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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe wisn't Joe? Do you

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Speaker 1: remember armacgeddon? Oh? Wait, let me start over? I cried,

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Speaker 1: I cried, keep that. Do you remember Val mcgeddon. Uh? Yeah.

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Speaker 1: If you asked me exactly when that was twenty eighteen, okay,

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Speaker 1: I wouldn't have nested. Maybe I would have said twenty

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Speaker 1: seventeen or something, but yeah, something crazy happened. And like

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Speaker 1: so I think with the vvgs and some ETN or something.

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Speaker 1: I don't this is a moment in market I'm still laughing. Sorry.

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Speaker 1: This is a moment in market history that lives for

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Speaker 1: free in my head because it was a lot of

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Speaker 1: interesting things happened. So for those who might not remember

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Speaker 1: all the details, there were these two little volatility products

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Speaker 1: to exchange traded notes that basically ended up having this

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Speaker 1: huge impact on the market and specifically the volatility index,

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Speaker 1: the VIX. And so you had this kind of tail

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Speaker 1: wagging the dog scenario where you had two products that

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Speaker 1: ended up impacting the overall market. Yeah, and you know

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Speaker 1: what was really notable about the post twenty ten environment

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Speaker 1: is that just keeping a steady short volatility trade on

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Speaker 1: was extremely profitable for years, and people sort of just

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Speaker 1: get rauled into it because, you know, by the dip

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Speaker 1: was like this sort of dominant thing. You had the

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Speaker 1: FED sort of on your side, typically playing some role

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Speaker 1: of you know, the FED put and all of that,

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Speaker 1: and you had the residual anxiety of the crisis. So

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Speaker 1: people were paying a large premium for protection, volatility protection.

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Speaker 1: So being a seller of that and sort of being

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Speaker 1: implicitly short volatility was just great until the one day

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Speaker 1: it wasn't. Well. This is why these two exchange traded

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Speaker 1: notes came into being in the first place. It was

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Speaker 1: because people wanted to be able to sell volatility, and

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Speaker 1: I remember they became very popular with a certain faction

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Speaker 1: of retail traders. There was even a sub credit called

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Speaker 1: a trade XIV, which was the name of one of

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Speaker 1: the notes. Yeah. Yeah, it has since rebranded to Trading

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Speaker 1: Vault because we had this vall mcgeddon situation and both

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Speaker 1: of these exchange traded notes ended up collapsing. So not

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Speaker 1: only did they sort of spark this wider move in

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Speaker 1: the market, but they ended up dying because of it.

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Speaker 1: What's interesting in retrospect and I hadn't really thought about this.

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Speaker 1: But what's interesting in retrospect about this story is that, Okay,

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Speaker 1: in twenty eighteen, the retail move was like, okay, trade

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Speaker 1: XIV or go along XIV, and that was sort of

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Speaker 1: like how people played this post twenty twenty. Now you

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Speaker 1: get the sense that retail is playing derivatives more directly,

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Speaker 1: particularly call options, and so then rather than some note

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Speaker 1: or instrument that implicitly did that. Now, of course, the

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Speaker 1: story of the Robin Hood and all that is lots

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Speaker 1: of people are just getting directly into options trading. That's right,

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Speaker 1: and the big story in options right now. And the

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Speaker 1: reason I brought up val mcgeddon not Armageddon, which thankfully

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Speaker 1: hasn't happened yet, is because eight thank you for the caveat.

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Speaker 1: You never know, all right. So the reason why we're

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Speaker 1: talking about val mcgeddon is because you have this new

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Speaker 1: type of option on the scene. They're called one day

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Speaker 1: or zero day options, a zero DTE or one DTE,

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Speaker 1: and they've kind of exploded in volumes in recent years,

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Speaker 1: and there's a lot of discussion about whether or not

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Speaker 1: they are going to lead to a similar val mcgeddon

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Speaker 1: type scenario where you have, you know, this small thing,

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Speaker 1: although they're not that small anymore, but you have this

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Speaker 1: small instrument that ends up having a cascade effect on

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Speaker 1: the market and leading to a bigger effect on the

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Speaker 1: SMP five hundred, the benchmark index. Right, And as always

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Speaker 1: there are these concerns that any sort of derivative instrument

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Speaker 1: which is you know, might be used for hedging purposes,

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Speaker 1: could have this feedback loop. And of course the classic

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Speaker 1: there's like nineteen eighty seven and yeah, and the Stock

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Speaker 1: market Insurance sort of they called it. And the other

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Speaker 1: thing you note, and this is sort of what's interesting

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Speaker 1: to me and why we're talking about this. It's like,

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Speaker 1: in twenty twenty one, I think we had a very

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Speaker 1: good story for why there was so much of this

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Speaker 1: sort of zero data expery option trading. Right. This story

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Speaker 1: is like all of these new degenerate gamblers and they're

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Speaker 1: on robin hood and they're like trading these hypervolatile derivatives

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Speaker 1: that you know, they're short term bets and they're just

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Speaker 1: being swings. We've had this cool and off of speculative

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Speaker 1: activity over the last year, as clearly seen by prices, right,

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Speaker 1: you know, Bitcoin and arc and all these things have

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Speaker 1: come way down from their high and yet the level

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Speaker 1: of trading in these instruments is still very high, which

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Speaker 1: complicates the a story that oh, it's just a bunch

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Speaker 1: of like retailer at home gambler. I was about to say,

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Speaker 1: I think it hints that maybe it's not just retail

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Speaker 1: and this is something that I've written about on All

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Speaker 1: Loots and you should all check it out. And speaking

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Speaker 1: of what I wrote on a blots on the blog recently,

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Speaker 1: we were going to actually be speaking to the perfect guest.

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Speaker 1: We're going to be speaking with Nomura Cross Assets strategist

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Speaker 1: Charlie McElligott. He was the author of a very very

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Speaker 1: good research piece that I wrote up a couple months

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Speaker 1: ago and has been writing quite a lot about this topic.

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Speaker 1: So Charlie, thank you so much for coming on All thoughts.

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Speaker 1: Excited to be here, a long time listener, first time calling.

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Speaker 1: I love it. Maybe just to begin with talk to

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Speaker 1: us about what these options are exactly and how they

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Speaker 1: came into being and also their intended purpose, because I

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Speaker 1: think nowadays people talk about them as oh, it's part

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Speaker 1: of this speculative betting frenzy, but I assume they're supposed

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Speaker 1: to serve some sort of purpose. Absolutely, So you know,

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Speaker 1: I would I would almost start this conversation going backwards

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Speaker 1: by saying, look at the stock chart of the CBO

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Speaker 1: right now, right, which is almost a proxy on the

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Speaker 1: explosive growth and usage of options, you know, from the

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Speaker 1: investing community, whether it's institutions or retail investors, and it

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Speaker 1: does fit somewhat tidily with this larger kind of speculative

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Speaker 1: excess boom of the past two and a half three

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Speaker 1: years in that post crisis period, the Wall Street bets

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Speaker 1: stuff that you guys just spoke about, you know, the

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Speaker 1: stimmy checks and you know SPACs to crypto. You know,

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Speaker 1: this kind of new world of leveraged, highly convexed payouts

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Speaker 1: is a place where flows and money followed, and this

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Speaker 1: is the type of return profile that people are really

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Speaker 1: looking to looking to exploit in this day and age.

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Speaker 1: And in that sense, that's the unspoken portion of why

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Speaker 1: these are have been rolled out and offered. Now there's

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Speaker 1: daily expirations, there's an expiration for every day of the week,

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Speaker 1: and the zero DTE product is now almost one out

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Speaker 1: of two options the trade with the spy ETF for instance, right, So,

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Speaker 1: and you know effectively there too for large S and

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Speaker 1: P which is almost exclusively an institutional product, So the

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Speaker 1: demand is there. I think the official line, probably from

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Speaker 1: the exchanges, would be something to the effect of, we

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Speaker 1: want to offer the net end users more tools to

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Speaker 1: manage their risk, manage their liquidity profile, things of that nature.

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Speaker 1: And look, that is not wrong either. Right when did

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Speaker 1: CBO actually launch things? You know, kind of call it

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Speaker 1: mid last year? Okay, oh, okay, so they really have

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Speaker 1: not been around very long. So options, right, hedge risk,

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Speaker 1: that's what they're all about in theory, and someone like

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Speaker 1: maybe take some more spectative position. Someone needs the hedging,

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Speaker 1: they trade an option, etc. How do you go about

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Speaker 1: trying to decompose how the instrument is actually used and

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Speaker 1: how much is it from Okay, you have a large

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Speaker 1: portfolio manager that needs to hedge their downside, etc. Versus

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Speaker 1: how much of it is being driven by someone who

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Speaker 1: wants to make a bet on what Tesla will do tomorrow. Right,

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Speaker 1: that's a It's a great point, and I think that

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Speaker 1: is where you know at this point, you know myself,

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Speaker 1: my colleagues Anthony Antonucci and Johanna Wang have done some

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Speaker 1: pretty quality work here. I think unpacking that exact idea,

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Speaker 1: like just looking at open interest, just looking at volumes

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Speaker 1: themselves is not indicative of anything. Right, we need to

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Speaker 1: get a sense for you know, are the net end

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Speaker 1: users buying or selling these? Right? It speaks to the

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Speaker 1: macro regime, speaks to the volatility regime. Right, you could

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Speaker 1: say it to a certain extent looking back in the

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Speaker 1: kind of QE era, let's say where we did or

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Speaker 1: where FED was an active suppression of volatility mode large

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Speaker 1: scale asset purchases zero percent or negative interest rates. You know,

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Speaker 1: that was part of this idea. You create a wealth effect.

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Speaker 1: Financial conditions are easy. It's a growth tail end. All

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Speaker 1: that good stuff, virtuous stuff happens. The FED was telling

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Speaker 1: you to be leverage long assets. Right, so you had

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Speaker 1: a need for hedges to a certain extent. So like

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Speaker 1: a measure like skew right, which is a measure of

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Speaker 1: kind of downside demand relative to upside demand, like the

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Speaker 1: credit Swiss fear barometer right right to a certain extent

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Speaker 1: right so or or even you know specifically put skew,

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Speaker 1: which is like demand for a tailier or crashier put

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Speaker 1: relative to something closer to the money. Those measures were

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Speaker 1: very high skew was very steep back then because you're

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Speaker 1: long leverage, long assets, you needed downside protection. And this

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Speaker 1: gets to the point though of why selling valld xav

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Speaker 1: was so profitable, because if you have so much demand, right,

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Speaker 1: you have the structural demand for protection, lots of buyers,

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Speaker 1: a good market to be seller exactly. And what it does,

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Speaker 1: I mean the way that you look at volatility, it's

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Speaker 1: kind of different from this um you know. I It's

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Speaker 1: what I've learned from being in the vall space, specifically

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Speaker 1: within the Numero Equity drives desk for the last five years,

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Speaker 1: which is, you know, a top three market share player

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Speaker 1: in the US options space, is that it's it's a

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Speaker 1: consistent shuffling of your feet. You're trying to find value,

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Speaker 1: trying to find kighie convexed payouts right, which to a

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Speaker 1: certain extent, is why these options exist in the first place,

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Speaker 1: where there's so much demand for them. You know, you

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Speaker 1: have a kind of a defined risk, but a much

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Speaker 1: larger kind of multiple times implicit leverage you know on

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Speaker 1: the payout right if this thing you know strikes gold,

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Speaker 1: you know to a certain extent, so you're kind of

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Speaker 1: range trading when something is cheap, or when Vaula is

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Speaker 1: cheap is when you want to be adding protection. When

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Speaker 1: Valla is rich, that's typically when you want to you know,

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Speaker 1: flip positions and be you know, kind of short volatility

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Speaker 1: or short gamma. So those those are all part of

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Speaker 1: the calculus here. I think what matters then, However, in

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Speaker 1: this QT era right where the Fed has their hands

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Speaker 1: tied in light of the inflation overshoot, in light of

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Speaker 1: this dynamic where you know, they were clearly behind the curve.

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Speaker 1: I mean it was just a year ago at this

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Speaker 1: time they only stopped buying bonds, might you, Right before

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Speaker 1: they even began, you know, their first hike, they were

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Speaker 1: still buying bonds. So they've needed to tighten financial conditions.

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Speaker 1: They've needed to try everything they can in their limited

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Speaker 1: tool kit to address you know, the wealth effect that

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Speaker 1: was caused from these you know, legacy ten year plus

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Speaker 1: easy financial conditions, and that means cramping you know, the

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Speaker 1: demand side of inflation through tightening FCI. And in this case,

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Speaker 1: what QT has meant was a very simple trade and

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Speaker 1: that's why you know it was such a clear trend

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Speaker 1: in twenty twenty two. It was kind of like long

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Speaker 1: dollar in short assets. That's why like CTAs for instance,

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Speaker 1: were you know, thirty some percent, like there was a

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Speaker 1: very clear defined trend, the FED was effectively telling you

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Speaker 1: to be short assets. Right. What we saw then was

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Speaker 1: this trade that still kind of exists to this day,

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Speaker 1: even for the most recent Jerome pal commentary, which was

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Speaker 1: kind of this view that when you're in a in

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Speaker 1: a kind of a stretched equities valuation, the FED is

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Speaker 1: de facto a seller of calls at the low end

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Speaker 1: of the equities valuation. They don't want to market crash

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Speaker 1: per se either. Then they kind of talk you off

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Speaker 1: the ledge and they're a seller of puts. We're bouncing

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Speaker 1: around this range. But in QT right, in a QT

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Speaker 1: era where you know, they're shrinking the balance sheet, where

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Speaker 1: they're jacking up rates, they're trying to tighten financial conditions,

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Speaker 1: it kind of perversely creates this situation where you're being

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Speaker 1: told to be short assets. You actually don't need as

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Speaker 1: much hedge protection. So one of the big questions for

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Speaker 1: the last year like why is VIX so low? Right,

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Speaker 1: And that's part of this idea. If you don't have

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Speaker 1: a lot of exposure on you're sitting in high cash

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Speaker 1: you're sitting in low nets. You don't need a lot

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Speaker 1: of like crashy downside. This is such a that clicks.

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Speaker 1: This like finally feels like it clicks and answer. It's

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Speaker 1: like a big question. It makes so much sense, right

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Speaker 1: if you're if you're if the feed is telling you

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Speaker 1: hold more cash, don't be so leverage. Yeah, then you

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Speaker 1: sort of have your built in hedge already cash is

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Speaker 1: and at the money put it. Yeah. So just a

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Speaker 1: really basic question. I know you've done some research on this,

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Speaker 1: but what does the split actually look like between institutional

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Speaker 1: versus retail usage right now? Well, I think that's part

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Speaker 1: of some of the the you know, fuzzy assumption that

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Speaker 1: makes this an uncomfortable discussion. You know, I don't truly

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Speaker 1: trust men, whether it's you know, cash percentage of the

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Speaker 1: overall cash equities universe, or um you know, assumptions about

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Speaker 1: options trading. With regards of this idea of what is

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Speaker 1: retail versus institutional, I think a lot of people do

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Speaker 1: kind of a naive analysis looking at the size of

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Speaker 1: saying you know, as it pertains to the options discussion,

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Speaker 1: looking at the size of options contracts, and then you know,

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Speaker 1: under a certain threshold. They will kind of label those

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Speaker 1: as Okay, this is you know, retail type size, and

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Speaker 1: then you get this, you know, potentially false narrative. I

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Speaker 1: think the issue is that, particularly with this product, it's

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Speaker 1: an electronic options product, which means it's a market maker.

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Speaker 1: Is kind of the counterpart here. It's going to be

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Speaker 1: my next question you get into that. But and and

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Speaker 1: who who are the savvyest electronic options market makers with

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Speaker 1: the best algorithms, the best risk tools. It's these entities

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Speaker 1: that you know, you know, no no specific names necessarily

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Speaker 1: I'll use, but you know, are incredibly savvy with those algorithms.

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Speaker 1: They're slicing and dicing up their risk all day. So

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Speaker 1: you're not going to see huge, blocky types of flows

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Speaker 1: that you know you could typically pinpoint and say, you know,

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Speaker 1: because just because something is an odd lot does not

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Speaker 1: necessarily mean it's retail correct. I mean you're I mean

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Speaker 1: I well, in my in my past career, on a

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Speaker 1: cash desk when I started out of college, I sat

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Speaker 1: at a dot machine and I had a time schedule

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Speaker 1: for every minute of the day on a view op order,

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Speaker 1: a tuop order, I had to send down one hundred

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Speaker 1: and twenty shares at nine fifty nine at ten am,

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Speaker 1: I had to send down one hundred and forty shares

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Speaker 1: at right. I mean, that's how this thing works. You're

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Speaker 1: on a you know, this distribution curve, so that's kind

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Speaker 1: of imagine that now times like a much larger risk

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Speaker 1: order than you have. So I have a hard time

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Speaker 1: attributing retail institutional here. You know. One thing that I

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Speaker 1: will say is that recently, what you have seen which

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Speaker 1: proves out this idea that this clearly is an institutional

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Speaker 1: product by and large, is you have seen kind of

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Speaker 1: upstairs size premium spent, right, so the amount of money

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Speaker 1: that the net end user is spending up front to

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Speaker 1: directionally buy. In this case, recently we've seen some large

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Speaker 1: put buying. Right. This is again you're sort of like

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Speaker 1: leading into all my next questions. But this is an

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Speaker 1: unusual thing about these shorter dated options, which is that

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Speaker 1: I think the split between put volume versus call volume,

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Speaker 1: it's very skewed in one direction. Why is that? Well,

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Speaker 1: I think the simplest thing I would say right now,

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Speaker 1: and this will kind of go into some of the

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Speaker 1: work though our team has done to kind of assign

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Speaker 1: this idea and to kind of push back as it

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Speaker 1: currently stands, this is an ever evolving product. And look,

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Speaker 1: each day, I like to say, is its own ecosystem

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Speaker 1: now with these products. So there's not necessarily going to

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Speaker 1: be a carryover of prior day trend, but generally so

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Speaker 1: you could have a day where it's mostly puts where

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Speaker 1: which it has been so far, and then you could

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Speaker 1: have a day where it's mostly calls, well to a

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Speaker 1: certain extent. But this is the deal. This is kind

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Speaker 1: of at core of how these things are trading right now.

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Speaker 1: By and large, there's an inherent almost by definition mean

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Speaker 1: reversion flow from these things, because whatever you're putting on

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Speaker 1: intra day ultimately then if if it's moving in your

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Speaker 1: direction ultimately then needs to be unwound and monetized. So

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Speaker 1: the actual impact that you're getting. So let me walk

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Speaker 1: you through kind of the way that one we're identifying

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Speaker 1: these flows and trying to assign a buy or a cell.

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Speaker 1: The CBO handles options flows, let's say, for kind of

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Speaker 1: you know, index and ETF options type stuff, and what

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Speaker 1: we do is they assign a kind of an end

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Speaker 1: user tag, right, so there's kind of a broker dealer

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Speaker 1: traditional let's say like upstairs, big bank options tailers. Sorry,

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Speaker 1: just before we go on, what is I think it's

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Speaker 1: the second time you've said upstairs. What does that mean? Sure? Sure,

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Speaker 1: so just speaking to actual high touch sales traders and

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Speaker 1: risk takers, not necessarily on the floor of the exchanges, right,

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Speaker 1: but more associated with large balance sheet banks, the big stuff.

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Speaker 1: If we if we did a subscriber only version of

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Speaker 1: odd Lots, we could call it upstairs. Yeah, that's kind

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Speaker 1: that's kind of nice. So in this case, you know,

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Speaker 1: the broker dealer tag with these products is actually there's

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Speaker 1: no clear angle to these to these flows. Right. You

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Speaker 1: can see everything that they're trading in these zero DT options,

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Speaker 1: and some days they are long and some days they

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Speaker 1: are short. Market makers right in this definition, are those

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Speaker 1: electronic options entities that we're speaking to, right, the very

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Speaker 1: tech savvy kind of newer players in the scene, I'll say,

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Speaker 1: and they buy and large are the net sellers, right,

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Speaker 1: they are the sellers. They are the source of supply

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Speaker 1: for the end users. In the final kind of category,

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Speaker 1: because there is a broker dealer prop, which is I

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Speaker 1: think an antiquity kind of term when you know prop

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Speaker 1: desks were a thing, and it's it's no longer really

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Speaker 1: particularly relevant. But the net end user is actually a

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Speaker 1: customer tag. So that to us, you know, are the

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Speaker 1: people who are you know, trading at home, you know clients,

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Speaker 1: you know, institutional clients for retail, etc. What we do

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Speaker 1: is we take a kind of a trade pressure monitor,

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Speaker 1: and you can do this with a you know, a

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Speaker 1: futures contract, but where you're looking at time and sales

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Speaker 1: and what is transacting at that time versus the bitter offer.

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Speaker 1: And what you then see is if something is kind

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Speaker 1: of you know, generically, you know, assumption wise, if it's

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Speaker 1: trading above the midpoint, right, doesn't even necessarily have to

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Speaker 1: trade offer. But it's above the midpoint, that's somebody typically

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Speaker 1: who's lifting an offer. That's a buyer, right, and vice

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Speaker 1: verse right. If it trades below the mids, it's somebody

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Speaker 1: hitting a bit, it's a seller. And what we do

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Speaker 1: is we net out all the trades over the course

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Speaker 1: of the day, and then we get that and we

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Speaker 1: look at buys of calls, cells of calls right by puts,

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Speaker 1: cells of puts, and what we end up seeing is

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Speaker 1: a very clear pattern that market makers are almost always

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Speaker 1: net sellers and customer flows are almost always net buyers.

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Speaker 1: And that is core to this discussion right now because

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Speaker 1: you know, as it relates to this larger topic of valmageddon,

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Speaker 1: which we'll touch on a bit. You know, that's actually

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Speaker 1: the setup that I am most comfortable with, where the

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Speaker 1: seemingly you know, day trader, right the seeming kind of

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Speaker 1: the buyer of this is more into creating a gamma

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Speaker 1: a gamma flow in the market, of momentum flow in

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Speaker 1: the market, and we can kind of unpack that, you

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Speaker 1: know what that means. But but they have a defined

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Speaker 1: risk they're spending the premium on the option. Most of

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Speaker 1: these options are going to expire worthless as you kind

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Speaker 1: of push out of out of the money. Wait, so

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Speaker 1: before we get into sort of knocking the valmac eddon

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Speaker 1: argument down, can you talk like what is the val

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Speaker 1: mcgeddon argument? Can you piece it together for us? And

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Speaker 1: then I know you don't necessarily agree with some of

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Speaker 1: the more extreme interpretations of it. And I know, for instance,

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Speaker 1: there was a JP Morgan note recently where they said

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Speaker 1: that a five percent drop in the SMP five hundred

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Speaker 1: could basically snowball into another twenty percent drop because of

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Speaker 1: these options. Talk to us about the dynamics that would

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Speaker 1: drive that cascade effect in theory. So in you know,

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Speaker 1: to take it back to twenty eighteen and that valmcgeddon scenario,

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Speaker 1: and you know, you guys kind of got the joke right.

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Speaker 1: There was very steep skew at the time. Vall was

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Speaker 1: you know, at times screening attractive as a cell because

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Speaker 1: of this kind of fed macro suppression, right, and you

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Speaker 1: had no yield and fixed income. So there was a

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Speaker 1: lot of growth in val selling strategies and you know,

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Speaker 1: yield enhancement strategies. And this isn't necessarily from you know

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Speaker 1: vall Arb you know, um, you know hedge funds, you know,

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Speaker 1: in dark, opaque corners of the market. This was you know,

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Speaker 1: the largest asset managers in the world, you know, with

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Speaker 1: overriding foot Bill gross stood up on stage and said

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Speaker 1: sell volatility, right, that was That's how he did it.

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Speaker 1: That's how he did it. He was you know, the

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Speaker 1: biggest ray Volve guy out there, you know, and just

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Speaker 1: constantly mushing that stuff. You know. So this is more

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Speaker 1: than just an equities discussion. But so there was this

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Speaker 1: build up, an accumulation of short volatility in the market

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Speaker 1: and in particular with those products right their end of

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Speaker 1: day hedging requirements. The larger that short vall trade got,

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Speaker 1: which again, you know, everybody gets the joke it's a

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Speaker 1: picking up pennies in front of a steamroller thing. You're

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Speaker 1: just collecting premium, You're you know, collecting income, you know,

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Speaker 1: FATA gang, all those kind of euphemisms. That one day,

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Speaker 1: and it happened to be that there was an actual

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Speaker 1: macro catalyst. Over the course of that December and January,

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Speaker 1: the Trump tax plan went from kind of zero delta,

401
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Speaker 1: meaning like nobody thought it was going to get done,

402
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Speaker 1: to getting approved in like the House or the Senate

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Speaker 1: by mid December, and we were already at above trend

404
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Speaker 1: growth and above trend inflation, and all of a sudden,

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Speaker 1: now you had this big fiscal boom out of nowhere.

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Speaker 1: Over the course of January, equity equities was spot up,

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Speaker 1: so the market was up, but VALL was going higher

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Speaker 1: because people were buying upside optionality like crazy. So a

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Speaker 1: spot up vall up, which is you know, a kind

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Speaker 1: of a known term for an unstable market, I guess

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Speaker 1: you would say. And over the course of that month,

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Speaker 1: we kept seeing you know, prices paid beats, you know,

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Speaker 1: from regional Feds. There was a CPI release and at

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Speaker 1: the day, the Friday prior to you know, Val mcgeddon,

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Speaker 1: you know, February fifth, I believe we had this average

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Speaker 1: early earnings print. I believe it was like a three

417
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Speaker 1: standard deviation beat or something like that. And for the

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Speaker 1: first time in that QY era, there was a Holy

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Speaker 1: smokesall there was a Holy Smokes moment, and there was

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Speaker 1: an inflation scare, and all of a sudden, that seemingly

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Speaker 1: very controlled forward path invisibility of the Fed keeping rates

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Speaker 1: lower forever was no longer a thing, and that morning,

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Speaker 1: you know, so THATSP traded down two and a half percent.

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Speaker 1: I think that Friday, that morning, we saw these things

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Speaker 1: start to come unglued, and a lot of people were

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Speaker 1: short these things right, and they had to turn by

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Speaker 1: the end of the day. Well, the craziest thing is

428
00:24:21,080 --> 00:24:24,240
Speaker 1: they were tied to VIX futures, and I think the

429
00:24:24,359 --> 00:24:28,280
Speaker 1: week before you could see the VIX curve start to invert,

430
00:24:28,720 --> 00:24:32,760
Speaker 1: and everyone knew what inversion would mean for these products.

431
00:24:32,840 --> 00:24:36,000
Speaker 1: And I remember, I will never stop bringing this up,

432
00:24:36,040 --> 00:24:38,720
Speaker 1: but I remember tweeting about how VIX curve inversion would

433
00:24:38,720 --> 00:24:41,840
Speaker 1: be really bad for you know, these two etns, and

434
00:24:41,960 --> 00:24:45,119
Speaker 1: then it happened and everyone was shocked. They were like, oh,

435
00:24:45,480 --> 00:24:46,960
Speaker 1: I didn't expect it, or at least you know, a

436
00:24:47,000 --> 00:24:50,199
Speaker 1: significant proportion of retail seemed to be shocked, which was unfortunate.

437
00:24:50,480 --> 00:24:52,919
Speaker 1: But you could see it coming right right. I mean

438
00:24:53,000 --> 00:24:55,840
Speaker 1: I called it a for you know, I think that

439
00:24:55,960 --> 00:24:58,320
Speaker 1: at that time, like it was a neon swan. Yeah,

440
00:24:58,680 --> 00:25:01,320
Speaker 1: we knew that you need needed a catalyst, and it

441
00:25:01,480 --> 00:25:03,640
Speaker 1: was probably as always as we've seen with this most

442
00:25:03,760 --> 00:25:06,359
Speaker 1: recent you know, multi year period as of you know,

443
00:25:06,600 --> 00:25:09,960
Speaker 1: the volatility catalyst was inflation, because it shocks you out

444
00:25:10,000 --> 00:25:13,680
Speaker 1: in this kind of lazy, you know, que mentality, zero

445
00:25:14,119 --> 00:25:34,480
Speaker 1: bound rate mentality. Moving back to the present day, you know,

446
00:25:34,640 --> 00:25:36,960
Speaker 1: what is it? So, as you pointed out, there's good

447
00:25:37,040 --> 00:25:41,320
Speaker 1: reason to believe this is heavy institution, institutional or active

448
00:25:41,640 --> 00:25:47,359
Speaker 1: buyers of these UM zero data expert options, and clearly

449
00:25:47,440 --> 00:25:50,160
Speaker 1: there's a lot of demand there. The demand is real

450
00:25:50,280 --> 00:25:53,280
Speaker 1: for it. What is it? I guess what are they

451
00:25:53,560 --> 00:25:57,320
Speaker 1: used for? And by that I mean specifically, what is

452
00:25:57,359 --> 00:26:03,480
Speaker 1: it about the characteristics of current large scale institutional portfolios

453
00:26:04,160 --> 00:26:09,280
Speaker 1: that this sort of like standard length longer I don't know,

454
00:26:09,400 --> 00:26:12,080
Speaker 1: duratial maturity option, I don't know what term, just whatever,

455
00:26:12,280 --> 00:26:16,080
Speaker 1: longer data expery options are not as good for why

456
00:26:16,119 --> 00:26:19,119
Speaker 1: do they need such short term protection? Well, so I

457
00:26:19,280 --> 00:26:21,119
Speaker 1: think what you want to do is you look, you know,

458
00:26:21,200 --> 00:26:23,399
Speaker 1: I spoke earlier about kind of the shifting vall regime

459
00:26:23,440 --> 00:26:25,680
Speaker 1: and a Q E versus K TIERA right, and then

460
00:26:25,800 --> 00:26:30,840
Speaker 1: last year skew flattened to like zero percentile. Right, So

461
00:26:31,040 --> 00:26:33,200
Speaker 1: that what that tells you? Right? And we said it

462
00:26:33,320 --> 00:26:35,640
Speaker 1: was because you know, largely generally speaking, without going into

463
00:26:35,680 --> 00:26:38,080
Speaker 1: some really technical kind of flows in the structure product space,

464
00:26:38,440 --> 00:26:41,119
Speaker 1: there was this general underposition that didn't require hedges. It

465
00:26:41,320 --> 00:26:45,080
Speaker 1: was a crash less sell off. It was a grinding

466
00:26:45,440 --> 00:26:48,440
Speaker 1: d leverage. Yeah, but why did they need the zero

467
00:26:48,960 --> 00:26:51,919
Speaker 1: Like why why do they need such short term activities

468
00:26:52,240 --> 00:26:55,240
Speaker 1: to get to get that same at the level of

469
00:26:55,280 --> 00:26:57,960
Speaker 1: protection to say, so that so that's the perversion here

470
00:26:58,160 --> 00:27:00,560
Speaker 1: is that if you were you know, so many tail

471
00:27:00,600 --> 00:27:05,159
Speaker 1: funds stunt class year because typically tail funds are owning

472
00:27:05,800 --> 00:27:07,720
Speaker 1: you know, you're you're you're kind of you're you're. We

473
00:27:07,880 --> 00:27:09,840
Speaker 1: like to say you're short the meat and you're long

474
00:27:09,960 --> 00:27:11,639
Speaker 1: the heat, you know, like that's a kind of a

475
00:27:11,720 --> 00:27:14,760
Speaker 1: generally you know, assumption of what works you need to

476
00:27:14,840 --> 00:27:18,120
Speaker 1: finance paying for you know, the hedges that you put

477
00:27:18,200 --> 00:27:20,040
Speaker 1: on by you know, being able to be shorts and

478
00:27:20,160 --> 00:27:22,719
Speaker 1: volatility at the time, stuff that's gonna you know you're

479
00:27:22,760 --> 00:27:24,520
Speaker 1: gonna be able to collect on. And then you want

480
00:27:24,560 --> 00:27:27,480
Speaker 1: to own like crashy stuff. Well because we never crashed. Yeah,

481
00:27:27,600 --> 00:27:32,119
Speaker 1: like you know, owning Gamma into these event risks didn't

482
00:27:32,160 --> 00:27:35,800
Speaker 1: pay out, so and owning puts didn't really pay out

483
00:27:35,840 --> 00:27:40,280
Speaker 1: because it was this grinding, spot down vall down environment.

484
00:27:40,880 --> 00:27:44,440
Speaker 1: Skew was flat. The actual only days we really saw

485
00:27:44,600 --> 00:27:48,200
Speaker 1: Vault perform were on crash ups because nobody had it

486
00:27:48,280 --> 00:27:51,560
Speaker 1: on right. Nobody was worried about a further sell off

487
00:27:51,760 --> 00:27:54,080
Speaker 1: because you had such low exposure. You're high cash, as

488
00:27:54,119 --> 00:27:56,719
Speaker 1: we already said, you know, like if anything, you were

489
00:27:56,800 --> 00:27:59,840
Speaker 1: hedging daily event risk, and that was a big thing.

490
00:28:00,320 --> 00:28:01,920
Speaker 1: So much of the event risk last year was a

491
00:28:01,960 --> 00:28:05,119
Speaker 1: CPI print, was an NFP, was an FOMC meeting, was

492
00:28:05,119 --> 00:28:08,800
Speaker 1: an ECB meeting. So you wanted something that really looked

493
00:28:08,840 --> 00:28:11,240
Speaker 1: alike and was going to be highly sensitive to that

494
00:28:11,400 --> 00:28:13,840
Speaker 1: day's move right if you were a header. So people

495
00:28:13,840 --> 00:28:17,200
Speaker 1: were buying like at the money same day puts, a

496
00:28:17,359 --> 00:28:20,680
Speaker 1: one month put or a quarterly put was not doing

497
00:28:20,720 --> 00:28:22,600
Speaker 1: you any good. And owning like put spreads for some

498
00:28:22,760 --> 00:28:24,840
Speaker 1: gamma or whatever, it was not doing you any good.

499
00:28:24,920 --> 00:28:29,159
Speaker 1: So as the kind of the migration of the flow

500
00:28:29,480 --> 00:28:32,520
Speaker 1: moved to these, to these, you know, each day to

501
00:28:32,600 --> 00:28:35,280
Speaker 1: that point early each day became its own ecosystem. And

502
00:28:35,760 --> 00:28:37,920
Speaker 1: if you are hedging those risks, if you are a

503
00:28:38,040 --> 00:28:41,840
Speaker 1: market maker selling into a kind of end user who

504
00:28:41,880 --> 00:28:45,560
Speaker 1: has demand to kind of push the market around either way,

505
00:28:45,640 --> 00:28:49,719
Speaker 1: whether it's buying puts or buying calls, which we were

506
00:28:49,760 --> 00:28:53,760
Speaker 1: seeing this, you know the customer base do currently there

507
00:28:53,800 --> 00:28:57,240
Speaker 1: they should be agnostic really about the direction of the market.

508
00:28:57,640 --> 00:29:00,560
Speaker 1: To be fair, right, what they were doing are buying this.

509
00:29:00,600 --> 00:29:04,360
Speaker 1: If you're if you're now short this stuff, you want

510
00:29:04,480 --> 00:29:07,000
Speaker 1: something that's going to perform just like those, and owning

511
00:29:07,040 --> 00:29:09,640
Speaker 1: a Friday option, a weekly option, or a monthly option

512
00:29:10,200 --> 00:29:13,040
Speaker 1: is not going to have the same umph kind of

513
00:29:13,120 --> 00:29:16,680
Speaker 1: inhedging your risk. So part of the volume proliferation that

514
00:29:16,760 --> 00:29:20,640
Speaker 1: we have seen this year is the market makers and

515
00:29:20,720 --> 00:29:23,840
Speaker 1: broker dealers themselves using these products to slice and disk

516
00:29:23,920 --> 00:29:27,200
Speaker 1: their own risk profile. Yeah right, it's symbiotic with the

517
00:29:27,320 --> 00:29:30,080
Speaker 1: kind of the underlying demand. So just on this note,

518
00:29:30,160 --> 00:29:33,320
Speaker 1: we have this environment where maybe you're worried about a

519
00:29:33,520 --> 00:29:36,360
Speaker 1: big intra day move because of event risk, and so

520
00:29:36,520 --> 00:29:38,920
Speaker 1: you're going to buy a short dated option or a

521
00:29:39,000 --> 00:29:42,120
Speaker 1: zero or one day option versus a weekly or a

522
00:29:42,200 --> 00:29:45,680
Speaker 1: monthly or something like that. What does that actually mean

523
00:29:46,160 --> 00:29:49,960
Speaker 1: for the impact on the market, Because the whole Volmageddon

524
00:29:50,160 --> 00:29:54,800
Speaker 1: portfolio insurance doom loop theory is that you end up

525
00:29:54,800 --> 00:29:58,280
Speaker 1: in a situation where the whole market is basically short gamma,

526
00:29:58,440 --> 00:30:00,520
Speaker 1: and what if it keeps to cli lining and then

527
00:30:00,600 --> 00:30:03,520
Speaker 1: market makers have to keep selling in order to hedge.

528
00:30:04,040 --> 00:30:08,080
Speaker 1: But I'm assuming if you're talking about these ultra short options,

529
00:30:08,480 --> 00:30:11,520
Speaker 1: I mean, maybe it could make the market volatile on

530
00:30:11,800 --> 00:30:16,200
Speaker 1: more volatile on a one day basis, but probably less

531
00:30:16,320 --> 00:30:20,320
Speaker 1: unless you get sustained selling for several days. Probably not

532
00:30:20,520 --> 00:30:22,800
Speaker 1: going to lead to, you know, a nineteen eighty seven

533
00:30:22,840 --> 00:30:26,000
Speaker 1: type situation, right, So you know, I think you know,

534
00:30:26,080 --> 00:30:29,440
Speaker 1: in one of my you know, quasi recent notes, there

535
00:30:29,560 --> 00:30:32,120
Speaker 1: was a span you know, at some point in February

536
00:30:32,120 --> 00:30:34,680
Speaker 1: I'd say like over ten days, seven days, I want

537
00:30:34,720 --> 00:30:37,680
Speaker 1: to say seven days. I think we had fifteen or

538
00:30:37,720 --> 00:30:40,680
Speaker 1: sixteen one percent moves in both directions, and like a

539
00:30:40,760 --> 00:30:43,080
Speaker 1: week and a half, I mean it really was. I

540
00:30:43,200 --> 00:30:44,680
Speaker 1: want to say it was like the first week and

541
00:30:44,720 --> 00:30:47,760
Speaker 1: a half save like February, Okay, when when you know

542
00:30:47,880 --> 00:30:50,520
Speaker 1: the velocity of mentions of this, you know, this became

543
00:30:50,560 --> 00:30:53,600
Speaker 1: a very trending conversation. Yeah, and you at that point too,

544
00:30:53,680 --> 00:30:56,720
Speaker 1: we were printing, you know, basically the high usage points

545
00:30:56,760 --> 00:30:58,680
Speaker 1: of these options to date. You know, one out of

546
00:30:58,720 --> 00:31:01,640
Speaker 1: every two options was a zero DT option. And what

547
00:31:01,920 --> 00:31:04,000
Speaker 1: you were seeing then was kind of that exact point

548
00:31:04,040 --> 00:31:06,520
Speaker 1: that you're bringing up, Tracy. It was like you're getting

549
00:31:06,920 --> 00:31:11,800
Speaker 1: this enhanced intra day volatility because when these options were

550
00:31:11,920 --> 00:31:15,280
Speaker 1: net bought by the customers, the dealers have to go

551
00:31:15,320 --> 00:31:17,640
Speaker 1: on had that gamma, right, So when and what that

552
00:31:17,840 --> 00:31:21,479
Speaker 1: means is that you know, if I'm selling upside, if

553
00:31:21,520 --> 00:31:24,000
Speaker 1: I'm selling upside to you, you're trying to induce a

554
00:31:24,120 --> 00:31:25,680
Speaker 1: move in the market. You're trying to kind of push

555
00:31:25,760 --> 00:31:28,640
Speaker 1: the market with this accelerant flow. That's the lesson that

556
00:31:28,720 --> 00:31:31,760
Speaker 1: we learned with the Wall Street Bets yellowing phenomenon. Right,

557
00:31:32,160 --> 00:31:35,600
Speaker 1: And you know this it came part and parcel with

558
00:31:35,720 --> 00:31:41,240
Speaker 1: the democratization of financial information, right, the democratization of trading

559
00:31:41,360 --> 00:31:43,640
Speaker 1: and making it like a video game. This was that

560
00:31:43,880 --> 00:31:46,960
Speaker 1: highly convex you know, low risk while you're doing is

561
00:31:47,000 --> 00:31:50,400
Speaker 1: spending your premium that lottery ticket phenomenon. Yeah, and this

562
00:31:50,840 --> 00:31:53,240
Speaker 1: has become a powerful flow and people now get the

563
00:31:53,320 --> 00:31:56,360
Speaker 1: joke from retail to former institutional folks that didn't think

564
00:31:56,400 --> 00:31:58,920
Speaker 1: about options as a vehicle. Joe, you might remember I

565
00:31:59,000 --> 00:32:00,800
Speaker 1: wrote about this in the news letter. But this to

566
00:32:00,920 --> 00:32:04,760
Speaker 1: me is like the legacy of crypt Well, crypto is

567
00:32:04,800 --> 00:32:06,760
Speaker 1: still here, but this is the big invalence of crypto

568
00:32:06,840 --> 00:32:10,000
Speaker 1: to me, which is that people bet on ever shorter

569
00:32:10,240 --> 00:32:13,239
Speaker 1: term events and they're kind of agnostic to price. Right,

570
00:32:13,320 --> 00:32:15,200
Speaker 1: it's like does the market go this way or does

571
00:32:15,240 --> 00:32:18,240
Speaker 1: it go that way? Actually, this leads perfectly my next question.

572
00:32:18,320 --> 00:32:22,720
Speaker 1: It was like, how big is that activity today in

573
00:32:23,080 --> 00:32:27,200
Speaker 1: early twenty twenty three in your view relative to where

574
00:32:27,240 --> 00:32:29,400
Speaker 1: it was and say middle of twenty twenty one, because

575
00:32:29,400 --> 00:32:31,600
Speaker 1: obviously a lot of those people must be gone or

576
00:32:31,640 --> 00:32:34,000
Speaker 1: wiped out or something, but it's clearly I mean there's

577
00:32:34,000 --> 00:32:35,800
Speaker 1: like this cultural thing and there's a lot of people

578
00:32:35,840 --> 00:32:37,600
Speaker 1: still doing it and talking about it, etc. So like

579
00:32:37,640 --> 00:32:41,360
Speaker 1: in your sense, like the sort of Yolo Gama squeeze

580
00:32:41,400 --> 00:32:44,240
Speaker 1: trades that we talked about We've had on the show

581
00:32:44,560 --> 00:32:48,640
Speaker 1: multiple times, like how much of a force is that today? First,

582
00:32:48,880 --> 00:32:50,640
Speaker 1: back then. So this is kind of the way I

583
00:32:50,680 --> 00:32:52,560
Speaker 1: think about it. It's a very it's a very option

584
00:32:52,680 --> 00:32:55,480
Speaker 1: centric phenomenon, right, And I'm not just saying, oh, like

585
00:32:55,640 --> 00:32:59,120
Speaker 1: zero DT options like shocking. What I'm saying is that

586
00:32:59,560 --> 00:33:02,640
Speaker 1: in the absence of a clear kind of macro message,

587
00:33:02,640 --> 00:33:05,080
Speaker 1: and you were seeing that with Jerome Powell and the

588
00:33:05,200 --> 00:33:07,520
Speaker 1: Fed and the market really trying to come to terms,

589
00:33:08,160 --> 00:33:10,600
Speaker 1: you know, by getting ahead of itself and anticipating the

590
00:33:10,720 --> 00:33:13,360
Speaker 1: end of the tightening cycle and trying to begin pricing

591
00:33:13,400 --> 00:33:16,360
Speaker 1: that in and then bang, you know, hot inflation data

592
00:33:16,400 --> 00:33:18,760
Speaker 1: or hot jobs data keeps you know, the Fed having

593
00:33:18,800 --> 00:33:21,239
Speaker 1: to readjust and the market reprices terminal rates and all

594
00:33:21,280 --> 00:33:25,920
Speaker 1: that stuff. When the trade becomes very challenging like that,

595
00:33:26,200 --> 00:33:29,000
Speaker 1: where again on a daily to weekly basis, where you

596
00:33:29,080 --> 00:33:32,160
Speaker 1: know we're completely held hostage by an individual new macro

597
00:33:32,320 --> 00:33:35,280
Speaker 1: data point or a new central bank meeting, I think

598
00:33:35,320 --> 00:33:37,960
Speaker 1: there has almost been I don't want to say a

599
00:33:38,040 --> 00:33:40,600
Speaker 1: trade or boredom, but you need to exploit some other

600
00:33:40,680 --> 00:33:43,880
Speaker 1: phenomenon where you're dealing with kind of binary outcomes and

601
00:33:44,040 --> 00:33:46,480
Speaker 1: what ends up happening. What we've seen is that if

602
00:33:46,560 --> 00:33:50,040
Speaker 1: you are a market maker or you know, to a

603
00:33:50,160 --> 00:33:52,880
Speaker 1: lesser extent, as I said, a dealer, and you have

604
00:33:53,520 --> 00:33:56,719
Speaker 1: clients looking to exploit these intra day moves, which by

605
00:33:56,800 --> 00:33:59,400
Speaker 1: the way, there's also you know, kind of a regulatory

606
00:34:00,320 --> 00:34:05,040
Speaker 1: paper trail aside here as well, because you know, if

607
00:34:05,120 --> 00:34:08,160
Speaker 1: I'm you know, selling, if I'm selling an option, let's say, okay,

608
00:34:08,320 --> 00:34:09,680
Speaker 1: I don't at the end of the day, if it's

609
00:34:09,719 --> 00:34:12,200
Speaker 1: not on my prime broker's books because that trade has gone,

610
00:34:12,920 --> 00:34:15,080
Speaker 1: I don't have to you know, do the kind of

611
00:34:15,160 --> 00:34:19,560
Speaker 1: the the margin you know requirement right the collateral um

612
00:34:19,719 --> 00:34:23,239
Speaker 1: you know kind of requirement. So you know, there's there's

613
00:34:23,360 --> 00:34:27,600
Speaker 1: also this at as opposed to using a futures order, which,

614
00:34:27,680 --> 00:34:29,680
Speaker 1: by the way, you would put a you know, like

615
00:34:29,800 --> 00:34:32,960
Speaker 1: for a stop loss or risk management tool. So often

616
00:34:33,080 --> 00:34:35,879
Speaker 1: in this type of world, you put your stop loss

617
00:34:35,960 --> 00:34:39,040
Speaker 1: out here down at this level, and you know, the

618
00:34:39,200 --> 00:34:41,200
Speaker 1: market goes there and you execute and you're out of

619
00:34:41,239 --> 00:34:42,799
Speaker 1: your position even though you want it to be long

620
00:34:42,880 --> 00:34:43,960
Speaker 1: And then by the end of the day, the thing

621
00:34:44,080 --> 00:34:46,520
Speaker 1: is higher and you just killed yourself. These sit out

622
00:34:46,560 --> 00:34:49,120
Speaker 1: there live until four o'clock. They give you a chance

623
00:34:49,160 --> 00:34:51,440
Speaker 1: to not get knocked out. Oh and I didn't realize

624
00:34:51,480 --> 00:34:53,799
Speaker 1: that about the margin requirements. That's interesting, Yeah, I mean

625
00:34:53,840 --> 00:34:55,359
Speaker 1: so it's just you know, those types of things are

626
00:34:55,400 --> 00:34:58,240
Speaker 1: all part of this tailwind to these to these products.

627
00:34:58,320 --> 00:35:00,279
Speaker 1: But the thing that I want to say, as if

628
00:35:00,280 --> 00:35:02,880
Speaker 1: you think about where a market maker is basically positioned,

629
00:35:03,120 --> 00:35:05,480
Speaker 1: they're kind of they're short of put and short of

630
00:35:05,600 --> 00:35:08,360
Speaker 1: call on a daily basis. Our data shows for that

631
00:35:08,480 --> 00:35:12,560
Speaker 1: customer tagging that almost every day by and large particularly

632
00:35:12,719 --> 00:35:15,600
Speaker 1: and we look at you know, moneyness buckets, right, So

633
00:35:15,800 --> 00:35:19,000
Speaker 1: and that sounds kind of intimidating perhaps, but just think

634
00:35:19,040 --> 00:35:21,880
Speaker 1: about like calls in the up one percent to up

635
00:35:21,960 --> 00:35:26,439
Speaker 1: three percent, right, is almost always a net customer buyer

636
00:35:27,480 --> 00:35:30,920
Speaker 1: trying to create that gamma squeeze, okay, But so are

637
00:35:31,080 --> 00:35:33,719
Speaker 1: puts in the ninety seven ninety nine. So like down one,

638
00:35:33,800 --> 00:35:37,439
Speaker 1: down three percent, almost always a customer buyer you're trying

639
00:35:37,480 --> 00:35:41,439
Speaker 1: to push these flows around. So just on this point,

640
00:35:41,640 --> 00:35:44,440
Speaker 1: and you mentioned exploitation earlier, and one of the things

641
00:35:44,640 --> 00:35:50,000
Speaker 1: about Vaal mcgeddon and those two exchange traded notes or products,

642
00:35:50,440 --> 00:35:54,960
Speaker 1: was that eventually market participants became very very aware of

643
00:35:55,200 --> 00:35:59,080
Speaker 1: their size and how they worked and sort of realized

644
00:35:59,280 --> 00:36:03,400
Speaker 1: that they could influence those products so that the products

645
00:36:03,480 --> 00:36:06,399
Speaker 1: in turn would influence the underlying which in this case

646
00:36:06,600 --> 00:36:10,239
Speaker 1: was Vic's futures. Is there a chance that you could

647
00:36:10,360 --> 00:36:13,680
Speaker 1: see something or you're already seeing something similar here where

648
00:36:13,880 --> 00:36:18,040
Speaker 1: sophisticated market participants understand how these options work, the hedging

649
00:36:18,080 --> 00:36:20,600
Speaker 1: activity that they generate, and they start to sort of

650
00:36:20,880 --> 00:36:24,960
Speaker 1: game them. Yes, but what you're doing is you're kind

651
00:36:24,960 --> 00:36:28,880
Speaker 1: of intraday gaming them because again the inherent mean reversion

652
00:36:29,000 --> 00:36:32,120
Speaker 1: property of these things. If you're going to monetize, you

653
00:36:32,200 --> 00:36:35,120
Speaker 1: got to do it by the clothes and what you're

654
00:36:35,160 --> 00:36:38,920
Speaker 1: getting this is feeding into the intraday volatility expansion, right,

655
00:36:39,280 --> 00:36:43,040
Speaker 1: the interday acceleration flow. I'm lifting a guy on upside calls,

656
00:36:43,080 --> 00:36:44,600
Speaker 1: you know, and out of the money upside calls, and

657
00:36:44,600 --> 00:36:47,000
Speaker 1: the market starts rallying, and then we get through a strike.

658
00:36:47,080 --> 00:36:50,000
Speaker 1: He's short gamma, right, So the higher the market goes,

659
00:36:50,080 --> 00:36:52,160
Speaker 1: the more they have to buy to stay hedged. You're

660
00:36:52,200 --> 00:36:55,279
Speaker 1: trying to help push, You're trying to get the ball rolling. Again,

661
00:36:55,360 --> 00:36:57,520
Speaker 1: These are acceler and flows the same thing to the downside,

662
00:36:58,040 --> 00:37:02,239
Speaker 1: and that is that is, you know, well within the

663
00:37:02,440 --> 00:37:04,400
Speaker 1: kind of the bounds of fair play, right, it's the

664
00:37:04,440 --> 00:37:05,920
Speaker 1: same thing as you have to go out and buy

665
00:37:06,280 --> 00:37:09,760
Speaker 1: five yards of futures. You know you're gonna rip the market.

666
00:37:09,800 --> 00:37:11,600
Speaker 1: It's going to leave a footprint. You know, you might

667
00:37:11,680 --> 00:37:13,560
Speaker 1: be trying to do it kind of little profile, but

668
00:37:14,000 --> 00:37:18,520
Speaker 1: you know these trades. We've seen futures on options on

669
00:37:18,640 --> 00:37:21,960
Speaker 1: futures trading of late where people are doing this clearly

670
00:37:22,080 --> 00:37:25,360
Speaker 1: on the screens where they're buying twenty thousand options on

671
00:37:25,560 --> 00:37:29,200
Speaker 1: futures down fifty points in the middle of the day

672
00:37:29,239 --> 00:37:32,919
Speaker 1: and puts. And that was a big story a week

673
00:37:33,040 --> 00:37:35,600
Speaker 1: or two ago where the market moved because there was

674
00:37:35,640 --> 00:37:38,160
Speaker 1: two billion dollars of delta for sale. Everybody saw that.

675
00:37:38,360 --> 00:37:41,920
Speaker 1: Everybody knew it. Actually, maybe just as a way to

676
00:37:42,000 --> 00:37:46,520
Speaker 1: sort of help me conceptualize this and understand the example

677
00:37:46,600 --> 00:37:49,480
Speaker 1: that you just cited, like can you talk a little

678
00:37:49,480 --> 00:37:53,080
Speaker 1: bit about payoff probabilities, Like can you sort of walk

679
00:37:53,200 --> 00:37:55,919
Speaker 1: through a sort of a specific like type of bet

680
00:37:56,160 --> 00:37:58,880
Speaker 1: that someone would make and this type of situation, like

681
00:37:59,239 --> 00:38:02,640
Speaker 1: what are they risking? What is the upside? Everyone wants

682
00:38:02,719 --> 00:38:06,560
Speaker 1: that's sort of like big lottery tickets type move et cetera.

683
00:38:06,600 --> 00:38:09,000
Speaker 1: Can you sort of like walk through like a sort

684
00:38:09,040 --> 00:38:13,239
Speaker 1: of theoretical trade or theoretical like math behind how an

685
00:38:13,400 --> 00:38:17,399
Speaker 1: entity would enter and think about the upside and downside. Well,

686
00:38:17,520 --> 00:38:21,160
Speaker 1: I mean without even getting into like a complex option strategy.

687
00:38:21,400 --> 00:38:25,560
Speaker 1: Right if you were just simply buying same day call options, Okay,

688
00:38:25,719 --> 00:38:29,160
Speaker 1: you know kind of through the end of January, You'm

689
00:38:29,200 --> 00:38:32,240
Speaker 1: just running a systematic strategy of you know, of buying

690
00:38:32,320 --> 00:38:35,680
Speaker 1: and closing like you're up you know, say, you know,

691
00:38:35,760 --> 00:38:39,400
Speaker 1: five percent just on you know that alone consistently, and

692
00:38:39,480 --> 00:38:43,520
Speaker 1: you had you know, an actual like positive sharp ratio too.

693
00:38:43,800 --> 00:38:46,080
Speaker 1: Like that's not a normal kind of environment because January

694
00:38:46,200 --> 00:38:49,520
Speaker 1: was this like everything type of rally even though you know,

695
00:38:49,600 --> 00:38:52,120
Speaker 1: there were times where we were rallying involved was going higher.

696
00:38:52,239 --> 00:38:56,040
Speaker 1: But it's more actually the view of why, in my mind,

697
00:38:56,360 --> 00:38:58,960
Speaker 1: why market makers want to be are willing to be

698
00:38:59,040 --> 00:39:02,680
Speaker 1: short these right, and that is you know, a critical

699
00:39:02,800 --> 00:39:05,560
Speaker 1: part of this process, particularly in this VALL regime where

700
00:39:06,000 --> 00:39:10,240
Speaker 1: you know, VALL can't squeeze yesterday, you know, barely barely

701
00:39:10,360 --> 00:39:13,600
Speaker 1: ticking higher, right even or excuse me, on yesterday, meaning

702
00:39:14,200 --> 00:39:18,200
Speaker 1: referring to the first day of the politicistimony on the sea.

703
00:39:18,320 --> 00:39:21,160
Speaker 1: But if you're looking at you know, a sharp ratio, right,

704
00:39:21,200 --> 00:39:24,000
Speaker 1: so a measure of kind of performance versus a risk unit.

705
00:39:24,280 --> 00:39:26,560
Speaker 1: You know, it's really a marketing tool, right, you know,

706
00:39:26,600 --> 00:39:30,360
Speaker 1: it's not an actual like risk calculate, but shorting a

707
00:39:30,640 --> 00:39:33,920
Speaker 1: daily straddle, which is what these market makers are doing. Right.

708
00:39:33,960 --> 00:39:36,360
Speaker 1: They're short of put and short of call to a client,

709
00:39:36,800 --> 00:39:38,920
Speaker 1: or you could say short of a strangle as well,

710
00:39:39,120 --> 00:39:42,200
Speaker 1: kind of depending on same strike or wider strikes. But

711
00:39:42,760 --> 00:39:45,040
Speaker 1: you're talking about an S and P for the last

712
00:39:45,120 --> 00:39:49,080
Speaker 1: ten days, that's a seven sharp selling that selling that

713
00:39:49,200 --> 00:39:52,239
Speaker 1: straddle systematically on a on a twenty day, you know,

714
00:39:52,320 --> 00:39:54,719
Speaker 1: it pushes up somewhere, you know, or it's still like

715
00:39:55,040 --> 00:39:57,239
Speaker 1: a five or something like that in an S and P.

716
00:39:57,800 --> 00:40:01,560
Speaker 1: So these this is a big pay out for these

717
00:40:01,680 --> 00:40:06,520
Speaker 1: market makes. So okay, So what is the regime shift

718
00:40:06,680 --> 00:40:10,719
Speaker 1: scenario in which market makers could get run over? There's

719
00:40:10,840 --> 00:40:14,840
Speaker 1: short puts and calls, so they're essentially making bets on

720
00:40:15,560 --> 00:40:19,640
Speaker 1: not big moves, right, Like to a certain extent, Yes,

721
00:40:19,800 --> 00:40:22,799
Speaker 1: in a world where we haven't had crash and there

722
00:40:22,920 --> 00:40:25,960
Speaker 1: is not so right, we've had declined but not crashes.

723
00:40:26,440 --> 00:40:29,320
Speaker 1: And part of that is perhaps you know, due to

724
00:40:29,560 --> 00:40:33,200
Speaker 1: these sort of like delevering people don't have people have

725
00:40:33,280 --> 00:40:35,040
Speaker 1: more cash on this sideline so they don't have to

726
00:40:35,080 --> 00:40:38,040
Speaker 1: like sell in response to selling, etc. But talked like

727
00:40:38,120 --> 00:40:41,320
Speaker 1: about like what is the scenario in which a market

728
00:40:41,400 --> 00:40:45,879
Speaker 1: maker with these you know, short straddles could get run over? Well,

729
00:40:45,960 --> 00:40:48,720
Speaker 1: so in this dynamic that we're that we're talking about,

730
00:40:48,880 --> 00:40:51,719
Speaker 1: that that has kind of been the setup for most days, right,

731
00:40:52,000 --> 00:40:54,160
Speaker 1: you know where you know it's it's actually a good thing.

732
00:40:54,520 --> 00:41:00,640
Speaker 1: I want the short ball short gamma being managed by professionals,

733
00:41:01,280 --> 00:41:06,239
Speaker 1: some sort of regulatory oversight, capital you know oversight you know,

734
00:41:06,640 --> 00:41:10,239
Speaker 1: with more robust discipline kind of risk management process and

735
00:41:10,400 --> 00:41:12,719
Speaker 1: not by the same day intra day scalpers who are

736
00:41:12,760 --> 00:41:15,920
Speaker 1: shorting tales for income. Yes, right, that's that's critical to me.

737
00:41:16,000 --> 00:41:18,800
Speaker 1: So when I'm speaking with regulators, which i am, you know,

738
00:41:18,880 --> 00:41:21,720
Speaker 1: when I'm speaking with um you know kind of oversight

739
00:41:21,840 --> 00:41:24,239
Speaker 1: type of entities and and you know things of that

740
00:41:24,440 --> 00:41:27,120
Speaker 1: nature that want to know is there a systemic risk? Yeah,

741
00:41:27,280 --> 00:41:29,719
Speaker 1: this currently is the right set up to be you know,

742
00:41:29,840 --> 00:41:33,560
Speaker 1: well managed. The thing that would make me uncomfortable would

743
00:41:33,680 --> 00:41:36,800
Speaker 1: very much come from what would almost require certainly a

744
00:41:36,960 --> 00:41:41,120
Speaker 1: different macroeconomic regime, which would be a much more highly

745
00:41:41,200 --> 00:41:44,400
Speaker 1: speculative environment. It would probably require, you know, a resumption

746
00:41:44,480 --> 00:41:47,600
Speaker 1: of quantitative easing. It would be a very different world

747
00:41:47,719 --> 00:41:49,920
Speaker 1: where there wouldn't be all this yield and sitting in

748
00:41:50,080 --> 00:41:53,040
Speaker 1: cash and you had to go back to being risky

749
00:41:53,120 --> 00:41:55,840
Speaker 1: by selling valls. Sorry, I don't want to keep pressing

750
00:41:55,920 --> 00:41:59,680
Speaker 1: on this, but I'm trying to understand, like, yeah, they're

751
00:41:59,719 --> 00:42:03,600
Speaker 1: really smart and their professionals, but smart professionals blow up

752
00:42:03,640 --> 00:42:05,759
Speaker 1: to wait, wait, wait, wait. So just on this point,

753
00:42:05,800 --> 00:42:08,640
Speaker 1: I think like the biggest criticism of the val mcgeddon

754
00:42:08,760 --> 00:42:12,160
Speaker 1: scenario is that if your put went up like a

755
00:42:12,239 --> 00:42:15,160
Speaker 1: thousand percent in a day, you would sell it, right,

756
00:42:15,320 --> 00:42:19,040
Speaker 1: which would like start to decrease some of the hedging

757
00:42:19,120 --> 00:42:23,080
Speaker 1: needs or bring in buyers buying from market makers, and

758
00:42:23,200 --> 00:42:26,120
Speaker 1: that would ultimately support the market. That's my understanding of

759
00:42:26,160 --> 00:42:30,440
Speaker 1: the sort of opposition to val mcgeddon thing. I think

760
00:42:30,600 --> 00:42:36,080
Speaker 1: the sheer supply of short vall then versus this very

761
00:42:36,200 --> 00:42:39,680
Speaker 1: tactical and then daisy chained hedged you know environment that

762
00:42:39,760 --> 00:42:43,000
Speaker 1: we're currently in where part of these volumes once the

763
00:42:43,080 --> 00:42:45,800
Speaker 1: dealers are short some of these you know, down to

764
00:42:46,239 --> 00:42:49,600
Speaker 1: or up to types of scenarios are them Are they

765
00:42:49,680 --> 00:42:53,399
Speaker 1: themselves hedging out these scenarios and slicing and dicing their risk.

766
00:42:54,480 --> 00:42:57,480
Speaker 1: Back then, that was the largest supply of kind of

767
00:42:57,520 --> 00:43:01,600
Speaker 1: short vall that we had seen, and we knew mechanically

768
00:43:01,760 --> 00:43:04,959
Speaker 1: it had to rebalance. That's why it was an extinction event.

769
00:43:05,200 --> 00:43:08,239
Speaker 1: People begin to shoot against it now that of course,

770
00:43:08,360 --> 00:43:11,680
Speaker 1: that can still happen now, but again due to this

771
00:43:11,880 --> 00:43:14,759
Speaker 1: dynamic where if the trade is actually going your way,

772
00:43:15,360 --> 00:43:19,239
Speaker 1: you are being incentivized to close it out. And that's why.

773
00:43:19,440 --> 00:43:23,040
Speaker 1: So if classic realized volatility is a measure of close

774
00:43:23,120 --> 00:43:26,560
Speaker 1: to close volatility right right now kind of sort of

775
00:43:26,680 --> 00:43:30,400
Speaker 1: say VIX the VIX future at like around twenty is

776
00:43:30,600 --> 00:43:33,360
Speaker 1: implying a one point two to one point three percent

777
00:43:33,520 --> 00:43:36,440
Speaker 1: daily move in the SMP like five of the last

778
00:43:36,520 --> 00:43:39,600
Speaker 1: seven days. I know it's a random sampling, but have

779
00:43:39,760 --> 00:43:42,480
Speaker 1: been like fifty bibs or less. But what you're getting

780
00:43:42,640 --> 00:43:45,520
Speaker 1: is one percent intra day moves. And this is the thing,

781
00:43:45,680 --> 00:43:47,960
Speaker 1: right what you're getting is like from from a you know,

782
00:43:48,360 --> 00:43:52,719
Speaker 1: a volatility measure that actually incorporates open to close or

783
00:43:52,880 --> 00:43:57,080
Speaker 1: hide to low. You're actually seeing vall expand at some times,

784
00:43:57,640 --> 00:44:02,480
Speaker 1: but from a classic volatility perspective, because this mean reversion

785
00:44:02,560 --> 00:44:07,200
Speaker 1: flow compresses from a daily change, right that idea of

786
00:44:07,320 --> 00:44:11,400
Speaker 1: an ecosystem of each day its own ecosystem on a

787
00:44:11,520 --> 00:44:15,120
Speaker 1: closed to close basis, these trades are actually helping to

788
00:44:15,239 --> 00:44:19,880
Speaker 1: compress volatility and actually leaning into implied you know, volatility

789
00:44:20,000 --> 00:44:22,439
Speaker 1: is kind of grinding lower, which is very much where

790
00:44:22,480 --> 00:44:25,320
Speaker 1: we're stuck right now. So I just have one more question,

791
00:44:25,440 --> 00:44:29,040
Speaker 1: and it's kind of facetious but not really like the

792
00:44:29,600 --> 00:44:31,840
Speaker 1: day to day takeaway from this is that like the

793
00:44:31,960 --> 00:44:36,320
Speaker 1: CBOE and the marketmakers must just be minting money from this.

794
00:44:36,840 --> 00:44:39,880
Speaker 1: And secondly, doesn't mean that if you're an equities trader,

795
00:44:40,280 --> 00:44:42,759
Speaker 1: like you don't even have to be around for the

796
00:44:42,840 --> 00:44:45,240
Speaker 1: full day. You could just be at like around present

797
00:44:45,320 --> 00:44:47,880
Speaker 1: for the open and the clothes and those are the

798
00:44:48,000 --> 00:44:52,160
Speaker 1: most important things. Now. Well, so we watch, you know,

799
00:44:52,840 --> 00:44:56,680
Speaker 1: there's a ton of mythology and wheel spinning based on

800
00:44:57,840 --> 00:44:59,520
Speaker 1: you know, in recent years, and I've been you know,

801
00:44:59,600 --> 00:45:03,800
Speaker 1: part of this process for certain with regards to getting

802
00:45:03,800 --> 00:45:08,080
Speaker 1: a sense for the aggregate options landscape and where extreme

803
00:45:08,239 --> 00:45:11,960
Speaker 1: long or short are the aggregate delta is across options

804
00:45:12,000 --> 00:45:15,120
Speaker 1: and where dealers go short gamma, you know, versus spot

805
00:45:15,200 --> 00:45:18,080
Speaker 1: and things like that, trying to find these acceleration points

806
00:45:18,120 --> 00:45:20,359
Speaker 1: in the market where things could go wrong or things

807
00:45:20,440 --> 00:45:24,160
Speaker 1: could get slippery in either direction. What the proliferation of

808
00:45:24,239 --> 00:45:27,120
Speaker 1: these tools is done. As we said, each day has

809
00:45:27,160 --> 00:45:31,120
Speaker 1: its own kind of environment, and when we're looking at

810
00:45:31,200 --> 00:45:35,640
Speaker 1: these things trading, these don't necessarily mean that it has

811
00:45:35,719 --> 00:45:38,160
Speaker 1: to be an open and closed So as we've moved

812
00:45:38,160 --> 00:45:40,839
Speaker 1: away from looking at the longer term impact of kind

813
00:45:40,880 --> 00:45:45,000
Speaker 1: of the longer expiration options, and now it's so intra

814
00:45:45,160 --> 00:45:48,759
Speaker 1: day based. We have a lot of tools internally where

815
00:45:48,880 --> 00:45:52,000
Speaker 1: I am seeing whether or not premium is being spent

816
00:45:52,640 --> 00:45:55,839
Speaker 1: or premium is being sold. And that's meaning so if

817
00:45:55,880 --> 00:46:00,279
Speaker 1: I see delta going higher and I see premium going

818
00:46:00,520 --> 00:46:03,239
Speaker 1: up in a positive direction, on these tools, I can

819
00:46:03,320 --> 00:46:06,800
Speaker 1: assume that calls are being bought right spending premium, and

820
00:46:07,000 --> 00:46:10,080
Speaker 1: thus the delta is going higher on a day like

821
00:46:10,320 --> 00:46:15,560
Speaker 1: this recent Jerome Powell, you know, hawkish kind of escalation yesterday,

822
00:46:15,640 --> 00:46:18,719
Speaker 1: what we saw, he comes out of the gates. There's

823
00:46:18,760 --> 00:46:22,640
Speaker 1: a ton of puts bought, and then you get the

824
00:46:22,719 --> 00:46:25,320
Speaker 1: down move. And this is a big theme in twenty

825
00:46:25,400 --> 00:46:27,120
Speaker 1: twenty two as well, with a number of the big

826
00:46:27,239 --> 00:46:31,480
Speaker 1: CPI upside surprises seemingly hawkish data points. People would monetize

827
00:46:31,560 --> 00:46:34,160
Speaker 1: that downside. It would immediately put in a floor in

828
00:46:34,200 --> 00:46:38,400
Speaker 1: the market, right because now you sell those puts, you

829
00:46:38,520 --> 00:46:42,280
Speaker 1: sell those hedges or directional puts. It creates an impetus

830
00:46:42,400 --> 00:46:46,160
Speaker 1: now for dealers to cover their short futures. And then

831
00:46:46,280 --> 00:46:48,839
Speaker 1: people would even further exploit that by buying same day

832
00:46:48,880 --> 00:46:52,320
Speaker 1: calls to kind of create a further squeeze of that impact.

833
00:46:52,680 --> 00:46:56,759
Speaker 1: So all day it was by puts, sell puts, by

834
00:46:56,840 --> 00:47:00,080
Speaker 1: calls rally, and then we got that, we snapped, and

835
00:47:00,200 --> 00:47:02,440
Speaker 1: we sold off again. It is a you can do

836
00:47:03,040 --> 00:47:05,760
Speaker 1: as much as you want, right and you're not held

837
00:47:05,840 --> 00:47:07,760
Speaker 1: to close. You know, you can close them out midday

838
00:47:07,800 --> 00:47:10,320
Speaker 1: if you got your two hundred percent return and a

839
00:47:10,400 --> 00:47:12,239
Speaker 1: far out of the money thing that went in the money,

840
00:47:12,280 --> 00:47:16,640
Speaker 1: And that's happened on multiple occasions intraday, you know you're good.

841
00:47:17,320 --> 00:47:21,200
Speaker 1: But the overall point is absolutely not every day are

842
00:47:21,239 --> 00:47:23,520
Speaker 1: we closing back to flat? You know, I'm not trying

843
00:47:23,560 --> 00:47:25,880
Speaker 1: to say that. With regards of this mean reversion dynamic,

844
00:47:26,280 --> 00:47:28,880
Speaker 1: we have had a number of days, certainly after the

845
00:47:29,040 --> 00:47:32,279
Speaker 1: rates repricing and some of the volatility in February, the

846
00:47:32,480 --> 00:47:35,600
Speaker 1: policy of volatility in February and the rate volatility in February,

847
00:47:35,880 --> 00:47:39,560
Speaker 1: where we actually did look kind of short gamma, meaning

848
00:47:39,600 --> 00:47:42,080
Speaker 1: we either closed on the low or closed on a

849
00:47:42,480 --> 00:47:44,239
Speaker 1: high at the end of the day. You know, when

850
00:47:44,280 --> 00:47:47,279
Speaker 1: I say we looked short gamma, it speaks to that

851
00:47:47,440 --> 00:47:52,080
Speaker 1: dynamic where market makers or dealers are needing to buy

852
00:47:52,280 --> 00:47:54,760
Speaker 1: something the higher it goes, or sell something the lower

853
00:47:54,800 --> 00:47:57,560
Speaker 1: it goes, particularly at that end of day hedging period.

854
00:47:58,200 --> 00:48:02,239
Speaker 1: Now you're getting this intra day hedging period and intra

855
00:48:02,360 --> 00:48:06,960
Speaker 1: day unwind period. So buy and large again with the

856
00:48:07,080 --> 00:48:10,120
Speaker 1: customers being the buyers and the kind of the the

857
00:48:10,440 --> 00:48:13,000
Speaker 1: dealers and the market makers being the managers of the

858
00:48:13,160 --> 00:48:17,040
Speaker 1: options greeks, risks and the second order greeks, that is

859
00:48:17,200 --> 00:48:20,960
Speaker 1: a far safer place to be in my eyes. It's

860
00:48:21,000 --> 00:48:24,799
Speaker 1: when we see that resumption of selling tales intra day

861
00:48:25,560 --> 00:48:28,880
Speaker 1: that my spidy senses will go up and say, I

862
00:48:29,120 --> 00:48:31,239
Speaker 1: don't like how this could go. Then you very well

863
00:48:31,840 --> 00:48:33,640
Speaker 1: could have a situation where they don't know how to

864
00:48:33,719 --> 00:48:36,040
Speaker 1: manage their their you know, their gamma risk, right that

865
00:48:36,120 --> 00:48:38,480
Speaker 1: with the sensitivity of their delta to a move in

866
00:48:38,480 --> 00:48:40,480
Speaker 1: the underlying the sensitivity of their delta to a move,

867
00:48:40,520 --> 00:48:43,480
Speaker 1: and involve their Vanna risk. Right, all those things. These

868
00:48:43,520 --> 00:48:45,520
Speaker 1: things have a shelf life of six and a half

869
00:48:45,560 --> 00:48:50,040
Speaker 1: hours best. They're super sensitive. That's the reason that they're attractive,

870
00:48:50,160 --> 00:48:54,280
Speaker 1: because they're you know, lottery tickets on steroids. And again

871
00:48:54,520 --> 00:48:57,000
Speaker 1: with a defined risk, you can spend eighty bucks to

872
00:48:57,080 --> 00:48:59,320
Speaker 1: make eleven thousand or whatever it is I want to

873
00:48:59,360 --> 00:49:02,480
Speaker 1: do that. You know, that's the kind of setup. You've

874
00:49:02,560 --> 00:49:06,839
Speaker 1: learned nothing from this podcast. Spidey Sense for a spy

875
00:49:06,960 --> 00:49:09,320
Speaker 1: impact is also very good, Charlie. We're going to have

876
00:49:09,360 --> 00:49:11,160
Speaker 1: to leave it there. Thank you so much. That was

877
00:49:11,200 --> 00:49:14,800
Speaker 1: a fantastic explanation. Really appreciate you coming on. Thank you

878
00:49:14,880 --> 00:49:32,040
Speaker 1: guys for having me so Joe. I found that conversation fascinating,

879
00:49:32,120 --> 00:49:34,800
Speaker 1: and I think whenever you do have an explosion in

880
00:49:35,400 --> 00:49:37,880
Speaker 1: volume of a new type of product, it does warrant

881
00:49:38,120 --> 00:49:41,520
Speaker 1: some caution and additional scrutiny. But for me, the big

882
00:49:41,680 --> 00:49:45,440
Speaker 1: takeaway there was this idea of every day is kind

883
00:49:45,480 --> 00:49:47,600
Speaker 1: of a new ecosystem. In this idea that more and

884
00:49:47,719 --> 00:49:50,719
Speaker 1: more people and I thought Charlie did an excellent job

885
00:49:50,800 --> 00:49:54,120
Speaker 1: of sort of crystallizing a lot of these ideas, This

886
00:49:54,280 --> 00:49:58,360
Speaker 1: idea that if you don't have a defined macro environment

887
00:49:58,440 --> 00:50:01,120
Speaker 1: or macro trend, then why not trade on a sort

888
00:50:01,160 --> 00:50:04,120
Speaker 1: of day to day basis on things going up or down?

889
00:50:04,520 --> 00:50:06,920
Speaker 1: There was a Yeah, I found that conversation to be

890
00:50:07,239 --> 00:50:10,960
Speaker 1: very clarifying. The big picture, like sort of aha moment

891
00:50:11,080 --> 00:50:15,160
Speaker 1: for me is that you know when portfolios are less

892
00:50:15,239 --> 00:50:17,400
Speaker 1: levered because the FED is sort of telling you to,

893
00:50:17,960 --> 00:50:20,920
Speaker 1: you know, use less leverage. They're raising the cost of borrowing, etc. Like,

894
00:50:21,239 --> 00:50:26,480
Speaker 1: you don't need as much long term structural protection because

895
00:50:26,520 --> 00:50:29,360
Speaker 1: you have a volatility hedge already, which is the amount

896
00:50:29,400 --> 00:50:32,719
Speaker 1: of cash that you're holding, But you know, you still

897
00:50:32,840 --> 00:50:36,319
Speaker 1: have these one day moves, so you have the less

898
00:50:36,360 --> 00:50:38,759
Speaker 1: big macro crash risk, but you still have these one

899
00:50:38,840 --> 00:50:43,200
Speaker 1: day moves around CPI releases or around FED speeches, and

900
00:50:43,440 --> 00:50:46,800
Speaker 1: so yeah, intuitively, you think, okay, short term options, this

901
00:50:47,120 --> 00:50:50,240
Speaker 1: must be all just people who like to gamble betting

902
00:50:50,280 --> 00:50:54,920
Speaker 1: that eighty dollars for eleven thousand payoff. But if the

903
00:50:55,120 --> 00:50:58,440
Speaker 1: story is really about one day moves and one day risk,

904
00:50:58,760 --> 00:51:01,600
Speaker 1: then you can see why institutional portfolios would like to

905
00:51:01,680 --> 00:51:04,520
Speaker 1: trade these instruments. Yeah, well, I think there's definitely a

906
00:51:04,719 --> 00:51:09,200
Speaker 1: rationality behind it, especially on the institutional side. But I

907
00:51:09,320 --> 00:51:11,480
Speaker 1: also think we can't ignore that just over the past

908
00:51:11,560 --> 00:51:13,800
Speaker 1: few years, you know, with the advent of crypto and

909
00:51:13,840 --> 00:51:15,640
Speaker 1: then the Wall Street bets phenomenon and all of that

910
00:51:15,840 --> 00:51:19,840
Speaker 1: is we've kind of normalized the tokenization of everything, or

911
00:51:19,960 --> 00:51:22,239
Speaker 1: the lottery ticket idea, and you know, I can just

912
00:51:22,360 --> 00:51:25,359
Speaker 1: treat this as sure, go up or down and make

913
00:51:25,400 --> 00:51:27,920
Speaker 1: a lot of money. No, I mean, like that's obviously

914
00:51:28,080 --> 00:51:29,800
Speaker 1: like such a thing. I mean, it's like such a

915
00:51:29,920 --> 00:51:33,680
Speaker 1: part of the culture, the gambling culture, the sort of

916
00:51:33,800 --> 00:51:36,239
Speaker 1: like take risks, the sort of like shoot for the moon,

917
00:51:36,640 --> 00:51:38,600
Speaker 1: like that is like a real thing that I don't

918
00:51:38,680 --> 00:51:42,080
Speaker 1: think we've felt to nearly the same degree five years

919
00:51:42,120 --> 00:51:45,720
Speaker 1: ago or whatever it was, you know, even Val mcgednon.

920
00:51:45,719 --> 00:51:47,600
Speaker 1: All that stuff feels like sort of like a quaint

921
00:51:47,640 --> 00:51:52,840
Speaker 1: era and now within how people treat markets. But yeah, no,

922
00:51:52,960 --> 00:51:55,320
Speaker 1: I think that was fascinating. And then also I do

923
00:51:55,520 --> 00:51:59,640
Speaker 1: think Charlie's explanation of like the sort of natural mean

924
00:52:00,120 --> 00:52:02,800
Speaker 1: version of the people who participated in the markets was

925
00:52:02,920 --> 00:52:06,440
Speaker 1: helpful and again sort of like reasons to think that

926
00:52:06,680 --> 00:52:10,800
Speaker 1: even with a lot of speculative activity, that the nature

927
00:52:10,840 --> 00:52:15,000
Speaker 1: of them is more towards curbing large moves rather than

928
00:52:15,239 --> 00:52:17,360
Speaker 1: accelerating a large move. Well, it's kind of like the

929
00:52:17,440 --> 00:52:20,520
Speaker 1: bad news is short. You know, one or zero day

930
00:52:20,560 --> 00:52:23,680
Speaker 1: options might add to intra day volatility, but the good

931
00:52:23,760 --> 00:52:26,960
Speaker 1: news is it's intra day volatility. Yeah, it's only a day. Well,

932
00:52:27,000 --> 00:52:29,239
Speaker 1: that was so fascinating, Like the idea that's like, Okay,

933
00:52:29,320 --> 00:52:31,640
Speaker 1: something bad happened, so like everyone started to buy and

934
00:52:31,680 --> 00:52:34,480
Speaker 1: puts that pushes it down. People immediately want to start

935
00:52:34,600 --> 00:52:37,160
Speaker 1: monetizing their profits on that. I was like, oh, let's

936
00:52:37,160 --> 00:52:39,040
Speaker 1: do the call squeeze and now, because we know that

937
00:52:39,120 --> 00:52:41,719
Speaker 1: everyone's going to be monetizing. So you do sort of

938
00:52:41,800 --> 00:52:44,839
Speaker 1: get that sort of like it's volatile, but it's sort

939
00:52:44,840 --> 00:52:47,840
Speaker 1: of also dampening at the same time. It sounds like exactly,

940
00:52:48,080 --> 00:52:49,800
Speaker 1: shall we leave it there? Let's leave it there. This

941
00:52:49,960 --> 00:52:52,799
Speaker 1: has been another episode of the All Thoughts podcast. I'm

942
00:52:52,840 --> 00:52:55,440
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy

943
00:52:55,480 --> 00:52:57,920
Speaker 1: Alloway and I'm Joe Why Isn't All? You can follow

944
00:52:58,000 --> 00:53:01,360
Speaker 1: me on Twitter at the Stalwart. Follow our producers Carmen

945
00:53:01,480 --> 00:53:05,920
Speaker 1: Rodriguez at crmin Arman and Dash Bennett at Dashbot. Follow

946
00:53:05,960 --> 00:53:09,239
Speaker 1: all of the Bloomberg podcasts onto the handle at podcasts,

947
00:53:09,560 --> 00:53:11,880
Speaker 1: and for more odd Lots content, go to Bloomberg dot

948
00:53:11,920 --> 00:53:15,040
Speaker 1: com slash odd Lots, where we post transcripts. We have

949
00:53:15,080 --> 00:53:17,880
Speaker 1: a blog and a newsletter that comes out every Friday.

950
00:53:18,239 --> 00:53:20,640
Speaker 1: Go there and sign up. Thank you for listening.