YouSaid · the spoken record

Benn Eifert

lines on the record: 87
first: 2022-06-20
most recent: 2022-06-20
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Like every single day. People will be scared and, you know, whatever, whatever, right? So, like, where is Vic going to be? Was the point of that question? There's no exact answer. You don't know. It depends on a lot of things, right? But you're starting from 24 realized fall, right? So if you add a reasonable premium and then a variance premium, maybe you've gotten to 28 or 30, and then anything on top of that has to be just kind of pure excess risk premium that's coming from people being scared and that's not being counterbalanced by enough selling, right? Because if you all is anywhere above 20, if at the money vault is anywhere above 24, you're going to make money selling it in that regime.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“So, this is an example of you said, yeah, folks who aren't in the derivative space, it's very challenging. So for me, down 1.5% every day, I just did it, you know, Googled it. So 0.985 to the 20th power because there are 20 trading days in a month is like 73. So that's a 27% sell-off in a month, which to me sounds huge. But you're saying if it is 1.5% every single day that is even if it's a 27% decrease over a month sell off that VIX will be low. So what is realized volatility if it's 1.5% 1.5%?”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Why would there be a massive spike of implied volatility if the market just goes down one and a half percent every single day? We might all get really scared and stuff, but again, if the market's only moving one and a half percent a day. Selling volatility if implied volatility gets materially higher than, say, 25 or 30 is going to be extraordinarily profitable and people are going to sell a lot of volatility. You're never going to get to 60 because, again, the profitability of selling volatility if the market's only moving one and a half percent a day and volta 60s would be massively profitable to sell vault. So your ZipFix 60 calls will never get anywhere close.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Total, and that was a fun question, right? And it's related to this environment of slow chop down in equity markets, right? So you just buy a put. That works great because the market just goes down and down and down. It actually goes down quite quickly over a meaningful enough period of time. So if you buy whatever, if that's going to happen every single day, you buy a six month 30% of the money put, that's going to cost you almost nothing and it's going to make a massive amount of money. And that's very easy and very simple. What won't work, you know, buying a VIX 60 call and people might be tempted to think like, oh, 30% of the money S&P put, 60 VIX call, these are both very wingy things, but they're in different spaces, right? One is in price space for equities. And if equities go down that much over any period of time, it doesn't matter before maturity. Like you get paid on your put option. If you buy a VIX call, you have exposure to a massive spike in implied volatility.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“And you can think in pretty absolute ways if a particular tale again can be effectively bought for free or very nearly free. That's a much more absolute sense in which this thing is cheap. If something is, if an implied ball is two standard deviations below its long-term average, but the realized vault is like massively low, and that probably won't change, that thing might actually be expensive.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Just what is the level of all of a five delta put or something is a much simpler thing? What does it mean that there's some different percentage difference between like the five delta put and the 25 delta put? And is that meaningful if they're all really low? I don't know, right? But if the five delta put is super low, then you know. Again, there's always, there's a difference between low and cheap. And I think this is like the most important thing ever in anything derivatives and volatility related is you can't say like that thing is relatively low compared to where it used to be and therefore it's cheap or that thing is relatively high and therefore that thing is expensive right because markets set prices and all of these things based on based on what's going on in the market and relative to everything else in the market and you really have to think in i think you know much more nuanced ways now can”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“It's really subtle and hard. So, as a starting point, Is your calculation for SKU? Are you looking at the 10 delta versus the 50 delta and normalizing by the 50 delta or not? Are you looking at a moneyiness terms? What does it really mean economically? I think people get into trouble with that, where a lot of the kinds of calculations that you might do naively aren't really time stationary, aren't really independent of all, and are kind of hard to use. I tend to discourage non-specialists from really trying to think about or look at SKU in any detail.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Underpriced is kind of the opposite. If certainly if there is a way to belong some unlikely but certainly possible event and long an exposure to that, for almost no or no cost of carry, then clearly that's wildly underpriced, right? And I think in markets, you don't see that often, but you certainly see that happen, especially if you're clever about how you express and structure those kind of opportunities.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Because there is some price of that tail risk. And if I'm talking about something that has sort of infinitely exponentially worse P&L in a crazier situation, then we're arguing about, well, is the probability of this really, really crazy thing one hundredth of a percent, or is it one thousandth of a percent? And none of us have any idea, right? Like there's no resolution, there's no information about the world that we have that tells us, is it sort of like this vanishingly small probability or three times bigger than that, right? And yet that should be reflected in three times difference in the price. So you might have a risk, a tail risk selling strategy and just say this is high relative to where we have seen it historically and we're deciding to do this. And here's the potential loss and people might sign up for that. But I think intellectually, honestly, saying, well, this is overpriced is very hard. Generally speaking,”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“I would loosely define tail risk as Not, for example, implied volatility, the level of implied volatility or the level of some near the money thing, right? Tail risk really refers to those Armageddon events, whether it be four standard deviations or five standard deviations or six standard deviations or whatever you want to talk about. That variance premium is actually an okay proxy or is one okay proxy for tail risk because a variance swap again is the P&L of a variant swap is proportional to the square of volatility, right? So if you're short it you lose a dollar if you know VAL is 20 maybe but if vol is 40 you lose that and you had a squared at a squared rate right so the year losses for 10 times higher volatility are 100 times bigger right so that's that's tail risk and it's very hard to ever know if Tail risk is really overpriced.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“At the money vault. And that's really driven by the, there's a lack of sellers of variants. There used to be for a long time a lot of systematic and opportunistic sellers of short-dated variants for income. That strategy is extremely risky because variance is massively negatively asymmetric. And March of 2020, variance sellers lost 25 years of gains. And so they all went away and stopped and nobody will let anyone sell variants anymore. So that's why we've had this kind of reset higher in the price of tail risk and convexity. And that's reset the VIX somewhat higher. Relative to add the money in realized well.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Say 16 realized 18 at the money implied to a 20 or 21 VIX range. And that might be like a very long-term average world, right? If anything, actually realizable, I mean, it's very regime dependent, right? So you'll go years with lower or higher than that. But that's a broad brushstrokes averages, right? And VIX right now is a bit higher than that, realized Vaul has been a bit higher than that. The VIX, the main reason making, the biggest thing making the VIX materially higher than that very long term is actually the fact that that premium of variance over at the money or VIX over at the money has been in a much higher range after COVID than it was or after the March of 2020 specifically than it was before. The new range is call it four to seven points over VIX relative to a one month.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“I mean, we're much more in line from a historical perspective with where risk premiums are, right? So historically, you would think of that of let's talk long-term averages for a second. So historically, you might think long-term realized volatility in U.S. large cap equity index might be 16% or something like that. at the money implied volatility relatively short term you know you might expect that to trade at a premium of a point and a half or two points over that and then for for a variance swap relative to at the money given the fact that if you sell a variance swap you're taking on much more negatively convex exposure to volatility historically that might trade at like a two or three points premium to the at the money and so you might get from”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“And if that example you gave where realized volatility was 15 and the VIX was at 60, that would be a fantastic opportunity to sell volatility. If we say that's an extreme example of volatility being overpriced on a historic basis using something that maybe you can explain, like the volatility risk premium, are we at fair value, undervalued or overvalued for VIX at 23, 24?”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Than we're in there. So realized has been kind of low to mid 20s in this recent regime. And it's coming down significantly right now. So again, it depends on exactly the horizon that you're looking at. But yeah, so VIX is forward-looking, right? So generally speaking, if the market's getting quieter, it might decline faster than a trailing 30-day realized volatility because the big move that happened a month ago will still be in that window, right? But yeah, generally speaking, right, the VIX is going to reflect the volatility environment that we're in in addition to the pricing of skew and convexity that VIX is technically a very unswap level, not an at the money ball level. So there's a premium of where VIX trades relative to like the volume of the at the money call or the at the money put. The realized vol will tend to price where that at the money caller put is and then kind of the price of convexity or tail risk.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Realized vault was 15, then it would be like ATM machine just printing money for anybody willing to sell options. And then the VIX would go down because people would sell options. Ultimately, the VIX over very short periods of time will move with the concerns of the investment community or whatever it is, right? But generally speaking, it's short-term implied volatility. It's going to move higher if the market's selling off in a big way. We're having 8% moves. We're having 6% moves. We're not, right? This is a relatively quiet index market environment. We've sold off, we've had a modest index correction in the S&P on modest realized volatility. There's no reason why the VIX should be super high, right? I mean, VIX exceeded 80 in March of 2020 because we sold off 35% in three weeks with 12% crash days, right? Just an order of magnitude, different environment than.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Sure, I mean, the VIX is very short-term, implied volatility, right? And I think people SIBO did a good job of making it this famous brand of kind of this benchmark Furitex thing, right? And I think non-specialists really think of VIX in very generic terms as it's like volatility. It's very short dated variance, right? So if the market is, you know, if VIX was 60,”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“And you see that in SKU. SKU is quite low right now. Upside is historically expensive relative to downside. And when the market moves down, Vaul really underperforms. When the market moves up, all really outperforms. Everything is very consistent with exactly the opposite of that kind of stylized example that you gave in the current market environment.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“May be very, very roughly directionally correct on average over long periods of time. But very not true a lot of the time and a vast oversimplification, right? So right now, if anything, dealer positioning is relatively the opposite. There's been very little demand for especially shorter dated puts markets been kind of grinding lower on relatively low volatility and bouncing back. People who have, if you had been trying to buy a lot of puts and really hedge a portfolio short term, that really didn't work and you lost, burned a lot of premium, right? Dealers are, if anything, pretty long to the downside. And people are trying to buy calls on the upside and, you know,”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“It does depend on to what degree the dealer community is long or short gamma. So there's a perception, and I'm curious if you think it's accurate that, let's say in equity indices, SPY, there's a lot of call overwriting. investors, pension funds will sell calls, there'll be sellers of calls and buyers of puts, meaning that dealers will be buyers of calls and sellers of puts. So there'll be short gamma for puts on the way down, but there'll be long gamma on the way up. Is that in any way accurate? And then does that also change for single stocks?”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“And so, you know, to your point, if people are buying downside puts, as stocks are falling, that will amplify price momentum in that direction.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Just to stay neutral in that position to the underlying exposure to those positions. But then if some exogenous event happens, there's some bad headline or Elon posts some really dumb meme on Twitter and nobody likes it, and then Twitter and then Tesla goes down 5%, then all of a sudden the Delta on those calls will fall from 50 back to 25. And now the market makers have to go out and sell a whole bunch, right? And so Gamma is really not a directional factor. It's really an accelerant, right? If the short dated option buying activity of retail investors or anyone hedge funds puts dynamic hedgers, market makers into a significantly short gamma position, then that effectively accelerates or amplifies price action in whatever direction the pressure is.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“The example, even first, let's just start with call buying of where there's a big crew of people buying Tesla calls, for example, short dated, and maybe they're buying 10% out of the money two-week calls. And then those calls are initially what we would call 10 Delta calls. They have 10% the sensitivity to the stock price of Tesla that a share of Tesla does because they're pretty far out of the money and they'll probably expire out of the money from a probability perspective ex ante. When the dealers or market makers sell those calls to the buyers, they have to hedge them. They will buy that much delta to 10% of the notional of the options. Now, if Tesla rallies and rallies and rallies and now actually those calls aren't 10 delta anymore, they're at the money, they're 50 delta. Now the dealers will have increased their long hedge by a factor of five. They will have bought five times more stock.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so that's right. So the gamma of an option and the way in which a dealer hedges it doesn't actually depend on whether it's a put or a call. It just depends on the strike price and where the underlying stock price is as compared to the strike price. And so when you think about”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“So, if 2020 and 2021 saw a proliferation of single stock option calls, and calls can sort of be a self-fulfilling prophecy, a tail wagging the dog, because dealers, as it goes up, they have to hedge more and more. To what degree do you get that on the put side when if someone buys a put struck at 60 and the stock's at 100, can you have those also, the gamma hedging on the way down as well? And perhaps to what degree is that responsible for some of the vicious sell-ups we've seen in single stocks this year”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Makers have been extremely successful over the last couple of years in monetizing that's usually who wins in the end, right? I think in most aggressive speculation and complicated instruments usually leads to losses among the people that are doing it and the gains are at the brokers and the exchanges and the market makers.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Rallying. Then into the pandemic where markets sold off aggressively very briefly and then turned around and again off to the races. That type of behavior of just constantly going out and buying these leveraged positions and short dated options worked very well for that crowd of retail investors. I think as you alluded to the last six months, we've had kind of a choppy down market. And so that's really burned a lot of that community. And you've seen volumes falling off. But that was really a phase shift in markets in terms of just this huge explosion of activity in volume in options and the composition of participants. And I think from a market maker perspective, market makers, I think lost a bit of money initially when retail started buying Tesla and driving Tesla through the roof, but then market makers adapted to, okay, this is how the game works now and this is a new set of participants. How do they behave? How do we adapt what we did? And I think generally speaking, option mark.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Options are much simpler than OTC exotic derivatives, but still they're complicated to understand how much risk you're taking and how things might go from an individual trader's perspective. Among other things, you did see single name, short dated call option volumes really accelerate spectacularly. That was often associated with the subredditive called Wall Street Bets initially and then became much broader than that. But you had a group of a widespread group of retail investors that realized that they could get a lot of leverage by buying short dated options and also kind of positive asymmetry or positive convexity where they could, if things went well, make a lot of money relative to the amount of money that they were risking. And so I think those features really made it very attractive. And through a period of time where markets were rallying and rallying and”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“2019 was really the beginning of the change of that. I think you started to see a lot of brokerages moving to zero commission, at least zero headline commission rates, first on stocks and then on options. And you saw the growth of widespread social media communities focused on trading and investing and speculating. And so it moved beyond even just a personal thing and became like a social thing and a fun thing. And you really did see a huge explosion in retail activity in general. And then specifically, as you pointed out in option trading.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so retail as a whole, I think, you would think of most of the last 20 years retail having been really quite quiet and not very involved in day trading and aggressive speculation, that really, really dating back to, I think, after the tech bust back in 2002, 2003, retail investors lost so much money and got so disheartened. And then again in 2008.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so exotic bank OTC over the counter derivatives, that is a much smaller environment than it used to be. So now folks like yourselves trade a lot more in listed options. I know that there's been a proliferation of retail purchases of options, calls and inputs on single stocks, I guess perhaps equity indices as well. To what degree has that defined the derivatives environment? Has that increased volatility? Has it decreased it? Has it made it more attractive to be a market maker? And then also perhaps later we can get into the retail call options, at least volumes, which have been falling this year, right?”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“20 years ago and the percentage represented by listed options within the equity category, for example, is much, much larger.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Changes in the regulatory environment following 2008, which, by the way, mostly were implemented much later. So it was, think of the implementation of Dodd-Frank and Basel III really as being a mid-2010s thing, largely 2014, 2015, 2016. Those changes were pretty broad-based. They were not targeted specifically like at mortgage derivatives only. They were really addressing banks' ability to take risk and have risk exposure and the possibility of large-scale loss across a wide variety of product categories. And so what you see today, again, it's not that there is not activity in OTC derivatives. There certainly is, but the percentage of overall derivatives market activity represented by exotic OTC derivatives is much smaller today than it was, say, 15 or 10 years.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Financial system and regulators wanted banks to do a lot less of that, to hold a lot less risk, take a lot less risk. And as a result, a lot of liquidity in certain parts of derivatives markets really move towards exchanges. So where you think today of the breadth of market activity on US option exchanges electronically, both among retail investors more recently and institutional investors over the last 10 years has really been a huge explosion, and that's generally been a good thing. We've embraced that at QBR.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So these days we trade primarily listed liquid options and futures. That is somewhat new at QVR relative to my prior history. So for most of the history of derivatives markets, hedge funds, including us, were involved in a lot of OTC products and traded bilaterally with banks and traded variance swaps and volatility swaps and all manner of things. The market really did start to change in the wake of the credit crisis of 2008 when really the Fed took the view arguably correctly that systemically risky institutions in financial markets like banks were taking far too much risk themselves, trading complex opaque derivatives and creating vulnerabilities.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Where we'll work with some very large endowment, for example, on structuring and managing a bespoke fund for them that's designed to solve the problem for”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT
“Sure, so QVR is what you would think of as a boutique hedge fund business. There are a couple different parts to the business. One piece is the absolute return in hedge fund strategies across a variety of different structures, but there the objective is to generate uncorrelated returns that aren't driven by the same risk factors that investors typically have exposure to, in particular monetizing dislocations in derivatives markets on a market-neutral basis, market up or market down doesn't matter too much. The other part of the business is what we would call a solutions business. There we use our infrastructure and skills and capabilities in derivatives markets to solve problems that big asset owners have on a much more customized basis. Often that has to do with things like tail hedging.”
2022-06-20 · Forward Guidance · Trading Volatility in Volatile Markets | Benn Eifert · IDENTIFIED FROM THE TRANSCRIPT