Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Hallaway and I'm Joe. Wasn't thal Joe? Yes?
Speaker 1: Did you know? Did you know that the VIX futures
Speaker 1: This is super dramatic, it's not that interesting. Did you
Speaker 1: know that the VIX futures curve has been inverted or
Speaker 1: kind of inverted for I think like six months now,
Speaker 1: basically since February. I didn't realize it was then, but
Speaker 1: I didn't realize it had been six months. So basically
Speaker 1: that means that investors are hedging again. It's higher volatility
Speaker 1: out in the future than they are right now, or
Speaker 1: the other way around, the other way around, so it
Speaker 1: means people are paying more for volatility protection in the
Speaker 1: near term than they are in the future. But that's unusual,
Speaker 1: or at least it's counter to how the VIX curve
Speaker 1: normally looks. Normally, the VIX curve is upwards sloping because
Speaker 1: there's more uncertainty further out into the future, and so
Speaker 1: you pay more for that volatility insurance. So kind of
Speaker 1: unusual to have the VIX curve downwards sloping for this long,
Speaker 1: And I guess it's one of those things that that
Speaker 1: tells you that we're in an interesting place when it
Speaker 1: comes to markets at the moment. Yeah, I mean it
Speaker 1: makes sense that people are paying up more for short
Speaker 1: term hedging right now because we obviously are just in
Speaker 1: extraordinary times. You know, you look out a little ways
Speaker 1: one year, two years, you could sort of envision a
Speaker 1: return to normal, but it feels like we're in a
Speaker 1: period where anything could happen tomorrow, whether it's policy, whether
Speaker 1: it's related to the virus, etcetera. And so yes, sort
Speaker 1: of intuitive that people want hedges in the here and now. Yeah,
Speaker 1: of course the big event risk on but can I say,
Speaker 1: can I say something though, go on, No, this is
Speaker 1: something that's always bothered me, and maybe we'll get into
Speaker 1: this with our guest today. But I don't understand why
Speaker 1: it's not always like that, because I understand that most
Speaker 1: of the time people want to pay out for some
Speaker 1: protection because the future seems like less certain than the presence.
Speaker 1: So I get that in theory. But on the other hand,
Speaker 1: one of the central like sort of like dogmas of
Speaker 1: finance is that you know, over the long term, things
Speaker 1: to things go up, the economy improves, stocks go up, etcetera.
Speaker 1: So it always seems to be like it should actually
Speaker 1: be the other way around, where it's like, in the
Speaker 1: short term anything can happen, but in the long term
Speaker 1: things are smooth. So I've never really understood the premise
Speaker 1: of why VIX futures curve slope upward in the first place.
Speaker 1: But anyway we can, we can get into that later. Yeah,
Speaker 1: I mean, there are dozens and dozens of exchange traded
Speaker 1: products whose very existence is predicated on the VIX curve
Speaker 1: upwards in normal times. Um, but yes, we should, we
Speaker 1: should ask the question. I guess, all right, well, you've
Speaker 1: already sort of given it away. But in this episode,
Speaker 1: we're gonna be talking about the current volatility regime. And
Speaker 1: I was about to mention that there is a very
Speaker 1: big event risk coming up on the horizon, which is
Speaker 1: the US elections, and we've seen a lot of talk
Speaker 1: about volatility hedging ahead of that. We're going to get
Speaker 1: into that, and we're also going to talk about some
Speaker 1: of the longer term changes in volatility market structure, including
Speaker 1: maybe even why the VIX futures curve is normally upwards sloping.
Speaker 1: Now I'm super excited about this one. I mean, it's
Speaker 1: obviously been an extraordinary year, I think due to the
Speaker 1: rise of these sort of discrete events, whether it's the
Speaker 1: the virus itself, the big thing that's coming up on
Speaker 1: November three of this year, which could be uh producing
Speaker 1: extraordinary amount of uncertainty. There's been so much interest um
Speaker 1: in uh what volatiary futures or vict futures curves on
Speaker 1: all sorts of asset classes are sort of anticipating on
Speaker 1: how wild things could get. We also, as we spoke
Speaker 1: about with Ben Eifford a few weeks ago, there's the
Speaker 1: emergence of this whole class of sort of retail derivatives
Speaker 1: buyers call options buyers also sort of breaking historical patterns
Speaker 1: potentially in terms of how hedging markets look. So this
Speaker 1: is an extraordinary rich topic to dive into, and although
Speaker 1: we've hit it in some ways in the past, it
Speaker 1: doesn't feel like we can never really talk about it enough. Yeah,
Speaker 1: I totally agree. So our guest for this particular episode
Speaker 1: is Chris Sidile. He's the co c i O over
Speaker 1: at Ambrosk Group, basically a volatility arbitrage trader, and he's
Speaker 1: been in that particular space for well many years now.
Speaker 1: So the perfect person to talk to us about the
Speaker 1: current volatility trading regime. Chris, welcome to a THOTS. Hey,
Speaker 1: good morning, Thank you. Then meet so I guess to
Speaker 1: begin with, you know, Joe asked that question about why
Speaker 1: the vix curve is normally upward sloping. Can you maybe
Speaker 1: explain to us what you've seen over the past few
Speaker 1: months in terms of how the market is pricing volatility
Speaker 1: and what's changed. Why is the vixed curve downward sloping?
Speaker 1: What are you saying in terms of ptging demand and
Speaker 1: things like that? Right, So, uh, it's very easy to
Speaker 1: tell that everybody is fixated on the December ball, right,
Speaker 1: and it's for good reason to write. You have the
Speaker 1: potential resurgence of the comtavirus, you have the election time hotility,
Speaker 1: you have the potential for corporate earning blagging. Thanks for
Speaker 1: pointing this week. So that's pretty big, especially because of
Speaker 1: not everything that's been taking place in trading on the
Speaker 1: baby side. So everybody has been fixated on December ball,
Speaker 1: and there has been a constant bid um. Even back
Speaker 1: in late August, we've seen that correalition break between Vixen
Speaker 1: Spot and you know, people were watching that that was
Speaker 1: a little bit supply and demand driven. We we understand
Speaker 1: that there was a big player in the market that
Speaker 1: helped propel that due to some of the dealer gama hedging, etcetera, etcetera.
Speaker 1: I could go on for for hours about that one.
Speaker 1: I think people have a concern about the upcoming catalysts,
Speaker 1: and we're being across the scope pre hedging that's taking place,
Speaker 1: you know, not only with some of the larger players,
Speaker 1: but you're seeing it with the smaller guys too, with
Speaker 1: some of the you know, registered advisors. You know, they're
Speaker 1: basically instructing their clients, you know, go out, make sure
Speaker 1: you protect yourself. So it's been a constant bid involved
Speaker 1: at that level. You know. I've been tweeting this is
Speaker 1: that when the term structure is so elevated, like what
Speaker 1: we see involves so bit up, it's very difficult to
Speaker 1: get that added convexity in the move. And what I
Speaker 1: mean is that when Vault is so pre bid, it's
Speaker 1: somewhat priced in al right, so people are kind of
Speaker 1: anticipating this. People are pre hedged the move that you
Speaker 1: need to get VIX to like a seventy or eighty.
Speaker 1: It has to be real panic and real fair in
Speaker 1: the market, and you won't get that if guys are
Speaker 1: pre heads, right, because let's think about it in the
Speaker 1: most basic conceptual way. If you have a book, all right,
Speaker 1: let's just say you're running a million dollar books, right,
Speaker 1: and you have your heades on them and the market
Speaker 1: is down seven right, your pre heads. So you're not
Speaker 1: gonna go and rush to the exit door right to
Speaker 1: sell off your positions because you really have your heads.
Speaker 1: And when you have that across the entire landscope, right,
Speaker 1: it becomes much more difficult to get volved to to
Speaker 1: really get going. It's like that example of like what
Speaker 1: causes the vex to really if you have a whole
Speaker 1: bunch of people in the room and they're all trying
Speaker 1: to get to the exit door at the same time.
Speaker 1: But in this case, no, So I mean just just
Speaker 1: sort of like to I mean, if you just sort
Speaker 1: of think about over the last several months, March was
Speaker 1: sort of like the mother of all panics, probably one
Speaker 1: of the biggest panics in the history of Wall streets.
Speaker 1: And since then it's just been nothing but fear of
Speaker 1: a second wave, fear of ongoing economics sort of fall out,
Speaker 1: fear of a policy mistake, fear of the election, everything
Speaker 1: going wrong, massive reason to hedge and stay out of
Speaker 1: the market. But as such, it's hard to get actual
Speaker 1: intense selling when essentially so many people were already have
Speaker 1: already been fearful, right, right, So it's uh, it's that
Speaker 1: pre hedged position that will disable all from going through
Speaker 1: the group, right, It needs to be uh, somewhat of
Speaker 1: a fear factor. And I was saying this that in
Speaker 1: order for VALL to really get going in December, you
Speaker 1: need a fresh catalyst, all right, So the the election
Speaker 1: time just isn't enough to really get the ball to
Speaker 1: go through how people are anticipating. And you were seeing
Speaker 1: that in the divergence between d v I X and X. Right,
Speaker 1: I X is VOLA And what we're seeing is the
Speaker 1: market is not really fearful. You're seeing a divergence between
Speaker 1: the two, and it's showing us that, yeah, guys are
Speaker 1: are pre hedged, but there isn't a massive rush to prehdge.
Speaker 1: Don't get me wrong, right, there is a potential for
Speaker 1: a fresh catalyst, right like, granted a Biden election, right now,
Speaker 1: you have to think you have to immediately shift your
Speaker 1: focus into the trade wards, right, if a Biden election
Speaker 1: takes place, Because what if we wake up the next day,
Speaker 1: right we find out Joe Biden is the president. One
Speaker 1: week later we hear China's like, okay, guys, well sorry,
Speaker 1: you know, we need to reassess these this trade deal
Speaker 1: that we were talking about, right, So, a fresh new
Speaker 1: catalysts like that, or you know, something just completely out
Speaker 1: the woodwork could be enough to get the market to
Speaker 1: get going. But it's very difficult to get volatility to
Speaker 1: really proof like a vix um a X move to
Speaker 1: seventy or eighty on things that are already pre priced.
Speaker 1: I just don't think that the velocity of the move
Speaker 1: will be there without a new catalyst that isn't already predetermined.
Speaker 1: M So one of the questions I have based on
Speaker 1: that is if everyone is pretty well hedged going into
Speaker 1: the presidential elections, who is actually selling vall exposure at
Speaker 1: the moment. So that's a really good question. Um, there
Speaker 1: are people that are out there that are taking advantage
Speaker 1: of this, and and you know they're looking to sell all.
Speaker 1: We actually know a couple of institutional guys who are
Speaker 1: trying to take advantage of this, but no they I
Speaker 1: think they are resting there in a more sophisticated way
Speaker 1: where they are um hedged off. But I would not
Speaker 1: suggest this to the average retail guy because there are
Speaker 1: a lot of complexities that go in to do this.
Speaker 1: With the recent correlation break in spotting VIX, it's very
Speaker 1: difficult to determine what the market is going to do.
Speaker 1: You can't have too much conviction that sid because you
Speaker 1: could have a situation where Spott is down and ball
Speaker 1: is down, all right, or you could have an inverse
Speaker 1: of that situation, right, So you can't be too sure
Speaker 1: of what exactly is going to take place historically and statistically.
Speaker 1: Right now, I'm very confident enough to say that the
Speaker 1: trade is short volatility. Right Statistically and historically, there are
Speaker 1: no numbers that I think an individual could pull up
Speaker 1: that can lead me to say that the trade is
Speaker 1: not shootball. However, as a trader, and you know, as
Speaker 1: a risk manager, you look at this from a different standpoint,
Speaker 1: right because you look at this and you say, Okay,
Speaker 1: the data makes sense, the numbers line up, but there's
Speaker 1: been so much variability in do we really want to
Speaker 1: take this shot? Right? So there are a million other
Speaker 1: trades out there that we could take, we're not expressing
Speaker 1: the the view which with so much conviction, right, So
Speaker 1: you know, we could be short a little bit of
Speaker 1: all in the book to try to capture that, but
Speaker 1: the risk to reward from what we've seen in I mean,
Speaker 1: has just been one of those years where I feel
Speaker 1: like I call it the critosis here because everything that
Speaker 1: is like a two delta, a five delta and under
Speaker 1: is just has been hitting like we've been seeing it
Speaker 1: left and right. And you want to talk about just
Speaker 1: life in general, right, like God rest his soul, Kobe
Speaker 1: Bryant died from a helicopter crash. Right, you're just thinking
Speaker 1: about every little thing you you want to talk about
Speaker 1: the election. I'm a fairly young guy, but I have
Speaker 1: not seen a year where there's been so much variability.
Speaker 1: So with everything taking place, it's very difficult for me
Speaker 1: to say, Okay, I'm just going to fixate on the
Speaker 1: numbers and most specifically, I'm just gonna say, like you know,
Speaker 1: I'm just gonna capture that the VRP and and short
Speaker 1: ball here because the wrist of awards just doesn't really
Speaker 1: pan out. I'm actually I'm really curious about these sort
Speaker 1: of other opportunities you identify. So of course, okay, they
Speaker 1: say the statistics line up and say you should probably
Speaker 1: be short vall because the sort of realized volatility UM
Speaker 1: going into the election is probably not going to be
Speaker 1: as high as the headgers are positioned for, and statistics
Speaker 1: suggest there's probably some money to be made there and
Speaker 1: taking advantage of all the fear. What are the other
Speaker 1: things that you look for in terms of opportunities that
Speaker 1: aren't the sort of simple directional bets on one way
Speaker 1: or another up or down in volatility. Yeah, so we
Speaker 1: look for, um, a little bit of regression in some
Speaker 1: relative value things. I think earning this season is really
Speaker 1: really promit. I think it's going to for guidance, is
Speaker 1: going to really paint the picture for us, and I
Speaker 1: think reality will set in a little bit because um,
Speaker 1: I'm anticipating a little bit of a slowdown in corporate
Speaker 1: earning uh this cycle. So there are ways to capture
Speaker 1: that spread between some of the single names in certain sectors, right,
Speaker 1: so we don't necessarily need to be Mega's focused on
Speaker 1: you know, vix up. You know, we look to express
Speaker 1: some of our views and in some of the sectors
Speaker 1: with single names and then also the ets right. So
Speaker 1: for example, if we're looking at a you know, the
Speaker 1: cues to i w M. You know, maybe we think
Speaker 1: the cues are trading relatively rich and i WM this
Speaker 1: trading relatively cheap from from a ball standpoint, right, maybe
Speaker 1: thirty day implied ball or you know, we we like
Speaker 1: to focus on the wings, so we'll be looking at
Speaker 1: how is Kurtosis trading, right, is the five delta and
Speaker 1: underputs or five delta and under calls trading relatively cheap
Speaker 1: or expensive? So I think this earning cycle brings up
Speaker 1: an opportunity for a lot of dispersion. And I think
Speaker 1: you'll see disparity in a few different sectors. So I
Speaker 1: think people could look to focus on that. And I mean,
Speaker 1: you know, from just eliminating okay, like ball itself this
Speaker 1: election time, it's very important in relationship sectors, right, think
Speaker 1: about how important the oil sector is, Think about how
Speaker 1: important healthcare sectors, think about how important the energy Like
Speaker 1: those sectors are heavily reliant on who will be the
Speaker 1: winner of this election, right, because it's night and day
Speaker 1: for the turnout for that. So you know, I think
Speaker 1: investors could and should focus on um some other areas besides,
Speaker 1: oh yeah, I think you know, volatility is going to spike.
Speaker 1: I think if you look at the volatility on individual
Speaker 1: names and and certain sectors that could present um a
Speaker 1: little bit bit more opportunity there, then oh yeah, I'm
Speaker 1: just gonna play like a calendar spread and you know,
Speaker 1: sell January balls and by December balls or vice versa.
Speaker 1: I wanted to zoom out a little bit and and
Speaker 1: sort of move away from the near term concerns about
Speaker 1: potential fat tails and the upcoming election and talk about
Speaker 1: vol utility trading over the past few years. So one
Speaker 1: thing that we hear a lot is that central banks
Speaker 1: have artificially suppressed volatility through their various unconventional monetary policies.
Speaker 1: But we also hear from various guests. You know, Ben
Speaker 1: Effort's a good example of that, or Chris Cole from Artemis.
Speaker 1: We also hear that Wall Street or traders and the
Speaker 1: sort of ecosystem around volatility trading has actually, in effect
Speaker 1: also had a hand in suppressing volatility as well. I'm
Speaker 1: just curious to get your take on that. If you
Speaker 1: look at ball now, how suppressed would you say it
Speaker 1: actually is and what would you attribute that too? Is
Speaker 1: it central banks or is it the way big ball
Speaker 1: players are actually dealing in the space at the moment.
Speaker 1: First of all, shout out to be Ben, such a
Speaker 1: good dude, I love that. But yeah, so vulatility is
Speaker 1: absolutely suppressed, but we're not seeing the same level of
Speaker 1: suppression as we were seeing pre the covid um because
Speaker 1: a lot of these short ball funds and a lot
Speaker 1: of the funds that just focused on selling you know,
Speaker 1: like the ten delta put or you know, it's put
Speaker 1: or whatnot, those guys are kind of those guys have
Speaker 1: been kind of blown out, all right, So you're not
Speaker 1: really seeing the level of suppression that we were seeing
Speaker 1: pre covid However, there I should say that this is
Speaker 1: on a relative level because it's still a very heavy
Speaker 1: amount of mulatility suppression that's going out there. Central banks
Speaker 1: are absolutely suppressing volatility, and I think the way how
Speaker 1: global rates are actually set up right now, it is
Speaker 1: it's a big problem. I mean, you know, you have
Speaker 1: to look at it like this, with global rates being
Speaker 1: so low. If you are an allocator, you are just
Speaker 1: who's just fixated on on generating a return. What can
Speaker 1: you do in this market? Right? Are you gonna go
Speaker 1: buy corporate bonds where you have to take on the
Speaker 1: same sort of default risks as you would with an equity,
Speaker 1: Or are you gonna go buy a treasury where you're
Speaker 1: yielding like zero percent? Right? There comes to point time
Speaker 1: when you're looking at at the the menu and you're
Speaker 1: saying yourself, all right, you know, I might as well
Speaker 1: just be invested in equity. Right. So what global arrates
Speaker 1: beings so low? Its forces new players who aren't really
Speaker 1: in the market to now move into this new spectrum. Right.
Speaker 1: And with that you also have this this interesting dynamic
Speaker 1: taking place with structure products just blowing up. Right, you
Speaker 1: have I mean I was doing the exotics could be
Speaker 1: a mode and I can tell you for a fact.
Speaker 1: You know, January before UM the COVID situation was an
Speaker 1: amazing month. People were eating structure products. The appetite for
Speaker 1: it is huge. Right. So you think about everybody who
Speaker 1: is in the investing role now, right, they want a
Speaker 1: piece of They want a little bit of everything compiled
Speaker 1: into one. Right, So they want a little bit of
Speaker 1: health care, they want a little bit of check, they
Speaker 1: want a little bit of UM energy, and they wanted
Speaker 1: all on one little one basket right, hence the growth
Speaker 1: of EPP products. But what we are seeing is this
Speaker 1: dynamic is actually taking away from market crept. So if
Speaker 1: you were to look at the main components in the
Speaker 1: spy and the queue, right, the components that are in
Speaker 1: the two are the same thing, right, It's basically the
Speaker 1: exact same thing, right. So what what this is telling
Speaker 1: you is that the market is being driven or no breath. Right.
Speaker 1: So as much as people want to diversify and they're
Speaker 1: just trying to diversify, their portfolio is creditated on the
Speaker 1: large name, right. So with the growth of structure products,
Speaker 1: with the low global rates and the force rush to
Speaker 1: too equities and then to us in passive investing with
Speaker 1: the millennial group, they're just like, oh yeah, I want
Speaker 1: I want to be invested in a novel that's going
Speaker 1: to return, you know, a guarantee twelve percent a year.
Speaker 1: Whereas the reality behind that is it's not as easy
Speaker 1: as that, and you know, people are just very open
Speaker 1: to putting their money into these types of passive products.
Speaker 1: So you mix that in now with a big transfer
Speaker 1: of wealth that comes with the actual market buying power. Right.
Speaker 1: So as a millennial myself, I have friends in the
Speaker 1: business and in different industries who are now becoming seasoned
Speaker 1: professional where you know, they're making a fairly good salary
Speaker 1: and these people are now able to put their money
Speaker 1: invest in the stock market. Right, So the decision making
Speaker 1: has now shifted from the boomers to the millennials, right,
Speaker 1: So the buying out and we're seeing that right because
Speaker 1: people complain so much about you know, the Robin Hooders
Speaker 1: and you know or some of the market flow that
Speaker 1: comes from there, right. But it's not only the Robin Hooders, right,
Speaker 1: it's the millennials that are a little more open to
Speaker 1: taking the risks. Myself and my team, we've we went
Speaker 1: through data on this little phenomenon and you know, some
Speaker 1: of the market psychology and sentiment of the younger group. Right.
Speaker 1: So with that taking place, right, all those things mixing
Speaker 1: into one, right, you have this added volatility right where
Speaker 1: you should and you could definitely have these left tail
Speaker 1: events take place more frequently than you were seeing, you know,
Speaker 1: in the nineties or the eighties. So you know, you
Speaker 1: mentioned having been on the on the cell side on
Speaker 1: the desk at BMO, and of course, um, you know
Speaker 1: again talking about our conversation with Ben a few weeks ago.
Speaker 1: Would you learn from that experience that you've taken over
Speaker 1: to the buy side, and how does that in sort
Speaker 1: of like, what did that experience teach you in terms
Speaker 1: of the opportunities that arise due to the positioning of
Speaker 1: the cell side of the dealers and so forth, how
Speaker 1: does that help you think about in spot opportunities. I
Speaker 1: was actually speaking to UH. I was actually at my
Speaker 1: old university and I was speaking UH two weeks ago,
Speaker 1: and I was speaking to a younger kid, and he
Speaker 1: was telling me that he trades options. So I'm just
Speaker 1: asking him, you know some basic questions. You know, okay,
Speaker 1: how do you expression you? And you know what is
Speaker 1: it that you look for? Right? So this gentleman had
Speaker 1: no idea what delta vega gamma was, which was okay, Right,
Speaker 1: he's a college student who go through what we all learned.
Speaker 1: But the appetite and the willingness to go and trade
Speaker 1: derivatives is at the highest it's ever been. Right. Everybody
Speaker 1: wants a point of leverage. Everybody wants to be invested
Speaker 1: in something that could generate something with a convex the component. Right,
Speaker 1: So people are very fixated on obserus trating even though
Speaker 1: they have no idea what they're doing. So the growth
Speaker 1: is tremendous, right. And now you add in the fact
Speaker 1: that dealers need to carry a matchbook, which means that
Speaker 1: they really just need to heade off their risks, and
Speaker 1: you add that in and that leads to excessive dealer
Speaker 1: gamma heaging, right, and that leads to more emphatic swings
Speaker 1: in the market. And you know, you asked me what
Speaker 1: did I learn at BMO, You know, I learned a
Speaker 1: tremendous amount under those guys. UM truly grateful to have
Speaker 1: experienced the or had the opportunity to help manage a
Speaker 1: book of that size and go through the day to
Speaker 1: day and understand the movie components of all the complexities
Speaker 1: and a book of that size with those type of products, right,
Speaker 1: because you have a million moving pieces. So I think
Speaker 1: understanding how to manage risk from a large book like
Speaker 1: that with all the moving pieces, I think really translated
Speaker 1: well to how we look at risk here at Ambers.
Speaker 1: But one thing that really opened my eyes was a
Speaker 1: situation that took place and I wanted to stay late
Speaker 1: February or launch, but it was really an eye opener
Speaker 1: to me that the book moves in a particular way
Speaker 1: that we didn't anticipate, right, And although obviously you know,
Speaker 1: I understood and knew the intricacies of the other gamma hedging, right,
Speaker 1: and obviously on a day to day base, I went
Speaker 1: through that process right when we hedged off our books,
Speaker 1: you know, at the beginning of the morning or or
Speaker 1: the end of the night, because that was our job.
Speaker 1: One of the exactly success the job was just use
Speaker 1: money for the bank, right, So you're you're basically there
Speaker 1: as the protection trader. So I remember the market was
Speaker 1: taking and we've got the call from the heads up
Speaker 1: and my boss at the time literally just I sat
Speaker 1: um one row away from him, remember him just saying like, Okay,
Speaker 1: we need to hedge everything. And I'm looking at the
Speaker 1: positions I'm looking at like our Vegas moving, our Gamas movies,
Speaker 1: and I'm saying to myself like, man, I don't know
Speaker 1: if this is really the right move. But he just said,
Speaker 1: he's like, we need to hedge everything. We got the
Speaker 1: call up like it does not matter what the prices,
Speaker 1: we have to hedge it. Right. So what that meant
Speaker 1: for us is that we now had to go out
Speaker 1: into the open market and sell sps teachers and basically
Speaker 1: I s so synthetically, what does that do? Right? That
Speaker 1: drives the price of the market down, and that drives
Speaker 1: the price of FIXEL during that time. You know, it
Speaker 1: was an eye opener because US as a large bank,
Speaker 1: you know, we had to basically come in with a
Speaker 1: ton of side and do this when the market was
Speaker 1: already getting hammered. And I see us of myself, this
Speaker 1: is taking place across the streets, and it really sank
Speaker 1: into me that this is much more severe than people
Speaker 1: give give it credit. Because obviously I understood the ramifications
Speaker 1: of this, because you know, I praised on the buy
Speaker 1: side before there, and you know, I I understand how
Speaker 1: market microstruction works. But when you see it in real
Speaker 1: time and you see how you're moving the market with
Speaker 1: so much side and it's other guys that are doing
Speaker 1: the exact same thing, and if you have force liquidations
Speaker 1: things in place, it kind of really just clicks to
Speaker 1: you and you're like, oh my gosh, like that was
Speaker 1: literally just we just dropped the market, or you know,
Speaker 1: us and you know two of the clients really just
Speaker 1: move the market. It emphasizes on what we try to
Speaker 1: do at Amber right. We are fixated on capturing those
Speaker 1: left and right tail events. Right. So we believe that
Speaker 1: with excessive all totally suppression, and we will continue to
Speaker 1: see this right, the market will get back into a
Speaker 1: point of complacency and we will have those short volatility
Speaker 1: funds come back, and we'll have guys that are Chris
Speaker 1: truth selling you know, variants left and right right. So
Speaker 1: it's just about wasting for for the for the complacency,
Speaker 1: the setting right, because when March of points point took place,
Speaker 1: everybody has that fresh in their minds, right, So everybody's
Speaker 1: now they want to manage risk right now. They want
Speaker 1: to focus on on on heading off the book right.
Speaker 1: But there will come a point time where the market
Speaker 1: is just going up and people are gonna be like, oh,
Speaker 1: you know I don't tape the hedge. I don't need to.
Speaker 1: Why do this? You know it's taking away three percent
Speaker 1: deals for me for a year. You know, I don't
Speaker 1: need this anymore. That's when we will have more of
Speaker 1: these emphasized moves takes place where you see a move
Speaker 1: like that, you know you have a right tail event
Speaker 1: or a left till event. And we believe that the
Speaker 1: way how we are set our positioning, we're going to
Speaker 1: be able to capture those type of moves because as
Speaker 1: the market mark streuss things with that, we believe that
Speaker 1: these moves will happen much more frequently than people are
Speaker 1: giving freedance. So this is something I wanted to ask
Speaker 1: about actually, when you were telling the story about how
Speaker 1: everyone on the street was kind of doing the same
Speaker 1: thing all at once and hedging their own volatility exposure
Speaker 1: in similar ways, what are your options when you're doing
Speaker 1: that kind of hedging. Is there an opportunity to do
Speaker 1: something different to what everyone else is doing, or by
Speaker 1: the nature of the exposure, you're sort of forced to,
Speaker 1: you know, buy or sell spy futures or vixed futures
Speaker 1: or something like that. How much freedom freedom is in
Speaker 1: the right word. How much creativity do you have in
Speaker 1: manage in those hedges. Well, you know, you could try
Speaker 1: to get a little bit cute and creative, but at
Speaker 1: the end of the day, it's going to lead to
Speaker 1: one thing. Right, If you are long, you need to
Speaker 1: cut down that dector, right, So at the end of
Speaker 1: the day you're gonna need to be negative delta. So
Speaker 1: no matter how you want to flip it, if you
Speaker 1: want to say, Okay, you know, I'm gonna try to
Speaker 1: sell something that I believe is relatively cheaper that carries
Speaker 1: heavier beta. Sure, but at the end of the day,
Speaker 1: whether you're trying to go through the window or go
Speaker 1: through the front door or the back door, you gotta
Speaker 1: get out of the house, all right. So it's literally
Speaker 1: the the exact same thing. If if you want to
Speaker 1: express it and jump through the attic, you can do that,
Speaker 1: but at the end of the day, you're not gonna
Speaker 1: be able to escape the situation measure, and then then
Speaker 1: that's basically Okay, I'm at a point where I need
Speaker 1: to minimize your all right. So I heard a m
Speaker 1: I think it was actually Chris Cole. Chris Cole said
Speaker 1: this when I podcast, and he was basically saying, like
Speaker 1: when the market was tanking, we had our our phones
Speaker 1: ringing off the hook, and you know, everybody wanted to
Speaker 1: to hide a point, but you're bid crent like, look,
Speaker 1: there's nothing I can do for you at this point,
Speaker 1: Like you you want you want to try to hide
Speaker 1: up your book now when the market takes you down,
Speaker 1: like the time to head was beforehand, right, you should
Speaker 1: have been calling those guys beforehand. So the game of
Speaker 1: volatility is a psychological game, right because people look at
Speaker 1: this and they say, you know, I don't really need
Speaker 1: this right now? Why am I gonna lose flod percent
Speaker 1: off my portfolio paying for this? You know, like things
Speaker 1: are fine, right, but those are the moments where you
Speaker 1: really need it, because yeah, you may lose five percent
Speaker 1: and your books paying for volatility, but it's going to
Speaker 1: off set those losses where you're gonna lose thirty five
Speaker 1: And in some situations, guys, if you were positioned well
Speaker 1: enough like we did. You know, we did um ah
Speaker 1: our tests to see where our positioning would be in
Speaker 1: and watch, and it was very easy to see that
Speaker 1: with a small allocation, not only would you have recoup
Speaker 1: your losses on and based on the allocation that we
Speaker 1: believe and I won't go into it, you know, discussing
Speaker 1: that on the podcast, but you would have not only
Speaker 1: recoup your losses, but you would have made money. So
Speaker 1: you know, obviously contingent on the allocation side and whatnot,
Speaker 1: but there is a situation where this thing is not
Speaker 1: only served as a perspective base, but it could also
Speaker 1: make money for you. And you know, even if you
Speaker 1: were just a blind guy that just decided blinding volatility
Speaker 1: pre February March, you made money. If you were long volatility,
Speaker 1: it was very difficult for you not to make money.
Speaker 1: It's hard to try to express that view and try
Speaker 1: to get cute and creative about it, because at the
Speaker 1: end of the day, your your focus is basically on
Speaker 1: one thing, and that's really just to mitigate list. I
Speaker 1: want to go back to the question that I asked
Speaker 1: right at the beginning, which is why do all curve
Speaker 1: slope upboards? And I mean, I understand that that's how
Speaker 1: it always is, but you know, it seems to me
Speaker 1: that if you wanted to ask, like, oh, what's the
Speaker 1: stock market going to do over the next week or
Speaker 1: the next month, for the next two years, the next
Speaker 1: five years, um, it's probably gonna go up based on
Speaker 1: I'm not talking about the future, but I mean, historically speaking,
Speaker 1: that was just the case that over the long term,
Speaker 1: and this is like a fundamental axiom of investing, just
Speaker 1: like over the long term, hold for the long term
Speaker 1: stocks usually go up, etcetera. And so if this is
Speaker 1: one of the fundamental ideas in investing that the short
Speaker 1: term is noise and the long term is a steady gain,
Speaker 1: which is what most asset managers sort of assume. Why
Speaker 1: do people pay more for protection over the long term
Speaker 1: than the short term. Yeah, that's a really good philosophical question.
Speaker 1: I think it's because we don't have and we can't
Speaker 1: really project an idea of how detrimental the ramistications will be. Right,
Speaker 1: And it's one of those situations where when the AD
Speaker 1: launched to take place, most likely it's the beginning of
Speaker 1: what will be a bigger ball, right, So it's like
Speaker 1: that snowball effect, and it's very hard to try to
Speaker 1: price that out. You know, if we were in a
Speaker 1: situation where guys could buy cheap ball on forward projections,
Speaker 1: I think, from philostrophical standpoint, guys to do it. But
Speaker 1: you know, I think people who don't really trade ball atility.
Speaker 1: I didn't know that when the market tanked in February March,
Speaker 1: the longer dated stuff on the term structure didn't really
Speaker 1: move too much, right if you look at some of
Speaker 1: the I mean, if you want to just talk about
Speaker 1: like an exotic note, um, well let's just say in jail,
Speaker 1: like two years out the vall on that didn't really
Speaker 1: move as much as people anticipate, right, But the longer dated,
Speaker 1: the real longer dated ball stuff like you know, you
Speaker 1: don't know five years, three years the year, that type
Speaker 1: of stuff doesn't really get going when fall is uh
Speaker 1: something like that. You know, So there is that miscon
Speaker 1: stuff and that people have where you know, they think like, well,
Speaker 1: you know, five years, five years of old or whatever,
Speaker 1: it's probably slight. So you know, I'm just gonna sell it. Well,
Speaker 1: it's not easy. I think everybody would just set up
Speaker 1: is you just do that? But yeah, from philostophical standpoint,
Speaker 1: I could see why, uh, or projecting its tough, right,
Speaker 1: And I mean you to think about all the bright
Speaker 1: hands in the market, right, we have so many intelligent guys,
Speaker 1: and nobody can per project volatility. There's a big assumption
Speaker 1: factor and there's a lot of variance and a ton
Speaker 1: of variability and in those types of assumptions and that
Speaker 1: type of modeling. So with all the bright minds that
Speaker 1: this world has produced, nobody has been able to accurately
Speaker 1: forecast volatility. You could have maybe a sense, and you
Speaker 1: know you could, you could make it one or two times,
Speaker 1: but actively forecasting volatility is something that I just don't
Speaker 1: think that humans can do right now. Well, Chris, that
Speaker 1: was a really engaging discussion, and it's always good to
Speaker 1: dive into the volatility space, especially now when we have
Speaker 1: interesting things going on ahead of the election. And I
Speaker 1: guess the good news is we won't have to wait
Speaker 1: that long to see how it all shakes out, so
Speaker 1: just until November December, I guess. Thanks so much for
Speaker 1: coming on. Thanks Chris, that was great. Thank you guys,
Speaker 1: So Joe. I always enjoy it when we talk about
Speaker 1: the volatility trading space, and it's good to get a
Speaker 1: sort of market practitioner like Chris who's in the weeds
Speaker 1: and can really explain what's going on when we see
Speaker 1: a gamma hedging event in markets. Yeah, there's so many
Speaker 1: interesting things to think about. I mean, one is, you know,
Speaker 1: against thinking talking to Chris trying to bend think about
Speaker 1: all these retail traders who have come in to the
Speaker 1: market either and in multiple ways, I mean, some of
Speaker 1: course going crazy with call buying. Also, I thought it
Speaker 1: was interesting Chris mentioning the rise of like this sort
Speaker 1: of like passive like I'm just getting, you know, by
Speaker 1: the same amount of stock every week on an app
Speaker 1: like acorn or whatever. How much of the opportunity sort
Speaker 1: of comes down to like market structure things as opposed
Speaker 1: to taking some directional view like oh, I think Biden
Speaker 1: is going to win and therefore X. Yeah. Absolutely, And
Speaker 1: I guess the big change that we've seen in the
Speaker 1: market in recent years is that volatility trading has sort
Speaker 1: of exploded into its own industry, and with it that's
Speaker 1: had had the impact on dealers, and then what the
Speaker 1: dealers are doing is having an impact on the broader market,
Speaker 1: but also volatility expectations as well, So it turns into
Speaker 1: this sort of um, self fulfilling isn't the right word,
Speaker 1: but I guess self fueling cycle of volatility trading, so
Speaker 1: like suppression begets further suppression. Basically, yes, And you know, look,
Speaker 1: I still don't feel like I understand why volatility curve
Speaker 1: slope upward. It doesn't make any sense to me. The
Speaker 1: short term is weird and we don't know what's going
Speaker 1: to happen tomorrow, but probably the long term will be
Speaker 1: kind of boring, right. I also know, I feel like
Speaker 1: the long term, I mean, look, I think has kind
Speaker 1: of jaded me about what can happen in a single year.
Speaker 1: Let alone over the course of a decade, but any
Speaker 1: tomorrow could be very weird. We know that, what about
Speaker 1: ten years from tomorrow, Well, ten years from tomorrow, every
Speaker 1: single advisor we would ever talk about say, yeah, stocks
Speaker 1: will probably be hard. Yeah, but you don't know what
Speaker 1: it's like, Like this is like but you don't know
Speaker 1: what happens in the meantime. Who cares? And I guess
Speaker 1: I'm still like on the hunt for like a totally
Speaker 1: satisfying answer about how the investment industry's view could be
Speaker 1: docs generally go up, ignore the short term noise. But
Speaker 1: also we're going to pay more for long term hedges
Speaker 1: than we do short term mages. Okay, look, I think
Speaker 1: the moral of this conversation, or the big takeaway is
Speaker 1: that you're going to be selling some very very cheap
Speaker 1: volatility exposure ten years in the future. Everyone should come
Speaker 1: to you for their long term hedging needs. Yeah, I'm
Speaker 1: I'm putting a call out right now. No, I'm not,
Speaker 1: but I guess, you know, thinking about it that way,
Speaker 1: it's like, sure, I can say that that I'll like
Speaker 1: would be a seller of long term vall, but do
Speaker 1: I really want to be on the hook for it?
Speaker 1: Maybe that's the issue. I just don't want to. I
Speaker 1: just don't want to take it on my book. Yeah.
Speaker 1: I think it's going to end up being something like
Speaker 1: the carrying cost over that course of time, isn't it. Okay? Well,
Speaker 1: on that note again, everyone buy vall exposure from Joe
Speaker 1: he's offering. But in the means time. This has been
Speaker 1: another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway. And
Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at
Speaker 1: the Stalwork. Follow our guest on Twitter, Chris Steel. He's
Speaker 1: at he S I D I I I So Pasted
Speaker 1: with three Eyes. Follow our producer Laura Carlson at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesco Levie at Francesco Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcast. Thanks for listening to