The Derivative - Behind the Buffered Notes Bonanza With Joe Halpern of Exceed Investments

Episode Date: August 5, 2021

Who hasn’t been pitched a buffered note at this point? Participate in the upside and get credited back the first 10% in losses. What could go wrong?  There are billions of dollars of these things out there, and they’re even creeping into the ETF and mutual fund space. How exactly do they work? Which options are being bought and sold? Is there hidden risk? What about exotics and knock ins and all the rest…. Do they cause extra liquidity issues for the market as a whole? We sat down with Exceed Investments Joe Halpern in the lively chat to find out just how these buffered notes work, and what investors need to be careful of. Listen to Joe talk about finding the right call to sell to cover the spend, why tail risk is much more important than a 10% buffer, field hospitals in Central Park, what it was like unwinding Lehman Brothers structured products, crafting exotic derivatives at ING, Stevie Cohen as the Mets owner, why duration matters, and how the risk/reward profile of a buffered note changes as the market moves. Enjoy! Chapters: 00:00-02:25=Intro 02:26-09:32=Mets, Cohen, Bobby Bonilla Day & Madoff 09:33-27:47=Custom Structured Notes & In the Trenches at Lehman 27:48-49:28=Behind the Scenes on a Buffered Note 49:29-01:08:00=Exceed = A Floor instead of a Buffer 01:08:01-01:16:27=Favorites From the episode: Webinar: Buffered Strategies: What They Are, How They Work, & When to Use Them - 1 CE Credit Catalyst Buffered Shield Fund Follow along with Joe on twitter @halpjoe, and visit Exceedinvestments.com for more information. 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

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, 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. 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. So why shouldn't I capture all of it? The part that's missing is that historical volatility, the real easy way to think about it, historical volatility of the market's 15 percent. Right. And so if you think about that, what that means is that a one standard deviation move, which which encompasses two thirds of the moves, will be a 15 percent range above below that 8 percent. Right. Which all of a sudden is now 23% and minus 7%. And so if you go look at the last 10,

20 years, there's very few times where the market actually returned a single digit number. It's usually much higher, much lower. And so, you know, that's kind of the rub. And then the second rub is, and there's a few rubs, it's what's actually the concern if you're going into, let's say, your retirement years. If the market declines 5% or 10% going into retirement years, that's not going to blow you up. You know, it stinks. You'd rather have the market go up 5% or 10%. But that's not what hurts people. What hurts people is the market going down 20%, 30, 40, 50 percent. You kind of start thinking, OK, what do I actually need on the downside? Is 10 percent really fine or should I do something else? Right.

Tail risk is so much more important for someone who's going into retirement than a 10 percent buffer. Hello and welcome back to the upstairs guest room here. Not sure what we're going to do if and when we return to the office, back to the studio perhaps. But anyway, what in the world is going on in buffered funds or buffered products. A Morningstar piece at the end of last year noted there were over 80 exchange traded funds now doing some sort of buffer structure with assets over $5 billion. And heck, even my neighbor pitched me on these in the middle of last year. So what are they? How do they work? Well, we're going to go to the source today and welcoming in Joe Halpern of XSEED Investments. Joe's been doing structured products, exotic derivatives, and listed options throughout his 25-year career

at Lehman Brothers, ING, and more, and is now the founder of XSEED, where they help mutual funds structure these types of products. So welcome, Joe. How are you doing, Jeff? Good, thanks. Nice having you on. Yeah. and where are you coming from today? We just talked through all that offline, but you're there in Manhattan? I am. I'm in New York City. I live on the Upper East, nobody's coming back. What are your thoughts? It's alive and well? worker, I'd say never bet against New York. That's what I'd say right off the bat. COVID, no question about it, was a difficult time for the city. And if you look through, it's really interesting. If you look through the neighborhoods like my neighborhood, there were times when it was really quiet, when it felt like the summer. In the summer, a lot of people go to second home to get out of the city. Through the first part of COVID. It felt like that.

There's actually a field hospital in Central Park, three blocks away from me. So that didn't feel great. But very quickly it opened up and you see the green shoots and the restaurant scene is amazing because they allowed everybody to go out and kind of build these structures, which hopefully now becomes a permanent part of the city. And ultimately, you know, it's a live, vibrant city with a lot going on and you're seeing it, you know, Midtown might change, downtown might change a little, but the residential areas are all coming back alive, thankfully. Good. And so born and raised there in the city or you're in the outskirts yeah i did the rounds uh i was born in brooklyn um i think it became cool after so i

probably missed that trend but but but now i could just label it right um then was in queens for a bit um which made me a mets fan um i don't know how you guys feel being, you know, being Wrigley Cubs, but I'm a Mets fan and then came to Manhattan itself at 14 years old. Great. So you're excited that Stevie Cohen bought it? All the Mets people I've talked to love him. They're like, finally, someone who's going to spend money and knows math. Yeah, that's right. That's right. It was very exciting. You know, Dunlop, they, you know, the old owners didn't seem to get it right from a management standpoint.

And then they unfortunately had some real issues from a capital standpoint due to Madoff. Madoff really hurt them. And so that was really a double whammy. You know, Mets historically have done great on pitching, but we need a little bit more money to buy a little bit of hitting to support that, you know, pitching. You know, when you've got a guy, DeGrom, who has like, you know,

a one ERA and still has – somehow still has like a 7-4 record, you're like, okay, what's going on here? Right. Get the guy one hit and we should win. That's right. Just a little run support here yeah that made-off story is incredible because everyone knows the bobby bonilla day where they pay him whatever it is 1.2 million every year for 35 years annuity yeah but the behind the scenes there was

they were saying hey we have to pay this guy 10 million dollars we'd be better off putting that in our made-off investment right where Where it makes 22% a year. So they were just doing the math of like, this would make more sense to pay him this money because we're going to make 4 million every year off, off the lump sum that we have to pay. So it's great to get a guaranteed return, right? Yeah. Yeah. Bobby Bonilla probably didn't know what hit him. That's a great story. I always love that.

And you mentioned people heading out of the city in the summer. Do you stay there all summer? Do you go somewhere? We're in and out. Last year, we had the opportunity to get out. We got to Long Island a bit. Hamptons, we went upstate near Woodstock, which was pretty cool. Really like it up there.

We'll see. We have a trip later this summer. We're supposed to go to Italy. It'll be really interesting to see if we make it or not. We might try to find, I don't know, what's going on out there in Chicago. Maybe we'll come out there. It seems sketch. To be seen.

Seems sketch. I actually took my son. We did the Cooperstown Little League Tournament in July, their first week of July. seems good and we i was actually took my son we did the cooperstown little league tournament in july their first week of july so it's up there near woodstock or it's kind of in the middle of nowhere but yeah it's pretty up there i like the vibe i like the feel yeah a lot of antiquing right that used to be the thing. So take us through the background a bit.

You got Lehman Brothers on there, which is always exciting. ING. So yeah, tell us how you got here. Yeah, sure. So coming out of college, I started working on the exchanges. I was on the American Stock Exchange, with a firm called let co. When you when you start on the exchange, you get a badge, the badge of the person who founded that firm had his name was Lee tensor, his bad said, L et, he labeled on a co and it became let co traded some really

volatile products through the.com boom and bust, which was exciting. Really learned a lot there. Became a partner in the firm. Managed a trading team, managed Grisk. And then that firm got acquired by TD Bank. Then eventually went to ING on their global capital markets desk. My desk was responsible for all exposures in North and South America from the global client base. So there we were engineering structured notes. It's one of the main topics of today. Engineering other esoteric

options, exotic options, anything that the client wanted, again, that had an exposure within the U.S. markets, we would create. Also manage, this was pre-God Frank, managed a proprietary portfolio, option-based portfolio on behalf of the bank when we're still allowed to do that. So that's a great job. And it kind of added on to my experiences, actually creating products, managing a bit more of an institutional based, you know, portfolio, and the like, and then, and then, you know, we're working with Europeans, I guess, right, working with the main guys out in

Belgium and in Amsterdam. And then what kind of clients were those? And like, what were they requesting? What kind of stuff were they requesting? Yeah, so it's all institutional based, a lot of pensions in Europe. ING had a few areas of Benulux, you know, so that whole area around Belgium, Amsterdam, etc. We dealt with a few pensions there and some institutional clients. They actually had a really good Asian business. We did a lot with Hong Kong. And so how it worked was generally on the European side, they were way more conservative.

And so you might have a principal protected structure. You might have something that looked to kind of capture a little yield. The Asian client base tended to be way more aggressive. We did some worst off products. So you take, and that was one of our best trades going into 2008, because we not only would we engineer it, but we'd also take the other side. So we'd be responsible for hedging. We'd take down the whole size. And so an example of a war stock would be Moody's, Bank of America, IBM, Apple. If any of those go down more than 20%, the whole product resets down 20% based on that product and you get some overlying yield. So let's say that product would return 8% a year. And then the hedging becomes really interesting because, and United Health was in there too, actually, if I remember correctly.

So you kind of based on which product was kind of the lowest and what volatility was and what correlation levels were and all these other inputs kind of informed the exposure we had as the hedging party. And so that's what we just had to stay on top of. And so that's an example of something that's a little bit more complicated. Ultimately, if you think about options, there's some options which are based on closed form formulas like Black-Scholes. If you have a listed option, you just plug it in. But the reality is for anything that anybody wants, you can make whatever you want up, Jeff. We could price it because all it does is comes down to writing a Monte Carlo simulation. You write some code around an engine you already have and you kind of put in those inputs and you under, you know, you could kind of create what the client wants. Obviously, the more esoteric you get, the more

expensive it gets, right? Because we're customizing. And then you need to take in, you know, all sorts of other elements for the trade. But hopefully that helped answer that question. Yeah, no, and we'll dig more into that in a little bit, but generally they were seeking yield, right? Is that yield with certain exposure? Yeah, it's either yield or participation, right? And so, you know, that trade in particular was yield. A lot of people were actually going after yield. But yeah, some participation too, and especially when the market really dropped, some clients probably to catch up tried to throw on some two-time, three-time exposures that look really different than the leveraged ETFs. If you think of a leveraged ETF historically,

those are leveraged only on a one-day basis. And so consumers have to be really careful because high volatility in a non-trending market will annihilate you in those products that held for a number of days. These were point to point to 3X, which means you get in for a year and you literally get double the return over that year if it goes up in some sort of characteristic if it goes down. So you can really break it down if you think about it in the structured notes world and even in the options world without structured notes. You know, it's either yield, right, trying to capture, you know, some sort of premium return or it's participation. And then people have to decide how they want to inform their hedge right you don't have to hedge but if you want to hedge you have to inform okay well you know it's

always a trade-off you want more yield you need to take more risk on the downside you know that's all it is right awesome so sorry i interrupted the bio there but so after ing yeah yeah it's after ing i went to lehman brothers post-bankG. I went to Lehman Brothers post-bankruptcy. It was a really fascinating job. Post-bankruptcy. Post-bankruptcy, yeah. The day I got there, I got a couple calls where people were like, you know your company's bankrupt.

I know, I know. I just came there. But it was a great opportunity. I was their head of their global exotic commodity book, All Derivatives. And so the task there, which was really different from what I've done in the past, was there's a multi-billion dollar portfolio that because it was all over the counter, and it's a really important distinction, again, for listeners, over the counter is based on ISDAs. So those are individual contracts with counterparties where on the day of the bankruptcy, September 15th, 2008, 2008, yeah, 2008,

you had to create valuations on that day. There's nothing ongoing as opposed to the exchange-based book of Lehman just kept on existing. Paul Slaith ended up buying most of it and taking it over. But there's no, that doesn't happen in the listed world. There's all these protections, DTC, you know, there's a real institutional rebuilt like pipes. It's why we're a developed market here in the US and that's why people are comfortable trading right and ultimately those Institutions take what they need from a collateral standpoint and make sure that that markets can only go always always move forward and even through

2008 2009 those institutions were not stressed So if you are a counter party on the listed you're fine if you're a counter party on over listed, you're fine. If you're a counterparty on over the counter, it's a little bit more complicated. And so the takeaway, you know, so that job in on top of figuring out valuations for hard to value products, and then negotiating with counterparties. I also was a lead negotiator across all derivatives with some of the major global banks, which was just great. And then was also on a structured notes task force prior to 2008. Everybody's like, yeah, don't worry about the credit risk of anybody. Well, we had, you know, billions of

dollars that, again, these were senior unsecured loans, right, that people, individuals, retail were making to Lehman Brothers. And so I felt really bad. There were a lot of people who had principal, I mean, you had tens of thousands of clients where someone had a principal protected note where they were probably sitting there and feeling pretty good about it. Hey, I have a principal protected note. They probably didn't even realize that they had it with Lehman Brothers. And then, you know, I'm doing valuation here. It's like, yeah, you're right. Your product, you bought it, you put $100,000 in it. It's worth $105,000. Kudos to you. You're going to get 20 cents back on the dollar. Right? It's terrible, right? So I

was on the task force there to just try to figure out valuations and how to kind of deal because if you think of Lehman, most of it is institutional. This is something that was very retail, you know, really affected a lot of people. And that was a tough one. But it kind of gave me another full circle. If you think about career, trading, managing option-based portfolios on an institutional level, risk management. They did risk manage a couple teams. And then real understanding of valuation and how that works dealt with listed vanilla all the way to as exotic as it gets.

And that was really the impetus to found XSEED. The idea behind XSEED is that options are these great vehicles that allow to inform really a lot of flexibility around informing an exposure you want on the market. That's point number one. And point number two is options are complex. You need someone who knows what's going on and has an appreciation of what can go on. I've now been through a few downturns in the market and it's always different. Market structure is always moving. Options are really complex. You need an expert here. Chapter one of Exceed was really creating and combining the beneficial elements of, I'll call it the structured note strategies, with the beneficial elements of 40-act products like mutual funds, you know, called variable insurance trusts and the like.

And Chapter 2, which Exceeded Entering right now, is to really inform in other ways. So really inform, let us be your options expert, right? For more advisors and the like through separately managed account, through, you know, custom creations, you know, with the other side. Love it. I'm going to go back to Lehman for a second.

So were you working for Lehman itself or for like the bankruptcy trustee? Yeah. So it was the bankruptcy. It became everybody worked for a company called Lamco. They changed it after I came from Lehman Brothers to Lamco, a legacy asset management company. And this is an interesting one.

The idea, one of the thoughts, and it's been done before, so it was smart of management, was that of management, was that it was still a big company in bankruptcy. And the sad thing is that most of the operations of Lehman were profitable going through 2008, but they had obviously one part of the bank really blew up the whole bank. And so the thought was, hey, can this be restructured and then built out as an entity on its own? And you can't rebuild Lehman Brothers. So the idea was, let's go from Lehman to Legacy Asset Management and go somewhere else. And while I was there, I was not part of that whole group of trying to get that to happen,

which would have meant my temporary job would have become a more formal job if they wanted to keep me on. The judge nagged it. The judge said, no way. And again, it's happened before. So it was reasonable. You know, as an aside, you know, there were two there were co-CEOs of my group, which was the biggest group. You know, I think there were about 200 people there. 200, 250 is always kind of declining, right? With time. Right. But the co-CEOs, I thought they did just a fantastic job.

If you kind of think through it for a minute, if you do your job too quickly and you finish your tasks, you're kind of fired. There's nothing else to do. Right. Right. If you do it too slow, that's problematic too. And then you should be fired and they fight. Yeah. So, so just from a management standpoint, you have to manage a group that, that, you know, has some inherent conflicts, right? The typical job, you don't have a conflict in that you just want to do really well. And then from compensation, all those things, you know, other conversations. Here, you have the added task of, well, do you really want to do your job really well? Or do

you want to try to like, what's going on? And what are you doing? I actually, yeah, yeah, exactly. I actually left on my own. I quit just because I wanted to start Exceed. and it was getting a little bit boring there because what ends up happening also, which is really hard, is things kind of go in waves as you get through it. And so there may be time where there's downtime, but you really need it because you're an expert, right, in a specific area. So it becomes really hard to unwind. And at some point you're sitting around i'm not really good at sitting around and to be active so yeah i just i've done been through that on the uh future side with pfg group um who went bankrupt but like the and i think in layman's case the trustee or the lawyers made like three billion dollars or something right right? It's insane. Just the online was, you know, they made out the best out of anyone.

I was on a call once, one of the, one of the, where I was leading on negotiations with one of the major banks and there was one or two very, very complex items that were going on, like positions, which there wasn't a clear answer to. And we had, I think, six lawyers on the phone.

And at some point I said, we don't need six lawyers on the phone. Yeah. Like, knock four of these guys off. I mean, it's not coming off my dollars, but it just wasn't, you know. And listen, there was a lot of justification. Like, that specific example I'm providing, it was complex. Like, it needed legal. But, you know, there's times where it's like, no, get some of these people off the phone.

That's a little much. So, but, yeah. And we won't spend the whole pot on Lehman. But the it was because of their, I'm not gonna say structured notes, but like their leverage was too high was at the end of the day, right. But like once. Yeah, what's your kind of postmortem? Having been like in the trenches there? Yeah, yeah. But you know, all the banks had leveraged that was too high.

And the postmortem is, you know, and it comes down to, I think it comes down to it every single time, is appreciating the risk, right? And a derivative-based product, you know, there's just not enough liquidity when the going gets gets tough so it's really important to understand um what product you're in right so so just going back to you know like our mutual fund um in matter of fact all the funds we have they're they're all based on on the s p 500 franchise um and even when the going gets tough i mean there's over $200 billion of notional trading a day.

Markets are super tight. People always ask me, okay, and the options, like what happens when things get really tough? And, you know, the answer is everything spreads out. Everything widens, but it widens to different degrees. So if you think of it just- If it started wide, it'll get wider. If it started narrow, it's going to get a little less narrow, right? Yeah, that's right.

Like if you have SPY and it's a penny wide, you know, maybe it goes to three pennies wide. Like, oh no, what's going to happen? You have, you know, S&P options, which are maybe like, honestly, three, four or five basis points wide. Maybe it widens to 10 basis points. When you start going down and you get into more, you know, less liquid options, that's when you get into trouble where maybe it was, you know, 10, 20 cents wide, where all of a sudden it's a dollar or two wide, right? It's a significant difference. So people really need to understand, you know, that risk element of what happens there, because then it becomes very hard to exit. And then just having an understanding of like, okay, what kind of collateral do I have to put

up at that point? And how am I going to do it? And how am I going to get there? I mean, that's the AIG story, right? So it really just came down to the risk they had on and understanding and effectively risk managing. And I think, you know, there were a lot of, I think there were a few banks that were stressed, obviously, in the position and Lehmanhman was just the one that that was you know that they felt wasn't going to blow up the system and they let it go and do you think they were like massively short volatility right if we had to sum it all up they were um selling volatility inside like if you bought all these complex products down into one sentence would it be they were short volatility so as soon as things got volatile it just and probably short gamma too right so it just as it happened it got worse and worse geometric yeah but it's all yeah but it's all in two spots right i mean their whole loss came down to the mortgage game right where they were getting picked off on the same exact products you know where derivatives were just created on this whole group of what were ended up being there.

There's the alarm we spoke about, but the, you know, the whole fraudulent, you know, real estate, you know, mortgage, you know, game, they got annihilated there and then on CDS on other banks. Right. And so that's where they got, you know, my bet is that in their equity options portfolio, you know, in their commodity options portfolio, I bet you they made money. I bet you they made money in those franchises.

Yeah, I really do. I think those two positions for the bank blew up the whole bank. That's my understanding. Awesome. Well, there's only about six dozen books out there. If anyone wants to go read up more on that. So let's move on to Buffered products. So many of these things are always shrouded in a little bit of mystery, right? When you see them, and I've usually seen them just privately offered now they're publicly

offered but um the privately offered one if you could you just walk us through like a plain vanilla example of kind of how it's pitched to the client and then secondarily like what a group is doing on the back end to deliver the you know that profile Yeah. I'll take you through it all. And Jeff, you know, for your listeners, if you go to catalyst MF, well, yeah, if you go to catalyst MF.com and go to the blog post, I've done some CE credits on it. I've done a lot of work on it. So, so you could work through some examples on your own after, after listening to this podcast. Yeah. We'll put the link in the show notes for everybody. Perfect, I appreciate it. I'll get those over to you.

So let's take a really simple example. We'll do a one-year buffered note on the S&P 500. And that buffered note has 10% initial protection. And let's just say you get participation up to a 15% cap. So what that means, right, all on the S&P 500. So what that means that we buy that today, Jeff, in one year's time, let's go over the math at maturity, when this product matures, and you get your money back, let's say you put $100,000 in it. If the market's up 15 or more you will get 15 back 115 000 plot you know 115 000 so market goes up 30 you just made 50 half of what the market made 115 000 if you're in the s&p you'd make 130 we're going to leave dividends off for a minute if the market's flat

you get your hundred thousand dollars back if the market's down, you get your $100,000 back. If the market's down 5%, you get $100,000 back, right? If you went into the S&P, you'd only get $95,000. If the market's down 40%, which can happen over that year, right, then you will lose 30%. You will get $70,000 back. So that's the math behind it. It's important to understand that all option products or most option products that any retail is going to buy on the markets will not capture the dividend. Now, what's important to understand there is that while you will not capture the dividend, when you price out options, they incorporate and include that fact in the forward. So you do get credit for it, but you're not going

to capture the return of it. So going back to my example, if the price return is up 20%, right, someone who's in SPY will have $120,000 plus, let's just say a one and a half percent yield dividend that they got paid over the year, they'd make $121,500. You'd make the $115,000. You don't capture that dividend. If the market's up $5,000, you're getting $105,000. You're not capturing the extra $1.5,000. Important to know. So now let's talk about what's happening behind the scenes. Real quick. Yeah, real quick. Two things there. So if the S&P price is up 13% and the total return with the dividend say is 15%, in this example, you're only getting the 13%, right?

That's exactly right. Right. So there's no dividend. That's exactly right. And then talk for a second. So in this example, it's a one-year product. So after a year, it resets, you get your money and then you can re-up or whatnot. And then there's all different flavors, 1, 5, 10, or what? Yeah, yeah. There's all different flavors. And we'll go into that, too, because it's a really important point.

We could discuss a one-year versus a three-year, and we could discuss also how that cap moves around because there's something variable going on. I think what may help inform that conversation is if we just kind of talk about the backend in a real general way, so people understand what's happening. And so if you do it with a bank, let's say JP Morgan is the issuer, your $100,000 is going to JP Morgan. let's ignore the fact that they take a fee uh which is totally reasonable that you know they're they are a for-profit entity um but we'll just leave that alone um when the hundred thousand dollars comes across um for one year what the bank is doing is they're giving you a zero coupon bond so in our let's just use, let's just claim that there's a 1% yield.

That's what JP Morgan should be paying to borrow money from you, the consumer for one year, right? Just for example. So with that 1%, that means on your $100,000 investment, $99,000 is going into a zero coupon bond with a one-year duration, which means that at the end of the year, you're going to get your $100,000 back on that bond piece. And then what J.P. Morgan needs to do is they need to inform that exposure they sold to you. So what that is, is it's a purchase of an option with, again, that one-year maturity. They're going to buy a call option, which gives them exposure up,

and it's going to be at the level of the market. So the strike price would be where the S&P 500 is currently trading. Let's say the S&P 500 is trading at 4,000, the strike price, right, the strike of the option will be 4,000. Okay. And that means if the market goes up 20 percent, that call will capture 20 percent. They will ignore the premium that you pay for a minute. Right. Then what's going to happen? And this is a little counterintuitive for people because they think, OK, I have 10 percent protection. What the bank then does is they actually sell a downside put. They're not buying a downside put, but they're selling a downside put. And the put they're selling is 10 percent away from the market. It's 10% below the market. Right. And so if you

think of how that informs, if you sell the right to someone else to sell, right, a put allows someone, a put owner allows someone to sell the market. So you're, you are giving the right to someone else. If I sold it to you, Jeff, you would own the put. You have the right, not the obligation, but the right to sell the market down 10% at any point in time. If the market's down 30, you'd come back to me and say, yeah, Joe, I'm going to exercise my option. And I'm going to capture that 20% because I'm selling it down 10 from where we initially made the deal. And now the market's down 30. So if you think about how that long call and short put informs exposure, if the market's down five, you have no exposure, both options, you know, they end up worthless, right? But if the market ends up down 15, the put has a 5% value. And since you sold it, you lose 5%.

And then the last piece of the equation is now you have a long call, which costs you money. You have a short put, which gets you money. You have that initial 1% that we spoke about. You add that together. And typically, almost always, in the case of a one-year, I'll say always, you still need some more money to make it where you didn't spend anything. And the way you kind of equate for that to fill in what you need is you sell an upside call, right? So in periods where certain characteristics like yield and volatility and skew are in certain cases, you know, like volatility is really low. You may only get a cap of 7%. Right.

And that's where we're starting to go back to where you're going to get a much lower cap than the one I used in this example. I just wanted to use a round number when, when, when markets are really frosty, like right after the COVID, you could get a 15, 20, 25% cap. Right. And so people have to be cognizant of that. But ultimately, you're going to sell that last piece of the equation is you're selling that upside call, which is the cap which limits you. So if you think about the two calls, one call will give you a return. Every percent up, you'll capture the return. The other call limits it. And

that's why if the market's up 20%, you make 20% on one call, you lose 5% on another call and the put is worthless. And that's how you get the math on 15%. So on the 15, let's break it down by each option. So I'm buying the call is maybe costing me 10% that much. Yeah, it's going to say like 7%. But sure, it doesn't make it 7%. Let's use 10%.

You have to use round numbers. Right. So using round numbers. Find that call for 10, then the put below is going to add 2.5, and the call above is going to add 2.5. Is that right? Yeah, well, let's do it as act. Let's use 10 as our starting point.

So let's buy a call for 10%, right? So now we spent 10, 10, 10, you know, 10%. We need to cover it. Right. We have 1% from yield, which helps us. So now we only need to cover 9%. That downside put, let's say we sold the downside put for 6%. Right. Now we only need 3%. So what you're doing is you're looking for a call that costs 3% that you could sell on the upside. And that gives you the math. So once again, 10% is what you spent. You need to take away that 10%. You got 1% from yield for your zero coupon, right? And then you get 6% from the put, and then you get another 3% from the call and it's all zero costs so there's no money going out from you on your hundred thousand dollars and that's what

allows you to just capture whatever the returns at the end of the day is of that whole you know product and we're going to just assume um that you don't uh have a default from the bank yeah i was going to mention that so there's there's default right? There's credit risk that they're the investors taking on as well. Yeah, that's right. That's right. And with the JP Morgan, I mean, it's, it's pretty low, right? But but if you think about it, how that's informed, right, you know, yields, you know, there's always a spread over Treasury, right? So if you go and you buy Treasury in the market right now, when you're out, I don't know, what are you getting? 25 basis points? If you go and you do JP Morgan in the market, it might be 60 basis points. You're probably going to lose a

little in these structured notes because it is retail. They're going to charge you a little bit more than where their bonds are. It's not going to be dramatic. Um, and then there's fees, right. And, and the fees, you know, they, they, they're, they're potentially all over the place. Sometimes it's, it's more competitive than, than other times. 50 bips or a hundred or what are we talking? Yeah. Yeah. Yeah. You're talking 50 to a hundred and then it comes down to, you know, how the, how the advisors get paid. So if it's in a wrap account, it might be 50 to 100 all in. If it's not, it might be, you know, closer to 150 200, you know, one to one and a half 2% because every you know, you need the advisor to get paid, you need the bank to get paid,

etc. And then, you know, some are more competitive, some are less. And then, you know, there's some other money coming out of there in terms of the spreads on the options, which should be pretty tight. But again, we're talking retail. You're getting a little bit spread on that yield. So there's money coming out in a few different spots. And by the way, Jeff, the example we just worked through, it works the same exact way in the variable buffered products out there, which is like a $10 billion, $20 billion industry right now, annually, like AXA has those products. Lincoln Financial has a lot of, Bright House is another big one. So there's a lot of participants there.

Of the variable life annuity kind of products you're saying? Yeah, yeah, they're variable index. Or they're indexed, right? Yeah. Yeah, and that's where it really gets, which is interesting. You know, they have them in ETF format too, but that's where it really gets into that. You know, earlier you brought up, Jeff,

well, how about duration, one year, three year, five year? How does that inform? And it's a really important question of how it informs. If you want to go there, we could still go there. You tell me. Yeah, definitely. I'll pause that for one second and just say, so you have the credit risk, but then is the bank actually they're putting on these trades or sometimes they might book it or are there

regulations where they have to actually put on the trade? What does that look like? Yeah, they all take down the other side. The bank's always going to do the other side. So they're hedging it. So if you think about the bank, you know, they're going long, you know, they're, they essentially, right when we talked through it before, where you say you bought a call, right, the client owns that call at the money, the bank had sold it to you, they have the other side, their trading operations will hedge it, right? That's what I used to do.

That was the hedger. I engineered the product. I passed it on to our sales team. They passed it on to whatever institution. I took the other side and then I'd be responsible for hedging that product however I decided to hedge it, which I could just match right off and might make a little spread. And as you get more esoteric, these products are know you can't just lock it exactly like you may be able to lock a buffer node uh which is all pretty vanilla meaning meaning it's all available in listed markets right but as far as you know they're not trying to massively trade around it and take on directional risk they'd rather just lay it off and and be perfectly hedged and earn the little spread yeah it's kind of kind of, yeah, if you have like a JP Morgan, right, there's, it's such a large franchise. It's not really, they have other groups that may do other things here, you're just, you're collecting a lot of spread, right? You're doing it over and over again.

And so how do you, how do you think about like, is it a little disingenuous or i don't know if that's the right word but just right you're gonna you're giving them the almost the full downside and truncating the upside but historically there's much more upside than downside so right it's kind of preying on people's fears a little bit but i'm at the same time like if it helps them behaviorally remain invested, I think that's a good thing. Yeah, this is where it becomes really interesting, right? This is where it becomes really interesting, the conversation, because most people look at that and they say, oh, wow, I get 10% downside, right? And the pitch a lot of times is like, yeah, most of the time, the market's not down more than 10. Okay, great. And then they think, you know, hey, in the example we gave where it's 15%, and maybe now it's closer to 8% to 12%.

But if you think about average return of the market, it's around 8%. And so you sit there and say, hey, if I could capture that amount, that's pretty cool. And the market mostly returns 8%. So why shouldn't I capture all of it? The part that's missing is that historical volatility, the real easy way to think about it is historical volatility of the market is 15%. And so if you think about what that means is that a one standard deviation move, which

encompasses two thirds of the moves, will be a 15% range above below that 8%, right? Which all of a sudden is now 23% and minus 7%. And so if you go look at the last 10, 20 years, there's very few times where the market actually returned a single digit number. It's usually much higher, much lower. And, and so, you know, that's kind of the rub. And then the second rub is, and there's a few rubs, it's what's actually the concern if you're going into, let's say, your retirement years. If the market declines 5% or 10% going into retirement years, that's not going to blow you up. You know, it stinks. You'd rather have the market go up 5% or 10%. But that's not what hurts

people. What hurts people is the market going down 20%, 30%, 40%, 50%. So you kind of have to start thinking, okay, what do I actually need on the downside? Is 10% really fine? Or should I do something else? Right? Teal risk is so much more important for someone who's going into retirement than a 10 percent buffer. Because, again, taking that initial five or 10 percent return, it's not really you know, you're sitting on a million dollars and you're going to retirement and you're really going to rely on that and Social Security and another couple of sources of income. You know, if that money goes from a million to nine fifty or nine hundred, it's like, yeah, it's not great. But, you know, but if that money goes to $700, $600, it could change your lifestyle. You're permanently impaired. And at some point, the strategy ends, and that's it. And you have to start taking money out. It's why our strategy is actually

a tail risk product, right? We have a 10% to 12% floor in the strategy that we seek by actually buying puts and not selling puts. The third one that's a really important one is that these are point to points, right? So you get in today, it's what happens today versus one year from now. So you have a lot of exposure to two points. And is that really the right point? So you have to start thinking about, hey, what am I really trying to do for this client or as a retail investor? What am I really trying to inform? What's really my exposure? Because if you start working through it, well, I buy it today. And in three months time, let's say the market's up 15% and my cap was 10. Well,

now the characteristics are really different on my trade. What am I doing over the next nine months? And as you know, options aren't binary. So when the market's up 15% in three months and you have the cap of 10, you might have a 6% return. So you have to decide on that point. Okay, now I have more risk to the downside. I'm not really participating much on the upside. You kind of turned into some weird yield product that has a 4% yield over the next nine months with a lot of risk. What do you want to do then? Right. So it's really interesting. And, you know, we really thought about like over our evolution, like all these issues. And so what we do is we actually optimize within our strategies where we're regularly,

right, we're active on behalf of the client, we're moving up the chains, you can almost think of it as a trailing stop. And we convert it to a participation where we're trying to capture, you know, call it roughly two thirds upside, and just always keep that that downside tail risk hedge moving up with the client. So as an example, in 2019, when the market was up 30%, our fund was up 20%. And at that point in time, if you put 100,000 in, you're at 120. Your 120 was, we put a tail risk hedge that limited you 10% to 12% down on that 120, not the initial 100. So those are just a couple of items to inform when you start really yeah go ahead just so in our vanilla example we were talking about that one

year product though i can't get out for the whole year or can i get out so you can get out and it comes down to where you have it you know who who the issuer is so if you're with the bank right and let's go through that math again let's say let, let's say there was a 15%, we'll stick with our initial. And let's say the market's up 15% in three months, you know, that product may be worth seven, 8%. You could go back to the bank, they may charge you a bit to get out. So maybe you lose a half a percent on the exits, you're getting out at six and a half, seven and a half with the market up 15% in three months. And then you can decide what you want to do. If you're with an insurance company, it's going to cost you a bit to get out to if you're with the ETFs, it's going to cost you nothing, right? They're pretty,

you know, but again, all of them have the same math. Yeah, the six and a half to seven and a half percent return at that point, it just comes down to your cost of exit, right? What your liquidity profile is at that point in time, right? And that's where ETFs do assist, you know, in terms of just liquidity to exit. Options work the same way, whether it's in my fund, whether it's with the banks, it's all the same. It's just what structure informs what your exposure looks like. And how do the ETFs work? Because if they have flows coming in and out, so they're like constantly just putting on and taking off different options, I guess. Yeah, but well, that's the thing, Jeff.

It's really important that they're taking on and putting on the same exact option. And so if you buy it after issuance, your characteristics are really, really different. And one of the things which is really interesting is that, you know, I'm pretty positive it was the SEC who asked them to put on kind of like the daily characteristics on their websites. If you think about, right, so if you come in day one, you have that 15% cap and you have a 10% buffer, then the market moves up and so your cap is closer. And so now maybe

you have 4% upside, but you have more downside or you have a buffer until you have downside, and then you have a buffer, and then you have downside. Beyond it just getting a little complex, what's really important to understand, which isn't put there and it shouldn't be put there, but people should understand, is that the probabilities change dramatically in terms of what will happen. So sometimes it looks really exciting because you think, oh, I have all this upside, but the probability is much lower, right? And sometimes it looks like you have all this downside, but the downside probability is lower and there's a much higher likelihood, right? The market's up 18 and you've only caught like 8% of a 15% cap. There's a much higher likelihood, right? The market's up 18, and you've only caught like

8% of a 15% cap, there's a much higher likelihood that you're going to capture the seven, it stinks, because it's less, but there's a much likely much higher likelihood, there's also a decently higher likelihood that you're going to lose that initial eight and kind of, you know, so it gets really complex. And the point is, you're not getting the same thing that other clients got into, which brings up a really important point for advisors, which is if you have wrap accounts, right, and you're managing a whole bunch of portfolios, right, a portfolio of clients, it gets complicated really quick because you have to use lots and lots of different Q-sPS to do what's right for the client. And then you need to figure out when to rebalance and how to rebalance. Because we optimize daily, you only need one product, right? One ticker and you're done. And you could manage everybody to what is a true exposure for that client base that you could define really easily. It's a tail risk product that looks to limit losses to 10 to 12

while participating up 60%. When you really get into what a structured note does, and I think they're great products for what they are, you just need to understand what you're getting into, and does that really inform your long-term exposure, and how are you going to manage it in your practice? We've touched on it a few times. So just I'll reverse. And so Exceed, tell us how Exceed is different. You've touched on a little bit, but yeah, dig into that a little bit more. Yeah, definitely. Definitely. You know, the product is called the Catalyst Buffered Shield Fund. The ticker is Sam Harry Ida Ida X-Ray. That's that's the ticker. It's been around for over five years and it's a five star Morningstar rated fund.

And what we do is provide S&P 500 exposure where we seek to capture roughly two thirds of the upside of the market. It's around 60%, 65% of the upside. While limiting the downside, we seek to limit the downside to 10% to 12% of the exposure. And if you look historically, in 2019, when the market was up around 30% for that year, we were up about 21%. When the S&P was down dramatically in 2020, we dropped right around that 12.5% mark when the market was down about 30%, 35%. So that's how we've historically performed. And what we do, Jeff, is we use an optimization within the strategy. So every single day, we are looking at our exposures on the option side. And we actually do the math on it of if the market,

if the S&P drops to zero, right, goes down a hundred percent, what is our exposure within our options? What we are doing, unlike a buffered note, which sells downside puts, we're actually buying downside puts, right? And so if the market goes to zero, what contractual rights do we have with those downside puts? If the math on any day adds up to more than 12 and a half, we rebalance higher. So as the markets increase, we're rebalancing to capture more participation on the upside and also to increase to make sure that that downside risk, that tail risk hedge is always 10% to 12.5% away from where we are on a daily basis. And how that really informs for,

let's say, an advisor who has a portfolio of clients that they want to manage through RAP accounts. Well, every single client, regardless of when you go in, has a similar experience, right? Someone who goes in earlier and generated returns, well, now those returns are also protected. I don't want to use the word protected, but we also hedge down 10 to 12 on the gains as well. A new client is just on that initial principle that came in. So you really have one product that you could drop into a model portfolio to allow every single client to get that, which you cannot do in any other product, by the way, in the market right now. Right. And so I mentioned my neighbor who's an advisor and he came over in March

showing me this JP Morgan product. product it was upside protection downside buffer which in hindsight was a perfect time for that product too right because the the spread was huge as well um but to that point so that if he's coming to me now that those levels are going to be much lower right it's going to be it used maybe it was 20 of the time i can't remember um now it's maybe like you said eight eight. So what you're trying to do is take that off the table and say that's the upsides variable, as well as saying, forget a buffer. It's not a buffer, but it's a floor. So that's right. That's for me. Yep. Good. I was just going to say for me, who's, you know, we don't do much option selling on this

podcast. So that's good to hear of like this is buying the puts versus selling the puts that's right that's right you'll get an initial buffer with us meaning like market drops five to ten percent in our strategy you're not gonna you'll fall you know call it three to five three to six um but what's really important is market drops 20 30 40 50 right? You shouldn't have exposure after a certain point, as opposed to in a buffer note, you're going to have it all. And again, like as long as you understand a buffer, I mean, I think they're great strategies.

Another great element for our strategy, it's really complimentary. So if you're running a practice where you're doing a lot of these buffered annuities, doing a lot of buffered with the banks, right? And especially if you're using, let's say that 10% level, which people like because it gets them more upside. Our product really complements that in that we're giving you the other side. So when you have your whole buffered book going to 100% downside exposure, when the market's down more than 10, we're on our way towards going to 0% downside exposure as the market falls. So it's a nice compliment as well to that product class. And it's important to really be informed on how these work, the point to point, and just on duration, just understanding

the opportunities. When volatility is super, super low, a lot of times people especially in the variable world will go out further and further in duration to get what better characteristics but what ends up happening is you're just locking in on a longer duration for really you know really low characteristics you know you may want to do the one year on those wait for a volatility pop and try to lock it in for a longer period of time. You know, there's a lot going on and how volatility is formed, but it's something just for people to think about because there's some headline numbers there where you look at it and say, oh, why would I ever do a one year versus a three year or five year? You know, one last thing, if you're doing a

five year, thinking about it for a minute, if do a five-year 10 buffer right and let's say there's a two percent dividend yield on the s p you really have no buffer you might as well just buy the s p yeah because if you're in the s p you're making two percent a year two percent times five is ten percent right right just if you didn't reinvest your dividends you'd have the same buffer right yeah that's right so So the answer is for everybody out there, if you're doing a five year product, please, please, please do a 20% buffer, a 30% buffer, don't do a 10% buffer. And it doesn't, at some point, it doesn't make sense, because it's almost guaranteed to get hit, right? If you're doing a 50 year term, right? Like, yeah, I can

almost for sure, there's going to be a 50 drawdowns yeah i mean the bigger thing jeff on that is the at the s&p just buying the s&p if you're doing a five year ten percent buffer if that buffer has any cap the s&p because you're capturing the dividend will outperform it at every single point there's no point where that buffer will outperform so you're not getting the downside protection you're not getting as much upside. You just can't outperform it. So you need to go to a 20 or 30% buffer where you actually could outperform down. But yet those are still sold out there?

Those are available? Yeah, they're there. That's my PSA, by the way, for service announcement. We'll leave that for another time. Some of these hedge funds I know buy the other sides of these looking for a big, uh, and they call these knock-in structured notes. What, what's a knock-in structured note. Can you explain that for us? Yeah, sure. So, so in that kind of, uh,

light exotic world of products, um, a buffer, which we discussed for quite a bit, right, that's going to limit where you don't take first loss, but you take second loss. Yeah. A knock-in is what we used to call in our desk a barrier. So a knock-in and a barrier are kind of the same terminology. And what happens there is if the market goes down 10%, if it goes through 10%, you actually take the full loss. So let me explain that. If the market is down 5% at maturity, let's just use a barrier or knock-in at maturity. If the market's down 5%, both a buffer and a barrier will return the same. You're

going to take no loss. You'll get your principal back. If the market is down 12% at maturity, the buffer, you'll lose 2%. 12 minus 10 is 2. The barrier will lose 12%. And the question is, well, why would anybody do that? If you think about it, based on the probabilities and pricing and all, you'll get much better upside if you take a barrier, right? Because your downside's worse, so you get a better upside. So if you think about our example where you have a 10% buffer, and let's just say an 8% cap because volatility is low, right? Someone might look at that and say, oh, this is kind of anemic.

I don't want an 8% cap over the next year with a 10% buffer. What can I do? Well, one thing you could do is make it a 5% buffer. Another thing you may be able to do is do even like a 15% barrier, and I'll give you a 12% cap instead. And they'll be like, that's awesome. I have more protection. I have that first loss down to 15, and I'm getting a better cap, 12%. That's pretty exciting. Why? It's like, well, yeah, if the market's under 15, you actually lose 15, 15, right? Yeah. Back in the day, there used to be a lot of these, which were one touch. What one touch means, and people have to be really careful for these. Most of the products out there in retail in America are at maturity,

but a one touch is all the market needs to do is at any point in time, touch that down 15 and bam, the protection's gone. That's pretty crazy. So you need one point over a whole year where the market's down, let's say exactly 10% on a dime. It clicks it off, it's gone. It's like you just don't have any more protection, but you still have the cap. And so those are usually brought up in terms of like, if the market's down 25%, all these knock-ins are going to happen and it's going to accelerate the move.

How do you view this whole universe of buffered products, structured products, knock-ins, your product? Is it adding a risk to the overall market of like a kind of a liquidity cascade to the downside of hedging needing to happen as we get closer to these strikes? Yeah, so the, if you think about those barriers, the banks are generally long them, and the clients short them. And so it's really a windfall for the banks because what ends up happening typically in an option is it's one for one, meaning every percent the S&P moves down, there's really an exposure of between zero and one. But when you start dealing with

these barriers, it kind of like gathers. It's really funky, where all of a sudden, your exposure is way more than one. Because if you think about it, when you go through, right, if the market is down nine and a half, and you have a 10% barrier, right, if it closes there, the exposure is zero, right, there's no payout. But if it's 10 and a half, the payouts 10 and a half percent. So all of a sudden you, you just bust through that one and, and, you know, for option traders out there, volatility and gamma just explode beneficially in your favor. And it's like, it's, it's just, it's kind of crazy. So you won't have an issue. Um, you shouldn't have an issue, um, with, with like, it's not going to ruin it. to ruin, if anything, it'll kind of dampen volatility if there's tons of exposure of those products out there.

Buffers are so big out there. And again, the banks are long because the clients are short. So, you know, I don't think that's really going to, you know, play in, you know, their much. I don't think that's going to be. If anything, to me, if I look at concerns of areas where the market becomes more volatile, it's more of a market structure issue informed by fixed income, which to me, that structure is really broken. There's no exchange based markets for it. And so during COVID, I mean, there's a reason the government came in and said, we're going to support the whole fixed income.

It was just broken because of regulation. Banks don't have money to take down inventory. It's not worth it to them. There's no market maker community. And so fixed income is going to inform it. And then the other thing that's going to inform it are more people, uh, probably ultra high net worth and the like potentially taking leverage out, um, where banks have gotten, uh, much more, um, pointed, um, in saying, okay, you just went through, you have 24 hours to send over a wire, or we're just going to start selling way more aggressive. This is what I was looking for. Um, IB is really aggressive with that too even to the point that that probably informs skew right now in that market which is at historical highs because ib is basically being

really conservative with how they inform risk on their side um so i don't think it'll be options per se um if anything options may may actually help to stabilize a little bit more. It's going to be the items I stated that will exacerbate volatility and make it for a bit of a tougher ride through a tough period, let's say, within markets, in my opinion. That's not as good of a headline, though. The headline's better, right? There's trillions in structured notes and derivatives, and these are going to crash the whole system.

Yeah, right. Sorry. Let's see. see yeah there's smart people on the other side at the end of the day that don't want to crash their system much less the whole system right um yeah and i agree yeah yeah i was just gonna we talked about this with others of like it's much different than 10 years ago where in you could have a prop desk inside a bank that could go home with $100 million of short option exposure. And these days, there's risk check. Three strikes, you're out. It's a much tighter system overall, it feels like. But I'm sure there's some hidden risk somewhere we're missing.

And one other thing on your strategy that I'll loop back into your strategy part, but just as you're moving up and re-striking those puts, in theory, that creates extra drag, right? So is that what's bringing you off the full participation? And that's why it's less than full participation? Yeah, sure. So the reason we have less than full participation is that when we put on our option portfolio, you know, day one, which is synthetic exposure to the S&P up, we buy this downside put, we still have to finance that downside put that we purchase. And the way we finance it is the same way Buffett Notes finance it, which is that upside cap. Now, the difference for us is that as the markets go up, we raise our downside put and we raise our upside cap. So we're actually able to capture more. And what it really comes down to is really participation. So another thing I look at every day is what my, the option market calls it delta. I'm just going to,

it's not a perfect technical match, but I'll just call it beta, right? And so every day I look at the beta of my positions and the beta of my positions, I try to keep right around that 0.6, 0.65 level, right? And so what I do every single morning, we look at the analytics and analytics tell me, what is your max drop based on the options you have there? And that needs to be in the 10 to 12 range or better, right? And then I look at what's my beta on the upside. And generally, when I move up the put, I'm moving up the call as well to capture more. The next part you asked, Jeff, was about drag.

The beauty of the S&P market is it is so tight. I go out and I put everything mid market. I'm doing spreads and I'm putting it mid market. I don't even pay a basis point. Right. I'm not even paying a basis point. So the drag is really, really minimal. By the way, Jeff, just to just come down to the headline, I got a good headline for you, if you want. Yeah. We could go, you know, buffered strategy participants, beware of tail risk. How about that one? Yes, I like it. I meant more the drag of like, if there's puts to you, right, every time you're restriking your put, it's going to be a little more expensive than what you're earning on restriking your call that you're selling up top, right?

Yeah, that's right. Yeah. So if you think about that, right, that beta of that 0.6, right? So that's exactly right. So, you know, what ends up happening is if you have a full cap and ignoring the dividend, which we discussed, you could potentially capture 100% return, right? So let's say you have a cap of 8%. If the market goes up to 7%, ignoring the dividend, you caught 100% of the S&P return up to 7%. I could conceptually do it based on the path of the market, meaning if the market just eked up and accreted up 7% over the year, which is not realistic, I don't expect that to happen. We really wouldn't optimize and then recapture 100%. But more realistically, the market's going to zigzag up, right? And as it goes up, I'm going to rebalance higher, right, in order to really

limit downside, especially for those last people who might come in and capture some of it. And so it goes back to that beta we discussed, right? So if we're just really dealt for those option pros out there, it's Delta, right? Yeah. Yeah, Delta, exactly. Right. So we have a 6065 delta, right? So market goes up five, we're just round everything, market is a 5%, we capture 3%, we rebalance higher, right? There's a cost to that. And we're now in this new world where now there's limit down and a cap

up but we caught three of five and we basically locked it in which means we're not going to capture five of five if it remained at five for the rest of the time yeah right and some other people would call that kind of gamma scalping right like as it's moving up and you're capturing that uh that gamma that you earned on the upset. Anything else on the strategy before I move on? We just finished with some quick favorites. Yeah, I'd say, yeah, I'd say at the end of the day, it's right. Ultimately it's really a great product for, for retail advisors,

advisors and retail where, you know, it's, it's, it's tail risk, risk you know tail risk hedge with upside participation it's easy as that one ticker in any sort of model format yeah and my brain as you were talking about i think of it as like almost a tax loss harvesting thing even though they might not be losses but when that risk reward gets out of whack on your other buffers like yeah for sure add this you could kind of cancel replace right um yep yep yep that's how i like to think about it cool we'll just do some quick fire favorites to end up here favorite new york city pizza place oh wow joe's joe's pizza and uh i think they have a couple more but this one's right off

bleaker and sixth Avenue got a little triangle there. It's across the street best best place to go. It's like classic New York style. slice. That's, we were just talking about that with some friends last night. I'm like de Blasio never had a chance but then in his first week, he ate it with a fork and knife. Now you eat it. You try to drop a little grease on your shirt. You fold it, but it's by the slice. It's old school. Perfect crust, perfect sauce, perfect cheese. Done.

How much else do you need? I'm going to hit that up next time. Favorite New York restaurant, not a pizza place. Yeah, so that one's a really, really hard one because New York has so many great places i'll throw a couple out lark tuesday is my favorite italian um you know up here there's a place called bucaria which is pretty good tapas but truthfully i hardly go to a you know french was a great meal uh if you want french um i think if i go to a restaurant two three times a year

that's not kind of a local, you know, neighborhood-y place. It's a lot because there's just so many great places to go and try. Pearl's, if you want, you know, kind of seafood lobster roll, you know, they have, to me, the best fish sandwich in the city and you could only get it for lunch. You go down to Pearl's, you get, you start with some seafood, you get a fish sandwich and a beer, and it's pretty good. Done. We're going to come do a food tour with you. Yeah, let's do it. You're a big reader, right? So favorite investing book. Oh, investing. That's interesting. I'm going to say the way almost the better favorite investing book is more history.

So where I'll go with that is I just read a book called, I want to say it's The Silk Road. Let's see, do I have it right here? I just took it into my office, but I think it's like Franco Pan or something. What's really interesting there is he goes over the history of the Silk Road and adds economics to it. He adds points where there was like high levels of inflation, how things are informed. And to me, the best financial books are history books, just really understanding what's happened. I read a great book. I'm never going to remember it recently. I'll try to give it to you for the notes, but talked about when the Fed was created in the 20s. It's just a really,

really good, interesting read. And, you know, they say, you know, history doesn't repeat, it rhymes. It's really helpful to look back at history, just to understand where we've been, and, you know, where we'll probably go. I've got a good one for you. The prize by Daniel Juergens about oil markets. And it's mostly just history of like, from when they first found oil in Pennsylvania to why shell is called shell because they found it down in the Caribbean to like a guy who earned a quarter on every barrel of oil in saudi arabia so super interesting all these stories of how they became giants um if you're into the history side

uh favorite non-investing book um so a couple that come to mind um at this point i think everybody's read sapiens but if you haven't, read Sapiens by Yuval Harari and listen to him too. To me, he's amazing. There's another one called, the one I just read, which I think everybody should read is The Code Breakers by Isaacson, the guy who wrote the Jobs jobs book i mean the the technology that's coming out uh mrna and the whole bit is just it's it's crazy um one or two other there's one called humankind i think the author's rutgard uh it was kind of like discussing are humans inherently good or evil uh by the way it comes out on the side of good so that's a good thing um but but but it's a really good read and then last one i'll throw out there is a book called moonshots um and moonshots i think

is a really helpful one and i can't remember the name of the author but i don't think there's that many books called moonshots um something with an s um but he uh he writes about big ideas and so i think it's really allows and informs out of the box thinking. And it was a really enjoyable read. Awesome. Where do you find time to read all these books with three kids and doing all these options trades? Yeah, it's hard,

but you know, you gotta find, you gotta find the time. You gotta find the time. So a lot of times at night, you know, way to kind of relax. And you're a bit of a traveler too.

So favorite spot you've traveled to? Favorite spot. You know, way to kind of relax. And you're a bit of a traveler too. So favorite spot you've traveled to? Favorite spot, you know, so it's interesting. A lot of people now are going to Iceland. I went back in 2002. I got lucky. It was a trip I was doing where I was going to England and France and Iceland was running a special, probably to get people to know that Iceland existed,

where you got a free stopover on your way there or back. So I did a free stopover on the way back. And it was just really cool, really, really different. I think I noted to you that I love the concept of traveling. I've traveled a lot through Europe. I haven't gone to Asia. I have a really good friend in Australia. I got to get there. So my traveling isn't as good as it should be so hopefully you know I have time to take an hour or two and read a book but I haven't gotten that like big big big big time to where I could kind of you know get to some some of the rest of the world but but it's on the agenda I highly recommend Australia and the the western coast too it's beautiful

um and my friends in Perth yeah perfect uh and lastly ask all our guests favorite star wars character okay that's a great one um so my favorite character is darth vader um the reason that's my favorite character is that my family is obsessed with star wars and and i and i'll probably turn off like easily half your listeners, I don't get it. And so one of the last movies we went to, I said, this is it. I'm not coming back to a Star Wars movie. The kids

are old enough where I don't have to be the one on bathroom and lap duty. I'm done. I'm gone. And they all laughed at me because they're like, yeah, you just had to do nine of them. So I take the bed. Yeah, you know, they also, I'm not into the sci-fi, so they love Harry Potter too. Um, I'm a Slytherin there. I generally side with the bad guys, uh, when I can. So I love it. Um, all right, Joe, this has been fun.

Thanks so much for your time. Uh, we'll put where to get ahold of you in the show notes, right? You read a blog as well. So, um, we'll get all that good info in there and follow up with Joe. I really appreciate it, Jeff. It was great speaking with you today. You too. Have a great weekend. 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.

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