Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: It's good. It's good.
Speaker 3: You know, markets are fun and as we said, springs.
Speaker 4: Here, Yeah, markets finally got interesting.
Speaker 2: Oh man, I mean I have so many thoughts.
Speaker 3: Oh good, all right, if you can't tell from my
Speaker 3: normal stream of consciousness operations.
Speaker 4: You know how I know it was bad, Joe go on.
Speaker 4: It was one of those weeks where we talked about
Speaker 4: negative gamma quite a lot's.
Speaker 1: Pretty interesting gamma again.
Speaker 4: Interestingly, we didn't talk that much about standard deviations, which
Speaker 4: is kind of funny. Normally those two kind of go
Speaker 4: hand in hand, but not last week.
Speaker 3: It was weird.
Speaker 1: What's gamma again? I feel so dumb because I know
Speaker 1: we've talked about gamma and it's just one of those
Speaker 1: things like what.
Speaker 4: Is it again? Should we get you a refresher?
Speaker 2: Yeah?
Speaker 1: I need one of those Guide to the Greeks books
Speaker 1: or something like a little like laminated card that I
Speaker 1: can want.
Speaker 4: Someone should do a coffee table.
Speaker 1: But yeah, yeah, guide to the Greeks like Greek stuff
Speaker 1: these days, you know, because I'm into like ancient history
Speaker 1: and everything like that. I know what alpha is, I know.
Speaker 2: What beta is.
Speaker 1: After that, I started to get a little dicey. I
Speaker 1: did a deadlist.
Speaker 4: I'm both the most popular trader and most successful trader
Speaker 4: at Citadel.
Speaker 1: That is going viral.
Speaker 4: Uh barges.
Speaker 1: This is an after school special, except.
Speaker 4: I've decided I'm going to base my entire personality going
Speaker 4: forward on campaigning for a strategic pork reserve in the.
Speaker 1: US Black Goal. These are the important question.
Speaker 4: Is it robots taking over the world? No.
Speaker 1: I think that, like in a couple of years, the
Speaker 1: AI will do a really good job of making the
Speaker 1: Odd Lots podcast. One day that person will have the
Speaker 1: mandate of Heaven.
Speaker 4: How do I get more popular and successful?
Speaker 2: We do have.
Speaker 4: You're listening to lots More, where we catch up with
Speaker 4: friends about what's going on right now, because.
Speaker 1: Even when the Odd Lots is over, there's always lots More.
Speaker 4: And we really do have the perfect best Oh the definition,
Speaker 4: I feel like I've done this before. But gamma. Gamma
Speaker 4: is the option sensitivity to the change in delta, and
Speaker 4: delta is the option sensitivity to the underlying price. So
Speaker 4: gamma is like the change of the change. It's a
Speaker 4: function of the underlying price. But it's second order, and
Speaker 4: I guess negative gamma that's when delta is the opposite
Speaker 4: direction to the stock price movement. So delta goes down
Speaker 4: if the underlying asset price is going up, and then
Speaker 4: it becomes less negative if the underlying asset price is falling.
Speaker 4: And we usually see people talk about this during market
Speaker 4: selloffs because all the options traders have to basically sell
Speaker 4: or buy stuff to hedge all that changing exposure, and
Speaker 4: the suspicion is always that that hedgeig activity are pushing
Speaker 4: the market in one way or the other. I think
Speaker 4: that's it. Okay, I did it, Charlie. You should write
Speaker 4: a book, a coffee table book on the Greek letters.
Speaker 3: I'm liking this, like Spartans versus Romans, history vibe or regard.
Speaker 1: Yeah, that's very you I feel that's very Yeah.
Speaker 3: Yeah, it resonates.
Speaker 2: It resonates. Could have something to do with the beard.
Speaker 3: Well, if you just think about it with regards to
Speaker 3: who is long and who is shortened option at a
Speaker 3: certain level. And that's so much of what we're asked
Speaker 3: to do, you know, in our job is to get
Speaker 3: a sense for where these potential acceleration points or potential
Speaker 3: gravity points are. And you're looking at the whole spectrum
Speaker 3: of strikes across the S and P index options, and
Speaker 3: you're then doing your kind of risk calculations and your
Speaker 3: Greek's calculations, and you net out all of those strikes.
Speaker 3: You have to identify calls sold, call spot puts sold,
Speaker 3: put spot, multi leg tracks.
Speaker 2: It's it's quite complex.
Speaker 3: I think in the past there's a lot of false
Speaker 3: narrative because people made kind of two core assumptions on
Speaker 3: dealer positioning before you had the actual exchange tagged data
Speaker 3: which now gives you the actuals. Those two prior assumptions
Speaker 3: are the dealers are short puts to hedges and long
Speaker 3: calls from overriders, these VRP of all sellers that you
Speaker 3: hear so much about these days, that create dynamics where
Speaker 3: the market is trapped in long gamma, right, because we're
Speaker 3: constantly dealers are constantly getting stuffed from these premium collectors.
Speaker 3: But short gamma matters because that's where you get these
Speaker 3: potential jump off points where you blow through level or
Speaker 3: a dealer is short a strike and then you get
Speaker 3: that prevailing market move is fed into so that matters.
Speaker 4: In case you can't tell, we are here with Charlie Mcalligant.
Speaker 4: He is of course, a strategist over at Nomora the
Speaker 4: person to talk to when it comes to this kind
Speaker 4: of market technicality. And we are recording this on March nineteenth.
Speaker 4: We're either stupid or brave for doing this, like right
Speaker 4: before a FED decision. I'm going to choose brave because
Speaker 4: the bar is fairly low now.
Speaker 1: Well, and like so in my view is like there's
Speaker 1: been so much volatility lately, Tracy, regardless of what happens
Speaker 1: in the forty eight hours between now and then, there's
Speaker 1: enough to talk about, Yeah for sure.
Speaker 4: Okay, So, speaking of what happened last week, you mentioned
Speaker 4: specific points at which the sell off can accelerate, and
Speaker 4: I think in your notes you had like five thousand
Speaker 4: and six fifty and five thousand and five sixty something
Speaker 4: like that as your points on the S and P
Speaker 4: five hundred at which point the sell off could accelerate.
Speaker 4: We did get to a low of like five thousand,
Speaker 4: five hundred on the Thursday, but we saw stocks recover.
Speaker 4: Why did that happen?
Speaker 3: So there was two large short gamma strikes in the
Speaker 3: S ANDP index options diaspora for dealers, and I think
Speaker 3: it was I think it was fifty six hundred and
Speaker 3: then fifty five sixty five particular level, which is part
Speaker 3: of this large listed trade in the market that is
Speaker 3: well socialized out there that at the end of this month,
Speaker 3: so not this week's options expiration, but the end of
Speaker 3: this month, the March quarterly exists and is part of
Speaker 3: something called a put spread collar where a call is
Speaker 3: sold out of the money to then help finance this
Speaker 3: put spread in the market. And that fifty five sixty
Speaker 3: five is a short strike, which means that in this
Speaker 3: case it looks like short gamma. I think the fact
Speaker 3: is about that, however, and thus this idea of well,
Speaker 3: at this point in the month, where it's still a
Speaker 3: few weeks out from happening, it could in fact potentially
Speaker 3: behave as you would think, is this acceleration point through it?
Speaker 3: Once you did, you kind of bounced around it held
Speaker 3: three or four times, and.
Speaker 2: It kind of crashed through it.
Speaker 3: The thing is is that the market knows that this
Speaker 3: trade gets rolled and rebalanced, i should say, into the
Speaker 3: next quarter's trade at the end of this month, and
Speaker 3: you know that there is going to be a ton
Speaker 3: of vega for sale as part of the and so
Speaker 3: then this strike in some ways actually ends up looking
Speaker 3: quite dissimilar from your typical idea of short gam as.
Speaker 2: This acceleration point.
Speaker 3: Depending on where the market is at the time of expiration,
Speaker 3: which will affect what the client does with those strikes
Speaker 3: and sets the new putspread collar. But I think the
Speaker 3: larger conversation that I want to have about VAW is
Speaker 3: that much of the incoming has been about why is
Speaker 3: VALL actually seemingly unresponsive?
Speaker 4: Yeah, so the VIX, Like I know, the VIX went up,
Speaker 4: but I think it went to like twenty nine, and
Speaker 4: you compare that to like it was above eighty in
Speaker 4: twenty twenty and even in twenty twenty two it was
Speaker 4: like thirty six or in the thirties. VALL was really
Speaker 4: quiet in twenty four.
Speaker 1: Yeah, August twenty twenty four got nearly four anyway.
Speaker 3: Yeah, So the last time I was in here was
Speaker 3: after that August shock, and that was it proper as
Speaker 3: as I kind of framed it at the time and
Speaker 3: still will, the world was aggregated around this soft landing
Speaker 3: viewpoint and all of a sudden in the span of
Speaker 3: one day's worth of data, but it was really even
Speaker 3: a week of data of labor data sixty five. Yeah,
Speaker 3: and that was because we repriced the left tail. All
Speaker 3: of a sudden there was a hard landing risk because
Speaker 3: the labor data shocked us. You know that U rate
Speaker 3: jump and then the NFP miss. The difference at this
Speaker 3: time around is that since the election, right, Donald Trump
Speaker 3: is the personification of a gamma agent.
Speaker 4: We are the only person I know who describes Trump
Speaker 4: as a gamma agent.
Speaker 1: Everyone knows the terms, right, but I'm a living personification again.
Speaker 3: And I think, look, his mandate is to break status quo.
Speaker 3: And we talked that last August shock about the idea
Speaker 3: that the concept of a carry trade because we were
Speaker 3: being asked about the carry online, which is kind of
Speaker 3: like this false narrative. But the idea of any sort
Speaker 3: of carry trade or positioning high sharp ratio trade right
Speaker 3: a high risk adjusted return is that you need a
Speaker 3: period of low volatility to kind of aggregate that position,
Speaker 3: to build that leverage into the trade because it keeps working,
Speaker 3: the wall is low, the price keeps working higher. That
Speaker 3: builds the leverage in the system that hence builds the risk. Right,
Speaker 3: stability breeds instability. In this case, Donald Trump, even if
Speaker 3: the market was misidentifying the macro of his policies at
Speaker 3: the time, which we should talk about, Oh.
Speaker 1: You're just never going to get that risk build up.
Speaker 3: Well, in this case, starting November, you know when it
Speaker 3: really took shape.
Speaker 2: And I think the market had.
Speaker 3: Been sensing certainly since kind of the summer skew was seepening.
Speaker 3: Skew matters, right, just as a relative measure of kind
Speaker 3: of demand for downside versus demand for upside put skew
Speaker 3: which is like deep out of the money downside relative
Speaker 3: do not the money put was jacked ninety something percentile
Speaker 3: because of all of the potential chaos agency expensive. The
Speaker 3: fall was already quite expensive going into this scenario, even
Speaker 3: if maybe the macro catalyst went wrong way and I
Speaker 3: think there's two big things that happens, So let's talk
Speaker 3: about this past.
Speaker 2: Week or really was past three weeks.
Speaker 3: Yeah, you had crowded narratives and crowded thematic positioning.
Speaker 2: With a lot of leverage.
Speaker 3: Right, that is what the prime broker's data shows and
Speaker 3: frankly still shows like gross exposure your lungs and your
Speaker 3: shorts in aggregate still kind of ninety something percentile was
Speaker 3: one hundred percent of coming into the year. Though we
Speaker 3: also had high nets, So you had a lot more
Speaker 3: long than short either way, a lot of leverage in
Speaker 3: the system.
Speaker 1: Give us like a little zoom out. Basically from mid
Speaker 1: November to as you said, about three weeks ago it
Speaker 1: started turning. I think the peak on this February nineteenth
Speaker 1: or something like that. Yes, but talk to us just
Speaker 1: about that sort of kind of an upcrash in the
Speaker 1: wake of the people loading into everything risky, from crypto
Speaker 1: to Tesla and everything. Yeah, what was going on there?
Speaker 1: And then how extreme did that get?
Speaker 3: Yeah, I mean that's the perfect segue here, because like
Speaker 3: in the sense that the post election narrative, and remember
Speaker 3: the rates sell off beginning in September, when the market
Speaker 3: really got their arms around seemingly some of this polling
Speaker 3: that was showing much more credible kind of Trump lead. Yeah,
Speaker 3: the rate sell off, meaning yields going higher, was about
Speaker 3: this idea that regardless of who won, but particularly if
Speaker 3: Trump won, that we had become both sides become economic populous,
Speaker 3: and that fiscal dominance was this overriding theme where like,
Speaker 3: we don't have a tolerance for pain as a society.
Speaker 3: We saw the kind of the steroidal impact of fiscal
Speaker 3: stimulus in the post COVID world, which kind of was
Speaker 3: the tiebreaker for finally getting an inflation shock as we
Speaker 3: all experience. So this idea that he was going to
Speaker 3: take an already strong economy and overheat it with d
Speaker 3: with tax cuts and these other stimulative measures completely had
Speaker 3: the market thinking about further extension of US exceptionalism. Right.
Speaker 3: This ability to outperform rest of the world for a
Speaker 3: whole number of reasons, which is a separate podcast, but
Speaker 3: like positioning was like long US assets, Europe was going
Speaker 3: to be cutting sooner because they were feeling the brunt
Speaker 3: of the slowdown force more so there China had all
Speaker 3: sorts of issues, right, rest of world struggling US exceptionalism
Speaker 3: and part of US exceptionalism not just kind of like
Speaker 3: global hedgemon, strongest economy, deregulation, all these stimultive measures in
Speaker 3: the pipes was also too. This idea of tech innovation
Speaker 3: and tech innovation was the story of last year, in
Speaker 3: the last two years, with the last ten years was
Speaker 3: with regards to AI, right, Yeah, it used to be
Speaker 3: fang back in the teens, right. So this idea of
Speaker 3: megacap tech, all those things that made people, you know,
Speaker 3: the completely dictated stock market last year like MAG seven,
Speaker 3: MAG eight thirty five percent of the S and P
Speaker 3: five hundred and fifty percent of the NASDAC. Concentration of
Speaker 3: all of these kind of tech and disruption themes in
Speaker 3: the market that was a big part of the US
Speaker 3: exceptionals and trade. Well, guess what those trades are really crowded,
Speaker 3: they're really loaded into And two shocks happened. The first
Speaker 3: shock was the market and this is why I started,
Speaker 3: you know, going out and talking about hedging for downside
Speaker 3: in February. Was this idea that the market I think
Speaker 3: was misunderstanding the phasing or the sequencing of a Trump
Speaker 3: economic plan, which was you've got to do the painful
Speaker 3: stuff first in order to get to the stimulative stuff later.
Speaker 3: And that's spread that time spread, you know, you had
Speaker 3: to kind of try to engineer a slowdown to then
Speaker 3: be able to get the rate cuts via the disinflation
Speaker 3: that he is trying to create, which ultimately you know,
Speaker 3: this idea of like fiscal contraction to potentially then fiscally
Speaker 3: expand and say the other shock, it's.
Speaker 2: Lost in the wash here.
Speaker 3: And this wasn't just a Trump growth scare, right, we
Speaker 3: are growth scare every Q one into Q two.
Speaker 2: That's an artifact of the post COVID at KO. Right.
Speaker 1: We had a good piece from Neil about Duo about
Speaker 1: that any.
Speaker 3: Yeah, so that matters, right, you know, that was part
Speaker 3: of my thesis, like, look and see the trajectory. We
Speaker 3: have these overheated animal spirits Q one numbers and then
Speaker 3: this seasonal adjustments kick in and we have a growth.
Speaker 2: Scare in Q two or into Q three.
Speaker 3: But the other element here was the deep seek story
Speaker 3: and tech innovation in that market concentration. And guess what,
Speaker 3: there's all sorts of those names aren't just massive parts
Speaker 3: of index and massive thematic parts Retail investors and hedge
Speaker 3: fund longs and things like that, think about their impact
Speaker 3: in the leverage GTF space, which has just absolutely grown massively.
Speaker 3: That's a source of synthetic negative gamut in the market,
Speaker 3: which you know, on the end of day rebalancing into
Speaker 3: an update, they've got a ton to buy at the
Speaker 3: end of the day. And eighty percent of those assets
Speaker 3: happened to be concentrated in kind of like concentric tech
Speaker 3: disruption circles. So you add in this massive rethink on
Speaker 3: what had been the perpetual motion machine of Ai Capex
Speaker 3: and that deep seak shock, IDIA trades down seventeen percent.
Speaker 3: Kind of after that realization that weekend of what we're
Speaker 3: looking at, all of a sudden, a massive valuation shock
Speaker 3: in an earnings repricing effectively.
Speaker 1: Tracy, did you see this from Eric Belcunis yesterday? Vista
Speaker 1: shares filing for an animal spirits ETF A and I
Speaker 1: am in a two x animal spirits ETF wild, which
Speaker 1: will hold the five fastest growing two X single stock
Speaker 1: ETFs at any given time.
Speaker 4: Isn't that just called momentum?
Speaker 1: Yeah, but that's not that momentum isn't enough.
Speaker 3: It's momentum with leverage, and guess what, there will be
Speaker 3: options on it too. So there's synthetic negative gamma and
Speaker 3: actual real negative gamma. So the final point here is
Speaker 3: you had these two shocks to what consensus was, consensus
Speaker 3: positioning and consensus narrative. Now, all of a sudden, this
Speaker 3: realization that Phase one is going to have to engineer
Speaker 3: a slowdown to get the stimulative stuff that Trump wants.
Speaker 4: Yeah, isn't that weird? Like why are we crashing economic
Speaker 4: growth to boost economic growth?
Speaker 2: Well?
Speaker 3: Because I think in this case, like there is something credible.
Speaker 2: To the idea that the deficit.
Speaker 3: Spending was a market concern, right, I mean, think about
Speaker 3: what rates were doing last year when we were talking
Speaker 3: about fiscal dominance. What's ironic here is that you then
Speaker 3: get punished for trying to address it. So look at
Speaker 3: Europe for instance, and this is like a big trade
Speaker 3: in the market right now. It's like very simplistic, but
Speaker 3: this is the way that acid allocators.
Speaker 2: Think and move.
Speaker 3: Right, who's fiscally contracting and tightening and who's fiscally expanding
Speaker 3: and stimulating Europe?
Speaker 2: Right?
Speaker 3: Trump said, Look, we might be talking about the end
Speaker 3: of Breton Woods post World War II packs Americana here, right,
Speaker 3: We're no longer going to protect you for you to
Speaker 3: buy US dollar assets and use our currency. So guess
Speaker 3: what Europe has to go out create this financing and
Speaker 3: with that, all of a sudden, now they are a
Speaker 3: fiscal expander after years of being the.
Speaker 2: Shift.
Speaker 3: It's a real potential regime shift. Even though I think
Speaker 3: this ultimately creates the conditions where if you do kind
Speaker 3: of crash the economy and you can't stick the landing
Speaker 3: on this engineered recession, then you inevitably have to fiscally expand,
Speaker 3: and that's why I think a lot of these like
Speaker 3: long Europe long China trades.
Speaker 2: Will be quick to move their feet.
Speaker 3: I can't say this is a tectonic, permanent structural shift yet,
Speaker 3: because the worst it gets for us and we get punished,
Speaker 3: and you have fiscal tightening and markets sell off and
Speaker 3: all those bad things to create a negative health effect,
Speaker 3: which in the short term help get the disinflation, to
Speaker 3: get the FED cuts right, to get the stimulus through right.
Speaker 3: This is all part of this kind of second order
Speaker 3: thinking that you need to be looking into.
Speaker 4: Okay, so we had a wild but not disorderly sell off.
Speaker 4: Sounds like my high school report card, but I imagine
Speaker 4: it was still painful for certain investors. So we just
Speaker 4: mentioned momentum like that must have been painful. Multistrats must
Speaker 4: have had a hard time because we saw a lot
Speaker 4: of the over performers underperforming and the underperformers suddenly overperforming.
Speaker 4: How was it give us some like market color?
Speaker 2: Well in some of those.
Speaker 3: I mean, you look at the biggest multistrats that have
Speaker 3: been one hundred percent of the net alternative investment or
Speaker 3: hedge fund inflow over the past X number of years. Right,
Speaker 3: So like long short isn't where it's at anymore. It's
Speaker 3: about the market neutrals, and that's just speaking to their
Speaker 3: equities components. But of course they have these other risk
Speaker 3: diversifying strategies with incredibly tight risk management tight stops, and
Speaker 3: that's how when you apply a lot of leverage to
Speaker 3: these small controlled market neutral gains, you then get these
Speaker 3: incredible annual returns that those biggest shops have been posting.
Speaker 3: But the fact of the matter is crowding happens, and
Speaker 3: leverage on top of crowding happens, and then shadow level
Speaker 3: it happens with leverageddtfs, leverage on and all control target
Speaker 3: volatility and CTAs and all that stuff is synthetic negative
Speaker 3: gamma in the market.
Speaker 2: So and even where you know.
Speaker 3: There's a very well publicized loss with regards to index are, uh,
Speaker 3: you know at one of these funds whatever, I think
Speaker 3: that was probably negatively impacted. They have to model out
Speaker 3: the flows across the diaspora of things out there at
Speaker 3: the end of the day to do their index ads
Speaker 3: and deletes. Well, they're probably getting screwed with by a
Speaker 3: lot of the leverage GTF flows the end of the
Speaker 3: day that are completely nuking and creating these big overshoots
Speaker 3: and these big negative gamma type moves. So the long
Speaker 3: story short is that for the month of February, let's say,
Speaker 3: talking with people deep in the inside, senior traders and whatnot,
Speaker 3: these were losses one month losses that people had not experienced,
Speaker 3: that have been there, you know, four or five type
Speaker 3: years in places that just don't lose money.
Speaker 2: They just stop you so effectively.
Speaker 3: Now it is a tribute to the model, however, that
Speaker 3: there's no blow ups, there's no ltcms here. I mean, yeah,
Speaker 3: they didn't make money. They might have had worst month
Speaker 3: or in the start of March with also you know,
Speaker 3: going the wrong way too, but you're not going existential here. Yeah,
Speaker 3: So that actually speaks to the model working. The bigger issue,
Speaker 3: and I think the bigger thought process takeaway here is
Speaker 3: that when you have trades over a period of time
Speaker 3: or built on the status quo of us exceptionalism, right,
Speaker 3: that is effectively a carry trade. And we had leverage
Speaker 3: built into the system for fifteen years of QE. We
Speaker 3: had leverage built in the system from modern monetary theory
Speaker 3: and the outright money drops that we've done over the show.
Speaker 3: Oh that's your fault, so maybe yeah. So, I mean,
Speaker 3: all of these things created this ugly de leveraging effect
Speaker 3: even at market neutral shops.
Speaker 2: The good news is it wasn't a VALL feature.
Speaker 3: It wasn't a VALL event because we were already hedged.
Speaker 3: That's why SKU was high. Implied VALL was high. All
Speaker 3: the put SKU was high, so it didn't become a
Speaker 3: VALL event, which is where you get some of those
Speaker 3: accelerant flows to kick in.
Speaker 4: On this note, I have a slightly weird question, but
Speaker 4: could we ever get to the point where the volatility
Speaker 4: complex is so large and so in demand that you're
Speaker 4: just never going to have a volatility event like we
Speaker 4: saw in twenty eighteen something along those lines, because everyone
Speaker 4: is paying through the nose for downside protection.
Speaker 3: Well, I mean, ironically, it's when you're well hedged that
Speaker 3: you then have a condition where you can create the crash, right,
Speaker 3: which means that dealers are short all these puts.
Speaker 4: I think, I guess you have to have sellers on
Speaker 4: the other side too.
Speaker 3: Well, that's the big thing that we've conditioned the behavior,
Speaker 3: whether it's you know, fed stepping in that moral hazard dynamic,
Speaker 3: or nowadays politicians fiscal stepping up, whether it's Silicon Valley
Speaker 3: Bank and seventy different new five letter acronym liquidity special
Speaker 3: features in the market that put out fires. And that's
Speaker 3: why the back test on VALL selling strategies and the
Speaker 3: AUM in VALL selling strategies just keeps working like you
Speaker 3: sell the Panics. And that's what ultimately what ends up
Speaker 3: happening when you have this short optionality dynamic in the market,
Speaker 3: whether it's dealers short reel downside hedges, or it's CTA
Speaker 3: trend flipping from along to a short and having to
Speaker 3: sell more of the lower it goes, or target volatility
Speaker 3: funds is like a hedge overlay doing the same thing,
Speaker 3: or leveragedtfs. You know, you get the point. Now, what
Speaker 3: ends up happening is that it's the option sellers that
Speaker 3: stop the problem because they come back in.
Speaker 2: They give dealers back.
Speaker 3: Their gamma, They sell optionality, they sell rich vall. The
Speaker 3: market stabilizes, ranges compress. You need to keep feeding volatility.
Speaker 3: Volatility is mean reverting and if you can't keep having
Speaker 3: daily one and a half percent moves, which is a
Speaker 3: big ask. You need persistent new bad news otherwise realize.
Speaker 3: Volatility compresses ranges, compress vall. Sellers feel more confident, they
Speaker 3: fill in. Dealers get long gamma. We stabilize. People start
Speaker 3: covering their monetizing their hedges. They take those off. That
Speaker 3: creates delta to buy. The market starts rallying people by
Speaker 3: short data upside it, squeeze it. That's the cycle that
Speaker 3: we're on, like this really short term ecosystem. But valse
Speaker 3: sellers are I would say, the bigger players now than
Speaker 3: hedge buyers. And that's a real footprint of the past
Speaker 3: twenty years ever since QE, where the previous buyers of
Speaker 3: volatility were real asset managers like long onlyes and things
Speaker 3: like that. After QE, a lot of those folks, big
Speaker 3: pension funds became sellers of volatility.
Speaker 4: Yeah, this was Bill Gross's thing when he stood up
Speaker 4: on stage and said, everyone sell volatility. That's like the
Speaker 4: only trade right now because nothing is happening, right you
Speaker 4: have to you have to bet on nothing. Yeah.
Speaker 3: Maybe one other point I would make on volatility. The
Speaker 3: reason that it got so wacky in August, for instance,
Speaker 3: was the fact that conditioning that says sell the rich
Speaker 3: vall and remember like the non farm payroll and U
Speaker 3: rate data was that Friday, and we crashed hard, but
Speaker 3: everybody was so conditioned that we closed the market that
Speaker 3: day with anybody in the VALL space saying I want
Speaker 3: to be short ball, short delta, I want to sell
Speaker 3: this rich vall, but still think the market normalizes here
Speaker 3: because we can't maintain this richness in volatility. Well then
Speaker 3: the NICK opened down twelve percent because it was like
Speaker 3: a kind of a hot leverage trade at that time,
Speaker 3: and it was the second day that got people stopped out.
Speaker 3: The other point here too was that that day of Friday,
Speaker 3: one of the largest ball players in the market, thinking
Speaker 3: that they were doing themselves a solid and hedging by
Speaker 3: buying vix calls, ended up creating their own demise in
Speaker 3: a sense because that created some of that short vixed
Speaker 3: convexity that then really went wild over the span of
Speaker 3: the next day and a half and created a bigger
Speaker 3: issue within the ball complex. So this is the idea
Speaker 3: that when you have buyers of hedges, they actually create
Speaker 3: the conditions for the crashes.
Speaker 4: Well, I guess we'll see what happened with meeting and
Speaker 4: we'll see.
Speaker 1: If there's like a big regime ship because it's eventually right,
Speaker 1: maybe something will change, maybe I mean maybe one day,
Speaker 1: mean reversion, welcome to an end.
Speaker 4: The volatility is mean reverting normally maybe, but what if
Speaker 4: we just get it or not normal times? So we'll see.
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