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Tracy, we have been in a leather jacket.
Yeah, well it's not just a leather jacket. It's a black leather blazer with sort of braided edges. It's got a little bit of a wait, is this an insult or a compliment? I don't know, a little bit of a little bit of a Ren fair Field.
Absolutely, that's a big to a volatility nerd. That's a couple.
Okay, good, all right. I was a question.
This is like one of it that would be a very polarizing not to me.
I do not have renfair vibes. But look, I respect it. These are renfair time, These are fair times. I get it. I get it.
Absolutely. There's pictures of me on Twitter in you know, Nightingale armor with his swords, So I think this is a fair game.
I did a deadlist.
I'm both the most popular trader and most successful trader at Citadel. That is going viral, barges.
This isn't after school special.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US Black Goal. These are the important questions that robots taking over the world.
No, I think that like in a couple of years, the AI will do a really good job of making the Odd lotch podcast. One day that person will have the mandate of heaven.
How do I get more popular and successful?
We do have.
You're listening to lots More where we catch up with friends about what's going on right now, because.
Even when the Odd Lots is over, there's always lots More.
And we really do have the perfect guest.
We are, of course with Ben Eiffer qv R Advisors. Then who's been getting steamrolled the most by this market? And I have some thoughts on this market, but I want to hear your No.
It's a super fun market. I mean really, First you had the deep seak thing, yeah, right, and that was really interesting because equity markets went down, but the fund was all under the surface, right, what did we sell off eight or ten percent? And index? It wasn't a huge deal, but there were like eight standard deviation moves in market, neutral factor type relationships and crowded equity long short and so you saw you know the type of
people that had the really popular equity positions. You'll Nvidia and you know Tesla and all these kind of stocks just get really really murdered. You heard of a lot of pain at the big multistrats. Again you have to put that in context because they're pretty well risk managed. The losses weren't that large in percent terms, but you had again just very very very large moves. And then I think the interesting thing about that was that led
to a lot of d risking in hedge funds. So you had pretty high gross in net leverage coming into that and then it came off quite a lot, you know, a lot of d risking. And then when you know that when Liberation Day hit, I think positioning wasn't nearly as you know, as offsides as it could have been otherwise.
And so you did see obviously big drawdowns in the equity market and big rallies back a lot of volatility, but I think, you know, the losses that you saw among head funds probably weren't as bad as they would have been otherwise. Another interesting thing to note, and we you know, we talked about this a lot. There really isn't that much of the kind of super crowded short volatility, short tail risk, tail risk selling kind of stuff out there that there was, like in twenty nineteen twenty twenty
for the pandemic. So you didn't see that those kind of fireworks right there. Weren't like hedge funds getting liquidated and people getting carried out in body bags and big auctions of all their positions making markets go crazy. You just didn't really have that kind of stuff. What you had was a pretty fundamentally driven, you know, orderly sell off, followed by you know, goofy rallies back and forth on Trump tweets and what's he going to do and all
this kind of thing. But it was really, I think much more about about you know, fundamentals of expectations of what is policy really actually going to be and how much does that matter for the economy as opposed to like technical positioning hedge fund blow ups and people getting steamrolled.
Yeah, I feel like the positioning point is really important and is probably one of the reasons like we had, I'm doing air quotes here, but that orderly sell off versus something super super chaotic. But that said, I mean we're talking about it being a fun market. I feel like I have to make the obvious disclaimer, which is, I'm sure it's very fun if you're in options and
in volatility trading. But if you're in the sort of long term buy and hold game, this feels almost like an impossible environment to navigate, right, Like one day we're up two or three percent, the next day we're down two or three percent. Everything is riding on like what Scott Besson says, what Lutnik chooses to say, and god knows, you know what Trump is going to say in his latest press conference very much so.
And you know, and in today too, it's like, well, yesterday we were up three point two percent and then there was a bunch of walking back of the unilateral terra production position, and then we sold off, you know, halfway back to flat almost immediately. I think there were I think someone.
By the way, we're recording this April twenty fourth, it's ten oh eight am.
Every time we have a Yesterday.
Or something that's right, very good point, keep going yeap, So we had I think just this morning I saw an article I think Alexander wrote it at Bloomberg saying, you know, we're in a traders are trying to trade Trump tweet's market, and that's really hard. You know. I think that generally speaking, anybody that you talk to the success rate of sitting there at your computer and looking at what just got tweeted or what article just came out, and then sort of doing trades and making money, Like
nobody makes money at that. It's incredibly difficult, right, It's a very choppy market. The people who do, of course, as you point it out, volatility traders have a very non consensus view on what's fun and what's not right. We love this, but yeah, I think that's.
Your definitions of fun may vary.
Exactly back to the renaissance fair point.
So, I thought there was a very interesting point about deep seek, which is that what it really obliterated were the market neutral factors that had been working on. That is very interesting, And of course, you know the pod shops that we're always talking about, their game is to find those market neutral and then this was a thing that just rearranged everything.
You know, when you're on.
Before you talk about the TikTok option influencers who are always looking at various Greek letters like alpha, beta, Gamma, delta, Epsilon's zeta, ata, theta iota, Kappa, lambdamu when oopsilon is trading way out there on some extreme all these trades are premised on some sort of mean reversion that there isn't a dislocation, and then eventually a normal returns, right. And it may go further out and the sigma and the row may get further blown out, but eventually they
come back to normal. How much of this is like a crisis of people really don't know that some sort of fundamental economic mean reversion is coming.
Yeah, I think that's something really important to that, right. I think that people are very conditioned in this market of the last many many years, really post credit crisis, right, that that sort of nothing ever happens. We talk about this a lot, right, but that any kind of sell off will be immediately bought, It'll immediately come back, any kind of all spike will get sold. And you know, even in the pandemic, obviously people got run over on
that view, but we still did come back. It's just that it got really crazy for like a month, right, Yeah. And I think this feels very different, where this isn't a flat in the pan with a technical squeeze and a big explosion of stuff like this is. You know, there are the real fundamental issues here, which is that you know, the US government is out there doing totally crazy economic policy that every economist in the world for
the most part, will tell you is totally crazy. And they're also changing the goalposts day to day on what exactly that policy is going to be, and they've really eroded the market's confidence that they kind of know what they're doing, not only on tariffs, but I think on everything else now, right, I think that one of the most important things that Liberation Day did was, you know, take the market, which really up to that point, I think you have to say, kind of believed that the
tariffs thing was like this four dimensional chess strategy and negotiation and everything else crazy that Trump was saying, you kind of discount, right, because he's not really going to
do that. He's got a plan. And really the market really had to re rate that whole expectations of how to interpret everything that Trump and his administration say or say they're going to do, because gosh, they said they were going to do this crazy tariffs thing and then they did it five times crazier than everybody thought they
were going to do. Yeah, right, and not just crazier in terms of levels of tariffs, but in terms of like the clownishness of implementation, right that like the chat GBT night before tariff table with the Penguin Islands and
like the whole thing. Right, So then when Trump is out there saying, Okay, tomorrow, you know, next week we're going to deport thirty million immigrants or like whatever crazy thing that he says, the market kind of has to take that more seriously now, right, or at least question
like what are the possible implications? And so I think it's a very different environment going forward, right, It's unlikely that that's going to just change and that he's going to suddenly turn into like a really serious guy.
So, speaking of things being weird, and there are any number of weird things that we could choose to talk about here, but like one of the weirdest to me has been what's been going on in equity volatility. So we've had a very big gap between the VIX, which is implied volatility versus realized volatility, which you know, like maybe explain the difference to us just to begin with, and like why we've seen that gap really developed?
Sure? Absolutely, So the VIX is up is something that everybody talks about, but not everybody really thinks about exactly what it is, right, it's the fear index. But what it is is it's a level of what's called implied volatility. So in some sense you could think of it as the market's forecast for realized volatility over the next month based on option prices. It's a little bit more nuanced, though, because calculation that they chose for a VIX isn't regular volatility.
It's something called variance, which is volatility squared but then normalized back into units that are volatility. And the distinction there is that it's so the level of VIX is the level of what's called the variance swap, and a variant swap pays you, as a volatility trader who buys it proportional to the square of volatility. And so what that means is if volatility doubles, you actually make a whole lot more money, or if volatility goes up by
four times, you make a ridiculously amount more money. Yea's right, there's a big slope to it, and so you have to pay a big premium to buy a variant swap relative to what you would pay to just buy volatility. And so when you compare the VIX to realize volatility or how much markets are moving on average. On average, there should be an extra premium there. It's not just
direct comparable. Now to Tracy's point, though, realized volatility recently has actually been generally much higher than like the average level of the VIX. Now, the VIX did spike into the fifties kind of briefly, but it's mostly come back down into like the thirties and high twenties. But yet markets are often moving you know, three percent in a day or four or five percent in a day, which implies a much higher level of implied volatility.
It's a crazy chart. So you can you can chart on the Bloomberg on your handy Bloomberg terminal, like the Gamma index versus the VIX. You could see that like the jaws kind of opening over the past few weeks.
Yeah, very much so. And again that's really reflects a you know, aggressive bet on the part of market participants that realized volatility has been high, but it's going to be lower over the next month than it was, and it's and actually the degree to which you see that in your chart is understated because of that variant swap effect.
You're actually not really even comparing the right number with the right number to compare would be like at the money implied ball, which you can also plot in Bloomberg.
Oh what's the ticker for that?
So you would just do SPX index and then you would do there's going to be a field for it, which would be like one month, one mt h something something field.
But yeah, oh awesome, Yes, this is very useful.
Thank you. There you go, And that guy will usually be anywhere between say three and eight or ten points below vix, depending on the level of X. So with VIX at fifty, that's probably at forty or thirty eight or.
Something like that. You know.
Tracy and I we put on events, trivia events, et cetera. One of the dreams that we have though, is a Bloomberg terminal live company competition terminal Olympics where we get like twenty traders and they're all seated at a terminal so good calculate actually, and they always flashes on a screen who gets the answer first?
Like, how well do you know?
So that would be such a good tea.
I think we think Ben for coming on if nothing else, to give us quotes and news about functions for when.
We eventually put this on.
I don't follow like you know, the Wolf of Gamma or whatever on TikTok you've seen anything good?
What are they saying they got?
They all got real quiet?
What are you seeing out there? You got any good? Like tweets or you know sellers or whatever.
Seriously, so as you know, like on a regular basis in normal environments, like everybody is tagging me in ridiculous like tweets or Instagram posts or whatever that that these kind of option selling influencers are making, you know, the
coal options grind guy and like all these people. And as of you know, a couple of weeks ago, there's just absolute crickets from that community because the types of trades that you know, they they advocate, as we talked about last time, you know, they make a little bit of money on average, you know, for a while, and then they give it all back or twice as much back when something like this happens. And so there's not a whole lot of talking coming from that crowd, and
you see it reflected. You know, obviously you can't see what you know is how happening to those highly over leveraged individuals that are unfortunately following that kind of advice. You know, you can look at how well like covered call ETFs are performing relative to just the underlying and things like that to get a little bit of of
a little bit of a sense. You know, look at the mstr covered call ETF for example, right, And it's just bad because the worst possible environment for those kind of strategies is when you have a sharp spike in realized volatility, and especially if there's like a lot of chop and back and forth, you know, mean reversion, right, because you'll have a situation where where they're selling like these weekly options, right, and you have a really big sell off for a week, they lose a bunch of
money on their puts, and then they sell some calls and you have the big rally back, and then they lose their money on their calls. And again, none of this is like something that they explain to their followers. They just sort of tell their followers that the income of the strategy is like the option premium that they sold, and they don't conceptualize the possibility that you can actually lose money when you sell the option.
Tracy, every once in a while, I'm reminded that we exist in world where there's like fourteen ETFs.
That are based on various doing things.
Micro strategy is crazy amazing anyway, Sorry, well, also.
I'm still blown away by the fact that micro Strategy also calls out the volatility and its share price in its earnings call as like a selling point.
Look how volatile we were in circuits and it's beautiful, right, But I mean Sailor is very smart, right, so Sailor understands all this stuff perfectly. If you if you can run a really really high volatility company, yes you can. It means hedge funds love your convertible bonds and will pay anything to get your convertible bonds. Yeah, it makes your actually makes your credit cheaper.
And I gotta say, if people want to hear more about this, we did record a lots more with Matt Leveeh.
It was a great episode.
God, it feels like so long. It feels like it was two years.
We get the.
Luxury of talking about micro strategy for a whole episode once.
Pretty amazing.
I feel like this is kind of the secret of volatility and options trading, which is like you think that a lot of these guys, a lot of these influencers would really enjoy this particular trading environment, but so much of it is based on that mean reversion that Joe pointing out that a lot of stuff just blows up when you finally get volatility right, it really does.
Wait not to come back to this, but MSTR. But did you see that there is going to be MSTR for Solana?
Yeah? Yeah, and they're yes, they're trying to I was.
I actually appeered on a crypto podcast recently and I was like, I'm tapping out this.
I don't understand MSDR.
But now there's a bunch of like copycats, and the question is can anyone really repeat this?
Yeah?
Yeah, but GSR just led a big round and to upa.
I just have to read these. Sorry, I have one more question, but I just before I do.
Here's some of the ETFs Defiant daily target two x long MSTR ETF yield max MSTR Option income Strategy ETF t REX two two x long MSTR daily target ETF bit wise MSTR income Strategy. Oh there's another one st key day, one hundred percent MSTR and one hundred percent coin TF. So I guess it makes us some coinbase in there.
There's a lot more. I just had to read those in last question for me, Like, if you're.
A long only investor, just a normal whatever investors I am, you know you have two choices I think, which is one the hope and praise strategy, which I always actually think is very legitimate because that does tend to work out over a long enough timeline. Or they're like, oh, I really need to think about diversification strategy or something
like that. Okay, in your world, don't you still have to have some sort of view because if the question is do some of these Greek letters snap back into place or there's a gap between where this Greek letter and this Greek letter are pricing to make money, don't you still need.
To have a view like I do.
That's a great question. So there's a couple of different important things here. There are different types of trades in the derivatives world that are driven by dislocations. Some of those trades make money on realized dynamics and markets and don't rely on some implied Greek coming back into Okay, right, so Tracy was talking about, you know, realized volatility and
implied volatility. This is like a simple dumb example, but just suppose that implied volatility was just always way too low, and realize volatiley was way higher for short term options. You would just buy short term options and hedge them all the time, and you would just make money constantly. Yeah, and you wouldn't need that to ever change. Wouldn't ever want that to change. You wouldn't ever want that dislocation
to go away. Okay. So there are some things like that that we can make money based on a dislocation but without requiring the dislocation to close. And then there are other things where exactly as you point out, you're trading an implied dislocation and you're going to only make money when it reverts. And for things like that, you know, we really have to think hard about, Okay, where is
this dislocation coming from? What flows are driving it? Are those flows that are going to be persistent and not go away and it's unlikely that those dislocations close. Are there fundamentals that actually cause that dislocation to stay there even if it doesn't really make sense? Or is this something that is being driven by temporary supply and demand dynamics in the market and you understand what might push it back over what kind of time horizon? And the
latter is an interesting trade. The former really isn't, And you actually have to think very hard about that. You can't just look at the level of the Wazoo parameter on a screen and sort of say, which, by the way, is the made up parameter that exotic derivatives traders you know, use to claim why you're losing money on your trade with them.
Man, I'm always looking at those parameters. That's a big mistake. Okay, Well I have a very simplistic question based on this conversation. But okay, implied volatility down quite a bit, realize volatility is still up quite a bit. Is buying vall that sort of hedging protection? Is that cheap at the moment? Like? Would you be a buyer at these levels? Basically?
Yeah, if you believe as I think I do, that Trump two point zero is not a low volatility president, right that one way or another, Right, this is different And that doesn't mean the world is going to end necessarily, but that this is not like a ten percent realized volatility market, and he doesn't want it that way, he
doesn't like it that way. Then yeah, I think you have to look at when you look at the overall volatility landscape, there are a lot of things that are relatively cheap, and you know, in our core business we're absolute return. We're always looking for what's cheap and what's expensive, and you know, hedge trades and so forth. But we also do help big institutional investors with tail risk hedging and with things that are outright defensive to protect their portfolios.
And yeah, there's still lots and lots of opportunities for that because really in this market we talked about this a little bit, but the knee jerk reaction of most market participants is that when volatility goes up, they just think you have to sell it, and they do a lot of risk on trades in the volatility markets, which don't necessarily make sense, you know, from a risk reward perspective. Most of the time, they should just buy equities, to be honest, if they want to be bullish.
Actually, you just reminded me. I mean, one of the other things we just saw was like this huge contraction in risk appetite across the entire financial industry basically around April second, that Liberation day. Who is selling vall at the moment, and have you seen continued appetite to sell volatility in the current environment, yeah, no very much.
So, so one thing that you can always tell is when you get a sell off like this and the VIC spikes a lot. So VIX went to a little over fifty. Look at where the front month Vick's future is trading, and that tells you whether people are buying
or selling ball. So the front month VIX future had you know, five or six days left to maturity early after Liberation Day, and it was trading at you know, thirty two when the VIX was fifty, right, So it was implying massive speed of normalization and mean reversion because everybody's selling it. And the VIX future is the best thing to look at because it's the tourist instrument, right, So you know, vall traders, you know, trade the VIX
inasmuch as there's dislocations in it. But if you're just a regular equity guy and you think ball is too high, you don't go trade options. Options are too much work. VIX is really easy, right because you can trade the ETFs, you can trade the futures. You don't have to think about like the gamma and the you know, the baga and all that stuff, and so there's an overwhelming appetite to sell ball on ball spikes from a lot of parts of the hedge fund community, from tourists, from volatility
tourists within the hedge fund community, and from retail investors. Also, retail investors are very much dip buyers and ball sellers on spikes.
Valdi tourists would be a good name for a trivia team one of our trivia nights.
I'm a Volatility that is a good A good name, be a fun one.
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