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.

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.

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

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

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

John Angelos: I'm doing well Patrick.

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

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

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

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

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

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

Patrick: Alright, Anthony, what about you? 

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

Patrick: And John, what do you got?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patrick: Dan, take us home.

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

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

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

Patrick: Yeah, let it rip. 

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

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

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

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

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

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

Activity will pick up today with the core consumer price index (CPI), and the Federal budget balance set for release. Plus, earnings season begins officially kicking off with a handful of bank stocks.

The following companies are slated to release quarterly earnings today, July 13:

AngioDynamics Inc. (NASDAQ:ANGO -- $28.41) designs, manufactures, and sells various medical, surgical, and diagnostic devices for the treatment of peripheral vascular disease and vascular access; and for use in oncology and surgical settings in the United States and internationally. AngioDynamics will report its Q4 earnings of 2021 before the bell today.

Conagra Brands Inc. (NYSE:CAG -- $35.93) operates as a consumer packaged goods food company in North America. Conagra will report its Q4 earnings of 2021 before the bell today.

Fastenal Co. (NASDAQ:FAST -- $54.02) engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, Mexico, North America, and internationally. Fastenal will report its Q2 earnings of 2021 before the bell today.

First Republic Bank (NYSE:FRC -- $196.99) provides private banking, private business banking, and private wealth management services to clients in metropolitan areas in the United States. First Republic Bank will report its Q2 earnings of 2021 before the bell today.

Goldman Sachs Group Inc. (NYSE:GS -- $380.50) provides range of financial services for corporations, financial institutions, governments, and individuals worldwide. Goldman Sachs will report its Q2 earnings of 2021 before the bell today.

JPMorgan Chase & Co. (NYSE:JPM -- $158.00) is a financial holding company. It provides financial and investment banking services worldwide. JPMorgan Chase will report its Q2 earnings of 2021 before the bell today.

PepsiCo Inc. (NASDAQ:PEP -- $149.51) operates as a food and beverage company worldwide. PepsiCo will report its Q2 earnings of 2021 before the bell today.

Washington Federal Inc. (NASDAQ:WAFD -- $31.25) operates as the bank holding company for Washington Federal Bank, National Association that provides lending, depository, insurance, and other banking services in the United States. Washington Federal will report its Q3 earnings of 2021 after the market closes today.

Looking ahead to tomorrow, the producer price index (PPI) for June, and the latest Beige Book report will be due out. 

All economic dates listed here are tentative and subject to change.

** Bernie Schaeffer's Event Trader portfolio has doubled in value (ROI of  +109.72%) over the past six months by simply placing simple put and call option buying trades! Compare that to the S&P 500 that has only returned 11.93% over the same timeframe. Schaeffer's Investment Research is celebrating our 40th year in business this month! Join in us in celebrating by taking Event Trader out for a spin for 30 days for just $4 by clicking here before the end of the week! **

The shares of streaming giant Roku Inc (NASDAQ:ROKU) faltered after their June rally to the $460 area, dipping lower on July 1 despite stringing together 10 consecutive daily wins prior to that tumble. The ascending 20-day moving average has since moved in as support, though, and the equity appears tto be attempting another run higher. At last check, ROKU was up 0.9% to trade at $435.19. 

Roku stock has also made an appearance on Schaeffer's Senior Quantitative Analyst Rocky White's list of stocks that have attracted the highest weekly options volume within the past two weeks, with new names added to the list highlighted in yellow. Specifically, 384,469 weekly calls and 179,230 weekly puts have been exchanged during this time. The most popular contract during that two-week period was the weekly 7/2 460-strike call. 

Analysts are overwhelmingly bullish towards the security, with 17 of the 20 in coverage calling ROKU a "buy" or better rating. Meanwhile, the 12-month consensus price target of $450.50 is a modest 3.6% premium to current levels, indicating price-target hikes could be on the horizon. 

Lastly, the security's Schaeffer's Volatility Scorecard (SVS) sits at a high 97 out of 100. This means ROKU has exceeded option traders' volatility expectations during the past year -- a boon for premium  buyers.