Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, I
Speaker 1: feel like there are some episodes of this where like
Speaker 1: where I, well, there are some episodes of our podcast
Speaker 1: where I think like, Okay, this is a Tracy podcast.
Speaker 1: I'm probably mostly just gonna sit back and listen, and
Speaker 1: anytime I feel like we're going to have a conversation
Speaker 1: that involves the term delta hedging, which I'm still like
Speaker 1: kind of like having totally like lockdown solid and what
Speaker 1: that means, I'm like, Okay, this is like, this is
Speaker 1: like a Tracy episode. Okay, first of all, that's very
Speaker 1: sweet of you to say. Second of all, I just
Speaker 1: told you that I lost all my notes for this episode,
Speaker 1: So now I feel like the stakes are very high,
Speaker 1: and uh, you know, I might not do as good
Speaker 1: a job as you expect, but yeah, we're gonna be
Speaker 1: diving into delta hedge. But the weird thing is that
Speaker 1: that delta hedging has kind of exploded into the public
Speaker 1: consciousness for I think the first time in a while,
Speaker 1: or at least everyone in the market is talking about
Speaker 1: it because we have this big drama in options. Yeah,
Speaker 1: that's exactly right. So basically, I mean, one of the
Speaker 1: most surprising things, uh, in this crisis period, and we've
Speaker 1: talked about this a few times, is the degree to
Speaker 1: which retail traders have really aggressively jumped into this market,
Speaker 1: timing the market really well, jumping in right at the bottom.
Speaker 1: And we sort of know about the mania. But what's
Speaker 1: interesting too is um sort of the options strategies not
Speaker 1: just sort of like buying Tesla or buying Amazon or
Speaker 1: buying Netflix, but actually like trading aggressively with options, and
Speaker 1: the use of options has all kinds of interesting sort
Speaker 1: of like market structure ramifications. Yeah. Absolutely. And one of
Speaker 1: the big developments that we've discussed on the podcast is
Speaker 1: the rise of Robin hood would and um, you know,
Speaker 1: forums like Wall Street Bets and instead of just buying
Speaker 1: stocks and profiting as the shares go up, a lot
Speaker 1: of people are undertaking equity derivative strategies call options to
Speaker 1: get leverage on their trades, and some of them seem
Speaker 1: to be making big money. But the major question for
Speaker 1: markets right now is whether or not all that options activity,
Speaker 1: that rising options activity, actually has an impact on the
Speaker 1: underlying stock so that's the big question. There's one other
Speaker 1: bit of drama that we haven't mentioned yet, and that
Speaker 1: is soft Bank. So you know, soft Bank is a
Speaker 1: Japanese conglomerate, a big tech investor, and it emerged relatively
Speaker 1: recently that they had been buying call options as well.
Speaker 1: Although I think there are varying reports about what exactly
Speaker 1: they're doing. Some people are describing them as the whale
Speaker 1: in the options market, the implication being that they're moving
Speaker 1: prices in some way. Again, there's a lot of debate
Speaker 1: about how much influence they actually have. We're going to
Speaker 1: be getting into all of that on this episode. Right
Speaker 1: anytime soft Bank is involved with something, there's an added
Speaker 1: level of drama because people love to People love SoftBank drama.
Speaker 1: They love the whole we work thing. So it's like, oh,
Speaker 1: soft Bank is doing the same trade buying a bunch
Speaker 1: of tech stocks. There's a bunch of people on Robin Hood.
Speaker 1: It's just a super juicy story something. So we're gonna
Speaker 1: it's kind of the perfect combat, perfect Twitter fodder. So
Speaker 1: we're gonna we're gonna break down what is actually going on,
Speaker 1: and we are our guest today is our go to
Speaker 1: for all things volatility, all things option trading. We've had
Speaker 1: them on in a couple of times in the past. Um,
Speaker 1: he is Ben Effort, he is the c i O
Speaker 1: at QVR Advisors, and he has a gift for explaining
Speaker 1: this stuff in a playing English. So Ben, thank you
Speaker 1: very much for joining us. What is don't to hedging again?
Speaker 1: Hey Joe? How are you? Guys? Thanks thanks for having
Speaker 1: me on And I'm excited, But seriously, what is it again?
Speaker 1: Don't they hedging? I always forget absolutely, so think of
Speaker 1: it this way, right, So, you know, options are simple
Speaker 1: tools that investors of different kinds used to hedge their
Speaker 1: portfolios or to speculate in different ways. You know, a
Speaker 1: call option, for example, is just a really simple instrument
Speaker 1: that gives the owner of that option, you know, the right,
Speaker 1: but not the obligation, to buy a stock in the
Speaker 1: future at some predetermined price. Right. So, a retail investor
Speaker 1: that thinks Tesla is going up, you know, could buy
Speaker 1: the to the next Friday's two thousands strike Tesla call
Speaker 1: and if Tesla goes up to two hundred, they're going
Speaker 1: to get to buy Tesla at you know, at two thousand,
Speaker 1: and it's going to be worth twenty at that point,
Speaker 1: and they might have only had to pay you know,
Speaker 1: bucks or thirty bucks for that, so that it just
Speaker 1: gives them a very simple way of expressing a directional
Speaker 1: be with limited loss. Not The thing to keep in
Speaker 1: mind is the way that this marketplace works. If that
Speaker 1: if that retail investor goes out and buys that Tesla
Speaker 1: call option, they're buying it from a market maker, And
Speaker 1: maybe that market maker holds onto that position, maybe they
Speaker 1: flip out of it to a volatility arbitrage hedge fund.
Speaker 1: But at the end of the day, the other side
Speaker 1: of that option position, you know, lives with a market
Speaker 1: participant that does not have a directional view on on
Speaker 1: the stock. Right, So the retail investor isn't sort of
Speaker 1: somehow magically pairing off with some you know, in every case,
Speaker 1: with some other retail investor that just has the exact
Speaker 1: opposite view and wants to sell that call. Right. When
Speaker 1: the market maker sells that call option to the retail investor,
Speaker 1: that call option is going to have some sensitivity to
Speaker 1: the price of the stock. If it's out of the money.
Speaker 1: It might be say, you know, per contract, it might
Speaker 1: be as sensitive to to to the stock price. In
Speaker 1: other words, if you know, if a thousand ship or
Speaker 1: is worth of Tesla, trade those call options might have,
Speaker 1: you know, to exposure worth two HU fifty shares. The
Speaker 1: market maker is just going to hedge that exposure right
Speaker 1: away when they do the transaction, right. And so if
Speaker 1: a retail investor comes and buys a bullish option structure
Speaker 1: from a market maker, the market maker does execute that
Speaker 1: trade and then buy some stock on the back of
Speaker 1: that to hedge out the directionality of that of that exposure. Right.
Speaker 1: The market maker's job is to you know, buy on
Speaker 1: the on the bid and sell on the offer and
Speaker 1: manage down their inventory and take as little risk as possible.
Speaker 1: And so that's the the you know, the delta hedging um,
Speaker 1: you know, just first order impact. And then the second
Speaker 1: thing to think about is that, you know, option delta
Speaker 1: or option exposure to the underlying stock price is itself dynamic,
Speaker 1: and it depends on where the stock price is relative
Speaker 1: to the strike. It depends on the time to maturity,
Speaker 1: you know, especially for very short term options. You know,
Speaker 1: what will happen if in that example we were talking about,
Speaker 1: if Tesla, you know, rallies you know, six or seven
Speaker 1: percent the next day, which in August it was doing
Speaker 1: you know, just on your average day, right, um, that
Speaker 1: that exposure might of that option might go from a
Speaker 1: delta or you know, sensitivity to the stock price to
Speaker 1: and then as it gets closer to the strike And
Speaker 1: what's going to happen then is the market maker who's
Speaker 1: holding the other side of that position is going to
Speaker 1: need to increase the size of their heads. They're gonna
Speaker 1: go need to buy more Tesla stock to bring their
Speaker 1: hedge up to them. And in doing so, you know
Speaker 1: that they'll end up having bought you know, a vast
Speaker 1: multiple as much dollars of Tesla stock as that investor
Speaker 1: will have spent on the premium of the option could
Speaker 1: be you know, in this example, it could be fifty
Speaker 1: times as much, right, so creating a very large amount
Speaker 1: of leverage for the end you know retail investor that's
Speaker 1: doing the strain a right. I'm going to ask you
Speaker 1: that again in a year, the next time we have
Speaker 1: you on for a different topic. But that was fantastic,
Speaker 1: So I mean, on that note, this idea of the
Speaker 1: shorter term options, can you maybe describe or explain why
Speaker 1: they seem to have become very popular recently and and
Speaker 1: maybe give us some color on on what people are
Speaker 1: actually doing in that market, like how big are the
Speaker 1: volumes at the moment, and why has everyone suddenly decided
Speaker 1: they want to tread short term calls? Sure? Absolutely, you know,
Speaker 1: so this has really been an evolving trend that, um,
Speaker 1: that the popularity of short term options. You know, this
Speaker 1: is a relatively new thing in market. So if you
Speaker 1: look back, you know, five or seven years ago, a
Speaker 1: short term option would have been considered saying you know,
Speaker 1: one month option and there was a little SMP weeklies
Speaker 1: we're starting to be listed. You know, most single lanes
Speaker 1: didn't have them. Um, you know, very short term options
Speaker 1: would have been considered you know, very path dependent, very risky. Uh.
Speaker 1: And you've just seen a steady, steady, rapid growth in
Speaker 1: you know, their utilization in the listing of those options
Speaker 1: on exchanges in single lanes and index and then the
Speaker 1: you know, relative fractions of volumes traded in those very
Speaker 1: short term options. So like in the SMP for example,
Speaker 1: you know, over the last six months, and I think
Speaker 1: that you know, the more recent data is, you know,
Speaker 1: some very large percentage of the daily volume in SMP
Speaker 1: options is in the you know couple of days. UM,
Speaker 1: you know, expery is happening that day or the next day,
Speaker 1: like or and that A similar pattern has emerged in
Speaker 1: especially in tech companies, mega cap tech companies now in
Speaker 1: terms of you know, the data, what we see, right,
Speaker 1: So first of all, you all of this is you
Speaker 1: know O C C. This is all exchange traded, you know,
Speaker 1: data reported by the OCC and you know, you can
Speaker 1: look at different individual transactions that happen. But so first
Speaker 1: of all, UM, small trader buying bullish call options UM
Speaker 1: have so under fifty lot positions. These those volumes had
Speaker 1: lived let's say, previously a high rate on a trailing
Speaker 1: one month basis in you know, any time in history
Speaker 1: up until would have been let's say a hundred billion
Speaker 1: dollars of notional trading across across single name options. UM,
Speaker 1: it's reached five hundred billion dollars today. It sort of
Speaker 1: went vertical, you know, rocketship blast off starting actually in
Speaker 1: late twenty nine, so it preceded you know, COVID really
Speaker 1: I think amplified this trend, but the trend started to
Speaker 1: take off before that. UM, And I think it's it's
Speaker 1: partly associated with the elimination of brokera of brokerage commissions
Speaker 1: across the majority of the large retail platforms, and that
Speaker 1: I think, you know, you're gonna have to give Robin
Speaker 1: Hood some credit for for you know, pushing the market
Speaker 1: in that direction. Um uh. And you know you can
Speaker 1: get into nuances of are the trading costs for retail
Speaker 1: investors and options actually any lower? I mean, I think
Speaker 1: most people would argue they're not right. It's just an
Speaker 1: optical thing about oh, we're not charging you. Um But anyway,
Speaker 1: I think that's a separate discussion to some extent, you've
Speaker 1: seen this huge explosion. You know, the chart just looks
Speaker 1: insane of again bullish call option buying by by small investors.
Speaker 1: The other thing that you see, you know, you can
Speaker 1: look at the again, it's it's really happening in call options,
Speaker 1: not in put options. So you know, small trader accounts
Speaker 1: are you know, trading somewhat more put options than they
Speaker 1: used to, but it's very modest, whereas you see this
Speaker 1: just incredible parabolic growth on the on the call option side.
Speaker 1: The other thing to note is that especially the last
Speaker 1: few months, this is flow is very heavily concentrated in
Speaker 1: mega cap tech. Um, there have been a few different
Speaker 1: adventures that that retail has had over the last six months.
Speaker 1: I mean, if you remember in the wake of COVID,
Speaker 1: actually there were some large position taking in bankrupt companies
Speaker 1: and in cruise ships and airlines and some of the
Speaker 1: most like distressed value value names. But really for the
Speaker 1: last three or four months, that's been very heavily a
Speaker 1: story about mega cap tech. So if you look at Facebook, Amazon, Apple, Netflix, Google, Microsoft, Tesla,
Speaker 1: you know, rolling one month average daily single stock call
Speaker 1: volumes are are around two hundred billion dollars a day um,
Speaker 1: which you know would have that would have number would
Speaker 1: have been like a hundred would have been like sorry,
Speaker 1: like fifteen million dollars, you know, twenty million dollars previous
Speaker 1: before in in over a long history of time. So
Speaker 1: I'm looking. You sent over some charts and as you mentioned,
Speaker 1: you know, we sort of associate this mania with the
Speaker 1: COVID and sort of post COVID era, but it really
Speaker 1: has been going on for a while. And you could
Speaker 1: see a really pick up in and it was the
Speaker 1: cover of that sort of infamous in this week story
Speaker 1: that are departed. Colleague Luke Cower wrote like this was
Speaker 1: like the Wall Street bet strategy. Essentially, this idea like
Speaker 1: these little you know, little retail traders thought they sort
Speaker 1: of created a perpetual money machine by these call options
Speaker 1: bullish force the brokers to delta hedge take positions with
Speaker 1: this idea that you could just sort of like snowball
Speaker 1: it into more money. Yeah, no, that's right. I mean
Speaker 1: that was some some really great reporting that Luke did.
Speaker 1: You know. It's an interesting community. I think the red
Speaker 1: of Wall Street bets community obviously is it's a microcosm
Speaker 1: of the broader retail investment community. Probably robin Hood itself
Speaker 1: is also a microcosm because we talked about robin Hood
Speaker 1: is kind of like band aid or Kleenex, but it
Speaker 1: represents in the sort of lexicon what a lot of
Speaker 1: people are doing on a lot of different plants. Yeah.
Speaker 1: I think that's exactly right, And I think that's an
Speaker 1: important point. You'll hear a lot of people, you know,
Speaker 1: who aren't necessarily that closed option markets be sort dismissive
Speaker 1: that retail activity could be large, it could be impactful
Speaker 1: when they say, look, robin hood is not that big.
Speaker 1: But yeah, I think a lot of times when people
Speaker 1: are are casually talking about the types of things that
Speaker 1: Robin Hood is doing. Um, you know, you have to
Speaker 1: look at this kind of data across all of the
Speaker 1: major retail brokerages and you see exactly the same pattern everywhere.
Speaker 1: Sort of these huge explosive growth at Schwab, but t
Speaker 1: D at interactive brokers. This is not it's not purely
Speaker 1: a Robin Hood phenomenon. Robin Hood's just the most colorful.
Speaker 1: I mean, it makes the news the most right and
Speaker 1: the m to your point, you know, the Redditt Wall
Speaker 1: Street bets community. You know, this is a it's an
Speaker 1: odd subculture, right, sort of in an Internet like subculture
Speaker 1: that I think had a lot of has a lot
Speaker 1: in common with the crypto community and probably shares a
Speaker 1: lot of the same you know, people who were who
Speaker 1: were very active in crypto like in two seventeen. Right,
Speaker 1: it's a very you know, lewd talking crew on the
Speaker 1: on the discord. You can go and you know, sit
Speaker 1: in the discord and watch what these guys are talking
Speaker 1: about and what they're doing, and you know, to to
Speaker 1: be to be clear, you know, there are you know,
Speaker 1: he influencers within that community that will say, all right,
Speaker 1: we're you know this. You know today we're buying the
Speaker 1: Teslas for next Friday, and like, you know, the volumes
Speaker 1: that will print are huge, right, Um, and it's not
Speaker 1: necessarily from any one account, but there's a couple of
Speaker 1: million members in that chat and if you know, if
Speaker 1: if ten percent of them go and buy a couple
Speaker 1: of contracts of Tesla, that volume is astronomical, right, and
Speaker 1: the market man, you better believe that the most sophisticated
Speaker 1: option players in the world and the Susquehannas instead of
Speaker 1: all securities, are extremely focused on this flow and then
Speaker 1: predicting it in real time and all the technology that
Speaker 1: you would associate with that. Right, it's it's monster monster flow.
Speaker 1: That's really interesting. And to your point, these guys know
Speaker 1: about this effect. It's it's really fascinating, right, But Joe
Speaker 1: Joe kind of mentioned it as Luke said, you know,
Speaker 1: these guys will will be the first ones to say, look,
Speaker 1: if we buy tons of short dated weekly calls, here's
Speaker 1: how gamma works. Um, here's how we put market makers
Speaker 1: into this negative convexity situation where if stocks are trending higher,
Speaker 1: they're forced to buy and like that is that benefit
Speaker 1: sence they get that you've got to think that there
Speaker 1: must be some like regulators from the SEC also keeping
Speaker 1: an eye on Wall Street bets at the moment. Although yeah, exactly,
Speaker 1: but that's kind of a separate topic. So okay, here's
Speaker 1: the big the big question. Then, what is your sense
Speaker 1: of how much impact these uh, these traders are actually
Speaker 1: having on the overall market and especially the mega cap
Speaker 1: text talks that have been in focus recently. Yeah, absolutely so,
Speaker 1: I think the way you have to think about this
Speaker 1: as this kind of option positioning UM, what it does
Speaker 1: is it it creates feedback mechanisms for trend amplification in markets. Right,
Speaker 1: So it's not I think the argument is not that
Speaker 1: UM necessarily even across you know, the option trading community
Speaker 1: within retail that you know, there's the amount of dollars
Speaker 1: of stock exposure that they're buying directly is like, you know,
Speaker 1: so large that they're pushing everything up, right, But there's
Speaker 1: a general you know, there's been a general move back
Speaker 1: into tech across both institutional and retail. Right, it's certainly
Speaker 1: not limited to retail and the h and the nature
Speaker 1: of very heavy buying of short term options by you know,
Speaker 1: by retail and big size you know, creates an amplification
Speaker 1: mechanism in the direction of a trend. And that could
Speaker 1: be upboard down, right, because the important thing about you
Speaker 1: know about delta hedgeting, and you know, to to Joe's
Speaker 1: question again, let's take that example of those um of
Speaker 1: those called Tesla call options that had been heavily bought,
Speaker 1: and that that the delta started out and then as
Speaker 1: Tesla rallied, that delta went to f into seventy, forcing
Speaker 1: the market maker on the other side to buy stock
Speaker 1: and buy stock and buy stock and amplifying that trend.
Speaker 1: You know what happens if then the next day, you know,
Speaker 1: there's more sellers than buyers for whatever reason, rights, some
Speaker 1: large institutions are selling or whatever, right, and Tesla comes
Speaker 1: off five or ten percent. These are very short term options, right,
Speaker 1: And suddenly the delta of those options goes back to
Speaker 1: fifty and back to and dealers have to sell out
Speaker 1: all of those hedges that they had, right. So the
Speaker 1: impact is not just a direct bullish impact, It's an
Speaker 1: impact that amplifies price action in either direction. Right. And
Speaker 1: I think you know you saw that at work this
Speaker 1: last you know, this last week right where you had
Speaker 1: the rally kind of peter out. You saw very heavy
Speaker 1: institutional selling coming in on Wednesday, you know, the last
Speaker 1: day of the rally, and then Thursday, the first day
Speaker 1: of the big sell off, and you know, then you
Speaker 1: saw the most wicked reversals in you know, the most
Speaker 1: popular megacap tech names that where that really were amplified
Speaker 1: throughout the day and into the clothes. So you know,
Speaker 1: it's very hard obviously to to give some kind of
Speaker 1: person you know, x percentage of the you know, tech
Speaker 1: rally from the state to the state was somehow caused
Speaker 1: by retail option buying. I think that's an impossible sort
Speaker 1: of question. But what I think is very clear is
Speaker 1: there's very is there's you know, strong near term momentum
Speaker 1: trend effects that amplify that rally um that come from
Speaker 1: from retail positioning and options. So let's get into the
Speaker 1: soft Bank angle of the story, because actually Bloomberg reported
Speaker 1: in early August that soft Bank plan to participate in
Speaker 1: public markets, particularly big tech companies. Then in early September,
Speaker 1: the Ft had a story and they said soft Bank
Speaker 1: is the Nazdack whale. So how much of a whale
Speaker 1: are they? And put into perspective, how much they're doing
Speaker 1: versus all this retail money and are they sort of
Speaker 1: leading the charge? Is it a drop of the bucket, Like,
Speaker 1: how do they fit in in your view overall? Sure?
Speaker 1: So you know, to your point, everybody likes to talk
Speaker 1: about SoftBank because you know it's such a colorful company
Speaker 1: and you know the personalities involved are are very big
Speaker 1: in the wee work story. I think we have to
Speaker 1: put this in perspective. Right, So, so, first of all, um,
Speaker 1: I think Bloomberg reported in earlier maybe it was August
Speaker 1: tenth or eleventh, about some of the equity positions that
Speaker 1: SoftBank had been building in mega cap techniques. I think
Speaker 1: those were reported at around ten billion dollars order of magnitude. Right,
Speaker 1: Buying ten billion dollars of stock in the biggest, most
Speaker 1: liquid megacap tech companies in the world that have trillions
Speaker 1: of dollars of market cap over two months is zero,
Speaker 1: full stop, Right, has no impact on any That's a
Speaker 1: tiny position from the perspective, not not for own single institution,
Speaker 1: but a tiny tiny from the perspective of volumes or
Speaker 1: market caps. Right, no, no impact. You know, a lot
Speaker 1: of the later activity that became interesting. Right, So you know,
Speaker 1: option market makers and option market participants have been following,
Speaker 1: you know, this kind of new, interesting, relatively large flow
Speaker 1: that started in early August in UM call spread buying
Speaker 1: for equity replacement purposes UM. And you know, just to
Speaker 1: give some example, and again, this is all people kind
Speaker 1: of have strange ideas about, like how do you see
Speaker 1: this happening? Or how do you never this is all.
Speaker 1: This is all exchange traded securities, you know, against large institutions,
Speaker 1: quote banks execute trades. Everybody hears about it in real time.
Speaker 1: Not who the sources, right, not that it's soft bank,
Speaker 1: but you and then you see the trades go up
Speaker 1: on exchange, you know. But these were large trades. So
Speaker 1: like on August fifth, you started to see for example,
Speaker 1: you know Facebook November five call spread traded and you know,
Speaker 1: thirty five thousand lots, which is pretty big. And you
Speaker 1: know Microsoft call spread webb seventy five times, right, So
Speaker 1: everybody's gonna talk about this and say, oh, that's interesting,
Speaker 1: what's going on. These trades were executed delta neutral, which
Speaker 1: means that the client was buying a call spread at
Speaker 1: the time. This would have been a you know, three
Speaker 1: month or so call spread, and it was three and
Speaker 1: a half months and executed versus selling stock, so with
Speaker 1: no net directional impact on the market. And this was
Speaker 1: an equity replacement trade, so reducing in a long equity
Speaker 1: position and replacing it with some options and in particular
Speaker 1: with some call spreads. Now this is so first of all,
Speaker 1: this is a three month call spread trade. A couple
Speaker 1: of three month call spread trades. I gave you an
Speaker 1: example of, right, So three month all spreads. How you know,
Speaker 1: if you want to think about how much convexity or
Speaker 1: how much gamma that induces this kind of dynamic delta
Speaker 1: hedging the impact that we were talking about. Does a
Speaker 1: three month call spread trade have you know, compared to
Speaker 1: like a one week a little bit upside call for example,
Speaker 1: you know, it would be again depending on the details,
Speaker 1: it could be a hundred times less per dollar of
Speaker 1: notional look, or it could be two hundred times less. Right,
Speaker 1: So a three month call spread is not a convex security,
Speaker 1: and as markets rally, it loses what little convexity that
Speaker 1: it has very quickly. Right, This is just the objective
Speaker 1: of this kind of trade. You know, from the end
Speaker 1: client's perspective, who already owns the stock. This is just
Speaker 1: a risk reduction trade, right where they're taking some stock
Speaker 1: off of the table, they're replacing it within an option
Speaker 1: structure that's maybe worth three or four percent of notional
Speaker 1: where if the world falls apart and these stocks go
Speaker 1: down at ton, they only lose that three or four
Speaker 1: percent instead of losing twenty percent or thirty percent on
Speaker 1: the stock. Right, So this is like very normal, very boring,
Speaker 1: except you know, decent sized, which is the only reason
Speaker 1: that options people were talking about them. Um, you know,
Speaker 1: transactions in the market. No, you know that don't have
Speaker 1: any of the types of impacts that we were talking
Speaker 1: about with respect to to Gamma. You know, they do
Speaker 1: have some their longer term they have some Vega exposure
Speaker 1: or exposure to imply volatility, and those exposures got decent sized. Um.
Speaker 1: And you know, there's some argument that these that trades
Speaker 1: like this contributed to some of the market up but
Speaker 1: implied volatility up dynamics that we saw in late August,
Speaker 1: and you know, you can you can argue about that,
Speaker 1: but I think there's there's absolutely no case that there
Speaker 1: would have been any meaningful impact on stock prices or
Speaker 1: on you know, acceleration of stock price moves from this
Speaker 1: kind of flow, you know, and later we learned that
Speaker 1: you know, soft Bank was probably involved in some of this.
Speaker 1: There may have been some other copycat flow. Um. But
Speaker 1: again I think this was you know, way overblown in
Speaker 1: terms of being impactful with respect to you know, then
Speaker 1: as back. Okay, so because they're trading three month call spreads,
Speaker 1: it doesn't have the same effect on markets as the
Speaker 1: short term call trading does, I guess my question. And
Speaker 1: also you describe the call spread strategy as basically risk
Speaker 1: mitigation for their tech bets. But I guess, could I
Speaker 1: just ask, how weird is it that soft Bank, you know,
Speaker 1: this big tech investor that normally does this sort of
Speaker 1: venture capital like business. How weird is it that they're
Speaker 1: just investing in the public markets like this, And who's
Speaker 1: doing who do you think is like in charge of
Speaker 1: their overall risk strategy on these type of trades. I mean,
Speaker 1: it's a it's certainly a bit unusual from from their
Speaker 1: historical perspective, But I think soft Bank also is a
Speaker 1: bit of an enigma, and you know, tend tends to
Speaker 1: do new interesting things that you know, surprise people and
Speaker 1: get people excited along a variety of dimensions. You know,
Speaker 1: they sort of tried to play this down as sort
Speaker 1: of liquid treasury functions almost right out. We have a
Speaker 1: bunch of extra cash, and like, why not you know,
Speaker 1: do something really simple with it. You know, normally you
Speaker 1: wouldn't think of buying tech stocks as as a treasury function.
Speaker 1: But you know, again, I think that gets relative if
Speaker 1: you think of the risk that they take in private
Speaker 1: markets investing uh, you know, investing ten billion dollars and
Speaker 1: some megacap tech companies is obviously a whole lot less
Speaker 1: risk than putting ten billion dollars into what we work
Speaker 1: or something like that. So it's it's certainly a different
Speaker 1: style of things. But is it like some totally crazy
Speaker 1: thing to do? I mean, I don't know. I have
Speaker 1: a quick question. It's not quite related to this specific incident,
Speaker 1: but you mentioned the sort of the coordination that goes
Speaker 1: on in the discord chats all these small traders. How
Speaker 1: different is this in terms of its market impact from
Speaker 1: the days, say twenty years ago or something, when a
Speaker 1: handful of macro fund managers like you know, the soros
Speaker 1: Is and Druck and Miller's really like would have been
Speaker 1: the big players and some of these markets, and the
Speaker 1: degree to which they could generate alphabi essentially you know,
Speaker 1: play moving the market due to their way. I mean,
Speaker 1: that's a great question. It's it's obviously a very different
Speaker 1: flavor kind of a few concentrated large investors, um, you know,
Speaker 1: versus a huge herd of smaller ones that do effectively
Speaker 1: rely on you know, not just their own you know, uh,
Speaker 1: not just their own money to move markets, but kind
Speaker 1: of putting some of the conditions in place to amplify
Speaker 1: trends and so forth. But I mean, first it's a
Speaker 1: lot more diversified. But you know, technology has really enabled
Speaker 1: large scale coordination, right, um, and you see them that's
Speaker 1: not just a finance phenomenon. I mean, that's a social
Speaker 1: media phenomenon. And you know, in a lot of ways.
Speaker 1: You know, you have to think of Redd at Wall
Speaker 1: Street bets as as more of a product of kind
Speaker 1: of the Internet and social media culture than of finance specifically. Right.
Speaker 1: It's manifesting itself, you know now in trading and finance,
Speaker 1: you know, but it's really this you know, technology enabled
Speaker 1: rapid coordination function where an influencer can be followed by
Speaker 1: millions of people and can say okay, let's do this
Speaker 1: and actually get a lot of people to do things
Speaker 1: in real time. It's you know, whereas in the nineties,
Speaker 1: you know again you had you did actually have quite
Speaker 1: at the nineties really were the last you know hey
Speaker 1: day and retail option trading. Um it would have been uh,
Speaker 1: I think still a much back in the nineties. You
Speaker 1: think of who were, um, you know, what kinds of
Speaker 1: people were like really active trading options in their new
Speaker 1: e trade accounts and things like that. Right it was
Speaker 1: you know, lawyers and doctors and dentists and people who
Speaker 1: were kind of at the forefront of technology at the
Speaker 1: time and getting interested in markets and had some money
Speaker 1: to play with. Whereas I think, you know, now when
Speaker 1: you look at you know, the breadth of a community
Speaker 1: like red and Wall Street bets, you know, you have
Speaker 1: you have a huge variety of different folks, some with
Speaker 1: you know, meaningful bankrolls and some with pretty you know,
Speaker 1: some with just a little bit of money, or some
Speaker 1: who started out with ten thousand books and then now
Speaker 1: it was two hundred thousand, and then it went to zero.
Speaker 1: And you know the last week, I mean, one crazy
Speaker 1: thing about Wall Street bets. It's a very gamified, aggressive
Speaker 1: risk taking culture, right, And there's lots of posting of
Speaker 1: P and L screenshots and the amount of the amount
Speaker 1: of like posting a screenshot of your five dollar account
Speaker 1: that just went to zero last you know, last last Friday, um,
Speaker 1: and then like you know, laughing about that is is
Speaker 1: pretty shocking. This was going to be my next question,
Speaker 1: this gamification of trading idea. And you mentioned earlier the
Speaker 1: overlap of bitcoin traders or cryptocurrency traders with Wall Street bets.
Speaker 1: It does seem like the way they're trading and the
Speaker 1: things that they're investing in are just sort of much
Speaker 1: more exciting than traditional you know, buy and hold for
Speaker 1: the long term investing. Is that going to be the
Speaker 1: new normal? Like? Are we ever going to go back
Speaker 1: to a time where call options aren't as popular as
Speaker 1: they are now? I think we probably will write you
Speaker 1: generally speaking the way that I think you have to
Speaker 1: expect these kind of uh, these kind of trends to
Speaker 1: end as with very large losses among you know, the
Speaker 1: segment of people that are that are very heavily involved. Right,
Speaker 1: this is extraordinarily risky speculation, UM, where you know, I
Speaker 1: think you know, when I when a hedge fund, when
Speaker 1: a volatility and derivatives have fun thinks about how to
Speaker 1: quantify risks and how to measure how much risk you're
Speaker 1: taking in the portfolio. You know, obviously we think about
Speaker 1: how risky a short term option is, and the fact
Speaker 1: that you know, if you're buying a one week call
Speaker 1: upside call option on Tesla, if it just doesn't go
Speaker 1: up ten percent, you're just gonna lose all your money.
Speaker 1: And and so you as size a variety of bets accordingly,
Speaker 1: right versus the gamified risk taking culture you see in
Speaker 1: redd a Wall Street that's being uh, you know, people say, well,
Speaker 1: I have a hundred thousand dollars in my brokerage account.
Speaker 1: What's interesting to do today, Well, it's buying those Tesla calls.
Speaker 1: So I'll put that hundred thousand dollars into one week
Speaker 1: Tesla calls. Right. Of course, what happens then is just
Speaker 1: you lose, just lose all the money when kind of
Speaker 1: the the huge upside move move stops. Right. So generally
Speaker 1: over risk taking and complex instruments that are you know
Speaker 1: like this, you know, just Lee, I think the end
Speaker 1: game is a lot of people losing a lot of
Speaker 1: money and stop and generally stopping doing this kind of
Speaker 1: this kind of thing. But you know it can last
Speaker 1: for a while because you have when you have these violent,
Speaker 1: you know, rallies that just keep going. People can buy
Speaker 1: lottery tickets over and over and over again and win,
Speaker 1: you know, three times out of four and keep playing.
Speaker 1: Is there a way with the data, so you know,
Speaker 1: just going back to the original formulation of this, okay,
Speaker 1: agressive call buying, and then the dealers have to sort
Speaker 1: of hedge their exposure and so you know that they
Speaker 1: have to buy stock. Is there a way to get
Speaker 1: a feel in the data for the sort of the
Speaker 1: community of dealers overall the degree to which, at any
Speaker 1: given moment the degree and volume to which they'll have
Speaker 1: to jump in. So let's say, okay, I don't know,
Speaker 1: Tesla is up again today, So Tesla I think is
Speaker 1: up like five percent as we're speaking. Is there a
Speaker 1: way to no sort of in real time or roughly
Speaker 1: real time, what that translates into in terms of forced
Speaker 1: buying or forced hedging, given what we've given the sort
Speaker 1: of constellation of outstanding options there are. So that's a
Speaker 1: very good question. You downplay I don't know anything about
Speaker 1: this delta hedging stuff. And then you ask a very
Speaker 1: good question like that, So, I mean, so no is
Speaker 1: too strong of a word, but you can certainly attempt
Speaker 1: to model or estimate that dynamic right and and you
Speaker 1: know you wouldn't be surprised that, you know, folks like
Speaker 1: us spend a decent amount time on that. But you know,
Speaker 1: think of it as you know, you have to observe
Speaker 1: all of the trades that happen in the marketplace. You
Speaker 1: have to have an educated way of modeling or guessing. Um,
Speaker 1: is this a trade that was a customer purchase of
Speaker 1: an option from a you know, dealer or dynamic header
Speaker 1: with what probability do you think that that's true? Uh?
Speaker 1: You know, building up your kind of simulated portfolio that
Speaker 1: you think that dealers hold and volatility arbitrage managers hold
Speaker 1: versus and customers who aren't dealt to hedging, and you
Speaker 1: have to make a variety of assumptions and you have
Speaker 1: to write it's a it's a modeled exercise. You have
Speaker 1: a probability distribution around it. But then you can end
Speaker 1: up with Okay, here's you know sort of how much
Speaker 1: dollar get, Here's how we think the gamma profile of
Speaker 1: dynamic headers, dealers and market makers and ball ARBs in
Speaker 1: a particular stock is at a particular time, and how
Speaker 1: that changes as the as the underlying spot price moves
Speaker 1: um and you know generally, you know, I think before
Speaker 1: this huge retail um you fhoria of the last six months,
Speaker 1: you know, a lot of that effort we would focus on,
Speaker 1: you know, looking at the SMP five hundred, because actually
Speaker 1: gamma positioning of dealers in you know, the megacaby index
Speaker 1: was a huge and very important phenomenon driven by institutional
Speaker 1: um largely called selling and put selling. But now but
Speaker 1: now actually much of the new trend is single a
Speaker 1: gallon positioning, driven again by these very short term retail flows.
Speaker 1: So we talk a lot about the idea of the
Speaker 1: options traders having an impact on the markets through delta
Speaker 1: hedging and the dynamics at the dealers themselves. Is there
Speaker 1: a scenario in which the dealers can have a sort
Speaker 1: of impact, like is there a scenario in which it
Speaker 1: can reverse? Can something happen at the dealers so that
Speaker 1: they become caught offside in the market or they end
Speaker 1: up taking a position in the market which they hadn't
Speaker 1: intended to, and that affects the underlying and then it's
Speaker 1: sort of ruins UM Wall Street bets trades. I think
Speaker 1: that you know, ultimately, you know, there's a there's a
Speaker 1: price for everything, right. Well, some of the early UM
Speaker 1: I think there were examples of dealers and market makers,
Speaker 1: you know, losing a material amount of money on some
Speaker 1: of the early growth in in this you know, speculative
Speaker 1: retail flow in options because you know, typically as a
Speaker 1: dealer that has experienced over the last ten or twenty years,
Speaker 1: you know, you see significant retail flow emerging in some
Speaker 1: stock UM in the options on that stock. You know,
Speaker 1: you view that as uninformed flow that's kind of paying
Speaker 1: the offer side, and you're really happy to take a
Speaker 1: big position, you know, facing those folks earning a lot
Speaker 1: of bit offer and you know not to worry that
Speaker 1: they sort of know something, right UM. And then what
Speaker 1: you saw like in Tesla earlier, you know, much earlier
Speaker 1: this year, right, was that flow coming and coming and
Speaker 1: coming in huge size and pushing the stock and pushing
Speaker 1: the stock and huge realized volatility. And you actually saw
Speaker 1: some of the market makers lose a material amount of
Speaker 1: money on that UM and I think you know, over
Speaker 1: over time, you saw but what you saw is first
Speaker 1: of all, imply volatilities moving much higher in those in
Speaker 1: those names, right, so you know, dealers charging a much
Speaker 1: higher price to facilitate that flow. And then you know
Speaker 1: of a deployment of a variety of techniques and you know,
Speaker 1: hedging techniques to try to better protect themselves. So you know,
Speaker 1: think of think of you know, accumulation of inventory in
Speaker 1: anticipation of future customer flow as a polite for um,
Speaker 1: you know, put and leaning extra long the stock and
Speaker 1: anticipation of how things are moving. And you know, so
Speaker 1: at some point, you know, you saw a test short
Speaker 1: term Tesla options trading at a hundred and twenty Imply
Speaker 1: ball or a hundred forty Imply ball, right, so you know,
Speaker 1: the market re equilibrates itself to the point where dealers
Speaker 1: and and people who are short those options you can
Speaker 1: make money on the positions because that's sort of how
Speaker 1: supply and demand works, right. So I think you know,
Speaker 1: are there, are there, You know, dealers know what they're doing,
Speaker 1: and the I think that with these kind of products,
Speaker 1: it's not too likely that there's gonna be like catastrophic
Speaker 1: losses that you know, JP Morgan are something that are
Speaker 1: going to shut down, you know, realistic capacity of options
Speaker 1: market makers to to to support this. I just have
Speaker 1: one more question. So you know, basic ideas, you know,
Speaker 1: buying a call, it's inherently levered. You put up a
Speaker 1: little bit of money, you can either make a lot,
Speaker 1: but if you don't, you know, it doesn't go in
Speaker 1: the money, you lose everything. And so it's a it's
Speaker 1: a leverage bed. And when the market you know, crashed
Speaker 1: in February and March, and I thought back to that
Speaker 1: Luke article, I was like, well, that was the top
Speaker 1: and they're all finished, you know, all these leveraged long
Speaker 1: call buyers, they're gone. And then it's like no, they
Speaker 1: like immediately they didn't waste any time coming back, and
Speaker 1: that that article did not turn out to be the top.
Speaker 1: But are you surprised that that the speed and intensity
Speaker 1: of that washout didn't just sort of like obliterate that
Speaker 1: community and that you know, are you surprised at how
Speaker 1: quickly they regrouped and got back in the game or
Speaker 1: were you surprised at the time. Yeah, I mean I
Speaker 1: I was to some extent, I definitely, you know, you
Speaker 1: would have typically thought if you have a big emergence
Speaker 1: of a lot of speculation and then you have a
Speaker 1: huge market sell, often people get burned and then they
Speaker 1: kind of take their ball and go home, right. I mean,
Speaker 1: I think part of it is I think the size
Speaker 1: of that community has been expanding steadily. Right. So it's
Speaker 1: you know, new entrance to the to the space. Um.
Speaker 1: And that was amplified by by COVID and lockdown and
Speaker 1: the fact that all of a sudden you sent a
Speaker 1: ton of people home to work on their computers at
Speaker 1: home with nobody staring over there over their back and
Speaker 1: their board, right, Um, you know, anecdotally, and I think
Speaker 1: everybody has these anecdotes, right, But cousins and uncles and
Speaker 1: everybody in the back office at the banks that you know,
Speaker 1: you know, all are like opening robin Hood accounts or
Speaker 1: again robin Hood using that term bury broadly opening brokerage
Speaker 1: accounts and asking about options trading and asking how to
Speaker 1: do things. And so I think a lot of new
Speaker 1: new participants have been you know, brought in. And you
Speaker 1: know the other thing, you know, some of these folks
Speaker 1: again are small scale guys who scraped together or girls
Speaker 1: who scraped together five or ten grand, and you know,
Speaker 1: trying to get into this stuff. You know, but there's
Speaker 1: plenty of associates at law firms and investment banking analysts
Speaker 1: and you know, people who have money to burn and
Speaker 1: who have incomes and who aren't outspending them on drinks
Speaker 1: and bars in Manhattan. They got to find some other
Speaker 1: form of entertainment and this is what they're doing, right,
Speaker 1: And so it's it's it is an impressive phenomenon. It's
Speaker 1: impressive how fast it it resurged after after March, and
Speaker 1: how it's accelerated to much bigger scale even even since then. Ben,
Speaker 1: that was great. You know, I said in the beginning
Speaker 1: you have a knack or a gift for explaining complex
Speaker 1: stuff in clear English, and I think you really delivered.
Speaker 1: That was super helpful, and uh, I really appreciate you joining. Cool.
Speaker 1: Thanks guys, love fun as always. Thanks Ben Tracy. I
Speaker 1: think I'm actually gonna remember what delta hedging is. No,
Speaker 1: you're not, You're totally not. No. I think I will.
Speaker 1: I think I will. Next time, there's like a big
Speaker 1: option and story and we get Ben back out of
Speaker 1: the podcast to explain what's going on. I actually don't think.
Speaker 1: I think this time I'll really internalize like what it means.
Speaker 1: I think I'm confident in myself. Okay, Um, I was
Speaker 1: just thinking on that gamification point, Like I know Ben
Speaker 1: said he thinks there's a point at which things will
Speaker 1: kind of return to normal, But I don't know. I
Speaker 1: kind of wonder if you can put the excitement genie
Speaker 1: back in the bottle, right, like once you've traded something
Speaker 1: like crypto, or once you've made a bunch of money
Speaker 1: on a on a really leveraged trade that you didn't
Speaker 1: pay anything for on on robin hood. I don't know,
Speaker 1: Like I think it might be hard to go back,
Speaker 1: like it has become a form of entertainment and not
Speaker 1: necessarily just a way of making money. Yeah, I'm kind
Speaker 1: of with you. I mean, look, if we had like
Speaker 1: some huge, massive sustained market sell off, if we hadn't
Speaker 1: gotten this rebound, if markets had kept going lower in March,
Speaker 1: if the unemployment rate UM just continued to worsen, then
Speaker 1: probably that would really iceless for a while. But of
Speaker 1: course we have seen a rebound in a lot of
Speaker 1: different measures, both marketing real economy. So you know, I
Speaker 1: think the broad thing is and Then's something that we've
Speaker 1: talked about in other UM avenues is like so many
Speaker 1: aspects of this crisis of just accelerated pre existing trends,
Speaker 1: and the chart of this sort of retail options trading
Speaker 1: leading into this is just another example of it. It
Speaker 1: was picking up pretty strongly in and then it just
Speaker 1: went insane over the last six months. Yeah, and I
Speaker 1: guess my other big question on all of this is
Speaker 1: what regulators are going to do if anything, like clearly
Speaker 1: this behavior is having an impact on the market. You
Speaker 1: can't really argue that it's insider trading because all the
Speaker 1: people on Wall Street bets, you know, presumably you don't
Speaker 1: have any insider knowledge. They're just saying let's all buy
Speaker 1: at the particular time. But it's still sort of a
Speaker 1: I don't know, it's it's coordinated in a way that
Speaker 1: I would think, um, catches someone's eye. Yeah, it's super interesting. Also,
Speaker 1: just going back to the key point Um, you know,
Speaker 1: it seemed like Ben was pretty dismissive of the soft
Speaker 1: bank whale theory. I mean, it's sort of like an
Speaker 1: interesting SoftBank story because soft bank always seems to be
Speaker 1: riding whatever wave is going on at the moment and
Speaker 1: riding the waves up and riding the waves down. But
Speaker 1: you know, it's obviously, in terms of what we've seen
Speaker 1: since March, a much bigger story than just that. Yeah,
Speaker 1: I think I think the narrative around soft Bank that
Speaker 1: they hired a bunch of people from Deutsche Bank who
Speaker 1: are now putting on these riskered lever trades is a
Speaker 1: really difficult one to fight against. But Ben's description of
Speaker 1: call spreads as a risk mitigation strategy rather than an
Speaker 1: outright that I think was an interesting one. So we'll
Speaker 1: see if that catches on, But somehow I doubt we'll
Speaker 1: see Why should we leave it there? Yeah? Okay, this
Speaker 1: has been another episode of the All Thoughts Podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe wisn'tal. You can follow me on
Speaker 1: Twitter at the Stalwark and be sure to follow our
Speaker 1: guest on Twitter, Ben Effort. It's Ben with two ends.
Speaker 1: P Effort absolutely must follow great on all of this stuff.
Speaker 1: If you're interested. Follow our producer on Twitter, Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levie at Francesca Today and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcast. Thanks
Speaker 1: for listening to