WEBVTT - What the Dramatic Boom in Zero-Day Options Means for Stocks 0:00:10.080 --> 0:00:13.480 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:13.560 --> 0:00:17.000 I'm Tracy Alloway and I'm Joe wisn't Joe? Do you 0:00:17.120 --> 0:00:22.840 remember armacgeddon? Oh? Wait, let me start over? I cried, 0:00:23.079 --> 0:00:31.120 I cried, keep that. Do you remember Val mcgeddon. Uh? Yeah. 0:00:31.160 --> 0:00:35.560 If you asked me exactly when that was twenty eighteen, okay, 0:00:35.600 --> 0:00:37.920 I wouldn't have nested. Maybe I would have said twenty 0:00:37.960 --> 0:00:41.519 seventeen or something, but yeah, something crazy happened. And like 0:00:41.960 --> 0:00:44.360 so I think with the vvgs and some ETN or something. 0:00:44.360 --> 0:00:48.440 I don't this is a moment in market I'm still laughing. Sorry. 0:00:48.680 --> 0:00:51.040 This is a moment in market history that lives for 0:00:51.080 --> 0:00:53.920 free in my head because it was a lot of 0:00:53.960 --> 0:00:56.960 interesting things happened. So for those who might not remember 0:00:57.000 --> 0:01:01.640 all the details, there were these two little volatility products 0:01:01.680 --> 0:01:05.800 to exchange traded notes that basically ended up having this 0:01:05.959 --> 0:01:11.040 huge impact on the market and specifically the volatility index, 0:01:11.080 --> 0:01:13.839 the VIX. And so you had this kind of tail 0:01:13.920 --> 0:01:17.840 wagging the dog scenario where you had two products that 0:01:18.000 --> 0:01:21.280 ended up impacting the overall market. Yeah, and you know 0:01:21.319 --> 0:01:24.800 what was really notable about the post twenty ten environment 0:01:25.040 --> 0:01:29.680 is that just keeping a steady short volatility trade on 0:01:30.160 --> 0:01:34.039 was extremely profitable for years, and people sort of just 0:01:34.080 --> 0:01:37.199 get rauled into it because, you know, by the dip 0:01:37.480 --> 0:01:39.399 was like this sort of dominant thing. You had the 0:01:39.440 --> 0:01:42.720 FED sort of on your side, typically playing some role 0:01:42.760 --> 0:01:45.000 of you know, the FED put and all of that, 0:01:45.360 --> 0:01:47.720 and you had the residual anxiety of the crisis. So 0:01:47.720 --> 0:01:51.120 people were paying a large premium for protection, volatility protection. 0:01:51.280 --> 0:01:53.320 So being a seller of that and sort of being 0:01:53.440 --> 0:01:56.480 implicitly short volatility was just great until the one day 0:01:56.480 --> 0:01:59.240 it wasn't. Well. This is why these two exchange traded 0:01:59.280 --> 0:02:01.800 notes came into being in the first place. It was 0:02:01.840 --> 0:02:05.400 because people wanted to be able to sell volatility, and 0:02:05.440 --> 0:02:08.520 I remember they became very popular with a certain faction 0:02:08.520 --> 0:02:11.600 of retail traders. There was even a sub credit called 0:02:11.680 --> 0:02:14.280 a trade XIV, which was the name of one of 0:02:14.280 --> 0:02:18.320 the notes. Yeah. Yeah, it has since rebranded to Trading 0:02:18.440 --> 0:02:22.519 Vault because we had this vall mcgeddon situation and both 0:02:22.560 --> 0:02:26.000 of these exchange traded notes ended up collapsing. So not 0:02:26.080 --> 0:02:28.440 only did they sort of spark this wider move in 0:02:28.480 --> 0:02:31.680 the market, but they ended up dying because of it. 0:02:31.800 --> 0:02:34.640 What's interesting in retrospect and I hadn't really thought about this. 0:02:34.680 --> 0:02:38.040 But what's interesting in retrospect about this story is that, Okay, 0:02:38.080 --> 0:02:42.799 in twenty eighteen, the retail move was like, okay, trade 0:02:42.960 --> 0:02:46.120 XIV or go along XIV, and that was sort of 0:02:46.160 --> 0:02:50.880 like how people played this post twenty twenty. Now you 0:02:50.919 --> 0:02:54.120 get the sense that retail is playing derivatives more directly, 0:02:54.200 --> 0:02:57.320 particularly call options, and so then rather than some note 0:02:57.400 --> 0:03:00.720 or instrument that implicitly did that. Now, of course, the 0:03:00.760 --> 0:03:03.480 story of the Robin Hood and all that is lots 0:03:03.480 --> 0:03:07.079 of people are just getting directly into options trading. That's right, 0:03:07.120 --> 0:03:09.960 and the big story in options right now. And the 0:03:10.040 --> 0:03:13.600 reason I brought up val mcgeddon not Armageddon, which thankfully 0:03:13.639 --> 0:03:19.400 hasn't happened yet, is because eight thank you for the caveat. 0:03:19.440 --> 0:03:22.079 You never know, all right. So the reason why we're 0:03:22.080 --> 0:03:25.120 talking about val mcgeddon is because you have this new 0:03:25.160 --> 0:03:28.560 type of option on the scene. They're called one day 0:03:28.800 --> 0:03:33.640 or zero day options, a zero DTE or one DTE, 0:03:33.960 --> 0:03:37.920 and they've kind of exploded in volumes in recent years, 0:03:38.000 --> 0:03:40.520 and there's a lot of discussion about whether or not 0:03:40.640 --> 0:03:43.520 they are going to lead to a similar val mcgeddon 0:03:43.560 --> 0:03:46.880 type scenario where you have, you know, this small thing, 0:03:46.960 --> 0:03:49.280 although they're not that small anymore, but you have this 0:03:49.400 --> 0:03:52.880 small instrument that ends up having a cascade effect on 0:03:52.920 --> 0:03:57.200 the market and leading to a bigger effect on the 0:03:57.400 --> 0:04:01.080 SMP five hundred, the benchmark index. Right, And as always 0:04:01.120 --> 0:04:04.360 there are these concerns that any sort of derivative instrument 0:04:04.800 --> 0:04:07.520 which is you know, might be used for hedging purposes, 0:04:07.720 --> 0:04:10.320 could have this feedback loop. And of course the classic 0:04:10.400 --> 0:04:14.720 there's like nineteen eighty seven and yeah, and the Stock 0:04:14.760 --> 0:04:18.080 market Insurance sort of they called it. And the other 0:04:18.120 --> 0:04:20.440 thing you note, and this is sort of what's interesting 0:04:20.640 --> 0:04:22.200 to me and why we're talking about this. It's like, 0:04:22.440 --> 0:04:25.479 in twenty twenty one, I think we had a very 0:04:25.520 --> 0:04:28.840 good story for why there was so much of this 0:04:29.000 --> 0:04:32.159 sort of zero data expery option trading. Right. This story 0:04:32.200 --> 0:04:35.560 is like all of these new degenerate gamblers and they're 0:04:35.560 --> 0:04:39.719 on robin hood and they're like trading these hypervolatile derivatives 0:04:39.720 --> 0:04:41.760 that you know, they're short term bets and they're just 0:04:41.839 --> 0:04:44.960 being swings. We've had this cool and off of speculative 0:04:45.000 --> 0:04:49.760 activity over the last year, as clearly seen by prices, right, 0:04:50.320 --> 0:04:52.520 you know, Bitcoin and arc and all these things have 0:04:52.560 --> 0:04:55.480 come way down from their high and yet the level 0:04:55.600 --> 0:04:59.040 of trading in these instruments is still very high, which 0:04:59.160 --> 0:05:01.880 complicates the a story that oh, it's just a bunch 0:05:01.880 --> 0:05:04.080 of like retailer at home gambler. I was about to say, 0:05:04.120 --> 0:05:06.520 I think it hints that maybe it's not just retail 0:05:06.560 --> 0:05:08.760 and this is something that I've written about on All 0:05:08.800 --> 0:05:11.360 Loots and you should all check it out. And speaking 0:05:11.480 --> 0:05:14.360 of what I wrote on a blots on the blog recently, 0:05:14.400 --> 0:05:16.799 we were going to actually be speaking to the perfect guest. 0:05:17.000 --> 0:05:20.400 We're going to be speaking with Nomura Cross Assets strategist 0:05:20.520 --> 0:05:23.440 Charlie McElligott. He was the author of a very very 0:05:23.480 --> 0:05:26.159 good research piece that I wrote up a couple months 0:05:26.160 --> 0:05:30.240 ago and has been writing quite a lot about this topic. 0:05:30.320 --> 0:05:33.000 So Charlie, thank you so much for coming on All thoughts. 0:05:33.040 --> 0:05:36.200 Excited to be here, a long time listener, first time calling. 0:05:36.360 --> 0:05:40.279 I love it. Maybe just to begin with talk to 0:05:40.360 --> 0:05:44.080 us about what these options are exactly and how they 0:05:44.160 --> 0:05:47.479 came into being and also their intended purpose, because I 0:05:47.480 --> 0:05:50.920 think nowadays people talk about them as oh, it's part 0:05:50.960 --> 0:05:55.400 of this speculative betting frenzy, but I assume they're supposed 0:05:55.400 --> 0:05:59.520 to serve some sort of purpose. Absolutely, So you know, 0:05:59.560 --> 0:06:04.120 I would I would almost start this conversation going backwards 0:06:04.120 --> 0:06:07.400 by saying, look at the stock chart of the CBO 0:06:07.560 --> 0:06:10.920 right now, right, which is almost a proxy on the 0:06:10.960 --> 0:06:15.520 explosive growth and usage of options, you know, from the 0:06:15.560 --> 0:06:20.240 investing community, whether it's institutions or retail investors, and it 0:06:20.279 --> 0:06:25.159 does fit somewhat tidily with this larger kind of speculative 0:06:25.160 --> 0:06:28.520 excess boom of the past two and a half three 0:06:28.600 --> 0:06:31.760 years in that post crisis period, the Wall Street bets 0:06:31.800 --> 0:06:34.240 stuff that you guys just spoke about, you know, the 0:06:34.480 --> 0:06:39.719 stimmy checks and you know SPACs to crypto. You know, 0:06:39.839 --> 0:06:45.400 this kind of new world of leveraged, highly convexed payouts 0:06:46.279 --> 0:06:51.479 is a place where flows and money followed, and this 0:06:51.560 --> 0:06:54.240 is the type of return profile that people are really 0:06:54.640 --> 0:06:58.120 looking to looking to exploit in this day and age. 0:06:58.120 --> 0:07:02.720 And in that sense, that's the unspoken portion of why 0:07:02.760 --> 0:07:05.440 these are have been rolled out and offered. Now there's 0:07:05.520 --> 0:07:08.520 daily expirations, there's an expiration for every day of the week, 0:07:08.560 --> 0:07:11.440 and the zero DTE product is now almost one out 0:07:11.480 --> 0:07:15.240 of two options the trade with the spy ETF for instance, right, So, 0:07:15.560 --> 0:07:18.520 and you know effectively there too for large S and 0:07:18.600 --> 0:07:23.280 P which is almost exclusively an institutional product, So the 0:07:23.440 --> 0:07:27.000 demand is there. I think the official line, probably from 0:07:27.000 --> 0:07:30.280 the exchanges, would be something to the effect of, we 0:07:30.320 --> 0:07:33.520 want to offer the net end users more tools to 0:07:33.680 --> 0:07:37.520 manage their risk, manage their liquidity profile, things of that nature. 0:07:37.640 --> 0:07:40.400 And look, that is not wrong either. Right when did 0:07:40.440 --> 0:07:43.800 CBO actually launch things? You know, kind of call it 0:07:44.000 --> 0:07:47.560 mid last year? Okay, oh, okay, so they really have 0:07:47.760 --> 0:07:51.880 not been around very long. So options, right, hedge risk, 0:07:52.000 --> 0:07:53.800 that's what they're all about in theory, and someone like 0:07:53.840 --> 0:07:57.440 maybe take some more spectative position. Someone needs the hedging, 0:07:57.480 --> 0:08:00.840 they trade an option, etc. How do you go about 0:08:00.920 --> 0:08:05.840 trying to decompose how the instrument is actually used and 0:08:06.000 --> 0:08:08.520 how much is it from Okay, you have a large 0:08:08.560 --> 0:08:13.240 portfolio manager that needs to hedge their downside, etc. Versus 0:08:13.280 --> 0:08:15.240 how much of it is being driven by someone who 0:08:15.240 --> 0:08:18.720 wants to make a bet on what Tesla will do tomorrow. Right, 0:08:18.880 --> 0:08:21.080 that's a It's a great point, and I think that 0:08:21.320 --> 0:08:24.960 is where you know at this point, you know myself, 0:08:25.080 --> 0:08:29.560 my colleagues Anthony Antonucci and Johanna Wang have done some 0:08:29.560 --> 0:08:32.520 pretty quality work here. I think unpacking that exact idea, 0:08:32.600 --> 0:08:35.680 like just looking at open interest, just looking at volumes 0:08:35.720 --> 0:08:38.840 themselves is not indicative of anything. Right, we need to 0:08:38.880 --> 0:08:42.040 get a sense for you know, are the net end 0:08:42.160 --> 0:08:46.160 users buying or selling these? Right? It speaks to the 0:08:46.160 --> 0:08:50.160 macro regime, speaks to the volatility regime. Right, you could 0:08:50.160 --> 0:08:53.000 say it to a certain extent looking back in the 0:08:53.160 --> 0:08:56.319 kind of QE era, let's say where we did or 0:08:56.360 --> 0:09:00.520 where FED was an active suppression of volatility mode large 0:09:00.520 --> 0:09:04.840 scale asset purchases zero percent or negative interest rates. You know, 0:09:04.960 --> 0:09:07.600 that was part of this idea. You create a wealth effect. 0:09:08.000 --> 0:09:11.320 Financial conditions are easy. It's a growth tail end. All 0:09:11.360 --> 0:09:14.200 that good stuff, virtuous stuff happens. The FED was telling 0:09:14.240 --> 0:09:16.559 you to be leverage long assets. Right, so you had 0:09:16.559 --> 0:09:20.040 a need for hedges to a certain extent. So like 0:09:20.080 --> 0:09:23.760 a measure like skew right, which is a measure of 0:09:23.840 --> 0:09:26.920 kind of downside demand relative to upside demand, like the 0:09:26.960 --> 0:09:30.360 credit Swiss fear barometer right right to a certain extent 0:09:30.520 --> 0:09:33.800 right so or or even you know specifically put skew, 0:09:33.840 --> 0:09:38.040 which is like demand for a tailier or crashier put 0:09:38.120 --> 0:09:42.080 relative to something closer to the money. Those measures were 0:09:42.160 --> 0:09:44.640 very high skew was very steep back then because you're 0:09:44.720 --> 0:09:47.880 long leverage, long assets, you needed downside protection. And this 0:09:47.920 --> 0:09:52.199 gets to the point though of why selling valld xav 0:09:52.400 --> 0:09:55.240 was so profitable, because if you have so much demand, right, 0:09:55.280 --> 0:09:58.920 you have the structural demand for protection, lots of buyers, 0:09:59.200 --> 0:10:02.040 a good market to be seller exactly. And what it does, 0:10:02.160 --> 0:10:04.560 I mean the way that you look at volatility, it's 0:10:04.640 --> 0:10:07.840 kind of different from this um you know. I It's 0:10:07.920 --> 0:10:10.280 what I've learned from being in the vall space, specifically 0:10:10.280 --> 0:10:13.320 within the Numero Equity drives desk for the last five years, 0:10:13.320 --> 0:10:15.560 which is, you know, a top three market share player 0:10:15.600 --> 0:10:18.760 in the US options space, is that it's it's a 0:10:18.840 --> 0:10:22.840 consistent shuffling of your feet. You're trying to find value, 0:10:22.960 --> 0:10:25.960 trying to find kighie convexed payouts right, which to a 0:10:26.000 --> 0:10:28.640 certain extent, is why these options exist in the first place, 0:10:28.640 --> 0:10:30.720 where there's so much demand for them. You know, you 0:10:30.800 --> 0:10:33.680 have a kind of a defined risk, but a much 0:10:33.800 --> 0:10:37.000 larger kind of multiple times implicit leverage you know on 0:10:37.040 --> 0:10:39.640 the payout right if this thing you know strikes gold, 0:10:40.040 --> 0:10:41.520 you know to a certain extent, so you're kind of 0:10:41.559 --> 0:10:43.559 range trading when something is cheap, or when Vaula is 0:10:43.640 --> 0:10:45.640 cheap is when you want to be adding protection. When 0:10:45.720 --> 0:10:47.800 Valla is rich, that's typically when you want to you know, 0:10:47.840 --> 0:10:50.319 flip positions and be you know, kind of short volatility 0:10:50.400 --> 0:10:53.080 or short gamma. So those those are all part of 0:10:53.080 --> 0:10:57.440 the calculus here. I think what matters then, However, in 0:10:57.480 --> 0:11:01.880 this QT era right where the Fed has their hands 0:11:01.880 --> 0:11:05.000 tied in light of the inflation overshoot, in light of 0:11:05.040 --> 0:11:08.000 this dynamic where you know, they were clearly behind the curve. 0:11:08.240 --> 0:11:10.240 I mean it was just a year ago at this 0:11:10.280 --> 0:11:14.800 time they only stopped buying bonds, might you, Right before 0:11:14.840 --> 0:11:16.680 they even began, you know, their first hike, they were 0:11:16.720 --> 0:11:20.760 still buying bonds. So they've needed to tighten financial conditions. 0:11:20.800 --> 0:11:24.000 They've needed to try everything they can in their limited 0:11:24.040 --> 0:11:27.719 tool kit to address you know, the wealth effect that 0:11:27.920 --> 0:11:30.560 was caused from these you know, legacy ten year plus 0:11:30.600 --> 0:11:34.200 easy financial conditions, and that means cramping you know, the 0:11:34.320 --> 0:11:39.080 demand side of inflation through tightening FCI. And in this case, 0:11:39.679 --> 0:11:42.840 what QT has meant was a very simple trade and 0:11:42.880 --> 0:11:45.280 that's why you know it was such a clear trend 0:11:45.360 --> 0:11:47.600 in twenty twenty two. It was kind of like long 0:11:47.720 --> 0:11:51.680 dollar in short assets. That's why like CTAs for instance, 0:11:51.760 --> 0:11:54.280 were you know, thirty some percent, like there was a 0:11:54.400 --> 0:11:58.400 very clear defined trend, the FED was effectively telling you 0:11:58.640 --> 0:12:02.080 to be short assets. Right. What we saw then was 0:12:02.120 --> 0:12:04.360 this trade that still kind of exists to this day, 0:12:05.000 --> 0:12:09.720 even for the most recent Jerome pal commentary, which was 0:12:09.880 --> 0:12:12.280 kind of this view that when you're in a in 0:12:12.320 --> 0:12:15.719 a kind of a stretched equities valuation, the FED is 0:12:15.760 --> 0:12:18.560 de facto a seller of calls at the low end 0:12:18.559 --> 0:12:20.720 of the equities valuation. They don't want to market crash 0:12:20.760 --> 0:12:23.040 per se either. Then they kind of talk you off 0:12:23.080 --> 0:12:25.160 the ledge and they're a seller of puts. We're bouncing 0:12:25.160 --> 0:12:28.400 around this range. But in QT right, in a QT 0:12:28.600 --> 0:12:30.920 era where you know, they're shrinking the balance sheet, where 0:12:30.920 --> 0:12:34.199 they're jacking up rates, they're trying to tighten financial conditions, 0:12:34.800 --> 0:12:39.320 it kind of perversely creates this situation where you're being 0:12:39.360 --> 0:12:41.679 told to be short assets. You actually don't need as 0:12:41.760 --> 0:12:44.920 much hedge protection. So one of the big questions for 0:12:44.920 --> 0:12:47.760 the last year like why is VIX so low? Right, 0:12:48.160 --> 0:12:50.720 And that's part of this idea. If you don't have 0:12:50.760 --> 0:12:53.080 a lot of exposure on you're sitting in high cash 0:12:53.120 --> 0:12:55.200 you're sitting in low nets. You don't need a lot 0:12:55.240 --> 0:12:58.960 of like crashy downside. This is such a that clicks. 0:12:59.000 --> 0:13:02.679 This like finally feels like it clicks and answer. It's 0:13:02.679 --> 0:13:04.520 like a big question. It makes so much sense, right 0:13:04.520 --> 0:13:06.319 if you're if you're if the feed is telling you 0:13:06.320 --> 0:13:08.520 hold more cash, don't be so leverage. Yeah, then you 0:13:08.559 --> 0:13:11.400 sort of have your built in hedge already cash is 0:13:11.640 --> 0:13:31.040 and at the money put it. Yeah. So just a 0:13:31.080 --> 0:13:33.320 really basic question. I know you've done some research on this, 0:13:33.400 --> 0:13:36.679 but what does the split actually look like between institutional 0:13:36.760 --> 0:13:40.319 versus retail usage right now? Well, I think that's part 0:13:40.360 --> 0:13:43.760 of some of the the you know, fuzzy assumption that 0:13:43.960 --> 0:13:47.720 makes this an uncomfortable discussion. You know, I don't truly 0:13:47.840 --> 0:13:52.480 trust men, whether it's you know, cash percentage of the 0:13:52.520 --> 0:13:56.520 overall cash equities universe, or um you know, assumptions about 0:13:56.520 --> 0:13:58.559 options trading. With regards of this idea of what is 0:13:58.640 --> 0:14:01.120 retail versus institutional, I think a lot of people do 0:14:01.240 --> 0:14:04.640 kind of a naive analysis looking at the size of 0:14:04.720 --> 0:14:06.960 saying you know, as it pertains to the options discussion, 0:14:07.160 --> 0:14:10.360 looking at the size of options contracts, and then you know, 0:14:10.480 --> 0:14:13.480 under a certain threshold. They will kind of label those 0:14:14.240 --> 0:14:16.800 as Okay, this is you know, retail type size, and 0:14:16.800 --> 0:14:19.920 then you get this, you know, potentially false narrative. I 0:14:19.920 --> 0:14:23.840 think the issue is that, particularly with this product, it's 0:14:23.880 --> 0:14:29.000 an electronic options product, which means it's a market maker. 0:14:29.120 --> 0:14:31.320 Is kind of the counterpart here. It's going to be 0:14:31.360 --> 0:14:33.440 my next question you get into that. But and and 0:14:33.600 --> 0:14:37.880 who who are the savvyest electronic options market makers with 0:14:37.920 --> 0:14:41.680 the best algorithms, the best risk tools. It's these entities 0:14:41.720 --> 0:14:45.320 that you know, you know, no no specific names necessarily 0:14:45.560 --> 0:14:49.760 I'll use, but you know, are incredibly savvy with those algorithms. 0:14:49.800 --> 0:14:52.560 They're slicing and dicing up their risk all day. So 0:14:52.600 --> 0:14:55.680 you're not going to see huge, blocky types of flows 0:14:55.720 --> 0:14:58.280 that you know you could typically pinpoint and say, you know, 0:14:58.720 --> 0:15:01.520 because just because something is an odd lot does not 0:15:01.600 --> 0:15:04.480 necessarily mean it's retail correct. I mean you're I mean 0:15:04.520 --> 0:15:07.880 I well, in my in my past career, on a 0:15:07.920 --> 0:15:10.560 cash desk when I started out of college, I sat 0:15:10.640 --> 0:15:13.840 at a dot machine and I had a time schedule 0:15:13.920 --> 0:15:16.600 for every minute of the day on a view op order, 0:15:16.680 --> 0:15:19.680 a tuop order, I had to send down one hundred 0:15:19.720 --> 0:15:22.760 and twenty shares at nine fifty nine at ten am, 0:15:22.800 --> 0:15:24.560 I had to send down one hundred and forty shares 0:15:24.840 --> 0:15:27.000 at right. I mean, that's how this thing works. You're 0:15:27.040 --> 0:15:29.880 on a you know, this distribution curve, so that's kind 0:15:29.880 --> 0:15:32.600 of imagine that now times like a much larger risk 0:15:32.680 --> 0:15:34.720 order than you have. So I have a hard time 0:15:35.360 --> 0:15:39.320 attributing retail institutional here. You know. One thing that I 0:15:39.360 --> 0:15:42.640 will say is that recently, what you have seen which 0:15:42.680 --> 0:15:45.440 proves out this idea that this clearly is an institutional 0:15:45.480 --> 0:15:48.640 product by and large, is you have seen kind of 0:15:48.880 --> 0:15:52.880 upstairs size premium spent, right, so the amount of money 0:15:53.000 --> 0:15:56.120 that the net end user is spending up front to 0:15:56.280 --> 0:16:00.000 directionally buy. In this case, recently we've seen some large 0:16:00.080 --> 0:16:03.680 put buying. Right. This is again you're sort of like 0:16:03.760 --> 0:16:05.920 leading into all my next questions. But this is an 0:16:05.960 --> 0:16:09.400 unusual thing about these shorter dated options, which is that 0:16:09.520 --> 0:16:12.680 I think the split between put volume versus call volume, 0:16:12.760 --> 0:16:17.480 it's very skewed in one direction. Why is that? Well, 0:16:18.040 --> 0:16:21.200 I think the simplest thing I would say right now, 0:16:21.200 --> 0:16:22.560 and this will kind of go into some of the 0:16:22.600 --> 0:16:25.320 work though our team has done to kind of assign 0:16:25.400 --> 0:16:29.280 this idea and to kind of push back as it 0:16:29.320 --> 0:16:32.840 currently stands, this is an ever evolving product. And look, 0:16:32.880 --> 0:16:35.080 each day, I like to say, is its own ecosystem 0:16:35.120 --> 0:16:39.400 now with these products. So there's not necessarily going to 0:16:39.400 --> 0:16:43.640 be a carryover of prior day trend, but generally so 0:16:43.680 --> 0:16:46.160 you could have a day where it's mostly puts where 0:16:46.280 --> 0:16:48.320 which it has been so far, and then you could 0:16:48.360 --> 0:16:50.720 have a day where it's mostly calls, well to a 0:16:50.760 --> 0:16:53.960 certain extent. But this is the deal. This is kind 0:16:53.960 --> 0:16:56.840 of at core of how these things are trading right now. 0:16:56.880 --> 0:17:01.520 By and large, there's an inherent almost by definition mean 0:17:01.600 --> 0:17:06.400 reversion flow from these things, because whatever you're putting on 0:17:06.640 --> 0:17:10.440 intra day ultimately then if if it's moving in your 0:17:10.480 --> 0:17:14.240 direction ultimately then needs to be unwound and monetized. So 0:17:14.560 --> 0:17:17.160 the actual impact that you're getting. So let me walk 0:17:17.200 --> 0:17:20.359 you through kind of the way that one we're identifying 0:17:20.760 --> 0:17:23.480 these flows and trying to assign a buy or a cell. 0:17:24.320 --> 0:17:28.520 The CBO handles options flows, let's say, for kind of 0:17:28.600 --> 0:17:32.760 you know, index and ETF options type stuff, and what 0:17:32.800 --> 0:17:35.680 we do is they assign a kind of an end 0:17:35.800 --> 0:17:39.760 user tag, right, so there's kind of a broker dealer 0:17:39.840 --> 0:17:44.200 traditional let's say like upstairs, big bank options tailers. Sorry, 0:17:44.240 --> 0:17:47.480 just before we go on, what is I think it's 0:17:47.560 --> 0:17:51.160 the second time you've said upstairs. What does that mean? Sure? Sure, 0:17:51.320 --> 0:17:56.760 so just speaking to actual high touch sales traders and 0:17:57.000 --> 0:18:01.119 risk takers, not necessarily on the floor of the exchanges, right, 0:18:01.200 --> 0:18:05.440 but more associated with large balance sheet banks, the big stuff. 0:18:05.760 --> 0:18:08.520 If we if we did a subscriber only version of 0:18:08.600 --> 0:18:12.240 odd Lots, we could call it upstairs. Yeah, that's kind 0:18:12.359 --> 0:18:15.600 that's kind of nice. So in this case, you know, 0:18:15.680 --> 0:18:20.840 the broker dealer tag with these products is actually there's 0:18:20.880 --> 0:18:24.920 no clear angle to these to these flows. Right. You 0:18:25.000 --> 0:18:28.120 can see everything that they're trading in these zero DT options, 0:18:28.640 --> 0:18:30.760 and some days they are long and some days they 0:18:30.760 --> 0:18:35.680 are short. Market makers right in this definition, are those 0:18:35.880 --> 0:18:39.160 electronic options entities that we're speaking to, right, the very 0:18:39.240 --> 0:18:44.080 tech savvy kind of newer players in the scene, I'll say, 0:18:44.600 --> 0:18:48.520 and they buy and large are the net sellers, right, 0:18:48.880 --> 0:18:51.199 they are the sellers. They are the source of supply 0:18:52.119 --> 0:18:54.359 for the end users. In the final kind of category, 0:18:54.440 --> 0:18:57.520 because there is a broker dealer prop, which is I 0:18:57.640 --> 0:19:01.120 think an antiquity kind of term when you know prop 0:19:01.200 --> 0:19:03.760 desks were a thing, and it's it's no longer really 0:19:03.960 --> 0:19:06.639 particularly relevant. But the net end user is actually a 0:19:06.720 --> 0:19:11.320 customer tag. So that to us, you know, are the 0:19:11.400 --> 0:19:13.920 people who are you know, trading at home, you know clients, 0:19:14.240 --> 0:19:17.520 you know, institutional clients for retail, etc. What we do 0:19:17.880 --> 0:19:20.560 is we take a kind of a trade pressure monitor, 0:19:20.600 --> 0:19:21.920 and you can do this with a you know, a 0:19:22.040 --> 0:19:26.040 futures contract, but where you're looking at time and sales 0:19:26.119 --> 0:19:30.600 and what is transacting at that time versus the bitter offer. 0:19:31.520 --> 0:19:34.160 And what you then see is if something is kind 0:19:34.200 --> 0:19:37.720 of you know, generically, you know, assumption wise, if it's 0:19:37.760 --> 0:19:42.200 trading above the midpoint, right, doesn't even necessarily have to 0:19:42.200 --> 0:19:44.960 trade offer. But it's above the midpoint, that's somebody typically 0:19:45.000 --> 0:19:47.960 who's lifting an offer. That's a buyer, right, and vice 0:19:48.080 --> 0:19:50.040 verse right. If it trades below the mids, it's somebody 0:19:50.119 --> 0:19:52.240 hitting a bit, it's a seller. And what we do 0:19:52.400 --> 0:19:54.240 is we net out all the trades over the course 0:19:54.280 --> 0:19:56.600 of the day, and then we get that and we 0:19:56.760 --> 0:20:00.520 look at buys of calls, cells of calls right by puts, 0:20:00.600 --> 0:20:02.680 cells of puts, and what we end up seeing is 0:20:02.720 --> 0:20:06.760 a very clear pattern that market makers are almost always 0:20:07.280 --> 0:20:10.720 net sellers and customer flows are almost always net buyers. 0:20:11.520 --> 0:20:14.520 And that is core to this discussion right now because 0:20:14.920 --> 0:20:17.960 you know, as it relates to this larger topic of valmageddon, 0:20:18.000 --> 0:20:21.000 which we'll touch on a bit. You know, that's actually 0:20:21.080 --> 0:20:24.720 the setup that I am most comfortable with, where the 0:20:25.160 --> 0:20:29.159 seemingly you know, day trader, right the seeming kind of 0:20:29.480 --> 0:20:35.359 the buyer of this is more into creating a gamma 0:20:36.080 --> 0:20:38.359 a gamma flow in the market, of momentum flow in 0:20:38.440 --> 0:20:41.200 the market, and we can kind of unpack that, you 0:20:41.240 --> 0:20:44.560 know what that means. But but they have a defined 0:20:44.720 --> 0:20:47.879 risk they're spending the premium on the option. Most of 0:20:47.920 --> 0:20:50.800 these options are going to expire worthless as you kind 0:20:50.800 --> 0:20:52.800 of push out of out of the money. Wait, so 0:20:53.359 --> 0:20:56.640 before we get into sort of knocking the valmac eddon 0:20:56.960 --> 0:21:00.399 argument down, can you talk like what is the val 0:21:00.520 --> 0:21:03.639 mcgeddon argument? Can you piece it together for us? And 0:21:03.800 --> 0:21:07.280 then I know you don't necessarily agree with some of 0:21:07.320 --> 0:21:10.600 the more extreme interpretations of it. And I know, for instance, 0:21:10.680 --> 0:21:13.720 there was a JP Morgan note recently where they said 0:21:13.760 --> 0:21:16.560 that a five percent drop in the SMP five hundred 0:21:17.000 --> 0:21:21.720 could basically snowball into another twenty percent drop because of 0:21:21.840 --> 0:21:26.400 these options. Talk to us about the dynamics that would 0:21:26.520 --> 0:21:31.399 drive that cascade effect in theory. So in you know, 0:21:31.480 --> 0:21:34.840 to take it back to twenty eighteen and that valmcgeddon scenario, 0:21:35.040 --> 0:21:37.760 and you know, you guys kind of got the joke right. 0:21:37.840 --> 0:21:41.359 There was very steep skew at the time. Vall was 0:21:41.680 --> 0:21:46.000 you know, at times screening attractive as a cell because 0:21:46.040 --> 0:21:50.639 of this kind of fed macro suppression, right, and you 0:21:50.720 --> 0:21:53.520 had no yield and fixed income. So there was a 0:21:53.640 --> 0:21:56.200 lot of growth in val selling strategies and you know, 0:21:56.320 --> 0:22:00.320 yield enhancement strategies. And this isn't necessarily from you know 0:22:01.200 --> 0:22:05.440 vall Arb you know, um, you know hedge funds, you know, 0:22:05.760 --> 0:22:08.200 in dark, opaque corners of the market. This was you know, 0:22:08.280 --> 0:22:10.840 the largest asset managers in the world, you know, with 0:22:11.040 --> 0:22:13.880 overriding foot Bill gross stood up on stage and said 0:22:14.000 --> 0:22:16.680 sell volatility, right, that was That's how he did it. 0:22:16.960 --> 0:22:18.639 That's how he did it. He was you know, the 0:22:18.680 --> 0:22:21.000 biggest ray Volve guy out there, you know, and just 0:22:21.119 --> 0:22:23.719 constantly mushing that stuff. You know. So this is more 0:22:23.760 --> 0:22:26.359 than just an equities discussion. But so there was this 0:22:26.720 --> 0:22:29.720 build up, an accumulation of short volatility in the market 0:22:29.760 --> 0:22:33.520 and in particular with those products right their end of 0:22:33.640 --> 0:22:36.840 day hedging requirements. The larger that short vall trade got, 0:22:36.880 --> 0:22:39.159 which again, you know, everybody gets the joke it's a 0:22:39.200 --> 0:22:41.080 picking up pennies in front of a steamroller thing. You're 0:22:41.119 --> 0:22:44.159 just collecting premium, You're you know, collecting income, you know, 0:22:44.320 --> 0:22:48.120 FATA gang, all those kind of euphemisms. That one day, 0:22:49.160 --> 0:22:51.359 and it happened to be that there was an actual 0:22:51.480 --> 0:22:54.840 macro catalyst. Over the course of that December and January, 0:22:55.040 --> 0:22:58.040 the Trump tax plan went from kind of zero delta, 0:22:58.240 --> 0:23:00.000 meaning like nobody thought it was going to get done, 0:23:00.400 --> 0:23:02.560 to getting approved in like the House or the Senate 0:23:02.600 --> 0:23:05.280 by mid December, and we were already at above trend 0:23:05.320 --> 0:23:07.639 growth and above trend inflation, and all of a sudden, 0:23:07.640 --> 0:23:09.679 now you had this big fiscal boom out of nowhere. 0:23:10.000 --> 0:23:13.719 Over the course of January, equity equities was spot up, 0:23:13.800 --> 0:23:16.000 so the market was up, but VALL was going higher 0:23:16.040 --> 0:23:19.960 because people were buying upside optionality like crazy. So a 0:23:20.080 --> 0:23:22.719 spot up vall up, which is you know, a kind 0:23:22.760 --> 0:23:25.160 of a known term for an unstable market, I guess 0:23:25.200 --> 0:23:27.800 you would say. And over the course of that month, 0:23:27.920 --> 0:23:30.600 we kept seeing you know, prices paid beats, you know, 0:23:30.720 --> 0:23:33.560 from regional Feds. There was a CPI release and at 0:23:33.720 --> 0:23:38.080 the day, the Friday prior to you know, Val mcgeddon, 0:23:38.240 --> 0:23:41.840 you know, February fifth, I believe we had this average 0:23:41.880 --> 0:23:43.880 early earnings print. I believe it was like a three 0:23:44.000 --> 0:23:46.480 standard deviation beat or something like that. And for the 0:23:46.600 --> 0:23:50.440 first time in that QY era, there was a Holy 0:23:50.720 --> 0:23:54.280 smokesall there was a Holy Smokes moment, and there was 0:23:54.280 --> 0:23:57.119 an inflation scare, and all of a sudden, that seemingly 0:23:57.520 --> 0:24:02.800 very controlled forward path invisibility of the Fed keeping rates 0:24:02.960 --> 0:24:06.560 lower forever was no longer a thing, and that morning, 0:24:06.960 --> 0:24:09.240 you know, so THATSP traded down two and a half percent. 0:24:09.320 --> 0:24:12.920 I think that Friday, that morning, we saw these things 0:24:13.440 --> 0:24:15.960 start to come unglued, and a lot of people were 0:24:16.000 --> 0:24:18.800 short these things right, and they had to turn by 0:24:18.840 --> 0:24:20.840 the end of the day. Well, the craziest thing is 0:24:21.080 --> 0:24:24.240 they were tied to VIX futures, and I think the 0:24:24.359 --> 0:24:28.280 week before you could see the VIX curve start to invert, 0:24:28.720 --> 0:24:32.760 and everyone knew what inversion would mean for these products. 0:24:32.840 --> 0:24:36.000 And I remember, I will never stop bringing this up, 0:24:36.040 --> 0:24:38.720 but I remember tweeting about how VIX curve inversion would 0:24:38.720 --> 0:24:41.840 be really bad for you know, these two etns, and 0:24:41.960 --> 0:24:45.119 then it happened and everyone was shocked. They were like, oh, 0:24:45.480 --> 0:24:46.960 I didn't expect it, or at least you know, a 0:24:47.000 --> 0:24:50.199 significant proportion of retail seemed to be shocked, which was unfortunate. 0:24:50.480 --> 0:24:52.919 But you could see it coming right right. I mean 0:24:53.000 --> 0:24:55.840 I called it a for you know, I think that 0:24:55.960 --> 0:24:58.320 at that time, like it was a neon swan. Yeah, 0:24:58.680 --> 0:25:01.320 we knew that you need needed a catalyst, and it 0:25:01.480 --> 0:25:03.640 was probably as always as we've seen with this most 0:25:03.760 --> 0:25:06.359 recent you know, multi year period as of you know, 0:25:06.600 --> 0:25:09.960 the volatility catalyst was inflation, because it shocks you out 0:25:10.000 --> 0:25:13.680 in this kind of lazy, you know, que mentality, zero 0:25:14.119 --> 0:25:34.480 bound rate mentality. Moving back to the present day, you know, 0:25:34.640 --> 0:25:36.960 what is it? So, as you pointed out, there's good 0:25:37.040 --> 0:25:41.320 reason to believe this is heavy institution, institutional or active 0:25:41.640 --> 0:25:47.359 buyers of these UM zero data expert options, and clearly 0:25:47.440 --> 0:25:50.160 there's a lot of demand there. The demand is real 0:25:50.280 --> 0:25:53.280 for it. What is it? I guess what are they 0:25:53.560 --> 0:25:57.320 used for? And by that I mean specifically, what is 0:25:57.359 --> 0:26:03.480 it about the characteristics of current large scale institutional portfolios 0:26:04.160 --> 0:26:09.280 that this sort of like standard length longer I don't know, 0:26:09.400 --> 0:26:12.080 duratial maturity option, I don't know what term, just whatever, 0:26:12.280 --> 0:26:16.080 longer data expery options are not as good for why 0:26:16.119 --> 0:26:19.119 do they need such short term protection? Well, so I 0:26:19.280 --> 0:26:21.119 think what you want to do is you look, you know, 0:26:21.200 --> 0:26:23.399 I spoke earlier about kind of the shifting vall regime 0:26:23.440 --> 0:26:25.680 and a Q E versus K TIERA right, and then 0:26:25.800 --> 0:26:30.840 last year skew flattened to like zero percentile. Right, So 0:26:31.040 --> 0:26:33.200 that what that tells you? Right? And we said it 0:26:33.320 --> 0:26:35.640 was because you know, largely generally speaking, without going into 0:26:35.680 --> 0:26:38.080 some really technical kind of flows in the structure product space, 0:26:38.440 --> 0:26:41.119 there was this general underposition that didn't require hedges. It 0:26:41.320 --> 0:26:45.080 was a crash less sell off. It was a grinding 0:26:45.440 --> 0:26:48.440 d leverage. Yeah, but why did they need the zero 0:26:48.960 --> 0:26:51.919 Like why why do they need such short term activities 0:26:52.240 --> 0:26:55.240 to get to get that same at the level of 0:26:55.280 --> 0:26:57.960 protection to say, so that so that's the perversion here 0:26:58.160 --> 0:27:00.560 is that if you were you know, so many tail 0:27:00.600 --> 0:27:05.159 funds stunt class year because typically tail funds are owning 0:27:05.800 --> 0:27:07.720 you know, you're you're you're kind of you're you're. We 0:27:07.880 --> 0:27:09.840 like to say you're short the meat and you're long 0:27:09.960 --> 0:27:11.639 the heat, you know, like that's a kind of a 0:27:11.720 --> 0:27:14.760 generally you know, assumption of what works you need to 0:27:14.840 --> 0:27:18.120 finance paying for you know, the hedges that you put 0:27:18.200 --> 0:27:20.040 on by you know, being able to be shorts and 0:27:20.160 --> 0:27:22.719 volatility at the time, stuff that's gonna you know you're 0:27:22.760 --> 0:27:24.520 gonna be able to collect on. And then you want 0:27:24.560 --> 0:27:27.480 to own like crashy stuff. Well because we never crashed. Yeah, 0:27:27.600 --> 0:27:32.119 like you know, owning Gamma into these event risks didn't 0:27:32.160 --> 0:27:35.800 pay out, so and owning puts didn't really pay out 0:27:35.840 --> 0:27:40.280 because it was this grinding, spot down vall down environment. 0:27:40.880 --> 0:27:44.440 Skew was flat. The actual only days we really saw 0:27:44.600 --> 0:27:48.200 Vault perform were on crash ups because nobody had it 0:27:48.280 --> 0:27:51.560 on right. Nobody was worried about a further sell off 0:27:51.760 --> 0:27:54.080 because you had such low exposure. You're high cash, as 0:27:54.119 --> 0:27:56.719 we already said, you know, like if anything, you were 0:27:56.800 --> 0:27:59.840 hedging daily event risk, and that was a big thing. 0:28:00.320 --> 0:28:01.920 So much of the event risk last year was a 0:28:01.960 --> 0:28:05.119 CPI print, was an NFP, was an FOMC meeting, was 0:28:05.119 --> 0:28:08.800 an ECB meeting. So you wanted something that really looked 0:28:08.840 --> 0:28:11.240 alike and was going to be highly sensitive to that 0:28:11.400 --> 0:28:13.840 day's move right if you were a header. So people 0:28:13.840 --> 0:28:17.200 were buying like at the money same day puts, a 0:28:17.359 --> 0:28:20.680 one month put or a quarterly put was not doing 0:28:20.720 --> 0:28:22.600 you any good. And owning like put spreads for some 0:28:22.760 --> 0:28:24.840 gamma or whatever, it was not doing you any good. 0:28:24.920 --> 0:28:29.159 So as the kind of the migration of the flow 0:28:29.480 --> 0:28:32.520 moved to these, to these, you know, each day to 0:28:32.600 --> 0:28:35.280 that point early each day became its own ecosystem. And 0:28:35.760 --> 0:28:37.920 if you are hedging those risks, if you are a 0:28:38.040 --> 0:28:41.840 market maker selling into a kind of end user who 0:28:41.880 --> 0:28:45.560 has demand to kind of push the market around either way, 0:28:45.640 --> 0:28:49.719 whether it's buying puts or buying calls, which we were 0:28:49.760 --> 0:28:53.760 seeing this, you know the customer base do currently there 0:28:53.800 --> 0:28:57.240 they should be agnostic really about the direction of the market. 0:28:57.640 --> 0:29:00.560 To be fair, right, what they were doing are buying this. 0:29:00.600 --> 0:29:04.360 If you're if you're now short this stuff, you want 0:29:04.480 --> 0:29:07.000 something that's going to perform just like those, and owning 0:29:07.040 --> 0:29:09.640 a Friday option, a weekly option, or a monthly option 0:29:10.200 --> 0:29:13.040 is not going to have the same umph kind of 0:29:13.120 --> 0:29:16.680 inhedging your risk. So part of the volume proliferation that 0:29:16.760 --> 0:29:20.640 we have seen this year is the market makers and 0:29:20.720 --> 0:29:23.840 broker dealers themselves using these products to slice and disk 0:29:23.920 --> 0:29:27.200 their own risk profile. Yeah right, it's symbiotic with the 0:29:27.320 --> 0:29:30.080 kind of the underlying demand. So just on this note, 0:29:30.160 --> 0:29:33.320 we have this environment where maybe you're worried about a 0:29:33.520 --> 0:29:36.360 big intra day move because of event risk, and so 0:29:36.520 --> 0:29:38.920 you're going to buy a short dated option or a 0:29:39.000 --> 0:29:42.120 zero or one day option versus a weekly or a 0:29:42.200 --> 0:29:45.680 monthly or something like that. What does that actually mean 0:29:46.160 --> 0:29:49.960 for the impact on the market, Because the whole Volmageddon 0:29:50.160 --> 0:29:54.800 portfolio insurance doom loop theory is that you end up 0:29:54.800 --> 0:29:58.280 in a situation where the whole market is basically short gamma, 0:29:58.440 --> 0:30:00.520 and what if it keeps to cli lining and then 0:30:00.600 --> 0:30:03.520 market makers have to keep selling in order to hedge. 0:30:04.040 --> 0:30:08.080 But I'm assuming if you're talking about these ultra short options, 0:30:08.480 --> 0:30:11.520 I mean, maybe it could make the market volatile on 0:30:11.800 --> 0:30:16.200 more volatile on a one day basis, but probably less 0:30:16.320 --> 0:30:20.320 unless you get sustained selling for several days. Probably not 0:30:20.520 --> 0:30:22.800 going to lead to, you know, a nineteen eighty seven 0:30:22.840 --> 0:30:26.000 type situation, right, So you know, I think you know, 0:30:26.080 --> 0:30:29.440 in one of my you know, quasi recent notes, there 0:30:29.560 --> 0:30:32.120 was a span you know, at some point in February 0:30:32.120 --> 0:30:34.680 I'd say like over ten days, seven days, I want 0:30:34.720 --> 0:30:37.680 to say seven days. I think we had fifteen or 0:30:37.720 --> 0:30:40.680 sixteen one percent moves in both directions, and like a 0:30:40.760 --> 0:30:43.080 week and a half, I mean it really was. I 0:30:43.200 --> 0:30:44.680 want to say it was like the first week and 0:30:44.720 --> 0:30:47.760 a half save like February, Okay, when when you know 0:30:47.880 --> 0:30:50.520 the velocity of mentions of this, you know, this became 0:30:50.560 --> 0:30:53.600 a very trending conversation. Yeah, and you at that point too, 0:30:53.680 --> 0:30:56.720 we were printing, you know, basically the high usage points 0:30:56.760 --> 0:30:58.680 of these options to date. You know, one out of 0:30:58.720 --> 0:31:01.640 every two options was a zero DT option. And what 0:31:01.920 --> 0:31:04.000 you were seeing then was kind of that exact point 0:31:04.040 --> 0:31:06.520 that you're bringing up, Tracy. It was like you're getting 0:31:06.920 --> 0:31:11.800 this enhanced intra day volatility because when these options were 0:31:11.920 --> 0:31:15.280 net bought by the customers, the dealers have to go 0:31:15.320 --> 0:31:17.640 on had that gamma, right, So when and what that 0:31:17.840 --> 0:31:21.479 means is that you know, if I'm selling upside, if 0:31:21.520 --> 0:31:24.000 I'm selling upside to you, you're trying to induce a 0:31:24.120 --> 0:31:25.680 move in the market. You're trying to kind of push 0:31:25.760 --> 0:31:28.640 the market with this accelerant flow. That's the lesson that 0:31:28.720 --> 0:31:31.760 we learned with the Wall Street Bets yellowing phenomenon. Right, 0:31:32.160 --> 0:31:35.600 And you know this it came part and parcel with 0:31:35.720 --> 0:31:41.240 the democratization of financial information, right, the democratization of trading 0:31:41.360 --> 0:31:43.640 and making it like a video game. This was that 0:31:43.880 --> 0:31:46.960 highly convex you know, low risk while you're doing is 0:31:47.000 --> 0:31:50.400 spending your premium that lottery ticket phenomenon. Yeah, and this 0:31:50.840 --> 0:31:53.240 has become a powerful flow and people now get the 0:31:53.320 --> 0:31:56.360 joke from retail to former institutional folks that didn't think 0:31:56.400 --> 0:31:58.920 about options as a vehicle. Joe, you might remember I 0:31:59.000 --> 0:32:00.800 wrote about this in the news letter. But this to 0:32:00.920 --> 0:32:04.760 me is like the legacy of crypt Well, crypto is 0:32:04.800 --> 0:32:06.760 still here, but this is the big invalence of crypto 0:32:06.840 --> 0:32:10.000 to me, which is that people bet on ever shorter 0:32:10.240 --> 0:32:13.239 term events and they're kind of agnostic to price. Right, 0:32:13.320 --> 0:32:15.200 it's like does the market go this way or does 0:32:15.240 --> 0:32:18.240 it go that way? Actually, this leads perfectly my next question. 0:32:18.320 --> 0:32:22.720 It was like, how big is that activity today in 0:32:23.080 --> 0:32:27.200 early twenty twenty three in your view relative to where 0:32:27.240 --> 0:32:29.400 it was and say middle of twenty twenty one, because 0:32:29.400 --> 0:32:31.600 obviously a lot of those people must be gone or 0:32:31.640 --> 0:32:34.000 wiped out or something, but it's clearly I mean there's 0:32:34.000 --> 0:32:35.800 like this cultural thing and there's a lot of people 0:32:35.840 --> 0:32:37.600 still doing it and talking about it, etc. So like 0:32:37.640 --> 0:32:41.360 in your sense, like the sort of Yolo Gama squeeze 0:32:41.400 --> 0:32:44.240 trades that we talked about We've had on the show 0:32:44.560 --> 0:32:48.640 multiple times, like how much of a force is that today? First, 0:32:48.880 --> 0:32:50.640 back then. So this is kind of the way I 0:32:50.680 --> 0:32:52.560 think about it. It's a very it's a very option 0:32:52.680 --> 0:32:55.480 centric phenomenon, right, And I'm not just saying, oh, like 0:32:55.640 --> 0:32:59.120 zero DT options like shocking. What I'm saying is that 0:32:59.560 --> 0:33:02.640 in the absence of a clear kind of macro message, 0:33:02.640 --> 0:33:05.080 and you were seeing that with Jerome Powell and the 0:33:05.200 --> 0:33:07.520 Fed and the market really trying to come to terms, 0:33:08.160 --> 0:33:10.600 you know, by getting ahead of itself and anticipating the 0:33:10.720 --> 0:33:13.360 end of the tightening cycle and trying to begin pricing 0:33:13.400 --> 0:33:16.360 that in and then bang, you know, hot inflation data 0:33:16.400 --> 0:33:18.760 or hot jobs data keeps you know, the Fed having 0:33:18.800 --> 0:33:21.239 to readjust and the market reprices terminal rates and all 0:33:21.280 --> 0:33:25.920 that stuff. When the trade becomes very challenging like that, 0:33:26.200 --> 0:33:29.000 where again on a daily to weekly basis, where you 0:33:29.080 --> 0:33:32.160 know we're completely held hostage by an individual new macro 0:33:32.320 --> 0:33:35.280 data point or a new central bank meeting, I think 0:33:35.320 --> 0:33:37.960 there has almost been I don't want to say a 0:33:38.040 --> 0:33:40.600 trade or boredom, but you need to exploit some other 0:33:40.680 --> 0:33:43.880 phenomenon where you're dealing with kind of binary outcomes and 0:33:44.040 --> 0:33:46.480 what ends up happening. What we've seen is that if 0:33:46.560 --> 0:33:50.040 you are a market maker or you know, to a 0:33:50.160 --> 0:33:52.880 lesser extent, as I said, a dealer, and you have 0:33:53.520 --> 0:33:56.719 clients looking to exploit these intra day moves, which by 0:33:56.800 --> 0:33:59.400 the way, there's also you know, kind of a regulatory 0:34:00.320 --> 0:34:05.040 paper trail aside here as well, because you know, if 0:34:05.120 --> 0:34:08.160 I'm you know, selling, if I'm selling an option, let's say, okay, 0:34:08.320 --> 0:34:09.680 I don't at the end of the day, if it's 0:34:09.719 --> 0:34:12.200 not on my prime broker's books because that trade has gone, 0:34:12.920 --> 0:34:15.080 I don't have to you know, do the kind of 0:34:15.160 --> 0:34:19.560 the the margin you know requirement right the collateral um 0:34:19.719 --> 0:34:23.239 you know kind of requirement. So you know, there's there's 0:34:23.360 --> 0:34:27.600 also this at as opposed to using a futures order, which, 0:34:27.680 --> 0:34:29.680 by the way, you would put a you know, like 0:34:29.800 --> 0:34:32.960 for a stop loss or risk management tool. So often 0:34:33.080 --> 0:34:35.879 in this type of world, you put your stop loss 0:34:35.960 --> 0:34:39.040 out here down at this level, and you know, the 0:34:39.200 --> 0:34:41.200 market goes there and you execute and you're out of 0:34:41.239 --> 0:34:42.799 your position even though you want it to be long 0:34:42.880 --> 0:34:43.960 And then by the end of the day, the thing 0:34:44.080 --> 0:34:46.520 is higher and you just killed yourself. These sit out 0:34:46.560 --> 0:34:49.120 there live until four o'clock. They give you a chance 0:34:49.160 --> 0:34:51.440 to not get knocked out. Oh and I didn't realize 0:34:51.480 --> 0:34:53.799 that about the margin requirements. That's interesting, Yeah, I mean 0:34:53.840 --> 0:34:55.359 so it's just you know, those types of things are 0:34:55.400 --> 0:34:58.240 all part of this tailwind to these to these products. 0:34:58.320 --> 0:35:00.279 But the thing that I want to say, as if 0:35:00.280 --> 0:35:02.880 you think about where a market maker is basically positioned, 0:35:03.120 --> 0:35:05.480 they're kind of they're short of put and short of 0:35:05.600 --> 0:35:08.360 call on a daily basis. Our data shows for that 0:35:08.480 --> 0:35:12.560 customer tagging that almost every day by and large particularly 0:35:12.719 --> 0:35:15.600 and we look at you know, moneyness buckets, right, So 0:35:15.800 --> 0:35:19.000 and that sounds kind of intimidating perhaps, but just think 0:35:19.040 --> 0:35:21.880 about like calls in the up one percent to up 0:35:21.960 --> 0:35:26.439 three percent, right, is almost always a net customer buyer 0:35:27.480 --> 0:35:30.920 trying to create that gamma squeeze, okay, But so are 0:35:31.080 --> 0:35:33.719 puts in the ninety seven ninety nine. So like down one, 0:35:33.800 --> 0:35:37.439 down three percent, almost always a customer buyer you're trying 0:35:37.480 --> 0:35:41.439 to push these flows around. So just on this point, 0:35:41.640 --> 0:35:44.440 and you mentioned exploitation earlier, and one of the things 0:35:44.640 --> 0:35:50.000 about Vaal mcgeddon and those two exchange traded notes or products, 0:35:50.440 --> 0:35:54.960 was that eventually market participants became very very aware of 0:35:55.200 --> 0:35:59.080 their size and how they worked and sort of realized 0:35:59.280 --> 0:36:03.400 that they could influence those products so that the products 0:36:03.480 --> 0:36:06.399 in turn would influence the underlying which in this case 0:36:06.600 --> 0:36:10.239 was Vic's futures. Is there a chance that you could 0:36:10.360 --> 0:36:13.680 see something or you're already seeing something similar here where 0:36:13.880 --> 0:36:18.040 sophisticated market participants understand how these options work, the hedging 0:36:18.080 --> 0:36:20.600 activity that they generate, and they start to sort of 0:36:20.880 --> 0:36:24.960 game them. Yes, but what you're doing is you're kind 0:36:24.960 --> 0:36:28.880 of intraday gaming them because again the inherent mean reversion 0:36:29.000 --> 0:36:32.120 property of these things. If you're going to monetize, you 0:36:32.200 --> 0:36:35.120 got to do it by the clothes and what you're 0:36:35.160 --> 0:36:38.920 getting this is feeding into the intraday volatility expansion, right, 0:36:39.280 --> 0:36:43.040 the interday acceleration flow. I'm lifting a guy on upside calls, 0:36:43.080 --> 0:36:44.600 you know, and out of the money upside calls, and 0:36:44.600 --> 0:36:47.000 the market starts rallying, and then we get through a strike. 0:36:47.080 --> 0:36:50.000 He's short gamma, right, So the higher the market goes, 0:36:50.080 --> 0:36:52.160 the more they have to buy to stay hedged. You're 0:36:52.200 --> 0:36:55.279 trying to help push, You're trying to get the ball rolling. Again, 0:36:55.360 --> 0:36:57.520 These are acceler and flows the same thing to the downside, 0:36:58.040 --> 0:37:02.239 and that is that is, you know, well within the 0:37:02.440 --> 0:37:04.400 kind of the bounds of fair play, right, it's the 0:37:04.440 --> 0:37:05.920 same thing as you have to go out and buy 0:37:06.280 --> 0:37:09.760 five yards of futures. You know you're gonna rip the market. 0:37:09.800 --> 0:37:11.600 It's going to leave a footprint. You know, you might 0:37:11.680 --> 0:37:13.560 be trying to do it kind of little profile, but 0:37:14.000 --> 0:37:18.520 you know these trades. We've seen futures on options on 0:37:18.640 --> 0:37:21.960 futures trading of late where people are doing this clearly 0:37:22.080 --> 0:37:25.360 on the screens where they're buying twenty thousand options on 0:37:25.560 --> 0:37:29.200 futures down fifty points in the middle of the day 0:37:29.239 --> 0:37:32.919 and puts. And that was a big story a week 0:37:33.040 --> 0:37:35.600 or two ago where the market moved because there was 0:37:35.640 --> 0:37:38.160 two billion dollars of delta for sale. Everybody saw that. 0:37:38.360 --> 0:37:41.920 Everybody knew it. Actually, maybe just as a way to 0:37:42.000 --> 0:37:46.520 sort of help me conceptualize this and understand the example 0:37:46.600 --> 0:37:49.480 that you just cited, like can you talk a little 0:37:49.480 --> 0:37:53.080 bit about payoff probabilities, Like can you sort of walk 0:37:53.200 --> 0:37:55.919 through a sort of a specific like type of bet 0:37:56.160 --> 0:37:58.880 that someone would make and this type of situation, like 0:37:59.239 --> 0:38:02.640 what are they risking? What is the upside? Everyone wants 0:38:02.719 --> 0:38:06.560 that's sort of like big lottery tickets type move et cetera. 0:38:06.600 --> 0:38:09.000 Can you sort of like walk through like a sort 0:38:09.040 --> 0:38:13.239 of theoretical trade or theoretical like math behind how an 0:38:13.400 --> 0:38:17.399 entity would enter and think about the upside and downside. Well, 0:38:17.520 --> 0:38:21.160 I mean without even getting into like a complex option strategy. 0:38:21.400 --> 0:38:25.560 Right if you were just simply buying same day call options, Okay, 0:38:25.719 --> 0:38:29.160 you know kind of through the end of January, You'm 0:38:29.200 --> 0:38:32.240 just running a systematic strategy of you know, of buying 0:38:32.320 --> 0:38:35.680 and closing like you're up you know, say, you know, 0:38:35.760 --> 0:38:39.400 five percent just on you know that alone consistently, and 0:38:39.480 --> 0:38:43.520 you had you know, an actual like positive sharp ratio too. 0:38:43.800 --> 0:38:46.080 Like that's not a normal kind of environment because January 0:38:46.200 --> 0:38:49.520 was this like everything type of rally even though you know, 0:38:49.600 --> 0:38:52.120 there were times where we were rallying involved was going higher. 0:38:52.239 --> 0:38:56.040 But it's more actually the view of why, in my mind, 0:38:56.360 --> 0:38:58.960 why market makers want to be are willing to be 0:38:59.040 --> 0:39:02.680 short these right, and that is you know, a critical 0:39:02.800 --> 0:39:05.560 part of this process, particularly in this VALL regime where 0:39:06.000 --> 0:39:10.240 you know, VALL can't squeeze yesterday, you know, barely barely 0:39:10.360 --> 0:39:13.600 ticking higher, right even or excuse me, on yesterday, meaning 0:39:14.200 --> 0:39:18.200 referring to the first day of the politicistimony on the sea. 0:39:18.320 --> 0:39:21.160 But if you're looking at you know, a sharp ratio, right, 0:39:21.200 --> 0:39:24.000 so a measure of kind of performance versus a risk unit. 0:39:24.280 --> 0:39:26.560 You know, it's really a marketing tool, right, you know, 0:39:26.600 --> 0:39:30.360 it's not an actual like risk calculate, but shorting a 0:39:30.640 --> 0:39:33.920 daily straddle, which is what these market makers are doing. Right. 0:39:33.960 --> 0:39:36.360 They're short of put and short of call to a client, 0:39:36.800 --> 0:39:38.920 or you could say short of a strangle as well, 0:39:39.120 --> 0:39:42.200 kind of depending on same strike or wider strikes. But 0:39:42.760 --> 0:39:45.040 you're talking about an S and P for the last 0:39:45.120 --> 0:39:49.080 ten days, that's a seven sharp selling that selling that 0:39:49.200 --> 0:39:52.239 straddle systematically on a on a twenty day, you know, 0:39:52.320 --> 0:39:54.719 it pushes up somewhere, you know, or it's still like 0:39:55.040 --> 0:39:57.239 a five or something like that in an S and P. 0:39:57.800 --> 0:40:01.560 So these this is a big pay out for these 0:40:01.680 --> 0:40:06.520 market makes. So okay, So what is the regime shift 0:40:06.680 --> 0:40:10.719 scenario in which market makers could get run over? There's 0:40:10.840 --> 0:40:14.840 short puts and calls, so they're essentially making bets on 0:40:15.560 --> 0:40:19.640 not big moves, right, Like to a certain extent, Yes, 0:40:19.800 --> 0:40:22.799 in a world where we haven't had crash and there 0:40:22.920 --> 0:40:25.960 is not so right, we've had declined but not crashes. 0:40:26.440 --> 0:40:29.320 And part of that is perhaps you know, due to 0:40:29.560 --> 0:40:33.200 these sort of like delevering people don't have people have 0:40:33.280 --> 0:40:35.040 more cash on this sideline so they don't have to 0:40:35.080 --> 0:40:38.040 like sell in response to selling, etc. But talked like 0:40:38.120 --> 0:40:41.320 about like what is the scenario in which a market 0:40:41.400 --> 0:40:45.879 maker with these you know, short straddles could get run over? Well, 0:40:45.960 --> 0:40:48.720 so in this dynamic that we're that we're talking about, 0:40:48.880 --> 0:40:51.719 that that has kind of been the setup for most days, right, 0:40:52.000 --> 0:40:54.160 you know where you know it's it's actually a good thing. 0:40:54.520 --> 0:41:00.640 I want the short ball short gamma being managed by professionals, 0:41:01.280 --> 0:41:06.239 some sort of regulatory oversight, capital you know oversight you know, 0:41:06.640 --> 0:41:10.239 with more robust discipline kind of risk management process and 0:41:10.400 --> 0:41:12.719 not by the same day intra day scalpers who are 0:41:12.760 --> 0:41:15.920 shorting tales for income. Yes, right, that's that's critical to me. 0:41:16.000 --> 0:41:18.800 So when I'm speaking with regulators, which i am, you know, 0:41:18.880 --> 0:41:21.720 when I'm speaking with um you know kind of oversight 0:41:21.840 --> 0:41:24.239 type of entities and and you know things of that 0:41:24.440 --> 0:41:27.120 nature that want to know is there a systemic risk? Yeah, 0:41:27.280 --> 0:41:29.719 this currently is the right set up to be you know, 0:41:29.840 --> 0:41:33.560 well managed. The thing that would make me uncomfortable would 0:41:33.680 --> 0:41:36.800 very much come from what would almost require certainly a 0:41:36.960 --> 0:41:41.120 different macroeconomic regime, which would be a much more highly 0:41:41.200 --> 0:41:44.400 speculative environment. It would probably require, you know, a resumption 0:41:44.480 --> 0:41:47.600 of quantitative easing. It would be a very different world 0:41:47.719 --> 0:41:49.920 where there wouldn't be all this yield and sitting in 0:41:50.080 --> 0:41:53.040 cash and you had to go back to being risky 0:41:53.120 --> 0:41:55.840 by selling valls. Sorry, I don't want to keep pressing 0:41:55.920 --> 0:41:59.680 on this, but I'm trying to understand, like, yeah, they're 0:41:59.719 --> 0:42:03.600 really smart and their professionals, but smart professionals blow up 0:42:03.640 --> 0:42:05.759 to wait, wait, wait, wait. So just on this point, 0:42:05.800 --> 0:42:08.640 I think like the biggest criticism of the val mcgeddon 0:42:08.760 --> 0:42:12.160 scenario is that if your put went up like a 0:42:12.239 --> 0:42:15.160 thousand percent in a day, you would sell it, right, 0:42:15.320 --> 0:42:19.040 which would like start to decrease some of the hedging 0:42:19.120 --> 0:42:23.080 needs or bring in buyers buying from market makers, and 0:42:23.200 --> 0:42:26.120 that would ultimately support the market. That's my understanding of 0:42:26.160 --> 0:42:30.440 the sort of opposition to val mcgeddon thing. I think 0:42:30.600 --> 0:42:36.080 the sheer supply of short vall then versus this very 0:42:36.200 --> 0:42:39.680 tactical and then daisy chained hedged you know environment that 0:42:39.760 --> 0:42:43.000 we're currently in where part of these volumes once the 0:42:43.080 --> 0:42:45.800 dealers are short some of these you know, down to 0:42:46.239 --> 0:42:49.600 or up to types of scenarios are them Are they 0:42:49.680 --> 0:42:53.399 themselves hedging out these scenarios and slicing and dicing their risk. 0:42:54.480 --> 0:42:57.480 Back then, that was the largest supply of kind of 0:42:57.520 --> 0:43:01.600 short vall that we had seen, and we knew mechanically 0:43:01.760 --> 0:43:04.959 it had to rebalance. That's why it was an extinction event. 0:43:05.200 --> 0:43:08.239 People begin to shoot against it now that of course, 0:43:08.360 --> 0:43:11.680 that can still happen now, but again due to this 0:43:11.880 --> 0:43:14.759 dynamic where if the trade is actually going your way, 0:43:15.360 --> 0:43:19.239 you are being incentivized to close it out. And that's why. 0:43:19.440 --> 0:43:23.040 So if classic realized volatility is a measure of close 0:43:23.120 --> 0:43:26.560 to close volatility right right now kind of sort of 0:43:26.680 --> 0:43:30.400 say VIX the VIX future at like around twenty is 0:43:30.600 --> 0:43:33.360 implying a one point two to one point three percent 0:43:33.520 --> 0:43:36.440 daily move in the SMP like five of the last 0:43:36.520 --> 0:43:39.600 seven days. I know it's a random sampling, but have 0:43:39.760 --> 0:43:42.480 been like fifty bibs or less. But what you're getting 0:43:42.640 --> 0:43:45.520 is one percent intra day moves. And this is the thing, 0:43:45.680 --> 0:43:47.960 right what you're getting is like from from a you know, 0:43:48.360 --> 0:43:52.719 a volatility measure that actually incorporates open to close or 0:43:52.880 --> 0:43:57.080 hide to low. You're actually seeing vall expand at some times, 0:43:57.640 --> 0:44:02.480 but from a classic volatility perspective, because this mean reversion 0:44:02.560 --> 0:44:07.200 flow compresses from a daily change, right that idea of 0:44:07.320 --> 0:44:11.400 an ecosystem of each day its own ecosystem on a 0:44:11.520 --> 0:44:15.120 closed to close basis, these trades are actually helping to 0:44:15.239 --> 0:44:19.880 compress volatility and actually leaning into implied you know, volatility 0:44:20.000 --> 0:44:22.439 is kind of grinding lower, which is very much where 0:44:22.480 --> 0:44:25.320 we're stuck right now. So I just have one more question, 0:44:25.440 --> 0:44:29.040 and it's kind of facetious but not really like the 0:44:29.600 --> 0:44:31.840 day to day takeaway from this is that like the 0:44:31.960 --> 0:44:36.320 CBOE and the marketmakers must just be minting money from this. 0:44:36.840 --> 0:44:39.880 And secondly, doesn't mean that if you're an equities trader, 0:44:40.280 --> 0:44:42.759 like you don't even have to be around for the 0:44:42.840 --> 0:44:45.240 full day. You could just be at like around present 0:44:45.320 --> 0:44:47.880 for the open and the clothes and those are the 0:44:48.000 --> 0:44:52.160 most important things. Now. Well, so we watch, you know, 0:44:52.840 --> 0:44:56.680 there's a ton of mythology and wheel spinning based on 0:44:57.840 --> 0:44:59.520 you know, in recent years, and I've been you know, 0:44:59.600 --> 0:45:03.800 part of this process for certain with regards to getting 0:45:03.800 --> 0:45:08.080 a sense for the aggregate options landscape and where extreme 0:45:08.239 --> 0:45:11.960 long or short are the aggregate delta is across options 0:45:12.000 --> 0:45:15.120 and where dealers go short gamma, you know, versus spot 0:45:15.200 --> 0:45:18.080 and things like that, trying to find these acceleration points 0:45:18.120 --> 0:45:20.359 in the market where things could go wrong or things 0:45:20.440 --> 0:45:24.160 could get slippery in either direction. What the proliferation of 0:45:24.239 --> 0:45:27.120 these tools is done. As we said, each day has 0:45:27.160 --> 0:45:31.120 its own kind of environment, and when we're looking at 0:45:31.200 --> 0:45:35.640 these things trading, these don't necessarily mean that it has 0:45:35.719 --> 0:45:38.160 to be an open and closed So as we've moved 0:45:38.160 --> 0:45:40.839 away from looking at the longer term impact of kind 0:45:40.880 --> 0:45:45.000 of the longer expiration options, and now it's so intra 0:45:45.160 --> 0:45:48.759 day based. We have a lot of tools internally where 0:45:48.880 --> 0:45:52.000 I am seeing whether or not premium is being spent 0:45:52.640 --> 0:45:55.839 or premium is being sold. And that's meaning so if 0:45:55.880 --> 0:46:00.279 I see delta going higher and I see premium going 0:46:00.520 --> 0:46:03.239 up in a positive direction, on these tools, I can 0:46:03.320 --> 0:46:06.800 assume that calls are being bought right spending premium, and 0:46:07.000 --> 0:46:10.080 thus the delta is going higher on a day like 0:46:10.320 --> 0:46:15.560 this recent Jerome Powell, you know, hawkish kind of escalation yesterday, 0:46:15.640 --> 0:46:18.719 what we saw, he comes out of the gates. There's 0:46:18.760 --> 0:46:22.640 a ton of puts bought, and then you get the 0:46:22.719 --> 0:46:25.320 down move. And this is a big theme in twenty 0:46:25.400 --> 0:46:27.120 twenty two as well, with a number of the big 0:46:27.239 --> 0:46:31.480 CPI upside surprises seemingly hawkish data points. People would monetize 0:46:31.560 --> 0:46:34.160 that downside. It would immediately put in a floor in 0:46:34.200 --> 0:46:38.400 the market, right because now you sell those puts, you 0:46:38.520 --> 0:46:42.280 sell those hedges or directional puts. It creates an impetus 0:46:42.400 --> 0:46:46.160 now for dealers to cover their short futures. And then 0:46:46.280 --> 0:46:48.839 people would even further exploit that by buying same day 0:46:48.880 --> 0:46:52.320 calls to kind of create a further squeeze of that impact. 0:46:52.680 --> 0:46:56.759 So all day it was by puts, sell puts, by 0:46:56.840 --> 0:47:00.080 calls rally, and then we got that, we snapped, and 0:47:00.200 --> 0:47:02.440 we sold off again. It is a you can do 0:47:03.040 --> 0:47:05.760 as much as you want, right and you're not held 0:47:05.840 --> 0:47:07.760 to close. You know, you can close them out midday 0:47:07.800 --> 0:47:10.320 if you got your two hundred percent return and a 0:47:10.400 --> 0:47:12.239 far out of the money thing that went in the money, 0:47:12.280 --> 0:47:16.640 And that's happened on multiple occasions intraday, you know you're good. 0:47:17.320 --> 0:47:21.200 But the overall point is absolutely not every day are 0:47:21.239 --> 0:47:23.520 we closing back to flat? You know, I'm not trying 0:47:23.560 --> 0:47:25.880 to say that. With regards of this mean reversion dynamic, 0:47:26.280 --> 0:47:28.880 we have had a number of days, certainly after the 0:47:29.040 --> 0:47:32.279 rates repricing and some of the volatility in February, the 0:47:32.480 --> 0:47:35.600 policy of volatility in February and the rate volatility in February, 0:47:35.880 --> 0:47:39.560 where we actually did look kind of short gamma, meaning 0:47:39.600 --> 0:47:42.080 we either closed on the low or closed on a 0:47:42.480 --> 0:47:44.239 high at the end of the day. You know, when 0:47:44.280 --> 0:47:47.279 I say we looked short gamma, it speaks to that 0:47:47.440 --> 0:47:52.080 dynamic where market makers or dealers are needing to buy 0:47:52.280 --> 0:47:54.760 something the higher it goes, or sell something the lower 0:47:54.800 --> 0:47:57.560 it goes, particularly at that end of day hedging period. 0:47:58.200 --> 0:48:02.239 Now you're getting this intra day hedging period and intra 0:48:02.360 --> 0:48:06.960 day unwind period. So buy and large again with the 0:48:07.080 --> 0:48:10.120 customers being the buyers and the kind of the the 0:48:10.440 --> 0:48:13.000 dealers and the market makers being the managers of the 0:48:13.160 --> 0:48:17.040 options greeks, risks and the second order greeks, that is 0:48:17.200 --> 0:48:20.960 a far safer place to be in my eyes. It's 0:48:21.000 --> 0:48:24.799 when we see that resumption of selling tales intra day 0:48:25.560 --> 0:48:28.880 that my spidy senses will go up and say, I 0:48:29.120 --> 0:48:31.239 don't like how this could go. Then you very well 0:48:31.840 --> 0:48:33.640 could have a situation where they don't know how to 0:48:33.719 --> 0:48:36.040 manage their their you know, their gamma risk, right that 0:48:36.120 --> 0:48:38.480 with the sensitivity of their delta to a move in 0:48:38.480 --> 0:48:40.480 the underlying the sensitivity of their delta to a move, 0:48:40.520 --> 0:48:43.480 and involve their Vanna risk. Right, all those things. These 0:48:43.520 --> 0:48:45.520 things have a shelf life of six and a half 0:48:45.560 --> 0:48:50.040 hours best. They're super sensitive. That's the reason that they're attractive, 0:48:50.160 --> 0:48:54.280 because they're you know, lottery tickets on steroids. And again 0:48:54.520 --> 0:48:57.000 with a defined risk, you can spend eighty bucks to 0:48:57.080 --> 0:48:59.320 make eleven thousand or whatever it is I want to 0:48:59.360 --> 0:49:02.480 do that. You know, that's the kind of setup. You've 0:49:02.560 --> 0:49:06.839 learned nothing from this podcast. Spidey Sense for a spy 0:49:06.960 --> 0:49:09.320 impact is also very good, Charlie. We're going to have 0:49:09.360 --> 0:49:11.160 to leave it there. Thank you so much. That was 0:49:11.200 --> 0:49:14.800 a fantastic explanation. Really appreciate you coming on. Thank you 0:49:14.880 --> 0:49:32.040 guys for having me so Joe. I found that conversation fascinating, 0:49:32.120 --> 0:49:34.800 and I think whenever you do have an explosion in 0:49:35.400 --> 0:49:37.880 volume of a new type of product, it does warrant 0:49:38.120 --> 0:49:41.520 some caution and additional scrutiny. But for me, the big 0:49:41.680 --> 0:49:45.440 takeaway there was this idea of every day is kind 0:49:45.480 --> 0:49:47.600 of a new ecosystem. In this idea that more and 0:49:47.719 --> 0:49:50.719 more people and I thought Charlie did an excellent job 0:49:50.800 --> 0:49:54.120 of sort of crystallizing a lot of these ideas, This 0:49:54.280 --> 0:49:58.360 idea that if you don't have a defined macro environment 0:49:58.440 --> 0:50:01.120 or macro trend, then why not trade on a sort 0:50:01.160 --> 0:50:04.120 of day to day basis on things going up or down? 0:50:04.520 --> 0:50:06.920 There was a Yeah, I found that conversation to be 0:50:07.239 --> 0:50:10.960 very clarifying. The big picture, like sort of aha moment 0:50:11.080 --> 0:50:15.160 for me is that you know when portfolios are less 0:50:15.239 --> 0:50:17.400 levered because the FED is sort of telling you to, 0:50:17.960 --> 0:50:20.920 you know, use less leverage. They're raising the cost of borrowing, etc. Like, 0:50:21.239 --> 0:50:26.480 you don't need as much long term structural protection because 0:50:26.520 --> 0:50:29.360 you have a volatility hedge already, which is the amount 0:50:29.400 --> 0:50:32.719 of cash that you're holding, But you know, you still 0:50:32.840 --> 0:50:36.319 have these one day moves, so you have the less 0:50:36.360 --> 0:50:38.759 big macro crash risk, but you still have these one 0:50:38.840 --> 0:50:43.200 day moves around CPI releases or around FED speeches, and 0:50:43.440 --> 0:50:46.800 so yeah, intuitively, you think, okay, short term options, this 0:50:47.120 --> 0:50:50.240 must be all just people who like to gamble betting 0:50:50.280 --> 0:50:54.920 that eighty dollars for eleven thousand payoff. But if the 0:50:55.120 --> 0:50:58.440 story is really about one day moves and one day risk, 0:50:58.760 --> 0:51:01.600 then you can see why institutional portfolios would like to 0:51:01.680 --> 0:51:04.520 trade these instruments. Yeah, well, I think there's definitely a 0:51:04.719 --> 0:51:09.200 rationality behind it, especially on the institutional side. But I 0:51:09.320 --> 0:51:11.480 also think we can't ignore that just over the past 0:51:11.560 --> 0:51:13.800 few years, you know, with the advent of crypto and 0:51:13.840 --> 0:51:15.640 then the Wall Street bets phenomenon and all of that 0:51:15.840 --> 0:51:19.840 is we've kind of normalized the tokenization of everything, or 0:51:19.960 --> 0:51:22.239 the lottery ticket idea, and you know, I can just 0:51:22.360 --> 0:51:25.359 treat this as sure, go up or down and make 0:51:25.400 --> 0:51:27.920 a lot of money. No, I mean, like that's obviously 0:51:28.080 --> 0:51:29.800 like such a thing. I mean, it's like such a 0:51:29.920 --> 0:51:33.680 part of the culture, the gambling culture, the sort of 0:51:33.800 --> 0:51:36.239 like take risks, the sort of like shoot for the moon, 0:51:36.640 --> 0:51:38.600 like that is like a real thing that I don't 0:51:38.680 --> 0:51:42.080 think we've felt to nearly the same degree five years 0:51:42.120 --> 0:51:45.720 ago or whatever it was, you know, even Val mcgednon. 0:51:45.719 --> 0:51:47.600 All that stuff feels like sort of like a quaint 0:51:47.640 --> 0:51:52.840 era and now within how people treat markets. But yeah, no, 0:51:52.960 --> 0:51:55.320 I think that was fascinating. And then also I do 0:51:55.520 --> 0:51:59.640 think Charlie's explanation of like the sort of natural mean 0:52:00.120 --> 0:52:02.800 version of the people who participated in the markets was 0:52:02.920 --> 0:52:06.440 helpful and again sort of like reasons to think that 0:52:06.680 --> 0:52:10.800 even with a lot of speculative activity, that the nature 0:52:10.840 --> 0:52:15.000 of them is more towards curbing large moves rather than 0:52:15.239 --> 0:52:17.360 accelerating a large move. Well, it's kind of like the 0:52:17.440 --> 0:52:20.520 bad news is short. You know, one or zero day 0:52:20.560 --> 0:52:23.680 options might add to intra day volatility, but the good 0:52:23.760 --> 0:52:26.960 news is it's intra day volatility. Yeah, it's only a day. Well, 0:52:27.000 --> 0:52:29.239 that was so fascinating, Like the idea that's like, Okay, 0:52:29.320 --> 0:52:31.640 something bad happened, so like everyone started to buy and 0:52:31.680 --> 0:52:34.480 puts that pushes it down. People immediately want to start 0:52:34.600 --> 0:52:37.160 monetizing their profits on that. I was like, oh, let's 0:52:37.160 --> 0:52:39.040 do the call squeeze and now, because we know that 0:52:39.120 --> 0:52:41.719 everyone's going to be monetizing. So you do sort of 0:52:41.800 --> 0:52:44.839 get that sort of like it's volatile, but it's sort 0:52:44.840 --> 0:52:47.840 of also dampening at the same time. It sounds like exactly, 0:52:48.080 --> 0:52:49.800 shall we leave it there? Let's leave it there. This 0:52:49.960 --> 0:52:52.799 has been another episode of the All Thoughts podcast. I'm 0:52:52.840 --> 0:52:55.440 Tracy Alloway. You can follow me on Twitter at Tracy 0:52:55.480 --> 0:52:57.920 Alloway and I'm Joe Why Isn't All? You can follow 0:52:58.000 --> 0:53:01.360 me on Twitter at the Stalwart. Follow our producers Carmen 0:53:01.480 --> 0:53:05.920 Rodriguez at crmin Arman and Dash Bennett at Dashbot. Follow 0:53:05.960 --> 0:53:09.239 all of the Bloomberg podcasts onto the handle at podcasts, 0:53:09.560 --> 0:53:11.880 and for more odd Lots content, go to Bloomberg dot 0:53:11.920 --> 0:53:15.040 com slash odd Lots, where we post transcripts. We have 0:53:15.080 --> 0:53:17.880 a blog and a newsletter that comes out every Friday. 0:53:18.239 --> 0:53:20.640 Go there and sign up. Thank you for listening.