WEBVTT - Why the Short Volatility Trade Is Back and Bigger Than Ever 0:00:10.680 --> 0:00:13.840 Hello, and welcome to another episode of The Odd Lots Podcast. 0:00:13.920 --> 0:00:15.280 I'm Tracy Alloway. 0:00:15.000 --> 0:00:16.280 And I'm Joe Wisenthal. 0:00:16.680 --> 0:00:18.040 Joe, do you know what's coming up? 0:00:20.560 --> 0:00:21.800 The Odd Lots pub quiz? 0:00:22.079 --> 0:00:25.600 That's true? Also Valentine's Day? 0:00:25.800 --> 0:00:27.800 This a little bit later on. What else? What else 0:00:27.840 --> 0:00:28.400 do you have in mind? 0:00:28.560 --> 0:00:32.280 Do you do you celebrate the anniversary of Vollmageddon. 0:00:33.040 --> 0:00:34.120 Do I celebrate it? 0:00:34.280 --> 0:00:34.480 Yeah? 0:00:34.640 --> 0:00:37.000 I mean who doesn't. No, I don't celebrate it. But 0:00:37.120 --> 0:00:40.960 that was such a formative moment. So that was February when. 0:00:40.880 --> 0:00:43.800 Was the twenty eighteen six year anniversary. 0:00:43.960 --> 0:00:46.880 That was one of our first like really good episodes 0:00:46.920 --> 0:00:48.920 where we sort of had a good We talked about 0:00:49.040 --> 0:00:53.360 what blew up the short vall etf XIV. I feel 0:00:53.360 --> 0:00:55.280 like we go back through our history. That was like 0:00:55.280 --> 0:00:56.400 an important episode. 0:00:56.480 --> 0:00:58.480 Wait, don't say that was one of the first good ones, 0:00:58.480 --> 0:01:01.600 because we're doing this for your years before twenty eighteen. 0:01:01.960 --> 0:01:04.040 You're right, We've had many good I think that was 0:01:04.080 --> 0:01:07.119 like a it was a highlight. It was a highlight. 0:01:07.200 --> 0:01:11.399 Okay, yes, okay, Well, I do in fact celebrate the 0:01:11.440 --> 0:01:14.319 anniversary of Valmageddon because I always enjoy going back to 0:01:14.520 --> 0:01:17.680 tweets around that time, because there are a lot of 0:01:17.760 --> 0:01:21.840 volatility traders on social media who have very strong and 0:01:21.880 --> 0:01:25.560 often erroneous opinions, and one of the opinions they were 0:01:25.920 --> 0:01:31.240 holding around January twenty eighteen was that everything was fine. Yeah, 0:01:31.319 --> 0:01:35.840 shortfall was this perpetual money maker, no issues with the 0:01:36.000 --> 0:01:40.400 two volatility exchange traded notes that eventually ended up blowing up, 0:01:40.720 --> 0:01:43.679 one of which was XIV, as you pointed out, and 0:01:43.760 --> 0:01:47.639 I remember tweeting things in January of twenty eighteen, stuff 0:01:47.760 --> 0:01:51.800 like if the VICS curve inverts, which was about to happen, 0:01:52.280 --> 0:01:55.920 this would be an absolute disaster for XIV, and I 0:01:55.960 --> 0:01:59.400 had a bunch of people pushing back complaining about the 0:01:59.440 --> 0:02:02.920 axis on my chart, and lo and behold, about a 0:02:02.920 --> 0:02:06.360 week later, XIV not only blew up, but was dead 0:02:06.440 --> 0:02:09.000 within a couple of days and actually royaled the market 0:02:09.080 --> 0:02:09.560 as well. 0:02:09.639 --> 0:02:14.080 I remember there it was very popular XIV, this vehicle, 0:02:14.160 --> 0:02:17.880 and there was a sound intuition about it, I think, 0:02:18.040 --> 0:02:21.080 which is that you know, is this basically betting against 0:02:21.080 --> 0:02:23.720 the VIX And you start with the assumption that Okay, 0:02:23.760 --> 0:02:30.359 people systematically and perpetually overpay for downside protection. Understandable people 0:02:30.400 --> 0:02:34.280 pay for insurance and so you can harvest that premium 0:02:34.320 --> 0:02:37.480 basically by taking the other side, and that by and large, 0:02:37.800 --> 0:02:40.240 shorting VALL is a sort of like a good way 0:02:40.280 --> 0:02:43.120 to a way that people super charge their returns and 0:02:43.160 --> 0:02:45.840 look like a core thing is that when we talk 0:02:45.880 --> 0:02:48.639 about VALL, I think like we are mostly in life shortfall. 0:02:48.720 --> 0:02:51.919 Anyone who owned stocks for a long period or any 0:02:51.919 --> 0:02:55.160 period is SHORTVALL, where sort of like VALL is bad 0:02:55.240 --> 0:02:58.640 for portfolios, et cetera. So like when we talk about 0:02:58.800 --> 0:03:02.600 specifically shorting VALL though, then that's where it gets interesting. 0:03:02.800 --> 0:03:05.080 Yeah, So this is one of the things that I 0:03:05.240 --> 0:03:09.600 find very remarkable about our current moment, which is that 0:03:10.360 --> 0:03:13.359 you know, shorting VALL post the two thousand and eight 0:03:13.400 --> 0:03:17.200 financial crisis became a very popular strategy because you had 0:03:17.240 --> 0:03:19.960 low interest rates, so people wanted to pick up yield 0:03:20.120 --> 0:03:23.480 wherever they could. Yeah, you also had central banks out 0:03:23.520 --> 0:03:27.280 there in the market literally crushing volatility, So you knew 0:03:27.320 --> 0:03:29.560 that there was the put that sort of existed over 0:03:29.600 --> 0:03:31.840 the overall market, so why not try to monetize it. 0:03:32.160 --> 0:03:35.840 There wasn't a lot going on up until twenty eighteen, 0:03:36.040 --> 0:03:39.480 so it made sense to bet on nothing, basically on 0:03:39.880 --> 0:03:43.480 things not happening. But what I find really fascinating about 0:03:43.520 --> 0:03:47.680 the current moment is we seem to be seeing a 0:03:47.760 --> 0:03:51.200 return of that short volatility trade. So you and I 0:03:51.240 --> 0:03:55.240 have discussed on this podcast these shorter dated options, one 0:03:55.360 --> 0:04:00.240 or zero dated options becoming incredibly popular, absolutely exploded voting 0:04:00.360 --> 0:04:03.560 in terms of volume. There's other types of derivatives that 0:04:03.600 --> 0:04:07.240 are also becoming more popular. And yet when I look 0:04:07.280 --> 0:04:09.720 around at the market, it seems like there is so 0:04:09.880 --> 0:04:12.880 much potential for one off events. You know, the FED 0:04:13.000 --> 0:04:16.760 is hiking rates, we have geopolitical risk, as you know 0:04:16.839 --> 0:04:20.000 we always talk about, joke about on this show, supply 0:04:20.160 --> 0:04:24.239 chain disruptions. The chance of one off events actually happening 0:04:24.279 --> 0:04:28.080 seems greater than ever, and yet shorting fall is popular 0:04:28.200 --> 0:04:31.159 and measures of aall itself remain pretty low. The VIX 0:04:31.240 --> 0:04:34.600 is pretty low, the volatility of the VIX index, the 0:04:34.720 --> 0:04:37.120 VVIX is really low. So I think we need to 0:04:37.240 --> 0:04:41.800 ask why is shortfall back, and why is it particularly 0:04:41.839 --> 0:04:44.800 popular at this moment in time, and what does it 0:04:44.920 --> 0:04:46.200 mean for the wider market. 0:04:46.560 --> 0:04:47.120 Let's do it. 0:04:47.440 --> 0:04:49.480 I am very happy to say that we do, in 0:04:49.520 --> 0:04:52.280 fact have the perfect guest. We're going to be speaking 0:04:52.320 --> 0:04:55.279 to Chris Sidel. We've had him on the podcast before. 0:04:55.360 --> 0:04:58.520 He is the co cio of Ambrose Group, and he 0:04:58.640 --> 0:05:00.960 is now officially one of my favorite guests ever because 0:05:00.960 --> 0:05:04.200 he brought us donuts. And if I sound more energetic 0:05:04.320 --> 0:05:06.520 than normal, it's because I'm currently on a sugar rush. 0:05:06.520 --> 0:05:08.680 And also I'm talking about volatility and you took us 0:05:08.720 --> 0:05:11.680 in this morning. I did not, although you tried to 0:05:11.720 --> 0:05:13.359 get me on. Can you imagine if I had a 0:05:13.400 --> 0:05:15.240 donut ends in at the same time. 0:05:15.880 --> 0:05:16.520 That would be bad? 0:05:16.640 --> 0:05:18.960 Okay, Chris, thank you so much for coming back. 0:05:18.880 --> 0:05:20.919 On odd Lots. Thank you so much for having me. 0:05:21.360 --> 0:05:22.320 So when we. 0:05:22.279 --> 0:05:27.159 Talk about short volatility, you know, Joe and I discussed 0:05:27.160 --> 0:05:29.400 it a little bit in the intro, but what is 0:05:29.440 --> 0:05:32.760 the expression of going short volatility? 0:05:33.440 --> 0:05:37.560 Yeah, the expression of going short volatility is taking a 0:05:37.600 --> 0:05:43.560 bet that the normality will continue, right, So effectively, if 0:05:43.600 --> 0:05:47.239 you are betting on long volatility, you are pretty much 0:05:47.360 --> 0:05:50.279 betting on the abnormality taking place. 0:05:51.240 --> 0:05:53.560 So, I mean, I said it in the beginning, but 0:05:53.600 --> 0:05:56.800 I sort of think that most life and investing is 0:05:56.839 --> 0:06:01.440 implicitly short. Well, if you have spy in your retirement account, 0:06:01.440 --> 0:06:04.039 then you know you think it's just generally going to 0:06:04.040 --> 0:06:06.880 go up very time. That is normal. That is so 0:06:06.920 --> 0:06:09.960 as you but per your definition, that is an implicit 0:06:10.080 --> 0:06:15.120 short volatility. How does it get expressed in the options market? 0:06:15.160 --> 0:06:18.360 And or maybe a question is why do people make 0:06:18.440 --> 0:06:21.600 that bet in the options market rather than just going 0:06:21.640 --> 0:06:23.799 the implicit route of being long risk assets. 0:06:24.480 --> 0:06:28.240 Yeah, because I think it's something that generally pays off 0:06:28.279 --> 0:06:31.320 the majority of the time. Within the spread as to 0:06:31.400 --> 0:06:34.360 how you can trade it, there's this embedded risk premium 0:06:34.960 --> 0:06:37.320 that I mean, sure people could argue that there's an 0:06:37.360 --> 0:06:41.360 equity risk premium as well, but the expression towards how 0:06:41.440 --> 0:06:44.920 you apply this, whether it's short s and p puts, 0:06:44.960 --> 0:06:50.240 short mixed calls, short variant swaps, it has a tendency 0:06:50.400 --> 0:06:53.960 to win the majority of the time, and this expression 0:06:54.560 --> 0:07:00.000 lulls market participants into very poor habits of expressing the training. 0:07:00.480 --> 0:07:03.680 Imagine you have taken a trade and you're going to 0:07:03.720 --> 0:07:06.760 win ninety percent of the time, and when the trade 0:07:06.800 --> 0:07:10.960 is working against you, you're adding more size and you're 0:07:10.960 --> 0:07:15.200 adding more conviction. Over the course of years, when the 0:07:15.280 --> 0:07:18.320 trade is beginning to work against you, you have a 0:07:18.360 --> 0:07:21.280 tendency to believe that this is just another one of 0:07:21.320 --> 0:07:25.559 those cases right, It's like being rewarded for buying the dip. 0:07:26.120 --> 0:07:28.240 If you do it over and over again, you're going 0:07:28.320 --> 0:07:32.320 to feel this conviction towards it. But in short volatility terms, 0:07:32.840 --> 0:07:36.400 eventually it catches up and it all goes wrong at once. 0:07:37.120 --> 0:07:41.679 Yeah. The journalistic euphemism that was usually deployed is picking 0:07:41.760 --> 0:07:45.040 up pennies in front of a steamroller. Right, So why 0:07:45.080 --> 0:07:47.880 don't you talk to us about the numbers that you're 0:07:47.920 --> 0:07:51.120 seeing in the market. We say, shortfall seems to be 0:07:51.280 --> 0:07:54.200 back and bigger than ever. What are the actual figures 0:07:54.280 --> 0:07:54.760 around that? 0:07:55.400 --> 0:07:58.400 Yeah, So I think it's important for listeners to have 0:07:58.440 --> 0:08:01.160 a little bit of an understanding of my background and 0:08:01.440 --> 0:08:04.280 why it is we track these numbers. So I was 0:08:04.320 --> 0:08:07.080 a prop trader on two different desks camera securities in 0:08:07.160 --> 0:08:09.840 Xanthis Capital, and then I went to a large Canadian 0:08:09.880 --> 0:08:12.160 investment bank. I spent three and a half years there 0:08:12.200 --> 0:08:15.040 and most of my time was spent trading exotic derivatives. 0:08:15.240 --> 0:08:17.600 Then myself and a couple of my partners who are 0:08:18.240 --> 0:08:21.720 XCTC excitadel guys, we got together and we said, hey, 0:08:22.120 --> 0:08:26.640 we could run this carriy neutral tail restrategy, which effectively 0:08:26.800 --> 0:08:31.080 when volatility is exploding, it's going to have this massive return. 0:08:31.640 --> 0:08:34.120 But when markets are dormant, we use a lot of 0:08:34.280 --> 0:08:38.439 short term proprietary trading to be flat. So you'll have foundations, 0:08:38.679 --> 0:08:42.440 high networked individuals, family offices that will use something like 0:08:42.480 --> 0:08:44.120 this as a hedge in their portfolio. 0:08:44.320 --> 0:08:44.480 Right. 0:08:45.280 --> 0:08:49.080 Because of that, we need to understand the derivative market 0:08:49.120 --> 0:08:54.440 microstructure and also the ecosystem, understanding how certain agents in 0:08:54.440 --> 0:08:58.640 that ecosystem are participating with one another. So over the 0:08:58.720 --> 0:09:01.160 last year, would start to come up in the data 0:09:01.440 --> 0:09:05.920 was that the short volatility trade was coming back in 0:09:06.280 --> 0:09:10.000 huge size. So when you think about the SMP complex, 0:09:10.240 --> 0:09:15.360 in the VIX complex, the net short VEGA notional today 0:09:16.080 --> 0:09:19.680 is two times higher than when it was during January 0:09:20.000 --> 0:09:22.840 of twenty eighteen, which was the month right before VALLMA, 0:09:22.880 --> 0:09:23.240 get it. 0:09:23.440 --> 0:09:26.760 This is when we're going to have to define vega. 0:09:27.679 --> 0:09:29.839 We should just do all the Greek letters, just cut 0:09:29.840 --> 0:09:31.680 them out of the way right now, but vega. 0:09:32.120 --> 0:09:37.480 Yeah, So in VALL terms, right, think one point of 0:09:37.520 --> 0:09:42.040 a VALL move and how much you'll make or lose. Okay, right, 0:09:42.160 --> 0:09:46.000 So if your net long a million bucks of vega 0:09:46.760 --> 0:09:50.000 and volatility moves up one vall point you'll make a 0:09:50.000 --> 0:09:54.880 million bucks vice versa. Right, So what that's saying today 0:09:55.080 --> 0:09:58.640 that number the netting short exposure is two times higher 0:09:59.040 --> 0:10:02.640 than where it was during January of twenty eighteen, which 0:10:02.679 --> 0:10:06.720 is right before vallom again. Additionally, and I sent you 0:10:06.720 --> 0:10:09.719 guys this chart from Morning STARU, which is such a 0:10:09.840 --> 0:10:14.360 crucial chart in my opinion. These derivative income generating funds, 0:10:14.600 --> 0:10:18.240 the AUM in these have increased by over ten x 0:10:18.840 --> 0:10:24.600 since January twenty eighteen. Right, that's another sort of fact 0:10:24.679 --> 0:10:26.800 that's pretty insane to think about. 0:10:27.000 --> 0:10:29.520 What's the definition of a derivative income fund? 0:10:30.040 --> 0:10:32.640 Yeah, so it's the same thing as to what we 0:10:32.640 --> 0:10:34.320 were talking about at the beginning of the pod, where 0:10:34.320 --> 0:10:53.360 we said different expressions towards harvesting these volatility versus premium traits. 0:10:56.280 --> 0:10:58.600 It's intuitive to me why there was so much interest 0:10:58.720 --> 0:11:03.280 in these income generating deriative strategies during the ZERP years 0:11:03.559 --> 0:11:06.120 when you couldn't just generate income by going out and 0:11:06.160 --> 0:11:08.600 buying a government bond. But now you can get five 0:11:08.640 --> 0:11:11.400 percent or whatever. So why is the like, why do 0:11:11.480 --> 0:11:14.719 people go to the exotic route for income generation when 0:11:14.720 --> 0:11:17.640 they are very plain, vanilla things that actually pay yield 0:11:17.679 --> 0:11:18.240 these days. 0:11:18.800 --> 0:11:21.920 I think twenty twenty one is a year that will 0:11:21.920 --> 0:11:26.160 go down in the derivative history books because what happened 0:11:26.200 --> 0:11:29.640 during that year was you had a slew of new 0:11:29.720 --> 0:11:38.120 mandate additions between large foundations, pensions, rias, endowments, mainly because 0:11:38.120 --> 0:11:40.439 of what transpired in twenty twenty. You had a really 0:11:40.440 --> 0:11:42.920 big ball move in twenty twenty, and then also in 0:11:43.040 --> 0:11:46.480 Q one of twenty twenty one, you had the whole 0:11:46.640 --> 0:11:49.520 Meme Stock sort of debacle. So if you were a 0:11:49.600 --> 0:11:53.839 large institution that did not have exposure to derivatives and 0:11:53.840 --> 0:11:56.600 that type of mandate, you almost looked at as archaic 0:11:56.720 --> 0:12:00.400 in a way, right, So at that time, a lot 0:12:00.400 --> 0:12:02.920 of these institutions said we want we want to start 0:12:02.920 --> 0:12:07.400 trading options. Simultaneously, what was going on was the exchanges 0:12:07.480 --> 0:12:10.880 started listing more and more tenors, right, so you started 0:12:10.920 --> 0:12:14.920 having seven days till expiration options, five days till expiration, 0:12:15.120 --> 0:12:20.600 zero days till expiration, and a lot of the consultants 0:12:20.640 --> 0:12:25.760 at these larger institutions started realizing, well, back in the day, 0:12:25.840 --> 0:12:28.360 if we wanted to sell a twenty percent out the 0:12:28.400 --> 0:12:31.920 money SMP put, we have to wait one quarter to 0:12:32.040 --> 0:12:37.280 collect five bucks in premium terms. Right today, we could 0:12:37.320 --> 0:12:42.200 sell a zero DT option for fifty cents and do 0:12:42.280 --> 0:12:44.520 that twenty times over and over and over. And what 0:12:44.559 --> 0:12:48.679 this does on paper is that it changes the path dependency, right, 0:12:48.840 --> 0:12:52.320 so you really won't get hurt for one little thing 0:12:52.360 --> 0:12:54.000 happening at the end of the month or the end 0:12:54.040 --> 0:12:58.079 of the quarter. The problem with that is that on 0:12:58.200 --> 0:13:01.480 paper it looks like that, but when you run certain 0:13:01.520 --> 0:13:05.800 correlations you realize that you're still taking the same exact trait. 0:13:06.040 --> 0:13:09.240 Because if you wake up tomorrow and you say balls 0:13:09.240 --> 0:13:11.640 are up five ball points across the wall surface and 0:13:11.679 --> 0:13:14.880 the term structure, you're going to realize that seven days 0:13:14.960 --> 0:13:18.559 till expiration option and the one month till expiration option 0:13:19.200 --> 0:13:21.559 are both going to be negatively impacted. 0:13:22.400 --> 0:13:25.120 Maybe this is a good chance to talk about the 0:13:25.200 --> 0:13:30.119 ecosystem of the options world. So, setting aside the derivative 0:13:30.280 --> 0:13:33.680 funds which are buying these things, someone is also selling 0:13:33.720 --> 0:13:37.400 them the options. Usually the market makers are the dealers, 0:13:37.440 --> 0:13:40.840 So what is the role of market makers in this process? 0:13:40.920 --> 0:13:44.800 And then also I'm curious how cheap it is to 0:13:44.880 --> 0:13:48.000 go short volatility in general now, because this was also 0:13:48.040 --> 0:13:51.440 a hallmark of the twenty tens, which was it was 0:13:51.440 --> 0:13:54.320 pretty cheap to do these trades, right, and so that 0:13:54.480 --> 0:13:56.920 was also another part of the appeal, like why not 0:13:57.160 --> 0:13:59.560 just pick up a little extra yield for not that 0:13:59.640 --> 0:14:00.000 much more? 0:14:00.960 --> 0:14:04.679 Right? So, in the ecosystem, the market makers play a 0:14:04.800 --> 0:14:08.680 very unique role because if you look at some of 0:14:08.720 --> 0:14:12.000 the data that some cell side research doesthks put out, 0:14:12.120 --> 0:14:16.199 it's not really entirely correct because a lot of these 0:14:16.240 --> 0:14:20.760 deaths like to take a certain narrative, but that positioning 0:14:20.920 --> 0:14:23.880 changes day by day with these market makers. So it's 0:14:23.880 --> 0:14:27.960 not to say that at every single day their long 0:14:28.000 --> 0:14:31.400 gamma or short camera. It's at certain moments where that 0:14:31.440 --> 0:14:36.960 positioning becomes unbalanced and can really create that more cascading 0:14:37.000 --> 0:14:42.520 effect in cheapness and richness in volatility terms. We're seeing 0:14:42.720 --> 0:14:46.080 one of the lowest levels of tail exposure that we've 0:14:46.120 --> 0:14:49.200 ever seen, huh. And this is something that is really 0:14:49.200 --> 0:14:55.080 surprising because everybody understands you shouldn't sell teals. That was 0:14:55.120 --> 0:14:59.640 something that people learned in two thousand and eight, twenty eighteen, 0:15:00.000 --> 0:15:05.000 twenty twenty. Yet that exposure keeps making its way back 0:15:05.040 --> 0:15:08.920 into the market and right now forward skew that like 0:15:09.280 --> 0:15:12.400 thirty days out skew and I'm not trying to get 0:15:12.440 --> 0:15:16.520 super esoteric with the VALL terminology, but just that type 0:15:16.520 --> 0:15:22.520 of WINGI exposure has been oversupplied over the last let's 0:15:22.560 --> 0:15:24.600 call it six to nine months. 0:15:24.800 --> 0:15:28.440 Wait, sorry, just to be clear, there is not currently 0:15:28.680 --> 0:15:33.360 a lot of people buying de facto tail insurance right now. 0:15:33.400 --> 0:15:34.440 Correct, not at all. 0:15:34.480 --> 0:15:37.120 It's weird. I mean, I guess on some level, I'm 0:15:37.280 --> 0:15:41.480 surprised because right like things seem crazy, and there's wars 0:15:41.520 --> 0:15:43.880 going on, and people are concerned about what the Fed 0:15:43.960 --> 0:15:46.480 is going to do, and the economic environment is uncertain, 0:15:46.480 --> 0:15:49.320 and the political environment is uncertain. On one level, it 0:15:49.320 --> 0:15:51.480 feels like it would be an environment that would be oh, 0:15:51.520 --> 0:15:53.560 I want to grab tails, I want to buy insurance. 0:15:53.920 --> 0:15:55.920 On the other hand, the stock market is at all 0:15:55.960 --> 0:16:00.600 time highs volatility is low. Clearly, just looking at financials, 0:16:01.000 --> 0:16:03.680 this is not a market environment in which many people 0:16:03.760 --> 0:16:05.800 seem particularly concerned about very much. 0:16:06.120 --> 0:16:09.880 Well, why would you buy tails up? Think about this, 0:16:11.040 --> 0:16:13.760 It's been four years since the last real fall move. 0:16:14.280 --> 0:16:18.600 So in the face of rising inflation, in the face 0:16:18.680 --> 0:16:22.440 of a declining SMP in twenty twenty two, in the 0:16:22.480 --> 0:16:25.840 face of a mini banking crisis, in the face of 0:16:25.920 --> 0:16:28.680 all those things, you've been able to sell vall make money. 0:16:29.000 --> 0:16:31.560 This is why. So some of the data that we 0:16:31.680 --> 0:16:36.120 track is like US equity short ball hedge funds that 0:16:36.200 --> 0:16:40.880 AUM has grown six times since twenty eighteen. Why would 0:16:40.880 --> 0:16:45.120 that AUM grow because those funds are doing insanely well 0:16:45.320 --> 0:16:48.320 because you've been able to sell volatility left and right 0:16:48.840 --> 0:16:51.720 and really just get away with it. A generic straddle 0:16:51.760 --> 0:16:56.640 selling program, like without having any sort of true quantitative input, 0:16:56.720 --> 0:16:58.960 you just wake up every day and sell straddles has 0:16:59.000 --> 0:17:02.480 made money handle for FIST over the last four years. 0:17:03.200 --> 0:17:07.040 Could it be the case you mentioned the shorter tenors 0:17:07.119 --> 0:17:09.880 that are now available, and this has been a much 0:17:09.920 --> 0:17:14.280 discussed point among market commentators, the impact of zero and 0:17:14.560 --> 0:17:19.119 one day options ODT and one DTE. Could it be 0:17:19.160 --> 0:17:23.119 the case that people are buying less tail risk exposure 0:17:23.760 --> 0:17:29.240 or extreme downside protection in favor of maybe hedging themselves 0:17:29.320 --> 0:17:31.920 on a day to day basis with the shorter dated options. 0:17:32.080 --> 0:17:35.879 So what we're seeing is that during certain events that's 0:17:35.920 --> 0:17:40.919 the case. However, that doesn't take away for the reach 0:17:41.240 --> 0:17:44.919 that you have in that thirty day exposure because when 0:17:45.000 --> 0:17:49.040 you look at the volume across the VIX complex, and 0:17:49.080 --> 0:17:52.120 you look at the volume traded in that thirty day exposure, 0:17:52.200 --> 0:17:55.760 it's still heavy. It's still there. So people that are saying, well, 0:17:56.040 --> 0:17:58.880 nobody's going to hedge with thirty day options anymore because 0:17:58.920 --> 0:18:01.760 they're hedging with zero DP so the vics won't go up, 0:18:02.000 --> 0:18:06.879 that's really a bad view. And there's one real point 0:18:06.920 --> 0:18:09.280 that I'll bring up that will push back on that 0:18:09.480 --> 0:18:12.480 in a pretty large way. If you are an institution, 0:18:12.760 --> 0:18:16.520 a multi billion dollar institution, and tomorrow, god forbid, there's 0:18:16.560 --> 0:18:19.600 a geopolitical event, are you going to hedge a multi 0:18:19.600 --> 0:18:23.480 billion dollar book with zero DT options. There's no way 0:18:24.200 --> 0:18:28.240 any sophisticated fund is going to realize, well, I probably 0:18:28.280 --> 0:18:30.800 need to extend my duration on that hedge, so that 0:18:30.960 --> 0:18:34.520 reach for one to let's call it three month old 0:18:34.720 --> 0:18:38.440 will always be there. It's just that in the recent environment, 0:18:38.880 --> 0:18:41.520 again over the last four years, that has not been 0:18:41.520 --> 0:18:44.199 the case because we really have not been met with 0:18:44.320 --> 0:18:47.760 a catalyst that has tested the broad market just real. 0:18:47.680 --> 0:18:50.000 Quickly going back to a short straddle trade, which are 0:18:50.080 --> 0:18:52.000 very popular or it has been a big money maker. 0:18:52.000 --> 0:18:55.440 As you said, that's just betting that markets won't move much, 0:18:55.600 --> 0:18:57.720 but selling a call and selling a put at the 0:18:57.720 --> 0:19:00.119 same time. Implicitly, it's just like you're just betting that 0:19:00.200 --> 0:19:01.920 things basically stay in a neuro range. 0:19:02.000 --> 0:19:02.840 Correct, you're selling. 0:19:02.920 --> 0:19:07.320 Yeah, how did shortvall make money in twenty twenty two 0:19:07.359 --> 0:19:08.720 when the stock market. 0:19:08.480 --> 0:19:11.480 Was going down? That was the main point of twenty 0:19:11.520 --> 0:19:14.439 twenty two. If you were a VALL trader, and you 0:19:14.440 --> 0:19:16.360 don't need to take my word for it, you could 0:19:16.359 --> 0:19:19.480 look at how well shortfall funds did in twenty twenty two, 0:19:19.600 --> 0:19:22.640 really because there was not a pickup in equity fall 0:19:23.080 --> 0:19:27.520 and a lot of people misunderstand this because rates VALL moved, 0:19:28.480 --> 0:19:31.720 fx fall moved. It was almost like every fall in 0:19:31.800 --> 0:19:36.040 every aspect move except for US equity VALL. So when 0:19:36.119 --> 0:19:38.080 you look at and you can look at just the 0:19:38.160 --> 0:19:42.080 VIX to begin with, right, nix is a great representation 0:19:42.160 --> 0:19:44.240 of something like that because it's variance right, So it's 0:19:44.280 --> 0:19:47.000 really VALL squared. SMP fall squared is going to give 0:19:47.000 --> 0:19:51.840 you VIX. So SMP thirty implied. VALL always stayed in 0:19:51.840 --> 0:19:54.560 that range from like twenty to I believe the high 0:19:54.600 --> 0:19:58.560 end was like thirty something. It's really difficult to get 0:19:58.800 --> 0:20:02.359 VALL to move up when you have a lack of 0:20:02.680 --> 0:20:07.159 realize move and panic that's coming in. So a slow 0:20:07.240 --> 0:20:11.200 grind down every day, going down one percent, half a percent, 0:20:11.600 --> 0:20:15.040 two percent, that's not really going to get people panicking 0:20:15.440 --> 0:20:17.119 to bid for that insurance protection. 0:20:18.840 --> 0:20:22.439 Let's go back to the sort of worst case scenario 0:20:22.840 --> 0:20:26.240 that you were touching on earlier. But just before Christmas, 0:20:26.440 --> 0:20:29.240 I think it was like a Wednesday or a Tuesday, 0:20:29.440 --> 0:20:31.320 there was a sharp drop in the S and P 0:20:31.440 --> 0:20:35.320 five hundred, and this kicked off a wave of speculation 0:20:35.880 --> 0:20:40.120 about the degree to which shorter dated options had exacerbated 0:20:40.160 --> 0:20:44.040 that fall into the close. And the thinking here is that, well, 0:20:44.040 --> 0:20:46.679 when stocks start to move down like that, all the 0:20:46.720 --> 0:20:50.160 market makers have to go out and hedge their exposure, 0:20:50.280 --> 0:20:53.080 and so you can get this sort of doom feedback 0:20:53.119 --> 0:20:56.439 loop in the market where stocks keep going down because 0:20:56.440 --> 0:20:59.280 dealers have to hedge the fact that stocks are going down. 0:21:00.119 --> 0:21:03.120 Walk us through that dynamic, and then how much are 0:21:03.160 --> 0:21:06.280 you actually seeing an impact in the wider market from 0:21:06.440 --> 0:21:09.360 these shorter dated options on a day to day basis. 0:21:09.600 --> 0:21:13.480 Yeah, So we wrote a paper early on in twenty 0:21:13.520 --> 0:21:16.240 twenty three. They got a lot of attention. Surprisingly, it 0:21:16.320 --> 0:21:22.399 got attention from regulators and central banks, and I think 0:21:22.960 --> 0:21:25.840 when some of the regulators reached out to us, it 0:21:25.960 --> 0:21:30.479 was because they understood as well just how severe a 0:21:30.520 --> 0:21:34.040 certain situation can end up being, and they want to 0:21:34.080 --> 0:21:37.080 collect data on that as well. So when you talk 0:21:37.119 --> 0:21:41.080 about zero DT, it usually falls into two camps. You 0:21:41.119 --> 0:21:45.720 have Camp A that says, oh, no, nothing's going to happen. 0:21:46.520 --> 0:21:49.400 The positioning off sets one another, this is not a risk. 0:21:49.760 --> 0:21:53.000 And then you have Camp BE that says this is 0:21:53.000 --> 0:21:56.320 going to create a massive catastrophe. This kind of stuff, right, 0:21:56.359 --> 0:22:00.200 this is a black Swan event, And I don't think 0:22:00.240 --> 0:22:01.119 either or are true. 0:22:01.440 --> 0:22:01.640 Right. 0:22:02.280 --> 0:22:06.840 This becomes a problem when dealers are hedging their exposure 0:22:06.920 --> 0:22:09.800 in a high ball environment. So what ends up happening 0:22:09.920 --> 0:22:13.560 is during normal conditions, when you have most of the 0:22:13.560 --> 0:22:16.680 flow that's leaned to sell these shorter data and options, 0:22:16.960 --> 0:22:21.199 that is stabilizing to the broad market. However, when volatility 0:22:21.240 --> 0:22:24.400 is going up and these end users are not only 0:22:24.440 --> 0:22:27.960 closing their position but opening new ones, that puts dealers 0:22:28.080 --> 0:22:31.320 under pressure where they now need to hedge their exposure 0:22:31.359 --> 0:22:34.680 and reflexively that could drive the asset price lower or 0:22:35.160 --> 0:22:39.560 instant cases higher as well. So in this situation, it's 0:22:39.640 --> 0:22:44.200 not really a case of the SMP going from zero 0:22:44.240 --> 0:22:47.080 percent on the day to down five percent. It's what 0:22:47.119 --> 0:22:49.760 does this look like if the SMP is down five 0:22:49.800 --> 0:22:53.000 percent and then could escalate to down ten percent. The 0:22:53.119 --> 0:22:56.040 second point to that that I'll bring up, and this 0:22:56.080 --> 0:22:59.280 is a very valid point. If you are a hedge 0:22:59.280 --> 0:23:02.919 fund or or an asset manager, you understand that the 0:23:03.040 --> 0:23:07.600 larger primes are concerned with trading with their clients trading 0:23:07.600 --> 0:23:11.160 this stuff because of the lack of visibility around certain 0:23:11.200 --> 0:23:14.399 intra day margin requirements. So if you're a hedge fund, 0:23:15.480 --> 0:23:19.520 you have a certain EMS that may be outsourced somewhere else. 0:23:20.720 --> 0:23:24.040 It's just like an execution management system, right, So you 0:23:24.119 --> 0:23:27.760