Speaker 1: But knowledge to work and grow your business with c
Speaker 1: i T from transportation to healthcare to manufacturing. C i
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Speaker 1: small and middle market businesses. Learn more at c i
Speaker 1: T dot com put Knowledge to Work. Hello and welcome
Speaker 1: to another edition of the All Thoughts podcast. I'm Tracy
Speaker 1: Alloway and I'm Joe Wisntal So Joe, we've been talking
Speaker 1: and writing about this a lot, which is kind of
Speaker 1: weird because essentially we're talking and writing about nothing, like
Speaker 1: nothing is happening in markets, at least when it comes
Speaker 1: to a very specific measure of volatility. Yeah, it's definitely. Uh,
Speaker 1: it's kind of like the Seinfeld markets. I guess right
Speaker 1: where the thing that's going on is that nothing is
Speaker 1: going on. That's good. That's good. I just made that up. Um.
Speaker 1: But no, you know we've talked about this on this
Speaker 1: podcast before. How we have this uh you know, we
Speaker 1: have a morning call that you and I participate on
Speaker 1: that you lead very ably. I met my dad where
Speaker 1: we talk amongst many of us in the newsroom about
Speaker 1: what's going on in markets, and every day it's like
Speaker 1: kind of not much. Yeah, every day the story is
Speaker 1: usually about how nothing is actually moving that significantly in markets,
Speaker 1: and the thing we look to when it comes to
Speaker 1: gauging market movement or market volatility is of course something
Speaker 1: called the VIX index, which occasionally gets called things like
Speaker 1: wall streets fear gauge. A lot of people take issue
Speaker 1: with that name. The VIX is one of these sort
Speaker 1: of technical things in markets that seems to have some
Speaker 1: popular currency. There are probably people who are sort of
Speaker 1: tangentially aware that this thing called the VIX exists, and
Speaker 1: but there's a lot of debate about what it really is.
Speaker 1: Most people probably have no idea how it's measured, whether
Speaker 1: it really signals anything useful about anything at all, and
Speaker 1: so in addition to being widely quoted and widely discussed,
Speaker 1: it's also extremely controversial. Right, So today we are going
Speaker 1: to dig into all the details about the VIX how
Speaker 1: it works, but we're also going to dig into why
Speaker 1: market volatility is so low as judged by this one measure.
Speaker 1: And I'm not talking about things like, oh, well, we
Speaker 1: have good economic growth, so people are, you know, relatively
Speaker 1: comfortable with their investment positions. I'm talking about the actual
Speaker 1: market for trading volatility because in many ways. Volatility is
Speaker 1: now an asset class in and of itself. Right, This
Speaker 1: is an important concept that a lot of people talk about.
Speaker 1: But you know, a lot of these things are not
Speaker 1: particularly well understood. What does that mean that volatility is
Speaker 1: an asset class, or more specifically, what is volatility itself? What?
Speaker 1: You know, we throw the word around a lot, but
Speaker 1: I doubt a lot of people really have a firm
Speaker 1: grasp of what that is. So I'm confident that our
Speaker 1: guest today is going to help us clear away the
Speaker 1: smoke on all these topics and actually shed some light
Speaker 1: on what can be a very confusing subject. All right, well,
Speaker 1: let's get into it. Our guest today is Provate Shinto
Speaker 1: Wong Vantage. He is head of derivative Strategy at Macro
Speaker 1: Risk Advisors, and he writes about volatility on a basically
Speaker 1: every day private. Thanks so much for joining us. Thank
Speaker 1: you for having me so private. Let's start with Joe's question,
Speaker 1: because I think that's the big one, and it's the
Speaker 1: right one to be asking what exactly is volatility? So
Speaker 1: when people talk about volatility, they're either referring to what
Speaker 1: we call implied volatility, So that's essentially the market cost
Speaker 1: of volatility or what's sometimes called realized vultility or in essence,
Speaker 1: which is how much are markets actually moving. Um So
Speaker 1: the VIX which you guys have been discussing as a
Speaker 1: measure of implied vaulatility, it's a measure of what people
Speaker 1: are willing to pay for vultility or essentially, you know,
Speaker 1: it's the markets uh gauge or measure of the cost
Speaker 1: of owning vulatility. Let's dive into that a little bit
Speaker 1: more that specific question. So volatility, intuitively is it just
Speaker 1: a measure of the degree to which markets are going
Speaker 1: up and down. So it's not necessarily a directional idea.
Speaker 1: But if you imagine a sort of oscillation, or you
Speaker 1: imagine a sort of one of those e k g
Speaker 1: s that measures your heartbeat, it's a kind of a
Speaker 1: measure of how dramatically the line is just moving. Absolutely,
Speaker 1: and another way that volatility can can be measured, or
Speaker 1: another thing that it measures is the potential for large
Speaker 1: moves for example, you know, head of the US elections
Speaker 1: or head of the French elections, you also had volatility
Speaker 1: rise a little bit, not necessarily because people are expecting
Speaker 1: high volatility, but maybe because they're expecting one large move
Speaker 1: from a future event. So break it down for our listeners,
Speaker 1: what does it mean to be long volatility? And what
Speaker 1: does it mean to be short volatility? So what does
Speaker 1: it mean to be long volatility? It's a really interesting question.
Speaker 1: You know. People often talk about buying volatility, like they
Speaker 1: see the VIX at eleven or ten or nine or
Speaker 1: you know, god knows how low it's going to get,
Speaker 1: and they say like, oh, I want to own volatility.
Speaker 1: That seems like a really good trade to me. Um,
Speaker 1: But the thing is, you've never really own volatility, you know.
Speaker 1: I like to say, you can't own volatil, you only
Speaker 1: rent it. Um. So what that means is that how
Speaker 1: do you go out and buy the VIX. Well, you
Speaker 1: can't just go and go to the store and buy
Speaker 1: one share of vix and and that's that right Um.
Speaker 1: In reality, volatilities traded through option contracts, and that's really
Speaker 1: I guess the key to understanding volatility trading is it's
Speaker 1: it's linked to options. Options are time limited contracts. Every
Speaker 1: bet on volatility is implicitly time limited. Our listeners are
Speaker 1: very very smart, but nonetheless I sometimes think it's you know,
Speaker 1: I would never want to insult the intelligence of our listeners,
Speaker 1: who are the smartest of all podcast listeners, clearly. But
Speaker 1: just to really simplify this, you talk about options, and
Speaker 1: they're time limited, so they're essentially an option is essentially
Speaker 1: a bet that an underlying asset we're talking about a
Speaker 1: stock here, just to keep it simple, will hit some
Speaker 1: level by some time. And if volatility is higher, then
Speaker 1: that makes it more likely that that underlying asset can
Speaker 1: travel to that point. So if we have a share
Speaker 1: of IBM and we are betting that it's gonna go
Speaker 1: from a hundred dollars to five dollars, in theory, the
Speaker 1: higher volatility is, the more likely it is it will
Speaker 1: travel that distance in that defined area of time and move.
Speaker 1: And so to own volatility and to go long volatility,
Speaker 1: what you essent you you do is you're betting that
Speaker 1: you know these options will rise and value because the
Speaker 1: underlying assets will travel to these points faster in times.
Speaker 1: That sort of the idea that that is a really
Speaker 1: good way of explaining it. Um you know, So to
Speaker 1: get back to traces questions, how do you how do
Speaker 1: you own? How do you what does it mean to
Speaker 1: be long volts? In your short vuatility. UM. Yes, buying
Speaker 1: options is one way to do it. When you trade
Speaker 1: an options contract, there's something which is called the implied vaulatility.
Speaker 1: You can think of this again as the markets expectation
Speaker 1: for future vultility. That's that's priced into these contracts when
Speaker 1: you when you pay I don't know, a couple of
Speaker 1: dollars for an S and P put option, there's implicitly
Speaker 1: of vulatility that you're paying, and that is how one
Speaker 1: goes long vaulatility. But I think, you know, I don't
Speaker 1: want to digress, but I think a very important concept
Speaker 1: is that because options are time limited UM, the concept
Speaker 1: of decay or rent or or burden will carry costs,
Speaker 1: whatever you wanna call it is it's factors into being
Speaker 1: long volatility. And that's super important. In other words, if
Speaker 1: I buy a put option on the SMP so in
Speaker 1: other words, of contract, that's that will pay out if
Speaker 1: the market um goes both ends below a certain level
Speaker 1: at some point in time. If the market never goes
Speaker 1: below that level, then I just lose my money on
Speaker 1: the put option. And you know, if I want to
Speaker 1: be long volatility, essentially one way of doing it would
Speaker 1: be to constantly buy these put options by the market,
Speaker 1: every sells offen, I'm just gonna keep losing money on
Speaker 1: these things. So in order to be long volatility, there
Speaker 1: is a carry cost. Right, we know that the VIX
Speaker 1: can never go to zero, options can never be worthless. Therefore,
Speaker 1: there's always gonna be some carry costs. For every day
Speaker 1: that I'm long volatility or owning the VIX, I'm paying
Speaker 1: away a rent or or a decay. And and that's
Speaker 1: key to understanding volatility trading. Likewise, if I'm short volatility,
Speaker 1: I'm actually being paid rent, I'm earning carry. That leads
Speaker 1: quite nicely into what I was going to ask next,
Speaker 1: which is, given that you have this carry cost when
Speaker 1: it comes to buying volatility or renting volatility, as you
Speaker 1: put it, walk us through of the ecosystem here, like
Speaker 1: what kind of players are actually buying and what kind
Speaker 1: of players are actually selling? Mm hmm. So traditionally, and
Speaker 1: if we think about option contracts, traditionally, the buyer of
Speaker 1: vulatility is going to be um like institutional asset managers
Speaker 1: like hedge funds who want to protect their portfolio. So, okay,
Speaker 1: let's say I own I don't know, a billion dollars
Speaker 1: worth of stock. Well, how can I protect it or
Speaker 1: how can I outperform the market and justify you investing
Speaker 1: in me versus going investing in next ones. Well, one
Speaker 1: way to do it is for me to own hedges, right,
Speaker 1: for me to say, for example, own put options on
Speaker 1: the SMP, so that the next time we get two
Speaker 1: thousand eight or twenty eleven or some kind of you know,
Speaker 1: market volatility event um, I will outperform in in the
Speaker 1: event of a sell off. So that's been the traditional
Speaker 1: buyer vulatility is essentially um. You know, I think big
Speaker 1: asset managers. Um. There's also like insurance like variable nuity
Speaker 1: programs that need to pay out a certain amount out um.
Speaker 1: Those those people are are often implicit buyers of volatility,
Speaker 1: but that's kind of traditionally been the institutional bid um
Speaker 1: for for basically financial protection or financial insurance. And then
Speaker 1: the sellers, so the sellers of alatility have typically been
Speaker 1: the banks, like the dealers. Right, So if you know,
Speaker 1: if you're hedge fund X and you want to go
Speaker 1: buy options, then you you quote up your dealer and say, okay,
Speaker 1: I want to buy these put options, and they'll more
Speaker 1: than likely be happy to sell them to you. But uh,
Speaker 1: I think like I think, what you guys are getting
Speaker 1: at is the concept of volatility as an investable asset class,
Speaker 1: and especially posts to as an aid UM. You know,
Speaker 1: with new regulations, banks actually can't take as much risk
Speaker 1: as they used to be able to um A lot
Speaker 1: of that vulatility selling risk has now been um laid
Speaker 1: off to uh, I guess other people on the buy side.
Speaker 1: So before whereas it would mainly be I guess, like
Speaker 1: the dealers taking the other side of all these financial
Speaker 1: insurance bets a lot of times, now it is other
Speaker 1: by side institutions coming into basically, you know, instead of
Speaker 1: investing in stocks or investing in bonds or what have you. There,
Speaker 1: they're basically becoming sellers of insurance and and that's how
Speaker 1: they develop deliver their alpha. Now. Uh we started off
Speaker 1: the introduction by talking about how volatility is very low,
Speaker 1: how every day we have these chats about what's going
Speaker 1: on in the market. Well, there's nothing going on the market.
Speaker 1: You've been you've spent a career trading derivatives and analyzing
Speaker 1: volatility and all this stuff. So what do you tell
Speaker 1: us characterize the current market environment? Put it into perspective
Speaker 1: relative to what you've seen. So that when we tell
Speaker 1: our listeners of all is very low these days, what
Speaker 1: does that actually mean? How does it compare to six
Speaker 1: years ago, ten years ago, twenty years ago, whatever. Well,
Speaker 1: you can look at the VIX and I think, you know,
Speaker 1: I'm not going to get into how the VIX has
Speaker 1: been poorly understood, But essentially the VIX is a measure
Speaker 1: of short term options pricing. That's really all it measures.
Speaker 1: I don't think it should be used to measure you know,
Speaker 1: fear or you know, like an economic you know whatever. Uh.
Speaker 1: It's just really a measure of short dated option prices.
Speaker 1: And if we look at the VIX um, it's really
Speaker 1: back to two thousand seven levels um, kind of like
Speaker 1: mid uh sorry, two thousand seven mid two thousands seven um,
Speaker 1: early nineteen nineties levels um. If you look at realized vault,
Speaker 1: so how much stocks are moving? I think that's really
Speaker 1: interesting because I think this is the probably the longest
Speaker 1: stretch of realized vault we've low realized vall we've had
Speaker 1: UM since I want to say, like the early May nine.
Speaker 1: I mean, it's one thing for for volatility to be
Speaker 1: to be low, for like a week or two. But
Speaker 1: it's another thing for for vaultil to be low for
Speaker 1: like six months at a time or one year at
Speaker 1: a time. UM. And we really haven't seen this, I
Speaker 1: guess since uh. I guess for the since the pre
Speaker 1: crisis period and also since the early nineteen nineties UM.
Speaker 1: And I think the common thread there is really that
Speaker 1: UH if you look back at those those two other
Speaker 1: low ball periods, is that the feders hiking rates. And
Speaker 1: do I think that the FED hiking rates causes low fultility? No,
Speaker 1: I don't. I think it's coincident. I think the FED
Speaker 1: hikes rates when the economy is good. When the economy
Speaker 1: is good, realize all tends to be inequity sends to
Speaker 1: be a little bit lower. And I think that ultimately
Speaker 1: then leads into implied ball on the VIX being lower.
Speaker 1: I want to take a quick break for a word
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Speaker 1: we're back with private ching twang advantage of macro risk advisors.
Speaker 1: You know, there was something that you said that was
Speaker 1: very interesting, uh, in the first half where you talk
Speaker 1: about how a lot of the VALL sellers these days
Speaker 1: are people who, you know, it's kind of an alternative
Speaker 1: to uh, straight up investing, and so that you have
Speaker 1: some of these people who might have been portfolio managers
Speaker 1: now making money selling VALL. And in a sense, a
Speaker 1: diversified portfolio is a short VALL strategy without buying derivatives.
Speaker 1: So that if a typical person they have uh, you know,
Speaker 1: a portfolio of stocks and bonds and commodities, and it's
Speaker 1: an attempt to smooth out the cycles and the fluctuations
Speaker 1: of markets. That that is a de facto short VALL strategy.
Speaker 1: And so the idea of actually selling VALL explicitly shorting
Speaker 1: volatility is kind of not that different from traditional investing.
Speaker 1: Oh percent agree. I mean, if you look at the
Speaker 1: if you look at the payoff profile, the kind of
Speaker 1: the the distribution of returns for being long stocks, you know,
Speaker 1: or long ons or like long uh let's say, like
Speaker 1: long carry the carry trade in f X, it's all
Speaker 1: very similar to being short volatility. I think being short
Speaker 1: volage is a more explicit way of assuming that risk.
Speaker 1: But yeah, it's it's all the same risk. I mean,
Speaker 1: if you're if you're like a credit manager, you know,
Speaker 1: who buys how yeld bonds, you're implicitly short invall just
Speaker 1: just through the fixed income space. Or even if you're
Speaker 1: just long stocks, I mean you're implicitly short vall. I
Speaker 1: mean you get two thousand and get draw down. I mean,
Speaker 1: that's not really that much different from from shorting ball.
Speaker 1: But wait, let me take the other side of that argument,
Speaker 1: because I have seen critics who have said, we have
Speaker 1: all these new sellers of volatility in the market. Some
Speaker 1: of them have called them, uh, tourists in the volatility market.
Speaker 1: And the argument that they sometimes put forth is that
Speaker 1: these this might be, you know, kind of patronizing. But
Speaker 1: they say, these guys aren't experts. They might not know
Speaker 1: what they're doing when it comes to selling ball, using
Speaker 1: specific you know, options instruments, that sort of thing. Do
Speaker 1: you think there's any basis for that. I think there's
Speaker 1: some basis to it. I think it's matten maybe a
Speaker 1: little bit overblown. In general, the people who sell all
Speaker 1: are are quite careful about doing it. It's one other
Speaker 1: words that I think people who sell all generally, they
Speaker 1: generally like to size things based on a worst case scenario.
Speaker 1: So if you're, if you're, if you make a living
Speaker 1: sell involved in generally you're always thinking about, well, okay,
Speaker 1: like what if the next two thousand and eleven happens
Speaker 1: or August when you remember when on the Monday when
Speaker 1: markets were down I don't know, like five percent, basically
Speaker 1: no reason the doubt crashed. I think a thousand pointed
Speaker 1: exactly supposed were a limit down overnight. Um, You're you're
Speaker 1: always thinking about those type of events, and I think
Speaker 1: that's how you size your risks. So if it falls
Speaker 1: very low, then you're gonna keep in mind that vall
Speaker 1: has a much larger, much more room to rise, and
Speaker 1: you're you're gonna implicitly size down your beds. But I
Speaker 1: do think there could be something to be said for
Speaker 1: just more people or or more different people who normally
Speaker 1: wouldn't be looking at ball so closely. Um, kind of
Speaker 1: getting into the short vall game. Um yeah, I think
Speaker 1: there is some risk for that, and I think you've
Speaker 1: seen it in the dynamics of all. Like if you
Speaker 1: look at is how quickly the VIX can spike from
Speaker 1: low levels and how quickly it reverts back down. Um,
Speaker 1: I think that's there's something to be said for kind
Speaker 1: of I guess money that's that's quickly coming in and
Speaker 1: out of the space. Um. So yeah, I think volatility
Speaker 1: of all itself has has kind of risen um and
Speaker 1: I think it it could be partially due to just
Speaker 1: short of all becoming a more popular strategy. Now, all right,
Speaker 1: we talked about how how cheap vall is or how
Speaker 1: low VALL is, and so I think that naturally raises
Speaker 1: the question, well, is this a good time to buy protection.
Speaker 1: I'm not going to ask you to make a call
Speaker 1: right now, but but thinking about that, Okay, so volatility
Speaker 1: is cheap, it's people know there seems to be a
Speaker 1: mood of sort of um complacency, perhaps suggested by the
Speaker 1: low volatility. But as you pointed out, you can never
Speaker 1: really buy vall. You can only rent it, so it's
Speaker 1: not like you can just lock in these prices and
Speaker 1: forget it. Uh So what does that mean for someone
Speaker 1: who's like, yeah, I'm pretty optimistic, but vall is cheap here,
Speaker 1: so I'll just buy some to protect myself. Does that
Speaker 1: kind of thinking work. I think it tends not to work.
Speaker 1: I think I think the smart way to think about
Speaker 1: buying protection is to budget for in advance. In other words,
Speaker 1: you're thinking, Okay, I'm I'm willing to pay you know,
Speaker 1: I'm willing to pay X percentage of my a U
Speaker 1: M on on protection, and to think about this in advance, right,
Speaker 1: So think like, Okay, I'm gonna buy some protection and
Speaker 1: I'm willing to lose I don't know, fifty BIPs on
Speaker 1: this this year. I don't really think it makes a
Speaker 1: ton of sense to buy all just because it's low. Because, um,
Speaker 1: I mean, we've done a lot of kind of studies
Speaker 1: on this, and we found that actually, uh volved being
Speaker 1: low is a good predictor of evolving low going forward.
Speaker 1: Um So, it's a good predictor of itself. Um And
Speaker 1: you can end up kind of getting burned on this
Speaker 1: carry cost for a very long time. Uh So. I
Speaker 1: think that's that's the danger, is that you end up
Speaker 1: getting stuck into a trade that you never kind of
Speaker 1: budgeted forward to begin with. But there's something to be
Speaker 1: said for just that, you know, the beginning of the
Speaker 1: year or the beginning of the cord deciding Okay, I'm
Speaker 1: going to spend next on protection this year. I think
Speaker 1: that makes a lot more sense than than buying involved
Speaker 1: just because it's low. Okay, well, speaking of buying protection, Uh,
Speaker 1: there has been I guess something of a celebrity created
Speaker 1: in the volatility market, and that has to be a
Speaker 1: person known as fifty cent um. And the reason forever yes,
Speaker 1: we are now going to talk about early two thousands
Speaker 1: hip hop Joe um No. Uh. The reason he's called
Speaker 1: fifty cent he or she is because they've supposedly been
Speaker 1: buying you know, these roughly half a dollar clips of
Speaker 1: VIX call options on a regular basis, and people started
Speaker 1: noticing it private. Actually, I think was one of the first,
Speaker 1: if not the first, to really write about it private.
Speaker 1: Why why did become such a talking point in the market.
Speaker 1: There's a really interesting question, I think. Firstly, then the name. Honestly,
Speaker 1: it is a catchy nickname, um, but just like among traders,
Speaker 1: so among people who watched this space closely, it was
Speaker 1: quite fascinating to see such, honestly, such huge flow and
Speaker 1: outright VIX call by and we've never seen for for years,
Speaker 1: I mean, we had seen people main buying called spreads
Speaker 1: or or trying to limit their you know, limit the
Speaker 1: premiums they pay. But for someone to just come in
Speaker 1: and just repeatedly, uh, just buy these vixed calls. And
Speaker 1: you know when you when you trade like that, everyone
Speaker 1: knows it's you, right, Like people come up with nicknames
Speaker 1: about you. Um So, for someone to just come out
Speaker 1: and out right just always, every single time, by fifty
Speaker 1: vixed calls for fifty cents, I don't care what strikes,
Speaker 1: just pay fifty cents and that's very unusual behavior. Um
Speaker 1: So that that type of that type of trading, the
Speaker 1: type of flow, it just definitely gets noticed by market participants.
Speaker 1: Is that a good idea? Is that a good strategy?
Speaker 1: Is there a type of investor for whom it makes
Speaker 1: sense to just have this permanent bid in? Yeah, I
Speaker 1: mean it makes sense for someone who wants to own protection.
Speaker 1: Do I think that's the best way of owning protection? Well?
Speaker 1: Probably not. I think there's maybe more other things you
Speaker 1: could there's other ways you go about trading and maybe
Speaker 1: be less obvious about it as well. But um this
Speaker 1: is definitely not like some kind of doomsday trader like that.
Speaker 1: I guess that's kind of what I've seen in a
Speaker 1: lot of the articles going around as people people trying
Speaker 1: to paint it is, you know, that makes it sound
Speaker 1: more exciting, but in reality it is probably just I
Speaker 1: think like a large sovereign wealth fund or institutional asset
Speaker 1: manager that's that's executing a hedge for their books. So
Speaker 1: they definitely have something else against it, like maybe they're
Speaker 1: just long stocks, or who knows, maybe they're actually short
Speaker 1: VAUL and massive size and and that's their tailhage. And
Speaker 1: just to be clear, would you say it's a vixed call,
Speaker 1: That means it's a option tied to the VIX correct
Speaker 1: In other words, if the VIX should go above twenty
Speaker 1: I think that's been his average strike, then then they'll
Speaker 1: they'll pay out. We have time for just a one
Speaker 1: or two more questions, Tracy. Don't you want to ask
Speaker 1: your question about whether the VIX is broken? You've just
Speaker 1: handed me a loaded grenade. Okay, Yes, I have a
Speaker 1: question if the VIX is pervasively low, despite what are
Speaker 1: ostensibly a lot of concerns in the market, and despite
Speaker 1: you know, we do see some abrupt moves in various
Speaker 1: asset classes every once in a while, UM does that
Speaker 1: mean the VIX is broken. And also, sorry, let me
Speaker 1: just add one more thing onto that question, because that's
Speaker 1: not enough for you. The the proliferation of products, exchange
Speaker 1: traded products tied to the VIX. There's some criticism that
Speaker 1: those specifically are basically creating a feedback flute to the VIX,
Speaker 1: which is artificially suppressing it in some way and increasing
Speaker 1: volatility of volatility as you pointed out, is there any
Speaker 1: any logic in those claims? Both very good questions. Um,
Speaker 1: let me just address the first part. Do we think
Speaker 1: the VIX is broken? Um? So this is really something
Speaker 1: we've seen a lot more more attention paid to people
Speaker 1: kind of contrasting the low level of VIX with the
Speaker 1: high political uncertainty. Uh, it's mainly political uncertain that people
Speaker 1: point to, but there is a little bit of you know,
Speaker 1: economic uncerty out there as well. I think the important
Speaker 1: point to remembers that the VIX only measures short term
Speaker 1: option price, short term option price specifically over the next
Speaker 1: thirty days. So do we think something's going to happen
Speaker 1: over the next thirty days, Well, maybe not. We don't
Speaker 1: know the exact timing. We don't you know, there's now
Speaker 1: been a special counsel appointing to investigate Trump. I mean,
Speaker 1: who knows when the next memo or leak is gonna hit,
Speaker 1: but we don't know the exact timing of that, and
Speaker 1: so that that makes these these short term bets and
Speaker 1: volatility very expensive. And people don't want to own short
Speaker 1: day protection for that reason because most likely it's gonna
Speaker 1: expire worthless. You know that the rent is super super
Speaker 1: high if you try to trade short term volve. Um.
Speaker 1: So I think that's that's the reason why the VIX
Speaker 1: is maybe a little bit lower than people think it
Speaker 1: should be, is because it's a measure short term volve
Speaker 1: and these these uh, this uncertainty that people are worried
Speaker 1: about is more general, it's a more long it's a
Speaker 1: more long term uncertainty. Um. Do I think long term
Speaker 1: volve You know, that's that's another that's another tangent in itself.
Speaker 1: But do I think long term vall is too low?
Speaker 1: I think it's approaching low levels. And look, I think
Speaker 1: it's worth buying at something I've been writing about that
Speaker 1: people should maybe look at owning long term volve because
Speaker 1: that's really where you get the uncertainty premium that's where
Speaker 1: uncertainy premium should be priceing is maybe like one year
Speaker 1: vulatility or even longer than that. So I think that's
Speaker 1: that's where people should be looking. UM that the short
Speaker 1: dated stuff is just really going to be affected most
Speaker 1: by that that high carrier or rent costs that we've
Speaker 1: talked about, and it's so hard to time this stuff
Speaker 1: in the very short term. So your next question about
Speaker 1: exchange traded products, UM, I think that those have kind
Speaker 1: of been the primary vehicle for for the so called
Speaker 1: vault tourists to enter this space. UM. So in other words, UM,
Speaker 1: exchange traded products like the x I V or the
Speaker 1: the S V x Y, these are e t f
Speaker 1: s which which essentially will go up will increase in
Speaker 1: value UM when when the VIX or vixed futures decrease,
Speaker 1: and they're they're basically going to be implicit UM recipients
Speaker 1: of that carry costs. So yes, we have seen a
Speaker 1: lot more interest in those products, and probably from people
Speaker 1: who don't know that much about vall trading UM. And uh,
Speaker 1: you know this is getting a little bit too technical,
Speaker 1: but yeah, like due to the way these kind of
Speaker 1: lever products have to rebalance themselves at the end of
Speaker 1: the day, um, they can contribute to high volatility in
Speaker 1: the VIX itself. And I think that's the main change
Speaker 1: you've seen as these products of gain traction is is
Speaker 1: really that the VIX it self tends to spike much
Speaker 1: much more rapidly and also come back um from from
Speaker 1: high levels much more quickly. I just want to make
Speaker 1: one really quick observation and ask a very tiny question
Speaker 1: before we go. So the x I V which is
Speaker 1: that short vix et f betting shorting volatility? Since late
Speaker 1: it's up nearly sevenfold, whereas the S and P itself
Speaker 1: hasn't quite doubled. So short involve has been extraordinarily profitable trade,
Speaker 1: even if you're just a tourist and do it through
Speaker 1: an exchange traded product. Profit Intang Niche of Macro Risk Advisors.
Speaker 1: Fascinating topic, great perspective. Really appreciate having you on. Thank
Speaker 1: you so, Joe. I don't know about you, but I
Speaker 1: will never call the VIX the fear gauge. Ever again,
Speaker 1: I probably will just because I'm not like that sophisticated
Speaker 1: it and when you're in I say stupid stuff. But no,
Speaker 1: I think I'm pretty disciplined about a not calling it
Speaker 1: a measure of fear. I try not to say cliches like, oh,
Speaker 1: it's really scary how complacent everyone is. That's a sign
Speaker 1: that everything is going to fall apart. I think, I
Speaker 1: think I don't fall into some of the obvious VIX traps,
Speaker 1: but I'm sure I fall into many. Yeah, but it is.
Speaker 1: It's a really good discussion to have because so many
Speaker 1: people point to the VIX and say, oh, you know,
Speaker 1: like markets are complacent because the VIX is at a
Speaker 1: thirty year low, and they never really have the conversation
Speaker 1: about what's happening both within and around the VIX. And
Speaker 1: as Profit was pointing out, a lot has changed over
Speaker 1: the past six or seven years, right, Yeah. I think
Speaker 1: there are two really sort of important things that I
Speaker 1: took away. One is just this idea that well, you know,
Speaker 1: the VIX is low because volatility is low. Volatility is
Speaker 1: low because you know, sort of the general environment. So
Speaker 1: it's not necessarily the VIX per se saying something, but
Speaker 1: it's the overall market. But I love that discussion about
Speaker 1: this that you sort of, you know, asked about the
Speaker 1: structure of volatility markets. Who are the natural buyers who
Speaker 1: are the natural sellers. How have the natural buyers and
Speaker 1: sellers changed with some of these opportunities for vault tourists.
Speaker 1: I think that is sort of a credibly important topic
Speaker 1: that I imagine will we'll be talking about a lot
Speaker 1: in the future. Yeah, but Joe, I do worry about UM.
Speaker 1: I guess the tail wagging the dog here, right, and
Speaker 1: the idea that you do have products, lots of products
Speaker 1: that are now tied to this one index that seemed
Speaker 1: to be affecting it um, either you know, by suppressing
Speaker 1: it or on days when the vix starts moving up
Speaker 1: by UM making it move up faster than it otherwise.
Speaker 1: Would that that worries me a little bit? Maybe I'm
Speaker 1: like fifty fifty on this question. So I think there's
Speaker 1: probably stuff lurking out there in the market that one day,
Speaker 1: you know, we could have more events like August or
Speaker 1: God forbid October, or we have these automatic things in
Speaker 1: place that exacerbate moves rather than curb them. On the
Speaker 1: other hand, I think stuff is quiet because stuff is quiet,
Speaker 1: and we every day we look at the what's going
Speaker 1: on in the SNP, the dow and it's up two
Speaker 1: points are down two points, and so in light of that,
Speaker 1: it feels very intuitive that, uh, we're not seeing any
Speaker 1: sort of signs of life and volatility of markets. But
Speaker 1: there's but your general idea that there could be things
Speaker 1: under the service that if the coil springs, that will
Speaker 1: accelerate the moves rather than curb them, I think is
Speaker 1: a pre legitimate worry. And I think it's worth pointing
Speaker 1: out that, you know, we're recording this podcast several days
Speaker 1: before it, uh it's actually gonna air, So who knows,
Speaker 1: we could be in a complete by the time people
Speaker 1: are listening to this, We could a be in a
Speaker 1: completely different volatility regime. We may have even JINXD this
Speaker 1: low volatility period. So that's your insurance policy, Joe. You
Speaker 1: are literally buying volatility protection on the podcast right now.
Speaker 1: That's exactly right. I have just essentially bought a de facto,
Speaker 1: de facto fixed contract on the option on the podcast
Speaker 1: to guarantee to hedge against this podcast being worthless. Exactly right. Alright,
Speaker 1: that is it for this episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Halloway, and I'm Joe wisntal You could follow me
Speaker 1: on Twitter at the Stalwart, and you should follow our
Speaker 1: fabulous producer, Sarah Patterson at Sarah pat With Two Teas.
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