Alpha Exchange

A major theme of Alpha Exchange podcasts over the years has been the impact that financial products that live and breathe within the markets have on asset clearing prices. Events like the crash of 1987, the GFC, the 2018 XIV event or the unwind of short variance exposure in March 2020 come to mind as examples. More recently, the substantial growth of leveraged ETF products has gotten a lot of attention, as a potentially amplifying factor with respect to underlying asset volatility.With this in mind, it was a pleasure to welcome Mike Green, a partner and Chief Strategist at Simplify Asset Management back to the Alpha Exchange. Our conversation drills down on leveraged products written on MSTR, the bitcoin buying company. Mike first describes how a leveraged product’s rebalancing requirement resembles a short straddle, buying when the underlying rises and selling when it falls. He next makes the case that the two times leveraged long products, MSTU and MSTX, are unique in that they are large in size and written on an underlying that is extremely asset.This creates the potential for vol amplifying feedback loops that result from the extremely large daily re-hedging. Mike believes the leveraged complex has contributed to the large premium of MSTR to the value of its bitcoin holdings. We talk as well about the costs being borne by the ETFs who have been forced to utilize the options market as the swap providers have reportedly limited the amount of leverage they are willing to provide.I hope you enjoy this episode of the Alpha Exchange, my conversation with Mike Green.

What follows are some of my recent thoughts on a favorite topic: the interaction between option prices and the assets upon which these options are written. Specifically, I share thoughts on price / vol spirals, which come in two flavors:  a) the asset plummets and vol explodes  b) the asset surges and vol explodes. In the first, which we might call "Melt Down", the asset nears a bankruptcy cliff as vol surges. See GFC.In "Melt Up", there's typically some version of a short squeeze involved. Everyone’s trying to get their hands on the same thing all at once. And that brings us to MSTR, the bitcoin buying engine run by Michael Saylor. There are some important considerations for evaluating risk in MSTR, driven by the fascinating interaction between the stock and both the leverage ETFs and options that sit alongside it. Especially given the unique empirical and implied distribution of bitcoin, these products create powerful powerful feedback loops that ought to be understood.I hope you find this discussion interesting and useful.

It was a pleasure to welcome Victor Haghani, the Founder and CIO of Elm Wealth Management back to the Alpha Exchange for an engaging discussion on those turbo-charged financial products called leveraged ETFs. Our conversation is focused on the large product suite built around MicroStrategy, a software company whose mission appears to be solely focused on the accumulation of bitcoin. Itself a stock realizing 75 to 150 vol, MSTRs two times daily return products – MSTU and MSTX – have experienced one month delivered volatility levels approaching 400.Victor shares the recent work he and team have done to model scenarios for these products based on price and vol assumptions for MSTR. The punchline is that investors need to carefully consider the risk exposure they are getting and be prepared for potentially large losses should the underlying stock fall and volatility rise. In the course of our discussion, we contemplate the directionality of the MSTR premium to its holdings of bitcoin and whether that is itself linked to the price of bitcoin.Lastly, we touch on a new product proposed by ETF provider Battleshares that targets a daily long/short exposure to two assets, for which the Elm team has built a model and posted on their website. I hope you enjoy this episode of the Alpha Exchange, my conversation with Victor Haghani.

Welcome back to the last installment of “20 Things to Do Before You Ask for a Price”.  This 4-part series has been geared towards illustrating how the equity derivative salestrader can be a meaningful part of getting two institutional counterparties to “yes” with respect to the transfer of option risk. The salestrader, sitting between the trader and the client, can quarterback the process by appreciating the context of the trade and contributing insights on the risk profile of it. Context is about the client, the underlying stock, the trade motivation and the risk environment. The risk profile is about the many nuances of different option trades and what they imply for how the sell-side trader will think about pricing and providing capital.In today’s highly electronified markets, prices are streamed continuously by tireless bots with neither faces nor names.  But risk transfer still occurs the old-fashioned way as well – and these voice trades require superb communication, led by the salestrader.  If you are executing upon “20 Things”, you are adding alpha to this process. Below are Things 16-20.  I hope this 4-part series has been interesting and you’ve enjoyed the perspective.16. What is the bid /offer is in vol terms?  For example, if an option has 30 cents of vega and the bid / offer is 50 cents, the vol bid/offer is 1.6 vols.  Bid / offers on long dated options often seem wide in terms of prices, but are not really in terms of implied volatility. This can be useful in defending your trader’s price.17. Look at the combo. Check the implied vol on the put vs. the implied vol on the call of corresponding strike.  Are they reasonably the same?  If not, there could be a borrow issue or a dividend issue.  When put vol is much higher than call vol, a borrow issue is often present.  In instances where market is forecasting an increase in dividends, it is also the case that the put vol will be higher than the call vol.18. Understand div risk. On long dated options, dividend risk is a big issue – especially for high delta options where the stock hedge is large.  Example: buying the Jan’25 35 puts in VZ carries a great deal of dividend risk – if we buy the puts and buy stock we are effectively buying the dividend stream which, if cut, is painful.  Use the Bloomberg function DVD and BDVD.19. Know put/call parity. C = S + P = PV (K) – PV (Divs) and be prepared to use it to explain pricing to accounts especially on deep in the money or out of the money options.20. Lastly, have an opinion on every single price you get.  You should have a feeling of what you think the price should be before you get a price.  Understand that traders are responsible for prices, but that your informed input is very important.

It was a pleasure to welcome Rocky Fishman, Founder and CEO of derivatives advisory firm Asym 500 back to the Alpha Exchange. An area of specialty for Rocky is evaluating systematic trading strategies, like vol targeting, that live and breathe within equity markets and potentially sponsor feedback loops.The focus of our discussion, the growing universe of leveraged ETFs, a unique product set that has been on my mind and that Rocky has recently done a deep dive on. We start our conversation by revisiting the August 5th VIX event that saw the S&P options market turn highly illiquid as the prices quoted for deep out of the money puts reached unheard of levels. For Rocky, while the event came and went, there are lessons, namely that the tails can exert themselves suddenly.With respect to leveraged ETFs, Rocky sizes the US universe as $135bln in assets under management for leveraged and inverse products, $120bln of which is in equity products. He walks through how both the leveraged long and inverse products on the same underlying, non-intuitively, are responsible for buying or selling in the same direction on the same day. These amplifying effects, unlike efforts to map the market’s gamma profile are unambiguous. As such, they are worth keeping a close eye on, especially as the ETF issuer’s daily required rebalancing efforts take place near the close of trading. Here, Rocky does observe both more vol and volume in the market near the end of the day.I hope you enjoy this episode of the Alpha Exchange, my conversation with Rocky Fishman.

Welcome to Part 3 of “20 Things to do Before You Ask for a Price”. To review, “20 Things” is a to-do list I developed more than 2 decades ago while running a derivative sales team. The desk committed a substantial amount of capital in pursuit of business, which made it easy to win trades but also easy to lose money in the process of winning those trades.  20 Things was about playing defense and offense simultaneously by requiring the salesperson to be an active part of the price discovery process. While the trader would ultimately make the price and bear the risk, the salesperson, through 20 Things, could be a valuable part of the process. The result: better risk taking and a more sustainable business.  Here are things 11-15.  I hope you enjoy and find this useful. I wish you an excellent Thanksgiving holiday.11. Corporate action? Is this stock a deal name or subject to some other corporate action?  Use the CACS function on Bloomberg to look for corporate actions. Deal names can have very unique implied distributions and are difficult to provide risk capital into in option trades.12. Evaluate the vol. What is the implied volatility of the name?  How does it compare to realized volatility?  How does the name spread versus index or sub-index volatility?  Run the GV function.13. What does strike skew look like?  The skew may be indicative of the amount of gap risk potential in the name.  Run Bloomberg command OVDV SKEW and look at the spread in risk reversals on the OMON screen.14. What is the shape of the term structure?  This can give a sense as to how much the market is willing to pay for an event (ie, earnings or an FDA announcement).  Run Bloomberg command OVDV TRMS.15. What is the vol risk in the trade?  Is this a long-dated option on a high-priced stock?  If so, you should know what the vega of the option is.  Example: 10k F Jan’25 11 strike calls have far less vega than 10k MSFT Jan’27 430 call.  These very different options call for different kinds of dialogue with the trader and client. Use the Bloomberg OV function.

While the SPX has enjoyed a banner year in 2024, a series of risk events have mattered, including the August 5th spike in the VIX and option pricing uncertainty into the US election. Credit spreads have generally behaved in benign fashion, however. What will 2025 bring for the world of credit and what risks should we pay attention to? With this in mind, it was a pleasure to welcome Dominique Toublan to the Alpha Exchange. Now the Head of Credit Strategy at Barclays, Dom landed on a credit derivatives desk in 2007. With a deep background in physics, Dom quickly saw that while derivative products may utilize some of the complex equations that underpin the physical sciences, markets are prone to episodes of disorder with unpredictable outcomes.Our conversation first considers the behavior of macro credit products in the period before and after US Election. Here, Dom shares that the same vol premium observed in equity options was visible in both credit spreads and credit implied vol as well. In the aftermath of the Election, Dom sees strong, ongoing demand for US spread product with a global buyer base looking less at whether spreads are wide or tight but for all-in yield, pointing to Taiwan life insurance companies for example. In evaluating the risk premium of credit spreads, Dom argues that while valuations are a bit tight, ongoing inflows should continue to support the market. Acknowledging there are some macro headwinds, he doesn’t see them as strong enough to be disruptive.Lastly, we talk about the progress made in gaining credit exposure through a systematic, factor-based approach. Dom sees this as an exciting time of product development, calling it the equitification of credit. With considerably more data now available and with the advent of credit ETFs, the market has embraced portfolio trading, greatly facilitating risk transfer. Along with this, the credit market is incorporating the principles of factor exposure, long a part of the equity market.I hope you enjoy this episode of the Alpha Exchange, my conversation with Dominque Toublan.

We are back, with installment number 2 of “20 Things to Do Before You Ask for a Price”. It’s a to-do list for the equity derivatives salestrader who chooses to be a relevant and constructive part of the option risk transfer process that a buy-side client and sell-side trader engage in. Small trades – like buying a pack of gum – can be consummated quickly. Large trades – like buying a house – typically take a while. But large trades that are borne in a moment’s notice – that’s a unique thing with unique risks. Things 6 through 10 are about quarterbacking trades to completion in the context of being short information asymmetry.  I hope you enjoy and find this useful.6. Is the order outright or delta neutral?  This dictates speed of response needed to the client. There’s more time on delta neutral orders.7. Check option market depth. Evaluate the screen market using OMON function.  How wide are the screen markets?  Is the option better bid or offered? 8. Check volume. Use the OMST function to see option volume in the name and that line today.  Check open interest in that line to see if the trade is opening or closing.9. What is the option delta?  What is the share delta?  What is share delta as % stock volume?  Note that low delta options can be challenging to sell from a risk standpoint and that high delta options can be difficult from a stock liquidity standpoint.10. Check earnings. When does the stock report?  Does this option order comprise a report date or other important release of company information?  Run the ERN function to look at historical impact of earnings announcements.  

I wanted to welcome you all to a new, 4-part series of the Alpha Exchange, “Twenty Things to Do Before You Ask for a Price”.  In short, this is my thinking on what a derivatives salesperson ought to do instinctively and nearly instantaneously in his or her interaction with a trader colleague being asked to price option risk for a client. These 20 things constitute a real time to do list for the salesperson that adds alpha to the process of price discovery and can allow the trader to take more risk by mitigating certain kinds of risks.  In this short podcast, I share the first 5.  I hope you enjoy and find this useful. Know the client.  Who is the client, what is desk relationship and what are the client’s expectations? This starting point is a critical component of quarterbacking the price discovery and execution process. Every client is unique. Know the risk environment.  Is vol better to buy or are clients dumping options? What is the backdrop for the commitment of capital around the street? This is critical to managing expectations. What motivates the specific trade?  Is the client likely buying or selling vol?  Is he/she opening, closing or rolling? What is the stock?  How well does the stock trade?  Is there news out in the stock? Buy yourself time.  If it is an off-the-run name with a ticker you have never heard of, let the client subtly know you have never heard of it (nor should you have).  This provides a bit more time for the trader.

A resounding Trump win. A collapse in vol. Bitcoin “number go up”. And up. And up. The French Whale on Polymarket got paid. A star was born in Scott Jennings. The Fed eased. And, Powell, in the words of DiCaprio in Wolf of Wall Street said, “I ain’t f’n leaving”.  That’s the summary. But there’s lots more to explore and in this short pod I aim to provide you with some food for thought on the risk front. Markets have been well behaved and the VIX spiraled lower as most expected it would on November 6th. Still, there are plenty of risks on the horizon and we ought to recognize what volatility is all about. It’s how the market processes change. And it’s pretty difficult to argue that we have not just experienced profound change in the leadership and governing philosophy of the United States. Taxes and tariffs, regulation and immigration, foreign policy and Fed policy. I finish the discussion with a recommendation to stay quite long, but also spend a little premium on a put spread overlay. It feels like a small price to pay for sleep at night insurance. I hope you find this interesting and useful.  Be well.

Of all the concepts focused on throughout the discussions hosted on the Alpha Exchange, the notion of “carry” is one of my favorites. In its most basic definition, carry measures the income or cost to holding an asset in the steady state, when nothing changes. Underpinning the assessment of value in any option trade or strategy is a view on the favorability of carry at a given point in time. Can I own options for free or at least at meaningful discounts to their value? Mr. Market makes this very unlikely.  Can I be especially well compensated for being short optionality? These are challenging questions, worthy of careful study. And in this context, it was a pleasure to welcome Shailesh Gupta, the Head of Structural Alpha at Simplify Asset Management to the podcast. Our conversation explores areas of carry in the market, why they exist, how they can be harvested and what can go wrong in the process. Shailesh shares his views on the pricing of interest rate volatility, where the vol risk premium has been especially high and how that fits into product design at his firm’s ETF platform. We talk also about risk – including the crowding episode in VIX products in 2017 leading into the XIV event of 2018. I hope you enjoy this episode of the Alpha Exchange, my conversation with Shailesh Gupta.

It was a pleasure to host a discussion with Meb Faber, the Founder and CEO of Cambria Asset Management. Our conversation begins with the question of whether it’s a good idea to buy the market at an all time high. To this, Meb argues it’s actually a great idea, pointing to the data and that markets in an uptrend continue to move higher.We incorporate the notion of a trend following strategy, which Meb illustrates can be helpful in managing the inevitable and substantial drawdown which forces many investors out of the market and destroys the value of compounding in the process. No strategy is perfect, and trend following can underperform during sideways, choppy markets. But it has proven important to cut off the deep left tail with reasonable success. We also explore the work Meb has done on shareholder yield, a strategy that he’s passionate about and argues works particularly well in foreign and emerging markets.Lastly, we talk about that a vastly under-appreciated aspect of return generation in investing: taxes. The team at Cambria is doing some interesting work on this front, utilizing a feature of the code that helps investors diversify risk in a tax efficient manner. I hope you enjoy this episode of the Alpha Exchange, my conversation with Meb Faber.

Is Trump in the price? Wall Street is asking this question. In this podcast, I walk through how the market prices implied volatility around the US Election, focusing on the SPX, TLT and even DJT. As option premiums are much higher than justified by recent realized, there’s an enormous vol risk premium, the result of a withdrawal of vol supply. There’s interesting information coming from betting sites like Polymarket and early voting data as well that might help us better understand the election probabilities and the implications for how the market prices options. Lastly, I consider the relatively rare co-existence of a high VIX but low SPX implied correlation and what that means. I hope you enjoy this discussion and welcome your feedback. Have a great week.

In this short podcast, I make the case for doing what doesn’t come naturally - taking defensive action when times are good. The first portion of the discussion assesses event risk premium into and after consequential macro events like Brexit and prior US elections. The main shared attribute is that implied vol remains elevated into the event, even in the face of muted realized volatility. A second attribute is that post event, implied vol falls. While the same playbook may be relevant in 2024, I argue that overlaying market-based insurance via SPX put spreads out to year end is compelling given the pricing and unique set of forward-looking uncertainties coming our way and the reality that liquidity conditions can change very quickly. I hope you find this podcast interesting and useful.

In China, the “vol shot” heard round the world occurred recently with the Chinese government throwing the kitchen sink at the economy and market, seeking to revive the relatively lifeless patient. As it usually does, at least temporarily, it worked. Insofar as asset price reaction that is.  An explosion in volumes ensued as did the classic “stock up vol up” dynamic made most famous in 2021 during the Meme stock episode. In this short pod, I review the five characteristics of price/vol spirals, their implications and how these unique episodes resolve themselves. I also cover US Election risk and how its impacting the VIX. I hope you enjoy and find this useful.

Option prices - by incorporating time (expiry) and distance (strike) - give us many more dimensions than a mere flat price like the SPX or a single stock. If the stock market speaks, then the option market sings. It's my strong contention that option prices are singing out loud right now, begging for attention. The market was largely unchanged on the week, but there were some meaningful developments in the price of options – on gold, on crude and on the VIX – that tell us something about an emerging discomfort and perhaps a view that stock prices at all-time highs do not have much margin of safety in this environment. What I highlight in this podcast is that hedging costs can be a function of the market's ability to provide the capital to absorb loss. The Election and a very unsettling geopolitical backdrop make this more challenging.  I hope you find this helpful.

The gamma and theta characteristics of ODTE are attached at the hip. But the zero day to expiration straddle on last Wednesday’s Fed day was no normal ODTE. We might call this straddle a OTTD straddle. Zero theta to decision. The Fed decision isn’t just a date on the calendar. It’s a specific time of day on that date. It’s not like NFP which comes out before the market opens. It’s not like NVDA earnings, which come out after the close. Powell and his Fed teammates have decided they want to give us the goods during the trading day and on Fed days, “Ain't nothing going on but the rent” becomes “Ain't nothing going on pre-event.”  I discuss the unique behavior of intraday option pricing on FOMC day and also how to think about the VIX floor as the US election comes into closer view.  I hope you enjoy and find this useful.

Most of the discussions on the Alpha Exchange podcast consist of guests sharing views on market risk and portfolio construction. To be sure that leads the conversations down the path of monetary policy, positioning, inflation and growth. There’s a great deal of consideration around the price of optionality and the correlation of assets. But what about insights on the nitty gritty of getting into option trades, being a liquidity provider to the Street and then risk managing those positions?  Enter, Kris Abdelmessih, who spent well more than a decade doing just that. Now the author of the Moontower Substack and the founder of Moontower.ai, Kris looks back at his time on the market making front, starting with his formative experience in the renowned Susquehanna training program and ultimately trading volatility at Parallax. We talk about how he sought micro-edge by maintaining sell-side relationships, getting into positions as cleanly as possible and then having a dispassionate process for unwinding trades for which the vol profile was no longer suitable to own. We also gain his insights on perils of trading off-the-run ETFs like those on natural gas and crude oil, with the April 2020 meltdown in the latter, an important case study. I hope you enjoy this episode of the Alpha Exchange, my conversation with Kris Abdelmessih.

“Elections have consequences”. So said former US President Barack Obama. He probably didn’t have our trusty fear gauge, the VIX, in mind, but he may as well have.  We are one day away from the US presidential debate. I am not sure this one can deliver the same fireworks that resulted from June 27th. It may devolve into a food fight, with each side hoping to land a definitive blow. What I’ve learned about election risk with regard to derivatives through events like Brexit, the 2016 and 2020 US elections and certainly this one as well is that the clearing price for volatility is impacted by a decline in the willingness and ability to supply it to the market. The result, a VIX stuck at a reasonably high level. I hope you find this discussion enjoyable and useful.

Three hundred odd years ago, Sir Isaac Newton told us that “no great discovery was ever made without a bold guess.” My sense is he didn’t have the order book in Emini futures in mind, but his words do translate well to our world of financial instruments. In this short pod, I revisit the events of August 5th, a day when prices normally well discovered went dark. The implications are real and we ought to learn from this short-lived but real episode of instability. As we approach the “4 E’s” – employment, earnings, the election and the easing cycle – there’s a good deal to consider with respect to playing defense in markets.  I hope you find this interesting and useful.