WEBVTT - Why Everyone's Talking About the VIX and 50 Cent 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.520 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:27.080 T dot com put Knowledge to Work. Hello and welcome 0:00:27.120 --> 0:00:30.120 to another edition of the All Thoughts podcast. I'm Tracy 0:00:30.120 --> 0:00:34.880 Alloway and I'm Joe Wisntal So Joe, we've been talking 0:00:35.400 --> 0:00:38.239 and writing about this a lot, which is kind of 0:00:38.280 --> 0:00:42.120 weird because essentially we're talking and writing about nothing, like 0:00:42.400 --> 0:00:45.240 nothing is happening in markets, at least when it comes 0:00:45.560 --> 0:00:51.680 to a very specific measure of volatility. Yeah, it's definitely. Uh, 0:00:51.720 --> 0:00:54.360 it's kind of like the Seinfeld markets. I guess right 0:00:54.400 --> 0:00:57.040 where the thing that's going on is that nothing is 0:00:57.080 --> 0:01:03.520 going on. That's good. That's good. I just made that up. Um. 0:01:03.560 --> 0:01:06.040 But no, you know we've talked about this on this 0:01:06.160 --> 0:01:09.120 podcast before. How we have this uh you know, we 0:01:09.200 --> 0:01:11.959 have a morning call that you and I participate on 0:01:12.080 --> 0:01:15.520 that you lead very ably. I met my dad where 0:01:15.560 --> 0:01:18.240 we talk amongst many of us in the newsroom about 0:01:18.240 --> 0:01:20.480 what's going on in markets, and every day it's like 0:01:21.160 --> 0:01:24.440 kind of not much. Yeah, every day the story is 0:01:24.520 --> 0:01:29.440 usually about how nothing is actually moving that significantly in markets, 0:01:29.520 --> 0:01:31.679 and the thing we look to when it comes to 0:01:31.840 --> 0:01:36.880 gauging market movement or market volatility is of course something 0:01:36.959 --> 0:01:40.760 called the VIX index, which occasionally gets called things like 0:01:40.880 --> 0:01:45.080 wall streets fear gauge. A lot of people take issue 0:01:45.120 --> 0:01:49.600 with that name. The VIX is one of these sort 0:01:49.600 --> 0:01:52.640 of technical things in markets that seems to have some 0:01:52.880 --> 0:01:56.240 popular currency. There are probably people who are sort of 0:01:56.280 --> 0:01:59.360 tangentially aware that this thing called the VIX exists, and 0:02:00.000 --> 0:02:01.960 but there's a lot of debate about what it really is. 0:02:02.440 --> 0:02:05.320 Most people probably have no idea how it's measured, whether 0:02:05.440 --> 0:02:09.799 it really signals anything useful about anything at all, and 0:02:09.840 --> 0:02:13.800 so in addition to being widely quoted and widely discussed, 0:02:13.840 --> 0:02:17.359 it's also extremely controversial. Right, So today we are going 0:02:17.400 --> 0:02:20.519 to dig into all the details about the VIX how 0:02:20.560 --> 0:02:23.320 it works, but we're also going to dig into why 0:02:23.600 --> 0:02:27.400 market volatility is so low as judged by this one measure. 0:02:27.400 --> 0:02:29.800 And I'm not talking about things like, oh, well, we 0:02:29.840 --> 0:02:32.520 have good economic growth, so people are, you know, relatively 0:02:32.520 --> 0:02:36.280 comfortable with their investment positions. I'm talking about the actual 0:02:36.480 --> 0:02:41.760 market for trading volatility because in many ways. Volatility is 0:02:41.800 --> 0:02:45.680 now an asset class in and of itself. Right, This 0:02:45.800 --> 0:02:48.919 is an important concept that a lot of people talk about. 0:02:49.320 --> 0:02:51.760 But you know, a lot of these things are not 0:02:51.880 --> 0:02:54.799 particularly well understood. What does that mean that volatility is 0:02:54.840 --> 0:02:59.280 an asset class, or more specifically, what is volatility itself? What? 0:02:59.600 --> 0:03:02.080 You know, we throw the word around a lot, but 0:03:02.320 --> 0:03:04.280 I doubt a lot of people really have a firm 0:03:04.320 --> 0:03:07.200 grasp of what that is. So I'm confident that our 0:03:07.280 --> 0:03:10.320 guest today is going to help us clear away the 0:03:10.320 --> 0:03:13.760 smoke on all these topics and actually shed some light 0:03:13.880 --> 0:03:16.720 on what can be a very confusing subject. All right, well, 0:03:16.800 --> 0:03:19.640 let's get into it. Our guest today is Provate Shinto 0:03:19.680 --> 0:03:23.440 Wong Vantage. He is head of derivative Strategy at Macro 0:03:23.639 --> 0:03:28.919 Risk Advisors, and he writes about volatility on a basically 0:03:29.240 --> 0:03:42.560 every day private. Thanks so much for joining us. Thank 0:03:42.600 --> 0:03:45.960 you for having me so private. Let's start with Joe's question, 0:03:46.000 --> 0:03:47.960 because I think that's the big one, and it's the 0:03:48.040 --> 0:03:51.800 right one to be asking what exactly is volatility? So 0:03:51.840 --> 0:03:55.040 when people talk about volatility, they're either referring to what 0:03:55.080 --> 0:03:59.200 we call implied volatility, So that's essentially the market cost 0:03:59.280 --> 0:04:03.760 of volatility or what's sometimes called realized vultility or in essence, 0:04:03.760 --> 0:04:07.280 which is how much are markets actually moving. Um So 0:04:07.360 --> 0:04:09.600 the VIX which you guys have been discussing as a 0:04:09.600 --> 0:04:12.400 measure of implied vaulatility, it's a measure of what people 0:04:12.440 --> 0:04:15.560 are willing to pay for vultility or essentially, you know, 0:04:15.640 --> 0:04:20.159 it's the markets uh gauge or measure of the cost 0:04:20.440 --> 0:04:24.280 of owning vulatility. Let's dive into that a little bit 0:04:24.279 --> 0:04:29.080 more that specific question. So volatility, intuitively is it just 0:04:29.160 --> 0:04:32.479 a measure of the degree to which markets are going 0:04:32.560 --> 0:04:36.159 up and down. So it's not necessarily a directional idea. 0:04:36.760 --> 0:04:40.440 But if you imagine a sort of oscillation, or you 0:04:40.440 --> 0:04:43.240 imagine a sort of one of those e k g 0:04:43.520 --> 0:04:46.520 s that measures your heartbeat, it's a kind of a 0:04:46.560 --> 0:04:51.480 measure of how dramatically the line is just moving. Absolutely, 0:04:51.560 --> 0:04:55.680 and another way that volatility can can be measured, or 0:04:55.720 --> 0:04:58.040 another thing that it measures is the potential for large 0:04:58.040 --> 0:05:01.240 moves for example, you know, head of the US elections 0:05:01.279 --> 0:05:03.720 or head of the French elections, you also had volatility 0:05:03.920 --> 0:05:06.719 rise a little bit, not necessarily because people are expecting 0:05:06.960 --> 0:05:09.960 high volatility, but maybe because they're expecting one large move 0:05:10.000 --> 0:05:13.240 from a future event. So break it down for our listeners, 0:05:13.279 --> 0:05:16.200 what does it mean to be long volatility? And what 0:05:16.240 --> 0:05:18.840 does it mean to be short volatility? So what does 0:05:18.880 --> 0:05:21.440 it mean to be long volatility? It's a really interesting question. 0:05:21.480 --> 0:05:23.800 You know. People often talk about buying volatility, like they 0:05:23.800 --> 0:05:26.640 see the VIX at eleven or ten or nine or 0:05:26.839 --> 0:05:28.200 you know, god knows how low it's going to get, 0:05:28.200 --> 0:05:30.040 and they say like, oh, I want to own volatility. 0:05:30.040 --> 0:05:32.400 That seems like a really good trade to me. Um, 0:05:32.440 --> 0:05:35.120 But the thing is, you've never really own volatility, you know. 0:05:35.160 --> 0:05:37.200 I like to say, you can't own volatil, you only 0:05:37.240 --> 0:05:39.720 rent it. Um. So what that means is that how 0:05:39.760 --> 0:05:41.599 do you go out and buy the VIX. Well, you 0:05:41.640 --> 0:05:43.600 can't just go and go to the store and buy 0:05:43.640 --> 0:05:46.200 one share of vix and and that's that right Um. 0:05:46.240 --> 0:05:50.320 In reality, volatilities traded through option contracts, and that's really 0:05:51.240 --> 0:05:54.440 I guess the key to understanding volatility trading is it's 0:05:54.480 --> 0:05:57.520 it's linked to options. Options are time limited contracts. Every 0:05:57.600 --> 0:06:01.560 bet on volatility is implicitly time limited. Our listeners are 0:06:01.720 --> 0:06:05.000 very very smart, but nonetheless I sometimes think it's you know, 0:06:05.160 --> 0:06:08.000 I would never want to insult the intelligence of our listeners, 0:06:08.040 --> 0:06:11.440 who are the smartest of all podcast listeners, clearly. But 0:06:11.560 --> 0:06:15.000 just to really simplify this, you talk about options, and 0:06:15.040 --> 0:06:19.560 they're time limited, so they're essentially an option is essentially 0:06:19.600 --> 0:06:23.719 a bet that an underlying asset we're talking about a 0:06:23.760 --> 0:06:26.719 stock here, just to keep it simple, will hit some 0:06:26.880 --> 0:06:30.800 level by some time. And if volatility is higher, then 0:06:30.839 --> 0:06:34.600 that makes it more likely that that underlying asset can 0:06:34.680 --> 0:06:37.200 travel to that point. So if we have a share 0:06:37.560 --> 0:06:41.599 of IBM and we are betting that it's gonna go 0:06:41.720 --> 0:06:46.000 from a hundred dollars to five dollars, in theory, the 0:06:46.080 --> 0:06:50.240 higher volatility is, the more likely it is it will 0:06:50.279 --> 0:06:55.120 travel that distance in that defined area of time and move. 0:06:56.000 --> 0:06:59.120 And so to own volatility and to go long volatility, 0:06:59.160 --> 0:07:02.800 what you essent you you do is you're betting that 0:07:02.880 --> 0:07:06.480 you know these options will rise and value because the 0:07:06.560 --> 0:07:09.680 underlying assets will travel to these points faster in times. 0:07:09.760 --> 0:07:12.160 That sort of the idea that that is a really 0:07:12.240 --> 0:07:14.400 good way of explaining it. Um you know, So to 0:07:14.400 --> 0:07:16.360 get back to traces questions, how do you how do 0:07:16.440 --> 0:07:18.000 you own? How do you what does it mean to 0:07:18.000 --> 0:07:21.280 be long volts? In your short vuatility. UM. Yes, buying 0:07:21.320 --> 0:07:23.800 options is one way to do it. When you trade 0:07:23.840 --> 0:07:28.160 an options contract, there's something which is called the implied vaulatility. 0:07:28.160 --> 0:07:30.440 You can think of this again as the markets expectation 0:07:30.520 --> 0:07:33.760 for future vultility. That's that's priced into these contracts when 0:07:33.760 --> 0:07:36.360 you when you pay I don't know, a couple of 0:07:36.400 --> 0:07:39.840 dollars for an S and P put option, there's implicitly 0:07:39.880 --> 0:07:42.760 of vulatility that you're paying, and that is how one 0:07:43.080 --> 0:07:46.240 goes long vaulatility. But I think, you know, I don't 0:07:46.400 --> 0:07:48.880 want to digress, but I think a very important concept 0:07:49.000 --> 0:07:53.520 is that because options are time limited UM, the concept 0:07:53.520 --> 0:07:57.880 of decay or rent or or burden will carry costs, 0:07:57.880 --> 0:08:00.240 whatever you wanna call it is it's factors into being 0:08:00.280 --> 0:08:03.520 long volatility. And that's super important. In other words, if 0:08:03.520 --> 0:08:06.200 I buy a put option on the SMP so in 0:08:06.200 --> 0:08:08.120 other words, of contract, that's that will pay out if 0:08:08.120 --> 0:08:11.160 the market um goes both ends below a certain level 0:08:11.200 --> 0:08:13.560 at some point in time. If the market never goes 0:08:13.600 --> 0:08:15.960 below that level, then I just lose my money on 0:08:16.000 --> 0:08:18.640 the put option. And you know, if I want to 0:08:18.640 --> 0:08:20.920 be long volatility, essentially one way of doing it would 0:08:20.960 --> 0:08:22.800 be to constantly buy these put options by the market, 0:08:22.840 --> 0:08:24.800 every sells offen, I'm just gonna keep losing money on 0:08:24.880 --> 0:08:27.960 these things. So in order to be long volatility, there 0:08:28.040 --> 0:08:30.720 is a carry cost. Right, we know that the VIX 0:08:30.760 --> 0:08:33.840 can never go to zero, options can never be worthless. Therefore, 0:08:33.880 --> 0:08:36.160 there's always gonna be some carry costs. For every day 0:08:36.200 --> 0:08:38.760 that I'm long volatility or owning the VIX, I'm paying 0:08:38.800 --> 0:08:41.640 away a rent or or a decay. And and that's 0:08:41.800 --> 0:08:45.720 key to understanding volatility trading. Likewise, if I'm short volatility, 0:08:45.760 --> 0:08:49.120 I'm actually being paid rent, I'm earning carry. That leads 0:08:49.280 --> 0:08:51.440 quite nicely into what I was going to ask next, 0:08:51.480 --> 0:08:54.320 which is, given that you have this carry cost when 0:08:54.360 --> 0:08:58.080 it comes to buying volatility or renting volatility, as you 0:08:58.320 --> 0:09:01.760 put it, walk us through of the ecosystem here, like 0:09:01.920 --> 0:09:05.400 what kind of players are actually buying and what kind 0:09:05.440 --> 0:09:11.160 of players are actually selling? Mm hmm. So traditionally, and 0:09:11.400 --> 0:09:15.080 if we think about option contracts, traditionally, the buyer of 0:09:15.200 --> 0:09:20.120 vulatility is going to be um like institutional asset managers 0:09:20.160 --> 0:09:23.440 like hedge funds who want to protect their portfolio. So, okay, 0:09:23.520 --> 0:09:25.760 let's say I own I don't know, a billion dollars 0:09:25.760 --> 0:09:27.760 worth of stock. Well, how can I protect it or 0:09:27.800 --> 0:09:30.640 how can I outperform the market and justify you investing 0:09:30.640 --> 0:09:32.800 in me versus going investing in next ones. Well, one 0:09:32.840 --> 0:09:35.200 way to do it is for me to own hedges, right, 0:09:35.280 --> 0:09:38.079 for me to say, for example, own put options on 0:09:38.120 --> 0:09:40.520 the SMP, so that the next time we get two 0:09:40.520 --> 0:09:42.960 thousand eight or twenty eleven or some kind of you know, 0:09:43.040 --> 0:09:47.640 market volatility event um, I will outperform in in the 0:09:47.679 --> 0:09:49.880 event of a sell off. So that's been the traditional 0:09:50.000 --> 0:09:53.120 buyer vulatility is essentially um. You know, I think big 0:09:53.160 --> 0:09:57.800 asset managers. Um. There's also like insurance like variable nuity 0:09:57.800 --> 0:10:00.480 programs that need to pay out a certain amount out um. 0:10:00.640 --> 0:10:04.160 Those those people are are often implicit buyers of volatility, 0:10:04.240 --> 0:10:08.120 but that's kind of traditionally been the institutional bid um 0:10:08.200 --> 0:10:11.640 for for basically financial protection or financial insurance. And then 0:10:11.679 --> 0:10:15.199 the sellers, so the sellers of alatility have typically been 0:10:15.240 --> 0:10:17.920 the banks, like the dealers. Right, So if you know, 0:10:17.960 --> 0:10:20.280 if you're hedge fund X and you want to go 0:10:20.400 --> 0:10:23.160 buy options, then you you quote up your dealer and say, okay, 0:10:23.200 --> 0:10:25.080 I want to buy these put options, and they'll more 0:10:25.160 --> 0:10:28.680 than likely be happy to sell them to you. But uh, 0:10:28.720 --> 0:10:30.760 I think like I think, what you guys are getting 0:10:30.760 --> 0:10:33.920 at is the concept of volatility as an investable asset class, 0:10:34.520 --> 0:10:36.720 and especially posts to as an aid UM. You know, 0:10:36.720 --> 0:10:39.520 with new regulations, banks actually can't take as much risk 0:10:39.559 --> 0:10:42.200 as they used to be able to um A lot 0:10:42.240 --> 0:10:45.400 of that vulatility selling risk has now been um laid 0:10:45.480 --> 0:10:48.559 off to uh, I guess other people on the buy side. 0:10:48.600 --> 0:10:51.440 So before whereas it would mainly be I guess, like 0:10:51.440 --> 0:10:54.680 the dealers taking the other side of all these financial 0:10:54.679 --> 0:10:57.280 insurance bets a lot of times, now it is other 0:10:57.559 --> 0:11:00.760 by side institutions coming into basically, you know, instead of 0:11:01.000 --> 0:11:04.679 investing in stocks or investing in bonds or what have you. There, 0:11:05.840 --> 0:11:09.240 they're basically becoming sellers of insurance and and that's how 0:11:09.280 --> 0:11:14.760 they develop deliver their alpha. Now. Uh we started off 0:11:14.920 --> 0:11:18.760 the introduction by talking about how volatility is very low, 0:11:18.920 --> 0:11:21.760 how every day we have these chats about what's going 0:11:21.800 --> 0:11:24.040 on in the market. Well, there's nothing going on the market. 0:11:24.520 --> 0:11:29.480 You've been you've spent a career trading derivatives and analyzing 0:11:29.559 --> 0:11:32.200 volatility and all this stuff. So what do you tell 0:11:32.320 --> 0:11:36.760 us characterize the current market environment? Put it into perspective 0:11:37.280 --> 0:11:40.120 relative to what you've seen. So that when we tell 0:11:40.120 --> 0:11:43.160 our listeners of all is very low these days, what 0:11:43.240 --> 0:11:47.440 does that actually mean? How does it compare to six 0:11:47.520 --> 0:11:52.000 years ago, ten years ago, twenty years ago, whatever. Well, 0:11:52.200 --> 0:11:54.680 you can look at the VIX and I think, you know, 0:11:54.960 --> 0:11:56.480 I'm not going to get into how the VIX has 0:11:56.640 --> 0:11:58.960 been poorly understood, But essentially the VIX is a measure 0:11:58.960 --> 0:12:02.439 of short term options pricing. That's really all it measures. 0:12:02.840 --> 0:12:04.920 I don't think it should be used to measure you know, 0:12:05.080 --> 0:12:10.760 fear or you know, like an economic you know whatever. Uh. 0:12:10.800 --> 0:12:13.439 It's just really a measure of short dated option prices. 0:12:13.760 --> 0:12:15.680 And if we look at the VIX um, it's really 0:12:15.720 --> 0:12:20.840 back to two thousand seven levels um, kind of like 0:12:20.960 --> 0:12:24.079 mid uh sorry, two thousand seven mid two thousands seven um, 0:12:24.400 --> 0:12:28.520 early nineteen nineties levels um. If you look at realized vault, 0:12:28.559 --> 0:12:30.480 so how much stocks are moving? I think that's really 0:12:30.520 --> 0:12:35.960 interesting because I think this is the probably the longest 0:12:36.040 --> 0:12:39.480 stretch of realized vault we've low realized vall we've had 0:12:39.679 --> 0:12:43.280 UM since I want to say, like the early May nine. 0:12:43.440 --> 0:12:45.199 I mean, it's one thing for for volatility to be 0:12:45.400 --> 0:12:46.880 to be low, for like a week or two. But 0:12:46.920 --> 0:12:48.840 it's another thing for for vaultil to be low for 0:12:48.880 --> 0:12:51.200 like six months at a time or one year at 0:12:51.240 --> 0:12:53.599 a time. UM. And we really haven't seen this, I 0:12:53.880 --> 0:12:56.400 guess since uh. I guess for the since the pre 0:12:56.480 --> 0:13:00.440 crisis period and also since the early nineteen nineties UM. 0:13:00.520 --> 0:13:02.360 And I think the common thread there is really that 0:13:02.800 --> 0:13:05.480 UH if you look back at those those two other 0:13:05.559 --> 0:13:07.920 low ball periods, is that the feders hiking rates. And 0:13:07.960 --> 0:13:10.800 do I think that the FED hiking rates causes low fultility? No, 0:13:10.920 --> 0:13:13.080 I don't. I think it's coincident. I think the FED 0:13:13.200 --> 0:13:16.679 hikes rates when the economy is good. When the economy 0:13:16.760 --> 0:13:19.439 is good, realize all tends to be inequity sends to 0:13:19.559 --> 0:13:21.280 be a little bit lower. And I think that ultimately 0:13:21.320 --> 0:13:23.760 then leads into implied ball on the VIX being lower. 0:13:24.160 --> 0:13:26.400 I want to take a quick break for a word 0:13:26.480 --> 0:13:32.439 from our sponsor, but knowledge to work and grow your 0:13:32.480 --> 0:13:37.000 business with c i T. From transportation to healthcare to manufacturing. 0:13:37.200 --> 0:13:40.600 C i T offers commercial lending, leasing, and treasury management 0:13:40.640 --> 0:13:44.000 services for small and middle market businesses. Learn more at 0:13:44.000 --> 0:13:51.200 c i T dot com. Put Knowledge to work and 0:13:51.280 --> 0:13:54.880 we're back with private ching twang advantage of macro risk advisors. 0:13:54.920 --> 0:13:56.559 You know, there was something that you said that was 0:13:56.679 --> 0:13:59.920 very interesting, uh, in the first half where you talk 0:14:00.080 --> 0:14:03.280 about how a lot of the VALL sellers these days 0:14:03.320 --> 0:14:06.359 are people who, you know, it's kind of an alternative 0:14:06.440 --> 0:14:09.280 to uh, straight up investing, and so that you have 0:14:09.360 --> 0:14:12.200 some of these people who might have been portfolio managers 0:14:12.240 --> 0:14:16.960 now making money selling VALL. And in a sense, a 0:14:17.080 --> 0:14:23.440 diversified portfolio is a short VALL strategy without buying derivatives. 0:14:23.480 --> 0:14:26.720 So that if a typical person they have uh, you know, 0:14:26.760 --> 0:14:31.160 a portfolio of stocks and bonds and commodities, and it's 0:14:31.200 --> 0:14:34.760 an attempt to smooth out the cycles and the fluctuations 0:14:34.800 --> 0:14:39.520 of markets. That that is a de facto short VALL strategy. 0:14:39.720 --> 0:14:44.440 And so the idea of actually selling VALL explicitly shorting 0:14:44.560 --> 0:14:49.160 volatility is kind of not that different from traditional investing. 0:14:49.720 --> 0:14:52.120 Oh percent agree. I mean, if you look at the 0:14:52.640 --> 0:14:54.800 if you look at the payoff profile, the kind of 0:14:54.840 --> 0:14:59.200 the the distribution of returns for being long stocks, you know, 0:14:59.520 --> 0:15:03.000 or long ons or like long uh let's say, like 0:15:03.040 --> 0:15:05.760 long carry the carry trade in f X, it's all 0:15:05.880 --> 0:15:08.880 very similar to being short volatility. I think being short 0:15:08.920 --> 0:15:11.480 volage is a more explicit way of assuming that risk. 0:15:11.560 --> 0:15:13.120 But yeah, it's it's all the same risk. I mean, 0:15:13.160 --> 0:15:17.280 if you're if you're like a credit manager, you know, 0:15:17.480 --> 0:15:21.080 who buys how yeld bonds, you're implicitly short invall just 0:15:21.080 --> 0:15:23.320 just through the fixed income space. Or even if you're 0:15:23.320 --> 0:15:26.320 just long stocks, I mean you're implicitly short vall. I 0:15:26.320 --> 0:15:28.880 mean you get two thousand and get draw down. I mean, 0:15:29.120 --> 0:15:31.600 that's not really that much different from from shorting ball. 0:15:32.480 --> 0:15:34.600 But wait, let me take the other side of that argument, 0:15:34.640 --> 0:15:39.080 because I have seen critics who have said, we have 0:15:39.200 --> 0:15:43.440 all these new sellers of volatility in the market. Some 0:15:43.520 --> 0:15:47.720 of them have called them, uh, tourists in the volatility market. 0:15:48.040 --> 0:15:50.680 And the argument that they sometimes put forth is that 0:15:50.880 --> 0:15:53.720 these this might be, you know, kind of patronizing. But 0:15:54.000 --> 0:15:56.560 they say, these guys aren't experts. They might not know 0:15:56.600 --> 0:15:59.920 what they're doing when it comes to selling ball, using 0:16:00.160 --> 0:16:03.640 specific you know, options instruments, that sort of thing. Do 0:16:03.680 --> 0:16:06.880 you think there's any basis for that. I think there's 0:16:06.920 --> 0:16:10.320 some basis to it. I think it's matten maybe a 0:16:10.360 --> 0:16:13.920 little bit overblown. In general, the people who sell all 0:16:13.960 --> 0:16:17.080 are are quite careful about doing it. It's one other 0:16:17.120 --> 0:16:20.440 words that I think people who sell all generally, they 0:16:20.520 --> 0:16:23.440 generally like to size things based on a worst case scenario. 0:16:23.640 --> 0:16:25.920 So if you're, if you're, if you make a living 0:16:25.960 --> 0:16:28.480 sell involved in generally you're always thinking about, well, okay, 0:16:28.520 --> 0:16:30.440 like what if the next two thousand and eleven happens 0:16:30.520 --> 0:16:33.800 or August when you remember when on the Monday when 0:16:33.880 --> 0:16:36.480 markets were down I don't know, like five percent, basically 0:16:36.480 --> 0:16:38.880 no reason the doubt crashed. I think a thousand pointed 0:16:39.040 --> 0:16:42.360 exactly supposed were a limit down overnight. Um, You're you're 0:16:42.360 --> 0:16:44.360 always thinking about those type of events, and I think 0:16:44.400 --> 0:16:46.960 that's how you size your risks. So if it falls 0:16:47.080 --> 0:16:50.720 very low, then you're gonna keep in mind that vall 0:16:50.800 --> 0:16:54.320 has a much larger, much more room to rise, and 0:16:54.360 --> 0:16:56.640 you're you're gonna implicitly size down your beds. But I 0:16:56.640 --> 0:16:58.520 do think there could be something to be said for 0:16:58.880 --> 0:17:02.240 just more people or or more different people who normally 0:17:02.280 --> 0:17:05.520 wouldn't be looking at ball so closely. Um, kind of 0:17:05.560 --> 0:17:09.040 getting into the short vall game. Um yeah, I think 0:17:09.040 --> 0:17:10.840 there is some risk for that, and I think you've 0:17:10.840 --> 0:17:12.879 seen it in the dynamics of all. Like if you 0:17:12.920 --> 0:17:16.440 look at is how quickly the VIX can spike from 0:17:16.440 --> 0:17:20.280 low levels and how quickly it reverts back down. Um, 0:17:20.320 --> 0:17:22.400 I think that's there's something to be said for kind 0:17:22.440 --> 0:17:25.080 of I guess money that's that's quickly coming in and 0:17:25.119 --> 0:17:28.240 out of the space. Um. So yeah, I think volatility 0:17:28.280 --> 0:17:30.760 of all itself has has kind of risen um and 0:17:30.800 --> 0:17:33.719 I think it it could be partially due to just 0:17:33.880 --> 0:17:36.959 short of all becoming a more popular strategy. Now, all right, 0:17:37.040 --> 0:17:40.960 we talked about how how cheap vall is or how 0:17:41.119 --> 0:17:44.439 low VALL is, and so I think that naturally raises 0:17:44.480 --> 0:17:48.639 the question, well, is this a good time to buy protection. 0:17:48.720 --> 0:17:50.840 I'm not going to ask you to make a call 0:17:51.040 --> 0:17:54.920 right now, but but thinking about that, Okay, so volatility 0:17:55.160 --> 0:17:59.560 is cheap, it's people know there seems to be a 0:17:59.600 --> 0:18:04.240 mood of sort of um complacency, perhaps suggested by the 0:18:04.240 --> 0:18:08.000 low volatility. But as you pointed out, you can never 0:18:08.040 --> 0:18:10.320 really buy vall. You can only rent it, so it's 0:18:10.359 --> 0:18:12.720 not like you can just lock in these prices and 0:18:12.840 --> 0:18:16.160 forget it. Uh So what does that mean for someone 0:18:16.200 --> 0:18:19.480 who's like, yeah, I'm pretty optimistic, but vall is cheap here, 0:18:19.520 --> 0:18:22.080 so I'll just buy some to protect myself. Does that 0:18:22.280 --> 0:18:26.080 kind of thinking work. I think it tends not to work. 0:18:26.320 --> 0:18:29.440 I think I think the smart way to think about 0:18:29.440 --> 0:18:32.280 buying protection is to budget for in advance. In other words, 0:18:32.320 --> 0:18:35.720 you're thinking, Okay, I'm I'm willing to pay you know, 0:18:35.760 --> 0:18:37.920 I'm willing to pay X percentage of my a U 0:18:38.119 --> 0:18:41.760 M on on protection, and to think about this in advance, right, 0:18:41.800 --> 0:18:44.160 So think like, Okay, I'm gonna buy some protection and 0:18:44.200 --> 0:18:46.640 I'm willing to lose I don't know, fifty BIPs on 0:18:46.720 --> 0:18:49.399 this this year. I don't really think it makes a 0:18:49.400 --> 0:18:53.359 ton of sense to buy all just because it's low. Because, um, 0:18:53.400 --> 0:18:55.440 I mean, we've done a lot of kind of studies 0:18:55.480 --> 0:18:58.720 on this, and we found that actually, uh volved being 0:18:58.800 --> 0:19:02.159 low is a good predictor of evolving low going forward. 0:19:02.560 --> 0:19:05.080 Um So, it's a good predictor of itself. Um And 0:19:05.080 --> 0:19:06.919 you can end up kind of getting burned on this 0:19:07.000 --> 0:19:10.040 carry cost for a very long time. Uh So. I 0:19:10.040 --> 0:19:12.199 think that's that's the danger, is that you end up 0:19:12.240 --> 0:19:14.840 getting stuck into a trade that you never kind of 0:19:14.880 --> 0:19:17.239 budgeted forward to begin with. But there's something to be 0:19:17.280 --> 0:19:19.359 said for just that, you know, the beginning of the 0:19:19.400 --> 0:19:21.200 year or the beginning of the cord deciding Okay, I'm 0:19:21.200 --> 0:19:23.200 going to spend next on protection this year. I think 0:19:23.240 --> 0:19:25.639 that makes a lot more sense than than buying involved 0:19:25.680 --> 0:19:31.240 just because it's low. Okay, well, speaking of buying protection, Uh, 0:19:31.280 --> 0:19:35.440 there has been I guess something of a celebrity created 0:19:35.640 --> 0:19:39.399 in the volatility market, and that has to be a 0:19:39.520 --> 0:19:46.080 person known as fifty cent um. And the reason forever yes, 0:19:46.160 --> 0:19:48.719 we are now going to talk about early two thousands 0:19:48.800 --> 0:19:52.400 hip hop Joe um No. Uh. The reason he's called 0:19:52.440 --> 0:19:56.480 fifty cent he or she is because they've supposedly been 0:19:56.520 --> 0:20:01.080 buying you know, these roughly half a dollar clips of 0:20:01.720 --> 0:20:05.400 VIX call options on a regular basis, and people started 0:20:05.480 --> 0:20:09.359 noticing it private. Actually, I think was one of the first, 0:20:09.359 --> 0:20:12.840 if not the first, to really write about it private. 0:20:12.960 --> 0:20:18.120 Why why did become such a talking point in the market. 0:20:18.720 --> 0:20:23.400 There's a really interesting question, I think. Firstly, then the name. Honestly, 0:20:24.440 --> 0:20:28.959 it is a catchy nickname, um, but just like among traders, 0:20:28.960 --> 0:20:32.200 so among people who watched this space closely, it was 0:20:32.320 --> 0:20:36.000 quite fascinating to see such, honestly, such huge flow and 0:20:36.119 --> 0:20:39.760 outright VIX call by and we've never seen for for years, 0:20:39.840 --> 0:20:42.120 I mean, we had seen people main buying called spreads 0:20:42.200 --> 0:20:45.240 or or trying to limit their you know, limit the 0:20:45.240 --> 0:20:47.560 premiums they pay. But for someone to just come in 0:20:47.600 --> 0:20:52.000 and just repeatedly, uh, just buy these vixed calls. And 0:20:52.160 --> 0:20:54.160 you know when you when you trade like that, everyone 0:20:54.240 --> 0:20:56.680 knows it's you, right, Like people come up with nicknames 0:20:56.680 --> 0:20:59.440 about you. Um So, for someone to just come out 0:20:59.480 --> 0:21:02.000 and out right just always, every single time, by fifty 0:21:02.840 --> 0:21:05.000 vixed calls for fifty cents, I don't care what strikes, 0:21:05.000 --> 0:21:08.439 just pay fifty cents and that's very unusual behavior. Um 0:21:08.520 --> 0:21:10.800 So that that type of that type of trading, the 0:21:10.840 --> 0:21:13.879 type of flow, it just definitely gets noticed by market participants. 0:21:14.359 --> 0:21:16.720 Is that a good idea? Is that a good strategy? 0:21:16.840 --> 0:21:19.280 Is there a type of investor for whom it makes 0:21:19.280 --> 0:21:22.919 sense to just have this permanent bid in? Yeah, I 0:21:22.920 --> 0:21:28.280 mean it makes sense for someone who wants to own protection. 0:21:28.440 --> 0:21:31.600 Do I think that's the best way of owning protection? Well? 0:21:31.640 --> 0:21:34.800 Probably not. I think there's maybe more other things you 0:21:34.800 --> 0:21:37.720 could there's other ways you go about trading and maybe 0:21:38.040 --> 0:21:41.560 be less obvious about it as well. But um this 0:21:41.640 --> 0:21:44.280 is definitely not like some kind of doomsday trader like that. 0:21:44.320 --> 0:21:45.840 I guess that's kind of what I've seen in a 0:21:45.880 --> 0:21:48.240 lot of the articles going around as people people trying 0:21:48.240 --> 0:21:50.240 to paint it is, you know, that makes it sound 0:21:50.240 --> 0:21:53.000 more exciting, but in reality it is probably just I 0:21:53.040 --> 0:21:55.560 think like a large sovereign wealth fund or institutional asset 0:21:55.600 --> 0:21:59.000 manager that's that's executing a hedge for their books. So 0:21:59.040 --> 0:22:01.160 they definitely have something else against it, like maybe they're 0:22:01.200 --> 0:22:03.200 just long stocks, or who knows, maybe they're actually short 0:22:03.280 --> 0:22:05.959 VAUL and massive size and and that's their tailhage. And 0:22:06.040 --> 0:22:08.840 just to be clear, would you say it's a vixed call, 0:22:09.440 --> 0:22:14.120