000
Speaker 2: Thank you to our producer Moses Ondem. For more Oddlots content,

770
00:44:10,040 --> 00:44:12,360
Speaker 2: go to Bloomberg dot com slash odd Lots, where we

771
00:44:12,400 --> 00:44:15,719
Speaker 2: have transcripts, a blog, and a newsletter and you can

772
00:44:15,800 --> 00:44:18,360
Speaker 2: chat about all these topics twenty four to seven in

773
00:44:18,440 --> 00:44:22,480
Speaker 2: the discord Discord dot gg slash Odlots.

774
00:44:22,600 --> 00:44:25,000
Speaker 1: And if you enjoy odd Lots, if you think that

775
00:44:25,080 --> 00:44:27,560
Speaker 1: all of our guests should bring donuts when they appear

776
00:44:27,600 --> 00:44:29,880
Speaker 1: on the show, then please leave us a positive review

777
00:44:29,920 --> 00:44:33,000
Speaker 1: on your favorite podcast platform. And remember, if you are

778
00:44:33,040 --> 00:44:36,360
Speaker 1: a Bloomberg subscriber, you can listen to all our episodes

779
00:44:36,440 --> 00:44:41,239
Speaker 1: add free by connecting your Bloomberg subscription to Apple podcasts.

780
00:44:41,360 --> 00:45:05,000
Speaker 1: Thanks for listening. Stood in the Eiler