The Derivative - Options to Trend Following, and Back Again with Scot Billington of Covenant Cap.

Episode Date: September 2, 2021

We jump back into some VIX and Volatility discussion with this week’s episode but also get to talk about trend following’s rise and fall (and rise again?) over the past decade. We’ve got Scot Billington, the co-founder and managing partner of Covenant Capital Mgmt., talking through his unique journey from futures broker to floor trader of OEX options, to trend following hedge fund manager, to VIX trader and volatility focused funds. We talk with Scot about his indoor, Kentucky basketball themed half court basketball gym above his garage in the Chicago suburbs, what it was like being a floor trader back in the hay day of the CBOE options pits, having a side gig when trying to start a hedge fund, when customers cry uncle in a drawdown, turning the switch from trend to vol, why the VIX is different than options, how one can be both long vol and short vol at the same time, why Goldman Sachs doesn’t care about your VIX trading, why the short vol blowups annoy him, and why it isn’t all that crazy to look at adding short vol to the mix. Enjoy! Chapters: 00:00-02:35=Intro 02:36-26:12 =JC Bradford, Options Sheets & the Trading Floor 26:13-44:16 = Trend Following Was GREAT, then it became Commoditized 44:17-01:08:47 = Turning the switch from Trend Following to VIX 01:08:48-01:24:35 =Selling Premium Retail, Buying Reinsurance Wholesale 01:24:36-01:30:03 =Favorites From the episode: LJM – THE AUTOPSY Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2,  or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. So there's a real rubber meets the road aspect of this in that the option traders, just over time, they're not going to overpay for those options. The VIX can't go to 100 and stay there. It can go to 100 over a month.

It could go to 10,000 over a month. But the market moves that would be necessary to justify 100 VIX, it'd have to move like 8% a day. Like it just, that can't be sustained. And if I also think about it this way, a long VIX is a really nice S&P hedge. It's unreasonable to expect that someone's going to take on your S&P risk for free.

And so unlike an option, the VIX doesn't decay. So if you bought some puts, So unlike an option, the VIX doesn't decay. So if you bought some puts, you would be paying this daily decay for that insurance. But if you bought a VIX, it doesn't have that decay. And in essence, that's what that contango represents. Hello, listeners and watchers. I see you YouTubers. We haven't had a Vic specialist on in a while or an options guy.

We also haven't had a trend follower on in a while. I'm ignoring Howard Lindzen, whose version of trend following last week wasn't quite what we would call trend following. But anyway, I think we found the perfect guest to kill those two birds with one stone today. We've got Scott Billington, the co-founder and managing partner of Covenant Capital Management, on with us today to dish on his journey from option trader to trend follower to volatility specialist. Welcome, Scott. Welcome. Thank you for having me. I'm looking forward to the conversation. Yeah, looking forward to it. So yeah, we've known each other too long now, maybe 20 years now. Frighteningly close, right? Let's pretend it's less,

but it's probably more. Pretend it's less. So when I was a young futures broker and we came out to your house there, I don't know if you're still in the same house, but I don't think they're in Naperville and you had the half Kentucky basketball court. You still got that? Ah, we still do. So we are in the same house indeed. That was amazing. So right. It's the garage, and it's almost a full-scale half court. It's about a third of a court. And oddly enough, my older sons have both gone off to college, and it had turned into a climbing gymnastics adventure room for my daughter.

But just this week, she decided to start playing basketball so we moved a lot of her stuff back out of the way and reconverted it into a basketball court nice and so you get a lot of action over the years you can shoot full three pointers and whatnot in there two threes for about you know the baselines are probably only 10 feet, but you can shoot threes from almost the 45 degree angles across the top of the key. Nice. And that, and in the center or whatever, what would be the center is the universe of Kentucky logo. Indeed it is.

So that's your alma mater, I'm assuming. It is not. I grew up in Kentucky, grew up a huge Kentucky sports fan. I'm not alone in that from the state. You know, there are no pro teams. They were always better, much better basketball. But recently they've had a little rejuvenation in football. And I would say I am a big enough fan that I even watched a lot of the women's volleyball team

won the national championship last year. Really? Nice. Women's volleyball team won the national championship last year. So really nice. And Kentucky, Sidney McLaughlin, the Olympic gold medal, 400 meter relay or 400 meter hurdle star. Yeah. Tokyo also went to Kentucky. So I am any Kentucky sports. I'm not allergic to any of them. And remind me your alma mater. My mama is Miami of Ohio.

Oh, gotcha. The Kentucky of Ohio. Perhaps. It was a popular school. It actually had come out in a book called Public Ivies back in the late 80s when I was graduating high school. And actually, one of my kids is going there now. So it's kind of fun to go back and see the old spots. Not a ton has changed in old Oxford. It's got a little bit of a back to the future feel. So I was just talking with a guy who went to my alma mater union college and

they put a reverse casino. Like literally it would have been two blocks from my freshman dorm. I suspect that would have been the best. That's not a rosy outcome by for anybody in that case. And I think they're asking like 60K a year or something now to be a freshman there. I'm like 60,000 a year to be 200 feet from a casino doesn't seem like a good mix. So. Too late to lose 60,000 in a year right or you got to add like a five

thousand dollar marker to the the tuition right room guard marker at the casino um so somewhere in there i don't know the whole backstory actually having known you for so long but between college and you ended up at the cboe trading options. So what was that? Between that, I lived in Nashville, Tennessee for a decade. A decade? Yeah. I got my start in futures there. I worked for a regional investment bank, J.C. Bradford.

Bradford, that's right. It's coming back to me now. Did some work in commercial hedging under, you know, for J.C. Bradford, was one of the larger producers. And that's actually where I developed the first models that later became Covenant Capital's trend following models. And once we started Covenant, then I moved back to Chicago and worked in the option pits while Covenant got its legs under it and got some AUM. I was just looking at a great thread recently on Twitter of the guys saying you need a war chest three to five years because you're going to have a period where you're not earning enough in fees or revenue to survive.

But that's the other method, right, of like have a day job, so to speak. Well, we were zero and 20 also annually. So there was, and you know, when you start out, not shockingly, you don't have a lot of money and the models were very low maintenance. We had two partners and we were easily able to handle the trades while I traded down on the floor. Yeah.

So I'll come back to the floor in a minute, but I'm always right. You meet a lot of interesting people that came up through JC Bradford. Like what, what happened to them? They're not still around, are they? Yeah. They sold out to Dean Witter. Okay. So they sold out.

Dean Witter needed to buy them for UBS to buy Dean Witter. It was a total Russian dolls scenario. And UBS wanted Dean Witter to have X amount of brokers or X amount of assets to buy them. And they bought Bradford across that finish line. And, but it was mainly grown in the ground commodity hedging and working with actual and farmers but then a lot of speculators as well well all the hedgers were speculators yes we call them hedge hedgelators yes uh we worked at first it was a lot of cotton hedging memphis was a bit of a hub yeah his client was a big merchant in Europe. And towards the end of the,

my time there, we did a lot of natural gas and oil hedging. So it was really those two things. I worked under a guy who had all the business, you know, the business and, and in essence was his right-hand man. And how,

how cool was it back at the time of like, they didn't need to call you for quotes, place orders, right? There was no screens. There was no, there was no screen. Well, back then I remember him being not thrilled that we had to charge $25 round

turn commissions. Yeah. That's the hedger too. Yeah. Oh, that was, those were for commercial. Like he was getting 50 around turn was very common.

And that doesn't even include the bid-ask spread. Right. And in fact, a lot of that went into my original, you know, cornerstone of anybody that's thinking about doing trading is I can remember, I would add up the P and L's of our clients and I'd think, oh, so-and-so, they lost 100 grand. And I'd look over, I'd be like, oh, they paid us 120 in commission. They don't need to trade better. They just need a cheaper broker. That doesn't even include the massive bid-ask spreads

they were paying every time they came in. And then did that inform you a little bit also of like, hey, these people are, right, it's always hard for people to understand, like, why would anyone want to lose money, right? For a trend following to work, for some of these models to work, you need someone on the other side, it's a zero-sum game that's sort of willing to lose money. It's interesting you bring that up because that is going to be, you've stolen a bit of my thunder for anticipating later. But yes, when you look at it, you have to think it is a zero-sum game. Someone is going to have to lose this money that I make and sort of not care. And theoretically, the hedgers are gaining it. You know, you're

taking risk on for them that you can't be expected to take that risk for free. Right. And much of, or some of what they're losing in the futures markets, theoretically they're making in the cash markets. So perhaps that's an explanation for some net pool of edge that trend followers can dip into. Yeah. People smarter than you and me have the, there's a term for it, economic incentive or dissentive or something, right? There's a technical term for it of like, these are different. Yes, different participants have different path dependencies, they have different outlooks. And that certainly applies to the option markets. And I don't

want to get ahead of us. But that applies to them. tenfold. Yeah. And have you had, you know, if you and I trade an option, and I hedge it, and you don't, we can both easily make money or both easily lose money. And even the way in which we hedge it or the timeframe on which we hedge it can make very significant differences on that trade outcome. Yeah. So, yeah, we'll come back to that. But speaking of options, so you're 30-ish, you're going down to the CBOE? 30-ish, go down to the CBOE, start out as a clerk, which is basically a fraternity pledge.

I'm like three years older than my bosses. They are calling me every name in the book. And I'm just thinking like, what am I like? Some guys like poking me in the chest. I worked for a small group. They, you know, some of the groups down there were just big and would physically muscle in on orders. Other groups were more cerebral and and luckily for me i was in more of the latter so uh we did not even then this is 2002 did not use computers so we had physical sheets in the pit i was just going to give the uh there it is oh yeah they were in the top pocket like this. Right there. And any options guy was. And so what was on those sheets?

So it would have, we would have, I was an OEX pit, but it would have underlying future price. And then all the surrounding strikes values. And then all the corresponding Greeks. And the thing that Sheets did that other people just had a box, a computer, and then they had one person who understand options theory and they're pumping the values through.

And if you're on a, if you're on a box, you're going to see, you know, seven 60 and you're going to go, Oh, I'm seven 30 at 780 or whatever. Yeah. So I want to buy it at 730 or sell it at 780.

On the sheets, we had to understand underlying option theory quite a bit more. We had to make adjustments. You know, the phraseology would be, these are trading two days out, which meant there was two days of decay out of the values. We had something worth 440 and there was 20 cents of decay a day, new value is 400. And by your sheets showing 440? Yeah, it's 140. And then the other ads would say, hey, we're at sheets. So that means you're offering the sheet. And then at times if the market moved so much, we might have to rerun the entire 200 sheet thing and bring them back out to everybody.

Yeah. That makes sense. So, you know, as a trader, it did make you learn a lot more about options, volatility and understanding how these prices were moved instead of just being spoon fed a digit. And then that makes sense. Yeah. Yeah. And two questions that did everyone from the different groups have the same numbers on their sheets? Was everyone coming to the same conclusions or about the same conclusion? Yeah.

I mean, in the, in the pit, not, you know, you're going to have some differences and, and like our, the guys that ran our group and like, we probably had an eight person group. They would trade a lot of time spreads and they would trade them a lot of times with some of the big groups, you know, more or less saying, Hey, we think there's some edge there that CTC or Knight or whomever were the big people out there don't. Wolverine was another big one. For the straight values of the options, you're within a dime and 20 cents. And it just depends on how aggressively you want to be buying or selling them. So they're going to end up pretty similar. But there is a speed aspect that you're having to make these adjustments.

I mean, I would do 4,000 subtraction problems in my head a day, just the spreads and stuff like that, that, that was challenging. Obviously the computer was better, but I do remember sitting there thinking, why are we all standing here like it's the 1600s?

One computer server could do this far better than all of us for better for everyone. And yet we're standing here like it's an open market and William Wallace is going to stroll up. It's insane. But I think the old adage is like the last sailing ship sailed 60 years after the steam engine was created. It does take time for people to adapt. And the entrenched power of the value of the seat, the money you can make as a broker and a market maker, guys that are making, obviously obviously they don't want to

give that up you know so and so the people get confused about this um so it wasn't in the value of your numbers it wasn't like a statistical edge down there was in the value of you being a trader, right? Of knowing. The bid-ask spread, no. Right. The value is the bid-ask spread. If it's worth 720 and I'm seven bid at 740, that's 20 cents on either side. And if you do that a hundred times a day, you're having a good day. Well, and then that's 20 cents times a hundred. Yeah.

Because each option is a hundred shares. So every option is 20 bucks. If I trade a thousand options a day, Because each option is 100 shares. So every option is 20 bucks. If I trade 1,000 options a day, 20 grand, then I got to spend five grand getting rid of reinsuring my own risk. Think about it that way. I got to explain, but it's a lot of money. I mean, big traders might trade 10,000 a day. And, and you know, I was definitely, I was not down there a super long time.

I'm far from, you know, the Nigerian or whatever. Although I do remember those guys that are on CNN. I were down there when I, you know, they were just starting their TV careers. You're far from the Jerry and full stop. You don't have the ponytail, the jacket. The whole thing. Dr. J, I think, is an acronym. But I was not down there a long time, was certainly not a big fry or anything.

But it is an experience. I mean, it's really kind of fun, to be honest. Like, well, it's just a bunch of guys yucking it up down there most of the day. It's like, well, you are in the basically in the NFL, right? Right. Of trading. Right. That's it doesn't get any higher level athletes. But sure. I don't think I would give us quite that much credit, but it, you know, it was much more, it was much closer to like a fraternity television room than it was to a job that you might imagine is a job. Yeah. Yeah. And they would bet like there was a bet on how many Krispy Kreme donut, like Krispy Kreme opened up across the street and there was a bet on how many

donuts this clerk could eat in an hour or whatever half hour and i mean there ends up being like hundreds of thousands of dollars bet on this dude jamming donuts down his throat the two least athletic guys in the pit would get an argument about who's faster and i mean they look like two penguins running down an alley, but you'd all bet on it and go out there and watch them. The famous one over at the Merck was if you could throw a football across the river, right?

Or they'd pay the clerks to jump into the river in December. There's all the same things. I was single, know young person it's all i mean it's 98 male so you're really talking about a bunch of young men frontal lobes only semi-formed yeah shockingly there was a lot of silliness that went on oh right a lot of a lot

of drugs a lot of that nonsense so good to see that you kept it together in that regard. I did keep it quite clean when I would go out with my friends. I generally caught the train back to Naperville, the 1130. Those are good stories. There's a whole bevel of those stories right of people who missed the last train and the taxis would line up and they'd know they had no choice. They charge them like three, four or five 500 bucks to go out to the suburbs. That's fun. Maybe. Enlightening and enjoyable. You know, I'm, I only caught the tail end of it. You know,

I think the late nineties was probably at the CBOE was, was probably the biggest, you know, boom time, but it was still, you know, I was probably the biggest boom time. But it was still, I was in the OEX pit. There were 100 and something guys in our pit, 100 and something guys in the Dow pit. It was adjacent. And now I think there's like a computer server and two dudes reading a newspaper.

Yeah. Which is depressing, right? Like where does this next level of, of CTA of hedge fund manager of trader come from when they don't get that experience, right? When they don't flow through that ecosystem. Yeah. I don't know.

The, the number of entry-level jobs is been eviscerated. Yeah. But. And, or you need a degree from Cal and finance or something right you can't be some mo from miami of ohio no offense and be like hey i'm hungry and i want to show up and get the job done the uh it really took the route of most industries if you think about like walmart

bankrupted all the local hardware stores because they would sell more stuff for less margin. Well, Citadel and GetGo, I mean, now they just front run, but like they basically trade more and more contracts for less and less bid-ask spread. Yeah. So it's really the same thing. It comes down to who can be efficient and will do it for the least amount of edge or profit margin.

If you're selling widgets, it'd be profit margin. And if you're trading futures or options, it's bid-ask spread. That is the profit margin for the market maker. So whoever will do the volume and can do it efficiently is going to take over the market and squeeze all the small players out. I mean, it's really, I think, ultimately pretty similar to many, if not most industries. We had a trader come in with a proposal of creating some structure that could basically go back into the pit because he's like all these big firms just have their computer number. And sometimes there's a big spread and they just pass on it because they have these really super tight parameters that their traders are just instructed to stick to.

Right. They're like, don't go off program. You just trade this all day, every day, like you're saying. Yeah, we make the money and all this volume you you do this all day every day and he's like there's you know super highway lanes wide trades that come every now and then they get past by it may be the case i know i i know a couple of old contacts from the floor i keep in you know a couple of them are doing some like energy spreads along the same theory where they get you know it's not frequent enough for citadel or whomever to bother making a market in it and it ends up with a or it's esoteric enough and it ends up with a human market maker who can make a bit of spread wide enough to make it worth the while. Right. Back to your thing, right? There's probably still a bookstore somewhere that sells like a specific set of

books on whatever model airplane building or something. Or if you've got a bookstore and a cheap enough rent and, and look, bookstores are still fun to go to. Yeah. And if you like someone and trust them, and you're kind of like, I'd rather come talk to this person. I love their recommendations in the books, $5 of my thunder of later, but that's in essence what we've done is tried to go find a niche that's big enough for the Billington family to enjoy, but small enough that Goldman Sachs is never going to bother. It literally would cost them more to set up a desk than they can make from it. And that's a nice analogy. So you're doing the options, you're doing this covenant, the trend following model, you started at JC Bradford. How did that start? How did it end? What was the middle like? Well, it started with, I'm a terrible salesperson and I wasn't ever going to be able

to make a living as a broker. Okay. You're too honest and direct. No, no, I'm not. I don't have enough courage is the problem. So I figured if I was going to be able to apply any value, I was going to have to have some way to have ultimately non-random trades. So in my opinion, there's a truly losing method is by definition as rare as a truly winning method. Because a losing method is just the opposite side of a winning method, which means that 99% of the trading that has to be done out there is just random. I think XYZ has some implication about future market prices, but it really doesn't. It doesn't mean that it is the opposite of what I think.

It just means that it's random. Does that make sense? Yeah. I think it's Michael Malbouston's book, something with skill. To define skill is it can you lose on purpose? Yeah, that's exactly exactly he's put it far better than i just did four words and it took me one stumbling paragraph but yes so we uh when i looked at that you know i distinctly remember i pulled out the barclays top 20 cTAs over the past 10 years, and this is in 1996 or 7,

and I think 15 of them described themselves as long-term trend following. So then when I thought about the part of costs, trading costs, I thought, okay, so trading costs are the net, that's the admission price that I have to pay to play. And by the way, I should. There are, you know, people, look, brokerage, they all provide a service that is necessary and they take on risk. And people should not expect them to do it for free by any means. But basically trading costs are in my control because I don't incur them when I don't trade. Right.

And so the larger, the smaller my gross outcome is the bigger effect. My trade, my trading costs is fixed whether I hold something for a day or six months. Right. So I might not hold it for six months. Well, my growth, I mean, there are reasons you wouldn't, but my gross cost is going to be very dependent on how long I hold something. Right.

And so I'm basically like, okay, the amount of non-randomness I need to break even equals trading costs. So if I keep trading costs smaller, that means I can be profitable with less non-randomness. I hope you've read a book that can state that in a clear way that I just did. I have, but it's not coming to top of mind. So we'll leave it there. So I started trying to develop very long-term trend following models. And I mean, looking back, it's absurd, but more or less came up with one that I thought worked and back-tested or whatever, and went out to try to find some business capital to run the business and some client capital to invest. And so Brent Wilford, who at the time was one of my best friends in Nashville, had made some money and said,

I want to invest in this business. And his dad and my dad and one of my hedger clients were our first three accounts. And then in a very proud moment, my dad closed his account like six months in. Which Brent used to like. I think Brent's kept a running total for almost a decade of how much that cost him. But kept reminding him at every cocktail party. So off we went. And I think, think you know we struggled our first year right out of the gate so we had a contingency plan in case of emergency break glass

we had to break the glass and what the note inside said scott go get another job yeah and so then i I went and traded options. That was fun. Learned a lot. And then we had three or four real blowout, extraordinarily good years there. Left the pit, came back to Covenant Trend following full time. And, you know, with our top assets under management, we'd taken that first $750,000 and I think we were probably $400 million

assets. It's not bad working out of Nashville Tennessee. No Harvard degrees, none of our dads were partners at Goldman. We You know, none of our dads were partners at Goldman. Like, you know, we worked hard to get that and we both stunk at selling.

So we made it particularly difficult. And was it the same model throughout or it got upgraded? It certainly evolved. You know, we certainly made changes to it, but the basic underlying structure really never changed. We were always trying to be, we don't, I mean, to this day, we don't think that I'm going to find some trinket that's going to be able to predict where the market's going. Yeah. It's, I got to have something that says the market started going up and I need to buy it. And I got to have something that says that's enough loss.

I got to get out. Yeah. Then some risk parameter. I mean, it's really not that much to it. And this day I would argue vehemently i highly doubt you've got some auto learning ai whatever whatever cutting edge stuff that is really predicting tomorrow's market move i you know i don't know don't know. I've never seen maybe Renaissance capital.

I've never seen any performance that would suggest that. Well, and at best they're even, and we've had AI people on the pot here that it's saying there's a 63% chance that tomorrow is up. So you need how many years or, you know, you need a huge sample size, even if it is correct, it needs a huge sample size to prove correct it is correct, it needs a huge sample size to prove correct. And I don't doubt it's been correct in the past. Yeah, right. And I don't doubt if we took 1000 of them, that 12 of them would be successful over the next five years. But if they

were random, 12 of them would be successful over the next five years. So, you know, anyways, you know, I was looking at it before we got on here, our aggressive program, which was our most popular program, it ran for 15 years and it compounded it 12 and a half percent a year after fees compounded annual return over those 15 years with the worst drawdown being less than 30%. Yeah. That's pretty good.

That's pretty good. Like you go out there and look around. Again, market makers, yes, but that's only because they get to do thousands of trades a day. For any position taking, it's pretty good, you know. And positive skew and long volatility as well. And, you know, that's also, because obviously like most,

it closed on a low. Yeah. You know, so, but even with that, you got one and a half time market return and the market had two 50% drawdowns in that period. And I think our worst was 27. So, you know, I'll throw out a risk. You got one and a half times the return in a non-correlated asset. That's pretty good. Or I, I don't know.

I don't want to sprain my shoulder, pat myself on the back. I'm pretty proud of what we were able to do with that. And I think it does suggest some of our ideas had some validity. Yeah. And so let's talk, I'll throw out a quick past performance is not necessarily indicative of future results disclaimer. Those are also programs are closed. They're not offered all in retrospect. So, but let's talk about that. So why did they close? I know the answer, but your version of the answer of, did the models break? Did the investors lose patience?

Combination of the two. Well, the investors are always, and probably should, going to lose patience before there's enough data to suggest this isn't going to work in the future. I mean, ultimately in all this investing, the problem is that the standard deviation is way larger than the drift. And so you're going to have wild swings. We changed twofold. One, we had a three-year drawdown. So that is going to put us business-wise in a very difficult situation. And we lost the gross majority of our assets. probably as if not more important trend following had become commoditized so you had a lot of very good very big groups offering trend at one and zero yeah or i think you can get like on a bank platform you can get a um right the uh i can't remember the name right now but you can just the return more i don't know if there's still, I haven't followed it yet, but ultimately it got very commoditized.

You can just say on their risk premium platform, give me trend for 45 bits. So, you know, could we do it better than that? Does it even matter? I mean, it. Yeah. Some years. I'm arguing, you know, if somebody says, Hey, there's 77 PhDs at Merrill Lynch have created this thing and I can get it for 45 basis points. Yeah.

Go get them. I mean, I can't, you know, there are advantages. I mean, those things, when they get that big, they end up being currency interest rate. You don't get the commodity exposure just because they're not big enough to be able to trade $30 billion in at a certain size. But that's why the two things coincided. If it hadn't been commoditized, then I still think trend following is a viable trading strategy. I don't think it will do as well over the next 20 years that it did for the 20 years up to, say, 2014 or 30 years up to that. Because it's a crowded space or because? No, I just think it,

I always think about it like this. Whenever anybody goes in to look for a trading strategy, it's almost impossible not to get swept up in a survivorship bias. So if you imagine, let's imagine there are four trading strategies that are profitable and you and I are looking at a 20 year period and let's say all four equal in their actual efficacy. One of the four has done one and a half to two deviations better than the other four. Well, guess which one we're

going to find? Yeah, yeah. And then guess what it's going to do over the next 20 years? The deviations are huge. This is a deviation and a half, maybe even two deviations to the good. Even if it just goes back to its expectancy, we're going to see a massive drop in efficacy. Does that make sense? Yep. So you always find the thing that has probably been outperforming its future expected performance, even if you test and do everything properly. Which to me reminds me right now, just of the S&P, right? Like how much trillions of dollars flowing into the S&P of like, what, you stupid? Why are you looking at all these alpha strategies, just invest in the S&P? Well, or you could even, that argument could be made on index investing versus non-index investing. It isn't to say one is better than the other. I'll say this,

and I think this is a very easy to defend statement. Whatever's been doing the best has been outperforming its expectation, not it's that much better. These are very competitive markets. It's almost impossible to be that much better. It's like, did you watch the golf tournament this weekend? I did not. So this dude makes eight 25-footers to win. Here's a newsflash. He's a great putter. He got lucky lucky who was it

um cantley oh yeah yeah yeah he makes a bunch and he beats de chambeau in a playoff but he does make a bunch of 15 plus footers and even the pros only make those 13 of the time yeah so like golf analytics show that the winners of tournaments are lucky putters for that week. The top money winners hit their approach shots the best and their drives the farthest. And the putting works itself out. And the putting, yes. You see what I mean? And so whoever won this week is the same as whatever trader, investment, whatever, happened to have done the best over the last five, even 10 years. The variances are still, they're extraordinary versus the drift.

And I'll one up you on that. For you guys to survive, you have survived. But if you had kept the trend following going, it would have been like, hey, we need to tilt long bias. Hey, we need to add more equity exposure. We need to do a few of these things that would have made those past 10 years better. Yes. And then you could even- But then you're just making it up.

I mean, you're not, then you're lying. I mean- But it's very tempting to say, oh, I'm going to tweak this model so that it gets in S&P trends easier and doesn't get out on X drop. I'm going to stay and I add on this. Right, yeah. And always buy on Wednesdays at 10 a.m., right?

Like, yeah, you can go crazy. So we didn't, you know, ultimately our decision to leave trend was business it had been commoditized and we expected it to do less well over the next 20 years even take out the cold period yeah less well over the next 20 years than it had from 94 to 2014, let's say. Were you tempted? Did you spin it up and see what it did end of last year? Because last year and the beginning of this year would have been great for trend followers.

I'm sure you guys would have crushed it. I'm sure it would have done very well. And that's great. I mean, trading is really hard. It's a huge net negative for your limbic brain system because everything in the world shows that losses are worse. Losses make you sadder than gains make you happy. So I do try to do, if one of the gifts I give myself is to not go back and see, oh, how would have trend done? I can only cause myself more pain. Plenty of that to go around as is.

I don't need to drum up anymore. I hear you. So let's go on. So you made that decision. Kudos for that. What I'll also say is that we'd begun developing these volatility systems. We started researching them in 16 and 15 and 16. They were good and we liked them a lot.

So the other and probably most important piece of leading trend is we had something we thought we could go to that was good. Not only the models were good, we felt the theory behind it was strong and it was this niche. We could be the bookstore that people really liked. Yeah, yeah. And there was reason to believe that the total volume in the VIX is small enough

that it just doesn't make sense for Citadel to go in there. So I don't think I've found anything that those people haven't found. They just are not the number of contracts where it makes any sense. Now, they'll market make there, but I mean, position take. So let's dive into that. So you guys switched, you shelved trend following, you had another reservation at another good restaurant, so to speak, and turned on the volatility model. So what do those look like? There's a few different programs now, so let's, however you want to lay it out. Well, so the volatility programs, the oldest running one is called total volatility. It analyzes the VIX term structure and is looking at contangling backwards. And when that spread is wide enough, it is going to take positions in the VIX and then the same position in the

S and P. So you're going to be short, both along, both front month, looking at front month to cash contango because the VIX has a pretty simple future has to equal cash at settlement period by law. So if the future's at 18 and the cash is at 15, there's $3,000 a contract. If nothing happens, that should come in. Although there's some arguments over whether that was

gamed that cash settlement. But we'll leave that there for now. We don't hold them all the way to cash settlement. So that is not a game we want to play. But that's the fundamental underpinning of what we're looking at. And the thing I like best about it is nowhere in there did it say Scott Billington can figure out where the market or where vol's going. Right. In fact, it really adheres to a, the market is right.

And if the market's right, nothing should happen. And that should, that 18 should go down and meet that 15. So the next question is, well, what if the 15 goes up to meet the 18? And while that certainly could happen in a given month and over a year, but if the cash continuously went up to the future, that would mean that the price of options would be perpetually rising. Right? Because that vol would have to go up.

It would be hard for the future to not also rise when the option price goes up. Even if the 1518 and you say, oh, well, let's say the future doesn't go down, the cash goes up. Okay? Well, now the cash is at 18. Next month, it's 2018. It goes up again. Okay. Well, now start cash is at 18. Next month, it's 2018. It goes up again. Well, now it started doing that over years. The cash VIX, the market is not, the cash VIX is a, there's a very rubber

meet the road aspect of that. So the 15 goes to the 18, that shouldn't happen over long periods of time because the options market. Cash volatility would have to be perpetually rising. Yeah. And the market doesn't move enough to justify that. Those insurance premiums are not that high. So there's a real rubber meets the road aspect of this in that option you know the option traders just over time they're not you know they're not going to over pay for those options the vix can't go to 100 and stay there

yeah it can go to 100 over a month it could go to 10 000 over a month but the market moves that would be necessary to justify a hundred VIX. It'd have to move like 8% a day. Yeah. It could go to zero at that point. Two years. Right. Like it just, that can't be sustained. And if I also think about it this way, a long VIX is a really nice S&P hedge. It's unreasonable to expect that someone's going to take on your S&P risk for free. And so unlike an option, the VIX doesn't decay. So if you bought some puts, you would be paying this daily decay for that insurance. But if you bought a VIX, it doesn't have that decay. And in essence,

that's what that contango represents. Does that make sense? Well, it's like pre-decayed, sort of, is how I would think of it, right? Well, when you buy it at 18 and it decays to 15, it's going to have to mimic an option decay or no one would buy puts. Right, right. You see what I mean?

Like those two hedges are going to be competing for hedge dollars. And so their costs are going to be competing for hedge dollars. And so their costs are going to have to be similar. And I don't mean this week or next week or next quarter, even next year, but over the next decade, they're going to have to be similar. And so it sounds like everything you're saying is you have a short vol tilt, but that's not true at all, right? It's not a short-vault tilt. It is the argument as to why the general, the usual VIX term structure is going to be contango. It's why I would be willing to bet that. And it's also the argument as to why this future is decaying into the cash rather than vice versa. And so your normal trade in that scenario would be short short? Now, if that sets up, then in total vol, we would trade that short short.

So we're going to be short the S&P, we're going to be short the S&P we're going to be short the VIX and you know theoretically we're agnostic as to which way the market goes yeah we're probably there's a we're probably against market speed but I mean actually a slow grinding down market is going to probably be the best we've got a good chance to win both ways on that. But what we're going to look at is, do I have a big enough head start in the contango to cover the anticipated variance of this pair? Have I explained that even close to clearly? I understand it, but I think it's good. That pair is going to move all over the place.

And obviously if the cash was at 10 and the future was at 40, that cushion is going to be able to absorb enormous amounts of movement. And if the cash is at 12 and the future's at 1203, that cushion is not going to be able to withstand barely any movement. So somewhere in there, we say, okay, that's enough. This is worth taking the risk. And a big part of the program is being in cash a lot of the time, right? So no, yeah, we do not. We're certainly,

if there a position is not available, we're not going to take one. And what, so there's a few of these types of strategies out there. Some have even gone out of business last year, 2020. So how does it differ? I know you don't know their inside out, but it's kind of was shown to be a very tough strategy towards the end of 2020. Well, it, it wasn't awesome.

You know, frankly, the short, short, which is kind of the mainstay position has not done well since 2019. It is not done very well at all. Which is partly because vol is remaining elevated, right? It's not selling off as much as the market rallying. Well, you know, pre that volmageddon early 18, vol had gotten so low that- You didn't have that spread.

And that cash can, you know, when we're at nine and 11, that cash can wander up to 11. And then we're at 11 and nine or 11 and 1150 and okay. It wanders, you know, now the VIX cash also has a hard floor somewhere above zero. Now maybe it's five, but you're taking on a lot of risk when you sell an option. And I mean, yeah, just how little are you going to get paid

to take on that risk? I mean, there's the implied vol for you, but when the vol got that low, it's not that strategy is going to struggle. Then obviously in 2020 and since Vol has just remained, you know, we've had a massive S&P rally and Vol has remained very stubbornly high. I mean, we're, we're, I don't know,

but it's got to be 30% above the highs, you know, the pre-COVID crash. Yeah. And vol is above where it was. Now, that's not unprecedented. In the mid to late 90s, the market ran and vol ran. You know, vol went from 12 to 16, 17. This is cash fix in the, from 95 to 99 while the market went higher.

And, you know, if you wanted to create a story around that, a narrative, the market is spiking up volatile. You know, if I'm short options and hedging them, I lose just as much on an up move as a down move on the gamma scalp on the gamma piece of that hedging you know the vega is different but like if i'm gonna if i sell you an option and we both hedge it and we both hold expiration and the market moves quickly and up i lose just as much to expiration as,

as I would have on the down move. Yeah. So it could make sense. Like, Hey, we're into all time highs. We're spiking into all time highs and fast moves. I'm not,

I don't want to sell you this option for nothing. Right. We bought Ben Eifert on the pod end of last year. He's like, we also have, you know, I'm paraphrasing here, but people buying JPEGs of pet rocks for $400,000 and crypto selling off 30% in two days. And all these things of like, it's not a nine ball world.

Like maybe the actual ball of the S&P is, but there's risk other places that gets reflected in the S&P option. I would say the thing that I have noticed this year versus last year is last year, and this makes sense. Last year, there was not a lot of contango. So when a new contract was coming on and, you know, the cash is at 20 and the front month might be at 21. Now, and if you imagine my hypothesis, which is people are not going to take on risk for free. Now, when they roll on, you're seeing cash at 17

and the front month future at 19 half. So you're seeing that contango build back in. Does that make sense? The risk assumers are demanding that difference to take that risk on. Now, unfortunately for those pair positions, a lot of times the market's been moving up so much and so fast, even when that contango comes in, that pair has been a loser a lot of times. So that short, short kind of standard position has not done well for a number of years. Now, the total vol, by its name, total vol, has other strategies in there. And, you know, everything doesn't always come out the way it's drawn up.

But, you know, it's drawn up that, hey, when this does well, these other things. So the long, long positions have done extraordinarily well. And then we do some term trades, short and long VIX spreads and butterflies that have also done well. We also have a short term strategy in within the total vol that that does buy the S&P. And it did very well in 2019. You know, actually, the exact year it should it did very well in 2019. You know, actually the exact year it should have done very well, the year that the market went parabolic. And that's in a day trade?

It's in less than a week trade, one to six days. And it again is analyzing the VIX term structure. And we just, I mean, this is the most predictive strategy we have, which is something that we generally try to stay away from. But we found a VIX term structure that was strongly suggested a good time to be long, a better than random time to be long in the market, I think is the fairest way to put it. And that's hedged on the other side? that is just an outright s&p long okay but does it typically go on when there's long

vicks also somewhere in the book it would typically go on i mean you can get it a lot of times most of the times it gets it's going to come on is when vol is really low. Yeah. And then, then that sort of makes sense. Like, okay. Vol's really low. We're better to take the directional trade. Then this is when the direction, you know,

a lot of times it will, it will trigger on a media, you know, small, medium break from low, low vol. So vols at nine or 10, the market breaks, I don't know,

2% over two or three days. And we'll get this type of this version of a signal in that kind of scenario. That makes sense. We have all these strategies. And the idea is by combining these different strategies that each one is pretty good on its own. Hopefully we'll have like, oh, this isn't working, but this is working. This isn't working, but this is doing okay. And that they can net together some nice years. But they all run independently of one another and they're firing their signals when they get there. They're firing their signals. The term trades, the pair trade and the long S&P trades cannot be on at the same time.

So you would not want a long S&P and short pair. That would just leave you short VIX. That's not something we're going to do. So that's total vol. So the next strategy we have is called hedged equity. And so when we looked at the total vol trades, what we saw was, hey, the very best trades we get are long vol long pairs those amounts of backwards can get giant and that long you know december of 18 there was a long long pair that, I think the cash is 25 and the future's 35 with, I don't know, 10 days left, let's call it. That's $10,000 a contract.

Now you're talking about a really big cushion. Yeah. You know, at the time, I think the ratio is two to one. So for every S&P, I've got $20,000 of VIX cushion. That's a lot of S&P points. So when we looked at that, we said, you know what? Those long vol trades do great when the market is tanking. Why don't we strip those

out and add them to an equity portfolio? Then we can leverage each a little bit and maybe create an interesting program. Get a rebalancing effect. And you can, you know, you can potentially when stuff goes well,

you're going to get a positive gamma scalp in your rebalancing. So we launched that proprietarily beginning of, or the December of 19 and started taking customer money in August of 20. And so that is a program we like a lot. It is designed to be a better mousetrap for having a long cap, large cap equity exposure. Yeah. Which makes, there's a long list of people who've been pairing now equities with their alts. It just makes me more and more nervous that the S&P's time is up.

It's going to just do nothing for 20 years and it's going to be that Hang Seng or some other market nobody's thinking of. Yeah. What we like about the long vol as a hedge is that it is so exponential that you can hedge a lot of S&P with a little bit of volatility. So if you think about like even a long option, if it's a put, it's got a lot of exponentiality until it gets in the money. Then it's just a future. Then it's linear, good and bad. Right. And as the market drops, it's going to decompound. So if I drop 20%, you know,

if I'm at 4,000 and I dropped 20%, it's an 800 point move. But if the next month I dropped 20%, it's not an 800 point move. It's 80% of an 800 point move. Right, right. 640. 640, yeah.

But if I'm long the VIX against that, the VIX is compounding. You see, and so that it gives it a lot of aspects

that we think are tremendous for a hedge. And what do you view as like the cost of that hedge versus the S&P? Right. Like if I just did rolling puts, you know, bottom every 30 days and rolled them, I might be paying four to 8% a year or something. More than that, but yeah, whatever the number is. I looked at it today, a one year at the money is a little under a year, 353 days,

a one year at the money costs seven and a half percent. At the month. Yeah. Sorry. I was talking like 20% out of the money, but 20% down. Oddly enough, I looked at that today too. 20% down put for a year costs two and a half percent. It's a bargain. S&P what's the lifetime returns are eight. So you're limiting yourself to the 22 and a half% loss and giving up over a quarter of the profits. Right.

That's, listen, that's a lot more. We're glad our houses don't cost that much to insure. Like, that's expensive. Yeah. The great, I mean, the best part, you know, the best parts of the vol are also, not shockingly, it's worse parts. Much, if, I mean, way more. The vast majority of the time, you don't have any hedge on. Because there's not a favorable situation in the VIX term structure.

Who are you saying? In the total portfolio? In the hedged equity. If I'm trading this long volatility to hedge my equity, the gross majority of the time, I'm not going to have any hedge on or variable because the term structure does not indicate that it's an advice, that it's a inexpensive time for insurance. And so that opens you up.

If there's a nine 11 event on a Sunday night and you're not in or whatever, but whatever. So be it over time, you think that's a better, well, what I would generally say is investor, you're at that risk already. Right. You own a million dollars of spiders if you've got a million and i mean it has equities leverage if you have the same amount of on leverage hedge equity it's the exact same risk you already have right minus some percent you've you've you know that it wasn't hedged hasn't hurt you. It's left you where you already are.

If that makes sense. Yeah. Yeah. Like, okay. Yeah. It's not a hundred one to one, but maybe it's 50 to one or 70 to one. Then you're still better off than you were. Here's the other side.

What you, you know, the main problem with hedges is how much money they lose in up markets. Yeah. They, they get, some of them get crushed. And now I got to keep reallocating money away from my stocks into these hedges. And hedge equity lets you have both because we're going to use futures and liquidity that's there. Yeah. So, you know,

our main argument is when you're looking at building wealth over decades, a 10% drawdown doesn't matter because it only takes 11 to get even. Even a 20% drawdown only takes 25 to get even. But a 50% drawdown takes 100 to get even. At 60% drawdown, 10 more percent is 150. Right. When you're talking about the Malik family long-term financial plan, those 10s, they feel scary when they're happening. They don't matter a bit, but that 50, it matters.

I mean, the S&P went nowhere from 2000, 2014. Right, or especially if your kid's about to go to college or you're about to retire, right? All those- You figured in 8% a year, which meant you thought you were at a quadruple in that time. Right. You're at zero.

So now you're 10, 20 years behind your retirement plan. Whoops. If that hedge can just flip one of those, doesn't have to flip them all, one of them from down 50, even to scratch, you're 15 years ahead of retirement. Right. Right, right. I mean, think about the impact that has. It's massive.

And that's what long equity has done or the hedged equity program has done. And we think it's quite possible we'll continue to do. Right. This is where we probably need to add in past performance is not indicative of future. And honestly, I'm not adding that in. No truer words have ever been spoken.

So you can bold those and everything else, period, paragraph. But I think in March, the market was down 20 in March of 20. And I think hedge equity made 40 or something. Yeah. Because the vol went berserk. Yeah.

Those mixes we bought at 25, we sold at 70. And I mean, that had you hedged down to zero almost. It was perfect. What are your thoughts? Change gears a little bit on all this work that's being done on tracking dealer gamma and the flows coming in and out. Do you give credence to any of that? Or do you focus on it, on how you're putting your hedges on? Or you're just thinking of it as noise that's in there?

You don't know. I don't know even what you're talking about, to be honest with you. You do not follow. I always think about what is it that I think I'm doing, and why do I think this is going to be profitable? And to think that I'm going to analyze what you've just described better than everybody else in the world who's looking at it, I frankly know that I can look at the VIX term structure and I can realize that where the VIX future is does not matter one bit to a giant pension fund that needs to hedge this equity risk. And whether they pay 1250 or 1450 for the options they're buying is somewhat immaterial and so there's you know in times of panic even if people are being you know short option people are being forced out of the market by their FCM.

So there is literally no analysis thought going into it. Yeah. If that's driving these things, when we put that long pair on, it is straight arithmetic. That thing's at 35. This is a 25. It's 10,000 a contract. I'm doing two VIX for one mini

S&P. So it's $20,000 a cushion. So I can tell you that was almost exactly where it was February 28 to 20. And if you may not remember the first day of March, the market rallied a hundred handles. The S&P said? Yep. I don't remember that. And the VIX cash came off 500 points, just like you'd expect. But the VIX future came off 10. 10 points.

Because there's a 1,000-point cushion there. And it just, the next day, the market dropped a hundred and whatever points, basically the whole thing back. And the VIX cash went up a thousand. The VIX future went up 500. I mean,

it's off memory for 500. Yeah. The market's basically where we were at the end of the month. The VIX future is up 400. So you're up that money on that side of the hedge and the gap between them had gotten even wider. So nothing is going to work all the time,

you know, like, but that is a bet I'm certainly willing to make. Yeah. It just doesn't come up that often. And so is that there's total vol hedged equity. Is that it? Yes. And so we've just, we do offer the long vol portion where you just take hedge equity and peel out the long vol.

We offer that separately. Again, we've taken those trades for years. We've only offered them separate as a program. I think we've had a customer in it for like two months. And then we just, I've been trading a short premium, a short option premium program proprietorially for about a year. And we just have customer money is going to start on it tomorrow. And that goes back to the idea that implied, you know, risk insurers are not going to take on risk for free. You and I, I don't know that anybody would say,

hey, if I sold a week out 30 Delta put one of them every week for the next 20 years, am I going to end up down money? I don't know that anybody wants that side of that. Right. The only problem is the pathway. You may not like, and the path, the amount of heat you have to take may not be worth the money that you make. Right. Or you might get forced out. Table limits at the casino. Now you get into what in essence, any short premium model is going to want to sell premium wholesale or sell premium retail by

reinsurance wholesale. Just like an insurance company, you're going to create a little bitty portfolio insurance company. So we have taken what we think are two or three steps that are going to make that path more stomachable. Not the least of which is we don't sell any naked puts. So every put is every downside risk is capped. Yeah. Secondly, most of your option bankruptcies happen because of Vega, not Delta. Yeah. So this option, the markets crash down to it.

It isn't that it's 7,000 points of the money, but the Vegas blown up. Yeah. And so we handle that by A, having all the puts cap, B, trading options inside of two weeks. That means their vegas are small and manageable. Right. And this view, this is kind of like an equity replacement? I have like an equity profile? I look at it as, so what I do with it is I pair that with long volatility as well. Yeah. Then I say, okay, what if equities stink?

They just grind around and go nowhere. Oh, well, short premium is going to do well. Right, now I got some- Now I want to diversify. And then I say, oh, and when this really gets blown up, this long vol is going to be a marvelous, hedge is maybe too strong a word, a marvelous matchup. Yeah. For a premium program. Well, it's almost a bond replacement at that point.

You're getting a yield and you have instead of credit risk, you have a. I mean, look at the numbers. think about the numbers we just gave. The 20% down year output is two and a half percent. Okay. So since 1926, I think it'd been six years that in a calendar year, the market lost more than 20%. It can only lose a hundred. Yeah. So my, now my problem is I can't go sell 50,000 of them. Right. That's right. Your other problem is you might have March, 2020, when you're down 40,

right. With eight months to go. So a, as long as I haven't sold too many of them, I can just sit. Yeah, yeah, yeah. I can just sit. B, if I'm trading long vol, there's a decent chance I may have made some, all, or more of that money back. It's a nice matchup. Right. And that always can, right, in theory, how do I trade long and short at the same time? It would just can, right? In theory, how do I trade long and short at the same time? It would just offset, right?

That's the simplistic model. My brain is, that's like too good to be true, right? But here's the thing. Options decay. VIX futures don't. So my long vol is in a future when it's backwards. Yeah, yeah. And I'm selling something with time decay really short term.

So I'm minimizing the, I'm maximizing the theta vega ratio. Right. Right. And, and, and by the way, I'm also willing to accept, Hey, I'm going to have a 10% down month. Yeah. If you don't like it, honestly, if'm going to have a 10% down month. Yeah. If you don't like it, honestly, if you don't like that, you should not invest in anything.

Yeah. I'm going to have a 10% down month. I'm probably going to have a 20% down month. Okay. But. Yeah. So is your 401k probably, right? I mean, one of the things that I've been thinking about a lot lately is perhaps we should all be much more real about what risk return we're going to get. So someone's really going to send you 15% a year every single year, and you never even have to take any heat.

You never have a down month or quarter or year. Really? Why are they continuing to send you this money? Yeah. So the low option buyer, they get to win sometimes. But if you were starting a small business and I said, hey, you can put in 200 grand. You can sell an at the money year out option and collect, I think it's $33,000 for it. And then once every... and collect, I think it's $33,000 for it.

And then once every 10 years, you're going to have to make a cash injection into this business. Right. All right. Now, can I compound it? Probably not, but that's not a bad business. And here's the other great thing. The year you take your big loser, guess how much you're going to collect on that option that year?

A lot more. It's just like an insurance premium. GEICO doesn't insure your car. When you have a wreck and they have to pay for it, they just charge you more. They're really just loaning you the money to fix it and you're going to pay them back with interest.

You see what I mean? You buy your nice beach house, one of your nice beach houses, and you get smacked with a hurricane, that hurricane insurance company, you didn't get one over on them. They're going to jack your rates up until you pay them back for that money. They just lent you to rebuild your house.

Yeah. Or they or they cry uncle on the government steps. steps in. I'd say it's very similar. A short option and particularly puts because they're bound. The S&P is weird, but it's a very similar setup. You're going to get smacked and

you cannot be out over your skis. If you're levered up, you're out of the game. Now you're out. And that's why I always hate when the guys that get blown out, they always cry. Oh my, my clearing firm blew me out.

If I'd been able to hold on. No, that market was going to keep going against you until you blew out. Right. Right. If you'd held on three more days, it had just been three more days worse. And then of course they blew you out.

You knew that when you started playing this game, that you had to keep margin. And when you were getting smoked, that clearing firm, what they're supposed to take your risk. Of course they blew you out. Like stop. What would happen on the floor back in the day, right? You're you're they would have come down and pulled your badge, right? Absolutely. They would have said, I mean, you're clearing for it, but physically come down and led you out. Yeah. Yeah. Yeah.

I mean, it happened. And and. So just like an insurance company who can't go insure every single house on the Gulf Coast right before hurricane season, but they go buy reinsurance, they do other things, you can run a little portfolio insurance business. So our short premium program is attempting to do the same thing. There are some very interesting,

when you go and look at the money options, a two-day is much a four-day is not twice as expensive as a two-day option at the money but down 10 percent a two-day option is way under half a four-day yeah so if you're capping the potential Delta loss on any short puts and trading small enough and trading short term enough options with low enough Vegas, you can really harness that risk.

Right. And get paid for it. And your daily decay is a little bit more because it's so short term. Now you're not going to be able to sell as many. So you've got to be thinking 10 to 12% a year after fees. And you also got to know like, look, I'm going to get smacked. There'll be a couple months, but guess what? And that's why blowing out as an option seller is so awful because the day you're blowing out is the day you'd love to be selling the most options possible. You see what I mean? Yeah. We did that autopsy on LJM. We'll put it in the show notes, but that didn't make sense to me.

They were only getting like 8% to 10% a year, and then they lost 80-some percent, right? Like, they didn't match up. They seemed like they were taking more risks, and the return didn't match up with the risk. Well, when the vol gets too low, you have to sell more and more to keep the agency. Maintain this performance so that those are the kind of things that we think we're going to avoid or not do now. It remains to be seen. Or investors, hey, we're in a 4% return environment. This is it. Or zero.

Like, look, vol 6. So now there are other things. You can sell skew i mean there are there are other optioning things you can do and it gets back to i want to sell insurance retail i want to buy my own it's wholesale there are a couple of very known established ways that you can do that and and so we're going to try to take advantage of some of them. Now, I also think you pair that with a long vol investment, particularly when in futures, I can do both in the same account, net fees, and I don't lose liquidity.

Now I think you've got, and again, a really interesting matchup of investments. And then the short premium is the equivalent to the long equity. Two different ways to make money during normal times. Right. And that'll bring you a little bit diversity rather than being all just long equity. And I'm not saying one is better than the other. I would start to argue.

I think there's some academic evidence to support that more different apples is almost always better. Yeah. Then add some trend following back in and you've really rounded it up. I disagree. If you can get it for 45 basis points, have at it. All right. Favorites.

Just we'll do some quick fire here. Your favorite, favorite Naperville restaurant. That's a bit of a slam from a city dweller. But I would say Maison Sabica. Maison Sabica sounds fancy. It's medium fancy kind of tapas kind of place. Right. Correct. That answer was anything besides like Applebee's or, you know, what the rest of us assume is suburbia. That's such a layup joke, and I like to think of myself as funnier than that. Exactly. You avoided it.

And we're going to go heavy Kentucky. Your favorite Kentucky basketball player of all time? Jamal Mashburn. Ooh, Jamal. He was unique. Favorite team year? 96. The 96 team. 54-2. I think they had 11 NBA players on the team. They were good. Who was that team? Delk, McCarty, Antoine Walker, Walter McCarty, Derek Anderson, Ron Mercer, all played in the pros. Nazi Muhammad was on that team.

He was like the string. Jeff Shepard played a little in the pros and won the MOP of the final four two years later. They were loaded. They had a good team. Favorite coach? Calipari. All right.

Was he the 96 team or no? No, that was Patino. Okay. Would have been Rick if he hadn't gone and coached Louisville, but we had that cut ties. And I'll move off basketball. Favorite football player? I can only think of one.

Tim Couch. Well, we had Benny Snell, Josh Allen. I would probably say Josh Allen. Okay. The Jaguars now. Went sixth or seventh in the draft. The defensive end. Yes.

Josh Allen, not the quarterback. Not the quarterback. He did not go to Kentucky. Yeah, he was North Dakota State or something, right? Right. And finally, favorite Star Wars character? Favorite Star Wars character. You know, I was a kid when the first three came out and liked them.

And then I thought those middle three were terrible. Yeah, very bad. But I got to admit, and I didn't see the last ones because the middle three had been so bad. They kind of came back and were pretty decent. But it's hard to get away

from the Wookiee. I'll go Chewbacca. It's hard to get away from the old school. We got to add all these up over all the hundred or so podcasts and see what the tally is. I think Chewbacca is perhaps in the lead. I would guess Han would win, but he's, he's close.

We had a, we did family do, we did a big Marvel like all of them all the way through. And then after that, we enjoyed it so much. We did the star Wars thing with my daughter. Who's perfect. 10 through 12 as all this happens. So we did the Star Wars thing with my daughter who's perfect of 10 through 12 as all this happens so we did the same thing in COVID did you do the Marvel like in the order of release or the order that their people say like we had a friend of mine's son would know and we asked him

he's a film major at Texas what's the order we should watch him in and he gave us a very detailed like this this this and do this and it was fantastic and we loved it and and uh we so we watched them all in that order and very thoroughly enjoyed it right you have to because by the end there's like 16 characters in there who's this who? Who's that? Like if you, if you're lost. And the movies are better if you know the whole arc than they are individually. Yeah, for sure. Like I can remember, I'm like, really? We got a superhero raccoon coming out. These people are desperate, but watching them in the arc, you're like, Oh, and that is that.

And like, it's, it's pretty cool. And I will go black Panther is probably my favorite Marvel character. You're right. He passed away, unfortunately, but yeah, it's pretty cool. And I will go Black Panther is probably my favorite Marvel character. You're right. He passed away, unfortunately, but yeah. It sucks. It sucks. All right, Scott, it's been fun. Thank you.

Hope to see you live soon, but it looks like we're headed for more lockdowns here in Chicago before. Like it. But whatever. We'll see you live sooner than later. I hope so. I enjoyed it thank you

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