Hello, and welcome to another episode of The Odd Lots Podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, do you know what's coming up?
The Odd Lots pub quiz?
That's true? Also Valentine's Day?
This a little bit later on. What else? What else do you have in mind?
Do you do you celebrate the anniversary of Vollmageddon.
Do I celebrate it?
Yeah?
I mean who doesn't. No, I don't celebrate it. But that was such a formative moment. So that was February when.
Was the twenty eighteen six year anniversary.
That was one of our first like really good episodes where we sort of had a good We talked about what blew up the short vall etf XIV. I feel like we go back through our history. That was like an important episode.
Wait, don't say that was one of the first good ones, because we're doing this for your years before twenty eighteen.
You're right, We've had many good I think that was like a it was a highlight. It was a highlight.
Okay, yes, okay, Well, I do in fact celebrate the anniversary of Valmageddon because I always enjoy going back to tweets around that time, because there are a lot of volatility traders on social media who have very strong and often erroneous opinions, and one of the opinions they were
holding around January twenty eighteen was that everything was fine. Yeah, shortfall was this perpetual money maker, no issues with the two volatility exchange traded notes that eventually ended up blowing up, one of which was XIV, as you pointed out, and I remember tweeting things in January of twenty eighteen, stuff like if the VICS curve inverts, which was about to happen, this would be an absolute disaster for XIV, and I had a bunch of people pushing back complaining about the
axis on my chart, and lo and behold, about a week later, XIV not only blew up, but was dead within a couple of days and actually royaled the market as well.
I remember there it was very popular XIV, this vehicle, and there was a sound intuition about it, I think, which is that you know, is this basically betting against the VIX And you start with the assumption that Okay,
people systematically and perpetually overpay for downside protection. Understandable people pay for insurance and so you can harvest that premium basically by taking the other side, and that by and large, shorting VALL is a sort of like a good way to a way that people super charge their returns and look like a core thing is that when we talk about VALL, I think like we are mostly in life shortfall.
Anyone who owned stocks for a long period or any period is SHORTVALL, where sort of like VALL is bad for portfolios, et cetera. So like when we talk about specifically shorting VALL though, then that's where it gets interesting.
Yeah, So this is one of the things that I find very remarkable about our current moment, which is that you know, shorting VALL post the two thousand and eight financial crisis became a very popular strategy because you had low interest rates, so people wanted to pick up yield wherever they could. Yeah, you also had central banks out there in the market literally crushing volatility, So you knew that there was the put that sort of existed over the overall market, so why not try to monetize it.
There wasn't a lot going on up until twenty eighteen, so it made sense to bet on nothing, basically on things not happening. But what I find really fascinating about the current moment is we seem to be seeing a return of that short volatility trade. So you and I have discussed on this podcast these shorter dated options, one or zero dated options becoming incredibly popular, absolutely exploded voting in terms of volume. There's other types of derivatives that
are also becoming more popular. And yet when I look around at the market, it seems like there is so much potential for one off events. You know, the FED is hiking rates, we have geopolitical risk, as you know we always talk about, joke about on this show, supply chain disruptions. The chance of one off events actually happening seems greater than ever, and yet shorting fall is popular and measures of aall itself remain pretty low. The VIX is pretty low, the volatility of the VIX index, the
VVIX is really low. So I think we need to ask why is shortfall back, and why is it particularly popular at this moment in time, and what does it mean for the wider market.
Let's do it.
I am very happy to say that we do, in fact have the perfect guest. We're going to be speaking to Chris Sidel. We've had him on the podcast before. He is the co cio of Ambrose Group, and he is now officially one of my favorite guests ever because he brought us donuts. And if I sound more energetic than normal, it's because I'm currently on a sugar rush. And also I'm talking about volatility and you took us in this morning. I did not, although you tried to
get me on. Can you imagine if I had a donut ends in at the same time.
That would be bad?
Okay, Chris, thank you so much for coming back.
On odd Lots. Thank you so much for having me. So when we.
Talk about short volatility, you know, Joe and I discussed it a little bit in the intro, but what is the expression of going short volatility?
Yeah, the expression of going short volatility is taking a bet that the normality will continue, right, So effectively, if you are betting on long volatility, you are pretty much betting on the abnormality taking place.
So, I mean, I said it in the beginning, but I sort of think that most life and investing is implicitly short. Well, if you have spy in your retirement account, then you know you think it's just generally going to go up very time. That is normal. That is so as you but per your definition, that is an implicit short volatility. How does it get expressed in the options market?
And or maybe a question is why do people make that bet in the options market rather than just going the implicit route of being long risk assets.
Yeah, because I think it's something that generally pays off
the majority of the time. Within the spread as to how you can trade it, there's this embedded risk premium that I mean, sure people could argue that there's an equity risk premium as well, but the expression towards how you apply this, whether it's short s and p puts, short mixed calls, short variant swaps, it has a tendency to win the majority of the time, and this expression lulls market participants into very poor habits of expressing the training.
Imagine you have taken a trade and you're going to win ninety percent of the time, and when the trade is working against you, you're adding more size and you're adding more conviction. Over the course of years, when the trade is beginning to work against you, you have a tendency to believe that this is just another one of those cases right, It's like being rewarded for buying the dip. If you do it over and over again, you're going
to feel this conviction towards it. But in short volatility terms, eventually it catches up and it all goes wrong at once.
Yeah. The journalistic euphemism that was usually deployed is picking up pennies in front of a steamroller. Right, So why don't you talk to us about the numbers that you're seeing in the market. We say, shortfall seems to be back and bigger than ever. What are the actual figures around that?
Yeah, So I think it's important for listeners to have a little bit of an understanding of my background and why it is we track these numbers. So I was a prop trader on two different desks camera securities in Xanthis Capital, and then I went to a large Canadian investment bank. I spent three and a half years there and most of my time was spent trading exotic derivatives.
Then myself and a couple of my partners who are XCTC excitadel guys, we got together and we said, hey, we could run this carriy neutral tail restrategy, which effectively when volatility is exploding, it's going to have this massive return. But when markets are dormant, we use a lot of short term proprietary trading to be flat. So you'll have foundations, high networked individuals, family offices that will use something like this as a hedge in their portfolio.
Right.
Because of that, we need to understand the derivative market microstructure and also the ecosystem, understanding how certain agents in that ecosystem are participating with one another. So over the last year, would start to come up in the data was that the short volatility trade was coming back in
huge size. So when you think about the SMP complex, in the VIX complex, the net short VEGA notional today is two times higher than when it was during January of twenty eighteen, which was the month right before VALLMA, get it.
This is when we're going to have to define vega. We should just do all the Greek letters, just cut them out of the way right now, but vega.
Yeah, So in VALL terms, right, think one point of a VALL move and how much you'll make or lose. Okay, right, So if your net long a million bucks of vega and volatility moves up one vall point you'll make a million bucks vice versa. Right, So what that's saying today that number the netting short exposure is two times higher than where it was during January of twenty eighteen, which is right before vallom again. Additionally, and I sent you guys this chart from Morning STARU, which is such a
crucial chart in my opinion. These derivative income generating funds, the AUM in these have increased by over ten x since January twenty eighteen. Right, that's another sort of fact that's pretty insane to think about.
What's the definition of a derivative income fund?
Yeah, so it's the same thing as to what we were talking about at the beginning of the pod, where we said different expressions towards harvesting these volatility versus premium traits.
It's intuitive to me why there was so much interest in these income generating deriative strategies during the ZERP years when you couldn't just generate income by going out and buying a government bond. But now you can get five percent or whatever. So why is the like, why do people go to the exotic route for income generation when they are very plain, vanilla things that actually pay yield these days.
I think twenty twenty one is a year that will go down in the derivative history books because what happened during that year was you had a slew of new mandate additions between large foundations, pensions, rias, endowments, mainly because of what transpired in twenty twenty. You had a really big ball move in twenty twenty, and then also in Q one of twenty twenty one, you had the whole
Meme Stock sort of debacle. So if you were a large institution that did not have exposure to derivatives and that type of mandate, you almost looked at as archaic in a way, right, So at that time, a lot of these institutions said we want we want to start
trading options. Simultaneously, what was going on was the exchanges started listing more and more tenors, right, so you started having seven days till expiration options, five days till expiration, zero days till expiration, and a lot of the consultants at these larger institutions started realizing, well, back in the day, if we wanted to sell a twenty percent out the money SMP put, we have to wait one quarter to
collect five bucks in premium terms. Right today, we could sell a zero DT option for fifty cents and do that twenty times over and over and over. And what this does on paper is that it changes the path dependency, right, so you really won't get hurt for one little thing happening at the end of the month or the end of the quarter. The problem with that is that on paper it looks like that, but when you run certain correlations you realize that you're still taking the same exact trait.
Because if you wake up tomorrow and you say balls are up five ball points across the wall surface and the term structure, you're going to realize that seven days till expiration option and the one month till expiration option are both going to be negatively impacted.
Maybe this is a good chance to talk about the ecosystem of the options world. So, setting aside the derivative funds which are buying these things, someone is also selling them the options. Usually the market makers are the dealers, So what is the role of market makers in this process?
And then also I'm curious how cheap it is to go short volatility in general now, because this was also a hallmark of the twenty tens, which was it was pretty cheap to do these trades, right, and so that was also another part of the appeal, like why not just pick up a little extra yield for not that much more?
Right? So, in the ecosystem, the market makers play a very unique role because if you look at some of the data that some cell side research doesthks put out, it's not really entirely correct because a lot of these deaths like to take a certain narrative, but that positioning changes day by day with these market makers. So it's not to say that at every single day their long
gamma or short camera. It's at certain moments where that positioning becomes unbalanced and can really create that more cascading effect in cheapness and richness in volatility terms. We're seeing one of the lowest levels of tail exposure that we've ever seen, huh. And this is something that is really surprising because everybody understands you shouldn't sell teals. That was something that people learned in two thousand and eight, twenty eighteen,
twenty twenty. Yet that exposure keeps making its way back into the market and right now forward skew that like thirty days out skew and I'm not trying to get super esoteric with the VALL terminology, but just that type of WINGI exposure has been oversupplied over the last let's call it six to nine months.
Wait, sorry, just to be clear, there is not currently a lot of people buying de facto tail insurance right now.
Correct, not at all.
It's weird. I mean, I guess on some level, I'm surprised because right like things seem crazy, and there's wars going on, and people are concerned about what the Fed is going to do, and the economic environment is uncertain, and the political environment is uncertain. On one level, it feels like it would be an environment that would be oh, I want to grab tails, I want to buy insurance. On the other hand, the stock market is at all
time highs volatility is low. Clearly, just looking at financials, this is not a market environment in which many people seem particularly concerned about very much.
Well, why would you buy tails up? Think about this, It's been four years since the last real fall move. So in the face of rising inflation, in the face of a declining SMP in twenty twenty two, in the face of a mini banking crisis, in the face of all those things, you've been able to sell vall make money. This is why. So some of the data that we track is like US equity short ball hedge funds that
AUM has grown six times since twenty eighteen. Why would that AUM grow because those funds are doing insanely well because you've been able to sell volatility left and right and really just get away with it. A generic straddle selling program, like without having any sort of true quantitative input, you just wake up every day and sell straddles has made money handle for FIST over the last four years.
Could it be the case you mentioned the shorter tenors that are now available, and this has been a much discussed point among market commentators, the impact of zero and one day options ODT and one DTE. Could it be the case that people are buying less tail risk exposure or extreme downside protection in favor of maybe hedging themselves on a day to day basis with the shorter dated options.
So what we're seeing is that during certain events that's the case. However, that doesn't take away for the reach that you have in that thirty day exposure because when you look at the volume across the VIX complex, and you look at the volume traded in that thirty day exposure, it's still heavy. It's still there. So people that are saying, well, nobody's going to hedge with thirty day options anymore because they're hedging with zero DP so the vics won't go up,
that's really a bad view. And there's one real point that I'll bring up that will push back on that in a pretty large way. If you are an institution, a multi billion dollar institution, and tomorrow, god forbid, there's a geopolitical event, are you going to hedge a multi billion dollar book with zero DT options. There's no way any sophisticated fund is going to realize, well, I probably need to extend my duration on that hedge, so that reach for one to let's call it three month old
will always be there. It's just that in the recent environment, again over the last four years, that has not been the case because we really have not been met with a catalyst that has tested the broad market just real.
Quickly going back to a short straddle trade, which are very popular or it has been a big money maker. As you said, that's just betting that markets won't move much, but selling a call and selling a put at the same time. Implicitly, it's just like you're just betting that things basically stay in a neuro range.
Correct, you're selling.
Yeah, how did shortvall make money in twenty twenty two when the stock market.
Was going down? That was the main point of twenty twenty two. If you were a VALL trader, and you don't need to take my word for it, you could look at how well shortfall funds did in twenty twenty two, really because there was not a pickup in equity fall and a lot of people misunderstand this because rates VALL moved, fx fall moved. It was almost like every fall in
every aspect move except for US equity VALL. So when you look at and you can look at just the VIX to begin with, right, nix is a great representation of something like that because it's variance right, So it's really VALL squared. SMP fall squared is going to give you VIX. So SMP thirty implied. VALL always stayed in that range from like twenty to I believe the high end was like thirty something. It's really difficult to get VALL to move up when you have a lack of
realize move and panic that's coming in. So a slow grind down every day, going down one percent, half a percent, two percent, that's not really going to get people panicking to bid for that insurance protection.
Let's go back to the sort of worst case scenario that you were touching on earlier. But just before Christmas, I think it was like a Wednesday or a Tuesday, there was a sharp drop in the S and P five hundred, and this kicked off a wave of speculation about the degree to which shorter dated options had exacerbated
that fall into the close. And the thinking here is that, well, when stocks start to move down like that, all the market makers have to go out and hedge their exposure, and so you can get this sort of doom feedback loop in the market where stocks keep going down because dealers have to hedge the fact that stocks are going down. Walk us through that dynamic, and then how much are you actually seeing an impact in the wider market from these shorter dated options on a day to day basis.
Yeah, So we wrote a paper early on in twenty twenty three. They got a lot of attention. Surprisingly, it got attention from regulators and central banks, and I think when some of the regulators reached out to us, it was because they understood as well just how severe a certain situation can end up being, and they want to collect data on that as well. So when you talk about zero DT, it usually falls into two camps. You have Camp A that says, oh, no, nothing's going to happen.
The positioning off sets one another, this is not a risk. And then you have Camp BE that says this is going to create a massive catastrophe. This kind of stuff, right, this is a black Swan event, And I don't think either or are true.
Right.
This becomes a problem when dealers are hedging their exposure in a high ball environment. So what ends up happening is during normal conditions, when you have most of the flow that's leaned to sell these shorter data and options,
that is stabilizing to the broad market. However, when volatility is going up and these end users are not only closing their position but opening new ones, that puts dealers under pressure where they now need to hedge their exposure and reflexively that could drive the asset price lower or instant cases higher as well. So in this situation, it's not really a case of the SMP going from zero percent on the day to down five percent. It's what does this look like if the SMP is down five
percent and then could escalate to down ten percent. The second point to that that I'll bring up, and this is a very valid point. If you are a hedge fund or or an asset manager, you understand that the larger primes are concerned with trading with their clients trading this stuff because of the lack of visibility around certain intra day margin requirements. So if you're a hedge fund, you have a certain EMS that may be outsourced somewhere else.
It's just like an execution management system, right, So you might be trading somewhere else and those positions are settling at the end of the day. The PB is not really able to see that. So if those positions go against you, you may be on the hook for certain exposure that is not accurately assessed for That's really the second Yeah, that's the second problem there.
I have so many questions already, but I do think this is actually an important point, which is that in a lot of the commentary on shorter dated options and zero TTE, there's an implication that it's all these stupid
retail traders who are using these things. And you know, people talk a lot about Wall Street bets, and it is true that you can find some out there stories about people on Wall Street bets losing and also making money on shorter dated options, But a big portion of this is huge institutional ostensibly sophisticated investors.
I'm glad you brought that up, because actually this brought me back to something that I wanted to return to,
the sophisticatid investor. Talk more about what happened in twenty twenty one with the introduction of these mandates, because I do think that feels like a very important element that like, we can always talk about market environments and we are in a high wall environment or a high rates environment or a low rates environment, but if the allocation is going to change and new products exist, we see how
that affects the market. What specifically were these decisions that were made where these big institutions felt that they had to, like tell us a little bit more about some of these decisions.
Yeah, so think of twenty twenty. Twenty twenty was a year that option trading did very well on both sides. Hedging programs did very well. And then also when the market rebounded, certain stock replacement programs did extremely well. When twenty twenty one came Q one and the memestock craze hit, that was almost like the nail in the coffin, where you had certain investors and boards that started pounding on the door and saying, why are we not exposed to options?
Because look, everybody's making money, not in the sense that they want exposure to MEME stocks, but they're saying, hey, we should have long call tech exposure, you know, or we should have vultility risk premium harvesting programs. And ultimately that put a lot of pressure on certain consultants. It
put a lot of pressure on certain teams. But as I said, simultaneously, when the exchanges began listing more and more tenors, people started realizing that, well, idly, we probably want to engage in these volatility risk premium harvesting programs because look, if this is what the S and P is doing, look how much more we can make by selling Vault. And now the path dependency has completely changed, so ideally this becomes an easier trade for everybody.
Tracy, now I am reminded it's so funny all these things I forgot from that time. But there was like that big thing with like soft Bank, because you know, a massive buyer of just like long call options. Yeah, on tech Is. If it weren't already exposed enough to tech Beta, they also bought a bunch of call options on tech Stock got to double down.
Now, I do find it remarkable that they're like everyone thinks Wall Street bets and that retail craziness was sort of people trying to imitate Wall Street, But now we basically have Wall Street trying to imitate the retail crowd and the sort of yolo mindset of let's just try to make as much money as possible on a sort of in as short an amount of time as possible.
I want to go back to the impact on markets, and I take the point about the doom loop scenario, although as you say, you don't think it's as bad as you know, getting a sort of Black Shoals esque kind of crash. But one thing I guess I don't quite understand in this argument is people are not going to keep doing the same stuff if the market is
falling significantly. So if someone has a put that went up five hundred percent, they're probably going to sell some of it, right, So if you have people selling puts, then wouldn't that bring in buying from the market makers, which could actually stabilize the market in that scenario.
No, No, So when an end user is short the put, the market maker is effectively long the put, right, So at that time, if they're long the put, they're going to be long the underlying on the other side, so long stop. It changes when the end user is now long the put, that puts the dealer short the put. If they're short the put, that's bullish, which means that they now need to sell the underlying on the other side. So, and this is where this comes into like a second
order effect. Naturally, if the end user is selling this, the market maker is stabilizing this. When that position starts to move against them, what's the what is the end user going to do? They're either going to close off that position, right, or they're going to close it off and then take more of the other side. So they're going to say, Okay, we're closing this off and maybe we're going to bat on long volatility.
Oh I see, okay.
That is when the market maker begins to get put under pressure. And just to be clear, this has existed since derivatives started trading. I think people think that gamma heaging is something that came about six years ago. That's not the case. If you were a market maker in the early two thousands in the nineties, you realized that, hey,
this is how we hedge of a derivatives book. So that second order effect only becomes more relevant because the sheer size of what you're trading is so much larger. So now you have back in the day, you had twenty market makers. Today you have four, right, four main market maker or let's go it, five that really control the flow in the US equity mark.
These are really big bank trading desks.
Are these not just banks?
Not just banks? I probably I'm not going to name them, but like.
Well, just like what are the nature of these, like the four or five?
I'll whisper to them to you after the show, but I don't wait, we could I mean, we have no limitations on market Yeah, okay, so people like JP Morgan, Citadel, that kind of thing.
So just big trading shops, yeah, okay, so some bank but not necessarily bank, yes, okay.
Yeah, So going back to the numbers right index option trading has grown two times since twenty eighteen, and equity option trading has grown almost two and a half times in totality. So when you think about the concentration risk here, you have less market makers and more options being traded. So of course it's natural to think that those market makers will get caught all sizes on positioning, especially when the end user is so dogmatic in their application of this shortfall trade.
You know you mentioned was it ems earlier? What is the underlying risk management architecture for managing these positions? Because it has to be there must be so many numbers involved with this, and like the values are constantly changing, so things like gamma and delta are changing along with
the market. And if you are one of the market makers, I can only imagine all the different exposures you have at any one point in time that you are trying to calculate in real time as well, how do people actually do it?
So if you are a sophisticated vall arbitraasure, you will have certain in house systems that monitor certain second order Greek exposure like vallavall right spot moves in gamma exposure van A exposure. Very few people in the world who need to care about that. You know, for the most part, if you are an RIA or even like a macro hedge fund that's trading options, you're probably going to be on like a certain bank platform, and that's going to be okay, right, because you really don't need to care
about second order Greek exposure. But if you are more so a dynamic ball shop, those things become more important. I think when you're thinking about the problems of an ems and how that translates to something like this, and then also the applications of shortfall, really you have to understand that the majority of the world and how they
trade is not like a sophisticated ball shop. It's like an RIA that's going to wake up and say, hey, we need to make fifty basis points every month, so sell these options, and if the position begins to move against them, they're gonna say, oh well great, sell some more, and then it moves against them. Sell some more, and then it moves against them, and then maybe they'll capitulate the position. So it's not really the bulk of the
world is not really dynamically trading these things. They're more so dogmatically taking a one sided view on this, and that's why you get those ball blow ups.
Yeah, who is longfall these days? Because you know, again in my mind, I just think, you know, very my, very.
Root of my theoretically they should net right, the amount of people shortening ball should be offset by the amount of people going to And.
Also I just think like, if I had a lot of money, I would want to take out some insurance against some sort of law. But if the people with the money, even them, are sort of like sort of changing their strategies, is there anyone who's structurally long vall in there in parts of their portfolio or like the sort of the hedging aspect.
Yeah, So for what we do, it's called carry neutral tail risk hedging, and this is more so a tactical approach. However, the majority of what you call strategic or solutions based long ball or tail risk hedging has done insanely poor over the last three to four years. It's been right, it's been obliteration. And we're you know, we're pretty outspoken
that those type of applications don't work. Because what you'll see at an asset management firm, they'll say, okay, great, you have if you're a family office, you have five hundred million dollars in equities, Let's take one percent a year and allocate it to some long fall and then over the course of years you realize that, well, that's really destroying my portfolio. I can't just lose a percent
a year. That's why you're seeing more sophisticated institutions go or lean towards tactical defensive hedging as opposed to the solutions based defensive hedging, because those just really do not work over the long run. So you just can't wake up and say, yeah, I'm gonna buy a put and just keep rolling it and rolling.
It right, That eventually costs a lot of money.
Exactly Who are the.
Big winners from the explosion in shortfall and derivatives in general? I have to imagine that the CBOE would be in there, given that they're the ones selling the shorter dated options. Maybe some of the market makers who's making tons of money from this.
Yeah, so definitely the exchanges are doing quite well. Market makers generally do quite well when you have big ball environments. For the most part, it's important to note, and I think that this goes over a lot of it goes over a lot of people's heads when they're going through the research. Se Bow is incentivized to make sure that
the data that they're showing you is pretty right. So Sebow's never really going to come out and say, hey, all these options traded is a hazard because it just goes against what they're trying to do as a business. And for what it's where I like the guys at SEBO, respect them clearly doing extremely well from a business standpoint, But yeah, the exchanges are doing quite well. Market makers
are doing quite well. But when whenever you're reading research or data about these options or zero DT, it's important to take it with a grain of salt. When you're getting the research from people who have been doing well.
I just have one more question, and it kind of goes back to what I was saying, like, how you know I understood the value of in come generating strategies through derivatives, particularly in the zurb era when there was not many sources of just sort of like income. You know, the market complexion is obviously changed quite a bit because although now you know there's yield, but also like traditional like sort of natural hedges in the market don't work anymore.
So if you had you know this, the old sixty forty portfolio, at least for a while, was like terrible and so like this idea like, oh, a hedge by having a little bit along here and long here, and they do differently like that doesn't work. How has that changed the vault trading business, These sort of reversals of some long standing just sort of correlations of bread and butter assets.
Yeah, I think it's it's for the good of the ecosystem because I think it is cycled out. The bad managers, the managers who have not been able to navigate this environment have been really taken to the woodshed, And I think that's important. You need a healthy cycle out of those bad products and those bad managers, because look, everybody's a hedge fund these days. Everybody manages some sort of assets these days, and the reality is that that alpha
doesn't exist everywhere. So when you have poor products, after a while, people start realizing just how poor they are, and then those participants get cycled out. So I think it's healthy that this sort of stuff has come to light, because yeah, you shouldn't just be able to put somebody in some generic put buying program you charge twenty five basis points and you know five percent CENTI fee on that. That doesn't just jibe. Well.
I have one more question, which is, how do you prove that the explosion and options is having an impact in the market, because so far, the observable pattern that I have seen is that something like a December twenty first happens where the market falls. JP Morgan publishes a note saying part of this was because of short dated options, and then the CBOE comes out and says, no, no, no, we didn't see any evidence of that, and you have
all this polarized commentary. It feels like in something as mathematical as options trading and finance, we should be able to point to concrete evidence, but we are still having this debate about the overall impact. So what do you look at to prove that this is happening.
So the way how we trade is literally a second by second basis, and I think unless you're trading like that, you won't be able to have a good picture as
to what's going on. So we have certain agency desks and market makers that cover our flow, and you talk to these guys, you go out to eat with them, you build relationships with them, and there's an ongoing joke that we have with one of them, and they say, listen, every time volatility spikes, we have five clients that will come in and fight with each other to sell it.
They are jumping over one another to sell volatility. Now, it's hard when you don't have that color or you're only seeing a price on screens, But when you understand the ecosystem and what's transpiring under the hood, it paints a cleaner mosaic to understand that we've only seen one side of the equation, which is yeah, volatility being stabilizing and just not really performing endorment markets. But there will come a day when there's a catalyst that pushes this
thing through. And it's very similar to like Vallmageddon, where everybody who was trading vault during that time understood the exposures were baked into the etpis, and then after it occurs they'll say, oh, yeah, it was so obvious. Didn't you know that everybody was short volatility in the ETPs H.
I swear to god, it was not obvious to everyone. Chris sid You'll thank you so much again for me back on all thoughts that was a fantastic explanation of you know, a pretty technical change in the markets, but an important one. So thank you.
Yeah, that was great, Thank you so much.
Joe. That was so good. That was really interesting. I have a joke. It's not as good as Chris's joke, though maybe I shouldn't tell it.
Tell it, tell it, tell it.
What is a risk manager with a science degree at a large market maker say when he wants a salary increase? Tell me he asks for a Gamma raise.
That's good. Yeah, it's good.
That's good, Gama raise.
It's good.
It's good for Gamma raise. I'll work a workshop.
No.
I thought that was really interesting. He's sort of Chris crystallized. Oh, Chris crystallized something in my head which was about the exact mechanism of the feedback loop. Because I had assumed that as the market moves around, like people are lessening their exposure, but as he put it, like the thing they're doing to lessen the exposure can also lead to market maker behavior that is not ideal. In the stock's going down, everyone scrambling all together a scenario.
Yeah, I thought that was very interesting. I also just thought like the sort of big picture if you have a lot of money, you just cannot buy insurance trivially. It's not like he's like, oh, I'm just gonna like, as you pointed out, like you know, you take one percent of your assets a year and roll it into some fun that supposedly is going to deliver major returns every time there's a pandemic or some major thing, like
you're just gonna lose too much money that way. And so then the idea of like, okay, well, like these institutions take the other side and see opportunities in shorting vall and so you sort of see how how this trade can just get so large on one side.
I also like the point that, okay, this is not nothing. It's not a trivial evolution of the market. But at the same time, it's not a black Monday black shoals reducts where this is going to lead to like a massive crash because at the end of the day one day options expire. At the end of the day, the options are ended. The end day options end. Okay, I need to.
Work that work, thank you, But there's something there.
But no, I like that point. I thought it was a very clear description of the ecosystem. Yeah, and it is amazing to me, given everything that's sort of gone on, how much the vault trading environment has changed, because you would have thought after twenty eighteen, after the wildness of the post pandemic period, that things would have gone in the other direction, but nope, no.
And also we knew because of you know, we took in twenty twenty one. We talked a lot about retail obviously, but it really is telling and then that fell off, and then you know, you could see, you know, Cibo as a stock kind of peaked at the end of twenty twenty one for a while and then fell and everything.
But obviously there's just so much more than retail. And so when we're talking, you know, I think if people hear zero day options or any of these options, you know, they just sort of think about people like on their apps gambling. But the idea that it's not necessarily gambling, but there's sort of like very dynamic intentional hedging participation in these markets from big money is pretty astounding.
Sometimes it is gambling though, and there's gambling all right, well, at the end of the day, one day options expire, that's what it is. But the conversation and the controversy over them certainly does not. It goes on forever.
Sounds good.
Shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You could have followed me at the Stalwart. Follow our guest Chris Sidiel, He's at CA sid I. I Hello our producers Kerman Rodriguez at Kerman armand dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks. Thank you to our producer Moses Ondem. For more Oddlots content, go to Bloomberg dot com slash odd Lots, where we have transcripts, a blog, and a newsletter and you can chat about all these topics twenty four to seven in the discord Discord dot gg slash Odlots.
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