Tue. May 28th, 2024

Episode 22: Kris Sidial [Ambrus Group]
In this episode, we talk with Kris Sidial, CIO and founder of Ambrus Group. The Ambrus Group is a volatility arbitrage focused firm that was founded in 2018. The firm takes pride in having a math driven ethos that specializes in leveraging an in-depth knowledge of volatility skew while applying a discretionary twist to quantitative volatility strategies.
We talk about Kris’s background working different prop desks at banks. How Kris believes that the market microstructure has evolved and changed since 2017. How to sell capped vega to fund the buying of out of the money wings with unique dispersion trades. How chaos theory can be represented by positional inflection points by a multitude of players on the volatility space.
I hope you enjoy Kris’s insights as much as I did…
Listening options:
Listen on Stitcher Listen on iTunes Listen on Spotify Android users can grab our RSS feed here.
Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at [email protected].
Sign up to stay up to date with the Mutiny Fund and receive our long volatility research and reading suggestions.
ENTER YOUR EMAIL TO STAY UP TO DATE:
Transcript for Episode 22:
Taylor Pearson:
Hello and welcome. This is the Mutiny investing podcast. This podcast features long-form conversations on topics relating to investing, markets, risk, volatility in complex systems.
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 Mutiny Fund, their affiliates or companies featured. Due to industry regulations, participants of this podcast are instructed to not make specific trade recommendations, nor reference past or potential profits. Listeners are reminded that managed futures, commodity trading, Forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer, for more information.
This is Jason Buck from the Mutiny Fund. And today I get to sit down with Kris Sidial, the CIO of Ambrus Group. Kris has a long history of working at different trading desks throughout some different banks that we’ll get into the story of that. But today we’re going to talk about all things volatility and all things options trading. We’ll get into a little bit about how you set up cap short volatility to maybe fund some of your long volatility at the WINGs. We’ll get into the different structural flows from non-economic hedgers. And all things that everybody that follows Kris on Twitter, loves all of his insights. So I think we should just dive right in. So Kris, let’s start with your background. What got you into wanting to be a trader and what’s your personal history?
Kris Sidial :
Yeah, absolutely. So I started out during my college days. I was really interested in sports gambling, really funny that the two actually hold a pretty good correlation. I had a pretty good math background, I was like a dirt in the math Olympiads and whatnot. So I tried to use applied statistics to actual sports gambling and it didn’t work out so well. But I got interested in the stock market, started trading stock market as always like with everybody, I had to pay my tuition, quote unquote to the market and lost some money there. But throughout the time I think I learned a lot. And from there I went to work under one of the individuals who helped start the CBOE directly. So the guy was like a vol veteran basically trading vol for like 40 something years. And I was a sole junior.
Kris Sidial :
So I had a real good opportunity to learn under this individual and learn all the intricacies about trading vol. He taught me a lot. And from there I went to come here security as well as on the prop desk. Learned a lot about trading constitutional order flow and some of the moving parts that happen there. Also from there, I went to a small buy-side equity hedge fund. They were more so focused on binary events and also looking in a way it was somewhat like stat arb, the way they looked to implement some of the moving factors.
Kris Sidial :
And then I spent most of my time at BMO Capital Markets, about three and a half years there. Most of my time there was on the exotic derivatives and listed options desk. And I learned a ton there. I learned what it was like to look at a book from a holistic standpoint, a really large book and all the idiosyncrasies about managing risk in a really big book. And how to think about the market and all these moving parts. Everybody talks about the fancy Greeks and whatnot on Twitter, which I think a lot of people don’t really understand the implications. And some of these Greeks, when you’re managing a large book and you’re thinking about risk in different buckets, whether it’s your six-month bucket, two-year bucket, especially for like an exotics desk, some of the longer-dated stuff. So I had the chance to learn a lot of senior guys that showed me the ropes and gave me a good understanding. And then from there, I had the opportunity to leave and start up this vol hedge fund with three of my partners. And here we are, almost six months into it.
And before we get back to Ambrus there’s a part of your story that I was actually thinking about the other day. When you were younger, you used to go down to a Wall Street. And just stand outside of investment banks with your resume, hoping to catch some traders and trying to just hustle on the street. And I think it’s interesting probably when you look at it now, you’re like, “That was a terrible move. There was no way that’s ever going to happen.” But the way I think about it is, it’s just hustling in general. There’s a story that parents should always read to their kids. That’s what’s important for your kids, like mental development. But what they found through studies is actually if you’re a parent that has been educated and can afford the time to read your kids at night, then your kids are going to be just fine.
So it’s more about their ability to have the economic structure and educational structure to be the ones that could read to their kids. It’s not necessarily that they have to read to their kids. And I like that story that you have about standing on the street trying to hustle your resumes, because you’re somebody that hustles that hard, it wasn’t going to work. But you’re the kind of person that’s going to do whatever it takes to make it work. I’m curious how you think about that.
Kris Sidial :
Yeah. I absolutely agree. I think there’s a part of that in trading where you have to have the real set-in determination to really follow through with it. Because when you’re starting off, markets could break you from all different angles. It breaks the smartest of smartest individuals, especially if you have a math background, you try to come in and use some math towards it. But yeah, that was definitely not a fun time, but it was good learning lessons. I would basically head out there and I would in a weird way stalk a guy on LinkedIn and figure out which office he was at. And I’d just go out there with my hand extended and say, “Hey, good afternoon. My name is Kris. I have my track record with me.” It’s so funny because I thought they cared about a track record where they would see like, “Oh yeah, you returned is 60%.” If somebody was to show me that these days, I’d just be like, “Oh, this kid.”
Kris Sidial :
So I get why they just shoot me off. But I think that hustle is something that a lot of the younger group lacks today, as opposed to the Wall Street and the 80s, like the old Salomon Bros and some of the Bear Stearns stories. And some of that where guys were really hustling to get the job and had a real passion towards it.
Yeah. I think it was [inaudible 00:06:41] that talk about, you should look for the ugly, fat, short surgeon or something with terrible hands. Not the person that looks like a perfect doctor, because they’ve had it easy through life. That other dude had to struggle and actually outdo everybody to get to where he is. Reminds me like you said, the old school, Chicago days of those pit traders. It was more about, what could you do. And not necessarily, what school did you go to and what investment bank did you work at and you had this golden path to get there. Not taking anything away from those guys, but it’s a different way of coming at the same problem and getting ahead. So you just mentioned that within the last year you guys decided to get together launch Ambrus. What was the general thesis besides wanting to go out on your own?
Kris Sidial :
So it really wasn’t about branching off. I think a lot of people, when they talk to me, they think of me of like very entrepreneurial, that I went off and I made this move. But I didn’t really care about, “Oh, I’m working for somebody under a bank,” or anything like that. It was more so opportunity. My partners and I all collectively viewed the change in market microstructure. And we looked at some of the moving dynamics and we said to ourselves, “There’s a lot of opportunity here.” And with all the experience that I learned throughout the years, being on the buy side and then like I said being on the sell side and learning and understanding how to manage a book of that size. I think it really all lined up for the correct moment to really jump.
Kris Sidial :
My partners bring a ton of experience to the table as well. And one of my partners he had market making firm in Chicago, we sold it for 100s of millions of dollars. So I think it was just one of these things that it just lined up completely due to the environment that the market was giving us. And I just didn’t want to let that opportunity go to waste.
And can you define what you mean when you say you view the changes in the market micostructure?
Kris Sidial :
Yeah, absolutely. So the market right now, if you look at what the market is currently doing, it’s completely different to the market that you see in the 80s and the 90s and the 2000s. One-month variance on a single name, equities have increased tremendously. And I think everybody who’s trading, understands this. Everybody is like, “Wow, equities just don’t stop going up. Equity’s buy stocks because that’s all it does.” The upward drift in the U. S. equities. When we’re going through certain back tests and things of that nature, the environments are just two completely different things. And I’m very outspoken about this. When you’re doing a back test, I think post 2017, you have to look at a back test from a completely different angle and you have to weight it heavier post 2017 than you would the data pre-2017. Because of all these moving parts and the change to the market.
That’s really interesting because I even think about even general volatility trading, everybody’s like, “Can you back-test this till 1900?” I’m like, “No, we can’t.” I wouldn’t even trust a back-test pre-2010. And then you’re even moving up that timeline to 2017. What do you think was really the baseline of that shift in 2017?
Kris Sidial :
So this is the big beast where we’re going to dive straightforward into it. A lot has changed to really add to that one-month variance in U. S. equities. The first moving part is obviously the growth of derivatives. Derivative exposure is at all-time highs. If you know anything about vol, you’ve heard these gamma squeezes and vega squeezes, the reflexivity of the market. It’s really true and it’s prominent. But outside of the listed option space what a lot of people tend to forget is in a low rate environment, this is happening in the exotics world just as well. U. S. exotics is more so a smaller market than the rest of the world. But the same way that the dealer needs to hedge off the risk that adds to a form of reflexivity to the overall or the underlying. It’s the same thing that goes on in the exotics world.
Kris Sidial :
So you have listed options, which is adding to this reflexivity, then you have exotic structures, which by the way, it’s having an amazing two years. Everybody wants exotic notes. Every financial advisor is putting their clients in some sort of exotic structure. So banks are just printing these things hot off the press, and they need to hedge off the book. Outside of-
By exotic structures, do you mean like a European and Asian structured products or other exotics?
Kris Sidial :
Just here in the U. S., let’s think solely in the U.S.. The structured products world is extremely big outside of the U. S. The U. S. is relatively small in comparison to the rest of the world. But yeah, most of these exotic notes in the U.S. are tied to some of the indexes like SPX, you’ll have some tech stuff, even single names. You’ll have like a worst of Phoenix Autocallable or a barrier like 75% or something like that that’s tied to like three tech names, which could be Apple, Tesla, Amazon.
You know I’m going to make you define a knock-in Phoenix Autocallable on tech names. So you’re going to have to break that one down.
Kris Sidial :
Okay. So basically how you have to think about this is you have to think about it as a knock-in put. So what happens is the bank structures the note, they price the note, they issue the note to the client, and it would be like a really large institution. I’m not going to say any names or whatnot, but the large institution takes this and what it does is it now packages it and gives it to the financial advisors. The financial advisors sell it off to the clients. Basically what it is, it’s like, think of three names, let’s think of Tesla, Apple, Amazon. And what it’s doing, it’s pricing in, let’s just say a one-year note, the worst performing of those notes and where it’s going to be at. So if you have a barrier note that struck at 75%, basically when it gets to 75%, the note knocks in. So let’s Tesla is the worst performing, which is probably not going to be true, but let’s say Tesla’s the worst performing and it’s down and Apple and Amazon are soaring.
Kris Sidial :
Just because that Tesla stock is underperforming and it hits that barrier, well, now the dealer needs to hedge out the risk and now basically the client loses on the trade. So if you’re the client, you’re clipping a yield, you’re getting some sort of a yield, whether it’s, they’ll probably price the notes somewhere along the range of like 9% annual yield. Or probably for tech, maybe like 12, 15% annual yield. So the client receives a yield and basically they are short a downside put which the bank is not.
And it makes it a little more difficult the more you do these baskets of worst off for actually the dealers to hedge that risk or the bank to hedge that risk. Because if you have three different stocks going in three different directions or three different volatilities, and then you’re moving maybe down towards that strike. It makes it a little more difficult for them to hedge that in real time, doesn’t it?
Kris Sidial :
Yeah, absolutely. So I think there are many different ways that banks look at the risk and this goes down to the risk model that they have in-house. I’ve seen different ways that people price these things and there’s been times where people would structure it and go to a bank and their pricing on it is way off of what the client had or something of that form. And yeah, absolutely, when you’re thinking about risk, you have to price in the moving parts of three things and the probability or assumption, whether you’re running a million Monte Carlo simulations or whatnot. So it can be very difficult. And when they print these notes, they’re generally printing a big notional so you have to make sure that that big notional to the downside is hedged off.
And then what’s interesting is what I always found, it’s like an inverted parabola hedging, it’s like, they’re hedging as they’re moving down towards that strike. But then when they’re getting closer to the strike, they know that the client’s going to get knocked out of that contract. So then they start taking off their hedges once it hits that 75% range.
Kris Sidial :
Yeah. It could be a tricky thing based on some of the other moving parts of the book. Some banks didn’t do as well as you would think that they would and should’ve done in an environment like March of ’20, where a lot of these notes are getting knocked in and the client is losing money on it. And what tends to happen sometimes too, is you’ll have buybacks. So what you’ll have is a client will basically get the note and they’ll be happy with the note or whatnot like that. And then let’s say it doesn’t fit their portfolio, they want to now basically sell it to the bank. Now, when the bank prices that, I’m telling you, when you’re on the exotic side, when you’re on the OTC side, the bank is going to price that very favorable to themselves. That’s the thing. A lot of the institutions after they issue the note, it’s fair game. And a lot of times, some banks don’t want to buy back notes from other banks that were issued.
Kris Sidial :
So you’ll have a bank, let’s just say Goldman Sachs, I’m just putting this out there. I don’t know anything about Goldman Sachs exotics desk. But could be a process where they’re like, “Okay, we’re only buying back our notes. We don’t want to buy back the notes from out there.” So the liquidity in the market at times can be brutal for some of the clients who are taking some of these stuff down.
And two more things about those Autocallables, and then I interrupted your flow of the microstructures and we’ll get back to it. People don’t realize a lot of times those Autocallables, if it’s negative 25% down, let’s say for the worst off, well, you missed the drift maybe before March. So it’s the actual vintage of when it was struck. So it was struck in January and the market drift up 10% and they’re like, “Well, we sold up.” Well, it never got touched. So a lot of those things didn’t get touched so they’re all still sitting out there, maybe they did some buybacks and ripped people’s faces off. But to your point too, part of it too is like that’s all OTC and that’s counterparty risk and everything. But a lot of times they’re hedging in the liquid market. So that’s what you have to pay attention to those flows. Is that the way you see it?
Kris Sidial :
Absolutely. Yeah. So the majority of the hedging is done on the listed option side. That’s where the majority of the hedging is going to take place. Now, it varies when you’re striking structured product notes that are like five years out, which is a common thing. You do have a lot of these notes that are struck long-dated. But yeah, most of the hedges are coming through on the listed option side. And back to your point, which you were saying about the market drifting up, that’s absolutely a true thing. And what’s super interesting is that financial advisors, remember they don’t really have a great understanding as to what’s going on in the market. So when you have a huge institution that comes in and takes down these notes from a bank that structures them, the financial advisors just want to push them to the clients. So if you’re a client and you’re striking one of those notes right now when the market is at all-time highs, it could be very brutal for you.
Kris Sidial :
So I think you, as a client, you have to also be aware of, what are the actual market conditions? Where is the market priced at right now? Because me personally, I wouldn’t be too enthusiastic about pricing a worst-off tech note that has a 25% barrier or whatnot that’s two years out. Me personally.
And I interrupt you, but I think about derivatives of data in markets there’s really a 20-year timeline, the really rich maturity that we’re at now. And it may have taken a hit a little bit in 2008, but like you said, now we’re seeing like, this is the tail wagging the dog and driving market. So huge because we push people out the risk curve and people are searching for yield. So they start to get into selling volatility and options and then even more exotic derivatives like structured products. Because they’re just trying to give clients yield that they’re so accustomed to, that they found in treasuries or duration prior to. Is there anything else you think since 2017 that’s really changed that market microstructure before we move on to what you guys do?
Kris Sidial :
Yeah, absolutely. So this is not only 2017, but I think from a regulatory standpoint, and I know you and I have spoken about this before and I’ve been pretty outspoken about this. But the implementation of Dodd-Frank, I think was pretty big. And I think pre-2008, if you were a dealer and you had a position in your book that was going against you, you could take down more risk, where you say, “Hey, I want to take on more risk. Hold off on warehousing the position.” That’s what you would call it, I’m inventorying the position, warehousing it.
Kris Sidial :
Funny thing that goes on, on the sell side, there’s a famous saying that, “You’re in the moving business so don’t warehouse the position.” But again, prior to 2008, you could warehouse the position. But now moving forward post 2008 and whatnot, we’re in an environment where the regulatory implications are so strict for some of these larger institutions that it creates the reflexivity to start the cascading effect. So if you are a trader and you have a position that’s going against you, basically you’ll get a tap on the shoulder from risk to say, “Hey, what’s going on? Where are your overnight risk levels at? I think you need to hedge that off.” And when the dealer now goes into the market to hedge that off, it starts the cascading effect. So it’s that reflexive cascading effect which could be pretty big.
Kris Sidial :
I also think, which is a very evident factor that the market participants are changing. We’re hearing so much about how millennials look at the market. And I think there’s a big transition of the actual buying power in the market that’s being driven from millennials. And people have to understand, millennials think in a growth speculative type of way. I’m a millennial, I will tell you straightforward, majority of millennials are looking for a home run type of play. I view markets differently than they do, but you have to understand, a lot of these individuals are now lawyers, doctors, they are now practitioners in their field that are well-respected and they have wealth. And they want to put that to work and they’re not afraid to do that in a speculative manner. And what makes this so different than 2001, when people try to make the comparison to 2001. You look at the accessibility to this market, it’s completely different. Anybody could just pick up a phone and open up a brokerage account and just start trading. And not only is the accessibility easy, but you also have the factor that the educational standpoint has now become super accessible.
Kris Sidial :
So in that 2001 environment, you didn’t have a million people on YouTube trying to train people how to trade. Right now somebody can open up a brokerage account to say, “Hey, it’s open.” And then they’ll go look at some guy who says, “Hey, I’m going to show you how to trade on YouTube.” And it gives them the conviction to be in that position. Even if it’s complete garbage, they now have the conviction to say, “I’m going to buy into that. I believe in this.” So the accessibility, the teaching, it just leads to more increased variance. And then you talk about, which is Mike Green’s big topic, this transition into passive. Some of these ETF products that are being created and the way they’re structured.
Kris Sidial :
Everybody wants a form of diversification. And that reach for diversification is actually leading to a lack of diversification. If you think about a dispersion trade in the cues and SPX, and I was telling this to my partner and I’ve been outspoken on this as well. It’s like no point in buying vols on the cues. You might as well just do it in SPY, SPX. Because if you look at the core names that are in there, they’re large tech names, Apple, Amazon, Google, Facebook. All tech, all huge components in the market.
Kris Sidial :
So the reach for diversification has now actually led for a lack of diversification where these large tech names are leading the path completely and driving the marketing.
Well, let’s break down that dispersion trade real quick. Just for the audience, describe the classic dispersion trade, and then how you alluded to now, if it’s only really five names. You’re not really getting that index, dispersion has gone away or how do you think about dispersion?
Kris Sidial :
So the way we express dispersion trading is a little bit different and we’ll go into that and when we talk about like the firm philosophy. But your standard dispersion trade will be something where you’ll sell a straddle on an ETF or an index, basically where you sell the straddle and then delta weight it or vega weight it. You’re going to buy the straddle on the components inside. So what you’re hoping for is a pure vol move where you have vega expansion from the constituencies in there in relation to the actual ETF or the index. So you’re hoping that all the little, let’s say five names that you buy, the vol expands there. And the vol that you’re short in the index, or the ETF doesn’t move too much.
And then how do you think about that correlation change, if we’re down to only maybe five names in the index that are really moving that flow weighted index.
Kris Sidial :
Yeah. It’s a big factor. If you look at the way implied correlation has been since November it’s been pretty much pinned down. It’s something that I think a lot of people need to think about. Because I think again, we’re moving into an environment where things are becoming much more tied than they generally are. And people are trading one data and a market that is no longer the same. Just moving away from that real fast, you even look at what took place in March where you had bonds down, equities down. You’re seeing a lot of the inverse correlation break, which means that it’s a positive correlation. So things are becoming much more tied together. Even though it may seem like, “Okay, implied correlation is pinned down or whatnot.” I don’t believe that’s true. And I think in true risk-off events, we will see more of those where you have that dynamic, that everything is coming down with it.
Kris Sidial :
You even thinking about the whole Bitcoin thing and this is a point that I had brought up when Musk now says, “Okay, yeah, we’re bringing on Bitcoin on our balance sheet.” Well, is sentiment now going to change to say that, “Okay, Bitcoin’s and Tesla correlations are going to be in line and by the way, Tesla’s a part of SPX. So is that correlation going to be in line?” So any real risk-off event, we have that dynamic where Bitcoin’s down, Tesla’s down, SPX down, everything’s down with it. And I think things are becoming much more tied together. So it’s a point of concern, I think if you are a money manager.
Yeah. It’s like if you’re short correlation in those classic trades, you can just get your face ripped off in these liquidity cascades of these markets to quote [inaudible 00:27:03] as well. But I also want to push back before we go ahead. When you said millennials are really long growth or they’re happy to take these YOLO trades and they’re making money. Let’s be honest, that’s just youth. As a Gen Xer, I hate to be an old man voice of reason, but it’s always been youth. Like you said, back in ’99, I was YOLO-ing in my E-Trade account on tech names. But it’s the same thing. Youth, we always want to get ahead. We want to stick it to our parents. We want to get rich quick.
So it’s the story of life. Just as unfortunately is the story of life is the old disparate to the young, I’m not playing that game either. It’s like, I get it, get yours, but we all learn from those mistakes hopefully over time. And we suck less hopefully overtime, but it’s not necessarily millennials versus boomers. It’s more just like the young versus the old, and this is a perennial story. Is there something you want to push back?
Kris Sidial :
Yeah, no, I think there’s a good amount of transfer of wealth as well. Especially when you look at a low rate environment, where a lot of millennials could just say, “I’m going to borrow cash.” And I know people who have done that, where they’re borrowing cash and they’re also using some cash that they have to put towards equities. Because technically there’s no other place to park money right now. Buy treasury, which is contrary to your standard portfolio breakdown which at once was. I know a few guys at large banks that I’m pretty, pretty friendly with that just freshly became a director level that are like, “Hey man, I have a couple 100,000 that I want to just put to work.” I think that wealth and that actual savings is much more different this time around. And I think the appetite is just very different with this generation. But we have also have a different-
And you’re also dead right on the education piece too. In ’99 there was no online messages or videos telling me how to operate a gamma squeeze. So the education level’s at a whole new level. Whether they get it or not, the education level’s shocking that at least somebody in the crew is figuring out the market microstructure and how to squeeze dealers. It really is fascinating at the end of the day. But let’s get back to Ambrus and you guys have primarily two strategies that really compliment each other actually, but let’s maybe start with the yield strategy and what that entails.
Kris Sidial :
Yeah. So we break the book down into a few different sub-components sleeves. But the main way that you should look at the book is we decided to segregate them into two forms. One is the yield strategy which focuses on a cap short vega type of book. And then the other strategy is the convexity fund where we have our long gamma, long vega profile, which is also being funded by some cap short vega in there. And I just want to give a little bit of the listeners an idea as to how we view markets as a whole. A lot of what we do is predicated around chaos theory, which a lot of people will say, “Oh, wow. Complex math.” But it’s not. We’re not looking to implement Lorenz attractors into every single factor in the model. We’re looking at markets from this lens. Whereas, humans naturally underestimate the potential distribution of outcomes at levels of extremity. And what I mean by that is that at those 99 percentile ranges, when things go two-sigma, people say, “No, this can’t go four-sigma.” And because they look to fade that, it reflectively contributes to a five-sigma or six-sigma event.
Kris Sidial :
We’re the guys on the other side that are looking at that and we’re saying, “Okay, at this level of extremity,” vol guys like to look at things in percentile terms so the 99 percentile range or the one percentile range. We like to be at that point where we are focusing at that point on positional imbalances and we try to remain agnostic to market direction. So what I mean by that is that we like to play way, way out the money WINGs. So we focused on a form of kurtosis trading both ways. So skew trading right of the market and the left of the market. But to go back to what you were saying, focusing on the yield book specifically, the reason why we cap the vega is because of our firm philosophy. Where we believe that in these scenarios, people underestimate the potential and you can have that six-sigma event happen to you overnight.
Kris Sidial :
So we don’t ever carry any short vega in the book that is not cap where we know that, okay, if the market was to tank and let’s say, VIX goes to a million. We know where our loss will be at. It’s not like to say we have a calendar spread on where we’re getting gamma basically ripping our faces off. It’s more so we have a defined point, which we carry in the book, we’re looking at certain strategies where we can harvest the VRP and also roll yield in the VIX futures term structure. And we’re capturing that to help fund the WINGs on the other side.
And just to give us like a toy model because like you said, you don’t want to take any basis risk, especially on a calendar risk basis. But how in essence can you set up a capped vega trade without diving too much into the details as far as make sure that spread doesn’t get blown out. Or there’s other ways you can get pinned or get your face ripped off. So maybe just a generic example of how you view a cap vega trade.
Kris Sidial :
Yeah. So I think this is a big misconception that I really want to address. People take structures for strategy. And what I mean by that is people will say, “Hey, I’m going to sell an iron condor or I’m going to sell a call spread.” That is not a strategy. That is a structure. You have no edge. If I just synthetically come out and I say, “I’m just going to sell a call spread.” There is no edge in doing that at all. People have a bad misunderstanding where they think that that’s a strategy. So what we do is we will analyze the data where we believe we have some sort of a statistical edge and we will implement a structure in that avenue. And what I mean by that, for example, in the VIX futures term structure, there are times where we are looking to take advantage of the roll yield there. So some of the ETP products, you could basically capture some of that short vega in some of the ETP products that decay at a pretty fast rate.
Kris Sidial :
The way we express that is by selling call spreads. A capped call spread. Some people will just sell naked calls or some people will just short the front month futures just straight outright. But that’s a way that you could express that. The same way how let’s say you come with some assumption that, “Okay, the market in a specific range and a specific timeframe, or whatever signal you may have, doesn’t go under this level.” I’m just making something up and you want to sell a put, instead of selling a naked put, we would sell like a put spread. So every type of trade that we take is a risk defined trade.
So you brought up VRP, which is volatility risk premium. And you alluded to two ways to look at that, but I just want to highlight both. A lot of times people think of the difference between implied and realized. But the other way to look at it is actually the term structured premium of the roll-up yield if you’re in backwardation. How do you look at VRP, volatility risk premium? Are you primarily, like you said, trying to capture the roll yield or do you even play the implied versus realized game?
Kris Sidial :
So we’re more so looking at the roll yields for the VIX futures term structure. There’s many ways that we analyze it. But more so we’re trying to harvest the roll yield there. For single name equities we’re focused on the VRP. So it could be some sort of an edge in a binary event where we think single name equities, the vol pricing may be out of whack and we look to target it there. But the way we look at some of the vol ETPs, is in a different thought process and a different frame. There was a very good article written by Vance Harwood on the misconception that individuals have with understanding the ETPs and the contango that decays it.
Kris Sidial :
And his point was that it is not the contango, it is the convergence between the two front month futures to VIX itself. And then he had some data in there. I would highly suggest some of the listeners check it out because I thought it was a great writeup and that’s the way we look at it. It’s not about that contango number specifically. It’s more so about that the spread difference between the front month futures and spot VIX.
Well, like you said too, there’s structures and strategies. And a lot of people then just try to capture that roll down yield in a systematic way, just always putting on the trade. But like you said, there’s a convergence of whether it’s coming up or down or meeting in the middle, but also there’s bellies of that move. And I assume that’s what you’re algorithmically trying to time more of the sweet spot of that as well.
Kris Sidial :
Yeah. So we have different ways that we look at these things. I’m just a believer against doing things in a completely systematic type of way. I don’t think markets offer opportunities like that. There are many different environments and regimes where you could pull out certain tools that you have in the toolbox. But I don’t think every strategy could just be fit into every market. And I think a lot of people just try to approach it that way, which if you’re a huge pension fund or a tremendously large fund and you’re trying to do something in relation to something else, I get it. But if you’re a money manager and you’re trying to outperform in a way, I don’t think things should be done systematically, especially vol selling. That’s the number one thing that I don’t think should be done.
Kris Sidial :
A perfect example would be how some of the vol products have been acting when VIX on this quote unquote fixed floor. We talk about this 20 VIX being the new VIX floor where you haven’t had that massive fall-apart in some of the ETPs. Prior to the last week and a couple, few days before, it’s been very, very rock solid at these levels. So if you were just systematically saying, “Yeah, I’m just going to go and I’m just going to go sell calls on ETPs or just short front month futures.” It just doesn’t work that way.
I just want to timestamp that. We’re recording on Thursday, February 18th. So when you’re talking about recently and everything, people can know exactly what you’re talking about, just in case they’re listening to this like two years from now or something. So thinking about selling that capped vega, how do you also about the tenor or duration of those trades? Do you think about the time preferences differently than you think about on the convexity side?
Kris Sidial :
No, and I’ll give you a good reasoning as to why. A lot of people who are larger allocators when we go to speak with them, they ask us, “Well, why not play six-month vol or three-month vol?” And it goes against our firm belief. We believe that due to this market microstructure, you’ll see increased variance in short-dated timeframes. It could be very difficult to time that if you’re playing three-month vol or six-month vol. Maybe you’ll land right in the middle. Maybe that six-month vol is going to turn into one-month vol the month that things blow up. But the way we like to look at things as in a short-dated timeframe.
Kris Sidial :
We look at our long vega, long gamma stuff within like one month to one and a half months. Because if you look at the crux of the moves that have taken place again in this post 2017 regime, volume we’re getting, December, 2018, COVID in 2020. All these moves just fall apart in about a month and two weeks or so. So we like to position ourselves on that monthly base, which for us means more trading, more rebating the book, more reallocating, but that’s how we trade. We trade flow. When we look to spot positional balances in the U.S. equity market. And these areas where we find the positional imbalances, we look to allocate towards it. We’ll say, “Okay, here’s a good avenue for us to fund a ton of WINGs. We could buy a lot of gamma.”
Kris Sidial :
Effectively that’s what we are. We are gamma hogs that are just trying to play skew. We’re the guys that are buying those two delta calls two delta puts that everybody’s like, “Who’s the idiot that’s buying this?” Well, that’s us, we’re on the other side. So we’re taking our short vega stuff that we’re winning on and we’re funding our long gamma stuff that we’re hoping to have that type of explosive action. And again, this is not just to the downside. Because of the increased variance in U. S. equities, we believe that you will continue to see these large rallies to the upside, more so due to the market microstructure. These imbalances and some of these flows that cause the positional dislocations, it’s here to stay. Until you have an environment where rates aren’t pinned down to the ground, or there’s some regulatory intervention, you will continue to see the market make these very sharp moves up and down, up and down.
Kris Sidial :
So that’s why we’re more so focused on the short-dated timeframe even though there are opportunities that arise with three-month vol, six-month vol, we’ll see ways that we could look at the term structure and say, “Hey, they know that looks good.” But again, it’s not what we do specifically. We’re looking for the most gamma that we could possibly obtain.
And I want to highlight a few things before we move on to the convexity side of the book that you touched on. When you’re talking about flows and positional imbalances, and I’ll take it back to chaos theory, I’m glad you defined your definition of it. Because chaos theory tends to be a catchall, like saying, “I think from first principles.” I’m like, “Great. Well, what does that mean to you?” So let me say it back to you what I think you said, just so I can clarify is that when you think about chaos theory when you have a two or three-sigma move. You can then look at the flows, the non-economic players and the position balances or imbalances to determine is this going to be mean or versionary from here? Or are we going to break out to a five or six-sigma move? And is that how you think about the chaos either feeds on itself, but you’re really looking at the flows or the positional imbalances, that inflection points? Is that fair?
Kris Sidial :
Yeah, that’s a good way to look at it as well. But I think one frame and it’s a very easy way to look at this is that when there’s smoke, there’s fire. And when you’re at a level of extremity, you could bank on the fact that there’s going to be more of that. Naturally people are going to say, “Okay, we’re now in the 99 percentile range, it has to come down.” But that thought process, it adds to the reflexivity to turn it into a six-sigma event. And this happened during COVID. I can give you guys a perfect example. When COVID first came about, you noticed the market started to tank in the, I would say third week of February, fourth week of February. But what were people doing? They were selling more vega. Nobody was covering vega at that point. And it just added fuel to the fire that led to this massive blow up. And even a GME, we can use this basic saying to every large outlier event in the market with GME. When GME was at like 70 people were like, “There’s no way it could go to 100. There’s no way it could go to 200. No way it go to 300. No way it go to 400.” And the reflectivity just continues to drive it.
Kris Sidial :
So I think the way we look at it is that when you have things that are at extreme levels, where you see large positional imbalances or dislocations. Where let’s just say, for example, we’re looking at the smile and we notice that the smile is now let’s say 80% money is now trading in the 99 percentile range. Most people will say, “Okay, that’s rich. We’re selling that.” We’re not viewing it in that sense. We’re saying that, “Hey, can we check the flows there? Can we check where some of the prints were at? Can we see what was done there? Do we know if there are any players that have been specifically targeting that? What is the reason for that?” And our thought process is we don’t want to step in front of that. We would probably be wanting to buy something like that. That very, very cheap gamma that we could buy in an area where we think, “Okay, maybe there is a dislocation there.”
Kris Sidial :
So it’s just a different frame of thinking, contrary to your standard, mean reverting type of way of thinking. This is not the market where you want to be playing a mean reverting type of price action on a one to two-week timeframe. It’s like when the market is trending, it’s going to trend in one direction on a short-dated timeframe and more so rip your face off.
It was funny, I was thinking about when you’re saying GME, “No way it can go to 100. No way it can go to 200. No way I can go to 400.” I was like, “Are you talking about the price of the vol?” Because those are rare times in life, we saw both at the same level, almost like vol 700. It was insane, right?
Kris Sidial :
Yeah. I think it got to… I was looking at the AMC vol, the AMC at the money, like one-month got to like 1,000 vol. It was another thing, it’s like, “Oh, tell me the difference between a 700 vol and 1,000 vol?” There’s no difference in it.
So before we get convexity book, you hinted already that you like to buy those teenies. But like you talk about you don’t do it in a systematic way. You’re looking for your spots, you’re picking your spots, but also can you define what long skew or long kurtosis is?
Kris Sidial :
Yeah. So there’s a lot of different definitions and there’s many ways that people could think about playing a long skew and long kurtosis. I think the easiest way to bring to viewers is that we’re looking to just buy WINGs. So again, think of us as the guys that are buying that five delta call five delta puts where we’re allocating a certain amount of VaR towards it. And we’re saying, “Hey, we want the most convexity here. We want that vol smile to pick up.”
Kris Sidial :
When the name is going down, the vol smile’s picking up, the vega’s picking up, the gamma’s picking up and we’re getting paid out like 50 to one, 100 to one on the initial trade. That’s what interests us. We’re fine with losing on the majority of these because that’s how it goes. The majority of the time, you’re going to miss on about a good amount. I would say about 70, 80% of the trades, you’re going to miss on these. But when you hit, you’re going to hit very big. And as long as you could fund that cost to carry with the stuff that you do statistically on the short vega’s side, because again, the correct side of the trades to be on, statistically is short vega. I think every vol trader would tell you that. Statistically, the short vega side pays.
Kris Sidial :
But if you really want to make that substantial gain, it doesn’t come from the short vega side, it comes from the convexity side. But people express the short vega side incorrectly so their P&L looks like this. They make money, make money, make money, and the risk isn’t defined and then they give it all back when the move happens. Whereas if you could do this in a structured, defined way, where you find an edge and you figure out, “Okay, is there an edge here? I can have some sort of defined risks where I’m capping the risk and I’m short vega, I’m short vega. I’m short vega, draw it down. And I’m short vega, short vega, short vega.” And you’re going back.
I think about historically, I grew up reading the market wizards books and those CTAs on long divergence, they’re looking for breakouts. So they would say these are target rich environments for divergent traders. And then when we’re in a convergent or mean reverting environment, we get hurt. And I was always like, “Why wouldn’t you just do both then?” And that’s what you’re talking about, it’s like, you want to be on that breakout side. Preternaturally, you want to be on the divergent trades on those WINGs. But you realize to fund that you need to have some cap vega. So you’re agnostic to short vol, long vol, but a lot of people can get blown out that way. So how do you think about, when you combine the two, how do you position size, maybe the short vega side while maybe losing on all those options on the WINGs, but being able to survive?
Kris Sidial :
Yeah. So that breaks down to environment, and this is where we get into a little of the proprietary stuff about some people. You can’t completely just theta weight it. I think you remove a lot of the edge there. It goes completely different than you just selling a straddle and buying the constituencies and the straddle vega weight. It doesn’t really work that simple. I think it comes down to the practitioner’s forecast and them having a forecast and then understanding, “Okay, can I take some sort of P&L from this pocket of the book and dump it into this, where I’m long gamma, long vega?” There’s different ratios that you could carry on your book at a certain time where you say, “Okay, maybe I want to be five to one gamma to or vice versa.” Maybe there’s an environment where you’re like, “You know what? The vol is just very rich here, I should be leaned heavier long in my book.” Because with vol being so high, obviously as vol increases, gamma is going to decrease. But you’re not going to get that convexity and you’re probably not going to get paid out.
Kris Sidial :
So you’re probably looking it and you’re saying to yourself, “Yeah, let me up some of that carries I’ll be long with theta in the book.” Whereas maybe in an environment where vol starts to get pinned down, you may be saying to yourself, “You know what? Gamma’s really cheap here. I’m going to load up on some excess gamma and maybe I’ll find some stuff four weeks out, a month out for the people who are playing, the entire term structure, three months out, six months out, whatever.” It’s different environments that go. And you have to adjust as a practitioner and as a trader to fit those environments as you go.
And then as you referenced before, you’re not just systematically or willy-nilly buying all these teenies and just loading up on inventory because it’s cheap. But how do you think about searching out for those points that you want to be buying, those three to five delta puts and calls?
Kris Sidial :
So one big thing on how we look at the book obviously we have certain band-aids to our allocators. So we need to make sure that the downside’s protected and also the upside’s protected. So there are some things that we need to make sure that we’re funding in the book. But we look at special situations as a good point of focus where we could see like an earnings event coming up. We’ll notice a dislocation. “Hey, why is the term structure moved so much in this earnings in comparison to last earnings? Why was the flow so strong this time around? Do we know if there was a large pension fund that’s been buying flow at this specific level? Do we know that there’s a large player that keeps coming back to the market?” Maybe we see them on the tape, maybe we spot something. So it’s really understanding positional imbalances and saying, “Okay, could there be a catalyst behind it?”
Kris Sidial :
And I think when you’re a long vol trader, the same way, how you would jump to a fusion model, when you’re basically calibrating vols or whatnot. You’ve got to look at that and say, “Well, I probably want to be on that side of it. In a scenario where the vols are going to potentially jump, I probably want to be there.” And this is something that I learned from a senior guy. And again, I’m really grateful. I had the opportunity to learn under all those guys, because these are these little things that you learn. Where it’s like, when you’re a long vol guy, you should be focused on areas that offer a potential catalyst. It’s going to give you that opportunity as opposed to you just buying dead vol. That regime where you’re like, “Yeah, I’m just to buy cheap realized because it’s just so super cheap.” It’s not going to work. You’re just going to bleed on out. You have to have something behind that for you to take that trade contrary to you just saying, “I’m just buying vol and I’m just buying it because it’s dirt cheap.”
Kris Sidial :
Now we have a view on certain things. There are certain sectors in the book where we think this is pretty cheap and any sell-off, we think the in relation to the rest of what the market is going to be doing, and the correlation is going to be much stronger. So we’ll buy those things as well. But focusing on some of the special situation events I think it goes a long way when you’re trying to play some of the stuff in U. S. equities.
Yeah. I think that’s an interesting wrinkle that you guys provide that. Not a lot of the vol managers that we track do that really play that special situations or earnings announcements. And I think it’s both a pro and a con. It allows you to play in a different field than most people, because it’s capacity constraint. So a lot of bigger funds or institutional players aren’t really going to play in earnings or special situations, but then that also hurts you on the business side that you can’t be 10 billion in AUM. I’m curious how you think about it.
Kris Sidial :
Yeah. You’re 10 billion in AUM and you’re buying WINGs on earnings. It could definitely be a problem, especially if you’re trying to spot positional imbalances with some of the dealers and positioning with some of the larger players. But as of right now where we’re at, it’s a very scalable strategy and what we’re doing as a whole I think we have a lot of way to scale up. So yeah, maybe when we get to 10 billion, God-willing, that’d be a good problem to have.
At that part of the book could be a rounding error and you’ll forget about it. You hinted it earlier and you brought it up when you’re talking about earnings in different sectors. But how do you think differently about dispersion and correlation than typically is assessed?
Kris Sidial :
Yeah. So I think when you’re looking at WINGs or when you’re focused on kurtosis trading, there are different ways that you could look at this because obviously you have a heavier path dependency with the underlying. It’s not your standard one-to-one. But there’s many different ways where we’ll look at a specific environment, we’ll look at the way something acted in an environment. And we like to break up the environments and assess it individually. And at prior shops, this is one thing that I would do very frequently, I would break up certain things into regimes. An example could be a VIX regime where you have a low vol regime, medium vol regime, high vol regime. And then you analyze how some of the factors have acted in that regime in relation to a specific shock. So the same way how you would shock your book, in a specific scenario analysis, you could do that and vice versa.
Kris Sidial :
Now, it’s hard to do this when you’re focused on outlier events, because statistically, there are so little of them. I can’t give you a great understanding, but I think when you couple these things with also understanding, “Okay, who are the main participants in this market or in this specific sector? How are they looking at risk in this sector? What are some of the moving parts that they may have? Who’s the main participant that’s playing this thing?” A person who is selling vol on HYG is going to be different from a market participant who’s selling vol on, like Apple. It’s two completely different things.
Kris Sidial :
It’s a very hard question to answer because you have to have many different ways to look at the book as a whole, to give you that conviction to say that, “Hey, in a real risk-off scenario, the beta on this would be heavier. And correlations on this would move more in line as opposed to stock B or sector B.”
So you do think about it more like statistical correlations don’t uphold when you’re doing a phase shift or extreme environment. So it’s much more philosophical or the art of thinking about how your book combines at different correlations at different, like you said, vol regimes, whether it’s short, medium, or high volatility. And I’m curious, how you would then look at that because you can’t really assess that mathematically if you’re almost like… You could shock test it, but you’re using a past history of shock tests, right?
Kris Sidial :
Right. Exactly. Yeah.
It changes how you align your whole book. And do you just go at the end of the day, all the correlations are one and I’m dealing with it that way, that’s my max risk? And then I believe the correlations are different in a mild environment or how do you think about it?
Kris Sidial :
Yeah. Again, you don’t want to statically just frame your thought process to one way of thinking. Because I think it could lead you down the wrong path, especially when you’re focused on something that, again, when you’re playing WINGs, it’s so path dependent. And when you’re assessing something like dispersion correlation in risk-off environments, it could be really hard to try to make that assumption base. I think it’s important to have that traders’ discretion to understand the market that we’re in. And an example would be, look at the dollar right now, everybody is short the dollar. And people are saying, “Synthetically, the dollar only has one way to go fine.” I get it. But you have to factor that in that the entire street is short the dollar. If you’re looking at some correlation with the dollar and the way equities act, whatever it is. If I just took that data and I just looked at it statically and compared this environment to a prior environment or something like that, how the dollar acted in 2015 Brexit or something like that. It’s not going to give me a correct way that I should be thinking about it when today everybody’s short the dollar.
Kris Sidial :
So could there be a cascading effect if for some reason the dollar spikes overnight? Maybe there’s some sort of governmental intervention that will go against it. But I have to be thinking about some of these moving factors. Again, the participants in this market, why are they participating in this market, for what reason? And just combining all those things. So this is why I say we do things from a quantitative perspective, but we do have a heavy discretionary overlay because I think that’s where you have the beauty of it too. Of where you have that quantitative ability and then the discretionary side matches it. And it’s like you have the best of both worlds and now you could actively act as a practitioner. I don’t think in this market, things can be done completely discretionary or completely quantitatively. I think there needs to be a balance between the two. From a practitioner standpoint to say, “Hey, this doesn’t make sense. Okay. Why doesn’t it make sense? Because I have this, this and the third. I may not be able to explain it mathematically, but I could tell you what is actually going on.”
Well, I think we’ve talked about this a million times and we think about it often is, as originally humans, then we went to machines and we thought that was the end all be it all. But now it’s human plus machine is really the future, because like you said, it’s the creativity of thinking outside of the algorithms on your back-test of what could happen in unique markets as they change and undulate throughout the years. You have to have that creativity of the human to figure out that something doesn’t feel right here. And you get that gut feel or that finger feel through experience. But speaking of that discretionary, the hardest part on options, especially buying WINGs is how and when do you monetize? So do you guys have some kind of mechanical heuristics or is it all dealers’ choice, discretionary, this feels good time to sell?
Kris Sidial :
Yeah. So this is the beautiful part. We don’t believe in quantifying the monetization process for the outlier events. We think that that’s where your discretion as a trader really needs to step in. And if you look at the way we structure the book, as I said, we’re cap short vega, but we’re uncap long vega. So we want that outcome of the six-sigma event or whatnot to take place. We don’t want to cap that where we’re along, let’s just say a call spread. We don’t want that to be cap. We want that to go as far as possible. And we want our discretion to look at that and say, “Okay, what is going on in this environment right now that will aid our conviction or remove our conviction?” Because you cannot quantify outlier events.
Kris Sidial :
So imagine, I’m trying to quantify a monetization process around the VIX. It can’t be done. If you were trying to do that prior to COVID, you missed out on a lot of money, you were monetizing too early. It takes that understanding of being a trader and being in the trenches a little bit to say, “Okay, hold on. Now, this fund is under pressure right now. There’s a lot of selling pressure that’s going on. Liquidity looks really dry right now. We’re hearing from this bank that they’re unloading a lot of size. We’re seeing this mount of size pop-up on level two, level three.”
Kris Sidial :
It’s ways of understanding that. Or when we get to a certain level and we see additional flow coming from a certain market maker. I think it’s a lot of forms of experience that comes with the monetization process, especially when you’re long vol. I just don’t think systematically, it’s the correct way of doing things. Now, I think on the short vol side, you can do that. You can have a systematic way where you’re like, “Okay, yeah. Exit here. We’re done.” But on the long vol side, I feel like you have to be out there scoping it and seeing, “Does this make sense? Does it not make sense? Should we get out now? Should we not get out now? What is the reason that’s aiding or removing our conviction?” And that would just need to be the traders’ discretion with them assessing the environment and assessing where flows are at.
Well, then also with one month in on most of your options, you also have that time as a sharp stick at your back too. That’s going to get you out of the trade no matter what too, even if you held on longer, it’s always there.
Kris Sidial :
Yeah. Well, here’s the thing about the way we look to monetize, we do it in tiers. And this just goes down to trading one on one, just being a decent trader like how the oldest guys used to trade. Where it’s like, okay. You have a position where you’ve now made 200% you lock in a quarter of that position. You sell some delta against that. And then you assess, “Okay, here we are.” Now I’m up let’s say 1,000%. I sell some more against it. And then you keep let’s say a fourth of the lot or a third of the lot, and you let it ride out. But you have to monetize and tiers. And that’s where, again, our discretion comes in, where we noticed that we have something and this is how we always trade. Immediately when the trade works in our favor, we complete something where we call it, paying for the trade. So now we’re correct. We’re going to make sure no matter what, this is a free trade. We are not losing on this trade. We may give up a lot of gains because the trade may go against us, but there is no way that we’re coming out losing on the trade.
Kris Sidial :
Let’s just say we paid let’s just say $15,000 for WINGs, or you paid $15,000 for WINGs one way. The moment that, that trade works in our favor, and we could cover the cost, we’re going to remove that. So we’re taking some off, we write out the remaining two-thirds or the final one-third. Because it stretches it out. It gives you a good frame and a good thought process on how to monetize and also how to keep your head on your shoulders. Because you don’t want your emotional discretion to take hold of you. Because now let’s say, if you’re up 1,000% and it goes down 200% now, you’re like, “Oh yeah, I’m getting out, I’m getting up.” You have to pay yourself along the way.
Yeah. So you’re saying you need to be able to sleep at night to be able to trade well? So you need to maybe take some of that position up? You’ve mentioned something that I always find fascinating. You said, “If vol is rich.” And people say vol is rich or cheap. But it’s interesting, there is no real definition for rich or cheap. It’s really individual and subjective. So I’m curious how you think about rich or cheap, does that really just come from gut-feel from experience?
Kris Sidial :
No, I think there’s a lot of metrics that you need to use to look at it. So what we do is we do different look-back period. So let’s just say we’re just doing a basic form of analyzing a skew. Let’s just say you’re taking the 10 delta put dividing it by the 50 delta put. And you’re just looking at that on a historical look-back. There’s different forms of historical look-backs. Again, that I think you should do a six-month look-back, one-year look-back, three-year look-back, five-year look-back. And it gauges your understanding and you could mold that into your model the way you feel best.
Kris Sidial :
As I said, we specifically give a heavier weighting to the more recent stuff due to the changing market microstructure. But there’s a lot of different ways that you could go about assessing what is rich, what is cheap. And maybe the trades are dirt cheap, but maybe it’s seeming that way because of the ratio that you ran. But unknowingly the entire term structure is lifted up. So it technically isn’t that cheap. It’s just that the ratio that you’re running between that 10 delta to the 50 delta on the look-back period is saying, “Hey, that’s cheap.”
Kris Sidial :
When you look at the overall term structure, term structure’s up 400 vols, which again, here’s another form that you have to analyze when you’re looking at that. You need to look at the entirety of the term structure and a look-back on that. So it’s taking all these different pieces and analyzing it and it’s all subjective. I think the way I look at skew and the way I may look to price skew, or look at skew as rich or cheap is definitely different from the way a lot of other practitioners do it. So it all comes down to what you’re trying to accomplish. I don’t pay attention to anything like six-month vol. People talk to me about things about the end of the term structure. And I’m just like, “Unless it’s VIX.” VIX is a complete different story. I’m always looking at that term structure. But for SPX and some of the other stuff with single names, I don’t really care too much about it.
And throughout this conversation on the periphery, we would touch on flows here and there. So the question we get really often and actually when we talk to people like you or other former market makers, et cetera, they’re always talking about, “How do these guys get access to these flows? What are they looking at for flows?” So it’s really like you’re looking at level two or level three order book. You’re looking at maybe block trades might tip you off that this is a non-economic hedger. Then you’re talking to other people on the street in Bloomberg chat. And you’ve built up these relationships over years, or sometimes decades for others. It’s a combination of all these things. And there’s not retail access to that. How do you think about putting that together? Do you get a feel for where the flows are and where those positional players are to think about your chaos theory again?
Kris Sidial :
Right. Exactly. And I think that’s a very fair point. We’ve definitely built a lot of relationships, my partners and I so we talk to people, we have certain institutions that cover us. We’re talking to people on the streets as things are going on. So we definitely do have an edge from that standpoint. The way I think retail should look at it, it boils down to more so… You have access to level two trading and you could see things that are printed on the tape. And what you could synthetically do is just try to recalibrate the vols for a term structure and say, “Okay, this printed at this specific level here. The rate of the change of the vol was pretty big. I know that there could be a potential dealer that’s under pressure at this level or something of that sort.”
Kris Sidial :
You could look at the way the term structure changes, the rate of change in the term structure. I think all those little things could give you a good idea. Or let’s just say, you notice a very big bidder that’s coming on around like midday in a specific name. And they’re printing on the tape midday for the last like four days. Well, that’s probably somebody that’s getting filled on a order. Or you look at some of the prints that’s taking place on VWAP. You notice that somebody’s soaking on VWAP. Okay that’s a big institutional order or something.
Kris Sidial :
I think you have to play the game for a little while to have this intuition and this understanding. You can’t just pick up a book and just figure these things out. Nobody’s going to show you these things that way. But after a while, you could make some assumptions on it. It’s very tough, I think when you’re not an institutional players to try to make these assumptions. But I think you need to have at least some sort of a hypothesis on what’s going on and why this is taking place. Again, if you notice a huge dislocation in the way the 80% money has changed on the smile.
Kris Sidial :
Maybe you said, “Wow, that’s jumped 20 vols overnight.” Okay, what’s the reason? Can you go back and let me see what hit the tape?” And then you see a huge order that came in. Somebody just bid up a bunch of puts down there or they’ve been bidding up the puts for the last 10 days. That’s going to give you an understanding that, “Okay, there’s a dislocation there. How can I take advantage of it?” You could form this creative way of thinking on, if I see this again in this specific name, because again, you have to think of that.
Kris Sidial :
A lot of players that have these mandates play specific names. So you’ll have like a fund that will only be buying downside vol in healthcare names or bank names. So maybe you spotted that in J. P. Morgan you’ve seen, “Okay, this hit the tape for the fifth day in a row. Is there a way for me to take advantage of that? Maybe I should be buying that because these guys are probably going to come up and push the vols up even more. Especially around earnings time, maybe they’re always buying protection during earnings time.” It’s hard to put these things together from a retail standpoint, but I think you have to be in the weeds a little bit to make a little bit of a discretionary call on it.
So I was thinking about it earlier today, like when you were saying Phoenix Autocallables and stuff, and it started relating in my mind on actually sports betting, which you and I have talked about a lot privately. Whether it’s parlaying or hedging, or even in game wagering and how just general mathematical minds work in general. And both of you and I have a history of every once in a while doing a little bit of card counting here and here, always trying to find that edge. But I also learned today about your short history as a chess champion and people have to find that on Twitter if they want to learn more about that.
But what I think about often is, us long vol guys in general are pretty quirky. So if you’re always looking for long volatility in the markets, I wonder why do all of us maybe sometimes search out short volatility outside the markets? I think Ben [inaudible 01:11:52] trying to get rhabdo on his Peloton. Vineer Bhansali is hell of skiing. Chris Cole is rock climbing. And you like to wrestle in skintight clothes with sweaty men and try to choke each other to death. So how do you think about short volatility in your personal life when you really got that long volatility on your books?
Kris Sidial :
That’s really funny. So for the viewers who are listening and don’t know anything about me, I enjoy boxing in Brazilian jiu-jitsu. And I’m very fortunate enough to express these interests with a lot of guys who are very good in this space. I think that’s a really good question, but there are some times where you have to just remove that way of thinking and just do what you enjoy. Sure, that is a short vol trade where for guys that don’t know, some of the guys I train would actually fight in the UFC, which is really cool. There’s not too many guys who could say, “Hey, I train with guys who legitimately fight in UFC.” But I could hit my head and something bad could happen and it could be a bad call. So of course there is a short vol trade.
Kris Sidial :
But there are times in life where I think you have to do what makes you happy. You have to fill up that happiness monitor in your heart. And sometimes the short vol trade is the trade that makes you happy, where you’re looking at that UVXY call and you’re saying, “Wow, that’s some juicy premium there. I’m going to sell that naked.” So I think everybody has that side to them as long vol. I think long vol guys naturally are risk-focused guys who think about things in positive payoffs, but also look for a form of excitement. I think all of us look for a form of excitement in life. It’s exciting when vol’s going. It’s exciting when that P&L is moving the way it is. It’s exciting to play this game. So I think at the end of the day, you got to do things that make you happy.
Well, in your defense, you do have a monk-like discipline with both your diet, your weightlifting, your exercise, your sleep. And all of that is to make sure you can sit in that chair and focus for hours and hours on end. So you do have to blow off a little steam and I’m sure rolling allows you to get some of that steam out from the market. So once again, I appreciate you coming on the podcast and I look forward to doing this again. And one day I’m going to teach you actually how to text instead of using voice. Or maybe I’m the old man that you’re going to teach me how to voice text instead of using my fat thumbs. But thanks again, Kris. I appreciate it.
Kris Sidial :
Thanks, Jason. I appreciate you.
Taylor Pearson :
Thanks for listening. If you enjoyed today’s show, we’d appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email on [email protected]. And Jason is [email protected]. Or you can reach us on Twitter on @TaylorPearsonMe and Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.
Taylor Pearson.
Copyright © 2022 · Mutiny Funds, LLC is a registered commodity pool operator with the National Futures Association and TaylorPearson.Me is a registered DBA of Mutiny Funds, LLC. This website is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed are solely the opinions of the authors, and do not necessarily reflect the opinions of Mutiny Funds, LLC, their affiliates, co-managers of their funds, or companies featured. Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives , and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments.
DISCLAIMER.
This website provides information regarding existing commodity pools known as The Long Volatility Fund LLC and The Cockroach Fund (collectively the “Fund(s)”), which are managed and operated by Attain Portfolio Advisors LLC and Mutiny Funds LLC (the “Managers”). Investments in the Funds are only available to Accredited Investors as defined in Rule 501 of Regulation D of The Securities Act of 1933. This content is being provided for information and discussion purposes only and should not be seen as a solicitation for said Fund(s). Any information relating to the Fund(s) is qualified in its entirety by the information included in the Fund’(s)’ offering documents and supplements (collectively, the “Memorandum(s)”) described herein. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). Before making any investment in the Fund(s), you should thoroughly review the Memorandum(s) with your professional advisor(s) to determine whether an investment in the Fund(s) are suitable for you in light of your investment objectives and financial situation. The Memorandum(s) contain important information concerning risk factors, including a more comprehensive description of the risks and other material aspects of an investment in the Fund(s), and should be read carefully before any decision to invest is made. This site is not intended for European investors, and nothing herein should be taken as a solicitation of such investors.