Lots More on How TikTok Options Traders Got Quiet
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Bloomberg Audio Studios. Podcasts. Radio. News. Tracy, we have Ben in a leather jacket. Yeah. Well, it's not just a leather jacket. It's a black leather blazer with sort of braided edges. It's got a little bit of a... Wait, is this an insult or a compliment? I don't know. A little bit of a Ren Faire feel to it. Oh, absolutely. That's a...

to a big, to a volatility nerd, that's a compliment. Okay, good. All right. I wasn't quite sure. This is like one of the, that would be a very polarizing comment to some people. Not to me. I do not have Ren Faire vibes, but I, look, I respect it. These are Ren Faire times. These are Ren Faire times. They absolutely are. So I get it. I get it. They absolutely are. There's pictures of me on Twitter in, you know, Nightingale armor with the sword. So I think this is fair game.

I did a deadlift. I'm both the most popular trader and most successful trader at Citadel. Fed has gone viral. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Black gold. These are the important questions. Is it robots taking over the world? No, I think that like...

In a couple of years, the AI will do a really good job of making the OBLOTS podcast. One day that person will have the mandate of heaven. How do I get more popular and successful? We do have the perfect guest. You're listening to LOTS MORE, where we catch up with friends about what's going on right now. Because even when the OBLOTS is over, there's always LOTS MORE. And we really do have the perfect guest. ♪

We are, of course, with Ben Eifert, QVR Advisors. Ben, who's been getting steamrolled the most by this market? And I have some thoughts on this market, but I want to hear yours. No, it's a super fun market. I mean, really, first you had the deep seek thing, right? And that was really interesting because equity markets went down, but the fun was all under the surface, right? What did we sell off? 8% or 10% in index. It wasn't a huge deal, but there were like

eight standard deviation moves in market neutral factor type relationships and crowded equity long short. And so you saw the type of people that had the really popular equity positions, Nvidia and Tesla and all these kind of stocks just get really, really murdered. You heard of a lot of pain at the big multistrats. Again, you have to put that in context because they're pretty well risk managed. The losses weren't that large in percent terms, but you had, again, just very, very, very large moves.

And then I think the interesting thing about that was that led to a lot of de-risking in hedge funds. So you had pretty high gross and net leverage coming into that.

And then it came off quite a lot, you know, a lot of de-risking. And then when, you know, when Liberation Day hit, I think positioning wasn't nearly as, you know, as offsides as it could have been otherwise. And so you did see obviously big drawdowns in the equity market and big rallies back a lot of volatility. But I think, you know, the losses that you saw among hedge funds probably weren't as bad as they would have been otherwise. Another interesting thing to note, and we, you know, we talked about this a lot, there really isn't

that much of the kind of super crowded, short volatility, short tail risk, tail risk selling kind of stuff out there that there was like in 2019, 2020 for the pandemic. So you didn't see that those kind of fireworks, right? There weren't like hedge funds getting liquidated and people getting carried out in body bags and big auctions of all their positions, making markets go crazy. You just didn't really have that kind of stuff. What you had was a

pretty fundamentally driven, you know, orderly sell-off followed by, you know, goofy rallies back and forth on Trump tweets and what's he going to do and all this kind of thing. But it was really, I think, much more about

about, you know, fundamentals of expectations of what is policy really actually going to be and how much does that matter for the economy as opposed to like technical positioning, hedge fund blowups and people getting steamrolled. Yeah, I feel like the positioning point is really important and is probably one of the reasons like we had, I'm doing air quotes here, but that orderly sell off versus something super, super chaotic. But that said, I mean, we're talking about it being a fun market. I feel like I have to make the obvious disclaimer, which is

I'm sure it's very fun if you're in options and in volatility trading. But if you're in the sort of long term buy and hold game, this feels almost like an impossible environment to navigate, right? Like one day we're up two or 3%, the next day we're down two or 3%, everything is riding on like,

Scott Besson says, what Lutnick chooses to say. And God knows, you know, what Trump is going to say in his latest press conference. Very much so. And, you know, and intraday, too. It's like, well, yesterday we were up 3.2 percent. And then there was a bunch of walking back of the unilateral tariff reduction position. And then we sold off, you know, halfway back to flat almost immediately. I think there were I think someone. By the way, we're recording this April 24th. It's 10.08 a.m. Every time we have a yesterday or something. That's right. Very good. Keep going.

Yeah. So we had, I think just this morning, I saw an article, I think Alexander wrote it at Bloomberg saying, you know, we're in a, you know, traders are trying to trade Trump tweets market. And that's really hard. You know, I think that generally speaking, anybody that you talk to the success rate of sitting there at your computer and looking at what just got tweeted or what article just came out and then sort of doing trades and making money like nobody makes money at that. It's incredibly difficult, right? It's a very choppy market. The people who do, of course, as you pointed out,

Volatility traders have a very non-consensus view on what's fun and what's not, right? We love this, but yeah, I think that's abnormal. - Your definitions of fun may vary. - Exactly, back to the Renaissance Fair point. - So I thought there was a very interesting point about DeepSeek, which is that what it really obliterated were the market neutral factors that had been working on. That is very interesting. And of course, you know, the pod shops that we're always talking about, their game is to find those market neutrals. And then this was a thing that just rearranged everything.

You know, when you're on before you talk about the TikTok option influencers who are always looking at various Greek letters like alpha, beta, gamma, delta, epsilon, zeta, eta, theta, iota, kappa, lambda, mu. When OOPSALON is trading way out there on some extreme, all these trades are premised on some sort of mean reversion.

that there is a dislocation and then eventually a normal returns, right? And it may go further out and the sigma and the row may get further blown out, but eventually they come back to normal. How much of this is like a crisis of people really don't know that some sort of fundamental economic mean reversion is coming? Yeah, I think there's something really important to that, right? I think that people are very conditioned in this market of the last many, many years, really post credit crisis, right? That

that sort of nothing ever happens. We talk about this a lot, right? But that any kind of sell-off will be immediately bought. It'll immediately come back. Any kind of vol spike will get sold. And even in the pandemic, obviously, people got run over on that view. But we still did come back. It's just that it got really crazy for like a month, right? And I think this feels very different where this isn't,

a flash in the pan with a technical squeeze and a big explosion of stuff like this. You know, there are the real fundamental issues here, which is that, you know, the U.S. government is out there doing totally crazy economic policy that every economist in the world, for the most part, will tell you is totally crazy. And they're also changing the goalposts day to day on what exactly that policy is going to be. And they've

really eroded the market's confidence that they kind of know what they're doing not only on tariffs, but I think on everything else now. I think that one of the most important things that Liberation Day did

Was you know take the market which really up to that point? I think you have to say kind of believed that the tariffs thing was like this four-dimensional chess strategy and the association and everything else crazy The Trump was saying you kind of discount right because he's not really gonna do that He's got a plan and really the market really had to rewrite that whole expectations of how to interpret everything that Trump and his administration say or say they're gonna do Because gosh they said they were gonna do this crazy terrorist thing and then they did it five times crazier than everybody thought they were gonna do Yeah

Right. And not just crazier in terms of levels of tariffs, but in terms of like the clownishness of of implementation. Right. But like the chat GPT night before tariff table with the Penguin Islands and like the whole thing. Right. So so then when Trump is out there saying, OK, tomorrow, you know, next week we're going to deport 30 million immigrants or like whatever crazy thing that he says, the market kind of has to take that more seriously now. Right. Or at least question like what are the possible implications?

And so I think it's a very different environment going forward. Right. It's unlikely that that's going to just change and that he's going to suddenly turn into like a really serious guy.

So speaking of things being weird, and there are any number of weird things that we could choose to talk about here. But like one of the weirdest to me has been what's been going on in equity volatility. So we've had a very big gap between the VIX, which is implied volatility versus realized volatility, which, you know, like maybe explain the difference to us just to begin with and like why we've seen that gap really develop.

Sure, absolutely. So the VIX is something that everybody talks about, but not everybody really thinks about exactly what it is, right? It's the fear index. But what it is, is it's a level of what's called implied volatility. So in some sense, you could think of it as the market's forecast for realized volatility over the next month based on option prices. It's a little bit more nuanced, though, because calculation that they chose for VIX isn't regular volatility. It's something called variance, which is volatility squared.

but then normalized back into units that are volatility. And the distinction there is that if you, it's the, so the level of VIX is the level of what's called the variance swap and a variance swap pays you as a volatility trader who buys it pro

proportional to the square of volatility. And so what that means is if volatility doubles, you actually make a whole lot more money. Or if volatility goes up by four times, you make a ridiculously amount more money. Yeah, there's like a slope. That's right. There's a big slope to it. And so you have to pay a big premium to buy a variance swap relative to what you would pay to just buy volatility. And so when you compare the VIX to realized volatility or how much markets are moving on average,

On average, there should be an extra premium there. It's not just directly comparable. Now, to Tracy's point, though, realized volatility recently has actually been generally much higher than like the average level of the VIX. Now, the VIX did spike into the 50s kind of briefly, but it's mostly come back down into like the 30s and high 20s.

But yet markets are often moving, you know, 3% in a day or 4 or 5% in a day, which implies a much higher level of implied volatility. It's a crazy chart. So you can you can chart on the Bloomberg on your handy Bloomberg terminal, like the gamma index versus the VIX. You could see that like that.

the jaws kind of opening over the past few weeks. Yeah, very much so. And again, that's really reflects a, you know, aggressive bet on the part of market participants that realized volatility has been high, but it's going to be lower over the next month than it was. And it's and actually the degree to which you see that in your chart is understated because of that variance swap effect, you're actually not really even comparing the right number with the right number to compare would be like at the money implied ball, which you can also plot in Bloomberg.

What's the ticker for that? So you just do SPX index and then you would do there's going to be a field for it, which would be like one month, one MTH, 100%.

Something, something. It's like a long field, but yeah. Oh, awesome. Yes, this is very useful. Thank you, Ben. There you go. And that guy will usually be anywhere between, say, three and eight or ten points below VIX, depending on the level of VIX. So with VIX at 50, that's probably at 40 or 38 or something like that. You know, Tracy and I, we put on events, trivia events, etc. One of the dreams that we have, though, is a Bloomberg Terminal live conference.

Competition for sure. Terminal Olympics. Terminal Olympics where we get like 20 traders and they're all seated at a terminal. Oh, that would be so good. Calculate X, Y, and then they all raise it and it flashes on a screen. Who gets the answer first? Like how well do you know? That would be such good TV. We thank Ben for coming on, if nothing else, to give us quotes and news about functions for when we eventually put this on. ♪

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I don't follow like, you know, the Wolf of Gamma or whatever on TikTok. You seen anything good? What are they saying? They all got real quiet, Joe. What are you seeing out there? You got any good like tweets or, you know, put sellers or whatever? Seriously. So as you know, like on a regular basis in normal environments, like everybody is tagging me in.

like tweets or Instagram posts or whatever that these kind of option-selling influencers are making, you know, the coal options grind guy and, like, all these people. And as of, you know, a couple weeks ago, there's just absolute crickets from that community because...

the types of trades that they advocate, as we talked about last time, they make a little bit of money on average for a while, and then they give it all back or twice as much back when something like this happens. And so there's not a whole lot of talking coming from that crowd. And you see it reflected. Obviously, you can't see what is happening to those highly overleveraged individuals that are unfortunately following that kind of advice. You can look at

how well like covered call ETFs are performing relative to just the underlying and things like that to get a little bit of a sense. You know, look at the MSTR covered call ETF, for example, right? And it's just bad because the worst possible environment for those kinds of strategies

is when you have a sharp spike in realized volatility, and especially if there's a lot of chop and back and forth, mean reversion, because you'll have a situation where they're selling these weekly options, and you have a really big sell-off for a week. They lose a bunch of money on their puts, and then they sell some calls, and you have the big rally back.

And then they lose their money on their calls. And again, none of this is like something that they explain to their followers. They just sort of tell their followers that the income of the strategy is like the option premium that they sold. And they don't conceptualize the possibility that you can actually lose money when you sell the option. Tracy, every once in a while, I'm reminded that we exist in a world where

where there's like 14 ETFs that are based on various doing things with MicroStrategy. It's so crazy. It's amazing. Anyway, sorry. Well, also, I'm still blown away by the fact that MicroStrategy also calls out the volatility in its share price in its earnings call as like a selling point. Look how volatile we were in this quarter, guys. And it's beautiful, right?

I mean, Saylor's very smart, right? So Saylor understands all this stuff perfectly. If you can run a really, really high volatility company, it means hedge funds love your convertible bonds and will pay anything to get your convertible bonds. Yeah, this is the secret. It actually makes your credit cheaper. And I gotta say, if people want to hear more about this, we did record a lot more with Matt Levine. No, it was a great episode. God, it feels like so long. It feels like it was two years ago. We had the luxury of talking about microstrategy for a whole episode once. Pretty amazing. But I feel like

This is kind of the secret of volatility and options trading, which is like you think that a lot of these guys, a lot of these influencers would really enjoy this particular trading environment. But so much of it is based on that mean reversion that Joe was pointing out that a lot of stuff just blows up when you finally get volatility. It really does. Wait, not to come back to this, but MSTR. But did you see that there is going to be MSTR for Solana? Yeah. Yeah. And yes, they're trying to. I was it.

I actually peered on a crypto podcast recently. Nice.

And I was like, I'm tapping out this. I don't understand that MSTR. But now there's a bunch of like copycats. And the question is, can anyone really repeat this? Yeah, yeah. But GSR just led a big round into Apex. I just have to read these. Sorry, I have one more question. But I just before I do, here's some of the ETFs. Defiance Daily Target 2X Long MSTR ETF. Yield Max MSTR Option Income Strategy ETF. T-Rex 2X Long MSTR Daily Target ETF. Bitwise MSTR Income Strategy. Oh, there's another one.

ST Key Day, 100% MSTR and 100% Coin ETF. So I guess it makes us some Coinbase in there. There's a lot more. I just had to read those in. Last question for me. Like if you're a long-only investor, just a normal, whatever, investor like I am, you know, you have two choices, I think, which is one,

the hope and pray strategy, which I always actually think is very legitimate because that does tend to work out over a long enough timeline or the like, oh, I really need to think about diversification strategy or something like that. Okay. In your world, don't you still have to have some sort of view? Because if the question is, do some of these Greek letters snap back into place or there's a gap between where this Greek letter and this Greek letter are pricing to make money,

Don't you still need to have a view like I do? That's a great question. So there's a couple of different important things here. There are different types of trades in the derivatives world that are driven by dislocations. Some of those trades make money on realized dynamics and markets and don't rely on some implied Greek coming back into line. Right. So Tracy was talking about, you know, realized volatility and implied volatility.

This is like a simple, dumb example, but just suppose that implied volatility was just always way too low and realized volatility was way higher for short-term options. You would just buy short-term options and hedge them all the time, and you would just make money constantly. And you wouldn't need that to ever change. You wouldn't ever want that to change. You wouldn't ever want that dislocation to go away. So there are some things like that, that we can make money based on a dislocation but without requiring the dislocation to close.

And then there are other things where exactly, as you point out, you're trading an implied dislocation and you're going to only make money when it reverts. And for things like that, you know, we really have to think hard about, OK, where is this dislocation coming from? What flows are driving it? Are those flows that are going to

persistent and not go away and it's unlikely that those dislocations close are there fundamentals that actually cause that dislocation to stay there even if it doesn't really make sense or is this something that is being driven by temporary supply and demand dynamics in the market and you understand what might push it back over what kind of time horizon and the latter is an interesting trade the former really isn't and you actually have to think very hard about

that. You can't just look at the level of the WISU parameter on a screen and sort of say, which by the way is the made up parameter that exotic derivatives traders use to claim why you're losing money on your trade with them. Oh man, I'm always looking at those parameters.

Exactly.

Yeah, if you believe, as I think I do, that Trump 2.0 is not a low volatility president, right, that one way or another, right, this is different. And that doesn't mean the world is going to end necessarily, but that this is not like a 10% realized volatility market. And he doesn't want it that way. He doesn't like it that way. Then, yeah, I think you have to look at when you look at the overall volatility landscape, there are a lot of things that are relatively cheap.

And, you know, in our core business, we're Absolute Return. We're always looking for what's cheap and what's expensive and, you know, hedge trades and so forth. But we also do help big institutional investors with tail risk hedging and with things that are outright defensive to protect their portfolios. And yeah, there's still lots and lots of opportunities for that. Because really, in this market, we talked about this a little bit, but the knee-jerk reaction of most market participants is that when volatility goes up, they just think you have to sell it.

And they do a lot of risk on trades in the volatility markets, which don't necessarily make sense from a risk reward perspective. Most of the time, they should just buy equities, to be honest, if they want to be bullish. Actually, you just reminded me. I mean, one of the other things we just saw was this huge contraction in risk appetite across the entire financial industry, basically around April 2nd, that liberation day. Who

Who is selling vol at the moment? And have you seen continued appetite to sell volatility in the current environment? Yeah, no, very much so. So one thing that you can always tell is when you get a sell off like this and the VIX spikes a lot. So VIX went to a little over 50.

Look at where the front month VIX future is trading. And that tells you whether people are buying or selling vol. So the front month VIX future had five or six days left to maturity early after Liberation Day. And it was trading at 32 when the VIX was 50. So it was implying massive speed of normalization and mean reversion because everybody's selling it. And the VIX future is the best thing to look at because it's the tourist instrument. So vol traders trade the VIX annually.

In as much as there's dislocations in it. But if you're just a regular equity guy and you think ball is too high, you don't trade options. Options are too much work. VIX is really easy, right? Because you can trade the ETFs, you can trade the futures. You don't have to think about like the gamma and the vega and all that stuff. Yeah.

And so there's an overwhelming appetite to sell vol on vol spikes from a lot of parts of the hedge fund community, from tourists, from volatility tourists within the hedge fund community, and from retail investors also. Retail investors are very much dip buyers and vol sellers on spikes. Volity tourists would be a good name for a trivia team at one of our trivia nights. I'm a volatility tourist. That is a good name. That would be a fun one.

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