Odd Lots - How SoftBank And Robinhooders Added Fuel To The Stock Market Boom

Episode Date: September 14, 2020

One of the most intriguing subplots to the 2020 stock market boom has been the speculative fervor with which investors have dived into this market. And it's not just that participants have bought a lot of stock, but that they've been using aggressive options strategies to do so. What's more, it's a range of players doing it, from retail traders on Robinhood (and other platforms) to large institutions like SoftBank. On this episode, we speak with Benn Eifert of QVR Advisors, who breaks it all down.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. And welcome to another episode of the Oblots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So Tracy, I feel like there are some episodes of this where like, where I, well, there's some episodes of our podcast where I think like, okay, this is a Tracy podcast.

I'm probably mostly just going to sit back and listen. And anytime I feel like we're going to have a conversation that involves the term delta hedging, which I'm still like kind of like have a totally like lockdown solving what that means. I'm like, okay, this is like a Tracy episode. Okay, first of all, that's very sweet of you to say. Second of all, I just told you that I lost all my notes for this episode. So now I feel like the stakes are very high and, you know, I might not do as good a job as you expect. But yeah, we're going to be diving into Delta hedging. But the weird thing is that Delta hedging has kind of exploded into the public consciousness for,

I think the first time in a while, or at least everyone in the market is talking about it, because we have this big drama in options. Yeah, that's exactly right. So basically, I mean, one of the most surprising things in this crisis period, and we've talked about this a few times, is the degree to which retail traders have really aggressively jumped into this market, timing the market really well, jumping in right at the bottom. We sort of know about the mania. But what's interesting, too, is sort of the option strategies, not just sort of like buying Tesla or buying Amazon or buying Netflix, but actually like trading aggressively with options. And the use of options has all kinds of interesting sort of like market structure ramification.

Yeah, absolutely. And one of the big developments that we've discussed on the podcast is the rise of Robin Hood and, you know, Reddit forums like Wall Street bets. And instead of just. buying stocks and profiting as the shares go up, a lot of people are undertaking equity derivative strategies, call options to get leverage on their trades. And some of them seem to be making big money. But the major question for markets right now is whether or not all that options activity, that rising options activity actually has an impact on the underlying stock. So that's the big question. There's one other bit of drama that we have. haven't mentioned yet, and that is SoftBank. So, you know, SoftBank is a Japanese conglomerate, a big tech investor, and it emerged relatively recently that they had been buying call options as

well, although I think there were varying reports about what exactly they're doing. Some people are describing them as the whale in the options market, the implication being that they're moving prices in some way. Again, there's a lot of debate about how much influence they actually have. We're going to be getting into all of that on this episode. Right. Anytime SoftBank is involved with something, there's an added level of drama because people love to, people love soft bank drama. They love the whole WeWork thing. So it's like, oh, SoftBank is doing the same trade, buying a bunch of tech stocks. There's a bunch of people on Robin Hood. Yeah. It's just a super juicy story. And so we're going to sort it all out.

Plus Wall Street bets. It's kind of the perfect combo. Perfect Twitter fodder. So we're going to, we're going to break down what is actually going on. And we are, our guest today is our go-to for all things volatility, all things, option trading. We've had them on a couple of times in the past. He is Ben Eifert. He is the CIO at QVR advisors. And he has a gift for explaining this stuff in plain English. So, Ben, thank you very much for joining us. What is Delta hedging again? Hey, Joe. How are you guys? Thanks for Thanks for having me on. I'm excited.

No, but seriously, what is it again? Delta hedging, I always forget. Absolutely. So think of it this way, right? So, you know, options are simple tools that investors of different kinds use to hedge their portfolios or to speculate in different ways. You know, a call option, for example, is just a really simple instrument that gives the owner of that option, you know, the right, but not the obligation to buy a stock in the future at some. predetermined price, right? So a retail investor that thinks Tesla's going up, you know, could buy the, you know, next Friday's 2000 strike Tesla call. And if Tesla goes up to, you know, $2,200,

they're going to get to buy Tesla at, you know, at 2000. And it's going to be worth $2,200 at that point. And they might have only had to pay, you know, $25 or $30 for that. So it just gives them a very simple way of expressing a directional view with limited loss. Now, the thing to keep in mind is the way that this marketplace works, if that retail investor goes out and buys that Tesla call option, they're buying it from a market maker. And maybe that market maker holds on to that position. Maybe they flip out of it to a volatility arbitrage hedge fund. But at the end of the day, the other side of that option position, you know, lives with a market participant that does not have a directional view on the stock. So the retail investor isn't sort of somehow magically

pairing off with some, you know, in every case with some other retail investor that just has the exact opposite view and wants to sell that call, right? When the market maker sells that call option to the retail investor, that call option is going to have some sensitivity to the price of the stock. If it's out of the money, it might be, say, per contract, it might be 25% as sensitive to the stock price. In other words, if, you know, if a thousand shares worth of Tesla trade, those call options might have, you know, exposure worth 250 shares, the market maker is just going to hedge that exposure right away when they do the transaction, right? And so if a retail investor comes and buys a bullish option structure from a market maker, the market maker does execute that trade and then buys

some stock on the back of that to hedge out the directionality of that exposure, right? The market maker's job is to, you know, buy on the bid and sell on the offer and manage down their inventory and take as little risk as possible. And so that's the, you know, the delta edging, you know, just first order impact. And then the second thing to think about is that, you know, option delta or option exposure to the underlying stock price is itself dynamic. And it depends on where the stock price is relative to the strike. It depends on the time to maturity, you know, especially for very short term options. You know, what will happen if in that example we were talking about if Tesla, you know, rallies, you know, six or seven percent the next day,

which in August it was doing, you know, just on your average. day, right? That exposure of that option might go from a 25 delta or 25% sensitivity to the stock price to 50%. And then as it gets closer to the strike, and what's going to happen then is the market maker who's holding the other side of that position is going to need to increase the size of their hedge. They're going to go need to buy more Tesla stock to bring their hedge up to 50%. And in doing so, you know, they'll end up having bought, you know, a vast multiple as much dollars of Tesla stock as that investor will have spent on the premium of the option. It could be, you know, in this example, it could be 50 times as much,

right? So creating a very large amount of leverage for the end, you know, retail investor that's doing this trade. Right. I'm going to ask you that again in a year the next time we have you on for a different topic, but that was fantastic. So, I mean, on that note, this idea of the shorter term options. Can you maybe describe or explain why they seem to have become very popular recently and maybe give us some color on what people are actually doing in that market? Like, how big are the volumes at the moment? And why has everyone suddenly decided they want to trade short-term calls? Sure, absolutely. So this has really been an evolving trend that the popularity of short-term options, You know, this is a relatively new thing in markets.

If you look back, you know, five or seven years ago, a short-term option would have been considered, say, a month, you know, one-month option. There was a little S&P weeklies were starting to be listed. You know, most single lanes didn't have them. You know, very short-term options would have been considered, you know, very path-dependent, very risky. and you've just seen a steady, steady rapid growth in, you know, their utilization in the listing of those options on exchanges, in single names and index, and in the, you know, relative fractions of volumes traded in those very short-term options. So, like, in the S&P, for example, you know, over the last six months, I think that, you know, the more recent data is, you know, some very large percentage of the daily volume in S&P options is in the, you know, couple of days, you know, expiryes. happening that day or the next day, like 30% or 40%. And that a similar pattern has emerged in, especially in tech companies,

in mega cap tech companies. Now, in terms of the data, what we see, right? So first of all, you can all of this is, you know, OCC. This is all exchange traded, you know, data reported by the OCC. And, you know, you can look at different individual transactions that happen. But so first of all, small trader buying. of bullish call options, so under 50 lot positions, those volumes had lived, let's say, previously a high rate on a trailing one-month basis in, you know, any time in history

up until 2020, would have been, let's say, $100 billion of notional trading across single-name options. it's reached $500 billion today. It's sort of went vertical, you know, rocket ship blast off starting actually in late 2019. So it preceded, you know, COVID really, I think, amplified this trend, but the trend started to take off before that. And I think it's partly associated with the elimination of brokerage commissions across the majority of the large retail platforms. And that, I think, you know, you can have to give Robin Hood some credit for pushing the market in that direction. And, you know, you can get into nuances of are the trading costs for retail investors and options actually any lower?

I mean, I think most people would argue they're not, right? It's just an optical thing about, oh, we're not charging you. But anyway, I think that's a separate discussion to some extent. You've seen this huge explosion. You know, the chart just looks insane of, again, bullish call option buying by small investors. The other thing that you see, you know, you can look at, again, it's really happening in call options, not in put options. So, you know, small trader accounts are, you know, trading somewhat more put options than they used to, but it's very modest. Whereas you see this just incredible parabolic growth on the on the call option side. The other thing to note is that, especially the last few months, this is flow is very heavily concentrated in mega cap tech. There have been some. a few different adventures that retail has had over the last six months. I mean, if you remember in the wake of COVID, actually, there were some large position taking in, you know, bankrupt companies

and in cruise ships and airlines and some of the most like distressed value names. But really for the last, you know, three or four months, it's been very heavily a story about mega cap tech. So if you look at Facebook, Amazon, Apple, Netflix, Google, Microsoft, Tesla, you know, rolling one month average daily single-stock call volumes are around $200 billion a day, which that would have, that would have number would have been like $15 million, you know, $20 million pre-billion before in, you know, over a long history of time. A lot of short daily news podcasts focus on just one story. But right now, you probably need more.

On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes because no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR. So I'm looking, you sent over some charts. And as you mentioned, you know, we sort of associate this mania with the COVID and sort of post-COVID era. But it really has been going on for a while and you could see it really pick up in 2018, 2019. And it was the cover of that sort of infamous Businessweek story that are, you know, departed colleague Luke Cowell wrote like this was like the Wall Street bet strategy essentially this idea like these little you know little retail traders thought they sort of created a perpetual

money machine by these call options bullish forced the brokers to Delta hedge take positions with this idea that you could just sort of like snowball it into more money yeah no that's right I mean that was some some really great reporting that Luke did you know it's an interesting community. I think the Reddard Wall Street Betts community, obviously, is a microcosm of the broader, you know, retail investment community probably. Robin Hood itself is also a microcosm, because we talk about Robin Hood is kind of like Band-Aid or Kleenex, but it represents in the sort of lexicon what a lot of people are doing on a lot of different platforms. Yeah, I think that's exactly right. And I think that's an important point. You'll hear a lot of people, you know, who aren't necessarily

that close to option markets, be sort of dismissive that retail activity. could be large or could be impactful. We may say, look, Robin Hood is not that big. But yeah, I think a lot of times when people are casually talking about the types of things that Robin Hood is doing, you know, you have to look at this kind of data across all of the major retail brokerages. And you see exactly the same pattern everywhere, sort of these huge explosive growth at, you know, Schwab, a TD at Interactive Brokers.

This is not, it's not purely a Robin Hood phenomenon. Robin Hood's just the most colorful and, you know, makes the news the most, right? And to your point, you know, the Reddit Wall Street, that's community. You know, this is a, it's an odd subculture, right? Sort of an internet-like subculture that I think has a lot in common with the crypto community and probably shares a lot of the same, you know, people who were very active in crypto, like in 2017, right? It's a very, you know, lewd-talking crew on the, on the Discord.

You can go and, you know, sit in the Discord and watch what these guys are talking about and what they're doing. And, you know, to be clear, you know, there are, you know, influencers within that community that will say, all right, we're, you know, this would, you know, today we're buying the Tesla 2,500 calls for next Friday. And like, you know, the volumes that will print are huge, right? And it's not necessarily from any one account, but there's a couple million members in that chat. And if, you know, if 10% of them go and buy a couple of contracts of Tesla, that volume is astronomical, right? And the market, you better believe that the most sophisticated option players in the world and the Susquehontas and Citadel Securities are extremely focused on.

this flow and then predicting it in real time and all of the technology that you would associate with that, right? It's monster, monster flow. That's really interesting. And to your point, these guys know about this effect. It's really fascinating, right? But Joe, Joe kind of mentioned it. As Luke said, you know, these guys will be the first ones to say, look, if we buy tons of short-dated weekly calls, here's how gamma works. Here's how we put market makers into this negative convexity situation, where if stocks are trending higher, they're forced to buy. And like, that is of being that benefits us. They get that. You got to think that there must be some like regulators from the SEC also keeping an eye on

Wall Street bets at the moment, although. In the discord. Yeah, exactly. But that's kind of a separate topic. So, okay, here's the big, the big question then. What is your sense of how much impact these, these traders are actually having on the overall market and especially the mega cap tech stocks that have been in focus recently? Yeah, absolutely. So I think the way you have to think about this as this kind of option positioning, what it does is it creates feedback mechanisms for trend amplification in markets. So it's not, I think the argument is not that necessarily even across, you know, the option trading community within retail that, you know, there's the amount of dollars of stock exposure that they're buying directly is like, you know, so large that they're pushing. everything up, right? But there's a general, you know, there's been a general move back into tech across both institutional and retail, right? It's certainly not limited to retail. And the, and the nature of very heavy buying of short-term options by, you know, by retail and big size,

you know, creates an amplification mechanism in the direction of a trend. And that could be up or down, right? Because the important thing about, you know, about Delta hedging and, you know, to Joe's question. Again, let's take that example of those of those call, Tesla call options that had been heavily bought and that the Delta started out, you know, at 25 percent. And then as Tesla rallied, that Delta went to 50 percent and to 75 percent, forcing the market maker on the other side to buy stock and buy stock and buy stock and amplifying that trend. You know, what happens if then the next day, you know, there's more sellers than buyers for whatever reason, right? Some large institutions are selling or whatever, right? And Tesla comes off five or 10 percent. These are very

short-term options, right? And so suddenly the 75 percent delta of those options goes back to 50 and back to 25, and dealers have to sell out all of those hedges that they have. Right. So the impact is not just a direct bullish impact. It's an impact that amplifies price action in either direction. And I think, you know, you saw that at work this last, you know, this last week, right, where you had the rally kind of peter out. You saw a very heavy institutional selling coming in on Wednesday, you know, the last day of the rally and then Thursday, the first day of the big sell-off. And, you know, then you saw the most wicked reversals in, you know,

the most popular mega-cap tech names where that really were amplified throughout the day and into the close. So, you know, it's very hard, obviously, to give some kind of, you know, X percentage of the, you know, tech rally from the state to the state was somehow caused by, you know, retail option buying. I think that's an impossible sort of question. But what I think is very clear is there's strong near-term momentum trend effects that amplify that rally that come from from retail positioning and options. So let's get into the soft bank angle of the story because actually Bloomberg reported in early August that soft bank plan to participate in public markets, particularly big tech

companies. Then in early September, the FT had a story and they said, SoftBank is the NASDAQ whale. So how much of a whale are they and put into perspective how much they're doing versus all this retail money? And are they sort of leading to charge? Is it a drop of the bucket? Like how do they fit in in your view overall? Sure. So to your point, everybody likes to talk about soft bank because it's such a colorful company.

And the personalities involved are very big in the we work story. I think we have to put this in perspective, right? So first of all, I think Bloomberg reported in early, maybe it was August 10th or 11th about some of the equity positions that SoftBank had been building in Mega Cap Tech names. I think those were reported at around $10 billion order of magnitude, right? Buying $10 billion of stock in the biggest most liquid mega cap tech companies in the world that have trillions of dollars of market cap over two months is zero. full stop, right, has no impact on anything.

That's a tiny position from the perspective, not for a single institution, but a tiny from the perspective of volumes or market caps, right? No impact. You know, a lot of the later activity that became interesting, right? So, you know, option market makers and option market participants have been following, you know, this kind of new, interesting, relatively large flow

that started in early August in, call spread buying for equity replacement purposes. And, you know, just to give some example. And again, this is all people kind of have strange ideas about like, how do you see this happening or how do you know, this is all exchange traded securities, you know, large institutions, quote banks, execute trades, everybody hears about it in real time, not who the source is, right, not that it's soft bank, but you, and then you see the trades go up on the exchange, you know, but these were large trades. So like on August 5th, you started to see, for example, you know, Facebook, November 2020, 250, 25, 275, call spread traded in, you know, 35,000 lots, which is pretty big.

And, you know, Microsoft, the 220, 240 call spread went up 75,000 times, right? So everybody's going to talk about this and say, oh, that's interesting, what's going on. These trades were executed, Delta neutral, which means that the client was buying a call spread. At the time, this would have been, you know, three month or so call spread. And it was, or three and a half months and executed versus selling stock. So with no net directional impact on the market. This was an equity replacement trade. So reducing a long equity position and replacing it with some options.

And in particular, with some call spreads. Now this is, so first of all, this is a three-month call spread, a couple of three-month call-spread trades I gave you an example of, right? So three-month call spreads, how, you know, if you want to think about how much convexity or how much gamma that induces this kind of dynamic delta hedging impact, that we were talking about. Does a three-month call spread trade have, you know, compared to like a one-week, a little bit upside call, for example, you know, it would be, again, depending on the

details, it could be a hundred times less per dollar of notion, or it could be 200 times less, right? So a three-month call spread is not a convex security. And as markets rally, it loses what little convexity that it has very quickly, right? This is just the objective of this kind of trade. from the end client's perspective, who already owns the stock, this is just a risk reduction trade, where they're taking some stock off of the table, they're replacing it within an option structure that's maybe worth three or four percent of notional,

where if the world falls apart and these stocks go down a ton, they only lose that three or four percent instead of losing, you know, 20 percent or 30 percent on their stocks. Right. So this is like very normal, very boring, except, you know, decent sized, which is the only reason that options people were talking about them. you know, transactions in the market, you know, that don't have any of the types of impacts that we were talking about with respect to to gamma.

You know, they do have some, their longer term, they have some vague exposure or exposure to implied volatility. And those exposures got decent sized. And, you know, there's some argument that these, the trades like this contributed to some of the market up, but implied volatility up dynamics that we saw in late August. And, you know, you can, you can argue about that. But I think there's absolutely no case that there would have been any meaningful impact on stock prices or on, you know, acceleration of stock price moves from this kind of flow. You know, and later we learned that, you know, SoftBank was probably involved in some of this. There may have been some other copycat flow. But again, I think this was, you know, way overblown in terms of being impactful with respect to, you know, the NASDAQ.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Okay, so because they're trading three-month call spreads, it doesn't have the same effect on markets as the short-term call trading does. I guess my question, and also you describe the call spread strategy as basically risk mitigation for their tech bets. But I guess could I just ask, how weird is it that soft bank, you know, this big tech investor that normally does a sort of venture capital like business? How weird is it that they're just investing in the public markets like this?

And who's doing, who do you think is like in charge of their overall risk strategy on these type of trades? I mean, it's certainly a bit unusual from their historical perspective. But I think soft bank also is a bit of an enigma and, you know, tends to do new interesting things that, you know, surprise people and get people excited along a variety of dimensions. They sort of tried to play this down as sort of liquid treasury functions almost, right? Oh, we have a bunch of extra cash and like, why not, you know, do something really simple with it? You know, normally you wouldn't think of buying tech stocks as a treasury function. But, you know, again, I think that it's relative, if you think of the risk that they take in private markets investing, you know, investing $10 billion in some mega cap tech companies is obviously a whole lot less risky than putting $10 billion into a we work or something like that. So it's certainly a different style of thing.

But is it like some totally crazy thing to do? I mean, I don't know. I have a quick question. It's not quite related to this specific incident, but you mentioned the sort of the coordination that goes on in the Discord chats, all these small traders. How different is this in terms of its market impact from the days, say, 20 years ago or something when a handful of macro funds,

managers like, you know, the Soros and Drucken-Millers really, like, would have been the big players in some of these markets and the degree to which they could generate Alpha by essentially, you know, moving the market due to their weight. I mean, that's a great question. It's obviously a very different flavor, kind of a few concentrated large investors, you know, versus a huge herd of smaller ones that do effectively rely on, you know, not just their own, you know, not just their own money to move markets, but kind of putting some of the conditions in place to amplify, you know, trends and so forth. I mean, first, it's a lot more diversified, but, you know, technology has really enabled large-scale coordination, right? And you see then that's not just

a finance phenomenon. I mean, that's a social media phenomenon. And, you know, in a lot of ways, you know, you have to think of right at Wall Street bets as more of a product of kind of the internet in social media culture, then finance specifically, right? It's manifesting itself now in trading and finance, you know, but it's really this, you know, technology enabled rapid coordination function where an influencer can be followed by millions of people and can say, okay, let's do this and actually get a lot of people to do things in real time. It's, you know, whereas in the 90s, you know, again, you had,

you did actually have quite a little, the 90s really were the last, you know, heyday of retail option trading. It would have been, I think still a much back in the 90s you think of who were you know what kinds of people were like really active trading options in their new e-trade accounts and things like that right it was you know lawyers and doctors and dentists and people who were kind of at the forefront of technology at the time and getting interested in markets and had some money to play with whereas I think you know now when you look at you know the breadth of a community like red or wall street bets you know you have you have a a huge variety of different folks, some with, you know, meaningful bank roles and some with pretty,

you know, some with just a little bit of money. Or some who started out with 10,000 bucks. And then now it was 200,000. And then it went to zero and, you know, the last week. I mean,

one crazy thing about Wall Street bets, it's a very gamified, aggressive risk-taking culture, right? And there's lots of posting of P&L screenshots and the amount of, the amount of, like, posting a screenshot of your $500,000 account

that just went to zero last, you know, last Friday. And then, like, laughing about that is pretty shocking. This was going to be my next question, this gamification of trading idea. And you mentioned earlier the overlap of Bitcoin traders or cryptocurrency traders with Wall Street bets. It does seem like the way they're trading and the things that they're investing in are just sort of much more exciting than traditional buy and hold for the long term investing. Is that going to be the new normal?

Are we ever going to go back to a time where call options aren't as popular as they are now? I think we probably will, right? Generally speaking, the way that I think you have to expect these kind of trends to end is with very large losses among the segment of people that are very heavily involved, right? this is extraordinarily risky speculation where, you know, I think, you know, when a hedge fund, when a volatility in derivatives hedge fund thinks about how to quantify risk and how to measure how much risk you're taking in their portfolio, you know, obviously we think about how risky a short-term option is and the fact that, you know, if you're buying a one-week upside-call

option on Tesla, if it just doesn't go up 10%, you're just going to lose all your money. and so you would size a variety of bets accordingly, right? Versus the gamified risk-taking culture you see in Red and Wall Street bets being, you know, people say, well, I have $100,000 in my brokerage account. What's interesting to do today? Well, it's buying those Tesla calls, so I'll put that $100,000 into one-week Tesla calls, right? Of course, what happens then is just you lose, just lose all the money when kind of the huge upside move stops, right?

So generally, over-risk-taking in complex instruments that are, you know, like this, I think the end game is a lot of people losing a lot of money and stop and generally stopping doing this kind of thing. But it can last for a while because when you have these violent rallies that just keep going, people can buy lottery tickets over and over and over again and win three times out of four and keep playing. Is there a way with the data? So just going back to the original formulation of this, okay, aggressive call buying,

and then the dealers have to sort of hedge their exposure and so, you know, then they have to buy stock. Is there a way to get a feel in the data for the sort of the community of dealers overall, the degree to which at any given moment, the degree and volume to which they'll have to jump in? So let's say, okay, I don't know, Tesla's up again today. So Tesla, I think, is up like 5% as we're speaking. is there a way to know sort of in real time or roughly real time what that translates into in terms of forced buying or forced hedging given what we given the sort of constellation of outstanding options there are? Joe, that's a very good question.

You downplay, I don't know anything about this delta hedging stuff and then you ask a very good question like that. So I mean, so no is too strong of a word, but you can certainly attempt to model or estimate that dynamic, right? And, you know, you wouldn't be surprised that, you know, folks like us spend a decent amount of time on that. But, you know, think of it as, you know, you have to observe all of the trades that happen in the marketplace. You have to have an educated way of modeling or guessing. Is this a trade that was a customer purchase of an option from a, you know, dealer or dynamic hedger?

With what probability do you think that that's true, you know, building up your kind of simulated portion? portfolio that you think that dealers hold and volatility arbitrage managers hold versus end customers who aren't delta hedging. And you have to make a variety of assumptions and you have to, right, it's a modeled exercise and you have a probability distribution around it. But then you can end up with, okay, here's sort of how much dollar gap. Here's how we think the gamma profile of dynamic hedgers, dealers and market makers involve arms in a particular stock is at a particular time and how that changes as the underlying spot price moves. And generally, you know, I think before this huge retail euphoria of the last six months,

you know, a lot of that effort we would focus on, you know, looking at the S&P 500 because actually gamma positioning of dealers in, you know, the mega cap index was a huge and very important phenomenon, you know, driven by institutional largely call selling and put selling. But now, but now actually much of the new trend is single name gamma positioning driven a and buy these very short-term retail flows. So we talk a lot about the idea of the options traders having an impact on the market through Delta hedging and the dynamics at the dealers themselves. Is there a scenario in which the dealers can have a sort of impact?

Like, is there a scenario in which it can reverse? Can something happen at the dealers so that they become caught offside in the market or they end up taking a position in the market, which they hadn't intended to? and that affects the underlying and then it sort of ruins Wall Street vets trade. I think that ultimately, you know, there's a price for everything, right? Some of the early, I think there were examples of dealers and market makers, you know, losing a material amount of money on some of the early growth in this, you know, speculative retail flow and options because, you know, typically as a dealer that has experience

over the last 10 or 20 years, you know, you see significant retail flow emerging in some stock in the options on that stock. You know, you view that as uninformed flow that's kind of paying the offer side, and you're really happy to take a big position, you know, facing those folks earning a lot of an offer and, you know, not too worried that they sort of know something, right? And then what you saw like in Tesla early, you know, much earlier this year, right, was that flow coming and coming and coming and huge sides and pushing the stock and pushing the stock and huge realized volatility and you actually saw some of the market makers lose a material amount of

money on that. And I think, you know, over time you saw, but what you saw is, first of all, implied volatility is moving much higher in those names, right? So, you know, dealers charging a much higher price to facilitate that flow. And then, you know, of a deployment of a variety of techniques and, you know, hedging techniques to try to, you know, better protect themselves. So, you know, think of, you know, accumulation of inventory in anticipation of future customers. customer flow is a polite word, you know, and leaning extra long in the stock in anticipation of how things are moving. And, you know, so at some point, you know, you saw a test short-term Tesla options trading at 120 implied ball or 140 implied ball, right? So, you know, the market re-equilibrates

itself to the point where dealers and people who are short those options, you know, can make money on the positions because that's sort of how supply and demand works, right? So I think, you know, are there, are there, you know, dealers know what they're doing. And, and the, I think, I think, with these kind of products, it's not too likely that there's going to be like catastrophic losses at, you know, J.P. Morgan or something that are going to shut down, you know, realistic capacity of option market makers to support this. I just have one more question. So, you know, basic ideas, you know, buying a call, it's inherently levered. You put up a little bit of money. You can either make a lot, but if you don't, you know, it doesn't go in the money, you lose everything. And so it's a,

it's a leveraged bet. And when the market, you know, crashed in February and March, and I I thought back to that Luke article. I was like, well, that was the top and they're all finished. You know, all these leveraged long call buyers, they're gone. And then it's like, no, they like immediately, they didn't waste any time coming back. And that that article did not turn out to be the top. But are you surprised that the speed and intensity of that washout didn't just sort of like obliterate that community and that, you know, are you surprised at how quickly they regrouped and got back in the game?

Or were you surprised at the time? Yeah, I mean, I was to some extent. I definitely, you know, you would have typically thought if you have a big emergence of a lot of speculation and then you have a huge market sell off and people get burned and then they kind of take their ball and go home, right? I mean, I think part of it is I think the size of that community has been expanding steadily. Right. So it's, you know, new entrance to the space. And that was amplified by by COVID and lockdown and the fact that all of a sudden you sent a ton of people home to work on their computers at home with nobody staring. over their back and their board, right? You know, anecdotally, and I think everybody has these anecdotes, right? But cousins and uncles and everybody in the back office at the banks that you know, all are like opening Robin Hood accounts or, again, Robin Hood using that term very broad, opening brokerage accounts and asking about options trading and asking how to do things. And so I think that a lot of new participants have been brought in.

And, you know, the other thing, you know, some of these folks, again, are small-scale guys who scrape together or girls who scrape together five or ten grand and, you know, trying to get into this stuff. You know, but there's plenty of associates at law firms and investment banking analysts and, you know, people who have money to burn and who have incomes and who aren't out spending them on drinks and bars in Manhattan. They've got to find some other form of entertainment and this is what they're doing, right? And so it's, it is an impressive phenomenon. It's impressive how fast it resurged after market. and how it's accelerated to much bigger scale even since then. Ben, that was great. You know, I said in the beginning you have a knack or a gift for explaining complex stuff in clear English,

and I think you really delivered. That was super helpful, and really appreciate you joining it. Cool. Thanks, guys. Love one. As always. Thanks, Ben. Chase.

Tracy, I think I'm actually going to remember what Delta hedging is now. No, you're not. You're totally not. No, I think I will. I think I will. Next time there's, like, a big option. story and we get Ben back out the podcast to explain what's going on. I actually don't think I think this time I'll really internalize like what I mean. I think I'm confident myself. Okay. I was just thinking on that

gamification point like I know Ben said he thinks there's a point at which things will kind of return to normal but I don't know. I kind of wonder if you can put the excitement genie back in the bottle, right? Like once you traded something like crypto or once you've made a bunch of money on a really leveraged trade that you didn't pay anything for on Robin Hood, I don't know. Like I think it might be hard to go back. Like it has become a form of entertainment and not necessarily just a way of making money. Yeah, I'm kind of with you. I mean, look, if we had like some huge, massive, sustained market sell off, if we hadn't gotten this rebound, if markets had, kept going lower in March. If the unemployment rate just continued to worsen, then probably

that would really ice this for a while. But of course, we have seen a rebound in a lot of different measures, both market and real economy. So, you know, I think the broad thing is, and this is something that we've talked about in other avenues is like so many aspects of this crisis have just accelerated preexisting trends. And the chart of this sort of retail options trading leading into this is just another example of it. It was picking up pretty strongly in 27, 2018, and 2019, and then it just went insane over the last six months. Yeah. And I guess my other big question on all of this is what regulators are going to do, if anything. Like, clearly this behavior is having an impact on the market. You can't really argue that it's insider trading because all the people on

Wall Street bets, you know, presumably you don't have any insider knowledge. They're just saying, let's all buy this at this particular time. But it's still sort of, I don't know, it's coordinated in a way that I would think catches someone's eye. Yeah, that's super interesting. Also, just going back to the key point, you know, it seemed like Ben was pretty dismissive of the soft bank whale theory. I mean, it's sort of like an interesting soft bank story because soft bank always seems

to be riding whatever wave is going on at the moment. and riding the waves up and riding the waves down. But, you know, it's obviously in terms of what we've seen since March, a much bigger story than just that by large. Yeah. I think the narrative around SoftBank that they hired a bunch of people from Deutsche Bank who are now putting on these risk- or lever trades is a really difficult one to fight against. But Ben's description of call spreads as a risk mitigation strategy rather than an outright bet,

I think was an interesting one. So we'll see if that catches on, but somehow I doubt it. We'll see. Well, should we leave it there? Yeah, okay. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway.

And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwork. And be sure to follow our guest on Twitter, Ben Eifert. It's Ben with two ends, P. Ifer. absolute must follow great on all of this stuff if you're interested. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today.

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