Tail Hedging Volatility Strategies with Kris Sidial

[00:00:02.19] - Speaker 1
All right.

[00:00:02.29] - Speaker 2
Good afternoon, everyone. Welcome. Very excited today. We're going to have an amazing session. We have some special guests. We have Ryan, of course, you probably already know, you've been with us a few times. And we have Chris. Very excited to have you here. And today's event is going to be about terror, risk and options. And we're going to talk about a lot of different things before we go through. And before I introduce yourself, let's just go over our disclaimer just very quickly. Right. And as always, guys like please send us questions. We're going to have a live Q and A. But with no further ado, I'm going to pass it on to you. Whoever wants to start, Ryan or Chris, to introduce yourself, be great.

[00:00:59.26] - Speaker 1
After you, Chris, since you're new.

[00:01:02.03] - Speaker 3
Okay. Yeah. So, hi everybody. Thanks for joining us today. Yeah. My name is Chris Citio. I'm the co CIO of Ambers Group. We are a firm that specializes in carry neutral tail risk hedging and volatility trading. Before this, I was a prop trader on two different desks, Chimera securities and Santa's Capital. Then I went to a large Canadian investment bank, spent three and a half years there. Most of my time was spent trading exotic derivatives. And yeah, I mean, throughout the course of the last four years, we've sort of become a thought leader in the, in the world of volatility trading. Not only with our research, but also just the strategies and things that we run. So, yeah, I think you guys are in good hands today when it comes to the tail risk hedging discussion.

[00:01:51.17] - Speaker 1
Good.

[00:01:52.18] - Speaker 3
Yeah.

[00:01:52.29] - Speaker 1
Again, I'm Ryan Darnell. I founded my own private fund, Senegal Capital, about three years ago. Focused on a more long bias kind of hybrid between traditional wealth management and the ability to kind of leverage up in a risk parity style approach to blend in other strategies and add maximal diversification. I've Also, I have 15 years of experience managing various exotic derivatives books, market making, proprietary trading and some private equity and, and private lending as well. And also managing commodities exotics and tail risk book today as well.

[00:02:34.13] - Speaker 2
Yeah. Awesome. Thank you, Ryan. And thank you, Chris. So, Chris, I'm gonna start maybe you. And maybe explaining, you know, what their risk means and maybe like explain a little bit more what kind of strategies you guys run. Yeah, that would be great.

[00:02:48.18] - Speaker 3
Yeah. So, you know, tail risk can be a very subjective thing for investors. It's that part of the distribution that becomes very hazardous to an investor. So this can exist in any type of form of capital markets.

[00:03:03.25] - Speaker 1
Right.

[00:03:04.00] - Speaker 3
It could be something like commodities, right? So a move in natural gas could destroy you. It could be in US equities, it could be in, it could be in rates, right? So tail risk is more so the outlier event that most people don't really think about in their portfolio and the negative effects that can come from those type of outlier events. So for us as a firm, we focus on the US equity market, right? So if you think about it, the majority of the world is in some way shape or form correlated to the S P500. You know, like if the S P500 goes down 20 over the next two weeks, a lot of people across Asia, Europe, every, everywhere in the world will be negatively affected, right? Of course, the U.S. so our, our specialty in that area lies in that we will have investors that will come to us and say, hey, we have this big portfolio of stocks and all sorts of different things in it. But we want to be sure that if the market goes down and volatility goes up, we have something in the portfolio that offsets those losses.

[00:04:18.28] - Speaker 3
So that's effectively where we come in, right? Where our goal for our investors is to have this type of protection on so that when markets go down, we, you know, generate these large returns, but in the interim we use a lot of short term proprietary trading to minimize the cost of that carry. So in a perfect world, our goal is to be flat during normal markets, but when volatility arises, have these big explosive returns. And to most people who are not familiar with this style of trading, it can almost be thought, it could almost be summarized as free insurance. Is there a way that you can get this type of free insurance? And I would say what sort of separates our way of trading this from the rest of the space is that in the world of derivative prop trading, this is sort of a common model, right? So you may go to like these firms in Chicago and say, you know, show me what a volume trader does, you know, on, on a desk, like a desk like CTC or Gelber or something like that. And effectively their book looks the same where they buy a bunch of tail options, right?

[00:05:33.03] - Speaker 3
So that when markets go down and volume goes up, they make a lot of money, but in the interim they're trading around stuff so that they can keep that type of flat book. So that sort of like summarizes Ambrus as a business and really the objective to try to make money from these outlier events in markets.

[00:05:53.21] - Speaker 1
That's fascinating. Just to add a little bit to that, we kind of, you know, the way I would define tails for me is really what I would just call a regime change. So sometimes when we talk about option pricing, probably a lot of people have now heard about Black Scholes. One of my other classes, we kind of talked about the basic Black Scholes model. There's some other models out there a little more complex called jump diffusion models. And the basic concept though is what happens when things stop moving continuously. Because a lot of these options pricing discussions have this kind of assumption that markets smoothly move up and down and that you can measure risk looking at things like standard deviation and correlation. And those generally work pretty well. But to me, tail risk really means when you have a regime change, meaning that suddenly you get massive moves in the standard deviation or the implied volatility of the market and you have kind of non continuous trading, often gaps in your ability to hedge and changes in correlation that are substantial moves on the chart. And it's kind of hard to give an exact measure of that.

[00:07:02.19] - Speaker 1
I think we're going to talk a little bit later about delta on the tails. But yeah, I mean at the end of the day when you look at a lot of. We'll talk about this more later, I think, but a lot of investment banks were thinking, okay, the correlation between these assets in 2007 was 15% or 20%. And then suddenly in a week it's 100% correlation. In the commodities markets where I work, you might see volatility that's consistently 15%. You brought up natural gas, Chris. And then the next day the volatility on natural gas or power can go to 250%. So we're not talking about a smooth continuous move. We have limit moves in the commodities market. So you can literally not be able to hedge your delta. You know, the market can be limit up every single day for, you know, six days in a row. And so we'll talk about that more. But that's kind of, you have to start to think about what happens at these extreme levels. What if you can't trade? What if the thing that you thought you could buy to protect yourself suddenly costs 10x or 100x you know, a week later?

[00:08:10.10] - Speaker 2
Yeah, and obviously we already have a lot of like interesting comments. So maybe like Chris, this is for you. Like obviously how do you actually make this kind of like a free insurance? Because it, it sounds very good where you are flat during normal time. But then obviously when volatility arise, then you make excessive return. But like how does that actually work?

[00:08:32.25] - Speaker 3
Yeah, yeah, right. The, the devil is certainly in the details. So I'll give you guys a little more color on this. You know, historically in the world of tail risk hedging, you have seen other firms sort of market themselves as like theta neutral or carry neutral. And then events like March 2020 have occurred and they've lost a lot of money, right? And you say, gee, how is it that you know, you could be a tail hedge and you lose a lot of money when volume goes up and it's because they more so take relative value volume trades, which is, there's nothing, there's absolutely nothing wrong with that. Right? But you, you have to understand that if you're taking relative value of all trades, there's embedded risk, there's basis risk that, that comes with that type of trading, right? So for what we do like this this past year, obviously there was a big move in August, right? And for us it was really good. We were nominated for volume of the year by hfm. Like we had a lot of attention from that. But what we try to explain to people is that it's really not novel.

[00:09:35.20] - Speaker 3
And I go back to like the market making or just think about like those derivative Chicago prop firms and their model which is like, you know, you buy a bunch of tails and then you have this form of alpha that exists, this form of edge that exists in this short term trading and you focus on doing that over and over and over in a repetitive way. Now some people will say, okay, well how exactly do you do that? And that could come from things like price insensitive end users coming in and creating dislocations throughout the trading day, right? So think about something like Tesla stock. There's a bunch of these like huge price insensitive flows that will trade names like Tesla, Nvidia, Google, Amazon. And there's lots of trading opportunities that present themselves throughout the trading day. And I think if you can be creative and, and think about these problems in a good way, you can structure a book that trades those edges that, that, that persist and continually pop up while simultaneously being long the tails. Now I definitely want to just preface this whole thing by saying I would not suggest that people who are running their individual accounts focus on trading like this because this is more so an institutional type of thing designed for people that don't have the benefit of being able to pivot in and out of positions, right?

[00:10:59.05] - Speaker 3
So if you're a, let's say you're.

[00:11:00.17] - Speaker 2
A.

[00:11:02.29] - Speaker 3
$10 billion pension plan, right? For them to get in and out of positions when markets are crashing would be extremely difficult, right? So they rely on alternative forms of defensive hedging. So they allocate to tail risk hedge funds that can do something that's creative. Now if you're an individual investor and you do have the luxury of pivoting in and out of stuff, right, you can just strictly worry about the things that you do to make money and then buying a little bit of tail protection as a fixed cost, right. So that you can operate within that band as opposed to saying, well, I need to get ultra creative with the fixed cost and think about how, how to offset the, the, the carry, you know, from that fixed cost as well. So I definitely want to preface it. When you're thinking about tail risk hedging from an independent investor standpoint, it's very different than if you are running a hedge fund vehicle for an institutional product.

[00:12:03.03] - Speaker 1
Yeah, I can totally attest to what Chris is saying too. I mean, we do the same thing with our market making business, right. You have this idea that you have a positive carry. And when he says carry, he means just you have a steady amount of money that you're making on your core strategy. But the question is, what do you do with that? Because if you ultimately your core strategy is going to suffer a lot in a tail event, you can reinvest some or all of that profit into owning those tails like, like you mentioned. And that's exactly what, what we've done throughout my career the same way. And I think for a retail investor you can just think, hey, okay, you know, if I do nothing and stay along the market, I'm going to make 10 a year and that's great, or 15 a year, but do I want to reinvest some of that? Right? Like maybe I shouldn't be making 15 a year, maybe I should be making 8% a year and be reinvesting some of those gains because some of those gains aren't are only coming because I am short tails. And so by reinvesting that in that tail protection like Chris is talking about, you know, you get a little less today, but you can change the, the risk profile of that, of that annual strategy.

[00:13:07.27] - Speaker 3
Absolutely.

[00:13:09.12] - Speaker 2
And you know, like what kind of like tools do you use? Like also like a lot of our users are retail investors, Right. When you look at like terrorists for retail investors, like, are you referring to like buying puts or like doing spreads? Like can you elaborate on our retail investors should think about like the concept of their risk?

[00:13:30.15] - Speaker 3
Yeah, absolutely. So this is where there might be some synergy that lines up, right? So when thinking about how to structure like a good Tail risk hedge. And the first thing is I would say you start by understanding the areas in your portfolio that would be harmed during those moments, right? And say, okay, well what does this look like? You know, if the S And P drops 20% over the next two months, you know, am I going to be harmed by that? And then you could sort of build that out from there. But generally speaking, I would say you do want a diversified mix across the VIX complex, the S P complex and let's say low volume sector ETF puts. That's kind of the way how we think about it. And I'll explain why we break it down into those three different buckets. So everybody knows about Volmageddon, right? Like February 2018 Vol blew out. And if you had any type of exposure to VIX calls, you did phenomenally well, right? But if you had downside S P puts, you, you didn't really make much money. Or if you had S or sector ETF puts, you didn't really make much money.

[00:14:37.15] - Speaker 3
So it was only your exposure to variance, which was vix, right, that really did well. Now if you flip this 10 months, fast forward December 2018, the complete opposite happened. The market dropped 20% in that one month. A lot of people forget that. And if you had exposure to VIX call, you didn't really do well. But if you had exposure to downside S P puts or sector ETF puts, you actually did really well. So it's a good lesson how the positioning can flip and change and certain sectors can outperform. Especially during moments where correlations go to one and you want to have some type of diversified tail hedge in that, in that moment. So if you think about this, VIX is effectively variance, which that all that means is that it's volume squared. So you could think that during moments of extreme crisis, this in theory should do very well. You have S and P volume. So in moments where the market's going down, this should do well. And then you have some exposure to low volume sector ETFs so that if you're buying something for like a 5 volume and it reprices to a 25 volume, the repricing of risk that could occur could pay out tremendously more than any other thing in your book.

[00:15:55.14] - Speaker 3
And this approach is in our, in my belief is much more holistic and diversified as opposed to you saying I'm only buying S and P puts or I'm only buying VIX calls or you know, I'm only buying, you know, these cheap low volume sector ETF puts It avoids the type of basis risks that could end up harming you during those moments.

[00:16:19.05] - Speaker 1
Yeah, I mean, I would also suggest that you should ask why you want to hedge your, your tailpipes. Like, because Chris has got brought up a really good point here, which is, you know, these institutional investors, they have a reason. They know specifically what they're trying to protect against when they invest with him. And you know, so for example, if you don't have any leverage and you have a pretty diversified portfolio, particularly if you're younger and you're still kind of dollar cost averaging in, I would suggest that not only should you probably not hit your tails and, but you love a downside event. I mean, I've actually run this analysis for somebody and I occasionally do a little personal finance for some in like asset planning for friends and family. And, and one of the amazing results that I found is that if you, you know, build a model of what your net worth is going to be over, say 20, over the next 20 or 30 years, if the market just goes a straight line up, you know, over that 20 or 30 years, steady 8% a year versus if the market collapses like 40% down and then back up again.

[00:17:19.04] - Speaker 1
And if you're investing your savings steadily over that time period, you actually end up with twice as much money in the, in a scenario where it collapses because you get the chance to reinvest dividends, interest and continue investing your savings at the downside. So I'd actually argue that for a lot of retail investors, you are actually long tails and you don't realize that if you have, if you have this kind of. To the downside, actually your biggest risk is the upside that the market screams higher and you're not participating, you have too much cash or, you know, you're afraid, you're not in the market. And so. But then that flips totally on its head if you start to have leverage and you start to trade. So if you adopt a trading strategy that's more high risk, you're in and out of things, then it completely flips on its head because you can lose your entire kind of capital stack. So if you're talking about, hey, I have my diversified portfolio and then I have my trading portfolio, how do I optimize the trading portfolio? And then that uses leverage, trading options, totally different game, right?

[00:18:24.06] - Speaker 1
And suddenly everything that we're talking about here today really becomes not just, not just something you should think about, but almost critical to the survival of your strategy because it will happen if you do it long enough. You are going to have this tail event if you, if, if you do it for 20 plus years.

[00:18:40.19] - Speaker 3
Yeah, yeah, I certainly agree with that.

[00:18:44.02] - Speaker 2
And Chris, so in your Twitter you always talk about the five day put as one of the best risk hedge. Right? So can you kind of like walk us through this or elaborate maybe on, on this?

[00:18:58.16] - Speaker 3
So I think we might have been a misunderstanding there. So I think what I was trying to say in those tweets is that.

[00:19:05.27] - Speaker 2
Sorry.

[00:19:06.17] - Speaker 3
Yeah, yeah, the five, the five Delta. So, so what you get across like pension plans and stuff. So sometimes like you know we'll speak with like an analyst at a pension plan and they'll come to us and they'll say hey, according to our data the 5 delta 1 month s p put is the best hedge. That's the best hedge. And I think that that's of it showcases like a misunderstanding as to like how markets work. Because there is no best hedge like ever.

[00:19:33.20] - Speaker 1
Right?

[00:19:33.27] - Speaker 3
You can't say like okay, only buying the 25 Delta Vix calls. Right? Or only buying the 5 Delta S P puts. Like there is like that doesn't exist. Right? Because markets are very dynamic. Like ball surfaces move, they change, pricing changes, positioning changes. All those things really matter. So I think this is where it gets a little more detailed and I, I do understand that some investors don't have the infrastructure to look into this. But in a perfect world, let's say that they did. Right? Here's sort of what, how you should think about this. You should always look at areas where there's value historically. So you can say okay, if I'm looking at this 10 Delta 1 month Vix call maybe historically and I'm just going to say this for easy math, maybe historically this trades at like a, an 80 volume. And then today, you know, or I'm sorry historically over the last 10 years it trades for 80 Vol. And then today I now see this trading at a 40 volume. There is value in buying that type of protection. Right? When the convexity is priced low. Right. The vols are priced low and your convexity payout could be quite high.

[00:20:49.15] - Speaker 3
So looking and understanding historical volume prices is pretty critical in doing this and I like to use this exercise. So sometimes when, when investors will come to us, I try to explain the importance of execution on the tails and I'll say okay, let's assume you went and you bought a S p put for 10 cents and you went to all your friends and family and you said hey I bought this S and p put for 10 cents. The majority of the world would say okay, that is a cheap put in premium terms, right? You paid 10 cents for that. It's a cheap put. So now the S and P goes down, volatility goes up and the price of that option reprices to $1. Right? So great, you made 10 times your return on that, that line, right? 10 times your return. You bought it for 10 cents, it repriced to a dollar 10 times your return. So let's take the exact same scenario now. Right? So you buy the exact same option. S, P goes down the exact same amount, vault goes up the exact same amount and the option reprices to the exact same amount, $1.

[00:21:52.24] - Speaker 3
Right. But the only difference in scenario two is that you paid $0.02 for the option instead of $0.10 one. Scenario one, you made 10 times your return. But scenario two, you made 50 times your return. And the only difference there was the price that you bought the option at. Right. The execution. So in or in order for you to get that, it starts with understanding the potential convexity. And if in order to understand the potential convexity, you have to understand the vault pricing. Right? So during March 2020, I saw a lot of institutions buying, you know, protection when Vix was in the 50s and the 60s and Vix went to the 80s and that protection barely paid anything. You know, they sort of broke even. So that's a really, really important thing. When you're thinking about tail risk hedging is, is being dynamic as to how the market is moving, how positioning is moving, how volume prices are changing and figuring out those pockets that are more opt. Sometimes the 5 Delta S P put is going to be more valuable than the 10 Delta Vix call or sometimes it's the complete opposite.

[00:23:03.02] - Speaker 2
And Ryan, to go back to you, obviously you manage your own fund. Can you give us some idea on how you protect against the risk event and what's kind of like your approach?

[00:23:14.00] - Speaker 1
Yeah, you know, you know, I think we are a little bit more in that bucket that I described earlier in that because we're kind of a long term, you know, asset protection fund. I would actually say we're long tails. Not in the same sense that Chris's group is because we won't actually make money, but the way our portfolio is structured, we should lose less money. And you know, we basically have the ability to add leverage. So really what we're hoping for, since we're, we tend to play on distress, like special opportunities and distress assets. And so for us it's great when the market, if the market collapses, then suddenly we can go from our pretty conservative portfolio to a pretty aggressive allocation. So I would say we're naturally in that fund. We're naturally, again, not long tails in the same sense. But you know, we're hoping for those kind of crisis scenarios because that's when we derive our primary alpha. When in market conditions like we're seeing today, you know, we're kind of just hanging out and waiting and hoping that we get this opportunity to spring and deploy capital. You know, I would say, I would say though that like one strategy that, you know, this is a very simple one, but if you just want a simple takeaway, I mean, you can take advantage of skew a lot of times in the s and P500.

[00:24:38.02] - Speaker 1
And so if you just want to kind of have a very straightforward, you know, trade, like sometimes just buying a put spread can be a really simple way to get some, some fixed downside protection. A very simple thing we can look at is say, say hey, in our stress testing scenario, you know, we think we're going to fall 30%. Our portfolio is going to be down 30%. We don't want to be down more than 20%. So 10, 10% wide put spread, you know, will just give us the right risk profile. And you can kind of get paid, you know, you're paying to do that, but you're paying less because people, so many people do want to buy tails on the S&P 500. And so again, that's kind of portfolio specific, like thinking about what you're actually concerned about. Chris said it great earlier. First you have to figure out what you're worried about. If you're worried about only what happens beyond, like beyond a 30% move, then that's not going to do you any good. If you're worried about what happens on the way down, like my fund is where you're just trying to minimize losses on the way down, then that kind of strategy can make a ton of sense.

[00:25:39.14] - Speaker 1
And the last thing I would mention, you know, for people who are trading options, like something we do in unlike commodity derivatives trading business, is there's some very simple checks. Even if you don't have the scenario analysis that Chris and I would use, where we can kind of stress test our portfolio and look at how it behaves in all these market environments. There's some very simple tests which is, which I've seen used even by profession, professionals and institutions, like what is my delta if the market goes to infinity or to zero, Right. Like, like if you're trading a bunch of options, just say, like, am I going to be net long or short stocks if the market goes, you know, to infinity and am I going to be net longer short stocks if it goes to zero? That's a great simple check that you can run on an options book, right? Like if you're doing, if you, if you like to play with condors, you know, ratio, like ratio spreads, one by two call spreads, foot spreads, things like that. Just a simple, hey, am I net short strikes or long strikes in a rally or sell off?

[00:26:37.28] - Speaker 1
It sounds simple to just add up the total number of calls and puts that you have in your book. But it can be shockingly effective and we still use it to manage a really complex exotic options book, at least as a second check to make sure that our Greeks and other risk levels are not missing something.

[00:26:57.25] - Speaker 2
And this is a question for both of you guys. Like Chris, you mentioned about infrastructure and of course, obviously you have a very complex tool that you use, but could you maybe give us an idea of what kind of tools like data you use, what kind of platform you use and what kind of things you look for and the same thing?

[00:27:19.08] - Speaker 3
Yeah. So I would definitely not suggest this to individual investors because this costs a lot of money, like a lot of money to have this platform. But yeah, we use a third party platform that's called Spider Rock, which is sort of like an institutional market making, low latency derivative based sort of platform. And then we bake out our own execution logic within it. So the platform is pretty, like, it's pretty flexible. And then you could build your own execution logic inside the code. So that's what we use. But you don't need that to make money trading off options at all. Right. I, I hope that that message is conveyed. Like I have friends that are at smaller size funds, I have friends that are independent investors and like they don't utilize that type of stuff. What I do think is important is just the infrastructure around. Like historically looking at volume and volume surfaces and understanding, you know, potential payouts and values. Like you just can't go and say, okay, like I'm just gonna, you know, I want upside to Tesla, I'm gonna buy Tesla calls. Like that's how you really lose money, right? Because like you are effectively paying for something where you don't know the price and, and in anything in life, right?

[00:28:38.24] - Speaker 3
You just can't blindly just go in. Like imagine if, if someone said, hey, I'm going into grocery shopping and I have no idea what the price for any of this is and I'm buying it, right? That would sound silly. So as like option traders and ball guys. When we see people buying these option in premium terms, right. Completely agnostic to volume, it's sort of the same thing. It's like, well, this is kind of silly. So you have to. The same way how, you know, you go to a grocery and you know like, you know, a steak, a good cut steak is going to cost you 20 bucks or something like that. You have to have some sort of infrastructure where you can value, you know, what that steak looked like historically at other shops, you know, stuff like that. And funny enough, I was actually speaking to a friend of mine who is building out this type of like platform. He's, he's pretty well known on Twitter too. It's, it's the other Chris. The other Chris. I'm always gonna botch his name but, but he has a, he has a thing called Moon Tower that's, that's really cool.

[00:29:39.15] - Speaker 3
A lot of independent traders like sort of gravitated towards. So I would definitely aid like independent traders to, to research into these type of platforms that can be good for the individual investor. Because if not, you're just like blindly going into this stuff. But you don't need institutional grade stuff to make money trading options. You definitely do not need that.

[00:30:00.29] - Speaker 1
Yeah, yeah, I would say, you know, we are building our own for that reason. And, and one of the reasons that I've been partnering with Mendor Q for a while now is, is for this reason because I do think it's, it's hard for a small fund or a retail investor to have this historical data. And so that's like one of the projects that we're working on together, right. Is to eventually exactly what Chris just described as the project we've been working on for a little while now, which is, you know, how do we have this sense of historical value? What are averages, what are lows, what are highs? Are we buying at the high or the low? That doesn't tend to tell you what's going to happen in the future, but you at least have that sense of value. I love the way that Chris said it. Like you have to know how much you can make like, like from convexity or what you have to know, like are you buying this option because it can go to 40vols or are you buying it just because you think the price is going higher? Because if you just buy and call because you think the price is going higher, well, you know, news flash, the whole market might already be pricing that in.

[00:30:59.20] - Speaker 1
And so it's critical to have this baseline value and so that's like kind of one of the projects I think we're working on for 2025. And you know, same for my fund. Like we're always trying to build that ourselves. To be honest with you, it is tough for a retail investor to do that. As long as you focus on a couple of tight strategies though. I mean you just have to know it well and know your kind of niche well.

[00:31:26.10] - Speaker 2
Yeah, and we have. So a lot of our users are obviously looking at options and one of obviously the common strategy that they use is zero DTs options on both Vix and SPX. So the question that we have is how do market makers affect, you know, those market dynamics, especially when we look at VIX and spx. And how do you like look at that kind of information when you obviously build your strategies? And that's for both you and Ryan, Chris.

[00:31:58.20] - Speaker 1
Yeah, I haven't done a 0ttes, to be honest with you. Like we, in my experience, I'm curious what Chris's experience is, but I would say that we typically call that pen risk like thinking about sort of super short dated stuff, even if it's not zero dte, even if it's, you know, stuff that's, that's been on the books longer and then coming off. And frankly we would typically just get out of it and outsource it to other people who specialized in it. Because in my experience you have a whole different set of models, different ways of calculating your delta, different ways of kind of measuring your risk. And so I think like, yeah, so I'm curious what Chris has to say about that.

[00:32:35.15] - Speaker 3
Yeah, so I think the, the emergence of zero dts have made its way into having two main functions. The first is like they have become more of a yield based thing from in our opinion from like a lot of the RIA community. So like different type of these wheels yield programs, these zero dts are getting sold, right? So instead of you selling like a one month option, you can now sell you know, seven zero dts, you know, like sell at this day, sell at this day, sell at this day, right? And then sell a weekly and a three week option. And then what this does is removes the path dependency as opposed to think about like back in the day you just have to sell a quarterly option, right? And then you could just get destroyed on the last day. So I've seen more frequency of these like wheel programs with zero DT utilizing this type of yield, like serving as a yield form and then it serves as like a cleaner way to hedge gamma risks. For more sophisticated Vol. Arbitrageurs. So I would say, you know, for us, you know, we could hedge event risk a lot better in different pockets, in different ways and think very creatively about that type of stuff.

[00:33:52.03] - Speaker 3
I would say that the market making community has enjoyed trading them from our understanding of some of those market makers we trade with. I, I don't think that anybody has been like any, any of the market maker community has been negative in terms of zero dt. It's, it seems like it's continually provided us a source of revenue for that group. So yeah, I mean I think the exchanges want to list zero dts. Market makers want to make markets on them and people want to sell them for the most part. And then V guys want cleaner ways to hedge a gamma. So as of right now, like it's not super meaningful but, but I think where it becomes meaningful is that there are certain days in certain pockets of like gamma exposures and how vols are changing where the reflexivity that comes from zero dt can cascade into something else. So like if you think about the conditional probability around like the market going down 2% after the market goes down 1% then this is just hand waving math. Right. But like I would say that it's higher today than 10 years ago because of the reflexivity that could, that's embedded into the broad market from the options market.

[00:35:09.02] - Speaker 3
And I think a big piece of that comes from the gamma exposure from zero dt. So I know that may seem like all over the place, but what I to summarize it, it's like this thing can create something that's reflexive and drive bigger market moves during certain moments, not every day, but during certain moments it has the potential to do that.

[00:35:28.06] - Speaker 2
So you think like there's obviously there's a lot of talks on Twitter about zero dte can become a terror risk event. Right. So I imagine that you agree with that.

[00:35:37.17] - Speaker 3
Yeah, I would say I agree with. I mean you get a lot of talks from Twitter on that like every, every week, you know, or every like month. Like oh, you know, this scamming profile there. But the reality is that for the most part the dealer community, like it takes a, a lot to get that dealer community off sides. But the thing is, is when they do get off sides it's easy to spot. Like you could tell from the way how local balls are changing and the repricing of local vaults when like a dealer's offside and, and that news spreads pretty fast around like the whole agency community. Right. So like all those agency desk will like shop that news very, very fast. So, yeah, hard for dealers to get offsides, but when they do get offsides, it spreads fast and vols erupt really, really quick.

[00:36:21.09] - Speaker 2
Yeah. And Chris, another question that we have. So can you, like, talk about our retail investors can make money with zero ET options. Obviously some of our users are very familiar with that. But, you know, maybe coming from you, like, how would you go about it if you were a retail investor?

[00:36:40.26] - Speaker 3
Yeah. So what I would say is that every strategy like you, you can't get caught up in thinking a trade structure is a strategy, right? So, like, selling a straddle every single day is like, that's not a strategy that. That's the application of a structure. Right? So it starts by understanding, like, having a hypothesis in markets and then going and quantitatively affirming that and then building out good infrastructure around that. So I think you can utilize zero DTE to, to capitalize on certain things that you may see in markets. Right? So, so here's an example, right? I'm going to give you guys like a re, like a real example here, but not something that has, like, validity around it. Let's say you said, okay, every Wednesday at 1pm You've noticed over the last 15 years the S&P tends to go up 50 basis points, right? That's your view. You've statistically affirmed that from the data. And now you say, okay, instead of historically me using 50% of my capital usage to try to capture that trade, what I'm going to do now is use 1% of my capital usage, have the same type of notional coverage, and just buy a zero dt call.

[00:38:03.01] - Speaker 3
All right? And that's a way how you can use zero dt to capture a strategy that you've baked out. So it's not that like, 0dte can create the strategy. It's like you need to create a strategy and then utilize zero DTE to harvest that. Hopefully that makes sense. But I would definitely say for everybody who's thinking about strategies, it needs to stem from some sort of market hypothesis and then be statistically validated. It can't just be something that's like, oh, zero DTS are there. I'm, I'm just gonna sell zero dts every day to collect the premium. Like, that's where things usually go wrong. Or I'm just gonna buy zero DTS every day. Like, that's where things usually go wrong.

[00:38:47.09] - Speaker 1
Yeah, I love that answer. Because that gets back to the point that Chris made earlier too, right? Which is that, you know, if you're selling zero dtes like it's. You're expressing the view that you're short volatility, that you don't think that they're adequately pricing that in. And it's unlikely that market makers will always be wrong every single time. Right. So like, so you have to have a view that it's periodically mispriced for and that it might stay mispriced for a certain amount of time or you know, there's got to be something like just selling options is generally not a good strategy. I mean, there can be long periods where it's a great strategy. But like Chris said, you have that view.

[00:39:26.20] - Speaker 3
Yeah, for sure. There's times to buy options, there's times to sell options. It's like your job is to figure out a strategy as to when to do each one of those things. And the options are just the tools that you use to express and harvest that edge and that alpha.

[00:39:42.13] - Speaker 2
Yeah. So we got a few questions about vix. So one of the question is if you can give your view on this, why has the VIX not been moving when the SPX dropped? And what do you think drives that? And then we have a follow up.

[00:40:01.12] - Speaker 3
Yeah, I mean, so, so I could, I could take that. Right. So there's a measurement that that I use quite frequently on Twitter. It's called like Spot Vol. Beta. And, and all this means is that you can look at the historical relationship that VIX has to the S and P. So like let's say the S and p goes down 1%, maybe Vix moves up 2 volume or something like that.

[00:40:23.00] - Speaker 1
Right.

[00:40:23.08] - Speaker 3
And you go back historically and you could measure this type of relationship of the reactiveness of volume based on the declines or the advances in the S P. I would say that in 2022 we saw a very historically low spot volume beta. So vault was very unreactive during that time. And then there were moments throughout this year where we saw extremely high spot Vol Beta. Like August of this past year, the S P decline. During that, that whole yen thing, we saw an extremely strong spotball beta. So I don't, I don't know what specific time frame you're, you're thinking about, but I would say that it seems like the reactiveness of, of VIX to the S P has been well in line, especially over the last few days. I mean you look at like Vicks balls have been bid across the S P moving down like, you know, 20 basis points, 50 basis points, days you're seeing ball move up, you know, a ball point or two. So I would say that right now that that relationship is, is quite fair. But it all boils down to positioning, right? Like people will buy Vol when there is a need to hedge, when there's not a need to hedge, when positioning is light, they won't buy vault.

[00:41:36.23] - Speaker 3
And I know it sounds very simple, but like it can really be summarized into that.

[00:41:42.02] - Speaker 1
Chris, is your view that that's a function, that, that sensitivity, the beta, the spot volume beta is a function of how high or low volatility is in the first place?

[00:41:53.17] - Speaker 3
Yeah, I would say that it's a function of a couple of things. One, I would say it's a function of positioning. Two, I would say it's a function of the cost of convexity. And then three, just pre hedging, you know, like think about like the notional coverage that needs to take place as you have these big pension plans that their portfolio is growing as the S P is growing, right? Like S P is going up, they need to hedge more, right? During moments where they're under hedged and cash is at use. Well, that's where VOL could really, really be reactive. Because like, and, and you guys as independent investors who are listening to this, think, think put yourself in the same shoes, right? Imagine you have a portfolio that doesn't have hedges on. Well, when your portfolio is going down, you're going to be very reactive to go and pay anything for the cost of that hedges because you need to get the hedges on. That type of aggressiveness is what widens out spreads and ultimately drives the price of VOL higher. So the positioning could come from people that are long equities, short volume.

[00:43:01.06] - Speaker 3
All of that sort of gets baked in. But that reactiveness and that need to reach for hedging is really important. And, and you can think about the year like 2022 as well. Like a lot of people were just enamored with 2022 because they were like, well, the fall isn't going up, but stocks are going down. But if you look in Q1 of 2022, there was a lot of deleveraging across hedge fund, hedge fund books. Long only equity guys like a lot of people, well, telegraph the, the rate hikers. And then in 2022, when that, that now came, it was like people were just slowly deleveraging and there wasn't that need to, to forcefully go and buy hedges, which is why fall didn't skyrocket.

[00:43:46.00] - Speaker 2
Okay, that's great. And following up to that, so vixaspiration is coming up. How is that going to Affect like, you know, maybe the market or the SPX in your point of view.

[00:43:59.15] - Speaker 3
I mean, you know, take what I say with a grain of salt because like we trade in and out of stuff all day long and like our views change all day long. My view may change like six times throughout the trading day. Right. Like so please take it with a grain of salt and you know, make sure you do your own due diligence on this. But me personally, I think that there's been a very repetitive sequence that has transpired going into VIX expiration this past like year. And I actually tweeted this early this morning and then also post fomc, which I think is like you'll see this run up of Vols going into Prio FOMC just slightly and then post fomc it just releases. So I think after tomorrow I think Vols will release and I think we go into a little bit of holiday lullaby where like it's going to be hard to get Vault to react. That's just my opinion. I don't know, maybe I could be wrong obviously. But I do think that next year becomes very interesting for Equity Ball. I think next year is the year where it will surprise a lot of people in terms of how reactive Equity Ball is going to be.

[00:45:05.07] - Speaker 3
And that's strictly a view based on positioning. Like we have seen very big forms of positioning making its way into the US equities, not only across like retail investors and US participants, but just speaking with like some of the international foundations and endowments and stuff like that. You know, we've seen a big interest from Asia, we've seen a big interest from Australia, we've seen big interest from Europe. So like these sort of things make us feel like positioning is going to be very one sided and, and whenever that's the case, Equity volume has the opportunity to perform whenever markets go down.

[00:45:41.27] - Speaker 2
Okay, and this is a question for both Ryan and maybe we start with you, Ryan. So obviously we are towards the end of the year, what do you think the market is gonna end up towards the end of the year? Are we gonna see like an end of year rally? Like what's your view on that based on the position that you see right now?

[00:46:02.14] - Speaker 1
Yeah, that's a great. That is the million dollar question. I mean, I've frankly been a bear for a while now. You know, I just think this run up is, is severely overextended. I feel like you're starting to see some of that. So I think if I had to guess, you could see some, some profit taking Going into year end here, I think this could continue. But again, I mean I'm just certainly not a short term directional trader so I would, I would take that with a grain of salt. That's not, we usually make our money over kind of long run stuff and allocation decisions. But yeah, I mean, you know, I'm not the first one and I think a lot of people like me have been hedging their bets too. Goldman put out a similar call, seen a few other analysts. Basically also the same thing which is like, well, nobody wants to call that the market's going to fall yet because, because momentum is a real well observed and studied phenomenon in markets. But at the same time everyone's seeing that how expensive markets are and, and how stretched they are. And so everyone seems to have this, this intuition that it's going to turn.

[00:47:06.14] - Speaker 1
The question is just when. But nobody wants to kind of step in front of that and you know, and call for it and say it's going to happen. Besides the people, you know, you've got some people who are always calling for collapses and I'm trying to avoid falling into that camp. There's the old joke, right, that like economists have predicted like 13 out of the last four recessions kind of thing. So I try to stay out of that. So, you know, you know, if I, if I had to guess, I would guess we're going to finish lower. But you know, I'd say that I think more about like volatility, like reactivity, like if we, if we start going lower, I would anticipate, like Chris said, that it could, you could see a bigger and more reactive kind of decline that touches that off. Because of positioning.

[00:47:57.12] - Speaker 3
Yeah, yeah. I mean for me, I, I, I think what's interesting about this market is exactly what Ryan said, right. Like, I think everybody looks at it and is like, wow, this move is way extended. I don't think there's anybody that's like, oh wow, you know, this has a lot more to run within the end of the year and, and stuff like that always piques my interest because markets sort of do the thing that a lot of people don't expect. So I think just based on there's like two big things that are echoing in my head which is like skewing my view. One is understanding the foreign investor appetite to be allocated in US equities for Q1. And the second thing is the light liquidity that we're going to have during the next week. Right. My partners and I were talking about this like a couple hours ago. That, wow, trading for the year is done this Friday because next Tuesday is Christmas Eve and like people are going to be completely checked out. So when you have light liquidity and the natural flow right now has been reallocation flow coming in from like, you know, those, those, those deaths and cash equity guys have been working those stuff over the last few weeks.

[00:49:14.13] - Speaker 3
I think it's hard to move away from the fact that like stocks might just continue to grind higher into the end of the year. And that's just, that's just my view, like I said I could, I'm not super convicted on that. But those are the two things that are like playing in the back of my head is like there's still more rebalance flow that, that needs to get mandated into the equity market for the start of Q1. And then the light liquidity that's about to hit after Friday makes it feel like maybe we just grind higher, but who knows? We'll see.

[00:49:46.00] - Speaker 2
And the follow up question is what can bring the market down? Right? Because we've seen obviously a very strong momentum as you mentioned. So what, what event of what, what things could bring the market down right now?

[00:49:59.20] - Speaker 1
Yeah, I'll, I'll go counter to what I said before and I think that's the big challenge. It's hard to see there's still a lot of like liquidity in the system. Right. It's, I actually don't see the obvious. You know, the obvious hit, at least in the short term. I mean, longer term, I do think we're due for a recession. I do think that we're starting to see debt levels climbing and leverage levels climbing, but we're not there yet. And so barring a big economic event like a recession to touch it off, I don't personally see it. Which would go more with Chris's view. You know, with the one big caveat that oftentimes it's usually the thing we don't expect, right? It's usually like nobody was talking about mortgage backed derivatives in 2007 when some market maker decided to check his marks with somebody else. And then, you know, it wasn't on most people's radar. And so I think, you know, similarly, you know, if I had to guess, I think there may be five to seven different touch points that could set something off, including some of the retail leverage. I do think there's more retail leverage in the system than there has been historically around options and other things as we've had this kind of big wave of people.

[00:51:18.27] - Speaker 1
But I don't know, it would take a move big enough to stress them before that would start to show up.

[00:51:26.08] - Speaker 2
Okay, so I think we, this is great. So we're gonna have a couple more questions and then we start wrapping it up. Because this has been amazing. And the question I have as a follow up is like, so if you're an investor, you mentioned a lot of funds are coming from Asia, Australia. Like, if you're not investing in the U.S. what other asset would you like, consider? The U.S. market has been very strong, but if you want to diversify and how can you go about that?

[00:51:58.10] - Speaker 1
Well, can I make just one point to that, though? I wouldn't say that the US market has been very strong. I'd say that a subset of the US market has been very strong. But actually valuation, whether you're looking at small and mid caps or international equities, it's really been everything but the magnificent seven and these things that has lagged. And so I actually think valuations are pretty healthy. You know, you don't have to go far, you don't even have to leave the country, which, you know, again, defer to Chris on like, what he's saying in terms of like, attractiveness for international portfolios. But yeah, I think it's a, I think it's a mistake to just look at the s and P500 right now when it's become like record levels of concentration in a few stocks. I think it's 30% right now in seven names to look at that and say, okay, well, the whole US market's super expensive. I don't think those two follow.

[00:52:51.29] - Speaker 2
Makes sense.

[00:52:55.12] - Speaker 3
Yeah. On my side, I mean, I've never been a good investor ever. I've, you know, I've been a trader my entire career. Right. So like, I just operate with like, what's in front of me. You know, statistically do the same thing over and over and over and like, you know, get really good at reacting. So please take, keep that in mind that, you know, I'm, I'm misguiding you here. But yeah, I think like the whole China thing, right, there's like, there's, there's tons of stimulus coming into China. Like, I could see how that could be appealing in the long run. I think over, long enough time, you see, when like governmental intervention is very axed on something, I think it could move especially in an economy like China. It's not an economy like Argentina. Right. Like there, there, there are other big economies that are intertwined with China. And that's why I think that maybe that could be an option. I think alternative investing is, is more interesting than anything though, like alts and like the hedge fund space and stuff like that. I know a lot of European investors are big into the alternatives world.

[00:53:58.07] - Speaker 3
Like we get a lot of European investors that reach out because they're interested, involved making money when markets are going down uncorrelated former returns. So yeah, I think there's other things to invest in as, as opposed to just like stocks on, you know, a domestic level or stocks on a certain geographical level. It's like tons of other ways to, to go out there and make money. But for me it's just been my own trading.

[00:54:28.25] - Speaker 2
All right, and one last question, right? So January we're gonna have a new president. Are you bullish or bearish? There's been a lot of talks about the Trump trade. What's Your view for 2025? And same to you, Rhyme.

[00:54:44.23] - Speaker 3
Oh, oh, okay. Yeah, sure, sure. I could go first. Yeah. So I, I was actually telling this to an investor of ours two days ago that if you think about Trump's last presidency, there were three tail events during that presidency, right? You had Feb 2018, which is Volmageddon. You had decent 2018, which was the rate hike chatter. And then you had March 2020, which was Covid. Now the first thing that we get back from investors when we've been telling them this is like, well, Chris, like none of those events had anything to do with Trump. All right? They were all like unique events in their own respect and we agree with that. However, Trump brings something that is very important. He brings the positioning that is needed to get those type of events. So if you think about fall Magetta in February 2018, that could have never happened unless you had a year like 2017. If you think about COVID right. March 2020, when your Vol Balls were trading in the 80s, that could have never happened unless you had a year like 2019. So Trump brings this type of very one sided positioning to, to markets, capital markets in the US And I think that that's going to be the case again.

[00:55:59.11] - Speaker 3
The other thing that he brings is this reactiveness, right? So like I remember, you know, trading in like 2017 time period, it's like it sounds like a joke, but you had to watch every single tweet that Trump was putting out. He was putting out insane tweets and actually moving markets, moving balls, moving commodities. And I think that we're not far fetched from that. Right? Like he's going to come back and, and he, the President will be outspoken about Certain things. In addition to that, he's bringing in this cabinet like guys like Elon Vivec and, and whether people believe with their policies and whether the policies are going to be good in the long run or bad in the short term, whatever. I think they are a cabinet that is actively seeking change. Right. They're not looking to stay with the status quo that has existed for the last four years. And it's sort of like seltzer water. Right. So when you shake up seltzer water, it's going to be, you know, very reactive and explosive. And I think this cabinet is coming in to, to the, the, the, the administration and looking to actually make change.

[00:57:05.02] - Speaker 3
And I think markets will have a tough time digesting those changes. So I don't know if stocks are going to go up in the long run or down or, or whatever. I would, if I had to guess, I would say up. But I really feel strong that volume is going to be reactive next year. I think the way how this type of stuff gets digested from capital markets with extreme positioning, volume markets will be reactive throughout this, this interval.

[00:57:29.21] - Speaker 1
Yeah, you know, I guess similar view. I mean, totally agree with everything Chris said about the positioning. I'd also note, I would generally say that I think trying to trade too much around the President is a tricky proposition. A lot of people are surprised, surprised. A lot of people think automatically like, oh, Republicans must be better for the, for the economy. And so stocks should go up more. But when you actually look historically, it seems like, if anything, stocks might have outperformed a little bit under Democrats. But I don't think that you should read into that the other way and suddenly think Democrats are better for the economy. I think, I think many of these fiscal policies and things takes years to, you know, actually play out. A lot of it depends on what's going on with Congress, you know, like, you know, what's going on with the deficit. My biggest concern is nothing to do with Trump, but simply the fact that whether we've had Republican or Democratic administrations, the deficit has skyrocketed and we've had massive fiscal stimulus right. Over the last 15 years on top of monetary stimulus. And so we've been getting double shots of stimulus.

[00:58:34.14] - Speaker 1
And that's kind of why I said the market could continue to grind higher short term because there's. Nobody's really taking their foot off the brake. Feds is already cutting rates again without inflation having come down and Republicans are talking about cutting taxes without cutting spending. So when you look at all of that, yeah, they can keep doing that. But at some point that does start to weigh on us as our debt to nobody knows.

[00:58:58.22] - Speaker 3
Right.

[00:58:59.00] - Speaker 1
Anytime people start waving the flag about debt to GDP and all that other stuff, nobody knows how high it can go. But each increment will be harder like for the government to fund and it's going to make it harder. So I think trading based off Trump is again, will he be able to get Republicans in Congress to go along? That's not clear. Will they balk when they see the cost of fiscal stimulus and if interest rates don't come down, will they balk when they can't even cover funding the death the existing deficit? So they might find that their hands are tied more. And so he may be making his changes more focused on other things like Justice Department and kind of non economic focused things. So I would be real hesitant to trade it either way. But like Chris said, it should concern you that so many people are so convinced that he's going to make the market soar and they're all in.

[00:59:58.16] - Speaker 3
Right.

[00:59:58.23] - Speaker 1
They're positioned for it. We saw that since, since election day.

[01:00:02.20] - Speaker 2
Yeah. Yeah. Awesome guys. So first of all, I want to thank you Chris. I want to thank you, Ryan. This was really amazing. For those who have been listening, if you guys have any question, please send us go to mentor Q.com send us a message and we'll get back to you on that. And then I don't know if you have any last words to, to add Chris or Ryan, but I really appreciate the time and hope we can have you again in a similar session.

[01:00:31.17] - Speaker 3
Yeah, no, well, I'll say thank you guys so much for having me. Ryan. It was definitely a really good discussion to just go back and forth with you and Fabio as well with you. So thank you guys for having me and yeah, I hope everybody has a good Christmas and good holiday season.

[01:00:44.08] - Speaker 2
Absolutely.

[01:00:44.29] - Speaker 1
Yeah, same everybody. Enjoy the holidays. Merry Christmas. Whatever you're celebrating, enjoy it and get some rest because it's probably going to be a crazy. I think it's going to be reactive here next year too. So get ready for it.

[01:00:57.02] - Speaker 2
Absolutely. Thank you guys and happy holidays and see you soon.

[01:01:00.05] - Speaker 3
Okay, talk soon, guys. Bye.