The Derivative - Covering Calls and Charting Curves with Jay Soloff of Investors Alley

Episode Date: July 14, 2022

You may know this week's guest as a Kansas City Chief and sometime Royals fan on Twitter, but he has more than one connection to Kansas City. Jay Soloff (@jsoloff), an options volatility analyst, former CBOE market maker, pirate, and seller of uncapped forward variance swaps, joins us this week to discuss covering calls and charting curves. Jay brings an exciting twist to this episode and talks about options education and where to find the premium, is the VIX broken (did we create a monster? + curve doodles), retail vs. investing (an exclusive look into what retail investors are getting wrong), and more. Plus, Jay gets put into the hot seat, where he provides his take on how The Fed is doing — SEND IT! Chapters: 0:00-01:09 = Intro 01:10-06:18 = Chiefs? Royals? What it takes to be a KC sports fan 06:19-20:02 = Option trading at KC Board of trade, being a market maker & Pit language 20:03-36:48 = Is the VIX broken? The VIX: Did we create a monster? VIX curve doodles 36:49-50:14 = Options education - Find the premium! 50:15-59:24 = Retail vs Investing w/ pros & what are retail investors getting wrong? 59:25-01:05:57 = Hottest Take: The Fed's doing pretty good Follow along with Jay on Twitter @jsoloff and for more information check out investorsalley.com 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. 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

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. Happy Bastille Day, everyone. I'm about 50 hours of watch time into the tour de france so bonjour and bienvenue stay tuned to this channel the rest of july we've got adam chukuk coming on to talk through some private equity stuff then working to get surgify and ben eifert scheduled for a unique classroom type format should be fun onto this episode where jay soloff he of the vix curve doodles and kc chiefs fandom helped us out on short notice and came talking market making to education, covered calls to financial innovation.

Send it. This episode is brought to you by RCM's Managed Futures Group. Go to rcmalts.com to learn more about how we help investors access unique hedge fund strategies. And now, back to the show. okay everyone we're here with jay sola welcome jay hey thanks jeff no worries did i get your last name correct yes so long um and where in the world are you looks like you're in the world's best conference room but everyone left for the day. Yeah, sunny conference room. Actually, I'm in Gilbert, Arizona, which is a suburb of Phoenix. Gilbert. Which way is that?

Southeast. So due south of Mesa. All right. On the way to Tucson? On the way to Tucson, exactly. My dad lives out in Tucson. So maybe next time I go out we'll stop have a beer absolutely um what do you golf out there i go so i went to grad school got my mba

at arizona state and we golfed regularly but then i hurt my lower back pretty soon after and i can't swing a club anymore which is fine because my swing was terrible anyway. So how'd you hurt your back? I just, you know, years of doing the wrong thing, basically. I mean, weightlifting and football and stuff that I was never any good at. And I just probably didn't do things properly for a very long time. And it caught up with me. I have a bad back, which I attribute to those two same exact things, weightlifting and football.

I'm like, I have to do these exercises for the rest of my life every night. They're like, pretty much like, come on, it's no good. And so what's the Kansas City affiliation? You're from there originally? Yeah. Yeah. I grew up, uh, I grew up in Kansas city. Um, I've been in Arizona for 20 years, but, uh, up until just recently I had been in Kansas city, the longest portion of, of my life. So basically Kansas city, Chicago, and then Arizona. Um, but from your Twitter avatar, rabid chiefs fan. Yeah. Chiefs and Royals. I mean, that's, uh, you don't meet many Royals fans, but okay. Yeah. And for the longest time, my avatar was the Royals, but I was very disappointed in them this year. They were supposed to be competitive this year and they're not. And so

I'm like, you know what? I'm going to give the Chiefs a run for a while. But yeah, I mean, Royals, that's what I grew up watching and then you know chiefs i mean every everybody in kansas city is a chiefs fan of course and even you ever seen those like nfl fan maps of the whole country right and like the whole center of the country used to be denver really all the dakotas and montanas but i bet a lot of that's turning chiefs these days probably yeah yeah when i was a kid it was elway. I mean, he would always beat the Chiefs. So we were joking around on Twitter. What are your thoughts?

Tyreek Hill's gone to Miami. They broke up the trio. Is that going to be good, bad, indifferent? Yeah, my initial reaction was definitely negative. And then I saw he signed for like 30 million a year and i'm like you know there's so much the chiefs could do with that and they ended up having basically an ideal draft and and you know a couple solid free agent signings and it's one of those things where i feel like mahomes elevates elevates everyone on the team

so i think they'll be all right and if you you add your choice, you're there in Kyler Murray territory, Mahomes or Kyler Murray. I still, I mean, I like, I like Kyler Murray, but Mahomes, I mean, you know, I, to me that's, he's the top quarterback versus anyone. You know, I, I just don't think that it's particularly close. I mean, you have Josh Allen maybe, but I'm, I'm, I'm a huge homes fan. I mean, what's not to like, but I feel like that trio should have gotten what they get one championship

right of my homes, Kelsey and Tyree. Yeah. One champion. I mean, you know, the, the they had a, they had, they had a pretty bad game in the super bowl against Tampa. And then this year was the early exit but um i don't think they're done you know that reed reed is reed always keeps them competitive yeah i was just pulling up my fan duel account here they're still plus 950 to win the super bowl they the favorites yeah or they're the third bills oh bucks tampa and then casey then the rams so they're still got rid of him they're still favored over the rams um but anyway yeah

i i've never been to a game how are the games awesome yeah you know and and i pretty much only went um for the playoff games when i lived there uh And it was always a, you know, a fantastic experience. I prefer generally to watch it on TV. I mean, weather can get pretty, pretty cruddy in Kansas city. And so I preferred to generally watch them at home, but I, you know, we'd always go to the playoff games and back, like even when Joe Montana was there and it's, I mean, it's an amazing environment.

You know, it makes you forget about the cold and the, you know, the rain or snow or whatever it happens to be doing. Awesome. Well, I'm jealous being a lifelong Bears fan who's never had a quarterback of that caliber. So share the love, share the wealth. So you do some options education now, but before that, you got your start in the option space on the floor, CBOE floor? Yeah. And actually, one more relevant connection to Kansas City. I actually started on the Kansas City Board of Trade, which

most people don't even really know about, but it was a legit... Yeah, wheat, exactly. Yeah. I mean, and you're a futures guy, so... But yeah, I mean, wheat was really big there. There was a couple other products, but wheat was really the reason it existed. And I didn't know, I got my econ degree from University of Illinois, and I really had no idea what I wanted to do. And my dad knew the CEO of the Kansas City Board of Trade. And he's like, hey, why don't you, you're in economics, why don't you go work for the Board of Trade? So yeah, so I went and actually worked for the exchange like you know pit reporting and collecting data and that sort of thing and and then and then i'm like i want to do this and they're like oh yeah well you need to go to chicago because there are no jobs here so i think

kc was one of the first to go electronic yeah they got purchased by um i was at the cbot or the cme what what and and then they they moved all the same thing now but yeah yeah it's all the same thing it was it hadn't merged yet but it was about to and yeah that was like 2017 or something and then they it had already gone mostly electronic at that point anyways but and i never actually realized there was an actual pit there um how big the how big was the building yeah it was it was pretty I mean, there were basically two kind of bigger, there was this really big pit for wheat. And then there was another bigger area. And when I was down there, it was half kind of the value line.

So people don't realize that the first actual derivatives on an index, on a stock index, actually started in Kansas City on the value line. But then soon after, S&P decided they wanted to get in that game, and they obviously had a much more popular product. But actually, that happened. The value line index on the Kansas City border trade was actually the first one, And most people had no idea that that's actually your first tradable index future. And it stuck around for a while. There's also like a natural gas product that didn't really trade. And so, I mean, the whole thing was like, you know, picture two pits from the CBOT, like a room that, you know, that's about the size of it. Preston Pyshko, And if we need one to get one of my ag guys on here,

I can't remember exactly which weed is which, right?'s hard red winter weed i think it's that's kansas city yeah that's the kansas city version all right and yeah because winter is minneapolis yeah soft winter is chicago well there's soft or spring spring is uh spring is minneapolis yeah and then come after us on twitter we're butchering this but yeah no we no, we are. But Kansas is like the, the number one, like the biggest provider in the world of like the hard red winter wheat. So that's why it got developed there. So, um, yeah. Um, so then onto Chicago, into the CBOE pit, what did you do?

So you weren't, you were just working for the exchange. You weren't trading. Right. And then you get to Chicago and you get thrown in the fire. Yeah. Obviously, I wanted to trade and I just kind of sat, did what you had to do back in the days was just knock on doors and hand out resumes. And someone needed a clerk. It was Blackhawk Financial, which is just a small SPX options trading firm that happened to need a clerk. So then that was it that I spent a year and a half or so clerking and setting prices for the index

group. And then we kind of were full on our number of people we could send in the index. So they started sending new traders out to the single stocks, single stock options. So for me, it was Amazon and WorldCom were the big ones that I traded. WorldCom. Yeah. What year is this? 01-ish? This was 99, 2000, like around that. Okay. So it's rocking and rolling. Yeah. It was. Yeah. And then it died. Yeah. So it was like right, right before the, you know, the dot-com bust and then the opening of electronic exchanges. And were you had the sheets in your pocket there or were you had a handheld? exchange started handing out handhelds for entering trades. But when I was a clerk, literally I was taking tickets from my traders and entering manually into the computer and

printing out reports and running them back to them. So that- To get his Greeks and whatnot of like, okay, let me plug you in and see where you're at. Exactly. They had a little matrix of there's a risk based on prices and volatility. And I had this big thing of sheets that I brought into the pit. And my traders in the SBX had, when I was a clerk, had these massive two foot long sheets that had all these prices. And then they'd go out there and 30 minutes later, they'd be like, all right, you need to go redo the curve because everything's changed. Can you print out some new sheets and bring them back? Run across the street to the office and print them and run them back.

Yeah. So I was a clerk in the bond futures pit and my broker where I was back, my back's to him and I'm staring at the options pit bond options. So they were arbing in their orders to Delta hedge and whatnot to me. But yeah, I tell people all the time like the amount of paper on these trading floors would blow your mind like you can't even fathom right at the end of the day there's two inches of paper on the ground but those option guys always and for those of you listening not on youtube right i'm putting this huge sleeve of paper in my pocket and they'd have all the strikes all the shocks each way ball moves price moves to see where their models thought the option should be priced given those moves

yeah computers didn't have the the you know handheld computers if they existed did not have the computing power to be able to do that sort of thing back then right now you pull up your thinker swim or yeah you can literally do it on your phone now right so you you know all the art you know so so you had all the arbing and all that i had to learn that too it was a lost art right but we'll do it here for the youtube palm towards you is buying one two three four five, turn your hand sideways, six, seven, eight, nine on your head, 10, 11, 12, 14, and then palm away is selling, selling five and then hundreds and thousands on the chin. The, uh, but I actually almost went, uh, I was supposed to go in the bond options pit. Actually that was, uh, and then at the last minute, they decided to put me into

equity. So actually, I was over there scouting that territory, maybe around the time that you were down there. Yeah. That would be, I'd love to do a little, once we get a time machine, we'll grab some super good prop trader these days, right? Who's so screen-based, pluck him into the middle of the bond options pit in circa like 98. He'd think he was in a different alien universe. You had to learn a new language with your hands. You had to write everything on paper. You had to keep track of your positions in your head on cards. Preston Pyshko And you had to do the math in your head. That's what they used to tell clerks. We used to sit there and have mock trading where they would give spreads and

you'd have to do, and things traded in 16ths. And so I had to memorize all the decimals for 16ths and be able to quickly do that math in my head. That's what I was good at. I'm not even sure if I would make it as a market maker today. I don't have a computer science degree. I don't have a PhD in math. I was really good at quick math. I could think on my feet, but that's not really a skill that you need anymore.

Yeah. The human computer. And so I was thinking about this, if you worked as a market maker, right? I'm always talking to guys who were at prop firms or were market makers, but it's always past tense. Very rarely are there guys, unless they now own the prop firms that are like, oh, I've been at a prop firm 20 years, or I've been at a market maker 20 years. Why do you think that is? Yeah. Well, if it's anything like the experience I had, it's an amazing experience, but it's very draining, right? Like I had a lot of sleepless nights. I had a lot of mornings where I woke up like sweating over what Amazon was going to be doing in the after hours. And do I need to get to the floor at six in the morning and trade before the

market opens? I mean, it's a little different now with screen trading and also you have algorithms that can handle a lot of your action. But back then it was a physical thing. You were standing all day. Sometimes you'd be done after a busy day and you'd be exhausted. You wouldn't want to do anything. But I think it's just a stressful thing. And a lot of people who started on the floor may have moved off floor. So either you burn out and you go a different direction. You start on the floor, then go off the floor. And if you're managed to be around that long, you probably made enough money where you could probably do whatever you want, like switch careers or just get in. It's almost NFL-ish, right? Why am I going in there and getting my

head bashed in every day? If I've made enough money, just get out of the game. But small market-making firms no longer exist. There's a handful of market makers, and it's a very different... I dealt with basically two stocks with a maximum of five. Now you can trade a thousand because of the software and technology. So it's a different game. You could probably be a market maker long-term, although it's still from the people I've talked to, it's still plenty stressful. I mean, it's just not maybe the sort of thing that mentally you can handle over the course of 10 or 20 years.

Do you ever go up against some of our other podcasts on here? Jem Carson or Noel Smith? Jem was down there when I was and knows some of the same people that I know, but I never met him. I would have been a I think he got on, he might have been gone on when I was a trader, but I was already

away from the SBX at that point. There's definitely some other Twitter presences that were Dennis Davitt. He was actually in the Amazon pit after I was, and he was in the SBX there. He was in the same place and maybe I knew of him in passing. And there's a few people definitely that I probably interacted with, but I didn't really know till later on in life. And what had you transitioned from moving off to Florida? So did you still trade your own account when you left the floor? No, it was actually kind of weird and unexpected path, like a volume dryer. So WorldCom started going downhill. They were starting to get in trouble. They didn't disappear till 2004, but they already started to have trouble around like 99, 2000. So

volume started drying up there. Amazon just before the dot-com bus started, went from whatever was high of 110 back down to like 10. And there was no options volume. And I wasn't really sure. And this was my first pit and there was no volume and I was super stressed out. I'm like, how am I going to make money? And the specialist in the pit was Eddie Boyle, who's now actually the CEO of Box, which is the exchange that also has a little floor there in Chicago. He was like, hey, some guys were, when I was wrapping up my position, I'm like saying, I'm not really sure what I'm going to do. He's like, Hey, some guys were, when I was wrapping up my position, I'm like saying, I'm not really sure what I'm going to do. He's like, well, there's these guys from Switzerland with this really cool market-making software. And that's the direction the markets are heading.

Maybe you should talk to them. And they were talking to me about needing someone who understood American markets. And so I contacted them and they hired me. They're like, oh yeah, we could use someone who really understands that you've been there and done that. So I went to Wall Street for about a year and then back to Chicago with these guys acting, helping basically on the floor of Bear, JP Morgan, stuff like working with these traders on how we can improve the software. So that was cool because I got to see the off floor stuff and I wasn't trading. I was more of like a software consultant and yeah. Yeah. So what happened to that group? They didn't make it. Yeah, they did. They're still around. I had some kind of weird desire to get my MBA after five years from undergrad. I honestly, to this day, I don't really know. I think maybe I was on the business side and the software area and I'm like, you know

what? Maybe I want to manage a company. I don't know. I don't remember what I was on the business side and the software area. And I'm like, you know what, maybe I want to manage a company. I don't, I don't know. I don't remember what I was thinking, but also I was tired of winters. And then I, and I applied to one place, I applied to Arizona state. So I'm like, I want to go someplace that's warm. And, um, you know, and they had a pretty decent MBA program. So that, uh, yeah. Who's your coach coach bobby hurley is he the basketball coach yeah that's right he uh that's pretty relatively recent i i you know i still don't really follow i'd follow uh u of i uh illinois where i went to undergrad but i never really got into asu sports that much herm edwards might be their football coach changing gears a little bit

so I've been seeing a lot of Vol Twit and less so those pros but more so some tangential people being like CBOE should have never created the VIX the VIX should be at 45 why is the VIX only up VIX should be at 45.

Why is the VIX only up 10%? So a lot of these like, might call them dumb comments for lack of a better word, but just weigh in if you can on, you know, what's your take? Why isn't VIX at 45 with the markets down? Is it broken? Give us your thoughts. Yeah, you know, and it's, you know, and I, you know, I hesitate to say, I mean, I think i you know and and it's you know and i i you know i hesitate to to say i mean i i

think you know there are some you know certainly some some very uh some comments on the vix where people clearly just don't understand the product i mean a lot of those but on the other hand like the vix doesn't necessarily i mean the vix can do weird things and so sometimes they're you know sometimes people are right to ask questions, but a lot of times I think it shows a lack of understanding. First of all, I think it was, I'm a big fan of financial innovation. Now that I work mostly with retail, I like that there's access to stuff that you can trade, VIX ETPs, VIX ETFs, things like that. The fact that that stuff exists, the fact that volatility is almost its own asset class. I mean,

I think these were all great innovations. I think you should be able to trade just about anything as long as you can understand it. So I've always been on that kind of side of the fence. Except Bitcoin ETFs, if you're the SEC. Yeah, I mean, Bitcoin ETFs. We'll save that for another pod, yeah. Yeah, I mean, and I'm not a fan of cryptocurrency per se, but yeah, you should be able to trade it if it's something that's out there and liquid,

then you should be able to trade it. That's kind of my belief. You know, Ben Eifert, I tell him we should have a, a variant, a variant swap ETF. And, uh, um, but that part I'm kidding about those aren't, but, um, but, uh, yeah. So the, the question, I mean, there's a lot of things that, that go into it, right. There's, there's the supply demand aspect of it, of just the SPX options themselves.

But I mean, you also have to take into account what's going on with realized volatility. So I mean, for instance, if you look over the last 10 days, I think we're at like 16. And although it's not a direct comparison of realized volatility and the VIX, it's a ballpark, right? If the VIX is at 26 or whatever, and the last 10 days we've been trading at 16, something's going to give there, right? Eventually now, if the VIX is forward looking, and so if you're looking at something like back in 2020, you might look at the presidential election, you knew it was coming down the pipeline. So no matter how slow the market was, VIX was staying at a certain level because options had to price in that uncertainty of the election.

But during the summer months, you're heading to the summer months and realize volatility slows down, even if the market starts moving a lot, it doesn't necessarily mean that people are really going to buy into it. Another thing, and this has been talked about probably ad nauseum, but there's a lot of front month options selling as part of systematic programs, right? A lot of put writing, a lot of covered call action that happens even at the pension level. So that part is the demand. The demand is there to sell options. So that's going to also kind of depress prices in the front month. So I mean, there's these other components that go in. There's institutional flows. There's forward-looking.

There's what the market is actually doing. And all these things kind of have to be taken into account when you're looking at this stuff. Right, which is sort of the gripe, I think, for a lot of people of like, you gave us this one indicator to understand this stuff. And then all the explanations are like, well, it's more than just one indicator. It's a ton of nuance involved in there. So it's kind of like, should we even be looking at that if there's so much nuance that it's hard to even understand it as a single indicator?

So it's like, yeah, it works most of the time, some of the time. Right, right. I mean, sometimes it does what you expect other times. Yeah, you're right. Like it can be very nuanced. So if it was easy to understand, to understand, just like stock picking, stock picking, you may guess what you think a stock should do. It doesn't mean it's going to do it. If any of that stuff was easy, then no one would make any money there, which is hard to do

anyways. How did you guys use VIX back in the day as a market maker? Were you using it all or was it more single name? No. We did actually look at it, although it wasn't like, I don't even know if it, I mean, I think it was publicly disseminated. It definitely wasn't tradable, but we were aware of it. We would look at it. It might've still been VXO or whatever they call it. Now it might've been the one that was based on the OEX. I can't remember when they changed that over. So it used to, SP100 used to be how they calculated. That used to be the bigger product.

And then they switched it over to S&P 500. And then they went from a, and then they also changed the methodology to the variant swap methodology. So it was a little bit different back then. I don't remember the exact timeline. They changed the product and then they changed the calculation from basically an at-the-money straddle to a variance swap. And so that all happened around the time I was down there.

But it was something we kept an eye on for sure. And dig into that a little bit. We're delving into Ben Eifert territory here, but the at-the-money straddle versus the variance swap, dig into that a little if you could. Yeah, sure. So there's certainly nothing wrong with looking at an at-the-money straddle that gives you your general idea of what your implied volatility is for any product. But there are other factors involved with a straddle, particularly if you move away from it, it no longer really reflects. Then you're dealing with basically options.

You move away from the straddle and you're not dealing with an accurate picture of what volatility is doing anymore. So I'm trying to give an example. If we're at 3,800 in the S&P, what's my at the money straddle look like? I mean, I'm not, you know, I actually haven't looked in a long time. I'm not sure what it's priced. What am I buying and selling? I'm saying.

Yeah. So you're buying and selling. I haven't, I don't even I'm saying. Luke Gromen Yeah. So you're buying and selling. I don't even know what the prices are anymore, but yeah, you're buying and selling this. So it's 3,800. You're buying and selling the 3,800 call and put. So you're buying one each of the call and the put. That's funny. I have no idea what the straddles trade at these days. Preston Pyshko Last time I looked, it might've been like 21 or something um since light but um but those things yeah that's that sounds about it but but those things um you know they it's a convex when you're buying you know you're buying that straddle it's it's a convex product so as you

move away from it you have these other factors gamma and you have these things that are impacting it. And as you move away, it's just no longer necessarily an indicator of what actual wings, so to speak, so the out of the money options on the call and put side, as those, as those change, those can change. Sometimes you'll have the money not change that much and the wings will change a lot. Like that could be reflected in the variant swap calculation, where if you just have the straddle, it's not, it may or may not be reflected in there. And there's nothing, again, there's nothing wrong with using a straddle. It's just, it's not really a pure measure of volatility where the VIX based on a variant swap and basically the way that any new volatility index for the most part, when they come out like spikes or whatever, which uses SPY, it's a variant swap calculation. Now, if you like VolQ, which is for NASDAQ, is a straddle. They wanted theirs to be the, that's Scott Nations, they wanted theirs to be the

straddle. So I mean, there was a conscious decision though, right? That's the way they wanted to show, express there. Preston Pysh, MD, MPH And to me, that's more how retail thinks about it, right? I think they think of it more, or I think it would help them better understand if there were, maybe there should be two products, right? Of like VolQ in the S&P, S&P, SPQ, and VIX, or VIXQ or something. We'll come up with the name, but whatever. I'm like, okay, I have these two measures. Here's basically the floating strike volatility number, and here's the fixed strike volatility number, right? That's kind of what we're saying of like, if I bought volatility at the beginning of the month with this straddle, did I make or

lose money, right? Did it expand or contract from where I bought it versus the floating strike is where a lot of that nuance I think is that people have trouble understanding. Yeah. And I'm sure that someone like Ben Eifert could explain it a lot more. I mean, this is stuff that he deals with on a regular basis. He could probably explain it to where it goes into encyclopedia somewhere. But yeah, I mean, I think that's a good way of looking at it. Well, we'll bring it back to him later. And so kind of like, I don't know if I'm pulling that thread a little more of like,

do you think we created a monster with the VIX? Or you're thinking overall, it's a good thing. Let people have the ability to trade it. Yeah, no, I think it's a good thing. I think volatility, personally, I think volatility is easier to trade than stock direction because it follows characteristics that are more predictable. Clustering, mean reversion, it's got some stuff that you can do. And so if you study it, I think there's more opportunity there. And used properly with proper risk management,

I think it's a really good addition to a portfolio. And particularly now, we're going into potentially an era of low expected returns from bonds, from stocks, and you need to get into alternatives to really juice up your portfolio. And that's something like managed futures or maybe some style premia, momentum, things like that. But then one of those is carry and short volatility is essentially carry. So I mean, specifically speaking to short volatility, I think something like that is extremely important. Again, maybe not for a person just learning to trade, but as you start to get more sophisticated, and I know plenty of retail traders who are definitely sophisticated enough to do some basic short volatility strategies. I think that's something that should be a part of just about every portfolio when you're trying to hit certain yield numbers,

right? Or certain percentage return numbers. Yeah. And then the glory is of course like a feb 18 happens and and you get right terminal break even trade some would say so you can collect that collect that collect that and then boom something happens and you lose all of the previous gains yeah that that's the counter but i mean you know something like um you know something like like covered calls is not really going to have that kind of risk and will potentially smooth your returns along the way. And I don't disagree with you in the sense like, I mean, I wouldn't necessarily just do a straight up put writing program and set it and forget it. Maybe you can if you're a pension fund and your view is very long-term and you need to meet cash obligations and things like that. But I mean, something like covered calls,

like it wouldn't really, Feb 18th would have been a blip. I'm sorry, Feb 18 would have been a blip. Yeah, exactly. Well, they would have got called. No. Yeah. Wouldn't have even really matter um and then so you do a lot of these uh vicks curve doodles i don't know if anyone's ever seen them go check out jay's twitter at j-a-s-o-l-o-f-f um go through the timeline you'll see some of these what tell us a couple of your favorites um doodles there on the curve yeah you know You know, it was funny. I just, there, there was, you know, I was looking at Vic central and like one of them looked like a, like the Batmobile or something. So I just kind of drew that on there for fun and I posted it and it got like a ton of likes, right? I got all of a sudden it was being retweeted. I'm like,

why do people like this stuff? There's nothing. But, but that was it retweeted. I'm like, why do people like this stuff? There's nothing. But, but that was it. Right. So I'm like, all right, I got to try this a few times. So I think I did. I think sort of the quintessential one was like a dinosaur, you know, eating something, you know, with teeth and, and yeah. And, and yeah. So then, you know, Ben and, and some, and, you know, Jim Carroll, some of the other guys in the volatility space, you know, whenever it's kind of a funky curve shape, they're like, hey, you should draw something here.

And I started just keeping an eye on it whenever I saw something and it popped in my head. Hey, that looks like a flying saucer or that looks like a snake or something. And I so, yeah, I try not to take myself too seriously. Here's one of the recent unladen VIX tortoise. Yeah, there's been some Monty Python references floating around for a while. But then how do you think about the curve and how it's looking now versus the past? It's had some weird shapes to it this year, right? Yeah.

I mean, but a lot of that, I mean, a lot of the, you know, a lot of the stuff that I draw on is like a zoomed in. And if you zoom out, it's basically like a straight line. And, but we're back to, you know, we're back to kind of standard contango. I think you're, you're seeing the vol selling programs you know in full swing again um with the you know the reason why we're we're sloping up uh you know you have that dip in december it's funny because every time a year every this time a year uh there's always all the comments on twitter about like what's going on in december are people like is it the

election and it's like no no it's just a day count convention. There are less trading days in December. And it always makes this bump in the curve. It's good to see, I think, that people are actually looking at the term structure and stuff like that and saying, hey, what's fixed trying to say about the market and actually thinking about it, even if it's not obvious. I like to see that, hey, what's this saying? This is another point of analysis. I like to have as many possible data points that could be relevant. So when people are asking questions, I think that's really good. But again, as new people get in, you see the same questions.

What's going on in December? Is it broken? No, no, no, no. Just day count convention. And dive into that a little more. I don't know if people understand that. So it's all in the math of the the math part, like fewer trading days, lower number, you know, it's not, yeah, it's a simple like mathematical property almost of the equation. Right. If you put the variance there. So if you moved 2% a day divided by X days, you have such and such variance. If you have the lower the denominator the lower the total number yeah um interesting so right and then that's where retail could get screwed up like oh look at it i found a little gem here it's it's trading at a discount uh nope it's trading mathematically where it should be trading right right and and it'll be priced in and even though it it's you know we could say well maybe i, maybe I sell November by December, blah, blah.

No, that stuff is already priced in, right? So it doesn't mean it won't work, but if it works, it's going to work for a different reason. Switching gears here. So a lot of your stuff's on options education. I ask anyone with even slight options knowledge of where do you stand on the whole gamma hedging dealer? Gamma hedging is the one force that rules all the market galaxy. What's your stance on that? So if we, if we give it a scale out of 10 on importance, I'd probably give it a five.

And I know that's kind of a cop-out, but sometimes it is important and sometimes it isn't. Right. Because I think that the reason that it's not is because there's always so much going on beneath the surface that we don't see. And you might see something that shows up in the listed markets that's related to something that's happening off the market OTC. And so you're maybe seeing part of a much more complex thing going on. And that probably happens quite a bit. On the other hand, it's important for something like JP Morgan hedge equity. This is another thing that you see on Twitter these days.

Every quarter, you have this whatever $15 billion fund that does a put spread collar. Basically, they're selling calls and they're buying a put spread and they roll that on $15 billion of SPX options and they're rolling that every quarter. Everyone knows it's coming and it kind of changes the prices of the curve. That's where it's important, right? Like if you have a known, and there's not too many of those, most people don't want it to be known. At the same time, that seemed like a bit of a nothing burger so far, right? Like everyone gets all hyped up for it and then they've done some then they basically synthetically rolled their strike by doing different strikes and i think well they caught on to the fact right that you know i'm sure that after you know after a while

of doing it and people you know changing the pricing because they knew it was coming i think they've they've started to adjust or maybe not do it all at once or do it synthetically or whatever you know i'm sure that they don't uh they don't appreciate people front running the trade. I mean, when it was small, it probably didn't matter. But then when it's publicized on Twitter and you can have millions of people potentially trading ahead of it. But there are situations like that where I think like in the ETF space, you have space, like, you know, you have cover call ETFs and some of them have gotten quite big and you'll see, you know, that by in their prospectus that,

you know, a week before expiration, they start rolling the 3% out of the money call or whatever. So, I mean, there are things out there where, you know, seeing that flow matters and, you know, certainly, you know, we saw what happened during the meme stock, the whole gamma squeeze stuff with, with GameStop and, and AMC and, and how the dealer hedging, you know, mattered, but that mattered for a very short time and then they adjusted. Right. So, I mean, anything that happens there is pretty quickly, you know, pretty quickly take use for, the market makers will find a way to use it to their advantage, basically.

It's the mantra of this podcast. It's complicated, right? It works some of the time, some of the time. And so coming back to options, what do you write mostly on this kind of retail stuff, like covered calls, selling puts, straddles, condors, what, what kind of your, is your, uh, go-to on the education side? What are you making sure people know about the option space?

Yeah. You know, so I started out being, you know, when I got into this industry thinking like, Hey, I know about sophisticated stuff. I used to be a floor trader. Let me share with you the sophisticated stuff because you're not going to get it elsewhere. And I thought that was pretty cool. But it turns out that it's just like, there's only, and it's grown over time, but there's just not that many people that really want to get into the weeds of volatility and fancy trades and even stuff like iron condors. That's the very first... So I have started out with just newsletters recommending trade ideas and I did it with iron condors and it was cool and there was a hundred people very interested in it, but it's just like that was the limit. It never grew. There was a hundred people interested in it, but it's just like, that was like the limit. It never grew. There was, you know, like a hundred people interested in trading iron condors, you know? And, and then I, but ultimately what changed, I think over time, just, just my own knowledge of the industry and

reading about it. And I've, and if you know, Ewan Sinclair, he's written several, you know, he's written three books, three very popular books on option trading. And I've started doing webinars with him. And over the years, I've learned a lot of what I know about options from Ewan and his books. And when there were people on Twitter basically saying, cover calls, it's a garbage strategy. It's not what people make it out to be. And Ewan was there saying, no, it's actually really good,

particularly for retail, because it's something that they can easily do. And it's something that takes advantage of the equity risk premium, basically owning stocks and also the volatility risk premium, selling options and doing so in a relatively safe manner. And so listening to him, I'm like, I mean, I've kind of felt that way. And I, maybe I was like skeptical because of all the comments I was reading on Twitter, but then I have like, you know, this, you know, my mentor basically saying, no, no, that's fine. So, So I've really gotten into that. I think the last couple of years have focused on cover calls or similar type stuff and how retail can use it to

improve themselves without taking on too much risk, improve their portfolio. And so what would you say, right? The cons on cover calls are like, well, just do less equity, right? It's basically just you're reducing your equity exposure. Yeah, no, exactly. Yeah. I mean, if you're in a runaway bull market, you're going to underperform stocks. I'm not a big fan of using on indexes because,es or popular index products like SPX because the premiums have been sold. So it's such a popular trade that it's just not worth it. You don't even need a runaway bull market, any sort of bull market, and you probably would be doing better just holding it. But focusing on single stocks and doing kind of a mix of single stocks with high premiums, but

not a whole ton of volatility. I mean, obviously that sounds like an oxymoron, high premiums, but not a ton of volatility. But there's a middle ground where you can find decent premiums without finding something that has a chance of going to zero, right? There's a middle ground there. Yeah. That seems counterintuitive, right? I feel like I want to sell calls on the super volatile stock. You do to some extent, but only if you... I mean, you don't want to sell something that's going to go from 50 to 100 in a month or something that's going to go from 50 to 25. But if you think it's going to go from 50 to 60, that's still relatively volatile, let's say in just a month period. And there might be decent premiums on it, but you're also not going to... It's the sort of

thing where you can capture some upside without leaving too much on the table, but also not the sort of stock that's going to have the bottom fall out because they've sold one electric vehicle and they're worth $2 billion. We got a handful of those. So do you view it more as an income producing strategy or like an equity replacement or absolute return? What do you view the covered call strategy as of what bucket would I put it in? Preston Pyshko Larson You know, again, like you'll hear naysayers, but I do think it is an income type of strategy. I mean, it's in the sense that I focus on the premiums. So while I enjoy stock picking,

it's not my specialty. Whatever, I went to business school. I know how to analyze companies, but that's not what I specialize in. What I know about is volatility and option premiums. And so I really try to focus on that and find these premiums that I feel are overvalued. And then I look at the stock and say, okay, now is this company going to be, is their biggest revenue generator in Bitcoin or is on tires? And the one with tires is not going to zero. They may have a rough period, but they're not going out of business. And I always view this a little weird because in my brain, just what I've done over the years personally, I'm like a stock gets to a certain point. I feel it's getting riskier. Then I sell the calls. You're talking about more of just, you find a premium you don't like, you buy the stock, sell the call simultaneously.

So what are the differences there? If you're saying as a strategy, as an income producer, find the premium and the stocks basically to make it a Delta neutral trade, essentially. Yeah. The stock is your collateral, so you can collect the premium. I mean, there are times where I do think there's upside in the stock and we'll sell 30 Delta calls and try to capture some of that. But that's, yeah, generally, like you said, I like to look at it from the premium standpoint. I, I don't, I do think there's a place for doing what you're talking about where you have this, you know, stock and it's, you know, whatever it's gone way up and the premiums are crazy. I mean, you could have done that with something like AMC and it was like a $20 stock and you could sell the $30 call for whatever, 10% premiums or whatever it was. That's a, that's a good trade. I mean, it's a good trade. That's

worth the risk, but that's not really... The clients I deal with are generally either retired or close to retirement. They don't want to look at their portfolio every day. If they can capture 3% a month in premium without risk of a stock going to zero, they can use that money in their retirement. They can take that 3% and put it into something safer. They can use it to freaking pay electric bills or whatever it is. That's important to them is having that steady cashflow. So I mean, they don't want to be looking at their... They don't want to be looking like AMC. Isn't that a movie theater? Why is it moving 10 bucks a day? That's not the sort of thing Preston Pysh, Why is it more volatile than Bitcoin? And what about the other side? Do you do put rights as well?

Luke Gromen, I do. If you're in the business, you know that puts tend to have more premium just because people use them for hedging. So there's more demand and, and, and, you know, and the market tends to go down faster down than it goes up when it goes up. So, so you have, you know, you have more premium inputs. The difference is though, is that, you know, when you sell a put you don't, it's, it's not the same as doing, so the doing an at the money cover call is the same as selling a put, right? The same P&L graph. But usually you sell a put in that case because the premiums are higher. But if you're doing an out-of-the-money call and you have the chance for it to go up,

then if you think something's got some upside, then you probably want to do the out-of-the-money call because you want to try to capture that upside. And like during the last several years when the market was mostly going up, that was the better strategy. Now, in times like this, selling puts mixed and not fully because obviously with VIX has been 25, 30 plus, Like there always is that possibility of a 5% down day or whatever. You don't want to go crazy with it, but clearly here the premiums

are very high on the put side. So it makes a lot of sense to sell targeted put selling. You can go pretty far out of the money and still get pretty good premium, or at least you could. Things have started to come back down to earth recently and then my worry again on all that is it's like a terminal break even eventually that'll catch up so you got to either yeah right i yeah if you're just you know if if you're just selling puts you know willy-nilly eventually you're going to have a big down move and you'll probably give

back all your gains that's why you know targeting that stuff um and you know probably give back all your gains. That's why targeting that stuff or maybe doing single stock short puts and then having maybe an equity hedge, or this is where you're talking about having the VIX, having a VIX or a UVIX, which is a 2X VIX ETF call in there to potentially hedge yourself. There are ways to do it to where it's not, you know, it's not the, the, the, the cliche pennies in front of the steamroller trade. Right. Like, like you don't have to do it that way. And what do you think of you listen to a few of our pods with some of these pros,

right, that do this for a living and structure these things and are looking at it day in, day out. Like, I don't want you to talk against your book, but right, like at the end of the day, it's like better to hand it off to the pros, right? Like if you're retail and you're just playing around and you're learning, but if this is truly to like generate a return for retirement or whatnot, what are your thoughts on being retail versus investing with some of the pros? Yeah. Certainly using pros, particularly

if you're looking to have a solid long-term portfolio and you want to make sure it's going to be there 30 years from now. like what I do, I generally recommend a small portion. This is for the people who want to trade actively, particularly they have the time or they're very interested in the markets and take a section of your portfolio that you don't have with the pros that you could trade for yourself. I mean, it's like, if I want a, just for example, I want a proper tail hedge and I've come across a ton of money and I haven't invested and I want a proper tail hedge. Yeah, I'm going to go to Ben Eifert. But I think there's nothing wrong with having a, you know, an allocation towards something like covered calls that you can do it yourself. You know, I'm not going to do managed futures myself.

That's for sure. I'm going to hire a professional for that. Why I look at it as like, oh, I'm going to invest some money in my buddy's restaurant or I'm going to do, right. I'm going to pick one of these Oklahoma MLPs and take a flight, right. Like it's just kind of play fun money, not necessarily fun, but right. Money you can afford to lose. And, and it's, but in the option space, it's particularly interesting.

Cause it's, but I don't think if I'm investing in my buddy's restaurant, if I'm buying MLPs, I'm not really out there to learn a lot, but I feel like a lot of the option investors have a dual mandate, right? Like I'm sure if I make some money, great, but I also want to really learn what's going to learn a lot. I feel like a lot of the option investors have a dual mandate, right? Like, I'm sure if I make some money, great, but I also want to really learn what's going on here in the option space. Do you tend to get that out of the people you talk to? Yes. Most of my longtime clients and the ones that if I introduce a new product or have a webinar and they basically show up to all of them, they're there to learn. And certainly some of them are not doing,

they're doing everything themselves. They really enjoy that aspect of it. I was just going to say, if they keep showing up, you're not doing a great job with teaching. It's my charming personality. My comedic saying, I mean, you've seen my VIX doodles. I mean, they just, I try to cover a lot of time. I mean, I talk about, I have the degree in economics and the business school degree. So I mean, I try to talk about stuff like central bank policy and alternative investing and diversify your portfolio. I try to mix it up to where it's like, hey, let's learn something different about options. We're going to focus on options,

but hey, here's some other things I'm interested in or I'm reading about. So I try to mix it up a little bit just because fortunately I have a background that I can talk about a few different things. Maybe that's why they come back. I love it. No, I'm giving you a hard time. I want to come back to that. We'll get your takes on the economy and where we're headed here. But sticking on this retail thread, what the most retail option traders get wrong? What's the biggest mistake you see them make out there that if you could just grab each of them by the scruff, you'd say, stop doing this. It's mostly like they get really enamored by high returns. And so we'll do a thing where we'll like, hey, send in some cover call

ideas and we'll publish our favorite ones. And just like, so you can share with the group and people will send in stuff. And inevitably it's's going to be stuff that I would never recommend because it's too risky. And it's like, hey, in two weeks, I can make 8% with a chance of, if it gets called away, I've made 30. I'm like, but you're forgetting the fact that this could also go down 50% over that period. I'm like, there's a reason why we use Ford instead of Nikola for a cover call trade, even though it's not as sexy. And so that's generally the biggest thing, at least with cover calls is that people really get excited when they learn how to do it about making these

really high premium trades. And I think that's fine every once in a while, or if you're doing 10 trades and one of them could be that way. But it ends up being a big part of someone's portfolio. And then as you said, you have that tail event and they give back all their gains in one period. Whereas the stuff that I generally recommend is we're still significantly outperforming the market this year with our recommendations, even though most stocks are down, right? So- Do you think a lot of the platforms, right? And the proliferation of like, I don't know if Robinhood even has this, but I know E-Trade does. I know some of the others, right? Of like, you just click on the tab, income producers or something. I can't remember what it's called, right? But it'll just give you the list. You can

move the slider and write, I want to make more than 50% and be like, cool, here's the options in the stocks that'll allow you to do that. But to your point, it really kind of masks the risks involved. It's good and bad, right? It's good because again, if you can do the research and realize that, hey, these first five are not good, but the sixth one actually is a really good idea. And I would have thought about that had I not seen this. But again, it needs to come with education. I like the no commission, easy access. In theory, I like what Robinhood is doing. The problem is that you don't have the education component. And I think that's really what I try to do. And it's like, I mean, I love what I do. I also really like helping people. I love when people

write me an email that said, hey, because of you, I can retire. Literally, I've had people write in, because of you, I can retire earlier than I planned and I feel comfortable with it. That is 100% why I'm doing it. Because as a floor trader, yes, you're doing something. You're not getting any of those calls. Well, you're providing liquidity. You're doing something useful, but no whatever. The pension doesn't send you a letter. Thanks for providing liquidity and welcome. Yeah, exactly. People think you're the bad guy and sometimes maybe you are and something. But I mean, legitimately, it's like the best part of this is really helping people understand and and doing better and so

you know that that part is so again Robin Hood I think helps to some extent but if you don't have the education component then then you're probably gonna kind of screw it up yeah but it feels to me do you feel like we're in the golden age of options trading, right? Of like the amount of tools and info and everything out there to really, if you wanted to, right, you could become PhD level in a year or something, right? And have all the tools at your fingertips and the knowledge. Unbelievable. Like you should have seen like the subscriber growth in my products once basically COVID

hit and commissions went away. I mean, it was ridiculous. Now it's obviously slowed because people don't have money to invest. They're not getting free checks from the government. Yes, exactly. And they need to spend the money to $500 to fill up their gas tank. But I mean, the growth over that period was insane like i never thought it would it would happen the way it did it was you know and and again it was and matched by the volume right all the the volume charts are showing like record option uh volumes yes uh i got a quick worldcom story for you the uh what was the guy's name bernie ebert yeah ebers

so i was talking with this i think he's coach on my kids baseball team we were having a beer and he was the uh he would sell right he was selling whatever they were selling worldcom services telephone services and jordan belfort of the uh right in new york was his Street was the largest, was one of the best revenue producers for WorldCom, right? Because they were just, they had the boiler room and they're pounding the phones and dialing long distance essentially. So this guy I'm having a beer with would bring his bill into Jordan Belfort. And it was like a couple of dictionaries stacked on top of each other. He's like, here's the monthly bill. So he'd say Bernie Evers would come to New York and just grab him out of the office and be like, let's go. Time to take him out to big steak dinners and be like, keep that Wolf of Wall Street account going.

That thing's great. So when that was one of the biggest revenues, it might have been a red flag of that the company was not long for this. Too bad I didn't know that at the time. I know. But it's also hard to believe what you used to charge us for long distance. What? It's no extra unit of work. So let's finish off with kind of your hottest take or some of the stuff you've been thinking of in terms of, you said, kind of global macro-ish or central bank-ish, some of the themes you've been seeing and tying in with some of your stuff.

Yeah. I mean, I'm actually reasonably optimistic that we're not going to have some kind of prolonged recession. I, you know, the Fed gets a lot of, it gets a lot of criticism and some of it is deserved, but I think they've basically done a solid job. They couldn't raise rates too soon because of COVID. And, you know, we just didn't know how bad, you know, and if it came back, would it be, would it be Delta or would it be Omicron, right? Is it going to be something that, you know, ends up keeping your kid out

of school for a week or is it something that's going to put you in a hospital? And we didn't really know. And so I think they did the best they could given that, you know, I. This is a hot take, right? Nobody on FinTwit's like, eh, Fed's doing pretty good. I really think that, I mean, I, you know, I think that, yeah, I mean, maybe they're focusing a little bit too much on gas prices and stuff like that. But I mean, for the most part, it's a tough situation. You want employment levels to stay high, particularly post-COVID. After everything that happened, you want people to have jobs. On the other hand, you know, you hear everyone complaining about, they're showing their screenshots of their gas prices and their food prices. And, and, you know, the ironic thing

is that the Fed has very little control over any of that stuff anyways. I mean, that's really more of a fiscal policy thing rather than a monetary monetary policy thing but still i mean you know they're still you know that that they hear they hear the criticism on that stuff and and also gas prices do certainly uh or you know oil prices certainly filter over into into the core cpi stuff for sure because everything needs to be shipped and you know power and all that other you know good stuff that we rely on. But I think that they're doing a reasonable job. I don't know about the whole leaking the article supposedly to the Wall Street Journal and then hiking 75. Who knows? I'm not a conspiracy theorist, but I felt like maybe the last month or two, the messaging could have been a little bit better.

But for the most part, they'll get to whatever it is, 3%. And I think prices will come down and I think the economy will, unemployment will rise. But I don't think we're due for some kind of major recession. I think it's going to be a relatively soft landing. My only concern really is the supply chain stuff. I mean, how long is it going to take? And is basically the war, Ukraine, is that going to drag on for... How long is that going to drag on for, you know, how long is that going to drag on?

Yeah, I mean, so, you know, there's a there's certainly a couple of things going on there that can't be controlled. But I mean, I'm just like, I'm never the person in there saying, oh, the Fed should have done this or should have done that. Like, I mean, it's. Yeah, I know. That's not a popular take, but- How much does volatility's behavior over the last three, six months inform that take? Because it's basically saying what you're saying. I'm like, hey, there's not a huge problem here. That's why we're hanging out in the 20s, not the 40s. Yeah. And then volatility of volatility, like the VVIX or whatever you want to look at, has been really low. It's been pretty stable.

People are like, okay, I'm preparing for roughly 2% moves per day and that's it. I'm not preparing for 4% moves today, but I'm also not preparing for 1% moves. Now, if we keep realizing 16%, eventually that'll drop down. But again, summer months months people on vacation all the all that good stuff so we'll see um well thanks jay it's been fun the uh any last thoughts before we go tell everyone where to get your stuff we'll put it in the show notes too but oh yeah um yeah if if if i said anything that all interests you you can check, you can go to Investors Alley. Investorsalley.com is where I am. And I'm not the only one there. We have all kinds of great

writers and interesting people. So check us out. Beyond that, I hope to not be proven wrong on the fed stuff and the soft landing if not then i'll i'm sure i'll just draw a picture on vix and blame ben eifert for it so that's uh right it'd be like a godzilla something right big big tall something in the front the godzilla one uh i love it thanks. We'll talk to you soon. Thanks for coming on. Short notice here. Jay helped us out. We had a dropout this week, so he decided to come on.

So round of applause for Jay. And keep doing what you're doing, man. Love it. Thanks, Jeff. All right. Thanks so much. You've been listening to The Derivative. Links from this episode

will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. 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.