The Derivative - Options give you Options with Scott Phillips of Lavaca Capital

Episode Date: February 27, 2025

In this episode, Jeff Malec sits down with Scott Phillips, the CIO of Lavaca Capital, to discuss the firm's journey in the world of options trading. Scott shares his personal background, from his start as an auditor of energy derivatives at KPMG to founding Lavaca Capital and navigating the complexities of options strategies. The conversation covers Lavaca Capital's evolution, from their initial focus on simple option structures to the expansion into more complex portfolios and the eventual return to simpler expressions. Scott provides insights into the challenges of managing option books, the importance of discretionary overrides, and the impact of the growing options ETF space.Scott and Jeff explore the misconceptions and pitfalls in the options market, the need for better education and simplification of concepts, and the potential for future market disruptions. They also discuss the firm's customized solutions for clients, the current market environment, and the lessons learned from historical market events.00:00-01:01=Intro01:02-08:40= Auditor to Trader, A Rare Bird, & Misconceptions of Options08:41-20:31= Complexity, Hedging, and Customized Option Strategies20:32-30:36=Current Strategies, Market Environment, and Systematic vs. Discretionary 30:37-35:42=Lessons from Historical Market Events and Looking Ahead35:43-43:13=Managing Options in Volatile Markets43:14-49:07=Back in Time, Texas, and the Options Capital of the WorldFrom the Episode:The VIX Index and Muted Volatility in 2022RCM: The Dummies Guide to Option GreeksFollow along with Scott and Lavaca Capital on LinkedIn and check out their website for more information at lavacacapital.comDon't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-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, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

I think that people get tripped up when they try to simplify them too much. I think that the options industry in general has not done a great job of bringing very complex products and simplifying those concepts to investors. Welcome to the Derivative by RCM Alternatives. Send it. My name is Scott Phillips. I'm the CIO of Lavaca Capital and we believe options can give you options. Where are you coming to us from today? I am in Houston, Texas here in our office in Houston, Texas.

We're in the Galleria area for those that are familiar with the city. It's also the options capital of the world, if you didn't realize. I was about to say you're an equity options guy stuck in an oil trading town. That's right. That's right. So I think some people get confused. They see Chicago on our website every once in a while. And they're like, are you in Chicago? Are you in Houston? What happens at party? Are people like, options? What? What kind party are people like options? What kind of options? Energy options?

Yeah. Or people get it down there? So I would say in Houston in general, there is more of a vague understanding of what we do versus, you know, you're in Chicago, like everybody knows options up there. Down here, it's a little bit off the run, more off the run. And if they do have any familiarity, it's through typically energy hedging, hedging programs that they've worked in, in some some distant past. We even have, it's probably just the people I know and hang out with who were on the floor in the biz. And so they talk deltas all the time of like, what do you think the delta of the Cubs winning the pennant this year are like, like, oh, there's only a 5% delta I make it to that it's going to rain anyway, blah, blah, blah.

Yeah, see, we're more, you know, you're all hat, no cattle. Yeah. All hat, no cattle. So let's dive in, give us a little personal background, how you got into the world of options and we'll go from there. Yeah, definitely. So I went to the University of Texas at Austin. I'm a native Houstonian. And when I first got out into the workforce, I started my career at KPMG. I worked in energy derivatives. So I was part of a lot of team here down in Houston working on a wholesale power company at the time that's no longer, I think they were absorbed by NRG 10, 15 years ago now.

So kind of got a hunger for derivatives there. I have a kind of a family background in it as well. And so I always knew I wanted to end up in investment management. I started off with more of a technical, you know, kind of career there in accounting and then jumped quickly over into investment management about two years after being in accounting. That's a rare path. I don't think we've ever had anyone that went from auditor to trading. And that's right.

That's right. Because the other way they were not so good traders and ended up in auditors. End that's right. That's right. Sometimes it goes the other way. They were not so good traders and ended up auditors. Ended up at auditors, yeah. So, yeah, so call me a rare bird. And definitely not your typical career path. But started out managing some family capital. Like I said, there's some background there in the family.

And then used that as kind of my initial capital base to start the firm back in 2014. 2014. Did you have any Enron overlap being down there? No, not for me. I did have a little bit with some people that I worked with, particularly KPMG, but not personally. KPMG wasn't the one auditing the Star Wars and no it was Arthur Anderson and A lot of those partners a lot of those guys left and joined KPMG when when Anderson went down. Oh, really? Yeah, so a lot of them plenty good war stories there. Yeah, it's got got any that are Family-friendly for the pod here. Yeah

Nothing PG All right. So then started the block of the same idea from the start. What was the general genesis of it? Yes. Better in options, you can do different in options. What was the?

Yes. So just started really with simple, kind of more simple structures and options. So utilizing, you know, more of more simple structures and options. So utilizing a more simple approach of just some simple cover call writing, some simple hedging around equity portfolios. And then quickly kind of got into more complex option portfolios as the business grew in 2018, made first new team member additions. Those team members are still here to this day.

And then 2019, made our move into the private fund space, the launch of our first fund and then into 2021, launched our second fund. And those strategies, it's kind of interesting to see the genesis of the business because we started with, or at least I started with much more simple structures, we went to a much more complicated book. And it's been interesting to see the genesis business kind of shift back towards more simple expressions of options.

And we were talking offline right before we started of those shift back towards more simple expressions of options. And we were talking offline right before we started of those simple expressions or gathered like 140 billion in ETF assets and simple covered call stuff. Yeah. I guess I wouldn't say the buffered note stuff is so super simple. Yeah. But at the end of the day, like a caller or a foot spread caller, so that they're utilizing there on the buffer notes or,

you know, you got three legs there and people generally these days are starting to pretty much understand cover calls. And a lot of them are starting to understand, you know, hedging or protection, I guess is the, is the buffered ETFs call it. So I think it's been interesting to see how options have been democratized pretty widespread since really since COVID. And if you, I mean, we were talking about that chart there,

you look at the inflows into these ETFs that utilize options, these actively managed ETFs that utilize options, this has grown tremendously over the past four or five years. I mean, when I first started in this,, I was just kind of like to say the Christmas dinner barometer. Now I go to go to Christmas dinner and people ask what I did and I'd say, no, what's an option? You know, now everybody wants to talk about options at Christmas dinner. You know, it's like people want to talk about Bitcoin back in 2019 when it made its first 2017 2018 when

it made its first peak and then went into the bear market after that. The some of that is not right. The democratization is not always good. We had a guy in here who's his nephew was the one who killed himself like because he lost a bunch of money trading options on Robinhood and all that. So like, yes, but also I think at some points it's been too gamified on some of the apps and whatnot. Yeah, you know, it's like, oh, you can make YOLO buy all these options on Nvidia and you could never have to work again. You're like, well, you also have a 5% chance of actually making any money. Yeah, you know, it's interesting you say that because I was on the so I now about how to use options to express a thesis,

essentially. Hey, I think Apple stock is going to go up or the volatility is going to go up on Apple by four points or something like that. And then it creates a pre-made, ready-made structure for you. It's like a TV dinner to stick it in the oven and push by. Yeah, there you go. a TV dinner to stick it in the oven and push by. Yeah, there you go. What are the problems you see with that? I mean, the simple answer is it's not that simple, right? Like, just if you think it's going to go up, you can't just buy the call. Yeah, it's never that easy.

Right? You need to think it's going to go up more than it's already expected to go up. Right, right. Yeah, It's never that easy. Um, I think that, uh, I think that people get tripped up, uh, when they try to simplify them too much. I think that, I think there's two parts to it. I think one, I think the options industry in general is not done a great job. Um, of bringing very complex products and simplifying those concepts to investors.

A lot of the talk still revolves around Greeks and second order Greeks and third order Greeks and Volga and Vanna and Charm and not let alone Delta and Gamma and all that. And for most investors, even the really institutional investors we come across, that stuff goes over most people's head unless you're in Chicago or you run an auction fund, like people don't have time to understand or really care to understand what the charm of a three-month put option on the SPX is. And tell us what charm is real quick. Yeah, so charm is the decay of the delta as time passes. Right, instead of the strike or of the premium. Yeah, yeah. The decay of the Delta as time passes Right and said of the strike or of the pre-a. Yeah. Okay of the Delta the Delta, right?

Yeah, it's helped out the changes through time. And so Do you I guess that's an interesting point do they care? Do they not care because they don't have to care right like so the institutional guys they just have a specific So the institutional guys, they just have a specific idea of what they want to do. Most of it involves hedging. They probably don't need to care that much about the decay of delta over time. Yeah, that's the thing. Well, I mean, I think if I was an institutional investor, I would care about the decay of delta over time because that's going to impact the effectiveness of your hedge.

But just simplifying that, you don't need to talk about it in terms of charm necessarily, right? You need to talk about it in terms of the effectiveness of your hedge, right? That's a much more simple concept for somebody to understand. The hedge loses its effectiveness at this rate over time. Yeah, exactly. Exactly. So when you started, when you said you went from simple to complex back to simpler, was that because you got taken to the woodshed? Most option programs have this historical progression, right? If they start out great,

mostly all are naively selling vol, and then they get whacked in some event like a Feb 18 or something Balmageddon and then like oh I need to have some filters I need to have this and that so did you ever have one of those events or you just started to see I Didn't I you know, I really didn't what I did get to was, you know when you're running You know a complex book multi-line item, option book, there's ways that you get surprised. Not because you don't understand it, but because when it gets that complex and there's that level of...

Let's say you got what? Seven, eight, nine Greeks, right? Per line item and how those all interact. You're just, you're not, your expectations are not going to be met like you think they're going to. Which is the idea of those Greeks, right? To sum that all across that book and be like, here's my exposure. Yeah.

Yeah. Certainly. Certainly. and be like, here's my exposure. Yeah, certainly. But I still think that things can move outside of the realm of your expectations, more often than you expect it to. And so, if you're trying to come up with... I think that things become far too complex when it comes time to say offer a portfolio hedge. A lot of times, the simplest hedge is the best. A lot of people want to try to use, maybe they'll try to use a VIX call to hedge a portfolio.

Well, that didn't work out great in 2022. But just delta, just owning a put delta, especially if it was longer term, didn't matter that Vega didn't expand on you. You got 100% of that short delta on that decline. What would you say to then just do, if that's kind of just taking down your overall delta, so instead of being 100% long stocks with this hedge, why not just go to 80% long stocks or something? Just adjust your delta on that side as well. Yeah, just trim your equity portfolio. That's certainly another way you can express that. Yeah, that's always a confusing part of the hedging. Like, well, that's the simplest of

all, just do less. Yeah, yeah. Yeah. And you know, in a cash environment where you're in four plus percent. Yeah, not, you know, it's not nothing. So you have any examples of some of those that got you by surprise, so to speak? It's like skew movements or what? I would say the level of volatility that we started at coming into 2022, you really didn't have like a spot vol beta kick up until June and September of those years. You had a little bit in January, it was January 24th, I only know that because it's my daughter's birthday.

And things always tend to, we're at Disney World and things always tend to happen when you're out of the office, right? Yeah. And then you have this massive ball crush in May of 22. If you don't remember that, Fick Strike Ball got just taken to the woodshed, and then picked back up in June when SMP was down nine that month. So that lack of Spotball Beta, which is somewhat returned though, meaning that we now have spot ball beta coming back into the market was a little bit surprising. Just the amount and magnitude of how it magnitude and velocity of the crush you're saying?

Yeah, yeah, correct. Like, I mean, you just, I mean, mark it down, ball down. Yeah, big strike ball was, I mean, I think, you know, Sibo asked me to write a blog on this. It was, you know, at this point, it's three years old, but you can go look it up. It's June of 2022. I think it was, I wrote a whole white paper on it. Just how anomalous that period was. And you know, the funny thing is, is that, you know, when we looked at things, we identified that as a period that can be challenging for some types of options strategies. It was very similar to like 2000, 2001. And yet when you live it, right, you know, 20 something years later, you're like, Whoa, wait a second.

So what, and then you went super complex. So talk, talk to me a little bit of when you went super complex. You just had all these major items. Yeah. So that was, you know, that was kind of mid midlife of the firm, I would say. And we really started to focus our business kind of more on a fund business. But as we went to the market and we started talking with investors, what became clear to us was that, and I think you would probably agree with this, investors these days are much more interested in what's specific to their portfolio, right? So like in order to invest in an off-the-shelf strategy, an investor has to raise cash.

They got to deliver cash to you. Any manager of a fund or SME or whatever, they have to deliver cash. But you can use options without having to do that and work with an existing investor portfolio to provide, maybe you're providing alpha, maybe you're providing a hedge, maybe you're expressing a thesis, and do much more creative things, which is what I love about this business. That's the part of options. Like I said, we kicked it off with options, give you options. That's what I like about it. It's kind of like a canvas, you know, investors looking for something specific and you can utilize a vast array

of these instruments to create what they're looking for. And what's an example of like the Boeing execs come and say, hey, I've got 50 million in Boeing stock. Can you help me hedge it or earn a yield off it, something like that? That's a great example. Generate alpha on that position, hedging that position. I think some of the ones that I kind of find interesting are private assets. So how would you hedge a private asset with a public instrument? Obviously, it's a dirty hedge because there's no direct, you can't buy an option on a private

company. But that's been pretty interesting to me, some of the mandates that we've worked on, their proposals that we've worked on. And those are like venture investments or things that have an IPO yet? It doesn't necessarily have to be a company, it could be a real asset, right? It could be a commodity, something like that that that's not hedgeable directly. And how do you do that? How do you start with that? You look at what's correlated? Yeah, yeah, yeah.

So you look at correlated instruments. You find either individual equities that are correlated, sectors, ETFs, even if it's just a broad beta, and really dial up to what the client is trying to achieve. If the impairment or the decline in value of some assets is going to impair cash flow to that entity, what can you construct on the public portfolio side, on the liquid portfolio side, you know, on the liquid portfolio side, that that gives an offset

to that decline in cash flow. Do you find that a lot those are rare, like those investors in privates or real assets that are actually looking to hedge? It seems to me a lot of those guys are just, hey, this is how I've made all this money, no need to hedge it. I'll just keep that risk going You know, it's funny. They don't care. It's not so much the hedging. It's They definitely don't want to cap the upside and it doesn't go down

Yeah, yeah. Yeah, so You know even in a mature asset or even in a public asset, right? If you have somebody that is very, you know has owned a public asset for our liquid asset for a very long time. They are very had generated material wealth off of that asset, they're very hesitant to, you know, to do an override on that, even if it's, you know, an opportunistic overwrite, nothing that we do systematic here. Everything's much more discretionary. And so I think that's the best way to express options because you have to find, you know, there's always a time to sell a call option.

There's always a time to buy a call option. What's the price you're paying for it? And so yeah. We used to have an investment advisor we worked with. He'd call those positions financial furniture. And be like, oh, Aunt Jenny's got this Coca-Cola stock that her grandfather had. I liked it.

And it's just sitting over there in the corner. You can't touch it, can't sit on it, can't do anything with it. Financial furniture. Yeah. Leave it alone. Admiring. Yeah, that's awesome.

That's awesome. Let's move into kind of the current strategies, what you guys are doing across the firm and how all that works. Yeah. So we currently manage about 450 million in AUM and we do primarily sub-advisory work. We do manage some coming old structures. Let's say about three quarters of our business though and the side that's really growing is providing kind of bespoke solutions to end investors, either through intermediaries, such an advisor or so, or directly to an entity like a family office or so.

The uptake of option strategies, we talked about the democratization. One benefit of that is that people are much more interested in the use and utilization of these types of instruments in their portfolios. And they're eager to see how you can provide value. I think that's the main thing that we focus on is focusing very, very closely on are we able to add value to the end client. If we can't, we'll tell you, hey, this isn't something that we can work with. Which would be what I'm trying to hedge this Malaysian palm oil stock. Yeah, or if it's a

liquid or, you know, the last thing that we want to do is to not have expectations be met. Right. And you can't,'t obviously you can't guarantee that. Um, and people, you know, there's always that possibility out there, but as close as possible as we can of meeting expectations with investors, um, you know, what is, is really important from a business perspective and a client relationship perspective. I think most of those clients are trying to protect downside or amplify upside? I would say currently we have received more inbound,

probably for downside protection. Yeah. Yeah. And then what's a typical structure? How are you structuring your trades or your strategy to kind of meet that mandate? Well, it depends on what the mandate is. Yeah, and it depends on the client and it does vary. Typically, we'll look for either direct hedge,

but put spread depending on what skew looks like, what pricing looks like. You can replicate OTC type structures in the listed space. Maybe it's a digital or something like that, a digital replicated in the liquid space. Maybe it's just a straight put spread, maybe it's one by two, you know, something like that. All depends on that specific asset. But and then in your funds, would you say there is like a flagship strategy? We do run a specific strategy, although we are limited on what we can speak about from the private side.

Right. Well, give me as much as you can speak about. Yeah, so we're just trying to generate alpha. Our goal is to generate alpha to the SMP. And so tracking the SMP. So if SMP is alpha to the SMP, so SMP is up, you expect to be up, SMP is down, you expect to be down less? Generally speaking. Generally speaking, right. So it's not pure absolute return,

it's more of what I would call tracking SMP+. You know, the downside. Well, I think it depends. I think it depends on if you pair something with equity or not, right? As a standalone, then maybe more absolute return. If it's paired with an equity, like looking at the total portfolio, right? If you have an absolute return bucket and you have an equity bucket and you pair those two together, equity is down 30, but you know,

your absolute returns up 10, I only total portfolio is still down 20. Yeah so you know where we judge you know the value of our basis on is what that incremental return to the portfolio is. And what what do you think most either we could go back to the retail guys or institutional guys like what do you think most, either we could go back to the retail guys or institutional guys, like what do you think most people get wrong or maybe that's too harsh of a word, but what are they overlooking in the option space? If anything, right? I think, no, I think one thing though that's currently being overlooked is the systematic nature of these ETFs and the explosion of AUM in them.

I think the next time we get a COVID-like decline or a layman-like decline, or maybe even a December 2018 kind of style market, which we haven't had, and we had a little bit in 22, but a lot of those programs- August 5th, we started to have one whenever that neat guy was around. Yeah, a lot of those August 5th, we started to have one whenever that knee guy. Yeah, yeah, that's right. August 5th. But I think the cadence of it has to

line up with one of these systematic portfolios rebalance, right? So like, let's say you had all this AUM today and those funds well, March 20 2020, you know, markets down what 30% from its highs. You know, XYZ, you know, $500 billion of XYZ ETFs that sell, you know, call options, you know, monthly call options, maybe at the money, maybe slightly out of the money, go and rip a bunch of calls, you know, at down 30. Market rips back up into April OPEX and investors are now capped. And so their return profile expectation there, something like that is going to happen in the future at some point when those two things line up. And I think that's where people are going to see that the systematic approach to option strategies does not produce the, what do they call it? SEC yield that they're getting, right? Because they're just returning

capital. Don't you think that's kind of a, right? They're calling them alternative income funds. They're just selling premium and I don't know if we should be calling premium collection income. And they're just returning capital, right? I mean, if you look at it, you know, they'll say if you look at the total return and the price return of the ETF, they're returning capital to the end investor. They're returning them their own dollar, not an income structure. So those always get me. They always get me. But even maybe they're smarter than us by half, right?

Because well, yeah, they got a lot more money in the door. But it's like their worst case scenario, as we just laid it out, is you were down less than the market and then you were up less than the market. But you're right. So the market ripped up 30 off a down move and you were only up five or something. Yeah, but the up down capture ratio is completely, completely thrown off, right?

Cause maybe they're down, you know, they're down 98% of what the market is. So market's down 30, they're down, you know, 28, right? But the market's up 30 and they're up five. Yeah. All right. You know, that's not a good ratio. That's not a good look, but I feel like the, But the markets up 30 and they're up five. Yeah. All right That's not a good ratio. That's not a good look, but I feel like the People are investing sort of really like well, but we lost less

Yeah, and I'm just it's consistent the rest of the time. It's consistent. Yeah Yeah, I mean it took if you go pull up the charts it took I Think it was until 23. Don't, don't quote me on this, but if you go put, look at the charts on some of those ETFs that were around, one mutual funds that were around, uh, that run ran these strategies through 2020. It took them almost two or three years to recover to their high water mark. You know, when equities took what? Six months.

Yeah. And the more insidious problem too, is they're having to get closer and closer to the market, right? Like the more they come online, the more they're trying to sell the calls, there are more demand, more supply. Yeah, yeah, way more supply on the market that's driving the price down, that's giving them lower premium, give them lower breakevens, all that kind of stuff. And don't get me wrong, like I think there is, I am not in the camp of, you know, kind of the more, the more, what's the right word I'm looking for, I don't want to offend somebody. But you know, I'm definitely in the camp that

there is definitely a time to sell a call option. Some people believe there's never a price to sell a call option, but I believe there's certainly a time and or price to sell a call option, but it's not systematically done on a regular basis. Well, you've walked yourself into that. When are the times and places to sell them? So I think it depends on what the investor's objective is. And there's always the argument, like you said, that you should just sell part of your

equity, right, proportionate to what the delta of that option is. But in general, I think that if you can look at a basically look at the volatility of that option, and if it's normally trading at a 18 vol, right? And all of a sudden it's a 24 vol for some reason, outside of an earnings or some type of special announcement or something like that, that might be a time to start to look at something. All right, so is it outside of what a normal market condition would imply for that underlying equity? Now that doesn't mean it's risk-free. Right. I mean, certainly none of these firms are out there Delta hedging that option, right?

So they could be right for the wrong reasons or wrong for the right reasons. What's your take on all the increase in, I mean, this has become less and less talked about, but zero DTE, all of that volume that's happening in the index option space, that's a good thing for you? Doesn't matter. So we so we do trade a decent amount of zero DT. That market's gotten much more efficient, but there's still pricing anomalies there. I think I still think that there is a price anomaly in the zero DTE space, but it's not any, you know, kind of widens and skinnies up at various

periods. In general, Zero DTE fully came online in what, May of 22, June of 22 when they listed all five days. And that's kind of how I define Zero DTE that you could do one every day of the week. Right, because there was always Zero DTE. You just had to trade it. Yeah, you had to trade it on Thursday, right? Yeah.

So that's kind of my definition of when real five day wait because ZDT came online. And I've seen that market get a lot skinnier. Now it's also possible because we're trading in a 2030 VIX environment, most of 2022. So you look over various periods when Vol realized vol has been trading into the low teens over the past month or two and some of those premiums start to look like what they did back in 22, not quite there, they're still lower. But as realized vol picks up, they generally tend to follow realized vol. Which makes sense.

That's what they are. If it gets realized, you're going to realize it. Yeah, exactly. And who do you see as the main players? And there's a retailer or institutional? I think institutional does a ton of it. But you've seen a decent adoption of retail ETFs utilizing them. So like there are some zero DTE put selling funds out there, call selling funds. They typically do at the money, I think. I think one of them does like 1% of the money call or 1% of the money call option. They express

it by selling a 1% of the money put option. But even that, it's a little bit different when you're selling that put versus call because of the carry environment we find ourselves in, what, seven years ago or four years ago know, four years ago, you really have to worry about much of the difference in carry because rates were zero. Now, you know, there's, you know, you're looking at the money put in SPX, you know, and then after money call in SPX, and there's a one to $2, you know, difference there because of the carry and that call.

So you don't see any problems with zero two like two years ago when it became everyone was talking about it was like this is gonna cause a big crash there's gonna be liquidity problems do you see that or it's a balanced book and it's just is what it is it's just instead of once a month now we have it every day of the week. Yeah I think it's we have it every day of the week I mean look at the flow and look at the volume I mean in gil trade I mean on a single line item, they'll trade 70, 90,000 SPX. Yeah. You know, and they go to the similar, it's interesting watching that flow throughout the

day and watching the market react at those levels and how the market trades around those levels, where primary volume is. That's a pretty interesting exercise if you ever want to follow along one day, because you generally tend to see the market react positively or negatively around those levels, depending on if it's the call. But I think there's plenty of liquidity there. I don't think that there's plenty of liquidity there. I don't think that they're instruments of financial Armageddon. I just think at the end of the day, they go away.

And everybody kind of might be able to get up in arms about, well, you can trade them intraday from a margin perspective and your prime may not know it. Right. But they still expire at the end of the day. Yeah. That doesn't drive clicks expire at the end of the day. Yeah. That doesn't drive clicks. We need some hotter takes there.

Like these things are arm against. What are the... So it's not buffered notes, it's not covered call funds, it's not zero DTE. What else we got? Anything else we want to dispel the myth of? Just outright put selling? I don't think you've seen as much of that in the market.

Yeah. It's coming back a little bit, but I don't see a ton of flow there. I think it's primarily on the call side, or it's synthetically cover calls through selling a put. They're selling money put. Where do I see it? I see some of that, but still there's no leverage in the system on that.

Right? And I mean, they're not the... If they were levering that, then sure. All right? But I don't see the kind of leverage there and those funds certainly can't be levered. Right? So, you know, selling a 1% in the money put to replicate a cover call. Okay, market's down five, they're down, you know, 4.8.

Right. Whatever it is. So yeah, I don't see that. So you said you're mostly all discretionary or it's all discretionary? Mostly discretionary. Yeah. I mean, we have a rules-based kind of process framework that we utilize. We're a team of four, three on the trading side. But in general, I would say there's always a discretionary override. And I think options strategy is going to trouble and there's not. But expand on that because it's not that simple as we outlined before. Like the price might not be the right

price. Right or knowing what to do, you know, I mean, you know, knowing what to do the morning of August 5th, right? Knowing that that spot ball beta was so out of whack, right? That not doing something to your portfolio there if you did not monetize in the early morning hours or right around the open, despite the market being extremely wide right even in SPX. I mean SPX was trading like 20 points wide on some stuff. Versus half a point. Yeah.

Yeah if not tighter. Not being able to realize that that is a time that there needs to be some discretion exercised, right? You know, you would have missed an opportunity there to do something good for your portfolio, I think. So things like that, where, you know, something gets so far out of whack, you know, zero DTs, you know, the straddle today where I traded 20 bucks, roughly $20 at the close today, I was trying to get pretty low on a $6,100 index $6,140 index. On quote on the close for tomorrow's expiration. Yeah, yeah, $20 SPX straddle. You start getting

much lower than that. And it's that's as low as I've seen it since zero DT started trading And what's that implying that it has to move a third of a point? Yeah, yeah, roughly Let's go put that on that does seem a trap But isn't it a case of like in theory you could systematize all those thoughts or is it just not worth the right, like okay if it is this far out of whack based on standard deviations or versus the average don't trade or do the opposite or yeah like in theory it's about my pay grade yeah all right good right it's not that it shouldn't be it's that it hasn't been you. You can definitely systematize to a point. But I still think, and in normal times,

like having a systematic expression should be just fine. You take all of your rules-based framework, codify that, systematize it, let something run that, but you have to be able to override that system. So like yeah, like you know the past couple weeks things not much has been happening. Right? Early in the month you know we had a little bit of a dip and not much has been happening. You could certainly systemize, tie something for a pretty normal or benign environment but outside of the you know when you start getting on the tails outside the media distribution there.

But outside of the, you know, we start getting on the tails outside the media distribution there. I think that's the time to over. What do you have any thoughts on what breaks us out of this low realized regime? Right. Like Trump seems like he's doing everything in his power, but nobody cares. Yeah, I think you have a tug of war. There's a lot going on. I mean, on one hand, you know, deregulation should be pretty good for markets. Yeah. On the other hand, you have this massive amount of debt, right at the fiscal level, US level. On the other hand, you got Elon Musk out here, you know, storming Fort Knox, creating

unemployment, and cutting costs left and right. So I think that there's all these kind of things swirling around on the under the surface in the macro world that are kind of canceling each other out and the November, until now in a range. We've traded 5,100, you know, just the past few days that we've broken out the 6,100, you know, top side of the range, but we traded 5,750, 5,800, 6,100 for three, four, five months now. The market's digested some of the Trump move. Right, or is everyone, traders are just like, don't stick your neck too far out one way or the other? Yeah, I don't know necessarily that I just think that I think that people there's so

much of that swirling around underneath, right? So maybe you're right. Yeah. People haven't fully grasped what the next move is going to be. Right. I don't know. But at the same time, I was just going to say like at the same time, you know, we're consolidating at the top of a, you know, of a pretty large range here on a, after a massive

run. You know, over the past two years, what it's been since the 70s, since the market's been up this much back to back 23 and 24. I think the, I saw a stat somewhere that it was 73 or something like 73, 74, since we had that type of run. Again, I have to go and look that one back up. Um, but that's a big run. That's a big move. That's an anomalous move.

And what are your thoughts on Nvidia, Mag seven, huge concentration, like all of those stats are that basically that hasn't been seen since 2000, 2001 as well. Yeah, but you have a lot of dispersion there. I think like look at those seven names. I mean, Microsoft's traded, you know, it's 15% off its size set last summer. For nine months now, it's traded around 400, 420 bucks. Nvidia kind of the same, you know, went to one, just traded 120, 140 for a period now, really the only ones that have actually

gained traction and you know, higher prices have to hire our Meta. Apple's kind of traded in this range, 200 to 240. Yeah. But that's kind of an argument, right? Like if one of them, if one of the sevens down, down the other load up on the other. Yeah. And so the game keeps going until people decide all seven need to go up. Yeah.

And in the options world too, like look at the volume and all those names. Right. I mean, once you get outside of the top 2030 names, you know equity names like volume just falls off a cliff Yeah in the options world. So Do you do any dispersion trading kind of stuff like that? No, we don't No, I think it's I think they're great. I think it's been a wonderful trade, fully understand it. But it's just, I think that I don't want to spread things too thin. You know, focusing core on what our on what our business is, can we do it? Sure. Yeah, is it time and effort that I would then have to spend or one of our team members would have to spend. Absolutely. But you will per that custom approach, if someone's heavy in tech, be like, okay, well we're gonna edge it with NASDAQ options or whatever.

Oh, certainly. Yeah, yeah. Certainly. Yeah, and I mean, it's always a cost benefit analysis, right? If you can get 50% or 80% of your hedge effectiveness through triple Q put versus buying a put on meta. Go for that. We got one last segment we'll do for you then here. If you could travel back in time to any big market event, what would it be and how would you trade it?

One that I was president or one that I would... It could be anything. It could be Napoleon or something. Yeah. Yeah. Really go back there. That's the... I think that is is the I don't know if it's truth or rumor of Rothschild Right the Rothschilds in Europe had a carrier pigeon. This was like the first ever high-frequency trading So someone witnessed that an appointed lost Sent back a carrier pigeon to England and he knew that before and was trading based off that knowledge Yeah so one that I always thought is super interesting is when the Hunt brothers traded the

silver market. Yeah. No idea how I trade it, but would have loved to have lived been in the room. The mother of all short squeezes. Yeah. Yeah. Yeah. But that's interesting from an option standpoint, right? You would think the obvious answer would be by calls, but perhaps not. They're like, so I mean, the ball was so out, you know, so blown out. Yeah. I've seen that data in the, uh, internet bubble crash. If you I think the best trade was selling putt Mm-hmm, it was which that you would think you'd be like, oh the market was NASDAQ was down 70%

Like buying puts would have been the best right? You're naive my naive brain just immediately goes Oh you buy the puts. Yeah, you knew it was gonna happen before time and ahead of time. You could have bought the yeah Yeah, yeah, I've talked a lot about that with one of your good friends Jason Buck. Yeah He talks about you know trying to have something buying puts and losing money on that Not only losing money on the other line position, but losing money. You know how you can end up losing double Right, which what's their professional explanation of that? It's just what we started the pod with. It's because it doesn't have to just go down.

It has to go down more than people are expecting. Right. Right. Because the price, there's always a price on something. Right. So just like 2022, uh, selling puts worked out pretty well for people in 2022. The ball was high, market star set down. Uh, those that, you know, were long ske. Those that were long skew certainly didn't have

that skew work in their favor. Really the only thing that worked was really just pure short delta as close as you could get to it on the option side. But I think that sensitivity in 22. I think the one-year putt, right right if you bought it at the end of 21 Mm-hmm for DS 22 like basically at in the end of the year there It was flat to down even though the market was down 20% That the money put I think so. No the 20% out of the money put oh, yeah. Yeah. Yeah the 20% out of money Yeah, yeah, they think like I nailed it. I got, right? I nailed it. Yeah. I thought the market was gonna go down 20%. I bought the one year 20% out of the money put

and you're sitting there at the end of the year going, what happened? I made no money. Right. Right. So all of that to say, I'm teeing you up to say, well that's why you need a professional in the office. That's right. Give us a call. All right, Scott, I think we'll leave it there. And now I got to put my the Houston rodeo on my I went to the Fort Worth one once. What's that called? OK, at the stockyards. Yeah. Yeah.

Yeah. Cowtown. You make it down to Houston much? No, Texas. Not not in a while. Usually Austin or whatever. You're in Chicago, right? Yeah, yeah. So you went to Houston College in Austin.

Have you ever been north of Austin or that's it? North of the Mason-Dixon line or something? I did an internship in New York. There you go. I thought it was too cold. I was there When the plane crashed in the Hudson, oh, man, I was looking out the window watching it floating around out there Selling wasn't me. Yes, only Sullenberger

Sullenberg. Yeah Yeah, yeah, Tom Alright Scott good chatting with you and we'll talk to you soon. All right. Appreciate it. Good luck with everything. All right. Thanks.

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