#252 - Cem Karsan, Aegea Capital - 30 Day Vol Tends To Be Overbid And You Have Extended Supply In The Back Of The Curve Historically
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We talk about what the years look like so far from his perspective and the feedback loop and risks associated with liquidity compress risk premia, and a low yield environment. We chat about what he sees. Markets were pricing in and risk perceptions around the election and some trade ideas to potentially take advantage of what he believes is miss price volatility in December to January period. please. Enjoy this episode with Jia Capitals Jim Person. Welcome to the show. Thanks for having me it's like to be here. I am as a static as most of our listeners know I love having newbies on we got a podcast version today folks introduced by a common friend Jim give us a quick background I. Know you're in Chicago give us a quick one to two minute overview of origin story, and then we're going to get super weird and deep all things vall. Sounds good. Yeah. Born London lived in Turkey as a child moved to Texas after that and kind of grew up in stateside educated here parents of the Norway went to Prep School in the East Coast and got a real interesting look the world early on and got travel lot always interested in math econ public policy and kind of took me down a derivative trail went to Rice University for College Matthew Gun policy there and then natural landing place after college which Chicago knowing I was interested in derivatives started in March making land in the deep five hundred equity options and nineteen ninety eight trial by fire during the tech bubble. Up The chain pretty quickly given my background and was fortune nothing two, thousand three to leave and start a big market making operation for prior special firm. They're wagner specialists at. New. York. Overlooking diversify. The mark making world and we built a twenty five person operation for them, and eventually in two thousand, six, I left and started my own mark making operation good timing during the beginning of the financial crisis in two thousand seven with Kim up thirteen percent of US volume during that time played across equity indexes as well as ups but really equity ball and really cut my teeth during that time really built out some new trend falling stuff in some structured trades eventually sold my stake in that business two, thousand, ten on ninety. Five percent of my net worth and started a G. capital after a year and a half and enjoying the fruits of my labor and late two thousand eleven. So g capitals been around like I said eight and a half years we trade volatility products mostly outer and that quantitative approach our flagship product is long ball and has been which has been a slug as you'd imagine starting late two thousand eleven till recently but we have kicked off north of ten percent off a year with positive returns long ball throughout that whole period. Over two minutes but that's kind of the origin story and kind of brings us into that. You and I would have overlapped at one point at rice there for about a week a super nerd and I went to a tissue engineering conference wants there's an Undergrad you guys were known for big biotech program there but I it's too damn hot. I couldn't take it I. It's been all the time indoors. It was too I think in the summertime. So all right. So interesting because you cut your teeth in a few different market environments, you mentioned starting your firm but sometime we started ours prior firm and Six right before the financial crisis, and then you've had this pretty mellow period sense talk to me a little bit about Jia though we'll. We'll kind of focus on some of the ideas when you say long vall I means a lot different things to a lot of different people. So give us sort of overview of the strategy, the process what that means to you guys. Absolutely, so we really take focus on a long ball in. The vicks and Equity Index Land We do look a couple of other products, but we're focused on equity mall. We really believe based on extensive research that the peak has for forty years been in thirty all even though long-term balls theoretically higher end skew extended is radically higher the actual structural demand kinks thirty days. So we actually try focus on capitalizing on the inefficiency and relative peaks in the Thirty Day ball and look at hedging till products or the vix calling as well as some other dispersion trades depending on the vol environment we really have a machine learning quantity background. So we're kind of out they're really studying different environments. What's happened long-term what's happening now? But where it's informed by twenty plus years of experience in his products and how things have moved. To later. Yeah. So maybe tell me a little bit about and you don't have to give away the secret sauce, but maybe just general examples of what a trade may look like or what a strategy may look like just. So people can have a broad understanding of what you guys might be doing when you're talking about some of these ideas. Yes. So without going too deep or essentially looking at the peak of skew in domestic indexes is generally in the month lease about thirty days out, we are looking to monetize that skew based on a we basically take a distribution of a market events based on different. Market Environments we look at the potential moves, underline the in that ball environment scale, the strategy, and look at the lots of the surface across the house single list names, as well as the next and find not just what's hi curve. But what relative to outcomes sticks out we then structure a trade based on our tools proprietary technology that allows us to put a position on his long tails. Long Vega within a band has a very structured position in shape and has a positive expectancy over that period relative to risk return the idea being that there's always opportunities Kerr based on supply-and-demand by namic but. Intrinsically structuring it with tail. and. So what's the actual products you guys are trading? Is it options on ATF's options on indexes are mixing in Future E. T. N.'s what's the toolkit? All, the above flagship is obviously the spx options of the CBO as well as the many options over at the Merck. But we also trained to fix futures Knicks calls and puts the options on mixed as well as all ATF's and larger equity options as well trained some structured products over the counter. But keep that to a minimum. We really think liquidity is key when you're being long role till you. WanNa make sure that you have the ability to monetize appropriately I don't want marcus. And you're not trading need other markets assume you're not trading international equities or fixed income or commodities or anything else is mainly focused on us sorta concepts. Were focused domestically, we do obviously watch and look at not your stocks as laws Nikkei and coffee, and those factors feed into our models. One thing I didn't mention we also run a CPA traveling strategy proprietary early this is not for public consumption currently, but that front falling strategy is producers feed into our ball strategies as well. So it's not just velarde it's also looking at rectal components. What makes that one? Unique is really while indicators were looking at Boeing kids across the board of what where supply demand dynamics are imbalanced at what points, how that helps indicate price direction generally on a daily weekly monthly level were not very high frequency but those indicators have always been great really out by edge to take and falling, and what we've discovered is over really the last eight years, their efficacy has exponentially grown as well so. and. So on the vault Arb- side like how active is this? Is this something that like you're updating on a minute by minute hour by hour you do daily. How long did the trades last? Is this something in the short term long term how's IT Kinda the position sizing risk management all work into the book. Are. Distributions at our five days or weekly. So we are forced rebounds at a minimum weekly but for the most part, our average hold times a day and a half. So the trains rebalance quite quickly based Mark Environments obviously the low vol environment they're gonNA redoubts more slowly in a high of environment, a more quickly are rebounding driven by. Implied volatility as well as market underlying movements they're really focused on Delta skew points or making sure the trades are balanced on a risk to profitability kind metric. So making sure that everything is constantly optimal routes into slippage and making sure that we're in the best part of the carpet times. So before we get into some of the regime's over the past number of years and decades perhaps any other ideas like when it comes to actual portfolio strategy that I'm glossing over that when you're talking institutions or investors one, maybe like where does this fit in how people think about strategy like this but also any other mechanics or things that I just I missed out on before we sort of skip over to some other ideas. This is meant to be a five to ten percent of a portfolio. It's non correlated to pretty much every single other product out there. It is a by definition, a tale complexity hedge that you can put in your portfolio for structured out if you look at a long put. Out. There that generally historically has yielded south of expected value of over long periods ten to twenty percent negative for Year of scale to capitol or kicking off about ten percent Alpha on average over when it's been a very low ball created. So being able to add that into your portfolio is not only important on a cut a Beta just a basis but more importantly having that tail exposure allows you. To, buy in times of stress, not liquidate parts portfolio at the most opportune time, and I, think that's really the big argument ear that people miss a lot of the time is why have that tail hedge in the portfolio special you can sit on court performance for relatively long periods of time an answer is to obviously be in a position of strength when things are at their most desirable to buy. Wins SORTA strategy work best. Wins. It face headwinds. The best performance strategy in the last eight years has been August two thousand, fifteen you on the evaluation we obviously about thirty percent that you're eighteen, thousand, eighteen, a similar number, and obviously march of this year when a about fifty percent up fifty percents for. It does well, not only in big kind of moves. But if when you get, we haven't really get a secular move Mike in two thousand and eight to the downside it has actually it's best performance. So it does have a tail component, but it also does quite well, this month last month would be a good example and trending market as well twenty down market. So it was informed by a lot of my greatest successes which were in two, thousand, eight, two, thousand, nine, as well as dot com bubble. So it will do very well month after month by taking advantage of special inefficiency that increases during those times of stress mentally will pay dividends month after month. A little bit more about that comment structural inefficiencies in markets often don't exist that hard to find or you're taking advantage of something whether it's behavioral Macro Technical Tax Related People Being Idiots whatever the category is why does this sort of approach continue to exist? What is the structural inefficiency anything more? You can say on that point? There is a juristic in vol markets. I would say money managers don't want to buy long dated ball for the most part it see it as a drain on month after month of costs they also see theoretically as long dated ball as being flagler better term kind of the highest implied volatilities. Highest askew is a natural inclination to not by longer data all the by one month fall that allows them to dynamically when they see fit, they also don't. Want. To manage instructor position longer bombers or shorter ball and rebalancing on a constant basis up unimaginable jump in and five cliques. When they feel it is best. They're also because the tendency which has been there for like forty years products have developed around these tendencies like the Knicks to help support that kind of dynamic thirty day all and so all of these factors for demand, which ultimately can foreign inefficiency structural inefficiency. It's GonNa be a supply and demand. Bounce and there is a massive supply and demand imbalance in thirty day ball thirty day ball tends to be overbid and you have extended supply and back of the curb historically, not just because of lack of demand but you have sellers on our delta basis don't sticky skew involve longer dated whether it's an institutional manager leg Buffett or Carl icahn sellers out there or is that just like to sell that? So you get this kind of Kink in the. Curve I guess I would say it's not just the visual king but a relative to expected outcomes I could get import partners go down a little bit of the rabbit hole to is people like to look at the stuff. Theoretically, you may get some arguments back on his own longer stuff is still theoretically more expensive I think the important takeaway here is a longer out you get through the liquidity premium that should exist Mike you saw during long term capital. Management other crises the longer dated you go, it's not just a matter of realize verse implied all that matters. It's really a function of supply and demand and a longer dated ball ultimately has a tail on it the longest especially during a secular down to like we saw. And owning that stuff can be limited downside with been structural upside on the tail at how can before one month going to decline in two experts expiration that is immutable and you're able to head scam effects of that thirty day ball into that decline with shorter dated options next and ball. So there's a way to structure these ads. You can get long big lump skew collects kind of decay, a have complexity and do it in a way where you're taking advantage of some the structural miss price in that exists at something like I said that's worked for period time. The inefficiency of anything has increased with the increase in demand for ball products and the introduction products like. So you've existed survived, which is a compliment. We often tell people in our world through long ball but also through a few different, totally different types of crisis I was smiling as you're talking about secular bear markets and trends and I was GonNa? Say What's that? We haven't seen one of those in a while but talk to me a little bit about have there been any different I mean obviously, there's different environments in two, thousand, seventeen, the market. Went up every single month, and then you have things like this year, which is totally different and then the financial crisis and you highlighted a few different months. What is sort of like fall in the quality over the last ten and for you feel free to extend twenty years because you've been doing this sort of for awhile what's changed? What's been the same had survived certain periods of fallow and famine and everything else in between any general thoughts. Yeah it's changed a lot having anybody who's been this market for twenty years has seen a dramatic change in the way these markets work. There's structural dramatic changes primarily driven by the Federal Reserve and increase liquidity ball compression really starting after the tech bubble with lower interest rates and response to that liquidity crisis have. Risk Premia, risk premium all terms, not just multi products but credit spreads tough to tell most of your people listening to this podcast. But you have the massive increase in carry trades lack of liquidity premium products in that crush I guess that Dutch compression of risk premia has led to a very different market. There is a move I would say the feedback loop into kind of markets without risk premium compressed. You essentially created markets like in two thousand seventeen, which I think is really a kind of the best example. Where implied volatilities are historically lower and realize until these as a result or lower than they've ever been in history, and that's not a coincidence feedback loop of low risk premia leads to everybody being long gamma and hedging much shorter periods. We didn't move greater than three percent in two thousand seventeen to the downside and as kind of proof positive that Mary's feedback rebounding two thousand seventeen. Briggs apple two, thousand seventeen. We saw also historically the lowest correlation inequities by twenty percent and again, not a coincidence. So why is that apply volatility is compressed index is in particular, which is where all be a compression happens from volatility selling. There's still syncretic risk at the end of the day markets. Single stocks will move based on coming up with the cure were a better earnings or. Some using credit issue and one stock goes up another stock has gone down the implied volatility industry minutes compressed and so a lot of people think it's the other way around correlations were the lowest they've ever lowest they've ever been so implied volatility he was compressed a strong belief based on history that the opposite is true that risk premia being compressed as really lead to structural changes in the way these things and so you have a much much lower realized volatility locally than you've ever had. A, relative to history but bigger faster more painful moves that happened on the tail essentially all acquitted he has been moved to local and the moral hazard and the Fed being in the game as essentially lead to bigger and more painful tales. So that's the biggest change in the markets. I think that is probably the biggest change have been big changes based on that in howdy implied volatility surfaces of equity options have moved. They don't move the way. They did twenty years ago particularly skew in these. Products, you have longer dated skew, really getting compressed into down moves and really going to hire highs than it's ever been. The range has dramatically increased relative to history the idea again, being that secular moves are not in the data set for the last twenty years and what works based on automated models and pass investing is to sell the longer dated Volun- skew into a drop in the market in by Gamma Protection that allows you to leverage of all selling essentially leverage buying the dip these trades. Work and had very high sharpe ratios, and as long as you're reading a strategy that cuts that tail when it needs to, and that's based on a lot of assumptions that you can do that selling that volun- skew into a depth and buying back when the markets rallying is the way to keep short ball to keep collecting that premium that has completely changed the structure of holidays volatility circuses work and move changed a lot of strategies that work that used to work and so the other day. And this is a big kind of issue that we can talk about as well as. If that liquidity were to ever change with interest rates toward to no longer be Penn near zero or were to actually come off that level the implications for this market in the way it moves and the ability for a secular declined to happen I think dramatically increase I think the Federal Reserve, nose up. But there are very few points in these data sets that people are running when trading products that. So I think if anything that makes it even more dangerous than the more likely that a change in monetary fiscal policy, which we may be facing here going forward can change of the movement and the way that ball and risk premium products are training could make a have a dramatic effect on what happens the next STA for. Got A lot at how much input in the struggle I always have is markets of course, is this time different being able to try to figure out how much is a structural change and how much is just business as usual irreverence long term capital in such a great example on a lot of levels of this how do you sort of manage that process over the years I mean? Because there's so many different levers. You mentioned some of the put selling and just fall selling strategies and how much impact that may have how much of its fiscal, how much monetary how much was something just getting pushed one way I guess part of my question is also just how much what you're doing is just purely algorithm and how much have you had it change adapt over the years. We've had to adopt a lot obviously, the first ten years I'd traded are very different than this world. I think it's important to have that experience. A lot of people managing money. Now don't know what it was like one, eight thirty years ago and what another market looks like. I think the increased `financialisation automation. Passing. Ultimately most that based on data from the last twenty years, which is very in my mind historically unique environment. You have to respect the Riyadh in the last twenty years and position yourself according to, but also be prepared that she given where we are. In terms of policy and politics and is important as well that things interest rates could very well move higher and go back to what would be completely different regime that had very little to do in the last twenty years, and again I think the leverage in the system, not just leverage and traditional senses, but leveraging all of these risk premium products. which really increase into extended meals like we saw in March, really create a dynamic especially if it were to ever be a secular move because again, if something like March happens in, it's quick and you're able to save and not mark to market certain products and having losses comeback things are okay. But if you have a system where people in longer dated. A great examples away you know we saw ten mall which makes no sense on a rational sense go on to north of sixty that doesn't make sense nobody thought ten year ball would be sixty but they leverage in the system create situation where people had to buy back at those levels and just like in two thousand six prior to the financial crisis tenure of all was I believe running at around thirteen again ridiculous doesn't make any sense but the back markets can do crazy things and so adds that the amount of leverage that's in the system and the amount on how big positions are now across the money mansion space embedded into a sculpture products you can. Really get a situation where the effects are almost ton of four an entire Connie not to be doctor doom or I think there are real aspects of this market that are built on a lot of sunshines and the recent assumptions there based on again, data sets that are not particularly relevant for longer term timeframes in different regimes and I think we're entering a time now in particular where reese the perception of the minimum of potential change given potential fiscal policy and potential inflation could really change kind of liquidity dynamic that has really supported a lot of the trading and helped to form Fangio's I was gonNA use the more technical phrase Shit's going to get weird but I. Figured we'll keep it. Pretty Basic Vernacular Jim talked to me about twenty twenty. You mentioned tenure blew out. Was this year too quick? Did it happen in March? Maybe walk us through of what this year is look like so far. Yeah so this year again, very little been talked about how March happened in how it ended. So quickly, I mean the bottom really happened right at March expiration to quarterly expiration derivatives played a significant role in the liquidation that happened at the bottom. It has really in every since two thousand fifteen at least every major downturn, all of them have been resolved though. With Federal Reserve with quantity and greater and greater amounts that have been necessary. Obviously, there's a lot of talk about how the feds pushing on a string needs greater and greater medication to solve the metaphorical illness and the idea there is by increasing liquidity is to allow these risk premia treads really, and that's what he plucks up that much to not get out. Of Hand to not allow the art market losses in these credit spread losses in these ball product losses structured products on and on to snowball tripoint a lack of confidence in the system. The problem is again great. You can continue to support this market and not allow it to you declined, but at some point which has happened in the last twenty years, it's. Longtime creates a moral hazard A. so people are systems and programs are set up to take advantage of this and assume that tale has a lower probability than it actually has and they're also forced because of the compression of the yields and these risk premia to really because of a scarcity potential yields obviously, that fact where leads to even more selling more compressions. LEVERED system with more selling because of a fear of missing out a lack of potential other option scarcity herald moral hazard creates a massive system south self reinforcing, and if you ever have a system where liquidity disappears, the effects are exponentially worse than they ever were Federal Reserve knows this but there's very few ways out and I think the reality is if they really want inflation. That's what they're talking about. Now, I think not enough incas then spilled on the effects of inflation and how it can pin the risk premia trade have been supporting all of us leverage in the system I. think that's an unintended consequence that's not being explored at thought about by the survey by many market participants at this point again, higher interest rates a delivering of the system. Is Ultimately, at these given away, the system works given the positions that are out. There is incredibly bearish long-term, and again would mean a complete regime change. It would lead to a growth value re rotation out of growth, and into that, you would lead to a reduction of law selling undone the markets allow ways. But I think your study assumptions built into current models and understanding that the tales are now with the potential risks of a move towards a more inflationary environment really opens the door for completely different regime with different strategies. Twenty twenty it's been weird already. We've had negative you'll. Sovereigns around the world oil futures traded negative at one point all the other crazy things going on the whole broncos lineup is hurt. So we're calling this time dating September twenty third. What do you think the chances as far as regimes and this is more of a happy hour coffee gossip question do you think there's a very real possibility? No possibility something in between for sovereign. Bonds in the US to go negative do you discount that is something that's no chance on the ten year or probable what's your thoughts i? Think it's highly likely and the reason I say that is I think the third reserve is going to be forced in the next downturn to do exponentially greater things I think they're going to have to control they're going to have to. The amount of leverage in the risks in the system at this point are such that on the next decline in order to prevent a secular decline again, they're going to have to rule out anything that they can. I wouldn't put it past lying stocks. I wouldn't put it past selling volatility products directly I don't think anybody really talks about that, but I think those are things. That ultimately can may the don't fight. The Fed thing is all matters is what limits are placed upon their ability to do things right now, they can't legally buy stocks but will congress eventually give them an ability. If things are bad enough maybe I think things will get a lot weirder a lot more upside down than you could ever possibly imagine as is almost always the case. I mean, that is definitely a non consensus view. The twenty twenties going to get weirder than it already is this has been I think for many people an entire decade fit in nine months, and by the way we still have three months left. So the rest of the year, what does the world look like right now as far as vall strategies I mean normally this time of year when things start to get pretty Jiechi October through December, everyone seems to be back from summertime in whatever sort of weird pandemic normalcy they find themselves in as we look to this year any general thoughts on what the world looks like today and a few months into the future Yeah look there are some really crazy things going on and on the volatility surface historically, you have a situation where long term when I say long term December January ball during the election given the fears of contested election our pricing at dramatically higher than something we've ever seen the election straddle the one day straddled for the election itself is only running at about eighty dogs, which is not that high. which given eighty dollars for the S&P five hundred so we're talking to an that percent if anything asked me, that's cheap. But behind that the pricing in one, hundred, ten to one, hundred, fifteen dollars, daily moves, which we're talking, you know three and a half percent daily moves in the sap throughout December in January those are dramatic moves. We're talking about risk perceptions especially given that there's a real possibility despite. Compensation, that one side wins outright. Selection everybody it will. He's all levels out. There are really I, and you think about the fact that volatility being compressed particularly in the index is right now what's been holding this market together you're seeing a lot of stress and pockets across the market, but it's really moves are being compressed by index volatility being relatives to realize if you actually look at realize versus implies right now. They're almost right on top of it. So there's almost no risk premia in these small children markets, not just because they're very oversupplied currently and in the front of the curb. So yet my point here is that the other day right now risk premia compression is holding this market from anything dramatic happening. But if you look forward post-election, that's not the case that ball. In play ball priced incredibly high and so imagine a situation where you have these pockets of restarting to really blow out, and now you no longer have risk premium that feedback loop calming the market allowing it to function without a stressing instead being a tale with that can promote a tale. What's the takeaway there? Because there's a couple different moving parts and speak. To Your Lehman, which I am say is it people were expecting a contested election one through their views in the derivative markets, which by the way, it doesn't seem I. Don't really do politics twitter, but it doesn't seem like a consensus view maybe it is, and then second, is there anything to take advantage of or avoid when it comes to the next three months? Greg Question. So time getting this is important but really the last several days into this decline you've seen interesting dynamic role. The recent history with the calendar spreads really expanding dramatically that should continue based on where election ball is given the compression feedback you talking about that's happening in the markets due to low imply ball again, implied vol is very low. It's allowing people to hedge at relatively cheap costs, but in the short term but. Long, term that's not the case eventually ensure going to move away from the short term ball, and if you expand these counter spreads of you expand long-term Vega and make that really high the coverage of Benxi. Over time, you're going to keep trying to hire hire volatilities and eventually that pinning the market like I was saying can cause a disruption allowing them. These other factors credit spreads beginning to increase, which is happening the last couple heads to really start taking over risks to kind. Of Snowball. So things take advantage of I would be positioning and we are positioned to take advantage of all to move potentially host election. There are great opportunities to do this for very low cost because there's a lot of inefficiency in curve structural inefficiency, not a thirty day per se. But because of these fears that are happening for contested election, you have situations where February of all is very low relative to diesel jam as well as of November monthly election ball being really cheap. Based on probabilities contested election, etc. You can really put on structure and fly trades in the indexes versus kind of than be long volatility while still being collecting of harvesting some of the extra. What we believe is misplaced volatility that December January period. Again, the key is to be long ball position yourself or a tell because I think it's likely to happen in December January period. Feet to the fire gun to the head Jim what's the percent odds you're putting on a contested election i? Think it's over you look at what the market price in the market pricing and north of sixty five percent chance. which is crazy I agree with you Is it a real risk? Absolutely I. Don't to be dismissive of it. I'm not saying go sell that goal in a vacuum I'm actually saying the opposite be long volatility or position yourself to be able to take advantage of the increased likelihood of something happening just because implied volatilities are hydrogen up your the construction risks that exists out there going forward with fiscal policy, etc. But in terms of specifically contested election writs. I. Believe it's high. If also defy what is a contested election what does that look like is that something that gets resolved relatively quickly within a week? Are we taking this December fourteenth which is when the Electoral College meets are you taking it to? Is it a tie? You're taking to January in Bush versus Gore Supreme Court settled on December twelve because the electoral college the next day on December thirteenth you have to understand these dynamics Understand what's possible? What's not what the odds are with the magnitude of the mood might be in those environments and structure yourself according that's a big part of positioning and making your preparing for these situations is understanding event not just hey, what's what's low on the curve? It's really understanding where's this thing being priced whereas the skewness about getting pricing wise. Is that efficient? There's a lot of mispricing of skew that happens during an event ball and On that there's some big opportunities and skew for events when you can take advantage of as well and so I think the gun to my head I would say the odds are twenty, five percent somewhere between five and and sixty five. I was tweeting about this the other day. 'cause I was curious again. I. Try to mute just about every political variation of phrases on twitter and elsewhere they still send to seep in. No matter what. But inevitable well, it's inevitable but it's funny because I look back four years ago I had a tweet where there's academic paper. It's a little bit tongue in cheek, but it demonstrated like stock market has like eighty five percent accuracy in predicting the election just based on if it's up, I think three months going into the election I think the twelve months is similar but I had tweeted. November I last election I said team Hillary better start buying futures because the stock market's down and if it continues to be down, the simple indicator is stock markets up incumbent party's stays in vice versa but it's funny because this year as of I think this podcast getting recorded, it's right at fifty fifty, which is right where the betting markets are. But so I was trying to assess. What the probabilities are, and at least try to place an actual bet on it. But most of the prediction markets only let you bet like a hundred or I think predict only caps out like eight hundred bucks or something but the rules they had, which is a little different was I think December fourth was priced at about ten to one but their criteria for the determination was it. Win Like Fox and CNBC both called the election in favor of one person and I was like I'm not sure if that's as trustworthy are accurate as I would hope, the bet would be anyway listeners. If you've got a good ways places bet I'm curious because I think it's a pretty decent chance given all the variables going in but anyway, it'll be interesting to watch. That's for sure. I think an interesting way to plan is really getting too deep Biz I think the value versus growth trade, which obviously has been widowmaker for years and so stretched I. Think there's a secular reasons like structural secular reasons why that trade looking forward many years talking one month to month will mean revert and just because of the need greater fiscal stimulus without getting into too much detail there. But clearly in abide victory that will happen quicker. The push for fiscal stimulus infrastructure spending social programs will be much quicker based on the current site guys from what people. Feel, necessary in the democratic. Party. So I think one of the best ways to play this is really kind of look for ways to structure of all trades around that kind of value growth factor. You might put yourself in a position where if trump wins, you may take a small loss on it, but I think the potential upside to trade that expresses that and especially in a convex way and Abidin victory could really pay dividends that happen. So that's one place kind of we're looking right now on their interesting trades given were growth wall tread versus valuable. That's interesting. I never even thought about that from a derivative standpoint being a value guy at heart as well as far and along Vol Guy all mixed in the value community has just been facing that pain trade as you mentioned, and it seems just keep getting worse by the day. But that's an interesting thought I had not considered. I mean again, it's a good kind of cheap way. I'd say they're very inexpensive way to get a lover on election Jim big picture question backup a second to the extent you guys do most of all our just on sap is accurate or It's across all inexpert but I'd say the flagship possessively I mean, that's kind of the center of all world you kind of to normalize everything to that because that's where the greatest volume happens. Clearly we've been having a lot more retail volume. You'll get into as well on the big growth ends, which has changed a little bit, but it's still the ten thousand pound gorilla. You know it's still what ultimately pins moons, markets and relative died about it's canal you start we have betrayed a lot of products but do it through the lens of Spx. Yeah because I mean I was thinking theoretically least diversification across other markets whether it's fixed income commodities are just other financial markets in equities would seem that there should be some broadly similar brushstrokes across them although we were talking Turkish stocks and investing. Before we got started, there's clearly differences in different markets is that something you would say is more accurate than not vall sort of concepts apply across markets or do you have to be pretty deep in the weeds aware of the structural differences or both? Yeah absolutely. So different markets both foreign equity markets as well as just Kinda, debt markets. Foreign Exchange Commodities. All experienced the risk premium compression dynamics that we've talked about two billion interest rates but there's something that makes that are very unique to Obviously, one-sided skew the equities, and the way that's skew is always highest pretty much in the world in a year in domestically in SMP because the people come hedge, really allow for some unique opportunities inequity land that don't translate over to some of the other law complexes legates. Dancer is in some ways universal kind of equating compression issues are across products. They all are related obviously working on X. market maker I think everything is the massive four dimensional matrix everything is related. To everything, risk is filtered from one product to the other end has factor exposure across each factor relative to one another. But there are certain things that can only be properly hedged equity land for equities and I. think that's why I think this complex in terms of opportunities for relative value connected trades as we saw and March actually march the best performing ball was as people equity all you're allowed opportunities here that you wouldn't get elsewhere outperformance I also think that at the End of the day, if you take on too much correlation, NASA's rents on a long ball trade in, you're trying to get out today opportunities but captured tale and the tale basis can each you up especially given this liquidity environment and the potential liquidity issues that arise entities, moons more and more with kind of unmatched tell liquidity out there. So I think it's critical that you're really focused on forming on the tail to not put too much basis risk on the bucks so. Clearly, trying not get too cute with some strategies really take advantage of strategies don't have generals. What's the impact if any we've certainly seen similarities to other times, but the media loves to cover all the Shenanigans going on and Robin Hood and Portnoy. Not Ours the other one shout out Portnoy and Masan or all these other things that may be going on these having an impact. Is it something that's Kinda? You know you brush aside as minor players, reminder effects they creating opportunity. Anybody who's been kinda following me on twitter. The last three months would kind of see kind of the ability to call market direction based on these voluntary factors and important they are to understanding kind of structure realities to how this market works. One of the things we have talked about is kind of gamma facts from these indexes from these ballparks. Let's talk about it. What does it? What does that? What does that mean? Yes. So a lot of talk about it in the last month or so but essentially, all this retail buying 'cause it was actually much more the retail bind calls than it was Amazon and bank. They also played a role, all that buying calls for some dealers to take short gamma positions in those stocks, which is only increasing leverage in the direction of the trade. So with all those caused being bought dealers were forced shorter and shorter Delta into that rally that ended in at the end of August and ultimately led to a situation where great and greater stock buyback raising balls into a rally, which was very unique, the extensive which involves rising and. kind of an unpaid again. As. We were talking about before the vall complex and allowing for some of these other risk factors to kind of ultimately push the market out in late August, I was very public about kind of when you see volatility rising into a rally, just a matter of time because at especially in this market, which is the quickey driven. Again unpicking lack of better term of the forces that have largely been at play that have allowed this market growth in particular Tau perform and so when all rises in a situation like that it really loosen the marketing allowed it to decline that said, these sophisticated players know this now at this point as dealers were forced to take on short short gamma and these products they were edging it net long. Ball by buying calls and puts both in the S&P Five, hundred across the rest of all conflict. So the positioning really got to a point at the top where people were long ball in sap across the non roof names and short it in his growth names and there extra long ball. So not surprisingly the pain trade is always where the market tends to go and the pain trade was for growth. To rotate out I publicly called for rotation growth at that point at a massive rotation out of growth into value beginning when that started happening and you had a compression of till the end to drop because people were extra long index volatility. So we had a massive decline in the market, which was again, not a surprise. We've got a ball compression Rodley in the market, which is not a surprise that. You move away from the short calls. The people had dealers had made ask as and you had a massive decline in growth names and that rotation habit. So this is the beauty of understanding ball markets as a multidimensional. You not only get to color on which way will the market go based on dynamics? What do likely? Where's the Patriot ball where the patron, the market? Where's the pen trade in? The spurs traded whereas the rotation likely to happen. All these things were, does it in terms of time nothing's likely to happen and our they likely to play out? Game in Varna. Flows that occurred during this time, the more you understand these vol markets and where the supply demand imbalances are and how the street is positioned the more you understand not just where the market will go but where and how the dynamics will play out in the months weeks months to. Well it's GonNa be fun to watch. That's for sure not going to be boring. No matter what as we look past the horizon started wind this down. Any general thoughts on talked a lot about instability but any other just general thoughts on markets your firm what's Y'alls plans over the next decade or I say the rest of the decade twenty twenty should have its own separate year the rest of the decade what are you excited about anything on your mind researching studying thinking about? Your I mean in terms of the business like I mentioned this before but I really started to focus a lot more on kind of the ball effects on the market itself. We've done a lot more kind of analysis to that effect and get by strategy that has been very successful in the last year since we launched it using these affects to predict kind of market movements. That's an area I think that is. Not as Much capital not as many people understand those effects as well as we do based on our experience and measuring the supply and demand factors is really the kind of secret sauce and being able to predict markets at time, it's hard to measure supply demand you have to be on the inside you have to have good information you have to track flows, and you have to have a good framework to take an engineer. That's nearly I'm trying to focus more on directional on ball. We really good at the ball art piece and kind of. Distributions understanding we're laws cheap inexpensive and how took take advantage of it for a long time but adding directional expertise related last year has been the revelation and I think obviously much more scalable strategy than some of the ball arm strategies are as well, which is a big benefits Russell's. So we'RE GONNA probably launch a product that CJ product based on performance and that end under volatility advisors in the next six months. With the sort of capacity for the Vol, are I mean you're trading in a pretty big pond? Is it really high or is it actually not that high? It's less than you think you'd think sap hundred ball is a incredibly deep pool and but the key is dealing with the tail like I said before to get the liquidity during times of stress that mismatch liquidity based on the amount of imagined or across the street or short five, Delta Ten puts not when you get down there become one hundred. Is already leveraged positions and everybody's trying to get out the same time. So real liquidity situation extended time and time. Again, the last five years not bear in those situations. So that really limits some of these fighting on alongside there's still only so much you can do the capacity of long ball strategy is around five, hundred million dollars, and we're managing about half of that now. So not as much as you'd expect, that's also a great career trying benefit from some of the Alpha in edge that we get from understandings markets All right listeners you gotta get your wires in before. Zonja before the election. What's been the most memorable you say investment or trade during your career could be good bad long short in between anything come to mind. I made the majority of my net than two thousand eight during the financial crisis. That's Kinda run I made my name when I really have developed a lot of studies that I now use a lot of things we still do in the long ball strategy. Our lessons learned from that experience but I believe in oncoming separate different but similar experience in the next year will be better. If that materializes to hang my hat on that that was the best tournament. We took a couple of million dollars and turned north of thirty five in a matter of a couple years Olympic numbers from your guests and again, not schedule strategies. But the risk reward on these types of positions that you can put out. There are incredible if you get a secular decline and that's really the key again, I mentioned the top programme those. Haven't happened really since away and the window is definitely opening for them if we do get higher inflation. So yeah, I think I will get into the details but trade, but again, it's very related to some things. I talked about in terms of how we position and take advantage of kind of structure in the fishing season, the indexes in emphasis ourselves long-haul. Takeaways, you only have to show up once every ten years. To take vacation once a decade have a month or to work monetize it and go back to bed God, the amount of like brain cells I've killed in the last eleven years trying to wait for that coming is you know? I wish I stayed on break longer than a year and a half I'd say that but. Good, Jim, we're going to have to hit you up next time. We want some deep due diligence on Turkey as well as what's going on after to revisit and see kind of how this year ended I. Imagine it's GonNa be a totally peaceful next three months viruses going to disappear into the ether peaceful political transition and then back to business as normal in twenty twenty, one, I'm a comeback I will say the one thing i. Didn't mention that just be off your monitoring i. do think when people are expecting something in terms of an actual expiration time like we are seeing in December January unlike the theory that like you mentioned the of the intelligence crowds existing there that because there's a feedback loop and ball markets, a lot of times in structural reasons why you events actually don't fully play out at that time because as ball compresses after I, bet you'll get. What you got in the trump election in sixteen, you could get a really kind of short term period of stabilization. So I wouldn't be surprised that we some initial volatility and then it amounts to some type of compression towards the end of the year only to come back after the new year something into spring of next year. So that's my general framework I would say who knows we'll see again. Position, Long Ball for the event but I do think there's a better chance to get some movement on the election November. Maybe some stabilisation in December January once era we all know who the next president is and then when the the whole idea you know growing fiscal policy as well as potential inflation depending on WHO's elected president I think we can see a real beginning of a secular move into next year. I think we didn't really touch on this and it's getting too late to go deep. You know. I think a undercurrent of lot of discussions I'm having with advisors who are more and more consistently getting concerned about where bonds are in the portfolio with bonds yielding sixty basis points and the potential if they do go to zero or negative, what other strategies Can they sell in that? Have some sort of protection to the rest of the portfolio going from sixty, forty, two, maybe eighty, twenty or seventy, twenty, ten and that ten being something like a strategy. You're talking about that hedges some of the equity, but it doesn't give you the negative carry bonds I don't know that's for next time. We'll talk about that. We'll talk about that in. It's time always leave the audience wanting more jim otherwise is going to start to be a Rogan. Ask Link Long podcast I definitely think this should be part of anybody's portfolio degree complexity mismatched given. The leverage is represents a real opportunity obviously, but I'm talking my book. So leave for next time. All right perfect. Where do people go? They WanNa find you handle website all that good stuff. Yeah twitter handles jam underscore croissant. I just wanted to hear you say we always put it in the show knows i. just wanted to hear you mentioned the twitter handle. Yeah, see my name Gem Carson. We'll see we'll see it celebrate on understand for Daria. It's kind of been a nickname for a little while a jam underscore croissant website is GE capital. Dot. COM, we're in the process of like I said, Raunchy a CPA product under the moniker advisors and that website it will be live here shortly as well and and something that you can hope to hear a lot more about. Jim Thanks so much for joining us today. Thanks for Apple. PODCAST listeners will post show notes. Today's conversation at Med favored dot com slash podcast. If you love the show, if you hate shoot US feedback at the MED favor show dot com we love to read the reviews please use on I tunes surprised show anywhere good podcasts are found. Current favorite is breaker. Thanks for listening friends in good investing.