The Derivative - Navigating Market Volatility with CBOE’s Kevin Davitt, Wayne Himelsein of Logica Capital Advisers, Jason Buck of Mutiny Fund, and Bastian Bolesta of Deep Field Capital.

Episode Date: June 4, 2020

In this episode, we’re joined by a powerhouse group of volatility experts consisting of Kevin Davitt, Wayne Himelsein, Jason Buck, and Bastian Bolesta – moderated by our very own Jeff Malec discussing Navigating Market Volatility. Providing more than just witty banter, you’ll be listening to us talk about how crazy volatility was during March/April, why the VIX is more than just for tail risk, is it too late for long volatility protection, why straddles & strangles, what everyone gets wrong about options, and the volatility landscape looking ahead. Follow along with our guests: · Kevin Davitt on Twitter and LinkedIn · Bastian Bolesta on LinkedIn and the Deep Field Capital website · Jason Buck on Mutiny Fund Twitter and the Mutiny Fund website · Wayne Himelsein on Twitter, LinkedIn, and the Logica Captial Advisers website. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, 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

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. In terms of IV, the SPX at the money went up for a moment into an IV of 129. I remember that figure because it was so drastic. And so 129% vol, that just goes back to what Bastion said. For any moment locally, vol can go anywhere.

I mean, 129 makes no sense, right? You're going to have greater than 100% vol is impossible, quote unquote. But it's possible for a moment and it's possible in markets when panic is erupting. Let's get to our panel for today. This is a great bunch of volatility traders and aficionados, as you're likely to get. So we have Wayne Himmelsine, Chief Investment Officer of Logica Capital Advisors, which concentrates on providing tail risk and convex absolute returns via option trades mainly. We have Bastian Balesta of Deepfield Capital, a Swiss-based systematic asset manager with a deep focus on volatility trading via VIX futures. We have Jason Buck of Black Pearl Management whose mutiny investment strategy aims to provide convex tail risk type returns via a portfolio of different VIX options and convex return

type strategies. And we have Kevin Davitt of the CBOE who helps the exchange educate those using the complex products they offer via the CBOE's Options Institute. So welcome everybody. Thanks for having us. Especially to you, Bastien, out there in Zug, Switzerland. What time is it in Zug? 10 pm, so just shortly after breakfast. It looks rather dark behind you, so good work. Yeah, we have stars and everything, so it's proper. And I'll also add my pre-webinar apologies for the blue line on Wayne's screen. It's some mathematical thing we don't know how to figure out yet, but hopefully we'll get to that by the end of the webinar. It's a tail event.

So just wanted to start out and throw it out and get started on basically talking, thinking back a few weeks to the lows in March and the sell-off preceding that. And just want to hear from each of you some war stories on what that was like or glory stories if you have those and would rather share those. So who wants to start it out? Wayne? Sure. Yeah, I have war stories and glory stories, so I'm not sure where to start. I think one of the interesting things to me was looking at, of the 08 financial crisis where it went up into the 80, I think high 80s, but very different to some of the more recents, or maybe 40. So the levels at 80 is, as I started with more reminiscent of the 08 crisis versus some of the extremes we felt in 2018, or even going back to 2011, I think was only the low 40s. So in that sense, it was a major calamity, a crash versus, I guess, in December of 18, or February of 18, we felt like that was maybe a correction and that kind of defines the breaking point.

But so to me, that was the one major thing that I saw is okay, this was major and everybody saw that, that's very obvious. The difference though, between this and 08 was how quickly that vol decayed or didn't even decay, just crushed, right? So in 088 it took maybe six to nine months for vol to decay back from call it the high 80s down to maybe the the high

20s or 30. i think it was at least six months here it did it in a month and a half to two months right so the the tough part in trading or navigating was, per the title of this podcast, navigating the vol market, is it's one thing to make the money on that vol going up when you're long vol. It's one thing to have the glory when it shoots from 20 all the way up to 80, and that's fantastic. But in 08, you had time to kind of weed your way out of that over the next six months. Here, a month later, it's back down to 30. So it went down as fast as it went up. And of course, the other side of this upside down is the V-shaped recovery in the market. Right. So the market just violently rallies back up on Fed liquidity and everything that the Fed does for us.

The good news. And so here we have vol, where as much as, as quickly as you can make it, you can give it back. And so for us, I think the war story side of it was trying to get out quickly. And we did. The glory side of it is we, I guess, took off the table, descaled right around March 23rd, which is right near the peak, and slowly got back in about three weeks later. So I think, yeah, that's what could have been a war story that ended up becoming a glory story. And it's just really interesting to see how extreme it went and yet how quickly it reverted. Yeah. And it seems odd to me, like my belief or without looking at stats, it seems like volatility stayed elevated for a very long time. But I guess, yeah, it was only a few weeks, but it was so high for so long.

Kevin, maybe you can speak to the math there. Sorry, I didn't prep you for this, but the 80 reading on the VIX, what is that telling us for annualized volatility, weekly volatility? What is that implying? So that is a really good question. And Wayne brought up some really salient points. The VIX calculation, the VIX index did have a closing high during this most recent bout of volatility. It was higher than any closing level in 2008, but on an intraday basis during sort of the zenith of the 2008 crisis, the VIX index had a measurement 89 and change, but the March 16th closing high of 8269 was the highest ever. Now, the VIX index is an annualized number,

an annualized standard deviation number. There aren't too many of us in this audience, certainly, but probably broadly, that think in one-year increments. So if we think in one day increments, a VIX around 80 is forecasting up or down 5% on a daily basis. In reality, the market was experiencing, was realizing that type of volatility in the middle of March, right? So VIX and SPX options, despite the historically high level of implied volatility, the broad market was realizing even higher levels of vol for a significant portion of that time. And only more recently have we moved back into a quote-unquote more normal environment where 30-day forward vol, there's some small premium to like trailing 20-day realized. And Bastian, is that what you were saying in the VIX futures themselves? Yeah, definitely. Basically, we saw massive swings on the S&P side and then

reflecting the corresponding high VIX. So it was to a certain degree not surprising that the VIX stayed elevated. It certainly came down rather quickly from the 80s, as Wayne explained, but it stayed above 60 for 10 trading days and coincided with a situation where the S&P basically continued to go down. So the S&P had its low on the 23rd of March, whereas the high in the VIX was already on the 18th. And this is a very difficult environment. So generally speaking, if you're a long wall manager, your objective is basically to benefit from these circumstances to protect your clients' portfolios. And you are very stressed out because whatever happened during that period, it was still very exhausting. If you're trading systematically, but still discretionary, implementing things automatically doesn't really matter you're still in front of the screens and and it was a very

humbling and exhausting experience our team was very glad that things worked out really well considering that a lot of things we saw in terms of extremes how quick the market sold off, how quick it recovered, how quick the VIX came down. As Wayne said, this is not really reflected in previous data. So if you have systematic trading approaches or quantitative trading approaches, it's based on data. And the data basically supports how you want to build the systems and how they can cope with circumstances. So it was a very difficult and humbling period, certainly. But it was a glory story, as Wayne said. That's probably also a reflection why we're on the podcast. It helps if you have good numbers. Otherwise, it would certainly look much sadder and even more fatigued.

But yes, we did well. It was still exhausting, humbling. At the same time, you had, if you look outside the real world as well, where families got impacted by COVID-19. All of us basically having, if you have children, basically started homeschooling as well. So we became professional teachers to a certain degree. So this was, it was just a very intense period, which hasn't really disappeared. You may recall, Jeff, that we had a podcast actually in the midst of that, I think on the 17th and 18th. And I was tempted to quote somebody else's quote, basically, that the Fed put was put at peace, a rest in peace Fed put, because it was triggered when the Fed initiated the interest

race cut on the 15th of March. The next day, the S&P was down more than 10%. And so we had the podcast later on. We said, well, obviously, this doesn't work anymore. We have crisis and just opening your pockets and putting money at play doesn't work. Well, where are we at the moment? What have we seen? We basically have seen a continuous recovery in the S&P as Wayne already reiterated. And as a result, to a certain degree, we have to go back and actually say, well, maybe we quickly saw that the Fed put should rest in peace, but it actually doesn't. And the combination of Fed and actually the Treasury's firing power has driven markets for the last two months. And to a certain degree, we can't really remember how heavy the toll was, what we experienced in

March across all asset classes in a liquidity crunch, where gold fell, everything basically fell except the VIX, which went up. Everything basically fell except the VIX, which went up. So if you're long VIX, you could basically compensate that. And now everybody forgot about it. We're still a bit fatigued, but happy, certainly because of glory and performance in that period of time. But it's still, I think a lot of us still will need time to really process and think about what that means going forward. And Jason, in your role looking across many different managers, were they in the long vol space, were they generally able to capture that move and not give most of it back in April?

Or what are your views? Yeah, I think we were pleasantly surprised by the managers we constantly track and follow and that we put into some of our investment strategies, how most of them were able to profit and monetize during that sell-off and then haven't given back a lot of those profits. Obviously, you're going to give some back, but as we all know in this space, the hardest part is to monetize. Thinking back what Wayne was saying and then Bastian followed on to as well as Kevin is that when that ball spikes so high and so quickly like that and then crushes back down so quickly like that, it's very hard to monetize those positions and still also remain long ball because you don't know if it's going to spike back up again. You know, thinking about, you know,

Wayne's talking about 2008 and Bastion referring to like, when you have look back periods and you try to build your models accordingly, is none of us know what that future path dependency is like. So it's great to watch in real time, talking to guys like Wayne and Bastian, seeing how they were handling it. You know, it makes me think of like the Greek terms for timeframes, you have Kronos and Kairos. You know, Kronos is that clock time, you know, and Kairos is that opportune moment.

And that's what we all felt in those February, March is like each day felt like years. And them being able to navigate that very well and not only to monetize but then to hold on to those monetizations um is is really impressive and it makes me wonder too that you know everything's relative because you know talking about volatility come back down to 30 now we think like 30 is low but 30 is relatively high if we think about the long span of vix so it's interesting now it's like is yeah are, you know, if we know our Benoit Mandelbrot, you know, volatility tends to cluster, but most of the time it mean reverts.

So none of us know a priori what the future holds. Is 30 now the new low for VIX and we're going to bounce around here and volatility will cluster for years as it tends to do in big sell-offs? Or does it come back to that 12 to 15 range? We don't know a priori if it mean reverts or it clusters. So if you have these dynamic managers like Wayne and Bastion that can navigate these environments in both circumstances, it's really impressive to watch. And I keep coming back to a little confusion on my part. I feel like, right, we were so trained in like 16, 17, 18 of every spike, the vol snapped back immediately. And then this one seemed like it stayed elevated, but you guys were saying, no, it still spiked back quickly. It just

got so elevated that the spike was, right. I'm having trouble reconciling those two things. It's all relative. Yeah, it's all relative. I think Bastian said that he brought up a good point that it was up around 60 for about 10 days. And I hadn't recalled that data point, but, or those data points, but right after that, then it just started crushing. And so it's, yeah, I mean, if you want to talk about it, break it down into timeframes, you have quick being the fact that we're back at the high 20s in a month and a half. That's super quick to go down from 80, right? But the fact is that while you're in it, as Jason very well put, a day felt like a year.

It's like we all slow down in these Einsteinian relative rockets, right? And so time was moving slowly and 10 days at 60 was a slow period or felt a lot slower. But at the end of the day, it was just 10 days. And therefore didn't have a lot of time to really reposition versus what you were used to in the past. And talk a little bit about the mechanics

of the actual trading during that. Were the spreads blown out like nothing you'd ever seen before? Or was it a rather orderly advance? What were the actual trading in and out of those markets looking like? For us, it's pretty orderly because we trade SPX and we start with at the money. And that's probably one of the more liquid parts. It's not probably, most definitely one of the most liquid

parts of the surface. So it's, I mean, yeah, spread's got a little wider, but we're still executed instantaneously. And so for us, given the liquid instrument that we're beginning with at the money front month, there's not much to worry about. And that's why we choose that in the first place to have the most liquidity possible during disaster. And it actually panned out exactly as we intended. So no, we did not have that problem. But on the VIX side, Bastien, how was it for you? We basically, our wallop has four different pillars. On the first pillar, there's a calendar spread that trades the first four expiries.

And it didn't really substantially change positions. It was already long, the front months against the second or third from mid and February. And so there was not as much pressure basically to react to it. The second pillar took positions at trades VIX versus S&P and basically then adjust position sizing. So again, even if there were distortions, they don't really impact us as much. What we observed while trading, but at the same time now in the aftermath during more analysis, we have these two relative value strategies and we combine them with directional Delta one,

so to say, where we trade intraday momentum on global equity index futures and also on the VIX futures in the first and second expiry. And we started the analysis on the S&P side where we looked at the largest drawdowns since the dot-com bubble. And actually in all cases, but this sell-off,

the action where the S&P sold off actually took place intraday. In this case, in March, it didn't. So there was something different. So a lot of these massive swings took place overnight. You still may recall that we had, we opened up and we already had our circuit breaker. So we didn't even start trading. So it was like, oh, we are already out again. And this was something very special we haven't seen in previous crises. And while we initially looked in the S&P, the next step was actually to look at the VIX futures, what happened there. And again, the VIX futures as well had the massive moves overnight with just a fraction actually happening in today, if you look over the entire moves and this um

occurred um already to a certain degree during the gfc but during um q q4 2018 or also during the vol margat on the february 2018 um the moves were actually intraday um so there was something different and as a result our intraday programsraday programs did have a reduced opportunity set in March itself. But they managed to capture the first waves of volatility in late January. And then again in February, early March, where a lot of action still took place intraday. And to a certain degree, we could cover it also in Asia and in Europe because we are trading globally on the equity side. And that certainly helped. But just looking on the US, it was a different opportunity set

than experienced in the past. And that may have something to do with market structure. Who was active? Maybe Kevin can add to that from the CBOE side. There are rationals like the coronavirus task force press conferences took place 6 p.m. Eastern, if I'm not mistaken. So after the market is closed, whatever happened there and drove markets up and down, triggered moves in the overnight.

You also had the Fed coming in over the weekend, which basically caused the gap. So again, overnight, but this was something we haven't seen in the past and certainly provides a challenge if you're just focused on one approach. It supports and benefits managers who have different past dependencies in their approaches. Yeah, the government's gotten smarter about when they release market moving information, right? I don't know if it's really smarter. If the Fed basically does and it dives 10% on the next day, that doesn't really look like a smart move,

but the Fed is back. So we should take the tombstone and put it away and let's see what happens going forward. There was a... Go ahead, William. I was just going to add on that there was an interesting point in the middle of the, of course, COVID-19 was the rationale behind all of it. At the same time, there was that one weekend in the middle where I remember on Sunday, OPEC made the decision with

oil. It was the Russia and Saudis, and of course, and so suddenly it's over the weekend and there's this disaster in the middle of a disaster. And it's almost like, what's going to happen next? Right. And it just, I couldn't believe that in the middle of everything. And it almost went unnoticed, which was kind of surprising because on Monday things were just like, I'll call it COVID crashing, not OPEC crashing. Right. And, and so, but had COVID not been there, that would have been a Monday event that we would have liked. All right. But here it was almost, I don't know whether it was diluted or just not even, it all just got muddled up. But the fact that it happened over the weekend was amazing to me because I was in the sense

of understanding how tail events are non-conditional, right? And here we all reading the news and I was on Twitter reading about the different COVID statistics. And then lo and behold, OPEC makes a life-changing decision. And so it just, it was profound in the moment and how, you know, we just never know when the next thing's coming, even in the middle of the current thing. And I found that interesting. And agreed. Kevin, from the exchange standpoint, you guys held up extremely well from what we could see outside looking in. You know, a few prop firms were in the news of going under, but the system seemed to work, even with vol at 80 and billions and billions of contracts trading hands and counterparty risk and the rest.

You got any thoughts on how that all held up? Well, that's a testament to my colleagues. I can take absolutely zero credit for that. In terms of liquidity, it's wonderful to hear sort of all these participants speak to the products that trade at SIBO being incredibly liquid, which is arguably most important during times of crisis like this. So that's a testament to our hybrid model, which clearly works. If you're talking just in terms of pure volume, the VIX futures volume peak was the end of February, somewhere around $850,000 a day there. The VIX options volume peak was a week later. That was March 6th, $2.3 million

on that day. Across the industry, February 25th set a record. There were like three or four different records for total OCC cleared volume. But the 28th of February was more than 47 million contracts. Now, just to give that a little bit of perspective, by the end of April, that cleared volume was closer to 25 million. And if you go back to full year 2018, say on average, it was 20 million. Now, two products that we've focused attention on today, the SPX and the VIX, on any given day, make up about somewhere between 10 and 11% of that total volume. So if there's roughly 22 million between SPX and VIX, there's about 2.2 million on an average day. Now that increases during times of acute volatility, like we've seen

in March and into April. Going back just a little bit, I think it's fair to point out that the velocity of this move was unique vis-a-vis 2008. And in 2008, we moved up into the 80s from a higher base. Like if you recall, the Bear Stearns bankruptcy was right around, ironically, the middle of March in 2008. And we had bounced around in the 30s, like into the low 50s. And then later on, with Lehman Brothers, moved up into the 80s. In this situation, we went from all-time highs on February 19th and evicts around 14 to down 35% and evicts in the 80s over the course of one month. And to that end, the emphasis that these managers have placed on how and when you monetize, I think is really the key point. So a testament to a job well done on your guys' end.

And I've asked maybe both of Wayne and Bastian this before, but is there a theoretical upper limit to the VIX, like where it would essentially imply that the market will go to zero tomorrow or negative? I would say there is no limit on the short term. It could go up wherever it wants to go, because however, the current crisis and evolving events, as Wayne said, you basically have COVID-19 and then have an old crisis on top of it. Maybe you have even some geopolitical aspects on top of it, conflicts, Taiwan, China, straight. So things like that could actually push things substantially higher. If I'm not mistaken, if you look at the 1987 crash, the VIX wasn't around back at the time, but it would have been

above 100. So in the short term, it could go up substantially, though there is no ceiling. But shortly afterwards, mid to long term, if we just go back to what Kevin said, if you have a VIX of 80, that means S&P moves on a daily basis, 5% up and down. And if you think about beyond that point, how massive the moves have to be, as soon as you have just an S&P move of 3%, it would come down substantially. So it can't stay up there. It needs a justification in terms of the moves in the S&P and as a result the impact on option pricing and then the VIX calculation and as a result it will not stay there for on these elevated levels for long periods of time. Yeah, I think what's also interesting is the

differentiation between the VIX and individual strikes, right? So the VIX is a slice of the surface. It's the front. It's about a month, right, along in the front and the back of that, and then the strikes up and down the vertical. And so you're getting quite a lot of options that are weighing in to determine the end weighted price of the VIX. Whereas if you look at a single strike like us, as an example, we always trade at the money on the SPX. So looking there, going back to 08 in terms of IV, the SPX at the money went up for a moment into an IV of 129. I remember that figure because it was so drastic. And so 129% vol, that just goes back to what Bastian said, for any moment locally, vol can go anywhere. I mean, 129 makes no sense, right? You're going to have a greater than 100% vol is impossible, quote unquote. But it's possible for a moment and it's possible in

markets when panic is erupting. I'm going to remind the audience that they can throw questions in via the chat, and we can ask the panelists here. And I'm going to start with just two quick ones, definitions. So Wayne, the surface, i'm assuming you're referring to the volatility surface can you give a one sentence answer to what that is and looks like uh sure maybe one one and a half sentences um yeah this this a surface is so let's start with it there's a vertical and a horizontal the vertical is the blue line down the middle of my camera screen so i knew i'd use it it was a good prop right

so the vertical is just going up and down the strikes and we go from at the money to far in the money or far out of the money is well below and so that's the vertical chain and the horizontal is is time is the calendar right so you So you have Jan, Feb, March, April, all the way out to as far as you want to go. And so the surface is the vertical and the horizontal. It's one big surface. And so, of course, when people talk about the term structure,

you can, you know, front could be more expensive than, I mean, vol always dissipates out. So the further you go out, the more expensive vol is, or the more vol there is just mathematically. But yeah, so if you want to... It's like a heat map, basically, of vol across timeframes and strikes. Right. If you normalized to the diffusion of vol, so vol diffuses out at basically square root of time, if you normalized for that, you'd get this surface and the fluctuations of that surface would tell you that, for example, the June 10% out of the monies are

cheaper than the May 8% out of the monies or whatever it might be. And there'd be little bubbles and dips and rises in that surface. And people trade that on a relative basis. And we look at it for how the whole surface is changing. When markets are imploding, there's more skews. So the whole surface starts to bend upward and you get this, you know, the tails get more expensive. And that's interesting because you see a change in that whole surface vertically and horizontally. But anyway, yeah, so there's different aspects to look at to get a deeper understanding of how vol behaves at different times. Perfect. That was a hell of a sentence.

Yeah, I was about to say, that's a Wayne sentence if you've never found a Wayne sentence before. And it was a short one. I actually recommend people Google volatility surface and then click on the images because it's actually, I mean, this will say what my aesthetic sense is. I think they're quite beautiful. The way you see like a 3D image of a vol service and then see how they change through time. It's very fascinating to see how that service undulates, you know, even throughout the day or as days goes on. And then, Kevin, my definition one from you, you said the exchange is a hybrid model. What do you mean by that for the listeners?

Oh, yeah, really, really good question. And thank you for asking. Meaning that liquidity or execution could take place electronically or particularly in the products that we focused on, again, SPX and VIX, that there is an open outcry market that perhaps some of these participants use as well. So that's the hybrid. There's an open outcry floor-based system, and there's also electronic liquidity. Except right now there's no open outcry, right? It's closed for coronavirus, but about to reopen? The first part is correct. The second one, I'm not in a position to speak to. Okay. The well-being, I mean, like from just a PR standpoint, ultimately the exchange is concerned about the well-being of market participants. And that's not just a platitude. Nobody wants to see

a rush back to that and then people getting sick. So a whole lot of thought goes into when, where, and why open outcry will reemerge. And hopefully that's the case, but the well-being of the people involved is paramount. Awesome. And then you mentioned, so in normal times, there's about 20 million in volume across the main products there. We spiked up to 47 million. And then you probably get sick of CBOE, VIX, as they get all this attention during the crisis periods, but you're like, Hey, it's a perfectly good product the rest of the time

so maybe jason if you could speak a little bit about how the managers you're looking at view volatility as a tool the rest of the time that it's not just for tail risk sure i think you know people have described it as either you know vol is a separate asset class like the fourth asset class or some people just say the only asset class is volatility. All of us are trading either short vol or long vol. And I know I speak for everybody here is we're very happy that they have the products like they have at CBOE because it allows us something to trade that's a little different. And more importantly, it allows us to hedge positions or we can be long volatility managers throughout time. It just offers ways for people to put on different kinds of trades, whether they're short vol

or long vol and different ways to express those trades. And then if you get into options, either options on VIX or options on SPX, it allows you a finer paintbrush to how you are able to express the trades you're looking to express, especially in the long volatility space. So especially with the VIX, going back like maybe 2010, you started to see the volume pick up and it was fairly starting to be tradable. And then you've seen it explode over the last 10 years, but that's relatively new. So I think a lot of people are kind of maybe unaware of the space or maybe scared of the space in a way, but you know, it's all about position sizing and then

whether you're long volatility or short volatility, and there's all sorts of dynamic trades you're able to put on within the space. I think Bastion could speak to this. It's not just about being long or short vol, but you can be both at the same time via relative value basis, correct? Sure. Obviously, if you're expecting a massive spike to be just long, just prior to that would be really nice. It's like knowing that your house house may be on fire next week and you just happen to buy fire insurance right now but generally speaking as jason said um the vix and the futures and options on it give you a broad opportunity tool set basically um to trade changes and market environment on a constant basis and to express your view or analyze basically based on data,

a view and opinion on how to best harvest alpha from circumstances. For example, how the first expiry trades in comparison to the second, third and fourth expiry. The expiries are a function of a forward-looking uncertainty and of course as further out you go, as high uncertainty normally is. But if you for example currently look at the VIX term structure, you see an interesting bump in the October-November area and that's of course referring, or I assume referring to the US election. So we have this broad theme of COVID-19 at the moment, which creates a lot of uncertainty right now at the moment, and markets swing back and forth with news if a vaccine is available in the near future or long future. But at the same time, you have

other events expressed in this term structure, and you can now start analyzing these different expiries against each other and can start trading relative value where you don't need an opinion what the VIX is going to do tomorrow. So it's not a necessity. You can do a risk-reward analysis of these individual expiries, and in our calendar spread, for example, we go along the risk reward was highest the the contract was the highest risk reward and the expiry short was the lowest risk reward and this may change an ongoing basis so we continuously calculate take a lot of data there and then come up with our position how we would like to be positioned in this

relative value trade and fortunately we happen to be long the front months, a bit more than 50% of the time, despite the term structure being in contango around 82% of the time historically. So normally, you would suggest a short position there. But this is an example where the analysis of the term structure, as Wayne alluded, and a relative value approach helps you to express different opinions with these tool sets available from the CBOE. And as a result, we are able to harvest alpha within this term structure complex without the necessity to know what's going to happen tomorrow and have a directional trade on. And Jason and I were talking the other day, it almost acts as a bit of a carry trade.

I know that has some negative connotations to it, but in one way, it sort of acts as a carry trade where you can just harvest that carry on it. Why would there be a negative connotation necessarily with that? I mean, if you understand how carry trades work and you can figure out a way to harvest that, where is the inherently negative connotation? That goes on with currencies and all sorts of markets. Yeah, I'm probably sharing my personal bias there. I don't know if it has a worldwide negative connotation. I remember in- Yeah, yeah, go ahead.

I think you're- The guy whose boat got repossessed and the name of the boat was Carry Trade. His yacht was called Carry. So yeah, I think- It's a fashion point- Sounds like undefined risk to me. Yeah, yeah.

To fashion's point though, you can use that carry to actually appropriately be long volatility is that fair is that fashion it offsets that long volatility exposure so you can almost carry that long volatility exposure for free if you're um if you're as sophisticated as bastion and deep field is at producing that relative value trade it allows you to be long the front month month while garnering some of that carry from the back month. So you can sit in that long ball position waiting for a spike to happen when you don't know exactly when it's going to happen. I got a few questions here from the audience. So I'll just dive in. I think this doesn't necessarily apply, but maybe, Wayne, I'll direct it to you.

At what level or percent profit would you lift the tail hedge? Lots of ball there. Yeah. Let me dig deep into the proprietary models. Yeah. It's actually not a percent level. So there's not a, I'll use the word price target or a percent target on vol so much. And so, yeah, one could say, hey, 80, that's high.

But as I talked about a few minutes ago, SPX at the money vol went to 130 in 08, right? So 80 is not high relative to 130, of course. So the question becomes, knowing that you're where you are, how do you make the decision? The way we look at it is probabilistically. And so you can give some kind of ceiling to vol and let's go to some extreme, as in an extreme value call that 150 right and so that's maybe the the furthest into the right tail of a vol explosion and so along the way there's a distribution that'll be from you know vol at 30 where it's already popping out and then 40 50 as it's getting up the probabilities are more and more favoring a reversion. So rather than waiting for a single

point, I like to trade that probability, meaning scale out alongside the cumulative level. And so if you're at a 50% likelihood, you're going to stay where you are. As soon as you get to a 70% likelihood of reversal, maybe take off 30% of your trade. You get to an 80% likelihood, you take off another 40% of your trade. And so you map the exit or scale the exit almost mathematically, or not almost, purely mathematically, one could do relative to the probabilistic reversion tendency, i.e. the higher it gets, the more likely it's going to get out or it's going to crush. So by the time you're at 130, you have three contracts left out of your original, perhaps 500 or whatever they might've been. That's how I like to do it just so I can't,

I don't, if there's a single level, I might miss it. And so it's less chance of being wrong if you probabilistically scale. Yeah. And especially as Kevin mentioned,'s less chance of being wrong if you probabilistically scale. Yeah. And especially, as Kevin mentioned, going from 14 to 80, if you're 14 to 25 and you're like, I'm going to lift the tail hedge now. It seems like a great time. Right. Oops. It just went to 80. So I think Jason would say that's kind of probably more of the art than the science of being in this space and being able to analyze the curve and whatnot. Yeah, because it's never going to repeat. It's never going to be the same level. And the presumption in the question, and forgive me if I'm misreading the question, is like, how do you time your tail insurance? And we would argue you should never try to time your insurance ever. You can toggle the positions around like Wayne and Bastian would. But other

than that, you always want to have some sort of long vol or long gamma position on because none of us know the future. So to say you take off your tail positions means that you're assuming the future is going to be risk-free. It's like having a house close to a river. And I think Nassim Taleb has this quote that you always have to have portfolio insurance, otherwise you don't have a portfolio. So it's your house at the river and it's not your house anymore if you don't have a portfolio. So it's your house at the river and it's not your house anymore. If you don't have flood insurance, it just has happened not to be carried away by the river yet, but it's going to happen eventually. So you don't really own a house. You just happen to be in one for the time being. So you should always have portfolio protection on, but of course, balance it against premium you have to pay so when you go shop around and you look for flood insurance you always you always compare

prices as well you compare different managers in that sense how they deal with that because ultimately you have a bleed if you carry a long wall position and you can address it with different forms and ways as we have shared with you already yeah and I think implied in that question is I need to take it off and need to time it because it's so expensive to keep on, whereas we're saying these products aren't just that negative bleed, negative carry, pop in a scenario. You can use them in different combinations to get to a different place, a neutral bleed or even positive if you want. So along those lines, another question of someone saying these seem like these strategies are just for tail risk,

which hopefully we've debunked a little bit of their more of absolute return with a convex profile that'll pop during tail risk. But just for a novice investor, how much of their portfolio, like if you don't have a portfolio, if you don't have portfolio insurance, their question is how much of the portfolio should be in the portfolio insurance part, which I'll just say to me, that's a highly personal question. So it depends on which manager, what your portfolio looks like, how much short volatility there really is. But you guys have any general thoughts on that? Isn's not like asking, like, this is the toughest question ever to answer. Cause it's like, almost like asking, Hey, should I marry this woman I just met? And you know, nothing about the person

it's like, so not only personal, it's just like, I don't know any factors or information that really to talk to you about that position sizing. Um, but I think one way to kind of look at it in a, in a general sense is we talk a lot about implicit short volatility and long volatility positions. So your stocks, bonds, real estate, VC, private equity are all implicitly short vol or mean reversion trades. They're convergent trades. When you look at long volatility or long gamma positions like Wayne or Bastion, they're inherently divergent trades. They will do well when vol spikes or the vol of all the gamma spiking as well. So you want to balance out

those positions in a portfolio, and that allows you to compound wealth better over time. Now, if you think about those implicit short vol positions, usually have a huge left tail. So let's say the S&P has an 8% to 10% return, but it's got a negative 50% drawdown. Meanwhile, great traders like Wayne and Bastion are going to have very low drawdowns or light paper cuts of leads or what we call debit card investing from Nancy Davis. It's like you know that there's a small drawdown, but there's a huge upside. So when you pair those two together, you have to think about those in combination. And honestly, you know, this is going to maybe sound a bit outside the box for people, but we always look at it as actually you want to pay 40 percent short volatility and 60 percent long volatility. And that balance over time is what compounds wealth throughout the decades, no matter kind of what market environment you're in.

Love it. that have interest to SIBO site, we have strategy benchmark indexes and third party white papers that from groups like Wilshire, well-known groups, that do research and test different sort of mixes over long timeframe. And generally speaking, the quote unquote appropriate level is something relatively small, right?

But those small allocations to products or strategies that behave like you just illustrated with that unique convexity in environments like this that can and will happen again, I don't know when, right? But can make a huge difference. Like there's a SIBO Eureka hedge tail, or Eureka tail hedge index. And that's up like 52% this year. The foods are down. The SMPs are down eight or something right now. And small allocations to stuff like that can really keep you,

um, headed in the right direction because this stuff, quite frankly, does happen. And the complacency that we've seen broadly over the better part of the past decade is unusual, right? On an annualized basis, typically you get somewhere between a 13% and 16% drawdown on the S&P during a typical calendar year. 2017 was highly unusual, but we kind of expect the future to look like the recent past. And so you need to think in bigger time horizons, I would argue. And then to follow on what Kevin said. I'm sorry, Jason. Yeah, go ahead. I just want to just follow on what Kevin said and give a big shout out actually to the CBOE Eureka Hedge indexes.

They're great. So people can actually look at those and think about positioning, especially as he alluded to the tail risk index and also the long volatility index, which actually goes back to what Wayne said earlier. It's actually, if you look at the long volatility index and we can argue about what's in that basket. But after the 2008 sell-off, actually long volatility funds did well from all the way up to 2011 because you had to carry through

a volatility being higher. Now, we said volatility has come back down to 30, but that's a relatively high vol, and we don't know if vol vol is going to spike around here between 30 and 50. So good long volatility managers like Wayne and Bastion actually will thrive when we see volatility cluster and we have years of long volatility. But none of us know if that's the case or we're reverting back down. But that's why you have these guys in your portfolio to balance out those other asset classes. We have become so used to low volatility levels. Before the entire March scenario actually evolved,

or actually started in February, we didn't have substantial moves in the S&P up or down more than a percent since October 2019. So basically from October until the 27th of January, there was nothing happening. And prior to that, we had longer stretches in 2019, as well as in 2017, historically low volatility year. So we are just used to these extreme low levels of volatility.

And if there's an occasional spike to come back down quickly and go back to these low levels, we're currently trading around 30. This includes or actually refers to 2% daily moves in the S&P, which is already substantially larger than what we saw prior to the January 27th. So even if we stay somewhere around 20 or 30, that would still be a substantial environmental change, a change of the environment in regards to what we saw prior to the COVID-19 breakout. And that dovetails in, we got a lot of questions here on basically summing five of them into one question is, what do you think of vol going forward?

But maybe, you know, most of your models aren't saying, you know, Bastian, you're not sitting there saying, oh, I think it's going to be be higher i'm going to put on all these positions it's mathematically analyzing the market so maybe we'll switch and just say for a for a novice trader or that's looking at vix what are the risks to the to uh putting on different volatility positions at these levels basically at 30 here what do the risks look like on each side of that trade, in your opinion? I would recommend not to have a directional trade with an opinion, but basically an absolute return so that you don't care if it goes up or down ultimately. So we were happy to make money in March, but we were even more relieved to also

make money in April because we could basically show that we delivered alongside our long wall profile, but we can also cope with contracting volatility. If you now just, if you get more interested in the VIX as an instrument and the futures and options on it, we would still probably recommend not to have an outright position because you have an opinion of what the VIX is going to be. Nobody of us knows what the future will bring. Probably every crisis has multiple scenarios which could play out. COVID-19 seems to be even more extreme in that sense because it's so binary. Someone comes around with a vaccine rather short term, there will be a substantially different

outcome than if there are disappointments after disappointments. And on top of it, you have monetary and fiscal measures influencing markets as well. So directional, very difficult. Probably much better to think about both scenarios and position yourself accordingly. Yeah. And Wayne, you talked about lifting the tail heads that you think of it in probabilities to think about both scenarios and position yourself accordingly. Yeah, and Wayne, you talked about lifting the tail heads that you think of it in probabilities. And at 80, the probability is more greater that it's probably gonna go down than up.

It puts some words in your mouth. So at 30, are we at 50-50 probability that it could go down or up? What are your thoughts there? Well, I think, yes, it's tough. Bastien's laughing because it's such a relative answer. I put on record just to quote you in a week's time. Yeah, thank you. Yeah, please do. Please quote me at will. So I think that obviously 30 is effectively or really double historical vol, right? So S&P historical vol is 16, roughly.

And so we could say, oh, it's expensive. But having just come from 80, it's, quote, cheaper. And back to what Bastian said, being in the middle of a really uncertain environment, aka COVID-19 and the aftermath and effects, and will we have a vaccine? And will there be a medication? How long? And will we go a vaccine and will there be a medication? How long?

And will we go in rolling stay-at-home orders or, you know, in and out? Just who knows is the big question now, because this is a whole new introduction of a tale event or a crisis to our world. So to me, there's no reason to look back at long-term history and say 16 is the norm, but rather to look at the fact that we're in a more uncertain environment than we have been as a world for a very long time. Therefore, I don't think 30 is high. I think it's starting to get cheap. And we're long-volume managers. We don't take relative or spread positions. We only trade a straddle. So we're, you know, our approach is we want to buy it as cheaply as possible. We're buying into it more now, right? And as it's, quote, dipped down here. That's not to say that markets don't get better and the S&P breaks on the upside

and the Fed does some more magic and everything's better and there's a vaccine in three weeks. Everything's possible. But given where I am, where we are today and not knowing the future, which is the word Basin used, and I could not agree with more, I think that this is a good level to start getting long vol or more long vol than we would have been before in the last month. To your point before, just the OPEC thing as a standalone in any other year could have probably kept vol at 30 for totally exactly exactly right so it's like ignore COVID we could be at 30 just from the from OPEC for right and COVID alone is crazy of course and just to kind of clarify though what Wade said though about when you said taking off the tail risk I just want to clarify briefly

Wayne may be taking off some of his tail risk puts at higher ball, but he's moving to more Delta one hedges. So he's not taking off his hedges. He's still long volatility, but he's just moving to different hedges. Is that fair, Wayne? Yeah, I'm taking off some of the greater exposure to IV itself. Going a little bit more in the money is getting me some still long optionality, which I think about as non-recourse leverage, right? So if the S&P drops, we still make money because we're betting short the S&P. We're just doing it through optionality. But by going deeper, closer to Delta 1, we're not as exposed to the volatility component of the option pricing.

Right. And then, Jeff, it seems like implicit in your question too is like, as exposed to the volatility component of the option pricing. Right. And then, Jeff, it seems like implicit in your question too, is like, well, how should retail traders look at VIX? I just want to point out a common misconception too. It's frequently, you know, bandied about that. Maybe, you know, VIX is negatively correlated to SPY, but we could actually have a blow off top in S&P and volatility rising. You know, VIX is a function of volatility. That can be upside volatility as well. And I think there's a lot of people that don't realize that

because we haven't seen that in a long time. Yes, that's a good point. Kevin, a question for you. Why did the exchanges raise margins far less during this crisis than past market crises, or did they? That arguably, I'm going to punt a little bit here, that arguably shouldn't be directed at me. On the futures side, that's a CME issue. They run their own clearing, right? Now on the STX and BIC side, that all is centrally cleared through the Options Clearing Corp, the OCC, that then sets margins. And your specific brokerage firm, those are minimum requirements and your brokerage firm may or may not require something greater than that level. So that's not a decision that anybody at the exchange goes out and mandates, all right, now we're moving VIX margins higher. So understanding the how and why-

You guys would keep it at $5 to get as much volume as possible, right? Ish. I mean, no, like derivatives broadly are appealing in large part because they're leveraged instruments, right? But that works both ways. And if you don't understand that, quite frankly, you don't belong using these types of tools. Like I have a young kid and he shouldn't be operating power tools, right? But they can do amazing things. It's just not appropriate for a five-year-old. And there may be a point where you recognize the power of whatever tool you have, whether it's the ocean or fire or what have you. This stuff isn't appropriate. You have to respect it. And so, no, it's not like we want anyone. Granted, volume plays a big role, but we want people like you're talking to today that really understand the product and use them as like chess pieces really, really strategically

because they continue to work in these markets. It's not going to be a one-off frustrating event. Yeah, I think we actually talk to people like Jason who have the expertise in combining different managers with different perspectives and opinions expressed in their positioning using these tools because a manager may be really good in one specific thing and if you combine it with someone something else so it's a long wall profile and you find something else which actually is able to pay for the carry or you have a manager who doesn't have any bleed but if you combine it in in a larger portfolio you're certainly much

better off not every investor when venturing into the space may have the knowledge at the beginning or as well the money necessary in order to build a broadly diversified portfolio with managers covering these different path dependencies and as a result it makes sense to look to look for projects which have multi-manager approaches, certainly across the entire board of ranges possibilities when using these instruments. But Bastian actually does that. He just uses little robots to do all of his different, those are his sub-managers that he combines. That's true. Couldn't do it all by myself. But we also have blind spots. We love the idea that you bring people with different expertise together there's a very inspiring exchange between these different

managers obviously our viewers have realized that we know each other a little bit because the space of these managers with these profiles is rather small because they have a very specific expertise and we very much support projects which combine for example Wayne's approach with things we do because if you put these things together they just show beautiful low or even anti-correlation despite the fact that we're in the same space, we use the same tools and instruments to a larger degree, our approaches happen to be very, very low correlated or anti-correlated. So if you combine them, you should actually combine as much as possible because diversification is probably the only free lunch in finance. You just have to find true diversification

and it's available in that space. I got a bunch of questions coming in here I'll try and summarize them first let's just talk about quickly and we sort of touch on this but it seems like okay there long vol strategies do poorly in short vol scenarios but April went from 80 to 30 30 and a lot of long vol managers didn't do poorly, right? So how do you reconcile that? What is the true worst case environment for a long vol manager or for you guys in particular, or you can speak generally? Which is that something to do with the vol of vol instead of the absolute direction of vol?

Anyone want to jump on that grenade? I could jump on it a little. Yeah, boom. I was just busy giving a drill to my five-year-old. And you don't want to see me on a- We all have different wrist power out there. Yeah, totally. So what is a hard environment? Obviously, April should have been a hard environment. So if you asked me before April happened, is it hard to be long vol and watch vol crush from 80 to 30 and not lose? Yes, I would say I'm going to lose during that period. I don't know how I could

possibly gain. That would be the answer. And yet we were up over that period. So how did we do that? For us, I guess our value add is trading vol with respect to market direction. So we're in a straddle. We trade calls and puts on the S&P and we will tilt or lean dynamically from one side to the other, which is effectively getting more long or more short the S&P and doing it with long vol instruments. If I want to be more long the S&P, of course, get more long we are losing on the vol side, on the vega of our options, we're dropping, the delta and gamma of our call optionality was going up because the market was recovering. So we are very simply long the market more than we are shorted and therefore made money enough to pay for the crush of the vol. And so that really is the overlay of a trading thesis on top of vol itself. And so our view is long vol, we should always be in, right? Because any disaster, vol's going up. That's what we all know to be true. Therefore, it's the ultimate hedge is to stay long vol.

The cost of doing it can be managed in many ways bastion does it through relative value trading we do it by directionally tilting and so when we go through the lines of what edge do you use all these edges are really just to pay for the cost of iv crushing so the first answer is there's no way to not lose money when iv crushes when you're long wall the second answer is you need to overlay something that will otherwise make money. You need some source of alpha to pay for that crush. And as long as it can overtake it, it works. So for us, the overtaking is that we are more net long than short the market via our option positions. Therefore, we made money more than it cost us. Perfect. A double question here. Does anyone see anything, the prevalence of Robinhood, more and more and more retail investors have access to option trading? Does that frenzy, is that influencing the market and making the spikes bigger and adding on to that? Do your guys trading during a spike make the spike go further?

Are you kind of adding fuel to the fire as markets are selling off? That's kind of in the nasty speculator category. I'll maybe start with a question for Kevin. What do they see with the ETPs having like end of day rebalancing and how much that affects kind of the VIX? That's a really good question. One that we could probably spend an entire hour on and probably very, very few people would stick around for that. There has been a move in the ETP space in an effort to be brief. There's been a move in the ETP space. Can you define ETP really quickly? Sure.

So exchange traded products broadly. Some are funds. Some are notes where there is potential exposure to the bank or whomever listed creates this product. They are wrappers that are marketed and available very much like securities, but behind the scenes there could be futures or option derivative based transactions behind them. They could be VIX based, they could be oil based, they could be natural gas, all sorts of things. There's a plethora of them. And so specific to the

volatility world, there has been a shift since early 2018, particularly on the leverage side. Big picture, just my opinion, outside of the exchange, my own personal one, I think that people like to have narratives when something doesn't work out the way that they had envisioned or they lose money. And I think it's fascinating that nobody jumped in there and said, yes, the trading I do is exacerbating the whole market. Because quite frankly, you understand how big and how global these markets are now. And that whatever role you play in these products, it's not moving the needle. This is my belief. Now, are there situations where ripples can have a bigger effect? Yes. But quite frankly, I think in the broad scheme of things, those are narratives that people like to

craft to point the finger at anyone but themselves. I'm with you, Kevin. Yeah, I think we're all with you. The other way to look at the question, I think too, is that when you're philosophically long vol like Wayne and Bastion is you're actually acquiring long vol inventory. So when those moves happen, you've bought that inventory beforehand. So you're not exacerbating that move like a gamma dealer hedger would. So you're actually providing liquidity when people need it the most. And so you're building up those inventories during low vol environments, waiting for that vol spike, so then you can sell back that inventory into the market.

Yeah. And the other side of the... Sorry. Go ahead, Brian. Thank you, Preston. I was just going to say the other side of what Jason just said is that not only do you own that inventory beforehand, but when the vol is spiking and you're at those peaks of 80, and as Jeff asked earlier, our spreads on SPX options wide, well, as much as we're selling out of our inventory, we can just go and buy the market if we want to. So we're the natural buyer at market bottoms where everybody's selling.

So we're the other side of the best liquidity there is, is to buy the bottom. All right, I still think you're going to get painted as the evil speculator but i appreciate the i'll take it they're not pointing those fingers if you're if you're chewing on you know vol in 2017 they're not blaming any of you guys when vol continues to stay in the low teens right so i don't know yeah and i think yeah the other part of that to jeff's point though is i think that a lot of times when these sell-offs happen um understandably all of us are quiet because we've done our jobs we've protected our

clients but we can't celebrate that because uh when sP tanks, there's people losing their jobs, committing suicide, et cetera, et cetera. And we all have friends and family that are in those situations. So all we can do is take some internal pride of a job well done to protect our clients, our families, et cetera, by building up that inventory when nobody wanted it.

Good point. Yeah. I like it guys. I'll finish out with one more question, which was sort of mentioned in there, but something I get a lot of, is it too late for long valve protection? Which is less important than when it was at the end. Absolute return. That's it. So we're going after absolute return and's that's it so you we're going after

absolute return and um if there's no option at all sell beta and go for absolute return and prepare yourself for all scenarios and specifically to benefit from the convexity if something massive is happening that's that's key. It goes a little bit back to, is it too late or when do you have trouble? So if the VIX is very, very low, very, very low, meaning there's pretty much no movement in the S&P as we have observed in previous years and up to the point until late January, that's where you don't want to have a lot of activity, but you can still have small positions on. Managers generally size their positions in regards to what's happening in the market environment. In some cases, if the term structure is too flat, flipping back and forth

slightly and on a very absolute low level, you may not engage substantially because there's nothing happening. But once things become a bit more pronounced, you will actually build up positions, not accelerating something which is already going down the train, but actually have the insurance or have the benefit to benefit from something like that before something massive is happening. So it's never too late. Going back to the portfolio insurance aspect, a portfolio without insurance, according to someone who knows quite well and has written various books about it and has expressly said COVID-19 was not a black swan, is saying that the entire spectrum of your portfolio, you will always be heavily exposed whatever is happening going forward. And as a result, it's never too late to put it on. And you should probably combine different approaches. So not all X in one basket and things like that. A lot of the normal general advice from finance applies here quite well as well.

And we may not have seen the end of this crisis yet. Nobody really knows. We just focused on earlier on aspects of COVID-19 of a solution for that, but we haven't really talked about the economic events afterwards. What does it actually mean if you have trillions of packages currently out there? If the Fed has just said today or yesterday, this hasn't been everything we can do. We can do much more, certainly up to unlimited. So what does it actually mean for the economy? So we don't even have to think about

just the next couple of months. There will a lot of things happening going forward. There are global tensions between the US and China as well, which have been cooked up substantially now because of that again. So there's a lot of uncertainty in the short term and in long term, and it always makes sense to think about portfolio protection and to have it on and maybe play a little bit with it, a little bit more in certain times, a little bit less in other

times or different managers with different path dependencies. But it's never too late. And it really makes sense to do it so that next time more people can be a bit more relaxed from the economic side of things and focus on the human life side of things when such a crisis hits. Right. If everyone had it, we wouldn't need the bailouts. It's funny, whenever... If everyone in the market had it.

Yeah. I've gotten that question quite a few times recently. Is it too late to be long vol now? And yeah, maybe at 80, it was too late. But here down at 30, it's getting more enticing. But the bigger point I wanted to make is that the idea of asking, is it too late to be in long vol? I want to now reframe that question and say, is it too early for the market to decline again? Right? That's really what you're asking. Well, I don't know. Is it too early? Sure. Can something happen tomorrow? All someone is saying is, can another bad thing happen anytime soon?

Well, of course it can. So it almost seems like, to Bastion's point, you need to be in long vol all the time. If you have a portfolio, and most portfolios are predominantly negative skew or short vol to some degree in most asset classes, then you always need long vol on. So sure, at those extreme peaks at 80, you want to take a little bit off because the probabilities are not in your favor. But as soon as you're back down to anywhere near the realm of reasonably priced volatility, is it too early for the next market decline? No, it's not too early. And so if you can find a good way to be in it, either cheap or profitable way to stay long vol, to me, to all of us here, of course, it's the natural answer is as much as you can of it.

Yeah, to me, it's like, Jeff, so it just, you're almost, you're almost disqualified by even asking the question, right? Because you're explicitly saying, like, is it safe to go back in the water? Are all my fears gone? But you have a fear if you have to ask the question. Right, exactly. Probably to the point that a lot of people got hurt with volatility in the past because they have invested in some kind of product which says volatility or VIX. Most of the time, it has been a short vol product, which did so reasonably well with these

steady small gains until then everything disappeared. Big banks have sold that to all kinds of different people. So the buzzwords volatility and VIX are contaminated to a certain degree. And we are also maybe catering to that by using words like insurance, because nobody really likes to pay insurance. We're just really happy when we have it. So it's not really that we just do insurance part. If you have an absolute return product, your idea that you want to make money pretty much every day. There are circumstances where you make no money,

where you lose money and where you make less money. But ultimately your objective is deal with the circumstances and position yourself accordingly. So maybe we have to use a different terminology when speaking with new investors, I'm not always referring to the insurance part, addressing bad experience on the shortfall side, because that's really what really, really hurts.

In all of us human beings, we don't like uncertainty. And short wall is so great because you have these steady gains. It's all good. And managers look much better if you take measures like sharp ratios and things like that. These short managers, short wall or short wall approaches, they look really great. That doesn't mean that you can't have a good short wall product, but you have to size risk very actively and accordingly.

And the majority of investors with negative experience in terms of VIX futures, options on the VIX, the VIX complex as a whole, probably have been burned in scenarios like February, 2018, during the Walmart get-on, where these products, the short complex, violently imploded. And to a certain degree, this also happened in March, because people got complacent again,

and investors got lured into products which print these steady returns, and then again blew up to a certain degree in March. And maybe we have to stress that more that there are different ways how to deal and trade with volatility and go away from these negative connotations. And with global rates at zero for the foreseeable future, we're going to probably see people

continuously searching for yield and getting complacent again. To summarize Bastian's point, it's not whether you should be in it. It's how you should be in it. Perfect. I love it. All right, guys, we've gone over time. So I apologize to anyone who asked. We had a bunch of questions there. Thank you. If we didn't get to them all or aggregate them correctly, I apologize. But we'll put in our show notes here how to get in contact with all these guys. So thank you, Kevin, Jason, Bastion, Wayne.

It's been fun. Thank you. Thanks for having me. Be safe and healthy. 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 alt and visit our website to read our blog or subscribe to our newsletter at rcm alt.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