Published on Jul 22, 2021 at 10:20 AM
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Chris Prybal, who previously scored a huge win with his huge GameStop (NYSE:GME) trade before meme madness, is back! Chris talks with Patrick about his recent Advanced Micro Devices (NASDAQ:AMD) call option that scored subscribers a 201% return in just under a month! Chris talks the semiconductor sector (2:46), AMD drivers (8:02), reading macro headlines (14:22), the feeling you get when you nail a big trade (17:51), the similarities between golf and options trading (19:55), and a little British Open preview (27:21).


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Published on Oct 27, 2020 at 1:00 PM
Updated on Jul 14, 2021 at 7:51 AM
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  • Strategies and Concepts

Schaeffer's Market Mashup is back for a deep dive into exchange-traded funds (ETFs). On the latest episode of the Schaeffer's Market Mashup podcast, Patrick enlists Graham Day, Vice President of Product and Research for Innovator ETFs, and Sumit Roy, ETF Analyst for They talk about ETF popularity (2:35), the trend toward the thematic (6:34), desired outcome ETFs (11:35), and their importance to the upcoming election and beyond (19:31)


Transcript of Schaeffer's Market Mashup Podcast: October 27, 2020

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. I'm a man of my word, as I've said numerous times, and I've brought two more esteemed guests with me today. I'm joined by Graham Day, Vice President of Product and Research for Innovator ETFs, and Sumit Roy, ETF analyst for Gentlemen, welcome.

Sumit Roy: Thanks for having us, Patrick. 

Graham Day: Great to be here.

Patrick: Awesome. Good to hear, you guys might be my first guests that aren't from Chicago or currently living in Chicago because usually I've got Cboe guests. Are you the first non-Chicago people here?

Sumit Roy: Yeah, I mean, I'm in San Francisco. We're out on the west coast. Quite a ways away from Chicago. 

Graham Day: Patrick, I'm actually kind of in your backyard. We're in Wheaton, Illinois. So just about a 40-minute train ride outside of the city. So we'll say we're not in Chicago, if that helps you out.

Patrick: I'm in Cincinnati right now, really don't like that we in news in division three soccer. Stings a little bit there, but you know what? I won't hold it against you. So today we're going to talk about ETFs and the trends and trades around them. Exchange traded fund, which is what it stands for. They are growing in popularity at a rapid rate and Cboe Global Markets is the listing exchange for more than 450 exchange-traded products from over 55 unique issuers globally. Since 2014, Cboe listings business has grown to capture approximately 30% of all US listed ETFs. Graham, I know your Innovator ETF's is a Cboe-listed issuer. You guys work on kind of like the next wave of innovation, in specialized and defined outcome ETF's. Sumit I know you're like the go-to for the news analysis and education about ETFs both online and in print. So in other words, I've got the two experts you need for this. So let's dive into it. My first question really is why are ETFs continuing to grow in popularity, especially in 2020. Graham, why don't you take that first?

Graham Day: That's a great question, Patrick. And you know, from our vantage point, we feel ETF's continued to grow at really an exponential rate in 2020 for the same reasons that they've been growing for the better part of the last two decades. And it's really simplicity. People know what they're getting with ETF's, but the benefits of the ETF are well known. And I think continued to be pervasive in the investment community, tax efficiency, lower cost, ease of access. I think that might be one of the bigger reasons accessing a product on the exchange, you can buy and sell just like any stock. Those are the things that people want and need for their investments today. And the ETF really cuts through a lot of the weeds of investing and we feel like it's the best way to, in many asset classes, access the markets today.

Sumit Roy: Yeah, I mean, Graham hit on all of the key selling points, the major ones. I mean the tax efficiency, the lower costs, the transparency, intraday trading, those are all super, super attractive for investors. Another important one I'd point out is just the sheer scope of ETFs. There's so many ETFs out there, 2300 plus a vast number of strategies, anything you want, and that's helped fuel this huge growth in the market as well. You have everything from stock ETFs to volatility ETFs, to hedge fund ETFs and even gold ETFs out there. So there really is something for everyone, including both retail investors and institutional investors. Now, a lot of ETF success has come at the expense of mutual funds. I think it's worth pointing that out. And that's something that continues in 2020. So far this year, we've had about $350 billion of inflows for US listed ETFs.

That's the second largest amount ever in any year. And then at the same time, we've seen outflows from mutual funds OF more than 300 billion. So that's a gap of 650 billion or so in less than a year. And which according to Morningstar is the largest disparity between each year. So mutual fund flows since 1993. But aside from that migration away from mutual funds and into ETFs, which has been going on for quite a while now, there are a couple of more recent catalysts that are driving the inflows. One is the low-interest rate environment. We have rates near zero, as many people are aware. And so investors are stretching for yield and stretching for returns to meet their savings and investment objectives. 

You can't simply stock your money in a bank account or a CD  anymore and hope to make a decent return. So a lot of individual investors are shifting into bonds, into equities and even some alternative strategies that you find in ETFs. And then another factor driving individual investors into ETFs is the pandemic itself. I mean it may sound like a silly thing, but all this time that people have been sitting at home as fuels a lot of interest in the financial markets, including ETFs. We've seen trading in the market become kind of like a form of entertainment for some of the younger generation who use platforms like Robin hood and other large-cost brokerages. And so they're using ETFs to move in and out of the markets.

Patrick: Yeah. A couple of things come to mind through both of your explanations. One is the word streamlined, where it basically takes out all the fluff of a product and offers you really the kind of flexibility that you want. And then it was almost like boredom really that, that brought investors into this. I think these products are so unique that it's not really going to fade once the pandemic is cleared up and we're out of this period, kind of on that note. Are there any other recent market trends in listed tradable products in trading strategies? Graham, I'll let you take that one first.

Graham Day: Yeah, I think there definitely are. And I would probably echo what Sumit was saying about this, the movement that continues from active to passive particularly in the equity markets. I think it's probably maybe 10 years in a row of outflows from mutual funds, equity exposures into ETFs. And I think that that is going to continue into the future. There's really no reason to think that active is going to make a comeback in terms of instability to garner flows, but maybe even more importantly deliver any relevant amount of outperformance relative to an index. But I think another thing that we're seeing in the markets is, a shift from traditional size and style investing, sector investing, to more thematic investing. What I mean by that is, for a long time, people would maybe look at the various gigs, sectors, energy, technology, healthcare industrials and that's really how they would rotate their exposure within the market, or maybe they're moving from large value to large growth.

And I think what we've seen in the ETF structure has really alliterated this idea, is investing in themes and really feeling that themes are the new sectors. So whether that's 5G or Junior IO technology, Junior internet stocks, I think we're seeing a lot of that coming to fruition through the ETF space. And so I think it's just an evolution where a lot of times people think of thematic as a very niche idea and they're never going to make up a large portion of investors portfolios. But I think the thinking has evolved to where more people are saying, look, I'm moving away from a traditional sector-based investment style or size and style, and I'm moving more to a thematic approach than anything else. So I think those are probably do think that I would highlight for trends diversity.

Sumit Roy: Yeah, absolutely. I mean, I have to back up exactly what Graham is saying and this movement from sectors to thematic ETFs really can't be understated, just how significant that is. And I think a reason why it's happening is that investors, people in general, they really like stories and themes are a great, well great way to tell a story in just one word or just a few words and things that are intuitive to understand like certain futuristic technology themes, those tend to do very well, because they're very easy to explain it. You have a lot of next-generation tech ETFs. Graham mentioned some of them that have really caught the imagination of investors and have attracted billions of dollars of inflows. So we have funds that track themes like robotics, artificial intelligence, e-commerce, gaming, people understand those ideas and these ETFs have done really well, not just in terms of popularity, but also in terms of performance, especially with the pandemic acting as a tailwind for a lot of these funds.

So when you see some of these funds up 50, 60, 90, a hundred percent, that adds interest to them as well. And it's not just those high-flying technology themes that are doing really well, but also seeing interest in something like jets, which is the airline. And it's attracted hundreds of millions of dollars this year. And it's simply because investors know that industry, they know their airline industry, they know the companies in it, and they know it struggled this year, but they think it could be a rebound play for the coming months and the coming years. So they've reached for this straight forward thematic fund to make. So when an ETF can tell a simple, straightforward story, investors love that.

Patrick: I love the concept of the thematic because coming from someone without a financial background in a liberal arts education, I think it's so much easier, like you said, for someone new to the game to grasp it. For example, we at Schaeffer's wrote an article about a month ago talking about the correlation between jets and I think it was the financial XLF ETF. So the banking one, and it was so easy just to plot and pinpoint when you break it down from banks to airlines. And I think that is incredibly intriguing to these new droves of investors that are coming in. To back up for a second I mentioned it earlier. Graham, talk to me about defined outcome ETFs.

Graham Day: Yeah. Will be happy to Patrick. And it may be for those aren't aware of what a defined outcome ETF is. Really very simple. It provides beta exposure to a well-known index, like the S&P 500 in exchange for capping upside appreciation over a one-year period. We provide a known built in buffer of 9, 15 or 30%. And we think that that's incredibly valuable for many investors today. I think 2020 is highlighted really the need for people to reevaluate their ability to take risk in the market. When the stock market sold off over 30% here in 2020, many people had to wake up and say, can I take on this type of risk? And what if the market correction has lasted even longer, instead of rebounding significantly? And that's really the power of the defined outcome ETF, is that you can buy it and know exactly how much upside you have relative to say the S&P 500, as well as how much downside buffer I have against losses. The concept of defined outcome investing isn't new, or it's new to the ETF world, but it's been around for decades in other wrappers, other bank, whether it's through banks or insurance companies, but the ETF wrapper is just another way to deliver these types of payoffs.

But we think that the benefits that they provide investors are significant. Through the ETF wrapper, there's liquidity, there's daily transparency, there's tax efficiency, there's no credit risk. And before these ETFs, there really hadn't been a way to be able to own the market with a level of protection in place prior to investing in. We think that that's game changing for a lot of those, we talked about thematic investing. At the end of the day thematic investing is never going to make up the large portion of a client's portfolio. Most people are owning a healthy mix of stocks and bonds. As you look at maybe the clientele or looking at retirees or pre-retirees, their risk tolerance is lowering. And they may be looking at the stock market today and saying, gosh, should I be invested in stocks or they are at all time equity, valuation levels? Or what about bonds? Gosh, they're not yielding anything. 

The defined outcome ETFs are a happy medium for a lot of those investors because they can still invest in the market. They can own the S&P 500, but they can have a known built in buffer against losses. And so it's that peace of mind for a lot of more conservative clients that can keep them invested, as opposed to saying, you know what, maybe I just need to put more money on the sidelines and with rates at zero, you're not earning anything on that as Sumit pointed out. So that is telling you, you have to take risks if you want to make money, but these ETFs are a solution for people that say, like, I understand I need cigarettes, but I want to know what I'm getting before I invest. And that's exactly what the defined outcome ETFs provide.

Patrick: For fear of dating myself and sounding like a millennial, it essentially eliminates the fear of missing out, really because even, you know, the most conservative people can dip their toe in. How are options utilized with the defined outcome ETF, is there a difference when compared with the other options type that's applicable to us at Schaeffer's here of course?

Graham Day: Yeah. So we use flex options to construct these ETFs. And a lot of times people can think, options, that sounds complicated. I'm not sure if I really want to go down that path, but in reality, these are amongst most simple ETFs that we've ever built. And they hold a basket of options that are fixed for a one-year outcome period. We don't do anything for that one year outcome period. We're not buying and selling options. We buy a basket that provides the defined outcome over the one-year period. And then only at the end of the outcome period, we changed the basket and we'll rebalance and do a new one year outcome period, by a fresh basket of options that will give you a new upside cap to the market, as well as the fresh downside buffer. But the biggest difference of our ETFs and really the first time ever in a 40 act fund is this defined outcome. Options have been used in 40 act vehicles for decades, but they've never given an investor an ability to achieve a defined outcome.

Again, meaning I can buy it today and know that at if the S&P goes up 10%, I'm going to match the returns of the S&P up 10%, one for one. If the S&P goes up 20% maybe I'm going to be capped out at 12%. So that's where I'm giving up some of my uncapped exposure for a known buffer. And if the market drops 5%, I'm going to be buffered. I've been dropped 50%. If I have a 50% buffer, I will not participate in any of those losses. If the market drops 30%, I know that I will only participate in the last 15%. And so, again, it's knowing before you invest, that's what makes these defined outcome ETFs so game changing.

Patrick: Yeah, it sounds almost too good to be true at this point. You mentioned a couple of times the risk management involved with ETFs. Sumit, can you elaborate on the benefits and the advantages that they have when it comes to risk management?

Sumit Roy: Yeah, the benefits come back to what I talked about earlier, and that is just the sheer scope of that ETF market gives investors, the ability to buy so many different strategies. You can mold your portfolio to fit your risk tolerance easily. If you want to diversify across asset classes, across sectors, across geographies, you can overweight and underweight industries. On the fixed income side you can raise or lower the duration of your portfolio by buying different ETFs. You can buy uncorrelated assets like gold and fixed futures. And like Graham was saying, you can buy these defined outcome ETFs, which are just fantastic instruments for hedging your downside risk, while maintaining a lot of that upside potential. If you look at what we saw earlier this year, when the S&P 500 dropped 30% plus in a matter of weeks, the defined outcome ETF only last a fraction of that amount. And then when the S&P 500 rebounded, the defined outcome ETFs captured most of that upside, if not all of that upside. So that kind of risk reward profile is very compelling for some investors who are more risk averse

Patrick: And speaking of risk adverse, we are approaching less than two weeks away, the monumental volatility event, that is the US presidential election. What could some possible outcomes be with ETFs in regards to in general, whatever happens with the election?

Graham Day: Yeah, I think it's a great question. And maybe to even borrow from Sumit, he had mentioned earlier, there's really an ETF for everything. And so whether you think the election could impacting things like clean energy if Biden wins, or if you want to play oil, there are ETFs to give you that exposure. And if you're looking to maybe take some risks off the table, leading up to, through the election, again, that's one of the areas where we see our defined outcome ETFs used because a lot of times, you see these strategies that come to market with risk management being touted as their selling points. But the problem is they work until they don't. And you know, I'll pick on something that we marketed at a previous firm, low volatility. Low volatility historically has given you a low beta to the market in periods of sell off. A beta of around 0.5, 0.6.

But if you look at 2020, you actually saw low-volatility stocks, underperforming the market, having a larger max shroud on it. So I think it's important to understand what you're buying, and if you're looking for a risk management tool and you know the 2020 election, know what you're buying, but also if you want to position yourself for emerging trends that might result from either candidate, there are ETFs to provide that exposure. And so I think the growth of ETFs will only accelerate. I don't think either candidate is going to derail that in any way, shape or form.

Patrick: I agree, Sumit.

Sumit Roy: I mean when we talk about the election, obviously everyone's going to have their own opinion just in terms of the outcome, and then also have their own opinion in terms of how that outcome is going to affect the markets. So you kind of stray into this area of speculation, but I think the two scenarios that people are most talking about are this blue wave, where the Democrats capture the Senate house and presidency. Then you have the other outcome, which could be a split government where the Republicans hold onto the Senate and or the presidency. So if we have that blue wave scenario, you're probably gonna see, and most people agree with this. You're going to have to see the Democrats pass a lot of different bills. And those include bills for higher taxes on capital gains, higher taxes on corporate cost, things like that. But at the same time, you're going to see these big spending bills, things like Corona virus relief measures, green energy and infrastructure, and even more healthcare legislation, which could offer insurance to more American citizens. So all else equal big spending like this is usually at least a short-term positive for the markets. 

So you might see a bid for the market from that. And in particular, you could see some interest in clean energy stocks, like Graham mentioned, and also healthcare infrastructure ETFs and things like that. The other scenario I just mentioned, which is the split government scenario that is going to result in grid lock, just like we've had for the last two years. Usually the market does like gridlock, but one thing to keep in mind is that in that scenario, tensions between China and the US could stay high, especially if President Trump is still in power. So you might see some pressure on the China ETFs. If we've got that scenario,

Patrick: It is a perfect situation where, however you think things are going to lean come January inauguration. That's how you can play that whole theme. So speaking of January in 2021, let's close out with Sumit, then Graham. What do you expect to see from the ETF space in 2021 and beyond? And you can kind of include like your closing thoughts and arguments in with this. 

Sumit Roy: So in 2021, I'd definitely expect to see more active ETFs come to market. So this year was a big year in that we got several new active ETF structures approved by the SEC, which allowed managers to put their strategies in the ETF wrapper without disclosing their holdings every day, so essentially this allows active managers to hide their secret sauce from the rest of the market. And this is likely going to push a lot of fund managers who don't want to reveal their holdings into the industry. And that could be big for ETFs. We're going to see even more assets probably flow from mutual funds into ETFs because of this. And as many people are aware, ETFs have been historically dominated by index strategies. Right now over 80% of the ETFs on the market are index based products. So having active join the party could lead to a shake up in terms of the mix of funds available to investors.

That could be a more even split between index products and mutual fund products out there. Now it remains to be seen whether investors are going to embrace these active funds. The academic research is pretty clear that active managers, as a whole tend to underperform broad indices over time, but a small fraction of active managers do consistently outperform. The question is, can an investor identify those managers? That's really, really hard to do, especially without the benefit of hindsight. So we will see more active products on the market. It just remains to be seen whether investors are going to actually put their money in that.

Patrick: I feel like it even like not transition year, but it will take some kind of like a transition phase. 

Sumit Roy: Definitely.

Graham Day: Yeah, I think Sumit is spot on. We're going to see more products being brought to market. The barriers to entry have never been lower in the ETF space, but I would definitely argue that the barriers to success have never been higher. And there's just so much competition. If you think about the wirehouses and home offices that approved these products there are risks in them approving new products and putting them on their platforms and making them available to their advisors. And, and because of that, the ability to gain access to distribution channels is more challenging than ever. But I agree with Sumit. I think you're going to continue to see a lot of these active management shops try to play catch up. They have resisted the ETF vehicle for a long time, but realize they can't really do that anymore, but I'll play more of a skeptical role in what they're providing the end investor.

In most ways I would argue the product proliferation that you'll see from active managers, whether it's transparent, active, or non-transparent active. At the end of the day I don't see the benefit that that will provide an end investor. I think it's a solution for a mutual fund company, but not a solution for the advisor and they're end client. And mostly because as Sumit pointed out, it is very hard to outperform the market and being able to select a manager that has out performed and will continue to outperform is also very, very challenging. And so if we know that's true, then it doesn't really matter if you are showing your holdings, or you're not because in mutual funds there isn't that same level of transparency that you have with ETF, but they still were not able to outperform. So I'm very skeptical on the adviser traction in this, because I don't think it solves a problem. The most successful ETFs have always been solutions for advisors and their clients. And I think these are a solution that are trying to find a problem. That's really a mutual fund company problem, not an advisor problem. 

Patrick: Interesting, so differentiating new points there. There's only one way to find out is I have to have you guys on a year from now and say, tell me what happened. 

Graham Day: I would love to be here.

Patrick: That's great. Well, I'm ready to wrap up. Graham Day, Vice President of Product and Research for Innovator ETFs, and Sumit Roy, ETF analyst for Thanks again, guys, for coming on. It was a great chat. I learned a ton, you know, I've been writing for Schaeffer's for three years and we cover ETFs pretty extensively. And I feel like I can now write a little better. So at least from my standpoint, thank you. And I'm sure my listeners learned something as well. Thanks again, guys. We'll talk soon. Take care.

Published on Oct 15, 2020 at 1:12 PM
Updated on Jul 14, 2021 at 7:51 AM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is back for a solo episode of Market Mashup! He tackles: the stimulus gridlock in D.C. (0:52), the Tweeter-in-Chief (2:30),'s Prime Day options trading (6:17), options traders unfazed by vaccine problems for JNJ and LLY (8:15), and earnings season! (11:21)


Transcript of Schaeffer's Market Mashup Podcast: October 15, 2020

Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. It is just me today. I don't have any distinguished cool genius guests from Cboe Global Markets this week. I am Jason Derulo, riding solo. Do not fret. I've got a lot of fun people coming on in the future though. So you'll just have to deal with me for one week. Okay, cool. We've got a ton to talk about. 

So let's jump right into it. It is Wednesday. The market just closed and there is no second round COVID-19 stimulus yet. Gridlock in Washington, DC continues to grind into the election. If I'm a betting man, I'm betting on nothing getting passed until after November 3rd. You truly hate to see it because it's so desperately needed for the American people. But there is unfortunately too much at stake between Democrats and Republicans to concede anything. The optics are just so monumental and too important for either side.

You don't want to come across as giving into anything. It's basically like the world's most frustrating staring contest or just a game of chicken that lasts way too long. And it's going to result in a head-on collision. One thing's for sure if something does happen, expect investors to react favorably to it. You have dozens of economic experts out there from all different sides of the aisle clamoring for something, anything, cash, weekly checks, IOUs from dumb and dumber, something. When that happens, I think markets will react favorably. You saw just today, treasury secretary, Steve Minchau around mid day says he does not see a stimulus package being passed by election day. And right after that, the Dow traded at its session lows. 

So conversely, hopefully when something does happen, it's a nice little bump for the stock market. You know what markets also don't favorably react to? Tweet storms, especially tweet storms from our commander in chief. The Washington post recently ran a fascinating tome about Trump's Twitter presidency essentially highlighting his nine most impactful tweets. It's a great article. I encourage you to give it a look. For example, they talk about January, 2017. He tweeted about general motors, ticker GM, ordering them to make cars in the US or face a border tax. All of a sudden Google searches for GM shot up 200% and general motors stock went down by 24 cents. The impact goes beyond the numbers. I mean, we all know Kofefi or however you say it. It sent Q Anon and keyboard warriors everywhere, cobbling together, conspiracy theories. You know, most of these conspiracy theories are silly and fun to laugh at, but in this day and age, some can be dangerous. See the recent Michigan governor kidnapping plot, but wherever you're looking to play the market, it's amazing that you should probably have to check Twitter first and see what the president tweeted or what is trending. It could literally dictate your investing strategy and it also makes Twitter, ticker TWTR an interesting stock to watch going forward.

Does a possibly new president and Joe Biden who doesn't tweet as much every day impact Twitter stock? Does a return to normalcy get people off the social media app in a way, looking for the latest dopamine fix of whatever controversy is going on? These are questions that I think it would be wise to start to form as the election gets closer and closer. And speaking of the election Schaeffer's has an upcoming vote 20 report, which features tons of election day 2020 investing content. It will be released Saturday, this Saturday October 17th. So be sure to sign up via our live chat on the website to get access to the report as soon as it drops. The live chat I looked at it to make sure that even I could use it. Just go to, entering your name and entering your email and one of our agents will hit you up in no time and have that dropped into your inbox. 

So enough about the election, because you've no doubt been beaten over the head with it. Instead, let's talk Apple, ticker AAPL. That's a nice little chaser. The Fang name had its big product reveal earlier this week, launching the iPhone 12 with its super special, brand new 5g connectivity, ticker APL hasn't moved much in response despite receiving three price target hikes this morning, including Jeffrey's bumping apple all the way up to 140 from 135. But what it did do was see a sizable bump from chip maker, Qualcomm, ticker QCOM, which closed today up 1.9%. Even the most basic investor knows apple stocks, technical tenacity. They're as solid as the green bay Packers offensive line, but 5g is prevalence is something to keep an eye on for chip stocks and apple suppliers and any other tech names going forward that could be involved in this emerging technology.

We'll stick with the Fang theme for a moment. In case you're living under a rock or you're just strictly anti-consumerism, ticker AMZN kicked off its vaunted prime day yesterday, and it ends tonight. So it's a two day event, not to be confused with celebrating auto bot leader Optimist prime, prime day is an event that features millions of deals on It's everything from discounted premium TV subscriptions to the latest gadgets, whatever. You know Amazon at this point, if you want it's discounted right now. It's pretty overwhelming to be honest, I won't get into the details because, you know, hashtag no free ads. So let's focus on the stock. AMZN gap tire by 4.8%, the session before prime day kicked off and it remains now just a chip shot from it's September 2nd, all-time peak of $3,552.25 cents. The most active stock options to start the week for Amazon have been the standard expiration 3,500 call followed by the 3,400 call.

Amazon is always featured in Schaeffer's senior quantitative analyst, Rocky White's most 10 day options volume table, which we write an article about every Monday. In this latest table was no exception. In the last 10 days there were over 980,000 calls and over 750,000 puts changing hands, in with Amazon closing at 3363.71 there's a lot of options bulls sniffing around. I'm going to try to avoid for as long as I can tonight any prime deals. Light a candle for me and hope that the next episode, I'm not talking about some $350 air fryer that I bought for 250 bucks. 

We have some vaccine updates, but to quote my favorite gift, they're not great Bob. Two Titans of the drug-making industry and recipients of Dr. Evil quotes, operation warped speed saw their COVID 19 vaccine trials halted this week. First up it was Johnson and Johnson, ticker J&J, forced to pause a clinical trial of its coronavirus vaccine candidate. After a participant in the study, came down with an unexplained illness. A day later, Eli Lilly, ticker LLY according to a router's report, US food and drug administration halted Eli Lilly's antibody treatment after it uncovered some serious quality control problems at the company's manufacturing plant. So this seriously hindered Eli Lilly's bid to get emergency use authorization for its treatment. Nevertheless, Eli Lilly does have other ongoing trials. However, these could be less beneficial for patients with serious cases. 

Now, from what I gather, and let's not forget that I think I maybe got a C in biology, halts are less severe than clinical holes, but it's nevertheless disappointing news, especially when a certain specialist somebody is touting that we'll have a vaccine by the conveniently and totally random date of November 3rd. Ticker J&J only shed 2.3% the day it's news broke, partly because the blue-chip pharma giant also reported a third quarter, top line earnings and revenue beat. October 155 calls that expire this week, that's standard exploration are so far the most popular in the first three days of this week. With J&J last seen trading at $148.10 cents, that's awfully ambitious two day rise for those options bulls, but there's also some activity around the $152.50 cent call from the same series, which makes a bit more sense. 

Switching over to ticker LLY, the stock hasn't been battered yet, shedding less than a 10th percent and down only 4.4 for the week so far. LLY's most active options this week are the December 155 and 170 calls as standard exploration, with LLY last seen trading at $148.46 cents buyers of these calls are clearly undeterred by this week's missed up.  As always it's unclear how this is all going to unfold. Honestly, it's almost as if we need commissioner Adam silver of the NBA, which has reported zero COVID cases inside its bubble to take over the vaccine project. I'm joking of course, but not really, lost in the shuffle of the election COVID and everything else that's going on out there, is there's another earning season underway. Whew. 

We already mentioned Johnson and Johnson's earnings were poor, but bank giants are typically among the first to try out their corporate reports. This week we've had the likes of Goldman Sachs, JP Morgan chase, Bank of America, US bank core, Wells Fargo, Citi, among many others step up to the plate. It's a veritable murderer's row of ATM's. JP Morgan and Citigroup, both hit alarm bells, really with their reports, despite third quarter earnings beats. CEO, Jamie diamond of JP Morgan did his best to kind of warn us by talking about building cash reserves in the event of a double dip recession, should Debree a lack of a STEMI part do, which as we know is probably not going to happen until the election. Citigroup CEO essentially echoed the same thing, day after JPM dropped 1.6% and Citigroup ticker C, dropped 4.8%. 

Shifting over into more bank earnings, Goldman Sachs, ticker GS closed up .2% today because its bond trading was stronger than expected and really that's the only good news. Bank of America missed its revenue goals and closed down 5.3% today. Wells Fargo had a complete third quarter earnings with low interest rates impacting its interest income. They took a 5.9% hit today. US bank dropped by 0.4%. I won't put you to sleep and run through the interesting options activity going on with each of those stocks. Instead, I want to look at the financial select SPDR fund, ticker XLF, that's the exchange traded fund for financial bank stocks. As of this morning, XLF was down 15% in 2020, which might seem bad, but isn't as catastrophic as other ETFs, like the travel or oil and gas sectors. But it's not necessarily blowing the top off either. Anyway the top trade for XLF this week has been the November 29 call. But the most volume has occurred so far this week at the October 26 call, which expires at the end of this week. XLF was last seen trading at $24 and 78 cents. But for some context, it hasn't closed above 26 since early June. So someone out there is banking on this earning season to really kickstart XLF,  Shout out Molly grew.

That's about it for me today. So to close, I want to plug our upcoming vote 20 report one more time. Once again, it's released Saturday, October 17th. Be sure to sign up via our live chat., enter your name, email, phone number in one of our agents will get it to you. Thank you for listening. Don't forget to check us out on Twitter, Facebook, Instagram, YouTube. Personally I'm a big fan of pulling up YouTube on the smart TV. I would highly recommend that. LinkedIn for the professional folks, you name it, we're there. Also don't forget to keep wearing those masks and stay socially distant. Have a great weekend.

Published on Oct 1, 2020 at 12:00 AM
Updated on Jul 14, 2021 at 7:51 AM
  • Podcast
  • Strategies and Concepts

Schaeffer's Market Mashup is back with another esteemed guest from Cboe Global Markets who joins our host, Patrick Martin. Michael Izhaky, Vice President of Derivatives Strategy stops by to explain just what Mini VIX futures are. Patrick and Michael talk about the utility of Mini VIX futures, the environments they could thrive in, and the growing preference for "mini" contracts


Transcript of Schaeffer's Market Mashup Podcast: October 1, 2020

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup podcast. I took a week off. I think I'm excused. It was my birthday. But we're back with a vengeance now. I have Michael Izhaky of Cboe Global Markets. He's the Vice President of Derivatives and Strategy. We have a great talk about VIX Mini Futures. I hope you enjoy it.

Welcome, Michael. Glad to have you on.

MICHEAL IZHAKY: Thank you very much. I appreciate that. And happy belated birthday.

Patrick: Thank you. 31, not very fun. Walk me through your career at Cboe and in your role in the investing world and give me kind of a snapshot of what you've been through.

MICHEAL IZHAKY: Sure. So I started out in the industry as an office straighter at O'Connor and Associates. And I spent several years as a bank trader and a portfolio manager. I mostly focused on [01:08inaudible]. I did that for just short of a decade. And then when I moved over to the buy-side, I started a derivative squishing analytics firm called FT Options. And in the beginning of February 2020 Cboe acquired the business of FT Options, the intention to further build out our information solutions. So my work within Cboe commanded focuses on capital efficiency and product strategy. I'm very happy to be with you today. 

Patrick: Interesting. So product strategy. Yeah, I like that. I think that's going to give some interesting insight that I haven't had before with people on. So we've talked at length about Cboe's VIX as well as futures contracts on our previous episodes. I've heard there's this new kid on the block. I actually read the PR Newswire from, I think in August, on Mini VIX futures. I'm gonna put the Dr. Evil quotations on the Mini VIX futures. Walk me through the creation of this mini contract and its purposes.

MICHEAL IZHAKY: Sure. So, Cboe futures exchange actually had launched Mini VIX futures back in 2009, but at that point we were ahead of our time. So market participants back then wanted pre-packaged products. So exchange-traded products of ETPs, that track the performance of VIX Futures, had generally been the vehicle where smaller market participants would trade volatility. However, these ETPs are limiting because they're constructed as a pre-packaged strategy that provides longer exposure to volatility through a combination of holding third month futures and second month futures. 

And since that time, volatility trading has evolved and volatility as a tradable asset class as matured. So strategies are smaller, market participants have developed to now include, seeking direct access to VIX futures without solely looking to ETPs that track the performance of its features. With Mini VIX futures, market participants are able to construct their own views on volatility and to target their own strategies, their on volatility strategies. The current market environment is conducive to reintroducing mini VIX future given the recent interest and expansion in mini and micro products. Similarly, we've heard market participants have a lot of demand for [03:27inaudible] VIX futures contracts. So it was responsive to demands from the market participants as well. 

Patrick: Okay. So I'm working my way through it right now. The difference between the standard and the mini contract, does it really come down to cost of entry and lower overhead?

MICHEAL IZHAKY: It does. I would say a few things. First of all, as it may apply, Mini VIX futures are a scaled down version of a standard VIX futures. And they have the same contract terms with the exception of the notional value. So the notional value for mini VIX futures is a one 10th of the contract size for VIX future. The way that this is accomplished is by having a $100 multiplier for mini VIX features, whereas the standard VIX futures have a $1,000 content multiplier. So that means the Mini VIX futures require less capital to achieve exposure to the VIX index. So I agree with you. Also one difference is that we're currently only listing four near-term serial months for mini VIX futures and no recruits. And the smaller notional value of the mini contract is designed to provide greater flexibility and precision, with volatility risk management as well. So in addition to having a lower notional and lower dollar costs, it also allows those that need additional precision and how they allocate their precisions to accomplish that with the smaller contract size.

Patrick: So yeah, there's a greater degree of customization with these.

MICHEAL IZHAKY: That's right. So if your objective is to have a specific amount of exposure, then instead of having to round to accommodate the standard VIX futures, you could trade a more precise amount of mini VIX futures.

Patrick: Got it, got it. So as far as who this is tailored for, why would someone use a mini VIX future or how could they use the mini VIX futures?

MICHEAL IZHAKY: That's a great question. So I would say that, I'll answer in terms of different strategies and then who might use them. So for example, there's Hedging, which would likely be a strategy for partnering trainers, CTAs or FCMs. There's a short ball and truck structural trading, which is likely a strategy for again, prop CPAs and professional VIX trainers. There's directional or event trading, which really would apply it to all user groups. And then there's also some diversification. So it's a new asset class for CTAs to help them diversify their overall portfolio strategies. Additionally the volatility in the early 2020, along with heightened uncertainty around COVID and now we have the US presidential election and potential for COVID treatments and vaccines have all increased the interest in harnessing credible volatility products to manage the risk. 

For example, speaking of the presidential election, you know, in 2020, we've seen the largest election bump in a US election year among the last four cycles. So if we look at the earliest September, my bank values for the VIX index and VIX futures, for the prior three election cycles and including this one, we see this bump where the October VIX future contract is significant with elevating in 2020 [07:15inaudible].

October VIX futures, which can be used to hedge events, a rise in Volatility in early November, generally have been priced much higher than the VIX index and VIX futures expxired in nearby months. So the Trumps structure of the VIX futures is a big thing that people focus on. And if we're looking at the spread between September and October VIX futures or October to November that's where people see those relationships, those are the types of things that people look at and try to imply for the term structure. Also VIX future demonstrates, they have a performance that is inversly correlated with the stock market, US stock market. So it's got a diversification element as well when entered to portfolio, and this can insulate capital from the risks associated with large unexpected market.

Patrick: Yeah. Agreed. And I think you alluded to it, as far as any other examples of this potential utility being elongated. When you look at the fact that there's a chance that the election may not be decided on election night and then you have the vaccine coming up and then inauguration for whoever wins in November. I feel like this is a tailor made tool for market participants who want to take advantage of this. Are there any other examples in recent history where these mini VIX futures have been important to the market environment?

MICHEAL IZHAKY: So one of the nice things about the mini VIX futures is that there's been a lot of history and they're part of the overall VIX futures complex. So if one could imagine the extreme moves in the beginning of March to late March when we had you know, very, very exaggerated market movements. One could imagine the volatility tools at that point been useful. You know, again, the fact that the VIX and VIX futures have a negative correlation to the market. It really does provide an opportunity to position for various moves in the marketplace. Another thing is also if folks have a view on the market's going to move, not exactly sure directionally, but it's going to move. That's where VIX Futures will come into play, where one can position for movement without necessarily knowing the right direction. So you've got a big event coming up, such as a presidential election, and one could say you know, not exactly sure how it's going to go, but the market is not going to be here and directionally if one does have a directional view, you can also augment it with a volatility component as well.

Patrick: Yeah, that's fascinating, when you hone in on the difference between movement and direction. Backing up for a second. Talk to me about the hype surrounding many derivative contracts in general, in the broader marketplace. It seems like there's this sudden boom for these micro products being launched. Do you have any reason why, can you point to something in particular?

MICHEAL IZHAKY: I mean, it's definitely been a lot of interest in mini and micro contracts for derivatives. Certainly the fact that other products have launched, as prompted us feeling like this is the right time that we introduce the mini VIX future. I think there's also a component of new participants in the marketplace, having the smaller notional combined with new participants in the marketplace is a good combination. So the mini VIX futures is first of all, they build on the success and popularity of the standard VIX futures contract, but also it meets the customer's demand for additional tools to gain direct exposure to the VIX index. I should say potentially the newer participants that maybe are trading with smaller notional amounts. And also mini VIX futures are available for a diverse base of market participants CTA SCMs, cracker trading firms, sophisticated market participants that may be institutional.

Another example of that, that I wanted to bring up is the fact that VIX futures term structure is typically contango. So that provides opportunities to potentially generate through roll-down strategies, for example. So there are people that have consistent strategies with VIX features that are now available to those that are trading mini VIX future size notional. Of course we highly recommend that all market participants, especially those that don't understand the derivatives market and have never used this product before, should be informed as much as possible about how mini VIX futures work before they print the file. But that contango and roll down is certainly one of the common use cases.

Patrick: It's been talked about a lot, the rise of the Robin hood trader with no sports and no sports betting. A lot of people at home are looking for something to do and they're getting into investing. I continue to think that that won't go away once the pandemic is over and there is a return to normalcy. I think this has peaked enough interest in investing, in the stock market, in basically finance in general, that I think people are going to be looking to take that next step out of, you know, individual stocks and into something like volatility, where you can play, like you said, movements in directions. Do you see this, the rise of the mini contracts increasing over time? Basically do you anticipate that moving higher?

MICHEAL IZHAKY: So forward looking projections. However, what I would say is that I agree with you that it seems to be more that a short-lived phenomenon. It seems like people are getting experienced to trading and you know, finding that they're finding useful activity and it's not something which is just taking the place of sports. Now we certainly have seen a lot of positive feedback from the customers and participants that we've engaged with, as far as volumes are concerned, but we see demand showing up in the trading volume. So within the first two weeks of launch, many events daily volumes have passed the hundred thousand contract mark for the first time on August 27th. And today the total volume is well over a million contracts with average daily volume of approximately 33000 contracts.

I think your point about looking for additional products beyond, well beyond signaling equities is certainly coming into play. And also if you start looking at the old lull markets such as the SUV, then it starts to become, you know, going back to my earlier point, sometimes you feel like things are going to be busy. It's going to move, you're just not clear on the direction, or you also feel like internet, for example, it might really someone usual, a volume model or activity, and you just want a position for it. So that's where the mini VIX futures can be a useful tool because the term structure is something which is being set up, the price is lined up such that the events are being priced in. So that's where one can express a view in that term structure or hat is being priced in for an event. The jury can give that as well. 

So if you look at the spread between different expirations, you can say, okay, well, what does it look like from the election's perspective? Is it being priced in to have the volatility decrease in November or December or January? So in a typical presidential election cycle, that duration is much shorter. 

Patrick: Yeah I think it's brilliant how this has been devised to take advantage of that. To wrap up first things first. Have you seen the Wolf of Wall Street?

MICHEAL IZHAKY: Are you talking about the mechana AC?

Patrick: No. I mean, we can talk about that later, maybe if you want. So they sell me this pen scene, always stuck with me, both in the middle of the movie and, and at the end, so to wrap up, have you give me a Sears tower, elevator pitch one last stance, sell me this pen for the mini VIX futures?

MICHEAL IZHAKY: Sure. So, first thing is that we're going to be providing future guides and webinars about mini VIX futures in the coming months. So additional beyond, but I can get through on a Sears tower elevator, which by the way, has three banks to it. The mini VIX futures, one of the great points of it, is that they are part of the product complex of the standard VIX futures. So there's a lot robust ecosystem there. The pricing is going to be complimented by the fact that it's linked to that standard VIX futures contract. It's just one tenth of the size. So what you get is access to more precision and a smaller notional value volatility contract that allows new participants that want to, or need to trade in smaller notional values to access a tried and true VIX futures product, which is been around for quite some time and has a very robust ecosystem.

Patrick: I'm sold. And yeah I probably made it what halfway up the Sears tower.

MICHEAL IZHAKY: Yeah, we're on one of the intermediate banks.

Patrick: Well, we can spend the rest of the time talking about the three Chicago bears maybe.

MICHEAL IZHAKY: I'm a Yankees fan. So we won our first game yesterday.

Patrick: We're gonna cut right now, born and raised I'm sitting in Connecticut right now. Diehard Sox, Celtics fan, you name it. That's great. Goodbye. Good night. But really Michael Izhaky thank you so much for coming on. Maybe one day, you know, when all this is over, we can reconnect and kind of talk about all the stuff that had just happened, but couldn't thank you enough for coming on and I'll talk to you soon. 

MICHEAL IZHAKY: Thanks very much for having me. 

Patrick: Thanks. Take care.

Published on Nov 20, 2020 at 7:16 AM
Updated on Jul 13, 2021 at 9:32 AM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick and Schaeffer's Market Mashup makes its triumphant return with Bill Looney, Managing Director at X-Change Financial Access (XFA). Patrick and Bill talk how brokers facilitate trading flow (7:05), open outcry (14:23), and market positioning before and after the election (24:02). A really fun chat that provides valuable insight into the functions of a floor-based agency broker.

**The views and opinions expressed on today’s podcast are that of Bill Looney and not XFA.**

Transcript of Schaeffer's Market Mashup Podcast: November 20, 2020

Patrick Martin: Welcome back to the Schaffer's Market Mashup. It's been a while everybody, and it's good to be back. I took a week off during election week, even though let's be honest, that felt like a month ago, but Hey, you know, we're here. We're happy. We're healthy. And I'm excited for today's interview, please. Welcome Bill Looney, managing director at Xchange Financial Access. Bill, thanks for coming.

Bill Looney: Hi Patrick. Good afternoon. And thanks for having me. It's a pleasure to be with.

Patrick Martin: Awesome. Awesome. Um, I guess I'll just start with a little bit of intro with what we're going to be talking about today. Uh, options volumes have not slowed down in 2020 despite the rest of life, essentially slowing down. Um, average daily volume this year is up more than 40% from 2019 in the options industry is on track to hitting record of more than 7 billion contracts in total volume. By the end of 2020, um, nine of the top 10, most active trading days have occurred in 2020 alone. So bill, I want you to, you know, you're, you're coming from, this is the broker dealers perspective. I want you to first talk me through your career and how you've got to where you are. [inaudible] and then give me a little breakdown of what SFA offers.

Bill Looney: Sure. Yeah. Well, I've been in the business just over two decades now and, uh, I, for the, for the large, for the biggest piece of my career, I was on the sales and training side. Uh, I started out based in club world, eventually migrated to the equity derivatives world where I get institutional sales and trading for a number of years with a lot of the big banks. Uh, subsequently thereafter, I headed over to CBO for a seven year stint, uh, and wound up, uh, my last role as CEO was running index options business there specific to SPX VIX products like that. And, uh, about a year and a half ago, I joined XSA heading up their global business development efforts, basically parlaying my sales trading as well as exchange background, uh, into pelvic row, uh, and, uh, continue to advance obviously be the global customer base that exit fate services.

So it's been a wonderful opportunity besides big news that exit failed last week, we were acquired by Merrick spectrum and they're a global commodity specialist tailored out of London. And, uh, we're very excited about the opportunities that our partnership with our expect John is going to afford us because they have a number of complementary product areas. And they're going to obviously allow us to grow our international footprint, offering more products and services, uh, you know, with a larger balance sheet offering varying. So XSA, is it, uh, great shape, uh, very exciting times for us. And I do believe you kind of wanted me to segue into exit a little bit in terms of, you know, exchange financial access, but pretty much street knows us as, as SFA. Uh, our three letter acronym. We are an agency broker dealer we've specialized in execution of equity derivatives as well as future options product, um, in operations. Well, uh, at CME as well as a number of other exchanges, uh, and, uh, then around roughly 2001, a formulation of a very long-term, uh, trader traders in space, uh, had a lot of foresight back in the day when the banks pulling up, whereas a broker dealer that was more based in suburban institution like derivatives and

Patrick Martin: Wow, well, first things, I guess I should offer a book. Congratulations, right on, on, on the, uh, on the merge, um, in, in for one I'm excited because a lot of my, most of my interviews have come from the broke, uh, or from the analyst side, you know, this year, my first broker. So I have a lot of, you know, I'm going to really be picking your brain here about that side of the aisle. Uh, and I, I guess, yeah, let's just jump right in. What does it mean to be a floor based agency broker? And what specific services does this come with for customers within the larger trading ecosystem?

Bill Looney: Sure. Well, what it means to be an agency floor broker they, or yes, the agency floor broker is basically, it is the keyword in that is agency. In other words, we don't commit cap. We sit as a beacon between two principles, sides that take risk, the buyer and seller, and we help them strategize on the best way to execute that order. And predominantly, uh, we provide them with market transparency and access to the entire liquidity ecosystem that's available in the product that they're trading. So broker dealers there's many others, inter-dealer brokers, banks are considered broker dealers, but an agency broker dealer is an entity that does not connect capital, but services its customers, the standpoint of helping them execute their strategy best way to most strategic way transparently, uh, with a lot of anonymity, uh, covering they're, covering the buyers, sellers identities, obviously, and that supplying the marketplace, uh, with patient, uh, as well as access ecosystem and expedient efficient and the, the services, you know, we, we provide, uh, are obviously, uh, execution based as, as I've alluded.

Uh, but we are floor based in sense, what makes one of the key attributes that makes X and [inaudible] most upstack, uh, that work ratio they are located on the actual trading, uh, the biggest trading pits that club of most of your audience would be aware of BD SBX VIX options. CBO. We also maintain what operations over at CME Euro dollars area, as well as in USP, big contract area, but being on the floor really, uh, gives us a tremendous ability to access the largest, uh, available to, uh, the marketplace, especially maybe your index product, larger notion products. Uh, and we also have, uh, an incredible ability within these larger next page bought cheap off speed fish. That's huge as a result of this mission. So it's a very unique setup, uh, Europe, definitely. Uh, one of the attributes that makes sense, I think stand out.

Patrick Martin: I agree. And it's ironic that, you know, entering January of 2020, would you have seen for seeing all these changes that you know, were coming to, you know, being a four based agency broker, nobody saw this coming. So in the fact that you guys have had to, uh, dapped in a, just makes, you know, kind of your, your function all the more fascinating I think, so to build on that, what types of execution avenues do you ha have available for trading? Walk me through what happens and what the process is?

Bill Looney: Sure. Well, you're exactly right. Nobody for Socos. I mean, for a very long time, as electronic markets have developed, especially within a derivative stakes quiddity on screen has developed meaningful enough where a large array of customer types can interact with it. There has always been talk of, you know, are the trading clothes going to the trading floors, excuse me, going to close, or are they going to go away? And the simple fact of the matter is, is, uh, they haven't, uh, yet, uh, all options can trade on a, on a floor to this day, whether they be single stock, whether they be ETF, option index option, but the index products in particular are, are where the floor really stands out in its ability to go off speed and efficient. I mean, you have to, you have to make the account as an example, the SPDX being up here 3,600 or so, you know, one contract notions, 200,000 pounds, uh, when you have these larger institutional players that are trading multi-layered strategy, buying and selling multiple strikes at a given time sometimes to give them up eight legs, multiple thousands, it really helps to have you with the ball.

Uh, that doesn't mean that the electronic marketplace doesn't serve its purpose and it doesn't have an ability to serve clients' needs. We get exit, they use electronic execution, rural that's when even appropriate when we do this. But to your one part of your question, what types of execution avenues are available? There's basically three. If you kind of want to make the statement, like an umbrella statement, what can you do on the one? I don't want to call an extreme, but on the one side of the equation, you have electronic execution, which basically where the menus your cluster, it takes responsibility on entering the order through on it, uh, execution management system. That system communicates to your point looking press when that individual press button on the mouse that says by herself, that's just communicating. What's called the backend smart that's smart router design, execute that order in smart way, because there are literally 16 options that exist with more on the Verizon.

All of these exchanges have different. These schedules, different setups. They take time for Rhonda. She's very nuanced stuff, but different ways that they engage the marketplace if cost structures and these smart routers know how to ex orders most cost efficiently while achieving best execution. But with that said, the customer ultimately is responsible, ultimately responsible for handling the order and the customer is going to interact with the marketing community. On the other side, that is resting on, there's an offers that they're engaging with. So to some extent, you get a little bit of a limited interaction. Again, not to say that it's, it's not a good thing, but you have to understand the dynamics of what that particular execution site has. And can often, if you go to the other side of the equation, the complete other side, like go over to let's say the big bank desk, uh, the investment thing that can make capital customer.

So this is larger institutional type orders, uh, where a customer may want to buy five or 10,000 contracts of a particular name, uh, you know, equivalent to 500 or a million chairs stock 500,000 per ancient stock bank will actually pick the other side of that chain guarantee of price. And then they themselves go down to the trade wars are executed electronic Boston that are available saying, Hey, you have a buyer seller here. And then the market participant, and then in the middle, which I say is the largest playground is the agency side, which is where exit Pedro, our customer, our global customer are very astute because they understand the value of electronic trading. They understand the value of the trade, but in the middle, they are, they really understand the value of agency tree, which gives them an ability to come to a special, uh, broker dealer like ourselves and understands the liquidity.

There is a lot of providers of validity in the derivatives market. It's not just marketing, there's upstairs proprietary trading unit there's bank, that's DealerNET and exit bay, as well as broker dealers like us have the ability to access those markets on an agency basis, find out where the best would it be, where the best price list. And then we could combinations X, some part of the order electronically execute some part in order to block, uh, transaction type, uh, uh, facility mechanisms and get the customer done at, uh, best price, uh, with, uh, the commission level that's in between those two extremes. And nowadays, especially in the institutional community transaction Boston house, it's a big part of the management of their business because making turns it's obviously not easy. So you really, of course, customers best-in-class execution, let's take advantage of all possible ways of executing orders and expense. It's what we do. We know it best. We do it the best and we have a big press to be like, so it's a very complex ecosystem of not only execution capability, but what did he and customers out there has to understand it, take time to learn it. And that's really, you know, uh, our, our value at that exit day is to get in there and help those best execute those orders best way possible.

Patrick Martin: Yeah. What I feel you just explained is, is, is almost like showing someone like how the sausage is made. And I think it's important that people know what exactly what exactly is going on, how much is being weighed, how much it's being calculated, uh, to, to know where this, this out, you know, the flows are coming from. Um, so,

Bill Looney: Well, if I, if I can add a point, you know, you've mentioned the retail audience, obviously some of your learnings that the retail audience, uh, especially like Charles Schwab, Ameritrade Delany, those platforms execute electronically, and they route a lot of the rotors and what's called the consolidated. In other words, marketing that internalized some of that order flow to the extent they want to buy and sell and they to take the other side of those trading retail orders are obviously typically smaller. So they do, uh, there is justification say, Hey, executing electronic properly to do this. Um, there are still, uh, we do execute on behalf of retail because it's been instilled deemed appropriate. You put a human in there, especially with the index ops were better price, but yes, it is a very large universe where those orders are going to, uh, consolidate and it's looking at them, journalizing them buying and selling what they want to interact with and then sending out these smart routers, but the rest where they're going. And, uh, there is a lot of work,

Patrick Martin: Right? I want to circle back to the four based broker dealers in the open outcry. So what, what exactly is occurring when you're participating in such a, such a thing?

Bill Looney: Well, open outcry is, is, is almost exactly put it pink. In other words, the trading pit is deservedly a large circle, or like, you know, almost like a Pentagon kind of set up bleachers, peop stand market makers, broker dealers, uh, stand, uh, and holler at one another for large parts throughout the day. And, you know, again, applying this more or less playing this part of the conversation to the index products think SBX thinks bags, things like that. When, uh, when, uh, when, uh, thank desperate saying institutional customer thanked us to get a market and the SP they're going to call a floor broker like XFL, uh, if they is going to holler out to that pit, whatever wants to be done, you know, March 3,600, foot's in the SPX thousand up, where are they? And it might respond, but marketing, you know, three at five, $3 bid box,

Patrick Martin: You can yell a little louder if you want.

Bill Looney: Yeah. I used to trust me. Uh, but I, I I'll, I'll spare the audience years, but the long and short of it is it's remarkable response, but that those markets are a little bit wider when you look at them on screen. Uh, if the market not the market to get in the crowd is three and five, maybe the market on the screen asset at six. So immediately the markets tend to tighten up. And then the broker dealer has the ability to try to represent that order, uh, mid word, or offered in the middle and try to build a picture of buyers or sellers that would take the other side of the price. And this gets back to my earlier point about the agency X person, because we are contacting in a matter of seconds, a massive array of liquidity providers we're explaining, uh, anonymous. In other words, the customers, not customers being represented through us, right?

So the customer gains and timidity this equation where we can go in and kind of, uh, you know, not sure hand, but show her hand, Hey, we're interested in this strike. So many. We have, maybe we start to let them know that we're buyers. And we started to fish for sellers. And all of a sudden that customer was really good color and information on where the market's at and what the best way is next, the order, whether it makes sense to try to work it over a period of time, our way maybe marketing's not really for sale right now. So better to just let it come to you. Or conversely, if customers in a rush are moving out, hi, um, you know, think certainly backwards COVID days, um, or in the initial state prices, the volatility group, um, you had plus members that wanted to buy their hedges immediately.

So getting non where cannot, and that's where the benefit of not only human element, but trading under the open outbreak, really content because all of these either connected not only to their Lord based staff, but then for their upstairs staff, that the guys that are trading proprietarily and the communication secrets, well, it seems it's fast, it's transparent. And it happens quickly. And I had seen, um, you know, hundreds of, you know, multiple millions of dollars cross hands in the, in the span of five seconds, uh, which would otherwise take, uh, quite a bit of time with a lot more restaurant, uh, electronic, so that it's not necessarily a quick definition, but I think it's definition of what open out by training is all about and why it applies to the larger notional index products in the market.

Patrick Martin: Yeah, I agree. Um, maybe because it's the NBA trade deadline and reminds me of like how an agent is almost, you know, we'll put out a couple of rumors so-and-so is interested in, you know, or there's rumors sources say there's going to be a trade to the Hawks in that that might not be existing, but that might perk up the ears of another team. Who's intrigued by that. And you, you, you set the market that way, way

Bill Looney: You hit the nail on the head within a trading fit. Um, there is tremendous amount of information flowing. Uh, that's what our brokers are so good at. That's one of xFi, uh, exit based greatest attributes, which is our understanding feel depth, size of positioning marketplace. I can tell you that every day I'm in touch with my floor personnel, uh, what they're seeing, what they're hearing, what they're feeling, which way the market's eating, which makes you, uh, and because they have access to all trades, not just trace it weekend, but all the other trades we're sitting there listening to what a daily basis for the market, because there's a great, you know, for your audience, you can go on YouTube and you can, uh, listen to, uh, S P futures that years ago during the flash crash out. There's a very famous recording of one of the large step with broadcasting.

What was going on at Pitt and for your audience that wants to experience and feel what it's like to have the market move and move fast. Uh, I would, I would recommend going out of this to that, because it's a great example of just what those traders do, what their capabilities are. And the reality is it's when, when the stuff hits the fan, for lack of better term, uh, electronic markets tend to fade and remember the market makers in this community, you have to supply books on multiple listed products, 16 different venues. So there will risk management or monitoring are very robust where if they all of a sudden start to get their offers started to get listed, or their bid start getting hit, they obviously are programmed to pull back. And that's kind of what you and I are really driving at is in a sense, what is the best way to execute my order.

If my water is not going to the markets, it's not to sizeable, it's not trading a name that is got a panicked news announcement, or has a particular risk, uh, potential within itself. Trading electronically often times becomes a good way to engage the market. And a lot of institutional customers are racing lifetime trading from what's called the systematic standpoint or the words they use algorithms to engage the market and make an exercise a lot of sites throughout the day. And a great example of that would be recently, um, I'm sure you remember hearing back in August when the market rally, it all looks at, came up soft bank, big institutional customer overseas, you know, hundreds of millions of dollars, notional options, limited number of mates. Um, well they did that. You know, it wasn't because I can tell you right now it's they had gone into this bank.

That's what one, your 30,000 options and Amazon, or Facebook, Google, whatever names are trading, that information would have been all over the street. And it wasn't an, it kind of, kind of came to kind of a shock. It didn't shock insiders like self. Like there is a lot of in there if you're willing to take an, but if you look at the 4,508, whatever, the number is of total name in the United States, equities market, literally 60, 75% of underlying validity in the obstipation rested about the top six, 10 names. It's an incredible small university where the bulk of people, when you start to trade outside of that universe. So think financials, industrials, I mean, we've just witnessed once president Biden was perceived winner of the election, you have witnessed a massive rotation. You know, there was five or 16 that contributed to most of the rally that we've seen coming out of the initial Facebook price predominantly they were tech mainstay and holds name Peloton to Amazon.

You know, the usual suspect. Now we have financials, dosh yields, uh, tumor state, uh, all of these other sector banks, um, especially getting action. Well, if you're an options trader, especially if you're trading more size, a lot of those names don't surprise us pop six and eight. So you're forced to be very conscious about how you interact with mark and the very easily outsized market electronic. So again, agent's broker perspective, my perspective, our firm's perspective, this is where, uh, we may pay wild sunshine because we know how to infiltrate that they asked quiddity of system and afford our customers best possible.

Patrick Martin: Right? So in addition to the liquidity, you might've touched on this before, but I do want to expand on it. What does this open outcry offer as far as price discovery?

Bill Looney: Well, as, as I mentioned, when you engage that crowd, when you holler out to that crowd, they will oftentimes provide you a quote that's much tighter than between because they are expressing their interest. You know, if the crowd has been buying options all day, then they're obviously going to be better at their sale. They might come into a better off. And you're also going to expose that order to a larger audience. Again, not every market maker is making markets on every series every second day. So if you're looking at a quote on the screen, you might have a vote that's being represented by two or three market makers when there's actually 18 or 20 market makers that are supplying the marketplace. So that open outcry environment allows all of those potential sources of validity she'll respond.

Patrick Martin: Okay. Yeah, that, that, that I understand that a lot more. Now that question was only basically for my own vanity to make sure I understood it. Oh, it's okay. It's, it's

Bill Looney: Complex. It's a lot of nuance to,

Patrick Martin: It really is. I do want to wrap up with a big picture look. And can you offer any insight on how you were facilitating flow by helping customers position themselves before the election? And then how are you gaining your footing now after the election looking to 2021, I've basically ended all of my podcasts, you know, with this eye towards 2021 and the assumption that things will be smoother, but not necessarily. So I'd love to get your insights.

Bill Looney: Sure. Well, you know, I kind of just touched on a piece of that answer to you in saying that most recently, the market has softened first time, much greater breadth. In other words, a reallocation, uh, various sectors that were not, uh, really engaged in the, in the rally. Um, as much as the, you know, five or six names, Fang names basically saying plus, you know, zoom and Peloton, right? If you want to, I'll answer your question from, you know, three a pre-election perspective, and then I'll answer your question a little bit, both for you to look at the 2021. So pre-election, um, one of the most interesting things that I saw occur that we had exit based. So I was over in the volatility space on the VIX, um, for your audience, you know, who may or may not totally get VIX VIX as a, as a measure for volatility and complied 30 day for volatility.

So it's the market's attempt that anticipating the anticipation, how much, you know, potential options prices is there over the next 30 days. And you know, when it's perceived that there's a lot to fix, we'll go up. Mark market would be more about when it's perceived that there's, there's less, it'll go down. Well, obviously volatility this year, but a major bid coming into the COVID crisis. If we actually achieve the highest level on the VIX ever, uh, it's it's surpassed excused thousand and eight high during the global financial crisis. So clearly volatility went through the roof for lack of a better term back in March and April and as it's come back down, uh, or what the market oftentimes you first give us it's mean reverted mixes notoriously mean reverting back towards it's been fast, but it hasn't occurred. And coming into the election, which is something that's been on my people for a long time.

It's here. Uh, everybody kind of initially anticipated that volatility would go up because of all of the potential, uh, outcomes or, or range of potential outcomes that could put occurred has to resolve, you know, you name it, who's going to win, but we actually saw a customer of mine put in the decks. And what that means is customers were buying options that would benefit fixed now post-election, uh, and to some extent it hats, uh, as you're probably been watching now, the big scale kind of came back down below 25 and it's longterm ten-year average, which does not 2008 and 17. And we've seen some customers take profits on some of those positions. They range anywhere between December expiring all the way out to March of next year, because they were kind of playing for how long it take revolve loaded down. But the overall assumption before the election was that volatility would now.

And so far, to some extent it has as maybe as far as it will potentially because we have to remember we're back in a zero interest rate environment. The last time we were here, the pixel was much lower all the way back down to, you know, 10, 11, 12. So that's one of the most interesting, uh, trade and strategies that we've seen, uh, kind of a per before election and continue now post 11 post election. Obviously I've alluded to the fact that there's much more breadth to the marketplace now because people are playing for a long-term economic recovery as out of the price, as there's news now, to companies that they have test trials in the backseat, and we anticipate getting in that scene next few months, there are a lot of potential factors that could create volatility. Don't have residential transition. Uh, if there is, uh, problems with distribution vaccine that doesn't work as well.

There's a lot of potential for volatility, but customers are trading a much larger swath of things because perception is that economy. Second row reception is that Washington word, marketed stimulus package infrastructure package. But I do think longer term and I'll end on this point. Um, there's there, there are a lot of customers that are looking further out into 20 21, 20 22, uh, which is a bit a ways, but they are talking about it. But a lot of people believe that if there is best stimulus, if there is a lot of infrastructure and people start spending money, then obviously that the interest rates higher, sooner than forecast visit a place. You can turn a lot of dollars. So I think 2021 is setting up. They've had some potential bouts of volatility in it, but for the most part right now, people are not forecast for that volatility. The second half, you're trying to need a lot more nation mold and a lot more aid illustration before customers start placing that. And, uh, it's going to be a very interesting time to trade options. And, uh, that'd be a very interesting time.

Patrick Martin: Well said, well said if anything, that makes me feel better because I've been watching these 10 day VIX PC ratios, and I pay like we should be keeping an eye on this. I think this is a pretty good indicator. Uh, and it's, it's fascinating to hear, you know, someone from your side, you know, basically ascertain the same thing as well as you know, everything about 2021. So yeah, let's, let's cut that there because I think that was as good as way to end it as possible. Bill Looney, managing director at SFA. Thank you so much for coming on. You know, you have the historic title of the first broker to be on the Shaffer's market mashup. Uh, I'll send you a trophy later or maybe, um, those little like police certificates, you know, with the little Teddy bear on it,

Bill Looney: I'll display it proudly. Patrick, listen, I appreciate you adding me on, I look forward to hopefully doing it again, and I certainly hope that you and your audience benefited. I enjoyed the content. I enjoyed the discussion.

Patrick Martin: I sure did too. Have a good one. Stay safe.

Published on Nov 2, 2020 at 7:32 AM
Updated on Jul 13, 2021 at 9:32 AM
  • Podcast
  • Strategies and Concepts

Four days from the 2020 U.S. Presidential Election, Patrick sits down with Dave Kovtun, Institutional Sales and Options Specialist at Jane Street and Henry Schwartz, Head of Product Intelligence at Cboe Global Markets for a special episode of Schaeffer's Market Mashup podcast. Dave, Henry, and Patrick talk what the options market is implying about the 2020 U.S. Presidential Election (7:45), scheduled volatility and unscheduled volatility (20:08), and what to expect once the election is over and we enter 2021 (27:40)


Transcript of Schaeffer's Market Mashup Podcast: November 2, 2020

Patrick: Alright, ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. I am very excited for this week's episode. Please, welcome back head of product intelligence at CBOE global markets, Henry Schwartz, and the new guy, David Kovtun, institutional sales and options specialist at Jane Street.

David Kovtun: Hey guys. 

Henry Schwartz: Patrick good to be with you.

Patrick: So, to make it easier on listeners. How about we just have you guys introduce each other, you know, feel free to do a little Alan Parsons project introduction and maybe gas up your guys' Heights, athletic abilities. Let's see what you guys got.

Henry Schwartz: This is a funny team builder. Okay, so Dave Kovtun is with us from Jane street group, which is a one of the most active option and ETF market makers on the street. You might have to edit this and fix it. Dave has been in the business for almost 45 years. Alright, maybe about 15 or 20 years and knows the ins and outs on the trading and the brokers side. And he's a really nice guy.

Patrick: Wonderful. It sounds like a power forward.

Dave Kovtun: Henry, appreciate that nice intro 15, 20 pretty good markets. Been 22 years in the business as a trader and an institutional salesperson and did join Jane street in the middle of 2018. And across from me, we've got Henry Schwartz, been following his work for a long time. All the insights he's shared with us through the business he built the trade alert and it's been great. What did we say? 5 - 10, Henry on a good day?

Henry Schwartz: With platform [unclear 02:10] absolutely.                    

Dave Kovtun: Excellent. But no, it's great to be here.          

Patrick: Wow.

Am I the tallest person on the podcast right now? That is I check in at six feet.

Dave Kovtun:  Really? You do not sound that tall.

Patrick: I know I'm six feet, 150 pounds soaking wet, but yeah, there you go. 

Dave Kovtun: Wow, bless you.     

Henry Schwartz: At least I outweigh you.

Patrick: I feel really good right now. Anyway, it is Friday, October 30th. We are four days from a very important historic market moving event. People are talking about it, everyone is running around wildly screaming and the panic buttons are being hit. Of course, I'm talking about the NFL trade deadline. I really thought about avoiding the dumb, like oh, there's something important going on next week, dad joke. But since I feel like those have jumped the shark these days, but I couldn't resist. I think it's because the bangles made like their first in season trade in a decade earlier. So anyway, it has been a heck of a week leading up to the 2020 election in the three days of this trading week, the Dow has lost 1800 points and is down triple digits again today.

But this episode will be focused on VOL and the VIX back on March 16th; the CBOE VOL index hit a new all-time closing high of 82.69. And in the months leading up to the election, expected VOL has been driven significantly higher when compared to election years of the past. But now there's been a shift over the past few weeks and there's been a lot going on. And I think it's great to have two VOL experts here to articulate what on earth is going on, without further ado, let's start at the beginning. What has changed in terms of VOL sentiment when comparing the past few weeks to the uncertainty we witnessed in the marketplace for the first six months of 2020 Henry how about you take that one first

Henry Schwartz: Well, sure. I mean the beginning of this year well, the very beginning of the year was nice and mellow. We came in and you know, at the money VOL and VIX was kind of in that the high teen range which, you know really is kind of the long-term average. And then obviously COVID took us all for a shocking ride. You know, we saw that, that all time new closing, I for VIX over 82 you know, we hadn't seen that since 2008. So you know, everybody kind of did what, you know, truly went into panic mode. There was a month there, you know, the March was very ugly in terms of performance was a really challenging one in terms of liquidity for the options markets and you know, things kind of stabilized.

And we kind of got into this little bit of a routine you know, with VIX kind of hanging around near 30 for really the rest of the year. And then you know, things actually kind of started to stabilize and it almost looked like people were really looking past the election. You know, at the beginning of October when the polls started to tip and we went from the situation where there was an implied kind of prolonged period of exceptional VOL. Post-election, too things feeling a little bit more normal, you know, and the Trump structure, reflecting that. And although the last couple of days, you know, this sell off has, certainly lifted an implied VOL with VIXs. The, specifically looking at that the election bump is what we were calling it at the moment it's not looking like there’s any dire fear of this protracted contested election at the moment. I don't know, Dave, do you agree with that? 

Dave Kovtun: Well, yeah, I know a couple of things to unpack there. I mean, I just love in the middle. You said, you know, after the March blow up, and then the VIX kind of just hung around 30. Like, I don't think we can kind of overstate what that means. The VIX hanging around 30 for the better part of the year because if we think back to like every time the markets had a drawdown kind of this decade, most of the time, what is the playbook been? It's basically monetize your put options, sell your options, you're in the money puts while you can, because the reversion, the snapback was so quick, you would get these like screaming rallies. VOL would go back down to, you know, VIX 12, VIX 13. The fact that it is consistently held around 30, I think is remarkable.

And like, I don't think we can under [unclear 07:07] that enough. And it's really kind of set the backdrop for this election. And if you look at like, just the day we're having today, I got, I couldn't close my Bloomberg just cause God forbid we dropped another 50 handles, but that kind of base VOL, the VOL before you even talk about the event is so elevated right now. It's really got all option premiums up. So, you know, while the actual event premium may not be crazy when added to the kind of existing base VOL you know, these options are not cheap.

Patrick: Right. So to be clear, what does that indicate about the options market, of the option markets view of this 2020 presidential election and how does this sentiment come through in directional cues?

Dave Kovtun: Sure. Yeah, no, Henry was talking about kind of protracted event and I know, you know, kind of the last month or two people have been nervous about this thing really dragging on. We kind of break down those weekly options. I mean, it's amazing nowadays SPX options expire every Monday, every Wednesday, every Friday, every week of the year. That allows one to be really granular, right? You can break down these really narrow windows and say, what is the VOL implied between Monday and Wednesday? What's the VOL implied between Wednesday and Friday? When we think about kind of the VOL surface at Jane Street, we think about this baseball, this VOL that's been just really, really elevated since March. And that's kind of contributing approximately half to that option premium that an investor is paying and then the XS is the event VOL. And we kind of see that event VOL contribute into options pricing around to November 9th. 

So while it doesn't look like it's going to be this long drawn out thing, the option market, it's definitely looking for some sort of post-election uncertainty, controversy in that kind of Wednesday, Thursday, Friday window, you know, in a kind of typical election get your votes in Tuesday. They call it late Tuesday, early Wednesday, you get a concession speech by the loser and now, you know, the market will totally discount them into market prices on Wednesday. This time doesn't look so simple so I guess the interesting thing about that is if you're looking at this selection, you say, you know what, I think this thing is more of a done deal one way or another. And I think it might go smoothly and we might get a result, good clean result on Tuesday night, and we price it on Wednesday. You know, you might have a trade to do in terms of selling that foreign VOL in between Thursday and Friday. And obviously that's a risky trade anytime you're short in VOL, but I think it's important to understand the option of the market's willing to compensate someone kind of for taking the other side that this thing might just play out kind of cut dry.

Patrick: No, that's fascinating. And I love the way you broke that down on a per day basis. I feel like that's very easily distinguishable for investors to kind of look and articulate Henry, what else do you got on that?

Henry Schwartz: Well I agree. And the, you know, thinking about it, you know, it's easy for VOL to kind of swamp people with, you know, and, math and, but, you know, if you take it at the simplest level, right, when, you know, when you're talking about annualized VOL. You can divide it by 16 to get the daily VOL rights where root 2 52. So you know, with, at the money VOL in the 30 something range, you know, you're looking at you know, 2% moves right at the money VOL around 16, and you're looking at about 1% moves, kind of, you know, typical right, because standard deviation. And so looking at where that the elevated near-term comes back down and it determines the term structure does let you see kind of where people are expecting and where the market is expecting the swings to be larger.         

And I was just listening to Amy Wolf from RBC was on Bloomberg yesterday, I think, and you've asked her, like, what does this market want? And she said, look, the market just wants a clear decision that doesn't want things to get ugly. And you know, currently we definitely are looking at, you know, swings, you know, closer to you know, the 3% range for a few days after expiration. In fact, you know, SPX over the beginning of this week, there were some pretty big trades using the November 6th, November 4th expiration, which I thought was really funny. Because that would be a, you know, a really decisive election, it's all clear by the morning.

Patrick: That's chaotic. 

Henry Schwartz: Yeah and then, and these happened to be upside call spreads, but and then some for the sixth and you know, we haven't seen a ton of positioning out longer except for what we saw in VIX which was those big February and March PUT spreads. Which, you know, that's another kind of vote for things stabilizing, but that one was a little, much longer time horizon, you know, maybe they were trying to cover the fact that things might get ugly for a month or two, and then smooth out early next year.

Patrick: Right. So for some historical context at the 2000 election was the last one that was decided, I think it went until the first week of December. So, you know, maybe that's kind of what those people in the end are leaning towards, who can say at this point. But I do want to compare specifically how this year stacks up from an options perspective to the 2016 setup?

Dave Kovtun: Yeah, absolutely. And just to echo Henry with that, those call spreads that's definitely some of the biggest trading we've seen. They kind of attach around 3,500, so they've gotten a little bit of a setback just given that we've sold off the last couple of days, but that's definitely a position to watch in the S and P. In terms of kind of thinking about the setup versus 2016, kind of two major differences, right, 2016, I think we're all guilty of a little revisionist history and that we think about Brexit. And we think about the night that the election, you know, when they called Florida and S and P futures, like went and do a nose dive, and we kind of think of it as this really high VOL year. But if you go back and look at it, you know, we recouped those Brexit losses pretty quickly.

And from like mid-July all the way to the doorstep of the election, like November, you know, up to say November 1st, the VIX only averaged around 13 or so in that period, like realized VOL was quite low you know, thinking around 11. So it wasn't that sustained high VOL and I can't emphasize enough how remarkable it is that we've held high VOL all year, this year. So it's just a totally different kind of base point that we were going into and, you know, those terms, structure charts that Henry referred to earlier we were looking at those together earlier this week. I mean, I think at the money VOL in S and P going in 2016 was still just in its kind of mid-teens. And as we're recording this, the VIX is at 44 four 0 right now.

So totally kind of different environment. It was just a lot cheaper on an absolute basis to buy options for 2016. I don't think it felt to investors like such a commitment, like to take a shot at one way or another on a long option strategy. It, when VOL is at four and the VIX is at 40, it can feel pretty punitive if you buy a bunch of options and then the market moves against you right away, like in the case of these call spreads. You know, that's a pretty big mark to market loss right away. So I think the high VOL definitely has some people sitting on the sidelines. I also just want to touch on what we talk about the skewness, when we think about skewer, essentially just comparing out of the money options against other out of the money options say PUTS versus CALLS.

And that's really the options market way of saying if there's going to be a big event, which way is that big move likely to be you know, higher or lower? 2016 was definitely kind of a downside risk set up. Like the kind of conventional wisdom was, you know, if Hillary Clinton wins the election the market might rally say a percent and a half. If Trump wins the election seemed a lot less likely. He was like 20% and a lot of the prediction markets in polls the market might go down four and a half percent. So really asymmetric and the setup this time well, I guess thinking back, we got it as a market collective, the collective wisdom of the market was totally wrong. In fact, the underdog did win yet stocks ended up ripping. So I think the market kind of

collectively feels chastened by the whole experience. And if you try to look into the skew this time about whether it looks like an upside or downside kind of fear, it's a lot less clear, kind of all options are pretty elevated. And I don't think the market wants to kind of simplify the framework like this candidate good, that candidate, bad. I just don't think it's that simple.

Patrick: Yeah, and before you go, Henry, I think it's interesting what you mentioned there, Dave, about they're being chastened. It's almost as if they're kind of, they don't want, they're going the other way now. They're trying to learn from the lesson and so that's kind of switching now to the tail end of it.

Dave Kovtun: Well, I agree it's kind of night and day and it may be an over you know, an overreaction in a way you know, you've had, it's been such a volatile year and you know, Dave's right. The implied VOL has held at levels, we haven't seen in that prolonged levels, we haven't really ever seen. Yeah, even though realized for some pretty long stretches where it was not that high, which kind of tells you either the very, you know, people are afraid to sell or they're unable to sell options. I mean, if the market is realizing kind of, you know, VOL in its teens, but the implied VOL, you know, VIX is way, way above that by more than 7, 8, 9, 10 points. You would expect some premium sellers to show up because in a way it's like watching, you know, watching opportunity go by and you say, oh man, I would have been okay if I sold some premium last week.

And then another week goes by, you're like, ah, I should have sold some premium and sooner or later somebody will pull the trigger. And we really haven't seen much of that right. You know, and even those VIX downside trades, they're long premium trades. So that's selling VOL, they're buying a put spread that will make money if VOL goes down, which is a little different, right. If, you really were so convicted that, you know, that VOL was going to drop you know, you might sell VIX calls instead of buying VIX put spreads. So, you know, I think structurally, you know, and this is also related to kind of how 2018 blew out some of the premium sellers and the, you know, when we saw the big CTPs implode or a couple of them, at least. Some of the sellers are just out of business or sitting out.

And I think a lot of people are on the sidelines waiting for, you know, this year to be done you know, in so many ways that people are just done with this whole thing. And I think people want to see how it goes. And then, you know, I think when they, if they feel like the water is safe, they're going to jump back in, which really might be an opportunity. I mean, I don't know the last kind of pundits that I've or heard have been talking about how, you know, either candidate winning is kind of a plus for the market, you know, if it's Biden, it's stimulus related and if it's Trump it's you know, tax-related, and kind of a repeat of what we saw for the fast past four years. So you know to me, it's kind of funky if they're saying, well, either, you know, as long as one side wins, it's good for the market, at least in the immediate term. You know, it's interesting to see that, and then, you know, have a couple of days, you know, we've had you know, this week has been rough on the market, you know this is just a 3 or 4% pull back before the election. And, you know, and we go shooting higher or kind of something else is going on.

Patrick: And I do want to take a step back here and, you know, there's a difference between scheduled VOL events, like the earnings and an election. And as I am about to coin, kind of like the wrench into the wrench, these unscheduled events, such as the COVID 19 pandemic, how is the market reading these different types of events?

Dave Kovtun: Sure. Yeah, I think that's a key concept. When you think about kind of the scheduled versus the unscheduled. I mean, we're here talking about the election and we're all braced for it, right? Like, no one's taking vacation next week you know; it's all hands on deck. Like that's just the fact that we can kind of see it coming and though you, it might be kind of sloppy the way it plays out. Maybe there'll be some controversy yeah; everyone's kind of steeled for it. And the market, you know, be in that vicious discounter that it is, it's given people the opportunity to weigh in on both sides, you know, long and short the direction long and short the VOL. Whereas, you know, and the options like, I think the NOV options got listed back in July. So like the day they got listed you know, the SPX, November options, we said, those are the election options, but you go back to like late January, and we're all sitting around on the trading desk when we used to work in offices and these crowded environments when we're sitting there in late January.

And we're looking at the Marches, you know, no one called the Marches, the COVID options. And I think that's key when the market doesn't have time to discount, when the market doesn't have time to let you know, buyers and sellers weigh in and kind of handicap an event. The effects are much more profound I mean, when you think about, you know, concepts that came from the book, the black Swan, and, you know, that's a common phrase these days. I think one of the key ideas from it was, you know, by definition, the kind of major impact in events, we don't even know what they are yet. They kind of come out of nowhere so, I think it is important for people to kind of step back and say, you know, this is a crazy election, but it is a known unknown, at least.

Patrick: It's a good point. Yeah, I like that. Henry, what have you got?

Henry Schwartz: Yeah, I would just reiterate, I mean, uncertainty is part of life and it's part of trading, but there is a big difference between something like earnings, you know, you have a date, everybody's going to get it.  Get that information, you know, they're going to process it and, you know, the market will recalibrate and then we'll go on. And, you know, if the market is able to absorb that information and these unknown unknowns or things where, you know, nobody knows kind of how this economic impact is going to be a blip or be a multi-year prolonged rough environment. It's toss up I mean, so that I think is part of why you see VOL, where it is, because, you know, the kind of potential outcomes. You know, six months, a year down the road, or really, nobody knows, you know, people might argue, this is how it's going to go, but we don't know right. So that makes people nervous, you know, it really does. And that's you know, that's what we've seen.

Patrick: Yeah, and to build on that, do you see VOL normalizing even in the post-election cycles now? Or is this going to be something that we're dealing with for a prolonged period of time?

Henry Schwartz: 
Well, I mean, I'll take a stab at it. I do think that a lot of people are waiting for this election to pass so that they can try to, you know, get back to work. you know, the COVID situation you know, people are, you know, getting used to as much as it sucks you know, people have adapted their lives to it and, you know, there's some winners and some losers for sure. but, you know, kind of, we're still going on. So I do think that you will see you know, possibly, you know, and I think it has a lot to do with how the election goes. If it's kind of clear, then I think you may see, you know, a five to 10 point drop in VIX in that, especially in that, you know, 3, 6, 9 months zone very quickly because as much as nobody wants to sell it, nobody wants to buy it either.

Because you look at that, you're like, well, gee, you know, owning long-term VOL  at the 20 something percent range has been a terrible trade most of the time. So as soon as, you know the liquidity community starts to pick up some positions there they're going to drop it like a stone. And I do, I think that's what's going to happen. And it would only take a couple of sellers you know and that, VIX put-spread, might've just been kind of the tip of things. You know they're not making any money yet, but if we start to sell down there and things start to settle down they will. And if the flow starts coming one direction the pricing will adjust very quickly. 

Dave Kovtun: Henry, that's such a great point about this middle area that we're in right now, where it's like, the options premium feels too high to buy, but it's too scary to sell. And then I think the market can get paralyzed a lot of times more in that middle ground. And I think those VIX trades that Henry, that you're flagging are fascinated. You know, I think it speaks to the ways people are trying to short VOL, you know, to the extent people are selling VOL right now using structures that are a lot more premium conscious. You know, and they're not selling VIX futures outright, they're not selling calls outright. So that, that could leave you what you can buy a put outright. But, you know, that's also not cheap. So the fact that someone would do a one by two in big size where they're writing twice as many puts, they're basically saying, I think VOL's going to come down, but not too fast. That's a pretty specific bet, but I think what they used 17, I think it was the bottom strike.

So yeah, it seems like a reasonable kind of line to draw on the downside and just generally more spreading type structures, I think will go, they will have more popularity after the election because like that event premium is going to come out. But, you know, we still see baseball fairly elevated it's not going to be, you know, back to 2016 levels where we're just options look absolutely cheap. So I do think investors will look for ways to defray costs, whether that means trading, put spreads, call spreads, butterflies, or getting even more creative with like kind of in-between ratios. You know, buy one, sell one and a half or things like that. You know, to the extent people are using kind of short VOL strategies.

Patrick: In shameless plug, but that's why, you know, Schaeffer's focuses on options is we, you know, we always talk about their flexibility and the ability to customize your trade. And for the past 10 minutes, that's everything we've talked about. And you guys already answered what I think will be the wrap up question, but how do you guys see, you know, market VOL for this unscheduled future of 2021? Because let's be honest that the COVID stuff will probably be in our lives for, looks like to be about a year. How do you see it playing into 2021 and beyond?

Dave Kovtun: Yeah, no, it is kind of the million dollar question, because, you know, we're talking here on Friday the 30th in a week's time, you know, this, the election will hopefully be in the rear view. So it's all about next year and what comes. I mean, there are so many crosscurrents right now, when you think about COVID and you think about the Fang leadership and that's getting tested this week and Fed response. It's a lot more complicated than just the election and then when you take the fact that six month VIX futures are still up in that region, that we really hadn't seen since the fallout from like the European sovereign debt crisis that was back in 2012. For like six months VOL to be elevated that high.

I think you've got to respect the fact that we might be in this high VOL regime for a good time to come. And you know, it'll definitely be interesting to follow those VIX positions that Henry mentioned, and to see kind if we really see like the short VOL trade return to the market in earnest that, you know, seems to generally have taken a step back. But yeah, we're definitely respecting the possibility of a sustained high VOL regime. 

Patrick: Agreed, agreed. 

Henry Schwartz: Well, I guess I'm more of an optimist I expect to see VOLS chill out you know, I expect, and I also am hopeful for decisive and to the election process so that, you know, we'll have one less thing to worry about. And, you know, there are things I'm nervous about. I don't love the dominance of, you know, the Fang stocks in making up such a huge part of market cap. I think that's not right and every once in a while we see kind of a little bit of a correction to that, you know, you'll see Apple and Netflix take a hit and kind of some of the other names finally come up. But, you know, there's a lot of turmoil and, you know, the way that COVID has impacted energy prices, you know, that's playing through right, it's killing you know, travel stocks and oil stocks. And you know, these companies are trying to figure out, is this temporary, or is this, you know, is this a three, four or five year? And, you know, maybe there'll be maybe even after this vaccine and everybody's vaccinated, which, you know, obviously it's going to take a while you know, will there be lingering effects where people now that you realize telecommuting is you know, pretty, you know, can be very functional for certain businesses. You know, maybe that's going to, you know, going to be somewhat permanent for some segments. So you know, I think that VOL will come down and I think the market has a lot of information to digest and you know, there will be some companies that are that adapt and do well and some that are really, really damaged.

Patrick: I agree. It's going to be an interesting 12 months and there's only one way to find out. So to close, I know you guys have some exciting products on each of your ends. If you'd like to just take a quick minute to plug Dave, you can go first.

Dave Kovtun: Sure. No, I just wanted to share, you know, at Jane Street, we provide liquidity listed options, ETFs, and fixed income products to institutional clients around the world. And given everything we've been talking about, we expect it's going to be a busy and volatile week. So we look forward to serving their liquidity needs and it's been great to be here.

Patrick: Well said, well said, Henry

Henry Schwartz: Well, you know, thank you Patrick, for having me on. And, you know, I've been with CBOE for about five or six months now, you know, and we have a pretty amazing suite of offerings, you know, trade alert, which is my baby. But, you know, live o pro and, you know, Silex and Handwork, which does a really top end theoretical value services and just what's available in the data shop. Which is really, you know, I remember years ago, hearing Kathy Clay who runs the entire division saying that CBOE wanted to be the Amazon of options data. And I said, well, that's funny I don't think there's nearly as many people interested in option data as there are in stuff from Amazon. But I'll tell you, you can pop on and if you want to get, you know, the last three months of option flow history in Neo, you can grab it and have that data very quickly. And it's really pretty remarkable. So I'm excited there's just a lot going on in the interplay between the systems that were evolving, you know, within CBOE is making things, you know, better and better.

Patrick: Wow. Yeah, that turns out to be a brilliant analysis there that's hysterical. Well, David and Henry, this was, this has been fun. Probably a nice way to kind of get our mind off the election is to sit and dish about this. You know, you guys, I may tower over you guys on the basketball court, but you guys, definitely towered over me on the, in the realm of volatility. So for that, I thank you in coming on and taking me to school but you guys take care and we'll talk soon.

Dave Kovtun: You too, good chatting with you both.

Patrick: Take care.

Published on Dec 11, 2020 at 2:29 PM
Updated on Jul 13, 2021 at 7:12 AM
  • Podcast
  • Strategies and Concepts

The volatile market environment has seen explosive growth in the options marketplace. On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is joined by John Angelos, Head of North American Derivatives Sales, and Anthony Monaco, Account Coverage Director at Cboe, and Dan Powers, Vice President of Portfolio Management at Vector Wealth Management to unpack all of it. The three experts discuss how work-from-home has created huge demand for options trading (3:20), the differences between standard and mini contracts (9:55), and how Mini S&P 500 Index (XSP) options differ from other contracts (17:23). The group wraps up with a broader discussion: is the "mini" trend here to stay? (22:11).

Transcript of Schaeffer's Market Mashup Podcast: December 11, 2020

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mash up hope everybody had a wonderful Thanksgiving, a socially distant Thanksgiving. Hopefully way from the in-laws or the aunts and uncles that you were kind of hoping to social distance from in the first place. Very excited for today's episode because of the work from home and the zero broker commissions that we're facing in this volatile market environment. Retail traders have become a huge piece of the order flow for the options marketplace. According to a recent E-Trade survey, Millennial, AKA myself are also twice as likely to trade options versus other market participants. So CBOE global markets offers mini VIX futures and mini S and P 500 index options, and they have plans for even more, mini options linked to its existing product suite. Today I'm joined by John Angelos, head of North American derivative sales. John, how are you? 

John Angelos: I'm doing well Patrick.

Patrick: I've also have Anthony Monaco account coverage director at CBOE. Anthony, how are we doing?

Anthony Monaco: Hi, Patrick. Good, thanks for having me.

Patrick: And last but not least, I've got Dan Powers, vice president of Portfolio Management at Vector Wealth Management, Dan what's up?

Dan Powers: Hey Patrick. Thanks for having me on the show.

Patrick: Looking forward to discussing this, the retail trading boom of 2020 with you guys and hearing how you may think these smaller drift of contracts could appeal to us. I'm going to say us because that's who I am at this point. But first gentlemen, let's start with your individual functions. Dan, you can take this first. Can you offer up a quick summary of what you do?

Dan Powers: Yeah, I'm a portfolio manager at Vector. We work with [unclear 02:03] of 1.3 billion. My main job [unclear 02:11] structured custom option trades for our clients. 

Patrick: Alright, Anthony, what about you? 

Anthony Monaco: Yeah, thanks Patrick. So my account coverage, I cover the sell side banks and the inter dealer brokers for CBOE.

Patrick: And John, what do you got?

John Angelos: Patrick you mentioned I head our North America derivative sales. And what that entails is that I'm responsible for covering institutional buy-side clients 02:40  think hedge bonds, pension funds, insurance companies, asset managers, family offices, and the like, and my mandate theory is to really promote CBOE's proprietary [unclear 02:50] options products. And that really entails products that we either have the existing or the exclusive rights to trade in our exchange [unclear 02:58] methodology. So in that respect, there would be index options on the S and P 500, Russell, 2000 VIX options where we own the methodology there at MSEI. So I'm there promoting use cases [unclear 03:10] managers.

Patrick: Great, great. Let's jump right into it. I want to first understand overall in broader strokes, what is contributing to this explosive growth that we've seen in the options marketplace this year? John, let's just stick it with you there.

John Angelos: Sure. So, you know, I'd say that we've got to go back a little ways to really get a running start because there were a number of contributing factors. I kind of look at this in a two phases. So we back to 2007 to 2009, the global financial crisis. What we really saw at that point in time was a market leading into that that was extremely complacent. When we look at nine 11, the fed arguably kept rates too low for too long, the market was on a steady grind higher. So in many instances market participants really didn't feel a need to insure their portfolios, right. There was a cost to insurance and in many instances; our products are using that capability to mitigate risk. So the market really didn't want to spend the money to do that. Well, lo and behold, we had a black Swan event, right, marker down 20 to 30%.

So all of a sudden that kind of changed the game. We were trading about 8 million contracts per day. And within two years that went up to 16 million contracts. So a couple of things happened right then and there, people realized there was risk in the world and number two, they educated themselves to make sure they understood how to protect their portfolios. And I think this is really one of the largest capitalists. When you look at education now it is so readily available it's virtually three. In many instances, you can go to YouTube, you can go to platforms like this, Shapers has research that they offer. So it is high quality, it's accessible and it's virtually free so we had none institutional investors become educated to the fact that they know how to now use these products to mitigate risks. So that was phase number one, phase number two, and you've already alluded to this was the Robin hood effect.

What we'd had as of late, where these retail platforms that are offering free commissions, free options commissions to trade on their platform. So I'd say that's pretty cost-effective number two, we have technology, technology that was reserved once for institutional operations. These are Wall Street traders that had sophisticated tools, platforms, execution platforms, data, and analytics that are now offered to retail clients. Same type of quality and then to overlay that you can trade these products on your phone using those down analytics so it's portable. So when you look at education and the Robin Hood effect, I would say those two things combined has really opened the doors to retail participations and levels that we currently see.

Patrick: Great. First of all, thank you for the Schaeffer's shout out. I think I've been doing these podcasts for about six months and you are the first person to shout us out individually. So gold star for you as a part of this current market environment is the work from home phenomenon. How has that impacted the overall demand for options usage from retail traders in particular?

John Angelos: Yeah, that's a great question. So, as I just mentioned everything to this point, it's really been a foundational building block. The work from home has really kind of gotten us across that finish line. So when you look at what has transpired with work from home, we now have people working from home, right? So either they're employed and they have a little bit more time on their hands, that they can multitask and trade from home. Or they're at home, but they're not working, which means they even have more free time on their hands. And to back into, add onto that if they're not working and they could be using options to generate income, right? So this could be a great supplement to that. Additionally, we know that human beings love to be entertained. And when you look at options, it really provides that type of entertainment, right?

I'm going to be involved in the markets. I'm going to be, you know look at this almost as a game. Making sure that I well-read understanding of what's going on in the world and how to position myself to monetize these types of trends. So just a look at what I said transpired since 2007, options volumes went from eight to 16 million almost overnight. Last year, our average daily volume was 28.6 million contracts. And this year in September, we actually had a record month in trade just under 32 million contracts. So that truly is a Testament to the work at home environment.

Patrick: Interesting. I mean, those are video game numbers, as they say, what has CBOE done in particular to attempt to meet this demand that we've seen from the retail community?

John Angelos: Yeah, that's a good question. You know, it's something that we most certainly don't want to overlook and we want to provide service to this growing community and more important community. But as I've mentioned before, options have primarily been used at the onset by very sophisticated investors and to mitigate risk. So when you look at our proprietary index options products, they're chunky, there are a large notional value that you get for every contract that you trade. Specifically when we look at the options on the S&P 500, the largest economic indicator and followed economic indicator in the world, right? It expresses the health and wellbeing of the US economy. If you were to trade one contract on the S&P 500, that would equate to almost 370,000 notional value of a diversified portfolio of stocks. 

You know, that's great for professional managers that manage hundreds of millions and billions of dollars. But many retail clients, they just don't need that kind of exposure. It's more expensive to control that amount of notional value and you're putting more capital at risk. That's not real user-friendly for a lot of these smaller investments. So having said that, what we've done is we've taken that notional, and we cut it down by 10 times, one 10th, the size. So you now can get that same exposure to the US bellwether S and P 500 index by one contract. It gives you exposure to 37,000 versus $370,000.

Patrick: Right, and this isn't the first time in this space, we've discussed the mini VIX or VXM futures. And you mentioned they were one 10th, the size of standard VIX futures. I'm going to pivot over to Anthony here, correct me if I'm wrong, but you guys also offer mini S&P 500 options XSP break that down for me.

Anthony Monaco: Yes, that's correct Patrick XSP is a product we're really excited about it is the mini SPX. It is one 10th, the standard size, and it is designed to track the S&P 500 index. It could fit into portfolio a variety of ways. It can be used to gain large cap US equity exposure. It can be used to mitigate downside risk and to enhance yields in portfolios. It's a smaller, more manageable contract size that allows for greater flexibility especially for the newer index trader.

Patrick: Okay. That's a pretty effectively tweet length review.

Anthony Monaco: You know another thing to think about Patrick is it could also be a smaller piece to fit into a larger strategy as well.

Patrick: Okay. So walk me through one more time, the difference between like a standard contract besides the specific quantitative differences, but between the standard and the mini, what else is at stake here?

Anthony Monaco: You know, I think that the fishermen is just a smaller bite-sized contract and John alluded to it before less capital intensive notional, but still allows investors to navigate their portfolios the same as they would if they're using the standard. Right, and just to give you a snap shot of where it is in the market, if the SPX is at 367 XSP, which tracks that is that 366 spot seven.

Patrick: Okay, alright. Yeah, that makes sense. Dan, let's get you involved here. Why would someone, or how could someone use these XSP options especially within this current market environment or in possibly in the future when we're through this pandemic?

Dan Powers: Yeah, well, that's a good question. As I mentioned before, we managed money for retail investors, as John was saying, there's still [unclear 12:12] investors, right? They're not big financial institutions like [unclear 12:15] endowments. They also have to think about their investments on an after-tax basis. And a lot of times people think about retail investors. Now, a lot of their assets tied up in after tax accounts [unclear 12:33] trusting them. One of the benefits of using XSP options is that you get the tax at a 60% [unclear 12:43] gains weight, 40% short term capital gains rate, same thing, with the SPX contract. But it allows us to be able to structure [unclear 12:54] accounts [unclear 13:00]. One of the things that we did this year as John mentioned also that we can use options. These are risk profile of your trade.

So we have a lot of clients that after the March crap happened in the spring and the summer, they wanted to increase their equity exposure that they maybe didn't want to just jump right in and buy the S&P or a different, a mutual fund at the current price of stocks. What we did was we structured a trade as Paul [unclear 13:34] that's allowed clients to augment or change the specific payout structure of other S&P investors. [Unclear 13:46] to do this. So the trade works worked where we, all the money and we were selling put options. Generally I bought 12 months out at a time, 24 [unclear 14:00] below the market. So for these clients that we're still a little bit cautious, but wanting to get something pretty, what that does is it makes us, they [unclear 14:09] get to the market at the current price.

So you don't have to pay the buffer, or they're going to essentially do all the [unclear 14:20] market. It also brings an option premium. So you collect premium when you sell the PUT, you use that PUT [unclear 14:29] going to buy call options. What it did was it created a structure where we had a job offer, but we also then got exposure to the upside if the market would hire us for those calls. So you had participated most of the move, not the entire thing. But we know that plants were a clients like that structure a lot better than just, certain clients like their lot better than yours, rather than just getting along with the stock market.

Patrick: Okay. So with XSP, you can speculate on the direction either way, correct?

Dan Powers: Yeah, [unclear 15:09] no directional movement at all. We like to talk about how with options, you can structure a trade that's going to make money in two or three market environments. What we were selling with the [unclear 15:24] market and having just come off of with a big crash. I didn't think that the market was going to be trading [unclear 15:32] the market [unclear 15:35] or down a lot. And so for clients that were, wanting to get some anxiety drawdowns in this some anxiety [unclear 15:46] draw. Using that risk reversal is a great way to [unclear 15:53] them from both sides. 

John Angelos: If I can just add on for a second, this reminded me kind of a funny story. When I was growing up I went to grad school and I took a derivatives class. And back in the day, this was really cutting edge. And what I learned in this class was pretty remarkable, which actually got me into this business. And I remember I went to my parents and I said, you know, I've got to figure out a way to get a job trading options.

And they're like, well, why is that? I go, well, I've learned that you can make money if the market goes up, if the market goes down or if the market goes sideways. And I'm like; there aren't too many businesses that you can make money in every possible regime. And to your point about really shaping your risk reward profile, there are unlimited things that you can do from a strategy perspective with the usage of options. So it's pretty remarkable so sorry, I just had to digress there and talk about my history in derivatives.

Patrick: No, trust me I love the stories. Yeah. I mean, and it hearkens back to what John was saying about the perfect storm, really, whereas you have all this, these products that are strategy heavy, and now people with more time on their hands that are ready to utilize said strategies. I know that there are other products out there that offer exposure to the S&P 500, Anthony. You can take this one first. What is the difference between XSP and those other options out there?

Anthony Monaco: Well, I think the one that it's most commonly compared to is spine, which is the ETF that tracks the S&P 500, and I think that it's, would be prudent to highlight the difference between index options and ETF options. And, you know, but before I do that, let me just back up and say, there are some similarities between XSP and SPY options where they are both PM settled, and they both have weekly expires for those strangers that like to trade shorter maturities. But I think the difference is that we feel index options have a competitive advantage. And there's three main points that I'd like to highlight, index options are cash settled as opposed to ETF options, which are physically settled. Which could cause unwanted delivery of shares, which can add another layer of operational risk to portfolios? 

Secondly, ETF options are American style they can be exercised at any time during the life of maturity, index options are European style expiry. They can only be exercised on the day of maturity and this really protects option sellers from any outsize moves the market may experience. And also there is no difference because indices do not pay dividends and last, but certainly not least what I think is really important is the favorable tax treatment that comes along with index options. And Dan, I'm curious to hear what you have to say about if some of the decision-making process, between choosing between SPY and XSP, if some of that is fiscally motivated. 

Dan Powers: Yeah, definitely. When we're dealing with practical accounts, [unclear 19:15] I'm using index options. Now that we have the XSP mini options that, they're going to [unclear 19:22] all of our clients the European stock was also really important. A lot of times we'll structure trades that are [unclear 19:33] wants in [unclear 19:35] and having an early or mess up. So we liked the fact that [unclear 19:42].

Patrick: That's was the difference between the index options and the ETF. What about specifically, when you talk about XSP and SPY, Dan, you can take that?

Dan Powers: [Unclear 20:02]. You've got a tax advantage using XS options if your duration of trade is less than 12 months, and you've got the European future. So, you know, you don't have early assignment with your strategy involves shorting and options, potentially shortening your call. So if we're doing call spreads as part of a strategy [unclear 20:28] index options [unclear 20:32]. 

Patrick: John, Anthony do you guys have anything to add to that? 

John Angelos: Yeah. As a matter of fact, I do. And I, again, it's a pleasure to know that you understand those benefits, because I will tell you this, since I do traffic in the institutional asset manager space. I can't tell you many asset managers, literally we use SPY options and they have no understanding as to the favorable tax treatment they would get with Index options. And, you know, we're not supposed to be advising, you know, regarding tax treatment I would suggest that everybody talks to their advisors for this but it seems to be pretty well known of the benefits.

And if you're not using SPX index options and you're using SPY, you're probably leaving money on the table. And I had a conversation just recently with a hedge fund that this gentleman was using SPY. And I brought to his attention the tax treatment and he thought, I always thought that that applied to SPX. I'm like, no, it also applies to XSP, right the smaller version. He was not aware of that. So it's a very important distinction to understand, because like I said, if you're using the competitor, you're most likely leaving money on the table, just from a pure taxation standpoint.

Patrick: Yeah, that's fascinating. And ironically that if this is, you know, tailored towards our retail audience, and they're essentially getting a leg up on these hedge fund people that are almost kind of glossing over that that knowledge is almost overlooked in some areas. So I do want to close out here focusing back on the mini trend and John, you can take this first and then we'll have all three or the rest of you guys give your final thoughts. Do you think the mini trend is here to stay? And what can we expect in the next year or so?

John Angelos: Yeah, I would say it's absolutely here to stay you know, these retail investors I don't think they're going away anytime soon. Once you start trading options and you understand the utility of it, you would be doing yourself a disservice not to continue to trade them. Having said that we're most certainly going to continue to take some of our larger index options products and miniaturize that. So next stop is going to be our RUT index options [unclear 22:47] gives you exposure to the Russell 2000 and we'll probably continue to roll out you know similar product innovations in a similar fashion. So yes, it's here to stay and we're going to continue to work with our retail community to make sure that we can provide these types of products for their benefit.

Patrick: I feel like that RUT will be incredibly popular given its notoriety this year.

John Angelos: Yeah. You know, exactly I mean, up until just recently, it seems like everything was relatively highly correlated. But we're starting to see those correlations breakdown. So I think it provides a lot of really interesting trading opportunities between the, you know, US industry you know so I agree with you.

Patrick: Dan, Anthony, what do you guys got to wrap up?

Anthony Monaco: Yeah. Patrick, I'd like to jump in thank you. So we've uncovered some interesting things here at the CBOE. You know, we're always looking to get a better idea of whose trading our products. And we did some data mining we're like, alright, let's pop the hood open, let's take a look. And we've uncovered that the average option trade is six contracts, which is about half the size from a couple of years ago. And we've also determined that there are two and a half million single contract trades per day. This is about 8% of the overall volume, so up from 2%, a few years back. And, you know, I think that this just screams that the retail investor is here and they will continue to be a driving force in the market. And we are fortunate here at the CBOE to have a robust educational arm. The options Institute team has extensive product knowledge and is always well willing and able to help bring clients up the product curve.

Patrick: Dan, take us home.

Dan Powers: Yeah, Patrick I sure hope that the mini trend is here to stay. It's definitely been helpful for us or for our clients. I think one thing that's important to mention, you know, when we view, when we're doing due diligence on new products, like when we're looking at the XSP options, which were pretty early adopters for. Sometimes you probably have concerns about the liquidity in the options and from our standpoint, when we do our due diligence. We care a lot more about the liquidity of the underlying securities, which would be the S&P 500, the most liquid financial instruments out there.

And there's many different ways of trade it and so from an option standpoint, you pull up an options chain. We, even if there's not a lot of volume or interest on a particular option for us, we care about the liquidity of the underlying security. And so you know, we just want to make sure that people understand that and know that. And we hope that people, more people take a look at it. 

Anthony Monaco: You know, Dan, that's a really important point. Patrick, do I have time to jump in.

Patrick: Yeah, let it rip. 

Anthony Monaco: Okay. So yeah, we've recently enhanced our liquidity metrics and guidelines for our market-making community. You know, this is to drive more foot traffic in the product. These are the same market makers that are quoting SPX that are quoting XSP with; you know the same risk profile and risk metrics. So I'm glad to hear that Dan has had good experience and there's been ease of getting in and out of the, of XSP. Because we've often heard the optics as some pushback as a reason for pushback from our clients.

Patrick: John, you said you had something there for a second. Do you want to chime in?

John Angelos: I did. I was just going to kind of highlight the optics as well. It's like the one thing that I've heard is when we've got customers that look at XSP and they compare it to SPY because they're the same notional. They say, well, my goodness the SPY is so much more liquid. And that's because when you look at the screens, there's a tighter market, fair enough. They don't understand that really what happens in the marketplace, even with XSP in the wider markets, on the screens, 90% of those trades trade, right at the mid. And most people don't understand that they're just lifting offers and eating bits instead of going into a market and working in order, which is more likely where the price is going to transact that. So it appears that it's not liquid, but it's unbelievably liquid, these products the suite of SPX products are arguably the most liquid index products on the face of the planet. So I would just encourage people that if you do look at the screens and you're comparing, side-by-side SPY to XSP, please don't get discouraged and think that it's a liquid because it's not, that's all that I wanted to say.

Patrick: Very well said. And yes, I'll just wrap up and say, I, you know, I feel like this perfect storm event that we've talked about with the pandemic has opened up all these different avenues for that, I thank you guys. John Angelos, Anthony Monaco, Dan Powers, all three of you guys, thanks for coming on, stay safe. And maybe we can chat in the future about the direction of mini and micro contracts down the road. 

Anthony Monaco: Thank you, Patrick. I appreciate it. 

John Angelos: It's been a pleasure, cheers.

Published on Dec 16, 2020 at 2:21 PM
Updated on Jul 12, 2021 at 2:40 PM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast and the last episode of the year, Patrick brought in Scott Phillips, Lavaca Capital’s Founder and Chief Investment Officer and Matt Moran, Head of Index Insights at Cboe Global Markets. Patrick, Scott, and Matt chat about risk-on/risk-off environments in 2020 (1:30), "Greek" talk (10:20), and options strategies amid volatility spikes (16:02).

Transcript of Schaeffer's Market Mashup Podcast: December 17, 2020

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mash up. This is possibly the last market mash up of 2020. Let's finish strong and get right to it. Volatility ever present and can change at the drop of a hat. So obviously we all remember early to mid-February, how we all felt about life in stocks and general, and then come March a month later, the S and P 500 lost a third of its value due to the pandemic. Today I'm joined by Scott Phillips Lavaca capital's founder and chief investment officer Scott, welcome. 

Scott Phillips: Thanks Patrick, good to be here. 

Patrick: And I also have Matt Moran head of Index Insights at CBOE global markets Matt, welcome. 

Matt Moran: Thank you, Patrick. 

Patrick: And today we're going to discuss how traders can use options as a tool to empower our inner Warren buffet, who has the famous quote of "it's to be fearful when others are greedy and greedy when others are fearful". I want to set the stage first by explaining the difference between a risk on and risk off environment to our listeners. And I know Matt and I were talking about this before we aired and 2020 is tricky. You know, the growth stocks were doing well while the value stocks underperformed, which is sort of the inverse of what the risk on and risk off environment implies. And then of course there's been rotations within the year. Matt, can you start to unpack that for our listeners just to start off?

Matt Moran: Sure. Well, if we're talking about the question of risk on versus risk off in 2020, it's not, maybe not quite as crystal clear as you might expect in that. Certainly if you're talking about risk on what I think about, I've been reading about risk on, you're talking about a situation where investors have an aggressive growth oriented feelings about the market. Whereas the risk off environment, you're talking more about more of fear in the market and more of a focus on safe havens. So what do we have this year? Well, you had a situation where the market early in the year was starting to go up, but then concerned about COVID basically hit worldwide. And by March you had a situation where the CBOE volatility index, ticker symbol VIX, very, very well known. It's all time daily closing high at 82 point 69.

That was in March, and certainly you could say, well, that's got to be a risk off environment. There's got to be, people have got to be fleeing for safe havens, but what you did see in subsequent months was people were looking at different sectors and different opportunities. And certainly different sectors, different industries out there did perform in very different ways and that energy was weighed down. But you did have some tech stocks and whatever, actually not, actually doing pretty well. And so you could say, well, it depends on what sector you're talking about, but certainly we did have, we have had an interesting year in terms of the risk on and risk off attitude on investors.

Patrick: its hyperbole sometimes to say it, but this year has been so crazy as far as what to expect. It's always worth breaking it down a little bit more. Scott, do you have anything to add?

Scott Phillips: Yeah, certainly. So, you know, to us, it just, it all comes down to investor expectations and what we're actually seeing price-wise in the various assets that trade globally. So, you know, Matt mentioned a bit to safe Haven assets. You know, typically a risk-off environment will be marked by something like that, where you have a bid to treasuries, a bid to those global government type securities particularly in the US. They kind of mark a traditional risk off environment you know, fast forward that towards more of the volatility side of things. And as Matt mentioned, you can see that present in the bit, right? So Matt mentioned the Volatility Index, the VIX and the S and P 500 and what that is particularly doing and how quickly that's changing.

And so you can look at a VIX of 85 as Matt mentioned, and certainly say that that would mark somewhat of a risk off environment. But high volatility doesn't necessarily, at least expressed in high VIX terms; it doesn't necessarily mean a risk off environment. So fast forward to the most recent month where by historical standards the VIX was still elevated in the period of November, but we had one of the strongest equity performances in quite a while. And so, you know, that pairing between what the volatility index is doing, what all the other asset classes are doing in terms of price movement that really helps define what a risk on or a risk off environment may be.

Patrick: Okay. That makes sense; I'll stick with you here. Is it as easy as considering a period of high volatility strictly when the VIX is above 20?

Scott Phillips: Yeah, that's a great question. You know, I would say if this was 2017, certainly a VIX of 20, would mark a higher volatility regime. And I think that you need to break it down by different time periods to kind of look into what high volatility, low volatility, average volatility really is within those different "volatility regime". So historically over the full Matt, what was it? 1990, 1992 that the VIX launched?

Matt Moran: The data on the VIX go back to January of 1990.

Scott Phillips: Right. So back to 1990, January, 1990, if you look over that full period, the VIX has averaged about 19. We've certainly had periods much lower than that, and much higher than that. The most recent March [unclear 06:22] the highest VIX level ever. And like I mentioned, 2017, I believe we had the lowest VIX reading ever in 2017. But historically has an average of around 19. And it has a range that it typically moves in of plus or minus eight points. So if you look at the standard deviation of the VIX movement, including all of these outlier events, which certainly skews some of the data the VIX typically moves plus, or minus eight points from that 20 point or that 20 or 19 average. 

And so when we think about, you know, what's a higher volatility regime, I think you got to dial in to the different time periods that you're looking at, because, you know, this year 20 is in the high VIX, right? That isn't necessarily a high volatility regime but in 2017, it may have been for that period. And then also look at that in the greater context of the overarching time period of that full history. And you can even utilize some of the S and P price movement and go back and extrapolate what the VIX would have been say on black Monday, right. Or what real life volatility would have been on black Monday back in 87, and really begin to get a better picture of what is considered "high volatility".

Patrick: Yeah, that's very helpful. Matt, do you want to expand on that?

Matt Moran: Yes. Well, you might say, well, high volatility, low volatility; VIX is above its long-term average. That's all nice, but how does this impact investors? And I would say this, that if you were in a higher volatility regime, let's say where VIX is around 30. Well, you have a situation where at least for some investors that might go to risk off where they might say, I'm going to look at safe Haven investments. Well, the challenge you have right now, though, is if you're looking at safe Haven investments like Treasuries, for example, the interest rates on those treasuries are extremely low. And you could say, well, actually, maybe that really isn't that safe and that if these interest rates are so low and there is the risk of the interest rates eventually going up. 

Maybe you could even lose money on these treasuries, but anyway, it's not a great place to be arguably. So what are the alternatives if VIX is high? Well, another thing to keep in mind though, if the VIX is high. If you were to go out and sell index option for example, there is the possibility of generating more options premium. And for example, at CBO, we do have several benchmark indexes and for example, we have the well-known DXM Bi-Rite index, and that goes out and sells one month option. Sells one month, 30 day at the money that's BX options and research does show that, for example, if you go out and write the options, when VIX is around 10, you're only generating about 1% per month, which comes out to about 12% for your gross premium. 

So that's pretty good but if the VIX is at 30, you generate about 3% per month 09:26  over 30% per year in gross premiums. Now, I do want to stress and talking just gross, not necessarily net, obviously the premiums you generate on an option writing strategy are all positive. It is possible, particularly in a bear market that your option writing position could actually take a drop. Anyway, the whole idea of generating more options premium with option selling strategies in times when VIX is high can be pretty appealing. And in my mind could be certainly considered by investors who are concerned about this low interest rate environment right now.

Patrick: I want to run with that a little bit and help me understand what is going on when volatility is rising. We know the price of an option is affected of course but there's more to it than that. And I'm thinking of the Greeks, which I've been in this business now for three years, and I'm only just starting to understand. So Scott, and then Matt unpack that a little bit more for me,

Scott Phillips: Certainly. Yeah, so there's different pricing components that make up the overall price that you see listed there on your screen when you're buying or your selling an option. Those are what's known as the Greeks and there are various first and second derivative Greeks that affect that option price. So go back to your calculus days a little bit here we first mentioned volatility being impactful to the overall pricing of an option and that's certainly true. That Greek is called Vega, and Vega is the amount that an option price will change based on a one point change in the underlying volatility of that instrument. So if an option has a Vega of 20 and the volatility rises at one, then you would have that corresponding change I should say 20% corresponding change to the overall option price.

So when we see periods of higher volatility, we get higher prices and options. When we see periods of lower volatility, we see lower prices and options. And so there's a direct impact by that amount of volatility change to the overall price. Other Greeks, that you may be familiar with the Delta Gamma and the life there's several others that I could go into, but those beta being kind of the fourth one, those four would be the four major. Just to break them down a bit more, we talked about Vega, Delta would be the change of an option for a change in the underlying price of the stock. So you're looking at S and P options Matt mentioned, a $1 change in an S and P option with a Delta of 30 would have a change to the option price of 30 cents.

Patrick: Okay. 

Scott Phillips: When we look at Gamma, Gamma is the change of Delta meaning that for every change that that market or that underlying instrument changes in price we reset the Delta to those different levels. And so I kind of liken it to driving down the road, so Delta is how fast you're going down the road while gamma is a Mount that you're changing, you're accelerating or decelerating as you're going down the road. I think that gives a pretty good depiction of how your Delta changes in respect to the option price and the underlying stock price. And then lastly would be Feta, Feta is the price, are the decay of an option price, and how that price, that option price will change as time passes. So Feta is the time passage component of the option price.

Patrick: Okay. Now my eyes kind of glazed over after you said, go back to your calculus days, but you brought me back with the driving analogy and that does make a little bit more sense to me. Matt, do you have anything to add?

Matt Moran: Yes, I'd like to pick up on just one of the concepts that's Scott mentioned feta or time decay and I'll put this in hopefully somewhat simple to understand language. When we came out with a BXM, Buy-Rite index early in this century, a lot of money managers at the time would write options just maybe once a quarter, right and write them four times a year. But then we came out with the BXM index with the whole concept. Well, how about writing more frequently? How about writing once a month? And the advantage of doing that running 12 one month options versus four, three month options is the fact that you are taking advantage of this option seller anyway, is taking advantage of time decay or Feta in that time decay or Feta helps the option seller, the closer you get to expiration.

So the thought is that roughly one should collect about twice as much premium writing 12 one month options as with four, three month options. Furthermore, in recent years, we've come out with weekly options. And certainly managers now are starting to look at that and looking at even shorter time periods. And so, for example, some managers actually do write options multiple times a month. I think some people sometimes suspect, oh, are they just doing that to speculate? No, they're doing it to take advantage of time decay or theta. And we now actually do have an index WPUT that does go and write in cells as PX options, 52 times a year. And the thought there in general is the fact that theory serious that, well, you write 52, 1 week options as opposed to 12 one month options. The goal there is to generate even twice as much premium as writing less frequently.

So anyway, the thought is that if you go out and write more often, that there is potential to generate more gross premium one morning though, is the fact that while you've really got to, you really should know what you're doing. Some people I think would say, well, you should maybe leave this to professional investors and certainly can invest in funds who are managers are able to access these concepts and these goals. But anyway, Theta and time Decay certainly is a very interesting concept that more and more options sellers are taking a close look at with the idea of generating more options premiums. And we do have an index now, ticker symbol WPUT again, that writes SPX options once a week, 52 times a year.

Patrick: I want to pivot now over to options strategy does a market participant always have to change their strategy when volatility rises, what's a formula, or at least some basic guidelines that they should be following to stay in the game? Scott, you can take that one first and then Matt can finish up.

Scott Phillips: Yeah. I mean, different environments call for different structures, you know, to us at the end of the day; an investor has to form a thesis, right. And you have to have a thesis, and then you have to make a decision on that thesis, that's how you're going to express it, right. So if you think that a stock is going to go up you may look to purchase a co-option, right. Very similar, if you think that a stock is going to go down you may purchase a put option a as a way to express that thesis, but everything ties into having a core thesis and a way to express that thesis. What we like about options is that they give you multiple ways to express that thesis. So you can get creative in how you're looking to express that thesis, and you don't have to have just a linear type return profile to your, to the strategy that you're using.

So, you know, step back to March this year, you know, an investor may have looked at the time period in March as a really extraordinary time period. You know, determining that those 10% daily moves that we were looking at you know. I think we had one that was over 10% and I note several in the seven to 10% range that those types of moves just weren't sustainable, right? And maybe that investor had purchased a put option to protect their portfolio you know, maybe a month or two before that. Maybe, you know, back in January when COVID first started appearing on the scene yet the equity market continued to rise. They decided to purchase that put options to try to hedge their downside exposure and their equity portfolio at least. 

And so fast forward to the week of March 23rd, when the equity markets bottom that put options that that investor had purchased benefited two fold, one had benefited from the price decline. If they still, if they had a maturity that went through that period had benefited from the price decline. It also benefited from the expansion of volatility that we saw. So Matt mentioned that 85 VIX I believe, you know, ahead of this, we were at 13, 14 and the VIX all the way up to 85. So you had a very, very large increase, I think Matt correct me if I'm wrong, I think that was the sharpest rise in the shortest period of time in the VIX that we've seen since the nineties. So pretty extraordinary, pretty significant historically type of period that we experienced there. 

And an investor may have utilized that opportunity to protect, to perhaps monetize their hedges so the PUT they purchased, they could have been sold into that type of event. So I think when you're looking at the environments and you're looking at how different environments impact your strategies, it comes down to your thesis, right? If it's protective and nature, like we just walked there or maybe it's more yield in nature, like Matt just mentioned. So potentially looking to sell some type of option to generate a type of yield, this other strategies that people implement based on different regimes. And it all goes back to those volatility regimes that we've mentioned at the beginning of the, of our time together. Yeah. 

Patrick: Yeah, that makes sense. Matt, do you have anything to add, or do you want to kind of build on some other factors that you are considered for an option strategy?

Matt Moran: You know, I think your question was in regard to what do you do when options volatility, rises? And this is kind of a key point from my point of view, in that I believe a lot of investors out there are saying, well, I'm not going to put on protection unless until the market takes a big fall. Well, one of the challenges right away though, is the fact that, well, the market takes a big fall in general, and the VIX price is going to go up. And so the cost of your hedging could be quite a bit higher and so if we get back to the statement, you mentioned earlier, as far as Warren Buffett said, be fearful when others are greedy and greedy, when others are fearful. The problem with buying protection, when the market is going down is you're being fearful when others are being fearful too.

And that can be a little expensive. And so you do want to keep that principle in mind, you want to keep in mind what your goals are, and if your goal is long-term capital protection and avoiding big drawdowns. You might think about, well, maybe I want, you might want to put on some protection when the VIX actually isn't that, isn't near its all-time highs. And recently we did have a webinar featuring a major Midwestern endowment that said that, yes; they devote 2% of their allocation to hedging types of strategies. With the realization that the vast majority of the times, these hedges are not going to pay off, but the hope is, and years like 2008 and 2020 that the hedges really can pay off and can help smooth out returns. And so again, I'd say, keep that in mind and certainly when volatility rises, that does impact the implied volatility and it can impact both option buying and option selling strategies, Patrick.

Patrick: Okay, great. Well said, Scott, did you have anything you wanted to expand upon when you were talking about objectives and a little bit more about risk tolerance.

Scott Phillips: Yeah, certainly, you know, Matt brings up some good points here and, you know, by having that safety net so to say in the form of a PUT option potentially in the example that we're discussing now. It really allows an investor to manage their emotions, right. It's you know, when we were talking earlier, Patrick, you know, I mentioned kind of the seatbelt analogy and it really, you know, I really kind of liken it to getting in your car and putting on your seatbelt. You don't ever want that seatbelt to activate. You never want that to be the scenario but it's there just in case, right? And it can be a lifesaving type feature in your vehicle, safety feature in your vehicle, in the case of an impactful crash or, you know, God forbid something horrendous happening, right.

It can really be there to save your life, same thing of a PUT option and portfolio. You never want them to pay off, right. When somebody buys a PUT option, unless they're speculating, if they're using to hedge it, they don't want them to pay off, right. And all the best worlds the market goes up, yeah they lose the money that they spent on the footprint [unclear 22:41]. But their stocks went up in price, right. And so they essentially made money that way versus the market declining and that being really impactful on that drawdown being really impactful, not only to their financial state, but to their emotional state. 

So if you look you know, right now the price of the PUT option out in the four to five month range may run an investor 2 to 3% when using an out of the money option to protect the portfolio. Yes, that is a cost to their portfolio and will be a drag if the market goes straight up between now and that time period. But it's a safety net for them and it gives them some peace of mind. And just to kind of add to what Matt say, you know, you really want to look to hedge these positions or to utilize these when you get the cheap opportunities. And then potentially profit from them when things get a little bit dicier.

Patrick: Yeah, I love that seatbelt analogy. From a personal standpoint, I always liked wearing my seatbelt don't you want to enjoy a ride knowing that you are safe and secure. You, never get a better sleep than knowing that peace of mind. Just, it always made sense to me to have that insurance locked in. Another personal example completely out of that field, but I purchased PGA championship tickets for Kiawah Island back in November for May. And it said, do you want to buy, you know, insurance for these tickets because of the pandemic? I said, of course, you know, now I have no worries about, are they going to allow fans or not? And you know that peace of mind, I think, is very integral to an investing strategy, especially when it pertains to options. Scott and Matt, I want you both to give the best advice you've received when making capital allocation decisions. Scott, you can go first and Matt, you can wrap it up.

Scott Phillips: Yeah, I took the best advice that I've received is to always protect your downside you know, by managing your draw down risk. You know, we talked about the emotional toll that a significant draw down can have on an investor, managing that risk potentially through the use of options can really allow you to emotionally weather that market volatility when things inevitably go array, right. It does seem like more and more so over the past several years we've had more episodes not maybe to the extent of March. But we've certainly have had sell offs that have come by surprise to many investors or caught many investors by surprise. And it really gives you that ability to kind of stay invested you know, knowing that you have the, have that protection on you know, the well-known secret, I guess to being consistently profitable is really limiting your downside.

And to us, you know, as I kind of look at the world, that's exactly what a PUT option can offer. Certainly it has its own implementation challenges, right? That an investor needs to know what they're doing when utilizing these instruments just don't take me, don't, you know, don't take me wrong. Any of these instruments require a significant amount of investor education before utilizing them, but an investor. You know one of these tools at the hands of a well-educated skilled investor can be a highly, highly useful tool in their portfolios.

Patrick: Well said.

Matt Moran: Well, in conclusion, one of the things I'd like to point out is the fact that Warren buffet is going out and actually certainly looked at the idea of collecting premium. He's gone out and bought several insurance companies whose main business is to collect premium. Another thing he's done though, too, is to go out and sell long dated OTC index options is collected upfront premium of $4 billion. So the whole idea of going out there and selling options, collecting premium certainly has been strongly endorsed by Warren buffet of all people. And at CBO we have a lot of resources if you do want to look in this concept more, as far as selling options premium, taken advantage of that, taking it into some premium that can help smooth out returns, generate more income for you. 

We do have several resources. So the resources would include bench mark indexes, such as the BXM, and the BXMD Bi-Rite indexes, and also the PUT, PUT write index. So we've got these indexes out there also in 2020, the Wilshire analytics firm, a firm, which has 20 I'm sorry, 1 trillion in assets under advisement. That firm has actually published three different papers and the whole idea of going out there and selling richly priced options premium to help smooth out returns. Hopefully generate some good risk adjust to returns. So there is quite a bit of research out there to help you out when you do try to attack these ideas and try to get a better handle on how can I generate more premium in times of low interest rates. So thank you very much for the opportunity, Patrick this has been a great call today.

Patrick: Yeah, thanks Matt. I mean, that's outstanding I, honestly I wish we can. I have a thousand more questions for you guys, and I can run up two hour podcast here. Thanks again, both of you guys, Scott Phillips Lavaca Capital's founder and chief investment officer down in Houston, best of luck with those ailing sports franchises.

Scott Phillips: Had to get the plug in.

Patrick: Had to get one little, I forgot in the intro. So I was like, alright, make sure I get the jab in at the end. And then Matt Moran, head of Index Insights of CBOE global markets. Matt, I have no qualms with any Chicago teams, so you get off free today. 

Matt Moran: Okay, sounds good. 

Patrick: Thanks again, guys. Stay safe out there and hopefully we can maybe revisit this conversation down the road because like you guys have both said there is so much to talk about here and we're really only just getting started.

Scott Phillips: Right.

Matt Moran: Okay, thank you Patrick. 

Patrick: Thanks guys. 

Scott Phillips: Thanks Patrick thanks everyone. 

Patrick: Cheers.

Published on Jan 22, 2021 at 2:06 PM
Updated on Jul 12, 2021 at 2:40 PM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick sits down with Schaeffer's Senior Quantitative Analyst Chris Prybal to talk his two recent GameStop (GME) options trades that netted 706% and 655% returns, respectively. Chris walks through what made GME an intriguing bullish pick (4:14), how options traders are impacted by it all (9:30), historical context and future ramifications (17:29), plus other sectors and industries that caught his eye for 2021 and beyond (21:50).

Transcript of Schaeffer's Market Mashup Podcast: January 28, 2021:

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mash up. It has been a minute folks, little over a month last time I checked. Happy belated new year to everybody first of all and what a time to reconvene though, am I right? The past week on Wall Street has been one of the weirder in recent memories, and that's saying something. You've got Reddit folks banding together to take down hedge funds, Twitter personalities clashing left and right, stocks with zero technical prowess, soaring to unheard of levels. It's like one plus one equals three or down is up and up is down. I can't tell you how many texts I've gotten from people asking me because they know I work in the financial space. What on earth is going on? I don't really know either like I'm sorry I have no clue. I needed an expert to unpack all of this. So, without further ado, please welcome back Schaeffer's senior quantitative analyst, Chris Prybal to the podcast. Chris, what is happening, my man?

Chris Prybal: Thank you, Patrick. First off for having me back you've had an impressive list of guests here on the show. I mean, it really took me a while to go through all the podcasts because I wanted to scrape as many notes together because I was learning things each time. So, good job to Schaeffer's for bringing all these people together, good job to you for putting it together. This volatile market it really is a head-scratcher. We got a lot to talk about, Game Stop, man. Where do we begin on this? Where do we begin?

Patrick: I don't even know. 

Chris Prybal: Let me tell you a little story about Game Stop while we begin that kind of brings everything together. We're the longest of time; let's say going back to the all-time highs on Game Stop, 2013 until February of last year, 2020 Game Stop had fallen 95%. So when you hear these short sellers being upset or losing money, keep in mind that they have made a killing on Game Stop for quite a long time. Maybe they had made too much money on Game Stop because last year things fundamentally started to change on the company and from the media flow and the sentiment, it was unnoticed to a certain degree. There was a point last year Patrick, in 2020 GameStop had 6 billion in sales that had been followed and that's what people were arguing. 

However, the market cap of all of the Game Stop shares was only 300 million. So you've got a company that's going 6 billion in revenue, and it's only valued at 300 million. How many companies today would love to have 300 million in revenue, but they're valued at 6 billion? What was totally undervalued coming into 2021, short interest from the end of 2018 was only 15 million but then, by the beginning of this year, it had shot up to 71 million. If that's in the indication of how much shorting was going on, as GameStop was going down, I cannot make a fundamental case for why GameStop is trading at $350 up a hundred percent from yesterday's price. I will try to bring it together for you later in the pod, but I think that's a good place to stop as a lead into the first trade. I think we wanted to highlight, correct?

Patrick: Yeah. So you had two options trades to start, or at least to end 2020 heading into 2021. I'm looking here at our spreadsheet and I'm seeing your respective gains of 706% and 655%. So first things first, congratulations good buddy, because that is quite the haul. You started to allude to some of the drivers such as the short interest and the favorable market cap. What else led you to this bullish GME position?

Chris Prybal: RC ventures took a position late last year and this had been, this was a follow-up to an announcement the company had made where they were going to become a streaming partner with Microsoft. That was on October 8th of last year and the stock did gap up 20% and it had a good start. But once again, we're talking about when GameStop was in the teens, not 350, like it is now. So it has made a big move, but initially the sentiment against it was still so negative. I mean, you've seen the Barron's articles that are routed to the group, the [unclear 05:27] alpha articles. These were 2, 3, 4 weeks ago. 

You know, when GameStop was in tens and the twenties, you know, these people were bashing it like it's, blockbuster. You know [unclear 05:41] out of business, why would you want to own this company? And I started thinking about it every time I drive past to Game Stop; there are people outside the door. And I know there was that craze because of the release of the new gaming consoles, but it seemed to me that they had a lot of traffic. They have a lot of revenue; there is value in this company. You coupled that with the Microsoft partnership, who's decided Microsoft couldn't buy GameStop even at these levels and just make it an X-Box store and sell gaming platforms and accessories and items to the community, almost their bricks and mortar leg of the streaming platform.

You can connect both ways. So when you look at, you know that there are possibilities to the fundamentals, improving enough. Now, again, I think we've gotten out of control because it's worth like $20 billion right now. When I put on this trade, it was 3 billion. I look at esoteric indicators and all of them is a 1000 day moving average.

Patrick: Okay. So that comes out too.

Chris Prybal: Roughly a four year moving average.

Patrick: Four year moving average, okay.

Chris Prybal: [Unclear 07:02] 52 calendar days, trading days per year. 

Chris Prybal: It's a long-term moving average obviously, but GameStop had traded, had begun to trade into that level and then it broke above the level. So there was some technical signs that there was a sea change occurring. And when I put on that trade, the first one, it was after earnings and GameStop actually pulled back to that 1000 day after being above it, that also aligned with 100% year to date at that time in 2020.

Patrick: I remember that because everyone was saying, wow, you know, look at Game Stop here. This is pretty interesting.

Chris Prybal: At that time, short interest had exceeded the float, the outstanding float of, on the marketplace. There were more people, short Game Stop than there were publicly traded shares available, which that in and of itself is a head-scratcher. And I'm sure regulators are going to look into this because it is creating a huge panic right now, as we talk on many, many, many, many stocks. I just saw a headline on Bloomberg that Joe Biden's not looking into Game Stop. I always get his last name, incorrect, Paul Pate he made money on GameStop this week. And since he's looking at running for governor of California, he's already decided I'm going to donate those proceeds to charity.

Patrick: I've seen that go around a couple of times with people on Reddit.

Chris Prybal: There's just so much going on with Melvin capital needed additional funding because basically they were bailed out on their Game Stop losses. I mean, you got to ask your question, did they not see this coming in advance? In addition to RC ventures, which is Ryan Cohen ventures taken a position Sen vest also took a 5.6% passive stick. Ryan Cohen himself on December 15th, December 16th, while we were already into the first leg of his trade, he personally bought more shares. Why am I telling you this? Well, if you have short interest so high and the available float actually shrinks, instead of increases, those people are even more vulnerable. 

Those shorts, there's not enough shares to cover them all. Now you're going to ask me eventually how option trading played into this. And there is a combo effect, the rush by the Reddit crowd that the Discore Trout, Robin Hood traders, Stock Put you name it. When they were rushed in Game Stop, there was huge call volume created. Now you've had exchange brokers and agency brokers and all kinds of market people on this podcast. So I won't get into too much detail, but if I'm the market maker and you as the customer buy the call from me, I'm the market maker. I'm now a net short that call. So how do I hedge my position if I'm net short? I have to buy underlying shares, proportional to the call contracts I sold to you. 

So if there's a huge rush of option traders, demanding call contracts, the market makers go net short, but to heck is that they buy stock, by them buying the stock it pushes it up, which squeezes the shorts and then the shorts have to cover. And then you get hauled seven times in one day, then you get this after hours trading, you cannot blame the after-hours movement on the retail crowd. That's big money player’s right there, that's not the retail money doing that after hours.

Patrick: I think that is being glossed over in certain media outlets where they're just saying its being short squeezed out. You know, it's just Robin Hood traders, you know, just clicking on their accounts, sitting on the couch. You look at the technical it's not that it's the big markets that are making the moves.

Chris Prybal: It's the market makers trying to get a grasp of the situation. And that's why you're seeing implied volatilities on some of these contracts exceed 2000%, which I've never seen that if you get to 1000%, it's super rare. If you get to a 200 IV, it's really, really rare though, 2000 I mean, and that makes it very difficult on retail and any trader because right there in IV, you’re paying so much per contract, that it's almost not worth trading because you're going to have to get so much price movement off of that contract that you need such a fat tail distribution to get what you want done. So it's, the market makers are kind of shutting it down and they will continue to until we get some kind of regulation or some kind of answers or hedge funds blow up and then additional money comes in and that money is blowing up because they're still short. A lot of other companies that are going up 20, 30% in a day.

Patrick: Yeah, AMC.

Chris Prybal: They're taking a hit. These people are taking a hit and it might automatically drive down the overall market, which we need a breather, but it'll drive down the overall value because these companies now have to raise cash to cover their losses. Their best way to raise cash is to sell existing holdings that they have, that they're [unclear 12:35]. So if you have that selling pressure it's going to put a blanket over the rally.

Patrick: Yeah and what I find scary is I, you know, against better judgment, I perused Reddit earlier today and you have people saying, keep hammer, you know, keep hammering it, keep hammering it. Let's get to 500, let's get to 750. And I think that is what I think it has a lot of people worried. They don't understand the ramifications of that.

Chris Prybal: Yeah, there could and probably will be unintended consequences of this activity that maybe doesn't bite us all in the butt, but it increases fees associated with some of these contracts or it reduces the bid-ask spread in some manner that it cannot happen again, which ultimately hurts us from a commission trading point of view. We'll stay on that I mean, it could happen today. It could happen a week from now it's, they can't let this continue to occur. 

Patrick: Well, what I find fascinating is you look at your trade, you saw something that not everyone else saw, you know, across the market, and then you were able to benefit from that. But, so like once it crossed a certain line though, it became so disconnected from reality that you almost had to kind of throw your hands up and say like, okay, what's really happening here? It's such a weird mix of very astute market reading and then just completely unregulated chaos.

Chris Prybal: Trading the market can be so much fun, but it is also very humiliating even when you win. Such as this case, while I've took huge profits, I missed out on over a hundred percent stock gains that would have took this option trade to even, you know, we would have been talking about a 1500 or a 2000% gain on this trade and I'm humiliated that I didn't keep it open. But at the same time, when you're seeing distorted price movements and you have a subscriber base as large as we have at Schaeffer's, you have to take care of the client. You have to think about how am I going to get these people out at a good price because it's not just me?

Patrick: Exactly. You have to remove your own ego and vanity from it.

Chris Prybal: There's tens of thousands, 20,000 contracts just on the opening day. So you're getting a lot of people and you don't know how many people added to it after, or took the position off, but there's a lot of money chasing these trades. You want to get them out at, you're obviously getting them out at a great price in the situation, but you want them to get out in an orderly fashion and not chase the market emotionally, because they see swings. So it was very difficult exiting trades.

Patrick: I see you had you’re, for one, for the event trader, you had your final partial closed on the 15th. And then for your, I think it was options under $5 was the final partial closed a week later on the 22nd. What was going through your mind when you were closing these out? Did you have any incline that this was, that this chaos was about to happen? I mean, like you said, you had to; you have to protect your investors.

Chris Prybal: I never thought I would advance to this degree. There were drivers in place that suggested it could happen. But really, when you have this wall, this wave of liquidity out in the market and it's looking for a home and it knows certain people are short on certain stocks you can punish them. I look back to my drivers and I said would you be happy with a thousand percent return on the second half of this trade? And any person I know would be like; you know what close that out. That's, a great job and the second trade there that got to 700 and stocks you, that was actually a 1200% exit. So when it gets to that level, where you say to yourself, man, this is awesome this is really good, I'm okay taking the profit then and moving on because we know how the market works. It goes up and it goes down and that 1200% could have easily fallen to 600% the next morning or even less, you know, I could have been closing the second half out less than I took the first half out. And that's really never a good situation to be in you know, you kind of feel like, well, why didn't I take all of it off?

Patrick: Exactly. So I've been working here at Schaeffer's for going on four years in April. And I have never seen something like this happen before, you know, you're a seasoned veteran trader. It has, is there any context in history that we can look back on and possibly learn from about like where we're going next, considering what just happened? 

Chris Prybal: 99 and 2000 when I was growing up, there were dotcom stocks that they filed for an IPO. They began trading and they'd go up 100% in one day, it kind of reminds me of that. Option trading was not as prevalent then; today you have a lot more option volume, which can influence the stock price more. So you've got that dynamic of the low commissions, you've got retail traders. They inherently are usually long only to begin but they're learning how to trade options at a frequent rate and they like them because they can get out, get in and get out the same day. You can, you know, you got a lot of flexibilities, you know, that has amplified the effect. So to answer your question yes, but honestly, no I don't think you can do that.

Patrick: Yeah. I just, I struggled to find a comparison looking back through history and trying to find some connective tissue with it all. So then moving forward, what do you think are some long-term ramifications of the way this escalated out of proportion?

Chris Prybal: [Unclear 18:52] the increased retail crowd and that being young people taking to the stock market is a very beneficial thing for the whole of American society. These people are going to be shareholders for much longer than someone, my age or someone 65 or 80. You know, they've got more skin in the game because they're going to have to live through these changes and with them as shareholders with them empowered to make changes. And to force these companies to clean up on carbon capture and do these other things that just make sense from a society point of view, instead of a shareholder point of view. I think ultimately it's going to benefit us, I do think that we're going to get a, the market's going to run into turbulence at some point this year. I don't think the powers that be want to bring it down so quickly after inauguration.

They want to let it ride, they want; we're still in the COVID effects. They're still stimulating, there's still a lot of people out of work. So they really can't push on the brakes too much because there's a lot of people hurting out on the streets, not wall street, but on main street and the back streets. So they, got to be delicate and the fed. The fed is going to be interesting with what they say, because they kind of got a tap down on things as well, but they don't want to rock the boat because it's still a lot of people hurting. So I'm thinking when we get into June, July the summer months when it's historically weak anyway, I think you'll get a pronounced pool back there always caveats to, you know, there's a black Swan event such as China trying to take over Taiwan. That would screw with the supply chains of many, many tech firms.

Patrick: The semiconductors.

Chris Prybal: Yeah, and the economy overall, because there's always things that could cause that type of swing. But I don't think that they want to bring down a market until summertime, honestly, let more people get their job back, get back to normal. You know, I just don't, there's so much money, so much liquidity right now that any pullbacks going to be purchased. I know me personally, I've got cash in my trading accounts, and I’m waiting for a better price. If it is I'll step in and buy, you know? So there's, if you and I are doing that, there's a lot more, there's a lot of other people doing that same thing. So that's how I feel about that.

Patrick: Yeah, well, very well said. I think if we're looking for an analogy instead of slamming on the brakes on an exit ramp, we're kind of just tapping the brakes a little bit, just, you know, tap every couple of seconds. You don't want to skid out; you don't want to flip the car.

Chris Prybal: Yeah, Like the air brake system that [unclear 21:47].

Patrick: Bingo, bingo. Moving beyond Game Stop and everything else. What are some other sectors and industries that have kind of caught your eye to start 2021? You mentioned briefly kind of we're still digging ourselves out of the COVID hole, but you know, you have some projections saying we're reaching mass vaccination by mid to early summer. Are you watching these trends and trying to formulate your trading strategy for 2021?

Chris Prybal: One into 2021 I kind of made a thematic approach to it, kind of segregated companies into certain sectors or industries. Now I'll share with you, some of them obviously Carbon Capture with Biden and the Green Energy Push, Solar Power. Anything like that, I think it's going to do well, just because of the flood of money going into it. There's going to be technology advances, things we don't even know are possible are going to happen. And you know, a couple of years from now, we will probably going to live in a different world than we are now and it's due to these companies. You could go into 5g, there are a lot of companies in 5g that I like. You could go into 3d printing, 3d printing companies that are revolutionizing the world. 

With GameStop, you could just look at gaming companies. I know you like Draft Kings from previous episodes [unclear 23:18] background, e-sports, e-sports gambling is a huge business, marijuana legalization. That's going to happen this year across the country. Any type of reopening trade, you got Bit coin mining and then probably the biggest one of all is revolution in genomics. This COVID kind of put people under the microscope and set up like RNA sequencing and they sped up development and that's going to benefit us all, whether its cancer research or a plague we don't know about. We're going to be better prepared to handle it.

Patrick: Absolutely. 

Chris Prybal: So, I mean, it's always fun. That's why this trading game, it's very exciting. I'm glad I do this I wouldn't do anything else, but at times you can be humiliated by your own winners. I mean, it's an exhausting game, but how else to make money?

Patrick: It's crazy you know, I can't think of any other aspect of life where if you turn in a 706% return, it's construed as almost like kind of a loss, like what other, you know, situation in sports life is that like, and that's what makes investing so unique. And I think it is starting to ensnare a lot of young traders. So yeah, I really agree with all of your insights into 2021 I think it's going to be very exciting. We've, with big macro events, such as the pandemic, there's always a shift to new technology, a shift to a different way of life. You think of the remote learning or the remote working, you know, we're doing this now over zoom, you know, who would have thought that that would have been so prevalent a year from, a year ago. But it's definitely an exciting time to be in investing. Couldn't agree more.

Chris Prybal: I'm glad, I hope everyone's happy and healthy and they stay safe and we get through this, but man, the markets sure have given us a lot to talk about and we're in the right place with that. Aren't we Patrick?

Patrick: Yeah. I couldn't help, but think that in the past week of like, we are at the center of the universe right now, in terms of investing, and it’s exciting. It's a little daunting and stressful. But hey, the only cure is for that is just a trip to the golf course. Am I right?

Chris Prybal: You're right about that. I can't wait to get some new Callaway woods tested not I changed my budding stroke. I'm left tad low now, it was really good. However, I'm putting on a mat inside my house because of the cold weather. So that's kind of like, is it real or is it not real?

Patrick: Be careful with those mats man, like I did a lot of mat work one off-season and then like the first couple of months, I was just rolling everything, no feel at all. I don't know, maybe that was my own fault, but those mats scare me.

Chris Prybal: We'll have to play golf this year, Patrick.

Patrick: Yeah, absolutely. Chris Prybal, Schaeffer's investment research. Thank you so much for coming on your second time on you were my first ever guest. Hopefully, you know, we can make you a frequent contributor.

Chris Prybal: Yeah. And for those listening, go to Schaeffer's See how many big hits we've had recently. We're going to keep it up so check this out.

Patrick: Chris beat me to the promotion. Schaeffer's, check us out. Instagram, Twitter, you know, our website, we were overhauling our whole front page, so you can see everything as quickly as possible. We're definitely working on some exciting things for the future and hopefully everybody can be involved.

Chris Prybal: An exciting time isn't it?

Patrick: Alrighty, Chris, be safe. I'll talk to you soon. See you in the new office.

Chris Prybal: Thanks to everyone for listening.

Patrick: Take care, cheers.

Published on Feb 25, 2021 at 1:58 PM
Updated on Jul 12, 2021 at 2:08 PM
  • Podcast
  • Strategies and Concepts

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 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. 


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. 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. 


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. 


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. 

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.

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. 

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 behaviour 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).

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. 

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, 

Patrick: 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.

Published on Feb 9, 2021 at 10:00 AM
Updated on Jul 12, 2021 at 1:53 PM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast, Cboe Global Markets’ Head of Product Intelligence Henry Schwartz returns for the third time to discuss post-election volatility (4:58), how options traders are reacting (10:28), and advice for the retail crowd just getting into options (18:15).


Transcript of Schaeffer's Market Mashup Podcast: February 9, 2021

Patrick: Welcome back to the Schaeffer's market mash up, please welcome back. Five 10 Henry Schwartz, CBOE global markets is head of product intelligence, Henry, you hanging in there, buddy?

Henry Schwartz: Oh, I am Patrick, thank you. It's been a heck of a year and it's only February. Yeah

Patrick: Yeah, it's, did you ever think when we did a pre-election volatility episode that we'd be talking about GameStop two months later?

Henry Schwartz: No, I thought whatever happened, you know, that, we'd get over the hump of the election and things would just settle down, but nothing settled down. I think Maura has gotten kind of stirred up in the, you know, the first month of the year and it's great, but I don't, I'm exhausted.

Patrick: You're telling me, well, in general stocks tend to post gains during periods of transition to a new us administration within these transition periods between incoming and outgoing US presidents, stock market performance tends to become more dependent on the economic cycle rather than the actual election results. I want to at least start with some context first. How have markets fared following previous presidential elections and historically, how have stocks performed in a new president's first few months on the job?

Henry Schwartz: Sure. So I dug up some data because it's really interesting, you know, a lot of us kind of coming from the pure option side are, you know, it's ingrained in your training that there's a normal distribution and there's a random walk. Which means that, you know, there shouldn't really be these timing effects around elections or around months or even around days of the week. But there are right? And so you know, I pulled up the STX and actually SPF and Vicks over the last three or four election cycles to see kind of how things played out and you know, November, December they tend to be good, good months for the market in general, right. so, you know, elections kind of bring a lot more into that mix, but over the last, I think the last eight election cycles I was able to look at you see generally good performance, I think, except for following 2000 and you know, and that was the dotcom bubble bursting there. but over the last three elections, you know, I think every year has went up more than 20% on the S and P and then I drill down into, you know, specifically what we, you know, what we were talking about, you know, November, December, January, like, you know, right in the midst of where we are right now. And in general you know, what I saw is November tends to be a little bit of kind of a waffley month, historically, you know, especially, I think in 2012 we were down in 2016, we were down in November, but then December and January things kind of popped back into positive. And that was true for, I think the last three election cycles. So, you know, and then with that, you know, as you kind of expect, if you get a couple months of two or 3% returns, you know, volatility tends to come out. And so you know, after 2016, even though that, you know, that was a surprising election for a lot of people. You know, we had, if you remember, like watching election night you know, when Trump won the future sold off, you know, huge, like, you know, three and a half, 4%, and then it all flipped around and we were up by the morning. You know, looking at December and January tends to be pretty strong. And that's kind of what we're seeing now so, and then there are factors of, you know, whether or not you have one party in control of presidency and Congress and all that that tends to help. So kind of where we are right now with a you know, one party in control is, actually kind of the best scenario for the market. And, you know, we're seeing, you know, we're seeing it kind of play out in front of us.

Patrick: Yeah. And I think after the November election, we, a new scheduled event was seemingly created the January 6th, Georgia runoff election. So it's like, it's almost an unscheduled scheduled event. And I feel like that plus the insurrection at the Capitol that happened [unclear 04:54] in the ensuing weeks, threw everything into disarray. But can you explain to listeners the type of month that Wall Street just endured? And it's funny, I looked back at our older episodes and you made a couple comments that proved prophetic about volatility saying like, you know, it, I really hope it just chills out after the election. One of the times you're like, hopefully in the rear view mirror.

Henry Schwartz: Yeah. Well, the chill out definitely has not happened yet. You know, people have been looking for it, you know, we saw, I think one of the reasons I've mentioned that is because, you know, right into you know, late October. Basically we saw some big directional trades in Vicks and fixed options where they were buying these put spreads or ratio put spreads that basically would make you know, I think it was 20 to 40 million bucks if volatility finally cracked below 20, you know, really headed back down to, you know, that kind of long-term average that's in the 15 to 18 range. And so that was a very kind of, bullish or optimistic view on things coming back to normal. You know, we also saw some, we also saw volatility kind of holding, you know, especially right into the election you know, and we can play ball. I spent all of last year, you know, after topping out at the 80 to 82% range, which was a new record. It's taken months and months, and it's barely even approach 20. And now we're, you know, we went into the election around 30 and even though, you know, that actually turned out to be more of stable outcome than some people were worried about. There has been plenty of these catalysts to keep people, you know, I guess a little bit on edge as far as, you know, we're not quite out of the woods yet. Obviously, COVID is still a big issue, it's kind of seems like things are on track to have that be completed someday. But we still see a lot of things to be concerned about. And then, you know, events in Washington on January 6th were a big deal. And it was really interesting to see, you know, I mean, I was watching the market super closely that day and watching, you know, the coverage of it. And I remember seeing, the market weirdly did not react like you kind of, you know, sometimes you see a disaster taking place and you know, you'll see a really sharp selloff. Everybody gets scared, which is pretty normal. You know, we were up 2% over 2% that day. And then, you know, things started to unfold and the markets sold off a little, but you know, basically I think we slipped back about a percent, you know, you didn't see an explosion in volatility. Which, you know, was really interesting, because a lot of people were like, well, that's, you know, how can that be? And, you know, I mean, I think that as major as that event was, you know, the market is focused on, you know, kind of the current situation, which, you know, we're in a severely kind of hampered economy because of COVID. But then you have all this stimulus and you have, you know, the fed, you know, basically saying we're going to make money easy for a long, long time. So those bigger currents, I think, are kind of, what's driving, you know, traders and investors, and there's a lot of capital in it and it's, it's flowing, it needs a place to need a place to land. And, you know, in general, that's why you're seeing pretty solid performance on almost all assets.

Patrick: Do you think if you remove the context of the pandemic and a new administration, if something like the Capitol insurrection occurred as a more isolated incident, it was of course, connected in the fabric of a lot of other components of life. Do you think that then would have created so much net have resulted in a spike of volatility or are we and basically are we just so numb to these events that continue to transpire that they're really just not registering?

Henry Schwartz: I mean, I don't know if we're, if the market doesn't care, but the market, you know, my market adapts to incoming information and, you know, in slow times, you know, something out of the blue can scare everybody. But, you know, the way things have gone for the last year when you've had, you know, basically crisis after crisis, I think that we're not, we're not numb to it, but the market's not that concerned about some of these individual events which, you know, for whatever reason. You know we're, the market was pretty quick to kind of identify that as a one-off, which, you know, are in the market definitely can shrug off a one-off event because it's, you know, it could be a horrible situation, but the market is basically saying, well, that happened. And what will things look like two years down the road? And that's, you know, I think that's the dynamic going in.

Patrick: Yeah, that's a good point. So when we look at these huge events that we continue to live through, have you, how have you observed ways in which market participants are managing their risk or generating alpha? I know unscheduled events were a big component of our previous episodes.

Henry Schwartz: Right. I mean, you know, it's the way that last year played out and it's, everything is continuing is, you know, we've seen a big shuffle in the, kind of the health of different stocks. And, you know, you, at the beginning, you have this rushing into the new online economy type of stocks, right Peloton and Amazon and everything else. And all the, you know and obviously these companies that we're going to have a really rough theory at airlines and cruise lines and everything else, you know, to, you know, go and take a beating. And that, you know, that kind of cycle of like, okay, we need, you know, you need to look at companies through a different lens basically it's like is this a healthy company in general? Is this a healthy company given the current situation, is this a healthy company? What's it look like, you know, if you know, as COVID goes away and people start, you know, traveling more or whatever? So, it's been an incredible time for stock pickers and, people that can kind of anticipate where the focus is going to be. And where you're going to, you know, solid earnings, solid performance. And it's been a wild, wild ride. I mean, that takes a lot of work and thought a lot more than, you know, usual, right. You could usually look at company and talk, look at their earnings growth and prospects for their business and try to make a judgment. You know, a lot of that's gotten completely shuffled up even into the, you know, some of the recent crazy short squeeze type of things, you know, that we're seeing. You know, that's its own funky dynamic and, you know, there's, people need to be able to make sense of it. And I guess, on the options side, you know, there's trades to take advantage of it, or there's just traits to protect yourself. You know, and that's what I've found really interesting is, you know, when you see big moves, you know some stock makes the 20% run or volatility moves 15 or 20%, or a hundred percent. as an options trader you want to look at that and say, okay, okay, now what are we looking at here? We're looking at a high vol scenario, maybe the put cost skewness has, you know, flipped. Like what kind of traits make sense, what kind of trades illustrate your view of how things are going to play out? And, you know, and then you have to kind of construct everything within your framework of risk and reward. And that's what I, you know, people talk to me about is there's just a lot of interest is sector rotation, there's stock picking, and then there's still, you know, there's still people that are kind of trying to do things that from a, you know, a higher level, right. And the index trading, premium harvesters or, you know people that express their view on that side of things. You know, so it's funny, it's like there's things that still work that people are still doing and they basically have to make sure they don't get kind of knocked off track when you get, you know, some of these funky situations or, you know, two or 3% swings. And so it's, I mean, it's kind of never been a more interesting time and, you know, I've done this forever and volume is off the charts. So there's a ton of activity to look at, and there's a lot of motion, you know, there's a lot of things that are changing, right? Volatilities are moving around, you know, more than they have been in a long time. And you know, you're just, it's in a way, you know, the, in the last kind of the last few years, the market kind of, you know, as much as it was a surprise to some people, the way that politics played out, the market's still kind of developed a level of comfort with it. And then you got into COVID and then that shook everything up. And now we're, you know, hopefully, you know, towards the end of that, and you're into a whole new political realm. So it's just, there's just a lot to process.

Patrick: Yeah. One thing that will remain a constant, I believe is the volume. I think the volume is here to stay. Like, what's your estimate as far as for 2021?

Henry Schwartz: You know, we when we looked at the data in early 2020 right, you know, kind of into March, right. When things were crazy and volume had exploded you know, we looked at it and said, this could be a 7 billion contract year. And you know, remember the prior record was five and 5.2 billion set in 2018. And we finished up at 7.47 billion, okay. Brand new record, like, you know, the kind of activity that really nobody's seen. And what's interesting is that it persisted through the year, right. It was not just, we got really busy for the first quarter and then the rest of the year was normal. It stayed busy and in fact, December was the busiest month of the year with average daily volume, you know, around 30, over 30 million contracts. And then January was even busier than that. January was 40 million contracts a day, which puts us on track now for a 10 billion contract year, which I think would be a stretch. I think if we, if we're going to stay that busy for the entire year, then this will be my last year in the business because I can barely keep up with it. But retail access to the market, which really picked up last year. And we analyze it a whole bunch of different ways and one of the simplest ways that we like to look at it is like, let's just look at tiny trades and figure out how many of those there are, because those tend to be your small accounts. And in the, in a framework of just looking at one lot trades the smallest possible contract, we saw that activity triple last year, you know, from like under a million contracts, a day of one lots to almost 3 million contracts a day of one lots. And that's, an enormous amount of new activity, you know, and that's not capturing all the retail. That's just kept the kind of the tiniest piece of it and we continue to see that. And, you know, that's one of the wildest things is seeing new participants coming into this market. You know, if they're coming in because they had a year working from home and because, you know, the, you know, zero cost brokerage accounts, make it a little easier to, you know, to break even on a trade, that's great. But, you know, it's, they're obviously doing pretty well because that volume just keeps on coming. And, you know, I don't see that changing. I mean, it may, morph a little bit if you know, this bull market gets tired because in general, you know, a lot of this retail small trade flow is in the form of call buyers. And they've done well because we're up 50% from the bottom in March, as, you know, if the market really stalls out and we run into more headwinds, so those trades are going to make money, right. So the question will be like, okay, how does retail, how does that segment adapt to a different market condition, right? You guys know there's different trades you want to do on a sideways market. There's different trades you want to do on a down market. And, you know, have, has retail, you know, has this segment figured out how to make money in a sideways market. Some of them have, I'm sure of that, but some of them haven't and some of them...

Patrick: But on that note, what are some specific, you know, pretend like you are talking to these people who are coming to you upset like, well, I, you know, I thought stocks only go up, like, what's going on here? You know, what would you tell them?

Henry Schwartz: I mean, I think it's funny. I, this year, like knowing, I can tell you that the retail segment has grown because I've personally gotten emails and texts from friends and friends that like the grown children of friends saying, Hey, I just started option trading. And what do you think about calls in XYZ? And I get those texts and I'm like, oh man, oh man, like, this is somebody who's never even traded stock before. And they're just going to jump right into the options. And I that my one message is there's no secret formula to making crazy returns and people have to be realistic. And in fact, I was talking to a professor and I was giving him some data. And I said, you know, how, how is it? And he said, well, you know, it's a challenge to be teaching investments, theory and diversification, and how, you know, the, you know, index, you know, SMP returns on average are, you know, eight or 9% a year on the long-term. So you know, if you use that as kind of like your lens, like, okay, you know what, if you could make 10% a year on an investment, you know, that's pretty good. There's a little risk there, he's like the problem is, is, you know, somewhat, some student will put up their hand and say, Hey, my cousin just made 300% on, you know, on this SPAC. How, what about those? And so my message for people that are new or learning the business is be realistic, put your money in the bank that you will get, you know, 0.1% interest. So that's, you know, that's one extreme and, you know, realize how good it is to make 10 or 15% in a trading strategy compared to what you would be getting on a you know, on a risk-free, you know bank account.

Patrick: Right and what I find fascinating is I found some old magazines from think money. Now, I don't subscribe to think money, but I guess we, as Schaeffer’s did from fall of 2008, and I'm just flipping through and I came across a quote that said, rookies, look for some magic bullet that will, turn any loser into a winner, sorry, folks, it doesn't exist. And that was fall of 2008.

Henry Schwartz: I mean, it's crucial, like, you know, training is, is fun. But you, it needs to be approached. You know, people need to be very smart about how they manage their money and every trade has a risk and a reward. And if you think about it that way, and you got to, you have to have a plan and there's, you know, you have to size your bets accordingly and intelligently. And like, it's, tough I mean, I don't know what to say. It's, you know, the emotional part, the psychological part is it's a tough business and that's why most people struggle. And, you know, if a bunch of option traders you buy a bunch, I mean, hundreds of thousands of new accounts over the last year have gotten into options and had some success and figured out how to make some money hat's awesome. But you better, you have to be able to tell the lock from some intelligent, you know, strategy and not, you know, not fall into so many of the traps that people fall into in terms of making trades.. learn to use the tools I guess, is you know the most important thing. You know, they're incredibly flexible options, let you position yourself and limit risk and specify a time horizon and trade volatility and direction and time decay and everything else. But you got to figure out how to handle all those little pieces of that puzzle and, some of the recent, the game stop type of activity we've seen, you know, in the last few weeks, like that's an incredible learning experience for like how things can go and what bizarro outliers, you know, can volatility to go to 600, 700, 800. Well, it sure can, it doesn't happen very often, but just never say never. So, you know, I think that's, what's been really kind of amazing and, you know, for the self-directed retail trading community out there, you know, I think options are, you know, derivatives are kind of like a chainsaw, like credible tool. It could do a lot, you know, you just don't want to drop it on your leg. 

Patrick: Like that. Yeah, you hear that everybody don't drop the chainsaw on your leg. That's why you come to the market mash up for solid parables like that. Let's close with do you have anything you'd, like products you'd like to plug that's, that are going on at CBO right now, I'm going to give you the floor.

Henry Schwartz: I mean, we have, and we’ve been so busy you know, on, you know, the information solutions group, which is my area, right? That's trade alert, that's live vol, that's Ft options, hand wick, you know, we're putting together. We have amazing technology where we're actually weaving the technologies together to even make it better. A couple of things like I would point out, like we now are doing much more with Hammond flex options, which are these options where the user gets to specify the strike and the expiration. And it could be anything that you want, I think out to the eight or nine years. They’re typically an institutional tool, but because we're, we're really focusing on that data. You'd be surprised how many small trades are actually taking place in these, in these flex options. And then I mean this last year was the year of single stocks, for sure. You know, that was the shift we saw in single stocks and retail trading and small retail trading that was the story. But, you know, the index and the ETF world is still healthy. Like there was growth there just wasn't, didn't match what the single stocks did, but, you know, CBO has SPX, which is the S and P 500, the benchmark, you know, a trillion dollars a day and premium can trade in SPX. But then there's also this XSP, which is that same cash settled European style index divided by 10. And so it's very similar to spy except its cash settled. You don't have to worry about dividend exercises. It's got some other advantages. And it's, something that, you know, like I said, the, you know, single stock, alpha, there's all sorts of activity there. A lot of focus on that, but, you know, at the same time, you know, some of these kind of higher level trades, you know skew trades, you know, put spreads, call spreads, just you know, coloring are doable and they're doable, you know, on a smaller scale using XSP. CBO also launched mini VIX futures so it's a pretty sophisticated tool, but the notional size of the smaller contracts makes it a little bit of a better fit for something like, you know, typical portfolio. And something for people to look at because, you know, volatility has been you know, last year, it was, it showed some real extreme moves. And, you know, you can look at it now and say, okay, well, you know, Vic's hanging around, you know, 23, 24, is that you know, how do you feel about that over the next, three months, six months or a year. And, you know, VIX futures let you make a direct position on, you know, on volatility which fits some people. 

Patrick: I think, I think that's a great way to account for these unscheduled events. Yeah. I mean, it's, you guys got a lot of exciting stuff. I couldn't thank you enough for coming back on for the third time. You now are, you lead the league in guest appearances?

Henry Schwartz: Really? 

Patrick: Yeah. 

Henry Swartz: That's cool. That's awesome, someday. I'll come to Ohio and visit.

Patrick: There you go. Yeah, a round of golf's on me or some skyline chili, I guess. I mean, that's really all Cincinnati has to offer

Henry Schwartz: There's that the chili on the spaghetti or something.

Patrick: Yeah, okay. So I don't subscribe to that and first of all, I grew up on Chile was supposed to be thick. I I've transitioned to enjoying the soup Chile, but I cannot do the spaghetti, but a Coney, Coney is pretty strong, I will admit.

Henry Schwartz: Okay, well, I'll check it out.

Patrick: Sounds good, sounds good. Henry Swartz CBOs global markets head of product intelligence thanks again for coming on. Six months, every six months you can just pop on and we can talk about on earth just happened.

Henry Swartz: I'll see you in the fall.

Patrick: Alright, sounds good cheers.

Published on May 4, 2021 at 10:00 AM
Updated on Jun 25, 2021 at 7:19 AM
  • Podcast
  • Strategies and Concepts

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is joined by Cboe’s Rick Rosenthal and Arin Risk Advisors’ Joe DeSipio to talk all things RUT and small-caps. They dive into small-cap's ascension and relation to economic expansion (6:00), its role in inflationary measures (10:05), and options strategies/products to employ in the small-cap market (19:38).


Transcript of Schaeffer's Market Mashup Podcast: May 4, 2021

Patrick: Welcome back to the Schaeffer's Market Mash up. This is your host, Patrick Martin. Thank you for tuning into last week's episode with Adam Warner; even though he's a Knicks fan, he had some great insight into the VIX. But today I'm very much looking forward to diving into the Russell 2000 index in the world of small caps. I've got two guests with me. The first is Aaron risk advisors, investment strategist, Joe DeSipio say hello to the crowd.

Joe DeSipio: Hello everyone. And thank you for having me, Patrick. 

Patrick: And then we have CBOE global markets, derivative sales, Rick Rosenthal, Rick, what is happening?

Rick Rosenthal: Hey Patrick. Thanks for having us. It's great to be here.

Patrick: Wonderful, wonderful. Hope everybody's doing well. Well, let's jump right in it's a small cap world right now for US market participants, as the rut continues to just, to leave large cap benchmarks in the dust. You know, even with, I think today's pullback, the rut is around 10% higher year to date. It has doubled off its March 2020 lows. So I guess the first question and I'll toss this one to Joe, is, will this breakout stick? It sounds like small ball, which as a basketball fan; I'm going to coin because I've never heard anywhere else. A small ball is going to be around for the time being right.

Joe DeSipio : Well, I'm about right, but it certainly appears that way because if you take a look at some of the activities as small cap stocks offer in comparison to say large cap stocks? The valuations that we see in small cap stocks are still a bit inexpensive relative to large cap stocks. And as people have this ongoing need to find value for their clients, even though people say value maybe dead as an investment strategy and growth is where it’s at. There's still a large number of investors out there who still want to invest for the long-term, they make sure they are paying decent prices for it. [Unclear 02:14], where you can do that right now is in the small cap world. Just because I don't think everyone's bound small cap as readily as they bound large cap, especially the findings over the last few years. And especially since the rebound recently everyone's kind of blocked into the small cap space, which is really, as you mentioned boosted different forums relative to the large cap names.

Patrick: So I'm looking at a chart here year over year of the rut, and you can trace some of the small cap rally really starting to pick up steam in November of 2020 when you had the COVID-19 vaccine rollout announcements. Does that mean that market participants are more optimistic about 2021 as a whole Joe, you can take that and then Rick, you can follow up.

Joe DeSipio : Sure. I always view investment or investing as a mosaic and one of the tile pieces would certainly be invest various vacations based upon an economic rebound. So in that regard, I think that's a net positive for small cap names, but you pointed out since the vaccine news and the stimulus news its become a lot more clear to folks. I think people have been a lot more willing to invest. And again, getting back to my fingers pointing  they've been trying to find places where they can invest that offer than, you know, good bang for the buck and that has been in the area of small caps.

Patrick: Okay.

Rick Rosenthal: [Unclear 03:43] some of Joe’s comments, but there's always uncertainty in the markets and it's hard to predict by even some of the best experts in the industry. But I might, I'm a half a glass, half full kind of guy and I am optimistic and I believe that market participants have reason to be more optimistic about the US economic recovery with the vaccine rollout. And we've got, let's give a mind the fed keeping rates low and a potential huge stimulus coming from the US government. What's interesting, you know, something you pointed out Patrick is that the Russell 2000 has been affected by the rollout of the vaccine. And I agree that the small caps could be the story here. They've led the rally and what they do is they measure the performance of small companies for the Russell 2000. These are companies that have a market cap between 150 million to 5 billion. And since last August, the Russell 2000 has been on a tear, it's rallied about 45% to new record levels. And this compares to the S and P 500 railing about 14%. So this is really a moment where the small caps have significantly outperformed their large cap counterparts. If you look at what happened in 2020, the storyline was besides volatility. Most of the performance has been narrowly focused and led by a handful of tech companies like apple, Amazon, Tesla, and Google. And we're seeing a rotation out of the tech stocks into the small caps. And as Joe pointed out, a lot of that is driven by value opportunities. Market participants are recognizing that there are value opportunities within the small cap segment, particularly when we're looking at an early stage of an economic recovery.

Patrick: And on that note, is that typical behavior for small caps to tend to outperform during economic downturns, and then almost act as an early or as a leading indicator during the early stage of an economic expansion, Joe you can take that one.

Joe DeSipio : You know, I just went back over kind of like the last [unclear 06:19] NBR recessions. That was like in the early eighties, the early nineties, the early [unclear 06:24] the 2000 [unclear 06:27], thousands of the credit prices, and then the most recent pandemic prices where we've gotten into this recession category. in each of those markets as we come out of that small caps have significantly outperform large gaps. And just by the kind of the back of the envelope numbers I came up with its somewhere around 20%. So that's a huge differential as you're coming, as the economy is getting itself out of recession. So there seemed to be, you know, a very high data, if you will, to economic rebound for small companies versus large companies. And this last go around has not been, you know, disappointing. We're still, you know, I think the performance [unclear 07:07], you know, 25%, if we start from like October 31st down to March 4th of seven.

Patrick: So you mentioned this time around, is there any context that a retail trader can look at this current rally and say like, okay, this has happened at other points in history where small caps have outperformed Rick, you can take that and then Joe can follow up. 

Rick Rosenthal: So I want to point out that when we're looking at the Russell 2000, this is an index that measures the performance of small cap companies that are domiciled in the U S and these companies generate the majority of their income domestically. Typically these small cap companies are leveraged they're nimble, and they tend to outperform larger companies during periods of economic expansion. And so what we've seen in the past you know, over the past four decades the large cap stocks have typically outperformed small caps in large measure due to the sector weightings and the indexes. Now, the tech sector has been the main driver of economic expansion. And if you look at the sector waiting for information technology and the S and P 500, it's over 27% versus 14% in the Russell 2000. So what makes this particular cycle different I believe it's a combination of the low interest rates. Fed's intention to maintain a low interest rate posture. The stimulation package that's being proposed by the US government, 1.9 trillion, and the impact that these combined stimulus and the vaccine rollout is creating an expectation that there's going to be a significant impact on the smaller companies. And we can see that from the current rally 

Joe DeSipio: And chime in for a second. We also see that in Alice expectations in the small cap space, too. So analysts are getting on board with the fact that as Rick pointed out, these small cap companies have a pretty good shot of growing their earnings as the economy rebounds.

Patrick: Okay. So when you said analyst expectations, does this mean they were perhaps on the sidelines in earlier months, and they're just now coming around?

Joe DeSipio:  Maybe a little bit, I wouldn't say on the sidelines, I would say let's use the word less gleeful, less certain, less positive, but, you know, expectations are coming in pretty strong for the small cap space.

Patrick:  Interesting. You, we started to kind of dance around that, but I want to jump into the inflation expectations since that's pretty pertinent right now, it's not a new phenomenon that the performance of small cap versus large cap tracks inflation expectations 2020 is a perfect example of that. Joe, do you want to unpack that a little bit and then Rick can go.

Joe DeSipio: Yeah. I just think for some of these smaller gap names that, you know, as Rick pointed out, they tend to be highly leveraged. And if you're going to be highly leveraged in inflation you know, potentially could be a benefit to you if you're a borrower, right? Because I saw the payback a hundred cents on a dollar, I just get to pay back with cheaper and cheaper money. So that may be one reason why the small cap needs, small cap space has benefited a bit from this presumption that inflation is going to pick up. Now, of course, the chairman Jerome Powell of the federal reserve would argue that any type of inflationary expectation that people have is going to be short-lived and don't get too excited about it as the bed is not. So I would just be a little bit cautious in that regard. 

Rick Rosenthal: Okay. So to jump in today, non-farm payroll came out, it rose by 379,000. Most of that were jobs created by smaller companies. If you look at what's happened to the 10 year treasury, it's up by almost a half a percent year to date. And that's despite the fact that the fed has announced their plans to keep rates low. So combination of, you know, rates going higher, jobless, non-farm payroll going up there's a lot of anticipation that we're going to see a rapid economic recovery. And during that, during an active and a rapid economic recovery, small caps tend to outperform, and we're expecting to see that. And we're seeing that with the outperformance of the Russell 2000 year to date inflationary pressures will impact sectors differently. And the large weightings for the Russell 2000 happened to be in healthcare, consumer discretionary, industrials, and financials, and these four sectors are sensitive to interest rates. So the low rate environment has been helpful for healthcare and consumer discretionary, ironically, when you have a rising interest rate that's very beneficial to the financial sector. So it's almost like the perfect storm for the Russell 2000 right now.

Patrick: And I'm going to tell on myself here and say in our dry run, I think Rick mentioned intentional inflation, how it's very important that that's, when there's intentional inflation that almost sets up the perfect storm instead of being a random event, is that correct?

Rick Rosenthal: We had a manufacturer recession and we're also experiencing a manufactured recovery. So when you've got the fed reserve maintaining low interest rates and pumping money into the system, you have the US federal government creating a $1.9 trillion stimulus package. The intention is to revitalize the US economy and small caps on the front line. They were the first to experience the downturn, and they're going to be the first to benefit from this recovery.

Patrick: Okay, well said very well said, Rick, talk to us about the dramatic volume going way up. We've seen lately with the Russell 2000 listed derivative ecosystem and how is this translated into CBOs launch of mini Russell, 2000 index options and misses rally because I know you've guys got, you know, a big thing that just popped up for you.

Rick Rosenthal: Well, thanks. I'm going to potentially embarrass myself by pointing out that I've been in this industry for 40 years and was on the floor of the Chicago mercantile exchange. When the Russell 2000 index futures were launched in 1993 a lot has changed since then, and the ecosystem for the list of derivatives on the Russell 2000 complex has grown. And I'm happy to say the E-mini Russell 2000 futures moved back to the original home of the CME on July 10th, 2017. And since then, the volume in the future says grown significantly, a year ago, CME launched a micro mini Russell 2000 futures contract in response to the growing demand from retail participants. And I'm happy to report this past Monday, CBO listed a mini version of its Russell, 2000 index cap settled index option. And this mini index, ticker is M R U T is very similar to the standard contract, but it's one 10th, the notional value. So instead of trading a contract, that's got a notional value of 220,000. This mini product has a notional value of 22,000. And some of the features that it offers are significant benefit or advantage over the option on the ETF it's cash settled, it's European style, no early assignment, it's got the 1256 tax benefit, meaning it's a 60, 40 blended rate long-term short-term. So we've got a lot of interesting products to express a view on the Russell 2000. And if you were to combine the average daily volume and all the listed derivatives based on the Russell 2000, including futures and options. The notional value of this daily volume is 47 billion, and we've seen a significant growth year over year as it's grown by over 66% in terms of average daily volume year over year. So this is a great time for market participants, interested in the small cap segment to use listed derivatives like Russell 2000 futures, mini futures, Russell 2000, options, mini index options for managing risk, expressing a market view. You know, trading volatility, you have deep liquidity and price transparency that's offered by these exchange listed derivatives.

Patrick: You know, that's, I mean, how is that for timing March 1st, you guys roll this out when all eyes are on the rut right now, I think that's perfect for you guys and congratulations. And then you mentioned trading volatility. So that means that market participants, they don't have to choose between being bullish or bearish, correct?

Rick Rosenthal: That's right. Yeah, and volatility is an interesting aspect of trading options and it's one of the few tools that's available to investors for isolating volatility. So what goes into the pricing of a, of an option includes, you know, the length of time till expiration, the intrinsic value, supply demand factors and volatility. So Russell 2000 volatility is an interesting component in and of itself because the underlying small caps aren't leveraged, they're smaller in terms of market cap. There's more volatility associated with small caps. So CBO calculates the volatility index. Most people are familiar with VIX, which is the volatility on the S and P 500 expressing a 30 day view of future more market expectation of volatility. We have the Russell 2000 volatility index, RVX is the ticker. And right now that is 36 compared to VIX at 27, it's got a 10 point premium over VIX. And typically it's about four, now it's 10, which tells you that there is an anticipation of continued volatility in the market, even though the Russell was reaching record levels, it maintained a high level of volatility. And so this is a great opportunity for those participants that want to look at the opportunity to harvest income, harvest premium, kind of like an insurance policy where insure is selling its insurance to the buyer. And the buyer's paying a premium to an insurance company, you think of options along those lines. An option seller is going to collect that premium. And you can see by the volatility on the Russell 2000, there's more premium, more volatility embedded in that product.

Patrick: Yeah. That's fascinating that you said that there still could be more to come, you know, even amidst all of this volatility that we've seen in the past three months. It's, there's still, there's plenty of runway left. And as you, as I noted, there's tons of eyeballs on this. So very exciting stuff that you guys have going on. Joe and this will be to wrap up here. Rick talked about a bit, a little but for market participants, are there examples of specific options strategies that someone can keep in mind with a specific view towards the small cap market?

Joe DeSipio: Sure. I think with the introduction of [unclear 19:55] and the options on [unclear 19:57], investors can, you know, test these trades out just to make sure they are appropriate and suitable for them. But some of the trades that people may be interested will be you know, selling puts and that takes on Rick's insurance company example where you receive an upfront premium and that's going to be a maximum gain. So if the Russell continues with its move or a surge higher, you're only going to participate with that limited amount of premium you collected and you are going to be facing the downside risk of being a short back put. So I just wanted to be sure that any of these options strategies are mapped out in advance, say your expectations for return are going to match what your realization is of return over time. Other things that people have looked at in terms of just trying to create some additional or differentiating cash flow for investors have been even covered calls and a covered call strategy is your, you take your small cap exposure, and then you sell a call option against those holdings and you can use [unclear 21:11] or rut for that purpose. And that's another way to generate incremental income. Again, when you're selling those options, selling those call options; you may be faced with capping your upside. So just again, it's a matter of expectation relative to which strategy you employ.

Patrick: Well said, well said. Rick you got anything to wrap up with?

Rick Rosenthal: Well, I have to say what Joe said is absolutely music to my ears. He's an industry practitioner and an expert, and he's been doing this for many years. And the reality is you buy a stock, you can go up or down or stay the same, same thing with futures. What makes options different is that you can design a strategy and shape an outcome that you're looking for. So as Joe pointed out, if you own the underlying, the Russell 2000 and you want to sell a call, essentially, you're interested in maintaining a long position. But you're collecting income; it's an alternative way to generate income. CBOs created a number of these strategy benchmark indexes on a Buy-Rite cast secured port rights, zero costs put collar. They have one that's getting a lot of interest and that's the Russell 2000 buffer protect index. And this is based on an options position that's constructed for a particular outcome. And that's for investors who want to maintain a long position in the Russell 2000 have downside protection in this case, 9% downside buffer protection and upside participation. The upside participation is going to be capped because you're selling a call to finance the cost of the put. So depending on how much premium is collected on the sale of the call, determines what the upside participation is, but it has the very similar outcome as a structured product, which is used by many advisors today. And this is a great alternative to a structured product because you can have, you know, price transparency, it may be less expensive, and you've got the options unclear 23:32] Corp as a counterparty. And it's a, you know, very stable financial counterparty. So options are a great tool for market participants that want to express the market view. They want to shape the outcome, or they want to trade volatility.

Patrick: Very well said, and music to my ears, everybody, I promise I didn't make them say those things because that's basically an audio version of the education articles that we put out two or three times a week. So there you go. If you want an audio book, just listen to our podcast. So I couldn't thank you enough for that endorsement of options at the end, Rick, Joe, do you guys have any, I know Rick talked about, you know, the big announcement, Joe, do you have anything you guys want to close with?

Joe DeSipio: No, I just made one final point that Rick kind of touched upon is when you're using listed options, as opposed to a structured product, you get to change your mind. And I think that's a very important thing in today's day and age, when you, when news is changing and you want to be able to change your view, listed options, allow you to do that. 

Rick Rosenthal: One thing I'd like to add to that is education is key. And I assume that your listeners are very interested in options and learning more. CBO is also a great resource for you. I would suggest you go to forward slash RUT for information on the Russell 2000, CBO [unclear 25:10] dot forward slash M R U T for the Russell mini product, and then check out our options Institute. They've got all sorts of webinars and some research available for those interested.

Patrick: Outstanding. I love, ending with plugs. You know, we always got to plug your stuff. We've got Aaron risk advisors, investment strategist, Joe DeSipio and CBOE global markets, derivative sales, Rick Rosenthal, gentlemen, thank you so much for coming on. You know, it's, it'll be exciting to watch, you know, what the rut does in the next six months to a year and, you know, thanks for educating me as well. 

Rick Rosenthal: Thanks for having us, Patrick, cheers guys.

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