Schaeffer's Market Mashup Podcast: Adam Warner and VIX/VXX

A deep dive into recent VIX/VXX movement

Managing Editor
Feb 25, 2021 at 10:00 AM
facebook twitter linkedin


On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is joined by finance author, trader and avid New York sports fan, Adam Warner. They chop it up over the VIX/VXX's recent movement (9:05), the role of social media in retail investing (18:45), and whether a market correction is upon us (21:50). And in between, plenty of Julius Randle, Lenny Dykstra, and Mets talk!

 

Transcript of Schaeffer's Market Mashup Podcast: February 25, 2021

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. I am very excited to introduce today's guest; I have been looking forward to having him on for the longest time so let's get right to it. Please welcome Adam Warner; an investing Renaissance man, author and trader. He's the author of Options Volatility Trading Strategies for Profiting from Market Swings; a book released back in October of 2009 which, perfect timing for market swings. Adam, how are yah man?

Adam Warner: I'm doing good, thanks for having me Patrick.

Patrick: Good, good. Well I guess I want to start and congratulate you Julius Randall making his first NBA all-star team and the Knick's, first since Kristaps Porzingis in 2017, 2018.

Adam Warner: It's been great. I was looking at it. And, I don't know if he's better than like Bam or Felter who got that left off, but he's been fantastic. He's getting triple doubles and getting forty points. It's fun actually, that the Knicks are relevant for the first time in, kind of forever. 

Patrick: Yeah, I really like the pieces they have. I have a couple of friends in Dayton, huge Obi Toppin fan. I see a lot of Shawn Marion in there with him. So yeah, like you said, I never hated the Knicks, you know? Well, one, I wasn't threatened by them as a Celtics fan. Two, when they're good, it's good for basketball so I'm happy you guys are on the upswing.

Adam Warner: Yeah, I mean, I'm old enough to remember the 90's extremely well and last year with that Michael Jourdan thing was on and my son came in was watching, I'm like, you know, he has no memories of the Knicks ever being good. I'm like, you know the Knicks were actually really good in the 90's, you know? Year after year they were, you know? Find and the game was so different and they were relevant, you know? And for 20 years they've been terrible. 

Patrick: Oh yeah.

Adam Warner: (2:15 inaudible) relevant, I mean they're not gonna make it to the title but for them to make the playoffs it's progress for them and yeah they got some good, young guys here. And Quickly is very promising and yeah. Like so Toppin, I was so excited when they drafted Toppin and I thought he was (2:26 inaudible) in college last year. And no one knows, you know? Dude, it's the Knicks so what they'll end up doing is they'll trade five of them for, you know, a 32 year old superstar but decline.

Patrick: Well I looked at Toppin's minutes and it was classic Thibodaux, just like playing him 10, 11 minutes. It's like, come on, man. Get 'em out there. Well, since you're a new guest, I want to start from the beginning. Give me a quick snapshot of your background. I know you were Johns Hopkins majored in Econ, so another fellow D three-person here; big lacrosse school. Tell me how you got to where you are today, what you're doing now, just kind of, break it down.

Adam Warner: I started a business as a Market Maker on the American stock exchange. It started in late 80's and, it was a very different business back then. We had single listed options, in other words, if you wanted to trade like Caterpillar options, you had to come to the Amex. If you wanted to trade Phillip Morris options, a couple off the top of my head, you had to come to the Amex. And so there was no, you know, online trading; it didn't exist at the time. Online didn't really exist at the time. So it was a good business for a while but by the end of the 90's, a lot of things happened to make that poor business. They went to decimals and then to pennies so it's heightened on the markets. The exchanges started all listing everybody's options so you would now have competition with all the other exchanges. And then you had online exchanges popped up and before you know it the spreads, went from, you know, a quarter to 2 cents. 

Patrick: Right.

Adam Warner: And you had the match other the markets. And so, there's no edge in being on the floor. So I left in 2001 and I figured as long as I can, like, train again, I might as well. As long as I can trade online, I might as well be able to dictate my positions. So I started trading online, this about 2001 and I subscribed to some websites and one of them was Real Money. It was under the street.com umbrella and they also have a site called Street Insight. And one time they said they were looking for writers. So I sent in an email and they said sure. So, I got my first ever writing gig and started writing about options and volatility and whatnot for street insight. And then I went (5:05 inaudible), I was going to switch. I guess I started reading (5:08 inaudible) and I might be dating myself (5:11 inaudible) Paris fantasy. 

Patrick: Yeah, you lost me.

Adam Warner: It was this fabulous site at the time. And, it turned out there was a non-compete agreement between the two sites, so I had to leave. I had to take I think, I forget it was either 3 or 6 months so I started to, it was about the time blogs were getting popular. 

Patrick: Okay.

Adam Warner: So it was, I have a few people that read my (5:30 inaudible) so, let me just do it in blog form. So I did it and it got really popular and my most popular topic was, oddly enough, Lenny Dykstra. As a big Mets, I am a big Mets fan and he started writing up an options column for Kramer's. I forget if it was the street or real (5:56 inaudible). And he was like making these outlandish recommendations and getting these outlandish representations of how well he was doing. Then it became like a running joke, he was recommending deep calls and these stocks, and he was like. 

Patrick: Lenny Dykstra was?

Adam Warner: Lenny Dysktra was, yeah; and Lenny Dysktra investment guru.

Patrick: (6:12 inaudible).

Adam Warner: He doesn't have any incarnations missing. Anyway, so here's this guy who was like, one of my all-time favourite players, but he was just (6:19 inaudible). I loved it as a kid, but he was just running these absurd options advice columns and he was like, misrepresenting his returns. What he do was, he would like mention only the winners that had closed out, but, let's say he had one that went against him, he would like literally never mention it again. So you're claim like he had like, you know, 99% winners, which he very well might've. But what he didn't mention was like, the losers were like, the winners were tiny and the sheet losers were just absolutely enormous. And if you actually looked at the numbers, the losers totally wiped out, any wins he had. Anyway, obviously, they did this and they once got picked up by (7:06 inaudible) cause I think they covered him once and I sent an email, like maybe, clarifying what he had done and then they linked to my site and they blew up my site up cause I got so many hits just from, kind of, the Lenny Dykstra. I was very sure that Lenny obviously did a million other things that got him into trouble beyond. 

Patrick: Yeah.

Adam Warner: His options that (7:28 inaudible).

Patrick: Well that's the long story short is never meet your idols, really.

Adam Warner: Right, right; it did cross my mind once on Twitter once where there was like a music video, I think. And I don't think he ever, I never mentioned that I used to write about him. Anyway, so for the blog I started doing (7:45 inaudible) thing got outdated really, you know, with Twitter and whatnot. So I just started doing freelance writing after that, which led me to a Schaefer's. I wrote for, column for Schaefer's for a number of years. Plug here, I love Schaefer's, love the people.

Patrick: Yes, there we go. I was sitting there waiting like, here we go, come on. Let's get it. 

Adam Warner: No, but everyone I ever dealt with was so nice, knowledgeable and I really loved it. I just kind of ran out of, like, daily ideas on telling people. I don't know how many times I could tell people, you know, some of these esoteric option products are, you know, (8:30 inaudible) but they're really bad, long term. So right now I just, I don't write much anymore, but I do trade, I guess. I do more long-term investing now. I don't do much in my 1short term training. So, just; you know? Like.

Patrick: Well, it sounds like you've had your hand in everything and your Twitter profile, which, you know, we'll get into that later; you know? It says in VIX, we trust so that's kind of where I'd like to start. 

Adam Warner: Sure.

Patrick: What is a VIX crush? And did it play a role in the recent highs and the, you know, subsequent pullback from 2020 into 2021, you know? In the past week, you know, we had that brief, very brief, dip below 20. Unpack that a little bit, you know, to start. 

Adam Warner: Well, I think that, I mean VIX is better looked at as reflecting what's happening as opposed to predicting. So, I think, just kind of, VIX is a perpetual, 30 day at the money-ish option on (9:43 inaudible) and it measures the volatility of that. So it's extensively predicting what the volatility of the market is going to be over the next 30 days. But, when you look at the numbers, like, I used to run numbers. I believe this is from a book where if your offset VIX and say like, how to do predicting the feature versus how to do just predicting what just happened. And, I don't have the exact numbers off hand, but it currently, hit at almost nil with, going forward and it correlated an awful lot with what just happened. So, a bit of the crash might be, you know, the market was very strong and then it kind of tapered off. But, you know, it's drifting a bit now but it's not doing anything too violent and I think the crash is more just reflecting. Like, it got kind of high last year and its still, you know, 20 is still a historically high number. The, let me just look this up real quick, the all-time median is about 17 and a half. 

Patrick: Yeah.

Adam Warner: So, you know, we're still even at 20 which seems low compared to last year is still on high side, all the time. So I think it's just, you know, sort of drifting off the high number. What's happening below the surface is the realized (11:04 inaudible) SPX that is absolutely imploded. That was in, you know, the 30's, the 40's, the 50's last year. The 20's recently it's down to about six. That's a very low number. 

Patrick: Yeah

Adam Warner: Like, if you use the rule of 16, where, 16 is (11:26 inaudible) is equivalent to about a 1% move in the markets. In other words, it picks the 16, is expecting a typical day to be about a 1% range. Realize what I'll tell you, which looks back to about the last 10 trading days, the number six. It means the typical range lasts 10 trading days is, you know, less than half a percent. So, you know, the actual ranges are tightening up and (11:50 inaudible) is just kind of following that. 

Patrick: It's been a lot of consolidation.

Adam Warner: Yeah, I think we're tight. I mean, I'm terrible at guessing where the market's going, but, that's what it seems like. You know the bond yields are going up. So it seems like the market's just kind of, you know, drifting a little quite right.

Patrick: Yeah.

Adam Warner: You know it's not much of a drift. 

Patrick: So

Adam Warner: At this point.

Patrick: You've mentioned on Twitter a couple of times recently, not saying that I stalk your Twitter, but I did do my research here. You mentioned VIX features, the VXX. To start, can you differentiate between the VIX and the VXX for those who aren't familiar and then give a snapshot for what you're seeing with the VXX lately?

Adam Warner: Okay, sure VIX is an index of actual options. So VIX is a hypothetical 30 day option on the SPX (12:52 inaudible) that option. There are futures on the VIX, which have fixed expiration dates and they; to simplify, it's kind of a bet on where the VIX is going to close on that date in the future. It's a little more complicated than that because; I don't even want to get started on the whole like.

Patrick: Yeah.

Adam Warner: VXX is, essentially a perpetual 30 day future on the VIX. So it's more or less a combination of the two near month VIX features. So it's always 30 days. VIX itself is not tradable. You can't trade the actual VIX. 

Patrick: Yeah.

Adam Warner: You can trade the VIX future. That's something very different from the VIX. The VIX itself is not tradable. VXX is tradeable; the idea is, essentially is, you can trade future volatility in the form of a, well it looks like an ETF; it's a little different, but it's like a stock. And so it looks and acts like a stock. The big issue is the VXX is not a stock. It has structural issues that are really important. It declines over time because the VIX features are in the tango almost all the time. Which, what that means is, you have to, for VXX, you have to look at the two nearer months and the further month out is almost always higher than the nearer month. So in order for VXX to maintain 30 day duration, it effectively has to sell the nearer month and buy the outer month. It doesn't necessarily do it that way. I believe they can do swaps and non-products, but it effectively has to buy time over and over and over and over again. That has the effect of causing you to lose value over time. People come into this, see VIX, and expect it to go up or down but they should not expect VIX to go up. They say "hey I cannot buy VIX but I can buy this VXX", so they buy it and in like a week later it's down and, you know, and VIX up or flat or floating down or whatever. And it's just been a disastrous product over time for a long-term investor. You shouldn't buy it for any length of time. It's fine as a tradeable way to play a very near term, moving. And VIX it correlates pretty well very, very, very near term. It does not correlate well with, like, (15:28 inaudible) length of time. I should also mention that this is VXX too. There is an original one, the original VXX was structured as if it was like a node of some sorts. So it had had a fixed expiration date from inception to the fixed expiration date, which was a decade away. I think it lost something like 99.9% of its value and then they created a new one that started a few years ago that now has about a 30 year deed. Although I did read they could cut the plug at any time, but. 

Patrick: Wow.

Adam Warner: So this is actually VXX 2, but it's the same dynamic. 

Patrick: Yeah that just doesn't roll off the tongue as nice as VXX. How would a retail trader read the VIX and adjust their trading strategy?

Adam Warner: I think VIX is a very good proxy for how good the market is for traders in general. Like, it's a bit like the pool of available profits. Like a low VIX, means like, you know, you really got to trade tightly and you technically have to play larger because if you want to get certain returns and whatnot, you'd need to trade more, you know? Maybe I could trade bigger. So with VIX higher it implies that the trading pools is just, you know, the potential profit is just bigger, you know? And you can branch it out to, you know, momentum stocks, you know? Whatever, you know; just higher VIX environment is just a better trading environment. So, you know, you could, obviously it's more uncertain if you lose, but, you know, you're going to be optimistic. It's more opportunity to make the trades. So, I think the best way to look at it is that, I don't think when VIX actually levels are not great for calling the market you know? When it gets extended, like, VIX versus it's moving average is something I like to look at just to see if a move is too extended. Like, when VIX goes too far beyond is moving averages I use a (17:47 inaudible) which I think pretty much the copy of the ones used (17:50 inaudible).

Patrick: Yeah.

Adam Warner: That's a decent market indicator, but VIX absolute levels, I think were just a good indicator of just the overall tradability of the market.

Patrick: Yeah, I'm looking up the VIX's10 day right now just to curiously see where it's at. Looks like, I think, five days above it, 1, 2, 3, 4, 5 days above it; yeah

Adam Warner: Yeah, it's like little above. You know, it got extended a couple of weeks ago.

Patrick: Yep, sure did. And then now it's kind of.

Adam Warner: Yeah.

Patrick: Levelling out.

Adam Warner: Here and now it's pretty close, it's kind of nothing much to really look at there.

Patrick: You're right though, I think that's definitely something that an investor or a retail investor, just trying to get as much information as possible can keep an eye on, you know? Just another alarm bell that they can use to say like, "oh, okay; you know, it breached here, let's keep watching it." I do want to pivot a little bit to the role in social media and in retail investing, given the, you know, I guess 2021, really is when it really blew up. Don't want to focus too much on the GameStop stuff and everything that's been played over. I'm so sick and tired of seeing that gene taker. But I do want to focus on the fallout. You are very active on Twitter. I want to try to understand how a retail investor can parse out good data from bad data. There is so much out there when you look on StockTwits, on Reddit, how does one kind of separate the, you know, real from the fake there and how has that impacted your own trading mind-set?

Adam Warner: That is a good question. I've never gone on Reddit, so I don't know.

Patrick: Good, good.

Adam Warner: Exactly, I knew one of the original StockTwits people, like just wanted the ones they recommended was probably (19:46 inaudible) that must be like 12, 13 years ago. I don't remember exactly what, I guess it cannot be because Twitter. It must be a little more recent than that. But StockTwits is better in that they do not just recommend anybody, you know? You have to have a bit of a track record for them to plug you and plug your material; it's difficult. I think, you know, the general rule, if someone's putting their name behind it and putting actual picks or advice in real time, you know, that stuff's good. You always got, watch out for like people to put out just the winners. You know, it's trying to show you how good they've done and you know, it's hard to trust. I don't want to use this as a total blanket rule, but when someone's not putting their actual name behind I think it creates a higher bar. I understand some people just cannot for maybe regulatory reasons or for some other reason, but, um, I just think you should have a high bar if the person's not attaching their name or a tattoo, you know, real time numbers and trades and whatnot. So it's dangerous. Cause I think, you know, like you said with Game Stop, you know that was a winner, but yeah, no one talks about, you know, the countless runs or, you know, the (21:08) people. Is like bad ideas, they'll pile them at the top and pile doubt at the bottom. And I would just recommend being careful. Just look at people who have a track record.

Patrick: I think in the same way that when you're reading a news source these days, you have to look and see, okay,  who is, you know, who owns this organization, you know?

Adam Warner: Yeah.

Patrick: You have to do research, not on what the person is saying, but who exactly is saying that. And I think that gets glossed over sometimes where; someone can, you know, you can look up someone's charts that they're peddling and it can be an echo chamber of like, "yeah, yeah, yeah. I really agree with that." But then look and see where this person has come from I think it is another step that needs to be taken. With that said, what are you looking at really in the next six months to so, because we've got Johnson, Johnson's vaccine is awaiting approval from the FDA; so six months to a year what are you keeping your eye on?

Adam Warner: Well, like I'm totally optimistic, societally with the vaccines and I think if anything they're being under sold. (22:17 inaudible) you know, if you look, they are doing a great job of stopping, you know, severe cases. They just don't know the answer on like decent amount of cases. They might be good for stopping that too, but they're demonstrably doing a good job with severe cases so I'm very optimistic in the real world economy. I guess the question is more, do the market price (22:44 inaudible) already because it's been going up in anticipation of this recovery for a while now. And that's where I'm a little questioning of that. Are you going to get, like, you know, a sell the news type thing, you know, whereas the numbers demonstrably get better. And, you know, I am at all remotely an expert at bonds but are the bonds telling you that, "hey, you know, the economy really is going to recover," and, you know, are we now I'm going to start worrying about inflation and, you know, whatnot and, you know, start, you know, if I have it priced in the recovery area now that it's going to just start pricing in. You know the not great effects of too fast a recovery. But, I'm not bearish but I'd say, you know, there is a question of like how much of this is already priced in and we are mostly there at this point and the actual market.

Patrick: Yeah, you know, I remember the day after they officially declared Biden, the winner, there was also vaccine news; I can't remember which one. 

Adam Warner: It may have been Pfizer news I think. 

Patrick: Yeah, I think it was the Pfizer and there was a huge explosion and it was just one of those days where everything was just, you know, shiny, perfect and new and you wonder now with three months later or so, was that it? And I feel like that is kind of the question people need to kind of start asking themselves and saying like, "how do I get ready for a potential correction and whatnot." And I feel like keeping an eye on the VIX, keeping an eye on the VXX are ways to strategize when it's coming. Am I correct in saying that or?

Adam Warner: Yeah, I mean, I think a good way to look at VXX is it behaves very much like a market cut. Like it decays for a different reason but it is a reasonable, it depends, downside. I mean, you know, and if it loses money for you it is not necessarily the worst thing in the world. 

Patrick: Yes.

Adam Warner: Because it might imply you're doing well with everything else. 

Patrick: Exactly.

Adam Warner: So, you know, a market heads, you know, the same you would look at maybe buying some puts against a portfolio, you know? I mean, VXX, I (25:03 inaudible) recommend this, but I'm just saying, like, it has similar behavior to if you bought an index (25:10 inaudible). So it's not terrible in that respect. The dynamics of the decay are different, but the effect is the same, you know? An option decays because time is running out. 

Patrick: Right, right.

Adam Warner: And VXX decays because of the Tango issue. 

Patrick: Yeah.

Adam Warner: Because of the rolling futures, more or less.

Patrick: One final question, who finishes with a better record this year, the Red Sox or the Mets? 

Adam Warner: Oh, that's easy, the Mets. 

Patrick: You know what, I'm afraid to say; I am agreeing with you

Adam Warner: We have Captain Money Bags now owning the team.

Patrick: Geez.

Adam Warner: And the Red Sox they are getting profits right now. 

Patrick: The Tampa Bay Red Sox over here; are you Jets or Giants?

Adam Warner: I'm a Giants fan man. My family had season tickets from when I was a kid until they switched stadiums and they made you buy these, cause at the time seat licenses were big and then it was like throwing money down for no reason. 

Patrick: Got it.

Adam Warner: I just wasn't young as much at the time anyway, but I am a Giants fan. They are periodically great.

Patrick: Yeah.

Adam Warner: But the highs are very high; I remember one of the Super Bowls versus how good they generally are, so that's fun.

Patrick: It's a Super Bowl; it is all that all that matters. 

Adam Warner: Yeah.

Patrick: Well then, I guess, in the last one will be, better record Giants or Bangles?

Adam Warner: Well I like Joe Burrow better than Daniel Jones I would have to admit so I do not know. I mean, I do not love the way the giants have. 

Patrick: Yeah, you I think.

Adam Warner: Managed the last few years.

Patrick: I think we got you. 

Adam Warner: So we got a little better this year.

Patrick: On that one. 

Adam Warner: Yeah, I think the Bangles long term, you know, they got another high pick this year I assume and I think they are headed the right direction. The Giants, I feel like they do business terrible and the Bangles (27:06 inaudible).

Patrick: Yeah.

Adam Warner: So that is one fact in the Giants favour but, the actual team, I do not think the Bangles (27:10 inaudible) going forward the next couple of years.

Patrick: Well, we will see; hopefully, you know, there will be actual people in the stands this fall. 

Adam Warner: Yeah, hopefully.

Patrick: So, but that's about it for me. Adam Warner thanks again for coming on. Do you have any thing you'd like to plug or last minute things you want to, you know, sign off with?

Adam Warner: Yeah, I'd just like to tell them to get your vaccine, that's going to help everyone. 

Patrick: There you go. Hey, my parents. 

Adam Warner: As soon as it's your times on the line, go get it. It's going to.

Patrick: My parents are getting theirs tomorrow or no, today and tomorrow. So, You know a lot of good feelings in the Martin family right now. So, yeah, go get that jab. 

Adam Warner: Exactly.

Patrick: Well, other than that, thanks again for coming on. Maybe we can do a summer episode and check-in on all our teams and, you know, kind of recap what's been going on.

Adam Warner: I anxiously await my Mets victory lap, so thank you and thanks for having me.

Patrick: There you go; yeah all right. We will sign off right there. Thanks again, everybody. Cheers.

Grab your FREE Eternal Contrarian report!


 




 
Special Offers from Schaeffer's Trading Partners