The Inflation Ghost, Gold and Options

Trading for the first time. With me, Alfonso Peccatello, founder of the Macro Compass and former head of investments at a large European bank. And I am Brent Donnelly, president of Spectrum Markets. I've been a portfolio manager, day trader, and market maker at the biggest commercial and investment banks in the United States. I'm also the author of Alpha Trader and the Art of Currency Trading. If you want to know what's going on in markets and where they're going, you found the right podcast.

Hi everybody, welcome back to the macro trading floor, Alf and Brent with you. I'm drinking my post lunch espresso. Brent wakes up at ungodly hours for an Italian guy. He's got this American virus where everyone wakes up at like five in the morning. What time do you wake up, Brent? Yeah, between four and five, depending on what's going on. Ungodly hours, I repeat. Ungodly indeed.

Any southern Italian genes in me is protesting against this thing. But, you know, that's why you have fun here. You have a... tactical trader and some sort of long term macro blubbering guy, which is me, we try to make sense of what's going on.

Now Brent is on fire, I can tell you. I read each of his notes and the guy decides to sell small caps and the moment he takes profits the day after the the thing rallies back. Brent is on fire. So let me ask him, he's much more on fire than I am the last month or two. So what is going on, Brent? What should we do next?

goodness. Yeah. I mean, my time horizon has been an okay time horizon to trade lately because there's been some microstructure y setups that have been working out. Um, bigger picture. I feel like the market has spent a lot of energy on the war and feels very tired, like, especially in FX, but anything you look at, you can kind of see like the reactions to the headlines aren't as strong.

People don't really know exactly what they're doing uh in a lot of cases with oil, like what what does oil mean? Is the correlation dropping because we've been here since March? Like essentially Brent is flat for two months now. So my feeling is that like the market only has so much energy. It spent a lot of energy in Q one and probably my base case would be, you know, Vic said 16, long carry.

And things just don't do all that much. I was looking at double no touches and FX and things like that. So that's kind of my base case. Um, we've also we've gone a little bit far to me in terms of Fed pricing now. Like we've gone from Warsh is gonna be the most dovish Fed guy ever to like a hike in December.

And that's a pretty long obviously a lot has changed. Like there's reasons for it, but I mean, on May twelfth, I remember that's when I was writing a thing about short Eurodollar because of strong CPI and inflationary stuff and the Fed starting to pivot and all that. So now we're ten days later and I noticed in my chats yesterday that there's a lot of talk about paying rates, Fed's gonna hike, dollar higher, and that's very different from ten days ago. So it makes me kind of

think that we may be at some kind of little local extreme here. Um, however, unfortunately we're doing this, we're recording this at six forty five AM. Uh on Friday, which is the day Waller speaks. So I suppose Waller could be important. I don't know. I sometimes feel like

I'm the only one talking about something and I do feel like I'm talking about Waller more than everyone else. So I don't know. Am I overweighting Waller here or like am I I is it w do they uh it you wrote something today, like how would they get the votes for a hike, say, even if you think about like September or December and hot data, is it possible that they hike or what do you think?

It's pretty hard. I mean of course if you get six months of strong data it's less hard. But I like to look at the FOMC voter composition because at the end of the day we are used to see the FOMC as a monolithic. voting mechanism, right? Uh.

Sorry, but that's not going to be the case going forward. I feel pretty strongly about it. I think in the article I called it the... of the of the fed where people vote against each other basically so you look at the treaty centers that have voted against the dovish bias at the last uh meeting

And you assume they're gonna vote for a hike, which is already quite an assumption. It's different to vote against the Dovish bias than to vote for a hike. Those are two different things. But but still let's assume that You know, they are pushed towards there. You have three of these guys, and then you might you might have Michael Barr, which is relatively hawkish in his speeches as well. So let's have a leap of faith. And let's say you have four hawkish members voting for a hike. Now

You still need another three to get to a majority. Uh in a situation where six people vote for a hike and six six six people vote for hold, as long as the Fed chair is voting for a hold, is the one that breaks the tie. Now My own assumption is that Walsh would rather eat his own hat than vote for a hike. I mean, seriously. Like guys, the guys talking about let's change the the benchmark from core PC to trimmed bean PC.

You want to try and guess where streaming PC is printing? Way below Core PC. I mean, guys, let's be serious. He was talking about shrinking the balance sheet as a... horse trading for cutting rates until a few weeks ago. I'm sorry, he's not gonna vote for a high So then you have you you can still get a hike, the the FOMC chair can get can lose his battle there, but you need three more voters on top of the dissenters plus Michael Barr to still vote for a hike. And the group is

Williams, Cook, Bauman, Waller, Powell, Paulson, and Jefferson. I mean guys, like you gotta be really creative to get three out of this group to vote for a hike. Can we get there? Yes, of course we can, but we need probably six months of very strong data. And as you say, December is twenty one basis point priced in, Brand. So I would say

The market is moving pretty quickly towards base case being data is going to be very, very strong and potentially inflationary. Because as a reminder, if the labour market tightens up, which is my expectation,

But this isn't immediately inflationary. The Fed isn't gonna hike. People are not gonna vote for a hike. If the labour market is goldilocks better so unemployment rate is stable or small down wage growth is consistent with two percent inflation why should the fed vote for a hike they're not gonna vote for a hike so I think the market is getting a little bit ahead of themselves with these twenty one basis points.

Yeah, I mean the one good thing is we do get Waller and Williams speaking um soon. So maybe we'll hear from them and Yeah, they're kinda like the intellectual thought leaders a lot of the time or the center of gravity or whatever. Um so and they've been dovish. So let's see what they say. But it like like you said and like I said, you know, a lot more is priced in now and then

Maybe it just comes down to, you know, how the data cooperates. Cause one thing that's interesting about this inflation thing. is well there's a few things, but first of all It's kind of embarrassing for them to say it's transitory now just because the the word is so loaded from the mistakes that they made in twenty one, twenty two when they didn't respond to the fiscal. And uh, you know, that was a major policy error by a lot of central banks.

But then at the same time, you do have inflation coming from other places as well, especially in PCE where you have like computer equipment and things like that have a higher weighting. And um securities prices just in when they go up. When's the when the stock market goes up, that's inflationary M core PCE, whether you like it or not, or PCE. Um, so like the AI CapEx thing is happening in the background. And then on top of that, you have More likely

second round effects given that there's a lot more inflationary psychology post-COVID because people understand that there is a risk that prices will go up. And so people are much more willing to prepare for or front run that by moving their own prices up.

in order to protect them from higher input costs. So when PPI is printing five, six percent, you know, people are in i in running small businesses aren't gonna sit around and and wait. They're gonna raise their prices. But we'll see. I mean, it does Kind of blow one's mind if you if you put yourself in the right.

in, you know, in the seat one year ago and looked at uh what worse is gonna be a puppet for the or whoever the new Fed chair is gonna be a puppet for Trump and Hassett might be cutting four times and all that kind of stuff. And then you look at where we are now, it's pretty mind blowing. But obviously there was a war in between. So um what do you think about like say, I don't know, two, three months. So that would take us to towards the end of the summer.

Where do you think things are? Like what do you think the trades might be? What's gonna have a high sharp in the next like two, three months? So we go.

The spot. into the very long time horizon part that I love. My time horizon like sometimes I There is due diligence on me on the fund and people are like, So, uh what are you training for the next two weeks? Nothing. I have no idea about the next two weeks, you know. You can ask me for the next six months.

Sometimes I go and buy one year out options. The dealers are like, What is this guy doing for a job? Like sitting on his hands for three months waiting for this option to do anything. Yes, welcome. This is me. Um now Brand, of course I I will uh make I will ignore Hormoots because if I start talking about Hormouths then all of a sudden everything I say is irrelevant.

so i'm going to assume that there is some energy transit okay well i'm gonna assume that they don't bomb each other i'm gonna assume there is some sort of energy transit going on yeah if i assume that Uh The tracker I have for money printing around the world are very, very strong. I mean US primary fiscal deficits are very strong.

We're running at about 80 basis points of GDP right now compared to last year. Last year, at this point of the year, we were at 43% of GDP. This is primary fiscal deficit in the US, so excluding interest rate payments. So I'm j j literally checking how much I'm going to do that.

Real inflation adjusted money the US government is giving the private sector on a year-to-date basis. Now, at the end of May, being at 80 basis point of GDP of primary deficit in the US, is the fastest pace in the last three years. And why the change from last year is that last year we had tariffs. Tariffs were a tax. They were a one off tax, right?

These year tariffs are still there, but there have been substitution effects from China. I mean, China is exporting way less to the US, which means the US is making less money on Chinese imports, namely the tax that the US is applying to the private sector is lower. and OBBB in the meantime, which has increased the fiscal impulse. So the two things are net. Money creation for the US.

On top of it, Trump yesterday said that the US might have to pay back one hundred and fifty billion dollars in tariff. So that's another one hundred and fifty billion dollar of fiscal impulse, plus minus any offsetting measure. But you might wanna assume there there will be a little bit more coming to the private sector.

And then there is the private sector credit creation, which is credit, bank credit, or shadow bank credit, or private credit, or any form of credit creation. And that's running very strong because all the companies doing AI CapEx have uh fully burned into their operating cash flow. So they're going into that. That's new money that gets created and gets spent into AI CapEx. ten year percentile of the acceleration in money creation in the US is the eightieth percentile. So the US is pumping.

And I always say that because at the end, this is data. It's like you can't debate that. If you measure the data, that's what the data says. When you regress the pace of money creation against forward nominal growth in the US, you will find a pretty decent correlation, which does make sense. The more money you print, the more the economy grows fast. I mean, that's not rocket science. It's just about measuring money correctly.

And nominal growth therefore is going to go up. The rest of the world, money printing, also looks pretty robust. Japan just announced another twenty billion dollar of fiscal deficit. Korea is doing it. Sweden, Germany, all the other guys are doing fiscal deficits. So when I look at the global measure of money creation, it's also pretty strong. And then I ask myself

very nice for steer trader to talk about whether the Fed is gonna hike twenty five basis points or not. But as my co founder said, Do we really care over a six month time horizon if the Fed hikes by twenty five bips, in reaction to a very strong US centric and global nominal growth acceleration, do we really care if the Fed hikes twenty five basis points? Does the dollar care more about 25 basis points more or less in front-end carry? Or does the dollar care more about global growth?

and macro tail risks that are cut by global nominal growth acceleration. I lean more towards it doesn't matter. It doesn't really matter. It matters for steer traders, obviously, but for macro it doesn't really matter. I see you wanna say something. That's an interesting point about the Fed is that if you do believe they'll hike, which I I mean it seems perfectly reasonable to think that they could be hiking in December given acceleration in job market and everything that you just described.

Does it actually mean anything? Like I think that's a mistake that the market makes over and over with the B.O. Just like trying to buy yen on on BOJ hikes. So like they're hiking once per year. from negative two percent real rates to negative one point eight or negative one point you know, like so the it it's not like the Fed you know, the Fed hiked seventeen increments of twenty five basis points in twenty two, twenty three.

They m what are the what are they gonna hike? One increment, two two hikes maybe in the next year or whatever, like maybe three at the most. So that's an interesting point. Is that If you have Fed hiking because nominal growth is strong and everything's accelerating and labor market is

relatively tight and there's supply of labor's low and Capex is still on fire. You know, like yeah, is it is that such a bad thing for stocks? And I guess the answer the stock market is giving is the answer is no, right? Like The the dollar has benefited a little bit from the repricing, but stocks haven't got hit because probably uh because of all the reasons that you've described. And then anyone waiting for like some sign of the CapEx is slowing.

Is just not getting anything like that. So like the earnings of these companies have been absolutely insane. And then, and I mean, that's the biggest argument against this being a bubble is that In in ninety-nine, two thousand, it was all um multiple expansion really. Like earnings weren't even really going up that much. Um, whereas now actually multiples have contracted in a lot of parts of tech.

Uh and like Nvidia's price of sales and all that. It's it's grown into it into its valuation somewhat, not necessarily fully, but mostly uh multiples have not expanded. And that's because earnings are going absolutely insane. So yeah, it's a it's a pretty tough backdrop for bears.

Because what are you looking for? I guess if you're a bear, maybe that's an interesting thing to think about. Cause like I try to be open-minded. I think the base case is like. Higher risky assets, lower vol, and everything kind of just keeps on grinding higher. That has to be my base case. But like, what's something that would actually be bearish? Like oil up up and away? Like is there a point up through one fifty or whatever?

Um, that's bearish, I guess, or maybe something that would be extremely unexpected now, but is always possible. um often dreamed about by economists, but never actually happens in reality, would be a labor market slowdown because you know, the Intuits cutting 17,000 jobs to focus on AI, all that kind of stuff, although there's no evidence of of net job losses. Um, in fact, like a lot of areas are hiring people because of AI right now. So I think the dominant sort of macro

Theory is that AI is inflationary at first because you have to build all this stuff and hire the people. And then it's disinflationary once the implementation succeeds. And we're in the you know, the second inning of the inflationary part, I guess. But I don't know, what's a what's a thing that would that you think could take so S and Ps Closed at seven seventy four forty six. What's something that could take SPs to sixty five hundred by September? Like what what scenario?

So if you follow the rational I was saying before With nominal growth going up and the central bank behind the curves around the world, you should be long risk guys. I mean, you can put any flavor you want with emerging market, carry, value, you should be long risk. If I'm right, if I'm right. And the curve should be steeper and long end rates should be, you know, not supported. The curve should be steeper, I would say. Now

All good. Then what am I wrong? Yeah, I think Brian, there are two things where am I wrong. Maybe maybe three. Uh the first one is Not only is there no Hormuz resolution, but there is no proper energy transit. So in certain places of the world, uh Southern East Asia, eventually Europe over time, this becomes a problem for earnings. You can't ignore it anymore. It just becomes a problem for earnings. And then governments are called

to try to solve the impossible trifecta of sustaining your own economy, sustaining your currency and sustaining your bond market and sorry, but it doesn't work. So you can go and try and ask the Philippines or Indonesia right now, because they're the first guys in that line of defense because they are the the terms of trade impact from our moods for them is by far the worst than for anyone else and it's the most immediate impact.

Bank of Indonesia, for people who are not following, hiked fifty basis points a few days ago, surprising the market, trying to defend their currency, right? The day after the Indonesian rupee was weaker again. So like these guys can't catch a break basically. And the Philippines is saying they wanna hike before the central bank meeting, you know, just off cycle hike now. They're trying everything they can and yet.

The currency can't catch a bit, bond market can't catch a bit. So if you get to that point, Brent, where you know the crisis goes for long enough, then ultimately Europe will find itself in a similar situation. Japan and Korea will find themselves in a similar situation.

Right. I guess that's the answer that I didn't include, which would be five percent inflation in the US or something like that. Like if all this stuff just starts feeding on itself and you know, even if oil stays here but inflation comes from other areas and and They we get a repeat of twenty twenty two and they hike, you know, seven times. And yeah, I mean, I remember going excuse me, going into twenty twenty two.

the we had a dinner and it it was the old like how many Fed hikes do you think are are gonna come in twenty twenty two? And like most people said two, one person said four, and I think one person said five and everyone laughed.

And it was like, you know, they they hiked seventy five, they hiked fifty. I mean, I don't know how many times they hiked, but they hiked a lot more than five increments of twenty five basis points. So that's correct. I guess that's like the the ten percent rogue inflation This is uh something that's yeah, it's possible. I mean, PPI is five, six percent, who knows? Yeah, the answer is that. So it's a runaway second round effects of inflation. Uh the demand destruction is

I mean not as far away as twenty twenty two where we did in twenty twenty, twenty twenty one, the largest amount of concerted fiscal spending ever seen since the second world war. We are not doing that much now, but we are printing money. So that means That the demand destruction is a bit farther away, I think, than people imagine, which means inflation comes first, second, and third as a problem, brand for the market. So that can be an issue.

And the second one can be if the AI CopEx ends up being a piece of crap. But there is no evidence. I mean, open AI is making six billion a quarter already. I mean, that's quite impressive. And you know, you're talking about a company where people always wondered about the profitability and the cash flows and this AI Capex isn't bringing anything. What is the return on equity? Guys, earnings are going to the moon in the first quarter of twenty twenty six. Like it's very hard.

to imagine at least for somebody like me to have an immediate full hundred and eighty degrees reversal of that story, people doubted it. Remember in October, November last year, where if a company announced higher CapEx, their shares would be selled off straight away. This was October, November two thousand and twenty five, not so long ago, eh?

And now the market is like, Yeah, okay, these guys can keep printing earnings at a very rapid pace. So maybe I shouldn't really doubt what these guys are doing. Uh but I think the inflation story is an actual risk. The second round effects are there, the demand destruction is further away, and at some point it just feeds on itself. And certain economists just can't

They can't defend their currency, their bond market and their economy at the same time. So they gotta you know there's gonna be some release valve. Uh so therefore my initial what is the trade to have I or sharp over the next three to six months, it relies on energy to flow through the straightover modes to a certain extent at least. It doesn't have to be full resolution. Uh but it has to be some sort of agreement out there. Right.

yeah then yeah then your scenario is actually not impossible at all Yeah. And I guess kind of what you're describing as like the potential for an uh Asian financial crisis or something like that as well, if they start losing control. Um one thing that I I don't know if this is worth talking about because um I'm not an expert on this, but one thing I was thinking about was.

Generally the cure for high prices is high prices, right? Like people either find new supply or they find more efficient ways to use the commodity that's going up. And I was wondering if that's a risk to the Capex thing, is that Token costs are and token shortages and all that are becoming uh, you know, more important than a shortage of oil for for markets in in a lot of ways.

But I wonder if there's some kind of possibility that they figure out a more efficient way to use these tokens, um, some kind of breakthrough on the on the inference side. or training side and and that could be like I guess something that bursts the bubble. But anyways, that's it's too far outside of my

my wheelhouse, but it does seem like extremely inefficient to just keep on building more data centers and and buying more memory versus finding more efficient ways to create tokens. But anyways, I guess we'll see. Yeah, I also have no idea about all the time about AI, the answer is I don't know.

So one thing that kind of comes together in both of our write ups and stuff these days is gold because I think for your framework of, you know, infinite money printing and Fed still relatively loose, like hiking small enough increments that who cares? It's that kind of scenario generally is good for liquidity thermometers like gold. And from my point of view, I saw it as essentially a retail bubble in silver and gold.

And that bubble has been pricked now. And you posted a good chart yesterday showing the the um skew and twenty five delta gold options. And the SKU is almost always bid for calls like for the last five years. Yeah. And quite a bit bid for calls. And then if you look at the chart, it went even more bid for calls in the bubble. And then everything crashed basically when the war started. That was like the ultimate good news, bad price.

for signal for gold. And then now gold's what a thousand dollars lower. And you have the the option markets actually bidding for puts, which is not very common and interesting to me. And I think it's a pretty good setup. So that's like more of a micro thing. And then the more macro thing is bullish. You have a pretty good entry point. And then you have two kind of if you look at the daily chart, there's two huge wicks where they had like big blowoffs.

Bottoms where where it held. So to me, I think the outlook for gold looks pretty good. Like if I was guessing. What are the odds that gold uh, you know, outperforms the is its negative carry, obviously. But what are the odds that gold is higher at the end of the year? You know, accounting for negative carry? I would say like my

view would be it's like sixty five percent, sixty five, seventy percent chance, which to me is high. Like anything, I'll do a trade if it's fifty eight forty two. So, you know, anything that's sixty five seventy seems pretty good to me. Um And if you think nothing's really gonna happen, you can always sell puts or sell put spreads as well. Um

Given the SKU, but I I think that's an interesting area that has kind of people have just kind of got bored of it. So no one's talking about it. But like what do you think? Do you think gold can make a new all time high in twenty twenty six? Uh the interesting thing about gold is that central banks

Wha there are a lot of central banks in trouble out there, Brent. I mean central banks that are importers of oils and uh with that nevertheless with the current account surplus, so these com these uh countries have accumulated large amount of foreign effects, mostly dollar.

And then they have central bank reserves, right? And amongst these reserves, over the last three years especially, they've accumulated a lot of gold. And I'm talking about Turkey, I'm talking about Poland, I'm talking about Asian central banks in general. So buying gold and making money off it is very nice, but people forget there is another use for gold, which is that when you need to prop up your domestic economy and doing subsidies against higher fuel prices at the tank.

Yeah, what you're gonna do there is you're gonna sell your gold and you're gonna raise money, right, as a central bank, and you're gonna try to basically Use that to backstop your economy. And so there is a seller of gold, Brand. That's what's happening. There is an actual seller of gold for the first time in a very long time. I wonder there was a resolution trade if gold can't be very compact. Because if there is a resolution, there is no need anymore for these central banks to sell gold.

after a while there will be a need for some people to buy metals because they fit pretty well into at least my macro scenario if there is a resolution of run it hot basically metals tend to trade very well and now so therefore i think gold upside is quite interesting but let me ask you something If I would tell you go into year end, yeah, and buy a A digital or a co-spreading gold that pays out if you hit all-time highs again. So let's say 5,500, something like that.

What would you say the odds are priced in the are fun. Um Don't check. No, no, I'm not checking. I'm just looking at a chart because I I don't feel like it's it's useful to t unless I look at a chart. So So is it a one touch or it has to stay above? Uh let's say uh standard digital recall spread. We can also do one touch. Let's do one time. One touch is easier. One touch. What's the one touch? Just touch is all all-time highs. What should be the odds?

Like the market price I think would be like Until thirty one percent, and my guess is like fifty percent. Yeah the market is willing to give it a little bit more. Twenty four. Okay. It's not too bad. Yeah, I mean, I think that's... cheap relative to what I would expect. Like not not relative to the Black Shoals, but relative to my actual, you know, ex ante odds of it actually happening, I think are higher than twenty four percent.

And five minutes on it. So okay, you and I just basically are sitting on a macro desk. We're chatting about an option. We think it might make sense to own. And we check that the market's giving us twenty five percent for a one time. So your subjective odds are fifty percent, so that makes this thing very cheap, but you said compared to the black shoals, I don't think the twenty five percent is that cheap. So

Walk me through. Why are you thinking like that? Does it make sense to compare it to what the blackshall pricing should be? Just you know, go for it. Well, I th my point was more that I'm I think if you trade a lot of options, you can sometimes kind of guess what the price is going to be. Um, and then you can say like, you know, sometimes the market will price above or below terminal value and things like that. So more of like options pricing mechanics.

are defined by certain things like implied volume it has to trade at the price, you know, described by those variables. Um, but I feel like, you know, that's step one of evaluating a trade is like what are the what's the market telling or what's the market selling it for percentage wise, and what do I think the real percentage is? And, you know, why why is it wider and like why is

Why is there convexity there? Or why is is there not convexity? That that's all I'm really talking about is assessing my ex ante odds against the market pricing. Because one thing that you can sometimes do is say, Um, mi if you know the ball market, is sometimes you can understand like why the ball is cheap because corporates are always selling it and things like that. Or sometimes it's just because implied obviously tracks realize.

And you have a view that like okay, realize has been low, but it's gonna pick up because of XYZ. And so You can have a view on vol and all that kind of stuff too. But I mean, the very simple way, if you're not like an a uh an options expert, is just to simply look at what the market's pricing and make your own assessment of the odds and compare the two. And I mean uh

In a very simple way, that's what trading is most of the time, right? Is looking for the widest possible spread between your odds or or the market odds. And I mean, that's really all I'm doing. Yes, and I think that's the right way to assess this. Your odds are based on your implicit distribution of what the vol will be going forward, right? What the direction will be and what the vol will be in this case. And I think that

what distinguish, let's say, a good positive expected value idea. At least ex ante, ex post, you'll see the PLL and then you'll figure out. But in the decision making, you can say, look, if I look at the chart, if I imagine the path ahead for gold, terms of delta and realized ball when it trends up. This is a discussion I was having as well uh with my uh fun colleagues kāpēc kāpēc kāpēc kāpēc kāpēc kāpēc kāpēc kāpēc

Do you think that gold can exhibit spot up, wall up? Or do you think gold is a full institutionalized asset class that's more like spot up and wall down? That's very different. Because if it's spot up vol down, it ends up being a proxy for a stock, basically, right? I mean no not the not the frenzy Wall Street Bet stock, but uh a proxy for the SP five hundred, right? It goes up, but it doesn't go up and vol up. I mean that's very rare.

And if you think in that in that sense, then actually holding a linear position here might make more sense. Instead, if you think look, this thing can be spot up and ball at least constant, spot up vol constant, because there is a price insensitive bid. Central banks will come in and buy it again. They don't care what the price is. So

And there is no seller of gold upside, there is no natural seller of gold upside, right? Then actually buying a cold spread could make a lot of sense, right? Because your realized ball on the way up could be pretty strong. Yeah, no, that completely makes sense. I mean, the other thing too is like ball's pretty low now because we haven't gone anywhere since the big liquidation and like Turkey and all the central banks sold.

And so the one hard thing obviously is if you do the call spread is if we just stick around for another four months. that can be a very disappointing trade. Um, but you you can then fund it by selling put spreads as well. And then that way you it you know, I like sometimes considering, okay, is the path Like if some there's some huge catalyst or or I think it's just gonna rip, obviously that's a different trade. But in this case, it's like I think

It's gonna go up, but it could easily just range trade for two more months. So I don't love the long ball trade. I would rather sell put spreads to buy call spreads or just be long spot or long features or whatever. Um that that's how I would think about it. And just one thing that I've been thinking about weirdly, I don't know why lately, is if you just make a whole bunch of 58, 42 bets.

I think that's one advantage of short-term trading is that you're going to do hundreds or thousands of trades in a year. Whereas if you're making sixty-five forty or sixty five forty five or sorry, cheese, sixty-five, thirty-five bets. Um, but you only make five bets a year. Um, then you know, you have a lot more variance around the sample size thing. So I don't know, that's one thing that I I didn't really realize.

When I was started trading, I just gravitated to short term horizon because I have an addictive personality. But um but in the in the long run, it actually does help with path dependence and things like that, is that if you have a larger sample size of trades, And you have an edge, then you know, you're gonna realize the edge most years. Whereas it's harder when you have a longer term view. Oh.

Oh, you're now taking a knife and you're stick you're sticking it into my ribs. So this is something I always Investors have a long time horizon, so they don't care about variants, right?

Yeah, but that's the key. Like your capital should be aligned with your time horizons, otherwise, you have a problem to start with. Now But something I need to say there, Brent, is that I felt the same, you know, like when you start in the edge of an industry, you realise allocators unfortunately have a very short Patience and time horizon, despite what they tell you beforehand, they tend to have a very short time horizon. They are humans, after all. They are allocators. They are humans.

And then I thought, you know, I'm gonna change my style, I'm gonna start trading bi weekly, whatever. So I have more shoot at at goalpost. The more time I shoot You know, the more likely the variance is going to go down. Yet, Brent, that's only true if you can preserve your positive expected value at every time you shoot.

If you if you just go randomly, that that the math doesn't work because you're watering down your edge in order to increase your sample size and that doesn't work either. So what I did Well, and your transaction costs are way higher as well. I mean, I my transaction costs are super high.

Yeah. So I just stick to my thing and I have like fifty teams a year and I'm very boring. I set something up, it stays in the book for six months and good luck. You know, like I and and and of course the downside of this is that your sample size is small, which means your variance is higher. Actually the path dependency of your PNL is higher, I should say. So yeah, if somebody looks at your PNL over three month horizon, it's absolutely

How can I say it's just a complete variance. There is no signal in that P and L so It's a bit of a decision, guys, but don't just be brandonnelly if you are brandonnelly. Okay, if you have an edge and you can trade a hundred times, three hundred times a year, go ahead. If you have to trade three hundred times a year, just to feel like You are reducing your variance. Please remember you should have positive expected value every time you trade. Right. And don't trade for the dopamine.

The dopamine, yes, the dopamine trait. Okay guys.

To give you some trading stuff. So we talk about options, sample sizes. I think we've done our job here. If you want to help us, you know what you should do? You should take this podcast and you should forward it to your best colleague, your most preferred colleague.

And say listen to these two idiots talking about digitals and black shows and implied vol and stuff. Maybe they're interesting. Seriously, that's a way for us to, you know, grow and have the podcast listen out a little bit more out there. So we appreciate just forward it to a college. Alpha's very good at marketing. I am not. Excellent marketing guy. I wish I was as good as an investor as I am a marketing guy. But I'm learning, I'm learning, I'm learning. Anything else for this podcast?

No, I think that's it. Thanks. Thanks everyone for listening. We always appreciate it. Thanks. It's almost summertime. I'm going to southern Italy. It's gonna be thirty five degrees already. Um but I will commit to try and do podcast also from thirty-five degrees Celsius. That's because I love you very much. And I'm gonna be on the beach. So who am I complaining to? Chào, talk soon. All right. Ciao. Any investment decision.