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Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
And he were talking about just one topic today.
Yeah.
That topic is you showed a horse this week.
I was gonna say ets, but yeah, okay, so yeah I did. I rode my horse this weekend. His name is Gus. He's about fifteen hands. For the equestrians in the audience, which is all of the audience after listening to the Money Stuff podcast, it's a good sized size, mine size. So he is technically a horse. The only to listen to me. Listen to me. A dividing line between a horse.
See think he's a person.
No, no, no, he does have a personality. But the dividing line between a horse and a pony is just tight. Some people think it's age. No, it's just tight. So he for a while because I got him before he turned three, like a couple months before he turned three, so he was still a baby and still growing. For a while, I had a large pony, but he has grown to the point where he is now technically a horse, which we're very thrilled for him for.
So you are, on occasion a competitive I.
Am so I ride dressage. There's a thing called the United States Dressage Federation. On my older pony, whose name is Batman. I've had him since I was twelve. Batman is a pony. Batman is a large pony, small horse, but the line is fuzzier there because he's he's like fourteen two hands for the equestrians in the audience. I got up pretty high in the levels with Batman. We got up to third life. It goes training. Let me tell you about it. Okay, we can cut all of
this if it's boring. Oh no, So when you when you showed your sage in the United States, there's intro level, there's training level first, second, third, fourth, then you get into like Grand Prix and stuff like that.
I wish that the audience see demonstrating what Prix looks like.
I tried to like embody the horse doing Grand Prix. So with Batman, we got up to third level and we did pretty good. Gus is just starting out. This was his second show ever. We showed training level. He did a great job. I will say I was so proud of him.
From Instagram, I got the impression that you and Gus one we.
Want a blue ribbon. But for context, we're showing training level. Like I'm a pretty good rider at this point, so it's like pretty easy and the classes were super small. I actually posted that on my close friend's story.
Oh no, I'm.
It's totally fine because it felt a little bit embarrassing because it was such a small class and it's training level. But Gus did a great job. Yeah, he got a little bit scared. The wind was blowing in a way he didn't like, but you know, he was really brave about it. So hats off to Gus. It really is you have to understand horses are flight animals. They don't fight, and the horse ancestors who survived were the really scared ones who started running at the first sign of danger.
So I mean it's written in their ancestral coat to be scared of things.
Like there's a nice metaphor there or something.
So that transitions nicely to what we're talking about today.
Sadly, we're actually talking about it. Yeah, yeah, your favorite topic.
You know, you would think I would be more excited about what we're doing today. I wouldn't think that we're talking about some pretty nitty gritty stuff when it comes to ETFs at the top.
No, we're talking about I don't know. I guess we're talking.
About well, we're talking about taxes and how to dodge them.
Yeah.
Yeah, we're also talking about derivatives enhanced exchange traded funds, which re chilled traders love because they're being hawked them on YouTube. And then we're gonna talk about Jamee Street.
You we're gonna start by dying on Jane Street.
Let's start with James Straw. I forget how you described it.
They're like vampire.
No, no, They're like these this secretive market maker that we read about all the time.
I do feel like Jane Street sort of went from nothing to extreme prominence, and like the course of my being aware of financial markets, and like there was a point where they were truly under the radar, nobody had heard of them thing and now there are several chapters of a Michael Lewis book. You know this, you know they represent fifteen percent of stock trading or whatever the numbers.
So they're pretty big, and they get a lot of articles about them because they're pretty interesting, and each of the articles has to say they're very press shy and at yeah, you know, they're not that pressure the information. Yeah, but I feel like the press they get is good in the sense that it's like, look at these guys. They make so much money. And my first thought was like, that's gotta be good for recruiting, but of course, like
it's bad for recruiting. There are a lot of people who want to go into finance to make money, and you want to hire the other people, the ones who are going to go into finance, like solve weird puzzles and like Jane Street, to be clear, I sometimes do puzzle hunts in New York City.
So what does that mean, Matt. It's a puzzle hunt.
It's like it's a little bit like dressage, but no, you like, it's like a scavenger hunt, but like the clues are weird.
Puzzles like geo cash.
I don't know, Okay, it's like a scavenger hunt, but a complicated puzzle cliss and it's a very financial industry thing. And like you basically you go and there's like eight teams from Goldman and like three teams from Jane Street, and then like a bunch of other hig freakoncy trading firms, and like it's always like Jane Street like a big puzzle hunt firm, you know, like you go to Jane Street.
Do they dominate the puzzle hunts.
No, it's like pretty competitive the puzzle hunts.
Cool.
Look, I think they're good at puzzle hunts. So it's like real puzzle solving people. If you do out too much of a reputation for being a giant lucrative pot of money, then you'll attract people who want the giant lucrative pot of money, and those people you might hypothesize will be worse at solving puzzles. I wrote something like
that and someone emailed me to say, you're right. I've known people who worked to Jane Street, and like, early on it was people who liked puzzles and didn't like staying that late at work, and then they made more money, so they got people who liked money and want to stay later at work. So the culture has deteriortor oh my god, in the sense that people like work harder and make more money.
Well, I was going to say, like, how do you control for that in the interview setting, Well.
You ask them puzzles.
Yeah, and you see if they're having fun.
Yeah, it's a little that's funny, right, you can't really, there's only so many puzzles can do. If you're not having fun doing puzzles, right, Yeah, you're really good at all the puzzles and you like don't have that sparking your eye, you're still probably.
Fine, right, there's not a certain light in your eyes.
Yeah, if you're just like grudgingly good at puzzles, you'll be okay, Yeah, fine, yeah, because the puzzles do result in money.
Yeah, if you work at Jane Street, do you have to like trading ETFs?
Uh?
No, Okay, well it seems like a lot of people at Jane Street do.
Yeah. But like Jane Street is in the news because the Ft had another like profile of them that had a lot of interesting facts and sort of quotes, and they do quote they're like head of fixed income saying basically like their business models, like they automate something and then they go up one level of abstraction and they automate that so they can sort of do higher and hire more complicated, more value adding things by like automating
all the stuff below it. And like that's kind of the common pattern and equities trading for the last twenty years. It is not really the pattern and fixed income trading, and like Jane Street has been kind of pushing bond trading to be more automated. But the point of that is that if you like solving puzzles and automating things, you don't have to care that much about trading ETFs because.
Like, you know, you're.
Puzzle. It's another puzzle. It's like you know, the computer is doing something amount of the ETF trading for you, or like some of the pricing for you. But it's clearly a place where people like the psychological aspect of trading.
One of the better pictures of Jane Street it comes from Michael Lewis's book about Sam Beckman Free who worked there for a while, and it's a lot of like puzzles and people betting against each other and people learning the perils of adverse selection firsthand by like having their interviewers like trick them. So you know, it's a it's a trading firm but it's not like people whose first love is ETFs like you, right.
Right, So talk to me about portfolio trading, where of course ETFs factor in mightily. Portfolio trading is something that I write about every couple of years and sort of relearn the mechanics of it every of years. When I have to write about it, I would say that I get it, but I don't understand it.
So portfolio is trading a portfolio of bonds. Basically, it's like there are investors who will need to sell a lot of bonds at once, right, who like their thing is not like I'm going to like slightly adjust the exposure of my bond portfolio, but like I'm an endowment and I'm moving from forty percent bonds to thirty percent bonds. I'm selling, you know, a giant pile of bonds, And
traditionally you would do that. You could call a bank and sell each bond and it would take a while because they'd price each bond and you'd sort of like pay a bit ask reread on each bond, and it was like inefficient. And people realize that trading a whole portfolio of bonds, you can price the portfolio itself. Rather than sort of think individually about each individual bond. And in particular, what people like Jane Street realized is like
they are all these bondtfs, bond ETFs. You can like hand in some bonds and get back shares with the ETF. The bonds that you hand in are going to be bonds that are supposed to go on the ETF. There's a lot of flexibility to create shares of the ETF because like a bond index, ETF just can never like
exactly contain the index. It's like impossible to recreate a bond innecks precisely like a big bond because like a lot of bonds, and like you know, you can't like buy fractions of bonds, and like bonds are not always out liquid, and so every bond ETF is going to you know, have some sampling where they're like sort of
tracking their index, but they're not exactly the index. What that means is like if someone wants to tell you a thousand bonds, you can go to an ETF and be like, overy this thousand bonds, would you like them in exchange for shares of the ETF, And the ETF will like do some math and be like, yeah, we'll take eight hundred and seventy six of those bonds and
then you just got rid of all those bonds. And so Jane Street and like other you know, bond market makers who are also ETF market makers can do this transaction where they will buy some pension funds a thousand bonds from them and hold some of them on their balance sheet, but also squash a lot of them into an ATF get back these like very easily tradeable, fungible ETF shares, And so they've like kind of turned this complicated problem of buying all these bonds, they've reduced it
mostly to a similar problem of like selling ETF shares. So it's a much more efficient way to do it. And it's become a big part of bond trading in the last like ten years. And it's like very electronified if people are doing it with computer models rather than like putting their finger in the air and trying to figure out how much each bond is worth. Yeah, it's like a move to like kind of equities like trading for bonds.
Yeah, and it hinges on the creation and redemption mechanism that is inherent to ETFs.
I'm not sure it always always does, because like you could sort of have the same concepts and just hold the bonds in your balance sheet. But yeah, and practice.
Like a huge balance.
Sheet and is like using an ETFs as kind of the balance sheet to.
Buy My understanding and maybe this is because you know, I'm coming from the ETF perspective, is that portfolio trading picked up in a big way as bond ETFs.
No, that's right, that's right. Yeah, that's right.
Yeah, that's right.
It is. It is very closely linked to ETFs.
I'm kind of surprised that portfolio trading isn't bigger though I know it's becoming a bigger part part of overall bond trading, but I think it's still in like single digit percentage of overall bond trading.
I mean, why did you trade bond?
Why did you trade?
You know, I've written about this acause I have been thinking about private credit. Like there's historically you buy bonds, you know, like a ten year bond. You you know, You're like, I have a ten year liability, so I'm going to buy a ten year bond to match it, and I'm just hold it for ten years, right, So why do you trade bonds. I mean, one reason you trade bonds is because you are a pension pond that's like decided to move some of your allocation out of
bonds or whatever. But a lot of the reasons you trade bonds is like you like a particular bond, right, Like you're some sort of like credit fund manager where you are making some sort of relative value trade that one bond is good and one bond is bad, and so then you're not like, oh, buy my hundred bonds at once, right. But yeah, I mean there are a lot of people who have needs to move whole portfolios and that's becoming a big business.
Oh let's talk about the fact that Jane Street doesn't have a CEO. We've talked about this before. I do love it. It's so cool because again you think about this secretive trading firm. Paik As the Ft says. I feel like the fact that they don't have a CEO and they're run by like this like faceless entity does kind of add to that image.
You know they have, like they'd like four founders. Yeah, couldn't name them. There's one guy who's still there's like one of the founders. And for a while I just looked yesterday and he doesn't shop up on LinkedIn or I couldn't find him, but like for a while, his LinkedIn just said like I had his name, and it's a like Trader had like quantitative trading for him. It's
like a top resident, like a top linkin. I was thinking about that when I was writing about the guy who has been suing David Einhorn or green Light for months because he wants to call himself the former head of macro at green Light and green Light is suing him and he's suing them and it's a mess, and it's like really really good trolling, and it's like one way to live is to like sue, to be able to call yourself the job title you think you deserve.
Another way to live is just trader on your LinkedIn. Like it's a different it's a different level. But yeah, they know have a CEO. They run everything by committee. I don't know, like I wrote this, like it just they give off the impression of just being like a group of buddies who'd like to solve puzzles together and like the puzzles create a lot of money for them, right, it doesn't seem like a traditional like hierarchical you know, business organization.
Yeah, specifically, the company calls itself a functionally organized structure consisting of various management and risk committees. Just amazing. I mean if this was a smaller company, I'd be like, I don't know, I don't know how long that can last. But obviously they're doing well for it.
That feels like the sort of thing that can last more easily if you're a smaller company, right, I mean, like one thing in this a FT article is like they've become really big. It is harder to be non hierarchical when you have that many people. You know, a lot of how that business works is like they all trust each other and so there's not a real, you know, deep hierarchical supervision. And that's harder to do if there's
three thousand people instead of three hundred. And also, they make so much money, and so all those people have grown accustomed to making a certain amount of money. And the article's like you they're one like even flat year, and people are going to be really dissatisfied because you know, you're sort of relying on the money growing every year to make everyone.
Yeah, I guess why I would be skeptical with a small company is just because I would assume human ego comes in at some point where like one guy or gal wants to say I'm in charge, it's me, I'm I'm responsible for our success and I call the shots.
That's just this trait a large company, except that there's more people might want to do that.
But I guess I'm saying I'm obviously it worked for them another large company and it's still working. Is there any conditions under which where this couldn't work for Jane Street?
Oh?
Yeah, when it happens, we'll talk about it. Yeah, let's talk about taxes. There's a really interesting ETF filing this week, the Cambria tack. So we're ETF and Matt what you were describing with portfolio trading, where you know, this big institution comes with this like big basket of bonds, maybe random bonds, they give them to a Jane Street and then they get ETF shares in exchange. That's kind of
like the process of this ETF. And I have to say, I'm not familiar with not that familiar with swap funds or exchange funds, but this is basically those. But in the ETF wrapper. Maybe you can make heads or tails of this.
Yeah, So a swap fund is like conceptually you have like a big undiversified stock position. For instance, you work at a company and you want a lot of your own company stock, and you want to get out of that position and like get into an SMP five hundred fund, right, you want to diversify, and so to have a more normal diversified portfolio and not just on your own company stock. Then natural thing to do is you sell the stock you buy n SMP fund. But when you do that,
you pay taxes on your stock. And if it's you know you've owned it for all time, it's appreciated a lot. You pay a lot of taxes. People figured out as like if you contribute property into a partnership, when you form a partnership and you get back shares of the partnership, this is not taxified, but that is come on and make it so that's not a taxable transaction. So like you don't have any gain, you don't have to pay
any taxes. You just get shares of the partnership, and when you eventually sell your shares of the partnership, you pay taxes. And so what people do is like they get ten tech company employees of different companies and they all put their shares into a pot and they get back ownership, the partial ownership of the pot. And so now instead of owning their undiversified share in their own company, they own like a slice of shares of ten companies,
and so they have a more diversified portfolio. And these ETF guys realize you could do that in ETF where basically you go out to like a bunch of retail investors who have portfolios at like Fidelity or whatever where they own not like a bunch of ETFs, but they
own like you know, Tesla and Berkshire, Hathaway and whatever. Right, Yeah, and they can all PLoP that into a pot and get back and the pot is an ETF, and they get back shares of the ETF and now they go from having a fairly short list of holdings to having a more divers like a share of a more diversial plot set of holdings. And yeah, pay taxes.
So the part that sort of breaks my brain is the CTF. The ticker is tax which is a great ticker. I can't believe that that hasn't already been used expected to launch in December. So it's going to run a strategy that favors value and quality shares with low or no dividend yields to avoid being taxed on those payouts. So what people come to them with the stocks that they own aren't necessarily the stocks that are going to be in the CTF.
I guess that's right.
I mean, unless they're soliciting people with specifically value in quality shares, well, I think they are.
There are some limitations on you know, you need to have like a certain amount of diversivation in your portfolio already, so there are limits. I'm like what you can bring in, Like if you come in with like I only have Tesla, they'll say no, yeah, but yeah they can they can rotate out of stuff. We talked on the podcast a couple of weeks ago. I was like, I used to own I call index mutual funds. Yeah, and I've moved
to ats because they're tax advantages. If you get emails about like what are the tax advantage, the tax advantage is like when someone puts money into an ETF, the ETF doesn't go buy like the underlying stock, and when someone takes money out of the ETF. The ETF doesn't sell the stock. There's this weird creation in kind creation redemption mechanism where like Jane Street goes and buys the
stocky and like contributes it to the ETF. And the reason for that is like there's like these weird old tax rulings saying that if you do it in this way, the ETF doesn't incur capital gains taxes on the stock that it gets rid of because I'm not selling it, it's getting rid of it. And and so people in the ETF world are very focused on like never selling stock. So you know, if you contribute sty to this ETF, the ETF might want to rotate out of that stock
into something different, but like they can't sell it. That's not necessarily a problem because as like Bloomberg's Zach Miter has written about, there is a mechanism for an ETF to say I don't want to own this stock. I want to own that stock. And basically what will happen is, like, you know, a Jane Street, an authorized participant will come to it with the stock it wants and hand that
in in a special creation basket to get new shares. Yeah, and it'll take out a redemption basket of the old shairs so that you can it's called a heartbeat transaction. Oh god, it's a way for them to avoid every selling stock. So it's a long answer to your question. Yes, they can move from what people put in to what they want, but they have to do it through these like in kind creation and redemption transactions because the goal is to never pay taxes. Not never, but you know, yeah, defer taxes.
I mean that's my understanding. Is that again, like you can bring them whatever I mean, not quite whatever, but yeah, and then they magic it into value shares.
Yeah. I'll also say I wrote this much like with the bond ETFs, they don't have to like have an index and then like mats that index exactly right, Like they can you know, if you bring them stuff and you're like, yeah, it's pretty value eat, then they can just.
Hold that, right, doesn't emulate the spirit.
They don't need like zero tracking ert or whatever index they have, because like they're giving you something else, right, They're giving you this like tax advantage, So like yeah, if you have like a little tracking.
Ert, it's fine, I do wonder. So the idea is like they're going to have these investors with these stocks coming to them. I want to know, like, how are they're soliciting yes, people to come to them. Is this like a builded and they will come situation? Do they have people lined up already? I wonder how much sort of chumming of the waters that they've done.
Yeah, I don't know. My sense is that this is like an advisor's product, right, Like this is like a thing that you can go out and pitch to financial advisors and like, oh, that's a great idea, right, and then like the financial advisor is like a cool thing to tell her client, you know, like if you want to diversify your like portfolio of six stocks, here's a way to do it without paying taxes. Like that's a cool piece of value added advice for the advisor to
give the client. It's not necessarily something that you watch a YouTube tutorial about and then and then do it.
Right, Are you trying to transition?
I think I'm trying to transition.
Well I have a few more things, Okay, So in the same way, like I wonder how many people like they've already lined up or maybe they launch and then they go out to the financial advisors et cetera. Or maybe they're already in touch with that network. It's interesting and fun to think that, you know, you and I could go just buy shares of this ETF for what reason, I don't know why we would, but because it's an ETF, anyone can buy it. There have no control over who actually owns this thing.
Yeah, nor did they care. I mean, they love it if it's just more people bought it.
But wouldn't that be weird if they did a little weird?
I mean my assumption is it's like any other equity. I don't like the tilt towards value, right, just want to own a value You after me like this one's performance is good. Maybe you have a thesis that is, like the people whose accounts at Fidelity have a lot of concentrated appreciated positions are really good investors, and this ETF will somehow attract their really good portfolios and it will have a it will have a better portfolio through like the wisdom of the crowd of.
People with Yeah, maybe it does. It's a little shaky, I would say. I just I wonder about the retail investor, who's you know going through one.
That if you're just like browsing. You know, robin Hood, and you see a thing with a ticker tax Like, that's pretty good.
Yeah you might.
You might just buy it exactly. I like, I like not paying taxes all Yeah.
I am fascinated. So again, according to this article written by Justina Lee and Wildna Hirich, this is expected to launch in December. I am so interested to see how big it gets, if at all, I don't know. It's interesting. First of it's kind an etf land.
You do need people to buy it, yeah, like, I guess the point of it is actually to let people transform their parts, yeah, like actualist and then hold it for a long time and not pay taxes. But eventually you want to be able to sell.
The thing, right, But I imagine that's where the bulk of its asset growth will come from.
Yeah, and those people will be sort of buy and hold investors because their whole purposes do not pay taxes. Yeah, you don't need.
Anything to buy it.
So how about YouTube? I mean, I don't know if anyone's going to be uh pitching tax on YouTube? Maybe though, But anyway, this isn't a good segue. Help me out?
Was good? So the taxi thing is interesting because, like as I said, it does kind of feel like a financial advisor product, right. It feels like the sort of thing that like you're like, I want to diversify, and your advisor's like, wait, let me show you something.
Mm hmmm.
A lot of ETFs are almost the opposite of financi advisor products. They're like a way to let anyone with like a Robinhood account buy a thing that you could historically have gotten from a financial advisor. And so if you're like in a sort of like somewhat upper tier financial advisor relationship, they will sell you all sorts of weird derivatives if you're willing to listen. And these are
called structured notes. And there's actually like a recent court case where like the founder of a big tech company is like wealth advisor, like First Republic put all of his money into like these terrible structured notes that like paid like five percent fees, and like they kept you know, they're like four year notes, and they kept rolling him every nine months because they want to get new fees.
That business people there's some skepticism about that business. But anyway, you can get like all sorts of weird derivatives from your financial advisor in the form of structured notes. But historically you could only get that from like your financial advisor. You could just go out in the market and buy
all these weird derotas and ETF. People realized that they could sell a lot of these weird derotors to people in the form of ETFs, and that people had a deep hunger for that and would go on YouTube and watch videos about like buy right strategies where you like, you know, buy some stocks and then you sell call options every month and you get you you know, as they say, earn yield on the stocks, yeah, which, like anyone in the options the world will get really angry
if you say you're earning yield by selling options, because that's not like yield. Yeah, good people do it. Or like, you know, there's like we've talked, i think on the podcast about buffer ets we have, which are like you buy a stock and you kind of collar it, or you buy the SMP and you put a collar on it, so you can't lose that much money, but you also
can't make that much money. Yeah, And there's other stuff, you know, like the liberty ets, which you also talked about, are just you know, they're essentially Derodo's products, and you can sell all that stuff to retail, you can package it into an ETF and then anyone who wants to can buy it. There's a guy in a Bloomberg article saying it's like potato chips, it's like sneakers. Anyone can
buy it, which is not historically true. A lot of like, you know, products that financial advisors sold, and so they talk you about like democratizing access to this stuff that before you have to have an advisor, you know, you have to have a relationship with a bank. Now you can click a button on your Robinhood account. And the downside of that is like you might wonder do people know what they're getting? But one, they can read read it, and watch YouTube where people will tell them probably a
great length, what they're getting. And two again this business, as a financial advisory business does not have an unblemished reputation. Like some number of financial advisors also wouldn't tell their clients what they're getting, but they would be proving their hands together about the five percent fees, and then like clients would get blown up on these things. So it's like, yeah, buy like the lower fee, you know, relatively more transparent ETF version of it. That's so bad.
Yeah, there's some great reporting in this article because Denisa Taykova and Fildna Hirich again wrote this piece. So they watched all the YouTube videos they you know, scraped Reddit, et cetera. They found thirty eight year old Todd Aken. He has a growing YouTube channel that promises to teach followers how to feed off these lucrative ETF payouts in a diversified portfolio. I let the dividends replace my nine to five. That's the motto. I live and die with the results. So I was.
Surprised dividends are technically it's like hm hm, it's like technically a horse. They're technically dividends in that they are difidends from the ETF, but they're not like did they're option.
Let's talk about that a little bit. I mean, they did quote some people who were criticizing that, and one of the big criticisms of these is that it's return of principle, right is the fancy word for it.
It's not return of principle either, it's.
What is it? Then? Is it to prenou Is it return of capital?
But what I'm yeah sorry. As a tax matter, it might be return for I don't know. Yeah, but like you know, a lot of these ETFs, what happens is that like every month you get a ten percent cash distribution and also the value of the thing goes down by eleven percent. Yeah, but what it is is that it's option premium. Like you're selling options every month, and like if the options move against you, then you lose more money than you may but like you get paid for the option. Yeah.
Well to that point, they have a great example in here. You take a look at the Yield Max Coin Option Income Strategy ETF. It's based on Coinbase. I believe it's sent more than one hundred percent of its current share value back to holders as cash in the past year. That's despite the fact on its holtal Road turn bas is so far in twenty twenty four it is trailing coin Base itself.
It's down and absolutely dums too. Yeah, the coinbase is up, this thing is down.
But does the end investor care if they're getting cash back in some form, like they're getting a payout in some form, Do they really care if it's not.
They're getting back less than they put it? Yeah, it's they yielded more than one hundred percent of the current stock price, but it is less than one hundred percent of the block price a year ago. They've gotten back less than they put in.
Yeah, well that's what I struggle with, and I don't know if I want to keep this in but.
Like not yield. Yeah, it's option premium. Like you buy a stock, right, you sell options on the stock, so you get paid five ten percent of the value of the stock in option pain. Right. Then if the stock goes up, you don't get most of the gains of the stock going up because your gains are capped at the option because you're selling out of many co options.
If stock goes down, you take that entire loss. You do this every month, right, So every time the stock goes down, you take the entire loss, and then you sell options struck at like whatever ten percent above the current price. And so the stock goes down, you sell options struck below where you start it okay, and then the stock goes back up. You don't get back to where you started. You do get some option pain. It
is over and over again. You have a very ball stock like coinbase, where it goes down a lot you lose money goes up, you don't make all the money back. Keep doing this, you keep getting the option premium every month, which is valuable, but you lose much of the appreciation of the stock, and you bear all of the losses
of the stock. And over the course of a year coinbase goes up, you don't get most of the games, but you do get the losses every time it goes down, and you end up making back less than you put in, even though you're getting paid option premier every month.
But I guess like that option premium every month is enough that these people keep buying because these things have exploded they are so popular.
Well, this is like a classic strategy, right, I mean, like this is by writing. Right, It's like you buy a stock and you sell call options. And I was thinking about, like one reason this thing exists is like you can just do that yourself. But if you do it yourself, you have to sell like one hundred share.
You know, options contract is one hundred shares, and so you have to buy a hundred shares of coinbase, which is like, you know, seventeen eighteen thousand dollars and so this so you know, you can buy one shot of the ETF if you want, and so do you get the same exposure for a lower dollar amount. So it is a popular strategy, but it you know, people talking about it as a volatility defending strategy, which kind of
is because you get the premium every month. It's like when the stock goes down, you don't You're don't really shield that, except.
Yeah, I do like that. They quoted Hamilton Rainer in here. So he manages Jeffie, which is like the JP Morgan equity premium making ETF, which is.
A totally normal by right, started.
This whole craze. One of the things that really contributed to the boom, and these types of ETFs. And he's so funny because he's he's kind of old school, like he managed these types of strategies and mutual funds and
then brought them over to the ETF rapper. They have been enormously popular and it's become this like Frankenstein's Monster sort of situation because obviously he doesn't like things such as the yield max coin option income strategy ETF, and he's quoted in the story saying that, like, not everything needs to be in the ETF rapper et cetera, et cetera, and these types of funds are a good example of that in his view of what doesn't need to be in the ETF wrapper.
But why not you know, like strategy feels a little gambling, right, This is a little bit of like a you know, like a retail day trader gambling product. But if people want that exposure, Like why should they have to trade one hundreds share lots of options? Why not do it in the ETF forum. Yeah, I don't know.
Yeah, this is like let the people trade.
You know, like the people selling these things talk about democratizing these financial products, and I don't love these Like I wouldn't buy any of these things, but like that's just me. Like it's so clear that there is a demand for this stuff, and you don't want to be too dismissive of it because it is people like watching
YouTube videos and like learning about this stuff. As someone who like grew up in the world of equity derivatives, it's impressive how like widespread colledge of equity derivatives has become the world of redhead. Right, there's like some truth to the idea that this says, like democratizing sophisticated investing strategies. Now, they're not always good investing strategies, right, And that was the Money Stuff Podcast.
I'm Matt Levian and I'm Katie Greifeld.
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