Published on Jan 4, 2022 at 3:29 PM
Updated on May 25, 2022 at 2:20 PM
  • Strategies and Concepts
  • Podcast
  • Editor's Pick

To close out 2021, we compiled a highlight reel of the Mashup's best moments. Part 1 covers January 2021 to May 2021. Part 2 will be posted later today.

A huge, heartfelt thank you to every guest that took time to hop on and talk about options trading this year. And a huge thank you to everyone that took the time to listen. Your support means the world!

Table of Contents

Chris Prybal: (2:37), Tony Battista of tastytrade: (5:55), Cboe's Henry Schwartz (8:02), Adam Warner (12:30), Cboe Global Markets (14:13), Don Fishback (17:14), Bond Yields (21:50), VIX Roundtable (25:11), Leigh Drogen (28:00), Adam Warner (29:11) Jermal Chandler (33:27)


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Published on May 23, 2022 at 1:55 PM
  • Strategies and Concepts
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Michael Oyster CFA, CAIA, the Chief Investment Officer at Options Solutions, joins the Schaeffer's Market Mashup podcast in our latest episode released on Friday, May 20. Oyster and podcast host, Patrick Martin, discuss the Time Magazine Cover fallacy (), why you shouldn't expect 10-12% returns anymore (), the new volatility regime (), and the similarities between athletics and investing ().

To sign up for Schaeffer's Playbook of the Week, Click here!

Check out Options Solutions here!

Published on May 13, 2022 at 11:17 AM
  • Strategies and Concepts
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Jermal Chandler of tastytrade is back on this week's episode of Schaeffer's Market Mashup podcast. With the stock market crumbling beneath their feet, host Patrick Martin and Jermal try to make some sense of it all. They talk options volume (), advice to retail traders suddenly in the red (), bear market strategies (), and some optimism amidst the carnage ()


Published on Mar 28, 2022 at 1:02 PM
  • Strategies and Concepts
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To close out March, Tradier's Senior V.P. of Business Development Lex Luthringshausen stopped by to talk the current market climate, implied volatility, and how options traders can navigate it.

This is hopefully the first of many collaborations between Schaeffer's and Tradier, and we look forward to having Lex on in future shows!

Table of Contents

The current investing ecosystem (6:50), implied volatility trends (11:50), options strategies that account for volatility (15:50), and some big moves coming up for Tradier (21:54).


Click here to out Lex and Tradier's content!

Click here to access Schaeffer's Playbook of the Week

Published on Jan 3, 2022 at 12:27 PM
  • Strategies and Concepts
  • Podcast
  • Editor's Pick

To close out 2021, we compiled a highlight reel of the Mashup's best moments. Part 1 covers January 2021 to May 2021. Part 2 will be posted later today.

A huge, heartfelt thank you to every guest that took time to hop on and talk about options trading this year. And a huge thank you to everyone that took the time to listen. Your support means the world!

Table of Contents

Chris Prybal: (2:37), Tony Battista of tastytrade: (5:55), Cboe's Henry Schwartz (8:02), Adam Warner (12:30), Cboe Global Markets (14:13), Don Fishback (17:14), Bond Yields (21:50), VIX Roundtable (25:11), Leigh Drogen (28:00), Adam Warner (29:11) Jermal Chandler (33:27)


To sign up for Schaeffer's Top Stock Picks of 2022 special report featuring our top four stocks to buy, click here.

To sign up for Schaeffer's Lightning Trader (Join us Today and Get 25 Chances for Lightning Fast Profits for Just $9.95!), click here.

Published on Oct 8, 2021 at 8:00 AM
Updated on Oct 12, 2021 at 1:54 PM
  • Podcast
  • Strategies and Concepts

Fan-favorite Jermal Chandler of tastytrade returns to Schaeffer's Investment Research's podcast to plug his newest featured show: Engineering the Trade. Jermal and Patrick discuss the seasonality trends (6:00), how to play bond movement (9:08), bracing for a potential energy crisis (13:30), and what to expect as we wrap up 2021 (18:30) on this week's episode of Schaeffer's Market Mashup.


Transcript of Schaeffer's Market Mashup Podcast: October 7, 2021

Patrick Martin  0:00  
Hey folks, welcome back to the Schaeffer's Market Mashup. Patrick Martin here on October 6, Wednesday, with another fan favorite we've got Jamal Chandler of tasty trade back again. Jamal we haven't chatted since May so how was your summer what are the top three things that you did?

Jermal Chandler  0:29  
Hey, Mart, what's happening man? Do people call you that?

Patrick Martin  0:34  
in high school yeah that would P.Marty was one of them so yeah I'll allow it

Jermal Chandler  0:41  
yeah man it's been a while since we talked good good to be on again for sure love love talking to you guys at shapers and as far as the summer man it feels like things just flew by. We we did you know my wife and I we we tried to do a bunch of things you know to get out right? Like, we've all been kind of locked away. So if I can recall I mean, we we went to we actually went to a Banksy exhibit, which was pretty cool. earlier. Actually, that was that was more recent. We did that a couple months ago. We also did like a van Gogh exhibit. So we had a little art thing going on throughout the summer. Definitely stuff with my kids. You know, my youngest is playing a bunch of sports right now he's playing flag football. He did baseball Actually, he won championship for his little baseball team. It was like coach pitch this year, so that was cool as well.

Patrick Martin  1:34  

Jermal Chandler  1:37  
It was pretty fun. It was pretty fun. And then my daughter just had her sweet 16 about a month ago and then my oldest who actually turns 18 on Friday he's playing football he caught a touchdown on senior night senior night was pretty nuts. It makes you feel a little old but it's pretty cool man so yeah, yeah lots going on lots going on person that's

Patrick Martin  1:58  
awesome What is your son, a wide receiver or tight end?

Jermal Chandler 2:03  
You got it, he's a he's a wide receiver it's actually his first year playing football he started playing during the pandemic and they had a you know mini season in the spring which you know a lot usually footballs fall right so they had a spring season in the spring and that was cool because he got his feet wet and so now he started off this season playing now he's like maybe the third second third off the second third as far as like wide receivers in the lineup so you know he's working to get time which I think is a great thing actually he learns that nothing is guaranteed everything is earned.

Patrick Martin  2:35  
Yeah, I've got a lot of respect for any high school college athlete that just had to go through their seasons in the past what 18 months with the pandemic and everything and then balancing school on top of that I don't know how I would have done it kudos to them and hopefully you know that's like you said gives them some serious life skills going forward

Jermal Chandler  2:55  
yeah for sure man I mean I don't know if I would have been able to handle it either all this freedom that they gave last year so I'm kind of glad there's a little more structure now as we're in the fall Yeah, knowing how I was in high school and to start college I needed as much structure as possible so

Patrick Martin  3:16  
Yeah, I needed it. Anyway um you know, I heard you know through the grapevine that you guys have some new content going on well you're the content kings over there at tasty so tell me what you guys got working on.

Jermal Chandler  3:29  
Like that man content kings almost sounds like a movie or something? Yeah, we got a bunch of new content actually. we've extended the network there's a little love through shows actions after the market close nowadays. And you know, we've got a couple of new people like we have you know, some some people that sort of aimed at the TikTok audience so they got a couple of shows and then you boy here has a new show. As of right now I have a show called engineering the trade actually comes on every day at 1:30 CT (2:30 ET) so been loving it, man. And the idea there is just you know, I think I've mentioned it before, but I was a chemist and an engineer, and that's my, that's what I went to college for. And so the idea of, you know, as engineers, I think there's a lot of engineers who are attracted to trading because you feel like it's a problem you can solve and the market has way too many random moves right? Almost like we're seeing the day and so I think it kind of laws a lot of engineering and science types into to the market. And so I think, you know, one of the my, my biggest things my approach to the market is always picking, you know, adding, finding little pieces of as to what's going on, I mean, there's never just one thing, right. As we'll discuss today, there's always a couple of different things that make up the market that we're seeing.

Patrick Martin  4:56  
Yeah, that's that's a very good point, the technical side of things. It's really the same brain when you look at engineering and investing. Unfortunately, I can't say I'm with you there as a liberal arts major. It took a lot of long nights to get this stuff down. But a tick tock I mean, I wish I was good looking enough to be in front of a tic toc and do all that. But you know, I'm glad you guys are, you know, branching out. That sounds awesome.

Jermal Chandler  5:26  
Yeah, it's pretty cool, man. I mean, they, you know, they are, you know, TikTok people, Kayla Kilbride and Errol Coleman, they have a couple of shows, they're also like shorter, as well, which makes sense, I guess, considering their audience. We got, you know, the Johnson gray show, which is one of the highlights of the post-market. programming with Victor Jones and Ryan gray. So we got a bunch of stuff going on, man.

Patrick Martin  5:51  
Gotta get gotta capture those short attention spans, for sure. So my last episode, I talked with Adam Warner earlier in September, right around when the seasonality really started to rear its ugly head. And I'll ask you the same question that I asked him is this historical period of underperformance and choppiness this time around something more? Is there something greater at play? And like, why is it so volatile and choppy this time around?

Jermal Chandler  6:24  
Yeah, you know, I noticed. And I guess, unsurprisingly, there's been a lot of that talk about the seasonality of September, of course, we're starting to talk about, I'm sure every, every October, we seem to get this more conversation about how the different moves we've seen historically, in October, of course, a sudden crash and some of the others and, you know, those are valid, but I mean, honestly, more than anything, I pay attention to what's in front of me, right. And what's in front of me is the volatility that you speak of that we have right now. And there's probably a little bit more to it. And I always look at, like what, like I just said earlier, the different pieces that add up. And that's usually the one thing that really sort of gives you an idea of how nervous we should be, there's a real wall of worry right now, if you will, I mean, you know, we Let's name them off, we got paper talk that's been going on, we got the rising rates that we've been seeing and yields more recently, which is affected tech, of course, because of that inverse relationship with 10. year and in tech. The energy crisis is hard to mess with, and we're gonna, you know, chat More on that later. Inflation Of course, I mean, that's just a real thing. We've seen it in the prices for everything that we buy, and we pay for more recently. And then, you know, the Evergreen crisis. I mean, that almost took us down. That was that was really interesting. But the truth is, is that it wasn't something that was systemic to any US equities that we know that there's a list of companies in the US that have bonds and evergrande You can find that list I think BlackRock is probably at the top but it's not a situation of like, I think for a while there was was being almost felt like it was a situation like in AIG during 2008 like, this is something that is so ingrained in the fabric of finance, that it's just gonna take everything down. And I think that's why the markets really reacted, right because it already had the dominoes of paper talk, rising rates, big price inflation, then evergrande it was like, Oh my god, and then everybody relaxed, calm down, because I realized like, this is not the thing. And then as soon as that, that that kind of washed away on the shore, the debt ceiling came up so what do you got to do?

Patrick Martin  8:35  
The evergreen stuff was funny because I remember reading an article that was comparing it like you said to AIG and housing and everything and that just kind of that came and went as quick as it you know, arrived, but it just feels like there's just so much more going on now. And I do want to focus on the first one you said which was the you know, the taper talk. One of the more reactive moments was September 28. I think that was when the Fed said it was gonna you know, scale back its bond buying that said the 10 year note soaring, climbing again, I think it was as high as 1.55%. Today, when this bond yield choppiness happens in you know, we know it's super sensitive to the stock stock market, what vehicles or methods can an options trader use to take advantage of this volatility? Is it is it as simple as saying like, okay, looking into an ETF like TLT?

Jermal Chandler  9:34  

Well, let's identify first the idea of bond prices and bond yields moving in different directions, right? And so TLT is the 20 I think it's the 20 year plus bond prices. So what's the prices versus yield on the I mean, I should say it's one a year plus on prices for 20 year bonds. Then you have other vehicles that you can play yield we add tasty we have, you know, one of our sister companies is the small exchange, which is a retail trader focused exchange, and we actually have 10 year yields that you can trade. So it's a little easier, I would say, to conceptualize, I don't know what you don't really know where 20 year bonds should be trading. I mean, right, like for TLT, but I haven't I know exactly where to yield to be trading. It's around 1.55, like you said, and so because we have that to your product at the smalls, I actually trade that a good bit. And then recently, I did this segment on our tastytrade live show, it's called options dive. My segment is every Friday, and we talked about the idea I the name of the segment was called Friends of the 10 year yield.

So just to get to exactly what you're talking about. And I identified some of the things that move with the 10 year yield in the same direction more recently, because the senior yield is kind of this this measure of global, I should say it's a measure of the US health right. And so at the 10 year yields going up theoretically, certain industries and areas should be should be going up. I'm one of them, and more recently has been airlines. Another one has been energy, we've seen oil kind of move up with tenure, you know, the yields moving up. financials, of course, is one of the bigger ones. So those are some of the ways that you can play you can play using a 10 year yield product like we have at the small exchange, you can also play using certain industries that move along with the 10 year yield. And you can play the opposite, which is for the last year has been Tet, which is you know, the Q's or any given tech name, those move opposite to 10 year yields, I think just the word itself bonds and yields that scares off a retail investor so quickly. So to know what is in adjacent impacting sector or area can help them you know, when they see that they know what, okay, now I need to look into this. And even if, like you said, the ratio is inverse, like it is to tech. Yeah.

And the truth is, you know, I've always, I've always appreciated the times where we have big market moves from beginning when I just was learning to mount because then you really see the relationships that make sense. And so despite the fact that we've had quite a bit of volatility recently, I mean, we've had, you know, for 1%, up or down days in the last week, you get to see how certain things are moving together or not. Together, we've seen the tech and the 10 year yield relationship that's played out consistently over the last 18 months. And we've seen energy more recently starting to move as the 10 year yield has begun to move. So we've seen a lot of relationships, because we've had, you know, oddly enough, the benefit of large moves in the plus or minus direction, we've been able to see a lot of these relationships play out. And it makes a lot more sense, I would say,

yeah, and from the Schaeffer's perspective, you know, these big moves more traffic for us, you know, because people are so interested in seeing Oh, wow, 400 point drop, what does this mean? rush over to tasty, rush to Schaeffer's! And, you know, here's where we have the products that help people understand this and take advantage of it.

Patrick Martin  13:04  
No question. Yeah, have a great, you know, there's so much going on, like we've talked about often feels like, the energy situation is getting swept under the rug, especially as it pertains to Europe and the supply chain. And then now we've got natural gas, looking at what steepest loss one day loss in a year, I think today. What should forward thinking traders be looking at overseas as to how these things can impact, you know, the US market ecosystem.

Jermal Chandler  13:41  
Number one, keep a close eye on your gas bills, good lord. I mean, it's kind of good, it might get a little crazy in the coming months, if we, we have, you know, a serious cold snap, we can see some surge in prices even more, because a lot of these companies, you know, who are not hedged themselves are going to have to go out and buy some prices. for natural gas, for example, right now, the biggest thing to pay attention to is what they call that, that Widowmaker spread. So if you pull up that gas, and you look at the different futures, if you look at the spread between March and April, which signifies the end of winter, that's what's called that Widowmaker spread and right now it's about you know, 1.6 I think $1.60 you know, bt use whatever, between the two. And to give you an indication of where how far it's moved in June, it was 40 cents. So it's like quadrupled in a certain amount of time. So that's one of the things that energy traders are watching big time. But when you look at the performances of key commodities over the last, you know, I should say it's from September like in September alone, that gas move 32% you know, another big one was, this is not energy, but cotton moved 14%. So, you can expect to maybe pay more for clothes at some point because that's how these things end playing out on the other end gold and silver had been down I mean golden and still Gold's down 3% Gold Silver was down for 8% in the month September So Matt gas has been really on the moon of course crude I mean croods up you know 10% in the month of September so you know energy prices have really skyrocket and more recently and I think the thing that really noticed is how many central banks I think I don't have quite many in Europe yet but you've seen central banks starting to raise rates in in not only anticipation of eventually us raising rates but also be cuts to counteract this situation that we're seeing with the energy prices so I think at some point, many in Europe we're gonna raise I mean, I think Russia raised more recently, who knows if they're gonna have to raise again, because natural gas really hits them? Of course, they have the biggest natural gas company and Gazprom out there but yeah, I mean it's it's, it's a real it's a real issue and it's something to pay attention to going forward.

Jermal Chandler 15:59  
Well, if you really want to get deep in the weeds, you have Germany, which is working out an entirely new coalition. And that's a multi month process and that's one of Europe's leading countries when it comes to you know, their presence in the ECB so you almost have to kind of wait for their dust to settle before you see what they're going to do and it's it's all seems like it's kind of piling up into this perfect storm no pun intended in the winter. I love reading about the supply chain stuff because it's not It seems so real so real Yeah, that the supply chain is definitely another thing that's really super interesting my wife actually works in supply chain and we talk about different stuff all the time I mean, the the idea of I think the idea of the crunch around Christmas is going to be crazy what target and Walmart I think they're hiring probably 100,000 people each I think that's what I heard but they're gonna need it because you know that you have I think right now which is I can't remember if it's the largest part of the second largest port right outside of La there you know, like Long Beach whatever, it's you know, there's all kinds if you look at a map, you'll see all kinds of ships just just sort of waiting outside that port to drop off cargo so supply chain issues are a really big deal right now and it's real.

Jermal Chandler  17:22  
Yeah, you mentioned target hiring a bunch of people in that in how it's all connected you know, you look at the ADP report today, which I think was its highest since June You know, that's that's a good sign going forward, but how much is that really going to impact the things that we're really looking at which is the inflation and the natural gas prices and the stuff that affects average Americans wallets on a day to day basis?

Patrick Martin  17:47  
Yeah, man, I mean, these things are hitting our pockets dude, like, we need we gotta we need some action or we got to figure out how to hedge ourselves against these natural gas and air moves and prices and food.

Jermal Chandler  17:59  
That's what I think you know, a retail trader has to look at a situation like this and say, okay, you can go to the grocery store and notice that they are you know, there are lots of products off the shelves, you will drive by and you see every other store saying they're hiring, you know, how can someone make money off of that? And I think that's an important question to ask. Well, I agree. So you know, as we're moving into the fourth quarter here and closing out 2021 beyond what we've already talked about, really we've bounced around all over the place. What are you looking for as far as storylines to end the year

Patrick Martin 18:39  
well, you know, let's you know, it's we can look back at how our year started I mean, you know, the names that we saw moving early in the year which were you know, some of the game stops and amcs what's going on with that now seems to be a little bit muted. So you know, I you wonder how the what what's going on with the Wall Street bats, bats crowd, it's kind of quiet a downside, but there's still been, you know, evidence shows a large amount of trading from retail traders, we look at one not trades, and we still see that higher, not as high as it was last year, but definitely higher than it's ever been. So that's good. I think a lot of self directed investors continue to trade and, you know, who knows better how to trade your money than us. So I think that's pretty awesome. We see you know, cryptocurrencies are really really taking off and I think they're becoming they're not quite a force to reckon with yet but I don't think they're going away. I think you know, a lot of us myself included, you know, a year or two ago, we're just kind of like, Okay, this thing's gonna fade away, but it's not it's actually a big deal and they're they're, they're becoming more meaningful and they're being they're becoming less volatile. I would say, you know, bitcoins back over 50k. Now, we saw the big, big move in May to the downside that was kind of scary, but they seem to have calmed down in the way and as a matter of fact, our small exchange just created In a cryptocurrency product sec x so all that that's in the nascent stages of being a small exchange product so that's pretty cool you know overall I guess you know we got earnings coming up for the fourth quarter we'll see how things play out we already know earnings aren't going to be what they were a year ago but they're still going to be interesting nonetheless so that's kind of a lot of things I'll be looking at

Patrick Martin  20:22  
Yeah, I think you covered it I can't really think of anything else. I have a theory it's completely unfounded by any technical analysis but this was a summer art you know our first summer you know reopening and everybody was out and about like you said catching up on life. I do think that when we retreat back inside for the winter I sense you know a lot of fatigue from activities and everything I think there will be a return to the okay let me hop on just see what the stock market is doing nothing else to do stay inside it's just a complete you know shot in the dark but I think there will be people that will revert to that stay at home mentality of just kind of make money my own way

Jermal Chandler  21:05  
I think it's entirely possible and when they do you know tasty works is ready tastytrade is ready. I'm ready I'll be on engineering and trade talking to the people let's go man.

Patrick Martin  21:16  
Yeah, so perfect timing I want you to replug your your new show and then you know, signing off with whatever else you want to close with.

Jermal Chandler  21:25  
My name is Jermal Chandler and you can check me out on engineering the trade every day at 130 Central 230 Eastern come over and see how we look at things

Patrick Martin  21:36  
couldn't have said or couldn't have said it any better myself. Jermal Chandler thanks for hopping on again. Let's try to not make it you know an entire season before you know before we chat again next time.

Jermal Chandler  21:48  
Absolutely my friend Always a pleasure to talk to you and can't wait till the next time.

Patrick Martin  21:53  
And best of luck to your kids. You sweet sixteens pitch you know baseball football Yeah, you guys got it all over there.

Jermal Chandler  22:02  
No doubt Yeah, we definitely stay busy but some way to live life in my opinion.

Patrick Martin  22:07  
There we go. Love it. Cheers, Jermal
Published on Jul 22, 2021 at 10:20 AM
  • Editor's Pick
  • Strategies and Concepts
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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
  • Podcast
  • 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.

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