The Derivative - 2021's Vol moves, 2022's outlook, Meme stocks, Option Flows and KAI with Cem Karsan

Episode Date: January 6, 2022

We're kickstarting the 2022 season of The Derivative with fan-favorite - Cem Karsan. In this episode, the FinTwit star better known as @jamcroissant and his calls on Gary and Gamma and Vol and Vanna, digs into the interesting 2021 Vol moves, what 2022 may look like in the vol space (not good…or good, depending on your positioning), how he actually trades flow and options in his KAI hedge fund, as well as a journey through all the things that make you go 'hmm.' Tune in as Cem also highlights the three trading strategies that make up his firm’s offerings,  a slightly different take on omicron, how he views the market’s movements as waves driven by flows, and more. Plus, as a bonus, you'll find out how Cem got stuck in a Bolivian salt flat!? Topics discussed in this episode include: How COVID accelerated a lot of trends in our lives, including the acceleration of VOL and VOL products Option volumes dwarfing the actual volume of the things that they are on top of and tracking What it means to have two-sided skew How to play Meme stocks, and more! Chapters: 00:00-01:32 = Intro 01:33-13:24 = Things that make you go Hmmm.. 13:24-26:00 = 2021 Vol Movements 26:01-43:15 = Proxy Hedges, Vol compression, Finding the pain points & Illiquid Markets 43:15-01:03:36 = KAI: Riding the Volatility Flow 01:03:37-01:16:05 = What’s in store for Vol in 2022? 01:16:06-1:22:22 = Two Truths & a Lie Additional resources discussed in this podcast: Vol Curves and Vanna Charm with Cem Karsan Wallstreet Bets Busts Wallstreet? WTF ^%$# with Cem Karsan and Kris Sidial Investing in Volatility & the VIX Whitepaper Follow Cem on Twitter Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thank you. updated VIX and volatility white paper. Just click the education tab, then white papers. Okay, on to the pod with Jim Carson, which was a gem. See what I did there? Talking through some of the highlights from a vol perspective in 2021, what he sees in store for 2022, not good, and how he trades vol in options and the gamma flows he's become known for inside of his CHI hedge fund. Send it. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Okay, welcome back, everyone. Happy New Year. We're recording this a little before the New Year, but you'll listen to it in the New Year. But we're here with the one and only Jem Carson, or Jem Carson as he's better known.

Welcome back, Jem. Thanks for having me. Good to be back. Yeah, and I think birthday wishes are in order. This will be out around January 6th or 7th. January 7th, yep yep all right are we allowed to ask how old you're gonna be uh much like yoda 900 900 years old somewhere between 30 and 900 make it'll be 45 45 believe it or not there you go all right um so we've done the full gem experience back uh at the beginning of last year uh we'll put links to that in the show notes talking through what vanna and charm and gary and all there are as well as your band as a market maker and more

uh so be sure to check that out we'll put it in the show notes anything from those old pods that we didn't cover in terms of your background or anything you want to touch on no i think most people know uh you know i had a market making uh company that was you know one of the biggest in the sp500 and uh kind of uh traveled traveled the world kind of uh turkish american born in london kind of all over so i think people know most of the story, but yeah, I think, I think we covered it mostly. Yeah. So here, our first part of the new year, I kind of want to do a 2021 review and being who you are kind of focused on the vol space and what transpired there. So we'll hit a few highlights and get to know your thoughts. And I want to dig into both what they

were at the time when things were happening and sort of what they are now after you've had time to reflect and the market's kind of shown what was actually going on uh so i'll just leave it open-ended for you and let you go ahead and start of kind of what you think were the three main i'm hesitant to say market moving events but kind of the three things that made you go, Hmm, which, what was the name of that band back in the day? Crash Test Dummies? Is that it? Things that make you go, Hmm. Yeah. So I think you can't talk about 2022 in the ball space without talking about kind of the meme kind of activity, GME, right? AMC, kind of all the upside call squeezes, you know, mark it up, vol up a lot of times in these names. I think that kind of dovetails into just broadly kind of the adoption of vol by retail, the access.

And I think that's probably the biggest story. And it's a huge one in the vol space because a lot of people seem to think that's a cyclical story, right? That's going to go away after things reopen and this is temporary and we'll get back to normal. Very much the camp that COVID accelerated a lot of trends in our lives.

I think one of the things that it very much accelerated a lot of trends in our lives. I think one of the things that it very much accelerated is adoption of vol and vol products. I've spoken about this before, but I think they're superior products. They allow you to not only like stocks and bonds, but up and down, but really allow you to bet on the whole distribution. I think people have woken up to this in a sense. They're powerful ways to bet on convexity. I think we'll get up to this later, but I think we're getting into a time when things are a bit more tail heavy, as I've talked about. In that type of environment, options are also more adept at navigating those types of scenarios. I do think that people have educated themselves a ton of the ball space, you know, we've been involved in that as well as SMU. And I think that adoption

in education will carry over to more and more kind of usage of these products into the future. So we've seen this secular trend for some time, but it's really accelerated. And I think you're going to see more of that kind of until there's, you know, more regulation, more whatever. We'll see if, you know, if and when that happens and what it takes. But in the meantime, I expect to see a different kind of market. This isn't your grandma, grandpa's market. I think we will see more squeezes. I don't think GME and AMC will look back at those as anomalies as much as, as kind of how the market seems to function now that, that ball products are much more involved. So that's one, you know, like I said,

that dovetails into kind of what we've been seeing recently, which is another big trend and important thing that's gone on in 2022 is that markets have become much more tail heavy. Ball of ball has increased dramatically. You know, we've seen that very recently. I talk about this kind of pretty openly about how it's become a leptokurtic market. You have a lot more kind of tail events and things move a lot more quickly. There's just a lot more leverage in the system. So you mentioned that the pandemic's accelerated everything, including options trading, but those seem like two different stories, right?

Like the move to online shopping, the move to all that, that makes sense of why that accelerated. But do you think we were going to get here anyway in the next 10 years in terms of adoption of options? And it's less like a technological thing, in my opinion, but more of just people's brains are advancing to get that, right? They want more and more and more. They want the full suite.

So I don't know, just popped in my head. How do you think about that? Yeah, I mean, I would put it in the, I guess an analogy I would say, work from home is accelerated, right? Why, like that was a trend that was happening. It probably would have played out over the course of the next decade,

but there was a excuse for people to work from home. And now people realize that this should have been how it is all along. And now it's become a thing, right? And it's not going away, right? I think it's the same thing with Vol, basically. I think people were adopting it. It is a superior product, more flexible. There's more access now. And people being at home, having more time, managing their portfolios, also having more disposable income, right? The fiscal policy we've talked about has lined a lot of people's pockets and allowed them to kind of speculate. A lot of millennials on down have had less disposable income until recently.

I think that's a big part of the desire to catch up and do things that are more kind of convex. And we've seen that whether it's in crypto or in volatility products. And so I think this kind of being at home, the access really accelerated a trend that was already in place. And again, now that people are getting educated, there's these network effects, there's more volume, there's more participation. There's more access. I think, you know, it's here to stay. And if anything, it's going to continue to accelerate. You know, I think it's I've talked about this before and I'm on the fringe on this one, but I do think it will eventually become the underlying product. And let's dive in. So you're saying the options volume will dwarf the actual volume of the things that they are on top of that they're tracking?

It sounds crazy. Notionally, we're already there. We've already had notional volumes higher than equity volumes themselves throughout this year. I personally think, again, it's not even close in terms of these products being superior to betting on underlying outcomes. If you look at, you know, what's happening ultimately on the, you know, on the effects of the market, there's a much more time element, right? When you want to bet on things, how you want to bet on them, what percentage out of the money, what tails you want to bet on, what part of the distribution. And, you know, as a market, we've gotten so factor, everything's financialized. There's a

factor ETF for everything. There is a automation for everything. Yet, we are still betting on up and down. We're still playing in two dimensions. And for me, the adoption is already happening. People are waking up to this. And I think it's just a function of time education um and and you know participation so so yeah i do think it is you know it is the full picture underneath the summary which is the asset itself um in terms of a financial asset eventually i think uh you know that's where things are heading that's great and do you think um knowing what you know now versus when when it was GameStop, that was last January, right? Was it end of January? So right at the time we talked about that, the citadels of the world, the market makers, the gamma play, the dealer flow. Have you since, you know, there was a couple of papers that came out that kind of talked around that.

Have you since that confirmed what you thought or is it a little different than you thought? Not as simple? Well, I mean, if you look at the congressional panel like that kind of looked over it, they basically claimed that gamma had nothing to do with it. So I'm going to go ahead and disagree with that. Obviously their analysis is a little kind of looking through a keyhole. I don't think Congress fully understands how these things work.

But, you know, that said, your original question, would I have expected it? And, you know, I think there's so much leverage in the system. This will go to that kind of that leptokurtic environment comment I've talked about. You know, the Fed has been the only solution up until the last two years to solving economic issues. So the Fed has been the only reaction function to the economy. And they essentially have one mandate, which is to use monetary policy to control price inflation and maximum employment, but one tool. And that tool is just more money to capital, more leverage. And ultimately, there's so much leverage now after 40 years of pushing money into the system,

that now that inflation is a potential problem, how do you resolve that? You have a lot of money in the markets, a lot of speculation, and now individuals have that access to your fiscal policy. So it's a very dynamic, I guess, explosive environment. I think if we saw it in March of 2020, I think we're going to see more of that. It doesn't mean that the world world is ending we're just going to see a much more kind of fat-tailed market um going forward and i think that will change how people people position do you think i'll be on both sides i do i do i think we'll probably see a right tail before we see a light left tail and And ultimately, I think we both know since the beginning of time, kings have been shaving coins, right? The inflationary response

is the easier path out from these valuations. I've talked about this before, and we can talk about macro more, but 68 to 82, the period right before monetary policy was everything, before supply-side economics was driving the economy, we had significant inflation. And I think the market will go nowhere for the next decade or so after the next blow-off, but ultimately, it will lose 70% of its value in inflation adjusted terms. That's generally how this works. Nominally, you know, markets don't go anywhere, people can live with it, they're not happy. But the inflation will help us monetize and growth will help us kind of monetize kind of where we are in the leverage in the system. talk a little bit about some of the underlying factors there so

there's this meme stop movement there's the gamma play and that's what is that what are the derivatives that we saw call volume way up we saw call skew became a thing right um we've seen a lot of days stocks up, vol up. So talk through a little bit of that as a vol trader. What's the downside? Not necessarily the downside, but what's made it hard? What's different given this new kind of regime where you have on the upside, on the call side? Well, it's one we're used to in the equity space for 95% of the time, SKU being to the downside, right?

And now in a lot of these products, you have two-sided SKU. So that's a challenge for those that aren't flexible or understanding kind of positioning in the marketplace. It is a huge opportunity. I mean, it's been an opportunity for us. You know, for the first time, we're really seeing big enough call volumes and call buying to create two-sided flow. Meaning, you know, in some names, you'll have VANA and charm flows, which I talked so much about, right, as short and the indexes, you're still seeing them long. And this creates a way to kind of get out of two different parts of the market, right, and trade them on a rotational basis. I think we saw another, I think it speaks to the amount of rotation we've seen this year. I think we've

seen a dramatic amount of kind of underlying dispersion in the market. I think we're going to continue to see that because of these dramatic flows in different parts of the market that are very leveraged, you know, in the options space. So I think that's been an opportunity. I also think, you know, it's been an opportunity in the sense that it allows for relative value positioning across the market in ways that you wouldn't have seen before that would have been much more monochromatic, right? Much less kind of dynamic opportunities. So as a ball trader, I think it's a signal-rich environment. It's great for ball arbitrage as well. Reminds me a

lot of 98, 99, 2000 on steroids, right? And that's 2000 on steroids. That's a good thing. That's a good thing. I think we're amidst a big boom in the ball space in lots of different ways. And explain what two-sided skew means for a second, if you could, for the listeners. Yeah, so skew in the option space, we're talking about implied volatility skew.

So every strike has implied fall, right? Skew generally refers to how the downside options in the market or this equity versus the upside. Generally, because the world is long stock, the markets take the elevator down and the escalator up, right? And people also hedge to the downside. So that creates a higher implied fall to the downside and skew to the downside. And higher price, essentially, we're saying, right? Those options are priced higher than they technically should be because there's more demand for it. Correct. Correct. Both on a realized basis and implied basis, they're higher. You know, markets do move faster historically to the downside broadly. But as you mentioned and as we've seen, that's, you know, certain names that's starting to do the opposite.

Reflexively, all the call buying is leading to, you know, convex moves to the upside. You know, so that's we've seen two sided skew. So in some products that the upside are more expensive than the downside um you know and and that that's always been the case in commodities or interest rate derivatives or several other products but in equities that's that's a relatively new phenomenon and and and fairly rare and it's been much more consistently happening in certain names as we know well um so that was number one the meme meme stack i had a listener wrote in he's like i said mem i don't know what i was calling it but he's like it's meme it rhymes with beam like okay mean so number one the meme stock revolution will cut what do you what's next 2020 yeah so

2021 volleyball boom yeah sorry and i keep saying 2020 right 2021 yeah right yeah Yeah, so 2021 vol of vol boom. Yeah, sorry, and I keep saying 2020, right? 2021. Yeah, right, yeah. So vol, you're living in the past, man. Yeah. Vol of vol boom, you know, again, I talked about the left-hand distribution,

but, you know, you're really starting to see the skew and convexity in the market, not just on a realized basis, but on an implied law basis. Again, I'm kind of repeating myself a little bit here, but I think it's an important thing going forward as well. It's a significant change in markets, and I think it is going to change kind of the next couple of years. We're going to be talking more and more about this.

And real quick, Lepto-Kernick is taller heads, fatter tails? That's right. So when we get, when we get those moves, they're, they're much more frequent and fatter, more likely, you know, big events that are unexpected. So those, those lepto, you know, those, those, those types of things are happening primarily as a function of, like I said, the leverage in the market, but also because you have these different participants in the market doing unique things. You have more participation broadly in the vol space, which is also affecting these outcomes like we talked about with the mean names. So you have a kind of a wild west kind of market with a lot of leverage, a lot of money,

and it's creating really outlier outcomes. The markets are moving in unique ways relative to history. I think that's an important point, and that's why you're seeing implied vol-a-vol going significantly higher, because realistically markets have changed the distribution under which they, they move recently. And again, until we kind of have a period of deleveraging in some way you know, I think we're likely to see more of this. You know,

it's a fragile market underneath the, you know, underneath the hood. And I think people need to be aware of that. So what's that vol of vol look like? What are some of the stats that you've seen there? I don't have the stats in front of me, but it was, I think, 1.15, I think, just recently on December 2nd. I mean, you might have some of the stats in front of you, actually. Generally, vol of vol is how vol itself is moving right the volatility of the vix we'll use as a proxy um that's right yeah so i do have some of those

stats right on that day after thanksgiving in the next two days right the the etf the vxx was up 27 down 16 up 15 and a half percent so that vol of vol on those types of move is through the roof. That's what we're saying. That's absolutely right. And the pricing of it as well. I mean, what's an interesting point here, which would probably be my third kind of vol comment, which kind of dovetails into this is,

if you look at realized vol this year it's very similar to 2019 the actual daily realized vol has been about a 19 um you know uh vol um you know on a daily basis yet the median vix right has been trading at uh 26 as opposed to kind of at 19 back in 2019. So you have a situation where, you know, the vol risk premium has been dramatic. And for vol sellers broadly, that's been very profitable this year. And the broad argument is, if you listen to the Goldman Sachs's of the world and the research is that, you know, this is, oh, post 2020, this is, you know, that's when you want to sell insurance right after a big event. And it's like it'll remain high for a while, you know, go monetize that ball. And I would just say on a risk adjusted basis, however, it doesn't look as good, right?

Because when you start looking at the ball of all and how quickly some of these ball events are playing out and the risk underneath even though those mean uh kind of realized balls are relatively low the distribution of the outcomes are different so we're you know um and so the risk of selling ball is actually you know much higher um and even particularly on a tail even in the even in 2021 you're not just saying over 10 years you're saying in 21 even that vol vol made it a i'm saying in 2021 that vol has been significantly higher and even though the vrp has been high and as long as you're willing to kind of hold close your eyes kind of monetize'll do fine. But there's been a lot of tail kind of moves and implied volatility as well as tail moves on a realized basis that need to, you know you know,

on a day-to-day basis that, that have really caught you know, been on a risk adjusted basis, a problem for traders. So I think, you know, again, I think this, again, the tails are going to continue to be a problem that said, I think the middle of that distribution is going to continue to stay high relative to, you know, what the realize will be. So, you know, that has a lot of knock on effects for positioning and, you know, opportunity set. And is it too simple just to think that I'll just sell that middle part and buy cheap wings right what's wrong with that simplistic attack approach yeah unfortunately you know the matter of getting that

part of the wing right right what part of the wing is is going to happen and when timing is everything you know there are structures which i won't go into intimate detail in here but that ultimately you know will allow you uh to kind of benefit from from when you get that move uh without being long you know skew is already high right the implied ball of ball is also trading high skew is high so they'll allow you to take advantage of that while still getting tail you know exposure and selling the ad. So, you know, there are these W-type trades, right, you know, that do very, very well in this environment. And those in particular have been, you know, again, arming the distribution a bit better.

The Sombrero or the Batman or the – there's a lot of fun names for that. And have you seen – so you're saying Goldmanman everyone's out like this is the time have you seen massive institutional flow into short ball or is there a worry is there you know it seems like to me outside looking in it's not back to the pre-vixmageddon 2018 levels no um i mean we've talked about this before i think think, you know, there's always this kind of this reality of August 15, you want to devaluation, people got blown out, right? We still had the Feb 16, kind of, you know, much less of a ball response, right in markets. And this year, um,

you know, the skew being high in volleyball being high, even though we've had daily big kind of, uh, crazy moves has, uh, has drawn a short-term floor right under some of these downside moves in particular. Um, so, you know, I, I think, uh, you know, if you, if you ask me, I think, you know, that's, we're getting to a point where that's going to resolve itself in the next six months to a year, just like that 16 ultimately led to, uh, you know, uh, in 2017 ball compression leading to, uh, you know, 18 XIV blowout, uh, you know, XIV blowout that leading to, you know, 18 XIV blowout, you know, XIV blowout, then leading to kind of the ball compression of the late 18, which eventually led to 20 March 2020. I think there's another one

coming here probably in the next year after people start selling ball a little more aggressively. But yes, at this point, people have been kind of able to come out and sell ball. And the hedging has been enough so that the skew is high. Right. But we do enough pods talking about implied 26 and realized 19. There's going to be people like, hmm, let's capture that. So a few more of the ones that I've seen, we'll just go through quickly, like these, the proxy hedges, as I like to call them, right? Some people think, hey, the skew's too high, the put skew's too high. I'm going to own bonds instead, or I'm going to own gold instead, right?

A positive carry hedge. Like, what are your thoughts on thoughts on and generally why you don't do that in your strategies but in specific you know why that didn't work this year yeah so vol this year um outside the equity space has been very interesting right uh it had a lot of uh you know whether it's 0.72 or you know uh you know there are a bunch of other names uh balyazny went on who have completely shut down vol trading in interest rate derivatives, for example, euro dollars. Had a ton of risk, especially here late in the year, starting in September. Also, like I talked about distribution, has been throughout the equity space even. You've had growth versus value really blow out and hurt a lot of long, short managers. So there have been a lot of unique

opportunities under the hood. That said, on the index level and broadly, it's been a bit more placid an opportunity to sell. So I, you know, the more traditional kind of hudges, I don't think have worked because, you know, the reality is those names, you know, those those approaches are kind of where the positioning is and where that positioning is reflexively doesn't work, right? You know, I think we're going to continue to see, you know, again, in the indexes, people are hedged, right? So you're going to continue to see a situation where the indexes is not where the hedge works in the short term. Same with a lot of those other kind of approaches. And you're saying even that's in the S&P itself. So explain that a little more. You're saying in the index, you're saying in the S&P itself? Yes, correct. If you think about it, the world is leveraged long assets. Everything is priced to perfection and people are hedging that on their tail, essentially buying index ball. It's cheaper, it's more statistical, like they're looking to hedge a broad market downturn.

And broadly what that does is that makes it so that the indexes is not where the vol events are ultimately occurring. It doesn't mean markets won't go down. It's just, they'll go down slowly, right. And more methodically when they do and they're generally supported, whereas you can still see that kind of massive move like we have since February, right under the hood, you know, a lot of stock, a lot of growth names topped in February. Right. And, and you have a, you have a massive rotation that's happening where

there's real stress under the hood. I think we'll get to it probably later in the show and like the predictions. But, you know, I think this holiday season is very important into January. You know, I've talked about this in other venues, but I think we're really seeing real underlying stress in this market um it's something that people don't talk that much about and by the time this comes out we'll have already probably know what happened during this period but um you know but uh the reality is there's been real throughout october november december has been real underlying stress underneath the hood but the indexes have pinned and held up the market.

Sorry, just you're saying that's like a structural, hey, I'm Joe Sixpack. I've got $2 million in equities. I've got all this downside tail protection on the S&P. So when markets start selling off, I don't panic because I have the hedges in place. So I don't panic sell and drive further selling. That's the- Yeah, reflexivity is everything in a market that's based on liquidity.

And ultimately, who has what and who has to sell when. And this is why markets kind of try and find the biggest pain point for everybody. Right. You know, if you've been in these markets for a while, you know where the most painful trade is, is where the market will generally go for the whole. And my view is that the most painful trade for this market is a continued unwind of kind of growth names and the over kind of the loved hedge fund names, right? Whereas kind of hedges broadly don't perform well, particularly in the indexes, right? You have to be in kind of in those single name places. And so the ball has been well supplied broadly in the indexes. There are people are hedged there. Broadly, you have these reflexive audit charm effects too that are supportive.

Skew is already high. And all of that leads to a difficult kind of, you know, the indexes are more pinned. When they do go down, the skew and ball does not perform. And ultimately, that's a pain point. That's a situation where people are losing on two sides of the coin. You know, we've definitely seen that lately, and I think we're going to see that for a while. But again, that's kind of a linchpin. What you have to be aware of was once that linchpin kind of gets pulled out to like, what, what does that mean? Do we eventually have a, our first kind of 10% plus correction in this market since that, that bottom in 2020.

And so, like I was saying, we'll get to this as a, you know, later in the show, I'm sure, but, but that, that, you know, this period, which should be very bullish, this November, December, January period, which hasn't really been yet. Again, we have a couple of weeks left under the hood here. If we can get that beginning of that melt up here, that very very you know what you'd what you'd hope for and expect during this time but if we don't uh you generally get to a more dangerous time for volatility markets and and less uh support and and and we could see some interesting action in the new year got it and i'll i'll end with one more 21 you were a bunch of your tweets were around icon what was he doing selling a bunch of puts buying a bunch of your tweets were around Icon. What was he doing?

Selling a bunch of puts, buying a bunch of puts. Yeah, there's a couple of big players that I've kind of, you know, introduced more broadly. Icon's been one of them. You know, he's been trading for 30 years in the ball space. You know, as long as I've been here, you know, he's come in at opportune times and and sold out of the money puts in the indexes he does it on the e-mini side so on the futures uh you know

he has a certain footprint um and so right so you don't necessarily know it was him but you know it was him it's yeah yeah it's it's like it's quite clear yeah but the point is not who it is really just as much as this guy is a consistent player that does that's very good yeah people who know also see it as a signal so it has a a reflect you know a reflexive effect right a cascade effect to it as well but it also comes in and provides downside support in the market in the ball space generally when there's stress which allows the market to kind of be satiated kind of brings down that skew and again can take that start that bonnet charm cycle back when ball does pop so those are generally very good moments when that when he

comes in because usually the dealers are selling there to the right. People are buying the protection on the way down and he's coming in and now the dealers have to buy market. Yeah. He's balancing the market right on. And now, and, and that, that then affects kind of the supply back the other way. Right. It's also ultimately a pin, right? It brings the ball down, makes it less stressful. When the ball has come up,

the amount of move that needs to happen after that move increases, right? For the move to continue, for implied ball not to come down. And when you provide that ball to the market, it helps slow down the market itself. Ultimately, tends to make that implied vol come down and starts a rotation back where those bond flows come back in and

then can be supportive again. What time was that? When did we see that come in? He's come in a couple. Yeah, he's come in a couple times. Most recently, he came in in November and he sold the December 3,800 puts that were about a month out. You know, he sold them about 20,000 times, 30,000 times. Again, it's not an overwhelmingly big trade. It's just the timing of it when he does it tends to be very good. And it tends to also be at a moment when vol is high enough. And, you know, that supply reflexively also helps, you know, begin a loop of support. Now, it hasn't always been at the exact bottom of the markets, but in terms of selling vol, it's been very good timing.

And eventually he's been right every time. So, yeah, he's a good one to look at. There's a lot of other big trades out there that have had a major effect that we've kind of introduced the importance of on social media. Let's talk about the other one that was news there in 21, which was the big JP Morgan hedge equity that's $18 billion. I can't remember what it is now. Yep, $18 billion. That's right. $18 billion. Markets were down. Everyone was like, they're going to have to roll these strikes. I can't remember what the number was, but then they did a little game theory, right? And they just did a spread around that and didn't come into that actual strike.

No, they did come in. They did come in, come in Jeff they yeah no they actually ended up having to um so they always come in it's it's in their prospectus they have to yeah yeah but I thought they did some synthetic that arrived at the same place but they didn't come in at the exact strike but I'll look that up no they they did it but they uh what they started doing is uh they will trade it early in the day and then by the end of the day they rebalance it to the strikes uh that are accurate the other day and we had a big move back in september on the trade day so they traded it and then they had to rebalance the whole trade uh you know uh 55 points um you know at the end of the day. Maybe that's the thing you're referring to.

But no, I have to go look again, but I think it's 10 delta to 40 delta. I forget what the put spread is now. I'm actually forgetting what the delta is. Sorry, it's the

5% to I believe 20% out of the money put spread that they have to buy. And whatever that premium is, they go sell a call that's equal to that premium. So the whole package is $0 as a hedge, but because of the market's front running this and prepared for it now, uh, broadly that call has come closer and closer. It's almost at the money when they trade it now. Um, yeah. And, uh, and on top of that, uh, you know, the, the trade's gotten bigger, so it's a bigger, uh, you know, it's, it's now 15 to $20 billion kind of a trade that happens kind of all of a sudden, which has a bigger

effect on the market. I think the important thing to talk about here, which I haven't talked about as much and does have a meaningful effect, important to note, this is coming up in a week, right? They're going to be trading this on December 31st. In a very liquid week. In a very liquid week at the end of the year, right? Definitely important to note and i think you've been seeing a lot of ball compression in preparation for that as well

mind you i think this last little blip up here and the support we've seen and our kind of expectations of this of this rally here have partially had to do with this not exclusively but it does have it does play a role here into the end of the year as well but an important thing that i haven't talked about as much which I think is very important about this trade, is I think it showcases how liquid markets are. And it ties in this leptokurtic thing I'm talking about. Not only is there tons of leverage, but the liquidity has dramatically come down in the market. The size of the market, the US domestic equity market is $50 trillion. right? That's the US. Internationally, it's closer to 100 trillion, right? Total global long assets, including commodities, real estate,

et cetera, $450, $500 trillion. Okay. These are long assets, right? Now, very little of this is trading on a day-to-day basis, right? If you think about the fact that an $18 billion trade in the context of a $50 trillion market and $500 trillion long assets is having a sizable and meaningful at all effect on market, that speaks to how little liquidity there really is in the market and how little it takes. Again, we're talking about the Carl Icahn trade. It's a 20,000 lot. We're talking about billions of dollars in the context of a, you know, a market goes up, the market goes up 1% and a 50 trillion, that's $500 billion. Yeah. Right. So like, you know, it's fascinating to when you start thinking about how little it takes to actually kind of move this massive market and the value of everything. And so I think that's important when we're talking about this left of credit market and how much leverage there is in the system, yet how little liquidity there actually is. I think the two things combined really add up to an important picture that I

think people don't fully appreciate. How do you square that with like options volume at record highs and, and all this interest in derivatives we talked about in the beginning, but then not coming through to the actual liquidity when it's needed, right? Those seem counterintuitive. They seem cross with one another. Yeah, I think the majority of the people who are speculating or placing directional bets, right? Not the majority of the liquidity. If you look at it, I think it's about $ billion dollars a day change hands and markets right that's a kind of the average volume um you know if you take half of that because it's two sides 350 billion right

but like most of that is just people you know high frequency trading kind of you know in and out kind of scalping and and the reality is the actual pushing of markets the actual kind of scalping. And the reality is the actual pushing of markets, the actual kind of thrust of, okay, I'm actually a buyer or I'm a seller is really that, you know, $50 billion type number in a day, if not lower. And so when it comes to options, you know, people are able to exert, given how low that liquidity is, that much more notional leverage and pressure in a very illiquid market. And I think that's what we saw in GameStop and AMC and, right, and hell, we're seeing in Tesla, right? Like, you know, we've seen in Tesla for some time. It's just these markets are very illiquid compared to the amount of notional leverage embedded in these products.

And it's another way to say that just there's no longer the big banks, the big players that are willing to step in and take a directional risk. Like they're in there playing. But as you said, very short timeframes, very defined risk models. They know what they want to get out of the market. And they're just going to take that on and nothing else. When perhaps 15, 20 years ago, there was a trader who's like, oh, I love this. I'm going to take this risk. And the departments weren't aligned and they were going to let them take some big risk and perhaps blow out the bank, right? Yeah, that was definitely, you know, that's been probably the biggest factor, right? That said, I think it'd be silly to act like it was always incredibly

liquid too, right? I think there's always been a a dearth of you know a lack of uh liquidity to some extent i mean i remember 20 some years ago being in the pit and taking down a big order and and sending my futures into the market right and moving the market by 20 basis points right like that was me like yeah exactly so i mean the that, you know, trades like that can have that kind of effect, I think, you know, it's always been fairly liquid, but more liquid than ever. And especially given that leverage, you know, a bigger issue than ever. I've told that story in the pod before. We used to trade this trend following system called Aberration, I think. And right, it was sold commercially through like technical analysis of stocks and commodities magazine and stuff like that. So when it had an order in palladium and it would write, you'd get the end of day prices.

It would generate an order. It broke through the high in palladium. Palladium was like limit up the next day. Right. And it's just from probably like a couple hundred people across the world that bought this system and were running it on their trade station or whatnot and put in an order to buy two palladium but all of a sudden you write you have 600 like coming in overnight or first thing on the open in a in a thinly traded market and boom let's move on you're uh you changed the name of your company since last we talked, now known as Kai Advisors, and offering a bunch of different, a bunch seems wrong, but offering multiple different programs. So tell us about the new name and the new programs. Let's start with the name. Yeah, so Kai means ocean in Hawaiian. It's also my son's name. Not to leave my daughter out of it. Her initials are I-A-K. So they're, you know, they're both equally represented there. But yeah, that works

out. So the, but the, the reality is, you know, we had a big institutional client as a long ball, you know, player, primarily a significant one uh through 2020 as you're supposed to do with long ball uh you know they monetize that position and in july of 2020 after a big return for us um in the uh you know march to april 2020 period and we shouldn't have been so good right that's the problem with long ball, right? Yeah. When you make money, you know, the people redeem, but that's. You're the ATN. Exactly. So, but, but the, you know, as part of that, now we have the ability to kind of launch

several other, you know, both the open capacity, launch our ball neutral product, which we had traded prior to the public, as well as launch our dealer flow strategy, which we've talked so much about kind of social media and even with you about kind of taking advantage of this dealer positioning, right, and taking net positioning. So much less of a vol arbitrage approach and a much more directional market timing approach based on understanding the underlying positioning in these volatility markets. So a new approach that we use in the background of our Volarb products for some time that we were able to spin out

as a separate, much more dynamic strategy. And we've had great success with that since launching that in 2020. And that's kind of, but launching these new products publicly, instead of having a kind of major managed accounts for institutions was kind of the pivot that really kind of led to the new name

and kind of the new branding really kind of led to the new name and kind of the new branding. And Oceans, right? These are their waves of vault flow. And obviously, that's kind of what the name is alluding to and what's important. So there's three main programs now? The Long Vault, which you've run for years and years and years, vol neutral and dealer flow. So that's correct. Yeah. Let's just spend a little time on each. So long vol, same thing you've always been doing. What's going on under the hood there? So the vol neutral, to be clear, was our first product. When I left market making, I actually, you know, typical for a market maker to kind of trade vol neutral, right? To really arbitrage by definition

of taking nets, your net positioning to zero, right? And try to extract the yield. So our first strategy was actually vol neutral, you know, for our big institutional client who came in. They wanted long vol.

We gave them long, we created a long vol product for them that eventually ended up being our long ball product. So the ball neutral is really bringing back a product, which is absolute return ball arbitrage that we originally had. Improved, however, because with that long ball, we also added this dealer flow, you know, strategy underneath the hood for market timing, you know, as a predictive piece. And that's really been put into both ball arm strategies as well. So the long ball not only does a relative value, what's high, what's low in domestic equity, you know, volatility, but it also does a what's the most likely outcome given dealer positioning

under the hood now, you know, construct a delta, you know, ball, you know, dynamic, you know, positioning that want, both for long ball or bond neutral, depending on the strategy. So those two use the same two engines, that relative value market maker framework, and that predictive dealer flow distributions of outcomes, both for underlying markets and volatility surfaces. So those two engines then we construct a portfolio with to get kind of optimal positioning. And then the long vol piece, so that'll be short deltas or just long vol? It's just long vol, delta neutral at baseline,

but it has embedded convexity. So all scenarios have to have a certain amount of embedded convexity, you know, in it. The, I think the key part there when you think about it is you know, a lot of long ball tail funds are essentially, you know, have a lot of burn to them. Like the long there, you know, you're talking about a situation where one in two years they may get that 100% type, 150% type return. We're really not a universo or a tail fund strategy. We are really

winning 25 to 30% of the time and have a positive expectancy over the long run. And that's what we've done, at least in our history. And so, you know, our view is it's really insurance for credit, which is a pretty rare kind of thing to get into portfolio. So that's, you know, again, a different approach. But you know, you want to have your capital there for the time that the big ball event happens, right? And our strategy really does allow for that to be the case. Again, not looking at 150, 200% type returns when it happens, looking for convex returns, but still not that kind of a tail product. But then the flip side is that you're not using the whole account buying premium either, right?

That's correct. Which is usually how you get those 200% returns. And then the vol neutral is actually delta neutral as well, but is it actually vol neutral? It is. It's vol neutral. It's skew neutral. It's norm vol neutral. It always minimum linear convexity on all scenarios.

So it's really trying to strive much like a market maker would for net neutrality. And it doesn't mean it doesn't have some gross exposure. Right. You know, what tends to happen when you limit the net exposure on a relative value strategy is your gross exposure goes up. So it has has a bit more gross exposure, as you expect from a ball arm strategy, but very non-correlated. Long term capital management rings in people's heads when you say that. I think the key here is it's always long. Unit's always long. Convexity, it really is.

Not only does it have max risk constraints, it has an N-bar max, a VAR constraint that's fairly conservative. But I think the important part here is these strategies, if done right, are one of those few strategies that you can have your cake and eat it too, in the sense that it's an absolute return strategy that has a nice long-term historic positive return, but it does very well in a bearish market. And a secularly bearish market, that's when market makers do well. That's when ball of arms strategies do well because the relative value spreads well. So mid-Feb to mid-March 2020, it's not going to make a lot of money on a crash, right? But late March through April, much like our strategy, it's going to do very, very well after that event or as you're going through a secular downturn like 07, 08, 09, right? Those types of periods

lead to very positive returns in vol relative value trading if you have a good mousetrap, which we do, obviously, as marketers. Yeah. Without giving away too much of the secret sauce, help us understand what that looks like. So you're selling what you believe is overpriced implied vol and buying what you believe is underpriced relative to that, buying the other something related implied vol and waiting for that to come in, right? Right. So imagine there's two engines. Like I said, the first one is a market maker framework. What is that?

Looking at volatility surfaces across the equity space, finding where the best opportunity is at any given moment, right? And not just across volatility space, but also within each product, what's high and what's low, what represents an opportunity based on the complete universe of information. I'm not down to a single stock level, right? You're still on the- We're primarily focused on the indexes to the extent we do single name, it's for dispersion, right? When the opportunity presents itself there, but that's even in a basket. So again, we're playing a statistical game.

We're looking at relative value. We don't want to be taking idiosyncratic risk. You know, so that said, you know, there are massive opportunities on the index level, even on a basket single stock level, when you kind of look on a relative value versus one another, both the moneyness and time, right? And across product as well. So again,

those are tight when there's not a lot going on, when there's not much stress, when there's a lot of liquidity, when there's less liquidity, when there's more stress in markets, that represents more opportunity in the space. So there tends to be much better forward returns on an annual basis when there's more kind of stress in markets and a downside type market. So these are great products to plug into your portfolio to diversify not only on a non-correlated way with absolute return, but also without paying that risk premium, really getting those nice returns and those downturns.

It's not a long ball hedge. Yeah, that seems counterintuitive to like, oh, you don't want to put on long ball during after the spike. But you're saying here, no, then those opportunities kind of present themselves because everything's a little bit blown out. Right. So how do you square those two? So after the kind of risk happens, right. Think about March 2020 as an example that's more recent in people's minds. You have the valuations of these ball derivatives are all over the place. Think about March 2020 as an example that's more recent in people's minds. The valuations of these vol derivatives are all over the place. The opportunity due to illiquidity and stress and people get blown out.

This creates opportunities on a relative value basis. And it's a time like 07, 08, 09, for example, you got those opportunities month after month after month right you had stress in markets uh you know and on a rolling basis right that allowed for monetization of relative value opportunities on a risk adjusted basis that are incredibly hard to find in a time of you know at times of placidity so so those are great opportunities for the strategy strategy is absolute return it makes money uh you know, on an annual basis in most environments, right? But it does significantly better when there's higher opportunity, more opportunity set. And that's why it tends to have on an annual basis, a more negative beta. These small arms strategies probably do.

So they're great things to plug into your portfolio. If you have a seasoned professional who knows what they're doing, you know, it's a great strategy to plug into the portfolio. Again, I had my success 07, 08, 09 as a market maker. Those are the periods when vol traders, if they know what they're doing and they're good, they really succeed. And those are when vol arm strategies do well, if they're real vol arm strategies. The problem is there's a lot of, quote unquote, vol arb out there, which is, you know, you mentioned long term capital. You know, it's not kind of systematic. It's not real arbitrage. Right.

You're not really going out there and keeping net exposure to zero. You know, I think the key is, you know, keeping it simple like we do. Don't go into idiosyncratic risk. Don't go into, you know, make sure that you really are net exposure of zero you know not to get too too into the weeds there but how often are you like delta hedging that and keeping it actually at zero because i've seen a little bit of that in the due diligence process of like yeah we're delta neutral i'm like on a monthly bait right they might be doing it every three weeks or it's arbitrary there's a lot of weirdness under the hood when people say delta neutral. Absolutely. We have, so first of all, delta neutral itself is a weird thing,

right? Because how do you determine delta neutrality? If you assume a log normal distribution, you may be delta neutral, but then all of a sudden you assume a, a leftocurtic distribution, or you have a, a very different, you know, again, we have this dealer flow dynamic where our distributions of underlying, you know, opportunities are very different from what the market may be assuming. So our deltas may be neutral and are kind of based on our distributions, right? But to your kind of layman, it may look like we're long or we're short, you know, so we really do have these two engines.

One, again, is a predictive piece, and we're going neutral to that distribution, right? And the other one is relative value, given static, where the universe of opportunities are, what's high, what's low. So we really do have these kind of two separate drivers of profitability and alpha there. And they're both kind of unique and non-correlated in a lot of ways, too. And how do you you mentioned before, like there's not as much opportunity in the index itself because it's kind of overplayed. I can't remember exactly what we said, but how do you square that with like you're dealing in all the indices themselves. To be clear, I was saying hedging, right? If you're a long, if you're going long ball, right? The opportunity, you know, tends to not be as strong, right?

As opportune in the indexes now, right? I think there is a, you know, particularly in the S&P, there's a lot of hedging going on there, right? Which reflexively makes it less, you know, less where the tail is going to be. You know, that said, that doesn't mean the relative value opportunity can't be reflected there, right? Again, I think in particular, I think we're likely to see a period, you know, periods like we have seen where dispersion is going to be a good opportunity,

where index small is more likely a short, even though it may seem cheap, to be long in other single list baskets or across other parts of the market. Again, I think you'll see more rotation of the hood you'll see some underlying volatility but ultimately i think um you know in the short term uh on an index level it's less likely so these represent opportunities my point uh yeah all arbitrage doesn't mean your long ball or short ball it means you're looking at relative value opportunities um and then so the second engine, the dealer flow, right? You've kind of over the last two years made your name on that, so to speak. Let's, I think it's well covered, but what are some of the limits of that, right?

Like, so you can't, it's not a perfect indicator. It's not always going to be a game over or is it? You tell me, but go ahead. Yeah. Yeah. You know, I think the important thing to note with dealer flow is dealer flow is in everything right uh it is it is important and it is a growing component of kind of uh you know why markets are moving the way they're moving i think if you're not paying attention to it you know i don't think i have to belabor these points at this point i think you know a year and a half or two years after starting to talk about it, we're starting to see – you've seen post-expiration windows where you're regularly getting these drawdowns.

This isn't a coincidence. The reality, though, is you know a certain thing that represents a certain percentage of an outcome, right? And you don't know everything. That's powerful, not only that it helps you predict the future, it predicts what's likely to happen, but it's powerful in that when it doesn't happen, it also tells you much about what you don't know, right? And I think that's a subtle thing that's hard to get right. If you know what the other components are, but you can't, you know, know explicitly what that, you know, how, how those things are going to respond when you have periods of flows that, you know, should be a certain way and they don't react. And I was referring to this in terms of

this part of the year, right. You know, and how this part of the year is important because we know certain things about not only vol flows, but also flows coming into in a liquid market at the end of the year, beginning of the year. And so there are old adages that are built around these things that people don't fully understand, but ultimately the point here is a positive. Yeah, Santa Claus will rally, January effect,

to write all these things that we can go on and on about. They're not magical constructs. They happen for a reason. We can talk about seasonality a little bit if you like. But ultimately, these are holiday periods when there's less involvement in markets, the more liquid. There's less time, and time matters for derivatives. So these charm flows are accelerated. You know, so you have in a liquid market, a lot more percentage kind of buyback because it's happening faster. These effects are very strong

and important during an end of the year period where you're also about to get, and we talked about the size of markets, $50 trillion U.S. domestic market, right? We made 20% or so this year, right? That's about $10 trillion in valuation increase in the S&P. How much of that goes to work on Jan 1? I don't know, maybe 10% of it? Something like that, right? That's a trillion dollars. We're talking about a JP Morgan trade of $18 billion pinning the market, right? So there's a period here of not just positive flows that are coming, but also an acceleration of time and Charmin Vana flows. In these periods, there's also those holidays, both times people don't think about this. So Thanksgiving and Christmas come right after major expirations, right? Which is a period of otherwise weakness.

So they're stabilizing in a period of otherwise where you'd have risk. So you have these monthly positive on a charm flows. Then you've got these holidays with all well supplied and then time accelerating, right? And then you have these big flows into the end of the year. The very positive seasonal time for reasons structurally. So a lot of people don't understand what underpins that seasonality. But my point is, these flows are things that you can understand and you can track and that if you know what you're doing are a real

edge, but that's not the whole story. But the whole story, the rest of the story kind of speaks to you a bit when these things don't come to pass, right? And it tells you something about the structural underpinning and the stress otherwise in the market. And that's why earlier I was talking a little bit about kind of how this is a very important two weeks and watching what happens in this context, meaning a lot more than people think. This is why that January effect people talk about,

how the first week of the year goes, right? It's kind of how the whole year says something about the year. It sounds crazy, right? If you don't understand these underpinnings, it makes no sense. But there's real there's real logic, actually. There's real reasons that that that tendency exists. So what what would you say to some volar that that doesn't look at dealer flow at all? Right. And just says, no, it's just in the math. It's just in the price. Like that stuff's all overrated that's not what's kind of like i don't want you to get anyone in trouble but yeah you're

gonna get me in trouble that's right yeah um i mean look it's uh you're playing yesterday's game right like the reality is the reality is uh you know there's there's a much bigger game going on as this as these it's always been going on. But as these products become a bigger and bigger part of markets, it's not just volatility traders I'd speak to. I speak to money managers writ large. If you're trying to trade based on fundamentals, or even just flow, not even looking at options involved in these effects,

you're you're missing a a dramatic percentage um of what's going on under the hood and another way as i think of it right you're playing the players not the game uh playing the game at the same time but if you're not playing right if you're a good poker player you can't just play the game you can't just play your cards you got to play the other players right that's well i'd say that i'd say the players are the game right it's a market exactly at the end of the day they're buyers and sellers that's what determines price and if you don't if you know who the buyers are and you know who the sellers are um you know you're going to end up at a better place and understanding what price should be

2022 predictions so you touched on some stuff, touched that this beginning of the year period, end of the year period is going to be laid out on fire. What do you got for some, what are we going to see? Now we can get into some kind of the macro stuff, which I kind of enjoyed too. You know, I think everybody's probably sick of hearing about Omicron, right? But I think Omicron is a big deal.

It's not a big deal in the way people think it's a big deal. It's a big deal in the sense that people are going, we're going to finally reach herd immunity. It's going to happen. So my prediction is, is whereas we've had fits and starts by playing this kind of hammer in the dance game of, you know, we're not going to overwhelm the system. We're going to back away. We're going to come back in. We've extended this whole process and this economic, the economic kind of pain with it. I think, you know, and this is not a political statement. I'm just, you know, but I think the Omicron kind of if if it looks like, it's still a little early to say, but if it looks like it's as relatively mild, again, very contagious, but less virulent and less deadly, if that is actually the case, especially given that we know more now about how to treat patients.

We're also better prepared than we were a year and a half ago. Combine all those things, this is going to accelerate the process, is my view. And acceleration of that process is a huge deal for the economy, for the markets. What does that mean for the economy and the markets? Let's kind of dive in a little bit. One, you know, the economy is going to probably accelerate, is my view. I think there have been people who have a different view. I think you're going to see a bit of an inflection coming into the spring.

Is that now a lot of people like, oh, the economy is going to accelerate. That's great. Go buy stocks. I'll actually argue that, you know, oh, the economy is going to accelerate. That's great. Go buy stocks. I'll actually argue that much like the economy and markets have been a bit unhinged from one another for the last year and a half, I think they continue to be. The economy is not the market. I would actually stress it's a bit of the opposite. I think now that Omicron is likely to come in, we're likely to get to herd immunity and we're likely to kind of reopen in the spring.

I think the Fed is going to have to accelerate tapering. I think you're already starting to see it. You know, and when the Fed begins to really take liquidity off the table, this market has a tough road to hoe.

I really think it has had wins. It feels like a classic by the rumor sell the fact right like hey everyone's real cured sell it all right like we get just got that crisis fuel rally now it's time to sell um yeah absolutely well i hope so that i think that's a big deal yeah yeah yeah i think i think ultimately you know again good news for the economy and i actually think this isn't just a one-year thing. I talk about this pretty broadly, but I think we're really starting to look at a decade before us. And again, I hate to be all doom and gloom, but we've had 40 years where the interest rates have gone top left to bottom right. And the assumption has been because that's what's happened for 40 years, that that will continue. I think we've dragged along the bottom in terms of interest rates until recently. But the fiscal response, the $12 trillion that's in the system is having an inflationary effect. It's not just the supply side kind of holdups from COVID. I think, again, the Fed has done about face on transitory.

I think, you know, I think there are real, if you look at wage growth on the bottom, it's dramatic. We haven't seen anything like that in 40 years. There's a lot of people who are not willing to work for the same price who are having major labor pressures, particularly on the low end. And that's part of what's driving that supply problem. I think that's what people are missing with that supply side response is that a lot of the problems are actually because there's not enough labor. There's not enough people willing to do the jobs that need to be done, whether it's, you know, shipping or factories or wherever as well. So I think, yeah, again, I think inflation is not talking about runaway inflation, but much higher than we've seen. And at least it's going to be something where the Fed has to worry about their dual mandate as opposed to their single mandate for 40 years. They're no longer just worrying about maximizing employment, but they

have to worry about price stability going forward. And I think that's really going to be a tough situation in the next decade. I think you will see a gradual increase in interest rates and normalization. And I think that's really bad for a liquidity be, you know, you know, for two reasons. One, there's now somebody, something competing as interest rates go higher for, for returns. You're no longer, you decrease that Tina effect. Right. for returns. You no longer, you decrease that TINA effect, right? But B, you also have just less liquidity, less money chasing assets and more money chasing goods. And that's ultimately not good for stocks. Multiple contraction tends to be what happens during those periods.

And you think that in the vol space in particular that how does that work out yeah uh i mean it it doesn't this is the thing about inflation and this is the thing a lot of people miss on the vol space is vol most of these products are priced in nominal terms right um and so you could get a situation very much so that where markets uh you know, in real terms, really have some pain. Right. But in nominal terms, it's a kind of a more gradual kind of decline. Now that you'll have periods of volatility in between there, we're not going to transition there, you know, just smoothly. So I do think there'll be some some ball ball on the way, some, some real opportunities, especially early on in that, that kind of decade long process. But eventually I think, you know,

you look back again, um, as you, you know, I encourage people to look at 68 to 82 as a, as a, as a, as a timeline, but you know, you'll eventually have a period where your markets will have net gone nowhere with, with, you know, several 20% type declines, you know, and several 50, 60% type rallies with much to do about nothing, right? So, and that itself represents massive opportunities in the vol-arb space because, you know, there's so many assumptions to skew and the acceleration the acceleration of markets to the upside right that actually um create other you know good opportunities in in a ball are the world where that's not the trend and just to be clear these views don't inform the trading and the models right like it's correct yeah which is a shame no i didn't. I will say the only way that these do affect the trading is that we do have macro factors like interest rates and assumptions on those that have, you know, our distributions are weekly with daily paths.

So very little effect. Right. But if you have a year-long multi-year kind of effect, that does have some minor effect on our predicted dealer flow. Wait, interest rates are part of option pricing? What? They've been zero for so long, right? They're basically... People probably forgot that.

Got any other predictions or should we move on? I think the only other thing that I think people aren't yet talking about, which will become a bigger thing here is we haven't thought as much about politics. You know, the midterms will be coming next year. It doesn't look good for thems, right? You know, I would argue that the next, again, these are bigger predictions with the next 10 years,

we're going to have a lot, a bunch of four-term, you know, four-year, one-term presidents. This is what happened the last time interest rates went higher with Ford and Carter, right? I think, I think, you know, I think Biden's going to end up being a poor, you know, you know, then the Dems likely are likely to lose, you know, much like a lot of times it happens, lose Congress in this midterm. I think that will at first people will think, OK, less fiscal, you know, that's it'll be kind of a positive. But I'm guessing that this this demand on the next straw down in the markets for more relief to people is going to come again, whether it's right or left. I think that's probably how we've moved as a population. So in the short term, I think it's probably seen as a positive by markets, you know, next year after kind of a

tough year this year. And then I think ultimately, you know, going into the next kind of multi-year period, I think you have another kind of retracement down when people realize there's more fiscal coming rates are probably going to continue to go higher, you know, over the long run. So this is going to be a rolling kind of less inflation in the short term, which will be a relief to markets that are, again, in the next six months going to probably have some pain related to the Fed tapering. Yeah. And we've talked about this before. I think the genie's out of the bottle on that, right? I think we're already basically at basic income and they're just going to keep saying, need another we need another um and i'm not even sure that's a bad thing like right wealth's at all-time highs everything's

everything's going swimmingly well besides the little inflation problem right besides that yeah there's no easy solution i think the reality that people miss a lot of the time is that what the Fed has done, which is allowing free markets to kind of work, which is supply-side economics, essentially, has been GDP maximum. It has created greater growth. It's created a technological revolution. Now, the problem is it's also created, because there's a cost to that, which is it's created inequality.

But it's been able to do that because it hasn't created inflation. Now, you start dealing with inequality, you start dealing with media and economics, there is an inflationary problem. And we're getting back to kind of the old economy, right? And so much harder to grow things the way we've been growing with the leverage that we have in that type of a world. So yeah, to your point, I think to the extent we are being forced to deal with inequality, we are going to have a tough time in markets given where we are in the amount of wealth

that's over there. Although I saw a tweet today, the last two years has been the biggest, right? The bottom 50% has increased in wealth the most. Like I think it was 40% versus the top one percent was 27 from a very from a very low level yeah yeah right yeah a couple chicago questions for you fellow chicago guys so what's your thoughts we're getting a little political here but the chicago crime all this are you bailing are you holding steady a couple of my friends are like hiring

private security to drive around their block like it's getting a little yeah so i was i lived in i lived in bucktown before until recently i sold my place moving to old town right by my kids school by the lakefront um as i after i left i found out that uh in our neighbor old neighborhood they hired again private security for the neighborhood. So, yeah, absolutely kind of strange. Right. A hall of mirrors. I'll tell you, it's weird.

I mean, you know this, being in Chicago. If you didn't look at the news, you probably wouldn't know, right? It's not like – there's also a lot of – we live in a city that's very de facto segregated. There's different pockets that are very high crime and there are other areas where you wouldn't notice it as much. That said, it's obviously been an issue. I think this speaks to kind of the inequality problem, right, that we were just talking about.

And it's easy to point the fingers in a lot of directions. So I'm gonna kind of stay away from the political piece. But I think the reality is, you know, if you address the causes of the problem, the inequality issue, I think you'll eventually kind of solve the bigger problem. So I'm hopeful that in the years to come, that this will be less of a problem here.

Versus us all hiring security guards and to wrap up new this season we're asking guests for two truths and a lie so tell us some some interesting tidbits about you and i'll see if i can suss out the real ones um all right i got a couple for you all right uh i got i got four for you here four all right uh just because i couldn't decide i was hit i was once i was once stuck in the bolivian salt flats and rescued by um contraband uh you know uh police and the hooligan softball another one another one um uh i was the mascot for my high school um which was i was which was andover uh you know on the boarding school i mean it was a gorilla it was a gorilla it was a gorilla gunga yes um uh i once uh performed ceremonial rites uh with a lot of indians in copper canyon um at the base of the canyon

um and then i i fell out of a four-story building and survived. Oh, well. I think I got to go with you fell out of the four-story building and survived as the lie. That's true. That's true? A four-story building. A four-story building. How old were you? I was in Chicago, actually. It was one of those uh it was in the

newspaper you could probably go dig it up if you really wanted to go look but i was uh like one of those roof 2005 yep rooftop uh kind of gave way and two of us fell for yep one of those wood decks right that really gave way i fell for i remember that story it was like wrigley village or something yeah not that one it was the year after that and it fell for it. I remember that story. It was like Wrigley Village or something. Yeah, not that one. It was the year after that. And it was actually in the newspaper because that one had happened the year before. It was a big deal. And I was like, this still hasn't been fixed.

But yeah. Four stories. Did you break anything? I did. I broke my spinal fracture to my tibia and I broke my shoulder blade. But luckily, the shoulder blade but i yeah luckily the shoulder blade is your your densest bone in your body you learn everything every day so and the tibia is the furthest thing from your head so i apparently fell the fell the right way all right you got me

i'm gonna go gunga the gorilla that's true. 0 for 2. Ceremonial Rites. That's true. 0 for 3. The Bolivian Salt Flats. There probably isn't even a thing. I cheated. They're all true.

They're all true. All right. Done. There you go. What were you doing in the Bolivian salt flats? I lived in South America my junior year of college in Chile, Santiago, Chile. And there were riots. Pinochet had made himself a lifetime senator prior, the riots counter Pinochet and it's a very activist

kind of you know South America that you know especially at the at the school I was at and so a bunch of Chilean kids came and tapped me on the shoulder were like you know you don't want to be at school tomorrow it's gonna be gonna be Riotas I was like well in that case I'm definitely coming to school tomorrow so uh no it was no, it was, so the Molotov cocktails and tanks, they closed the school, but it was just after the midpoint of, of the school year. So they, uh, I still got kind of credit. Right. And then we had probably the best education of all because we hopped in a car and traverse South America, um, for a good three, four months. Um,

and, uh, yeah, that was an incredible experience at one point. Like I said, I, we were in the Bolivian South flat, four months. And yeah, that was an incredible experience. At one point, like I said, we were in the Bolivian South Flats. It's the highest plateau in South America. Beautiful place, but needless to say, a Toyota Tercel doesn't do too well in off-road environments. Yeah.

So we had a little breakdown and it's literally the middle of you know nowhere there's nothing out there and for like about a day we were just stuck like you know in the middle of this this self-plan wow pretty cool story and butch butch and sundance hanging out in belize i love it all right Jim. Well, happy holidays to you. Happy New Year. Same to you. Happy birthday. Thank you. And we'll talk soon.

It's been fun. Yeah, I look forward to being in touch. Yeah. Thanks for having me again. It's always a good time. The Derivative is brought to you by CME Group. CME Group is the world's leading and most diverse futures and options exchange. For more information and educational resources about futures and options, visit cmegroup.com. You've been listening to The Derivative. Links from this episode will be in

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