YouSaid · the spoken record

Zed Francis

lines on the record: 131
first: 2022-11-14
most recent: 2022-11-14
sittings or episodes: 1
sources: podcast

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“Just our website www.convexitas.com. And, you know, hopefully there's some interesting things that are insight page where you can hear what we did in 90 minutes just in a three-minute read. There we go.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“It that way, yeah, but a lot of people do that basically relative to the rest of the choices, it makes shorter data, close to the money, S&P 500 options, cheap, relative.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it was good for a period, and then everybody got the back test and started doing it. And then it wasn't good. We focus on comparison.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Like yield. And again, they're doing that in shorter data to get a really, really big number. And most people are doing that in index. They're selling index calls because twofold. One, like it's easier. If I had to sell it in every single name, that's hard from a technology perspective where I just like regress things to an S&P 500 beta and say like, I, you know, I sell this much spy or SPX calls against it. That's basically the market exposure that things have. And then the second side of things is, of course, people think that they have security selection edge. So you're like, if I own a bunch of these 30 names, like I don't want to sell calls on the 30 names, I own the 30 names because I think they have tons of upside. But like I can sell market exposure against that. Those two things, again, cause a ton of cover call selling. And let's say that the back.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yield product, like if I can sell two month put six times that generates a potential yield, and by the way, I hate that word yield in this context, but it's what everybody refers to things. But if I can sell, you know, that at the money S&B 500 puts six times in a year, I can get a headline yield number that's a lot bigger than selling a one-year put once, right? So there's a ton of product that basically sells shorter data options a bunch of time so they can say like, oh, the potential yield of this is a very big number. The other side is the easiest option strategy for most folks to, you know, insert another portfolio is doing covered calls. It feels very unrisky because it's like, I own a bunch of things. I'm quote unquote capping the upside in exchange for capping the upside and receiving a premium that smells a lot.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So, first off, correlations, you don't even need to go to esoteric product. You're like 60 40 portfolio. Everybody owns 6040 because obviously fixed income does well when equities do poorly. And relying upon that probably has not made a lot of people happy this year. But the flows side of things. So shorter data close to the money, S&P 500 options for. Have been, you know.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so it's a basis risk you want to protect against. Event A, but you say, oh, actually, event B happens pretty much every single time event A happens. So I'll just buy insurance against event B. But event B doesn't happen. I'll give you an example. Typically interest rate futures, euro dollar call options, for example, betting that the market will, that short-term interest rates will collapse, that historically does really well during market when the S&P 500 does really poorly, like March 2020, 2008. However, this year you wanted to own euro dollar puts. You did not want to own euro dollar call. So you did not want to take that basis risk. And then, yeah, exactly, what's the structural flow? So you're selling longer dated S&P 500 puts and buying shorter dated S&P 500 puts. And you're sort of doing the opposite of what the market's doing, like a mildly contrarian position because there are a lot of people who buy those longer data puts and sell the shorter data puts. Who's selling the shorter data puts? I know there's tons of covered quality TFs that's like we own the Nasdaq 100, but we sell covered calls against it.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Of what we're doing. So, again, we don't want to introduce basis, so we're utilizing that. We want to make sure this is most likely to be liquid during the worst possible events. And then finally, we actually see edge in what we're constructing.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“That seems very odd. You're like the biggest, most liquid thing in the world. How the heck do you see lots of edge there? It's essentially that everybody is built structured products, the mutual funds, the ETS, even parametric derivative overlay products, all this kind of stuff. S&P 500 tends to be the baseline for all those. And it's because it's the easiest thing to communicate. And so you have all these persistent flows from these products that are creating, we'll call it inefficiencies in the vault surface. Vault surface. Again, like tons of different maturities, tons of different strikes that creates, you know, a surface and all these different products are, you know, buying really heavily at one part and selling really heavily in another part. And we're looking to extract a little bit of edge from those flows to construct the design.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Because of that, step one is we're using only SP 500 options because basically your equity portfolio looks somewhat like the SP 500. The other piece of that is S&P 500 options are basically the most liquid market on the planet. So if you're hiring us to provide that diversification during those drawn out events and the entire point of having that diversification is to be able to redeploy capital when the market is down, we better be able to trade it and turn that into cash in all market environments, especially the ones when things are really hairy. So we have we're using a tool that we have confidence that we'll be able to liquidate it pretty darn close to fair value or what we perceive as fair value even during the worst events. Finally, as you're kind of alluded to without getting too much of it, because this is like a two-hour conversation, is we actually see significant edge in S&P 500.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So, you know, first off, if we're trying to create a portfolio construction tool that folks can utilize in that kind of means means we can't be taking like basis risk. Now we've talked a lot about rates. I love fixed income, like all that kind of stuff. If I came to you and said, you know, I think I have this brilliant hedge using some sort of interest rate project product for your equity portfolio, you might think it's interesting, but you just can't do it. It's huge basis risk. Like you can't have something you need to rely upon in your portfolio, have tons of basis risk. So what we utilize as instruments to go ahead and deliver our targeted portfolio is only S&P $500 options. We don't want to be introducing basis risk. We want this to be a tool that you can rely upon for true diversification during all market environments.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Is you can size this based on risk rather than cutting a check allocation. We're unfunded day one. It's your assets that are collateralizing everything we're doing. You get instantaneous access to any returns that we hopefully create when the market is down, allowing you to be a pretty proactive redeployer of capital during market drought on events. And then all this stuff together, the like sneaky thing on the side is we dramatically increase a portfolio's ability to tax loss harvest over the long haul.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Everything has gains. We are truly negatively correlated. We're looking to deliver a possibly asymmetric return profile, but we are negatively correlated to equity markets. So Margaret goes up for five straight years. We're losing money. Those losses can be utilized to go ahead and do traditional tax on service in your portfolio continuously raising the cost basis of your portfolio. along with when the market goes down and we hopefully do our job and generate on a covered cash and you take that cash and buy more things you just created a whole litany of new tax lots so now you have tons of different tax slots that allow you the opportunity to increase the odds of increased tax loss harvesting because you don't have just you know one thing going up and down you have lots of things going up and down which increase the opportunity of something went up and something went down up that's a tax loss harvesting opportunity so you know the really quick like you know”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“There for you to use that day, no redemption, no nothing. It's just naturally part of our, you know, rebalancing process. We're creating cash. Hopefully if we're doing our job when the market is down, that cash is there for you to use to go ahead and redeploy during drawdown events, which ultimately is the value proposition. It's that redeployment of capital acquiring additional assets for the long haul during drawdown events. And then like the kind of like final lever of value creation is we're a huge accelerant to tax loss harvesting. Tax harvesting, what call it reasonably standard procedure for folks, especially these days, because people have built a lot of tools, so it's a lot easier to do. Issue attacks harvesting is twofold. One, when market just goes up for eight years, like everything has a cost basis, you know, way, way below.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“To so that way you main 100% fully invested. And if you believe in us, maybe even take more risk. Like get rid of this fixed income and just buy more equities and VC and P, things that over the long haul you think actually have a positive real return. So that's like step one is how we engage with folks. You can size things. Step two is we're completely unfunded, meaning your assets you currently hold collateralize everything that we're doing. There's no cash you don't need to reserve cash. Be fully invested. You don't actually require any cash day one. Your assets are collateralizing everything that we're doing. The next level of exactly where you're drawing on is marijuana goes down and hopefully we do our job. We're generating unencumbered cash directly into your account, meaning you have cash sitting directly in your fidelity schwab per account.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“You're TME up way too much. So, yeah. So, I mean, of course, we think we're good investment managers. We wouldn't be in the business if we thought we're, you know, at least as good as other good people. But the real separator for us is the operational structure. So how we are hired by folks who invest on their behalf and we would view it much more as like a portfolio construction tool rather than like an allocation is essentially you hire us as an overlay manager, which just means we get access to place trades in your account. And what does this mean for how we engage with your portfolio? One, you can size us to be 100% of your equity portfolio. It's not that like issue or shoot like I have to cut a check, which means like they have to be like one, two, three percent. Nobody's going to do more than that because it's cash going elsewhere. No, you can overlay us on your entire portfolio if you were to choose.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“In March of 2020, I'm not, you know, you can't use the money that I generated for you. You have to ask me for it. And it takes me 30, 60, 90 days. So I know there's a certain solution that you at Convex discuss do. So yeah, tell us about that problem and how there's a different way to do things that you think is better.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“All of it, you're buying options that lose money. You're buying options that expire worthless. It's just like, you know, it's very, very bad for long-term investment. I mean, just look at this is a poorly intentionally done poor strategy, but like, look up UVXY ETF over time, you're down like 99.9% of it over time for the folks at home. But the value of tail risk is that you get the money, you have a position that's negatively correlated to the market, that generates a ton of money while the market's crashing. So you get to use that cash that is being earned by those tail risks and deploy them back into the market so you can buy the S&P 500 at 2300 in March of 2020. However, and this is the thought I had, if you invest in a tail risk, it takes, what, 60 days, 90 days to redeem that, you're not able to automatically deploy that cash. If I'm a tail risk manager and Zed, you give me your money, let's say I'm up a thousand percent.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yes. And yeah, equities and bonds have been selling off together. We talk about this a lot on the show. Normally stocks down, bonds will do well because the Fed's going to cut rates and deflation is coming. So buy bonds all across the yield curve. Now bonds and stocks have been selling off together so that mix that's normally such a great pairing of stocks and bonds. It's been a pretty toxic cocktail for investors to own. baby boomers they own a lot of bonds final thing i want to ask you is you know i want to hear about the work that you're doing at convexitas and i'll start by posing you a question which is actually a problem that i encountered in my head before i even met you which was okay the tail risk the value like tail risk is a absolute on a long-term basis it is a money losing strategy on an absolute basis because yes you're going to make 10x during 2008 and march 2020 but long term you're just bleeding out”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Exactly right. That's why nobody cares about this until you get these weird years where equity and bond correlations are one and they're both down.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“They only had to sell $10 from an $115 portfolio because it was valued at $100 at the beginning of 2021. Now that portfolio is worth $80 and they have to sell, yeah, 12, 13%. So it's a reflexive loop where the worse the market does, the more that they have to sell as a percentage just because it's down. That's interesting.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Between now and December, like who knows? Like, maybe we have a really happy Thanksgiving here. But I think there's going to be some interesting pressure from the calendar come December. That's really cool.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“For the year that these required minimum distributions are going to have a pretty substantial effect this December once again. And people, because they saw it happen so aggressively in 2018, probably will sidestep it even more aggressively, right? Like if you know something's going to happen, if you know somebody's going to sell every single day and you saw how dramatically it affected markets only four years ago, you might go hands off and taking risk until you get towards the end of the month.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“And on the other side of it, a lot of wealthy people that have 401ks, they take the minimum distribution. Do they need that money to live? Are they putting it in the bank account? No. Like they want to stay invested. They go buy some stocks. So you have both effects. Not only do you force the market lower from these distributions, but now people have cash and they're like, oh, shoot, like market's down a bunch. Like I have this cash. I want to go buy more stuff. And sure enough, they did. And from, you know, Christmas Eve through, you know, February. It was the opposite. We were up every single day as everybody was putting this capital back to work. But I do think simply because we have such a dramatic movement in both equities and fixed income.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“And then you had the rolling every single day. Another custodian would come to market, blast market. Next one, blast market. And that's why in December like 2018, you kind of had that orderly but down, you know, two to three percent every single day. And sure Paul didn't help things, but he's like, I'm taking things through the neutral rate, didn't convince anybody to jump on in there. That's also why in December 2018, you got to, you know, Christmas Eve. And then we took off because that was the end of it. Everybody was done with these forced distributions that were taking place throughout the month. We're done.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Sure, because that's like that's how I get sued. This is basically not doing it. So, the less good custodians from operational standpoint start early. The last ones go somewhat before Christmas because they don't want to do it the last week because liquidity gets junky, all that kind of stuff. But anyway, you create this waterfall event of forced liquidations, you know, call it between the mid first week of December and before, you know, Christmas, you're going to have a rolling custodial environment selling required minimum distributions. And the last time we saw this that had any material effect on markets was December 2018. December 2018, you had both fixed income sell-off and equities sell off, not dramatically, but they're both down, which again was increasing the percent of those portfolios.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“I know how much I have to liquidate. We're going to go ahead and liquidate and then distribute the cash. And then we're going to run checks. I want to be 100%.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“The important mechanics of it is when you have yours where both fixed income and equities fall, then the amount of the portfolio that has to be liquidated jumps pretty aggressively because it's a dollar amount that you actually have to liquidate combined with all the custodial environments will essentially force liquidate you before your end because it'd be basically a breach of fiduciary duty for you not to get the required minimum distribution And when do they use custodians force liquidate you? Well, they're going to do it close to year end. And we'll call it custodial world with less fantastic operations. They liquidate first. They liquidate starting, I think, like December 6th is like one of the first ones. And the reason why they do it December 6th and not December 31st is they want to have enough time to make sure they didn't screw it up.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“They don't have to sell 10%. Office $10, they have to sell $10. And so rather than liquidating 10% of their assets, they actually have to liquidate 12.5% of their assets. Like it starts feeling kind of meatier in terms of what you have to do. And again, most people don't really, really live off those retirement plans from like a month-to-month basis. They tend to receive the money one time throughout the year and then live, you know, then it goes to their bank account or they reinvest it if they have a lot of money.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So, where it becomes a problem on these types of years. Again, $100 is what you had, distribution 10%. You know you have to sell ten dollars. Not 10%, ten dollars. And your portfolio is probably if an 80-year-old, we'll call it 60, 40, 60% ag, 40% equity, something like those, I slightly de-risk. Both sides are down 20-ish percent irritated. So you don't have $100 anymore. You have $80. But they still have to sell $10.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Again, I got $100 on January 1st. I got $100. That means I have to sell $10 sometime in 2022. First off, most of people don't actually do it like on a monthly basis to survive. They kind of think markets go up. They stay in there. And then they get reminded at year end that, hey, you got to sell this or else like it's taxed, you know, all the way as income. And in fact, all the custodians, your fidelities and DVs and Goldman Sachs and all this kind of stuff, they will force liquidate to the minimum distribution because it's almost a breach of fiduciary duty to not do it. So they actually have the mechanics to do it.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“For the rich to pass things on to their kids so they force you to distribute money from those vehicles once you get to 72 half. And right out of the gate, it's about foreign change percent. But once you get into your 80s, it's almost 10% cram. All right. So you're like, here's a big pot of money that is a force seller every single year. Like that's not new this year. It's every single year. Yes, we're like older population and, you know, the older population tends to hold most of the wealth. So maybe it's increasing in terms of the amount of asset holders that are forced liquidators every single year. But like it's in every single year thing. So why is this year more interesting? What makes it more interesting is the liquidation amount is set essentially on January 1st of the year. So January 1st, 2022. So same 82 year old where I think it's about a 10% mandatory distribution every single year.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“You can be structurally bankrupt without going bankrupt. Like it'll eventually happen. Like if conditions don't change But, like, you can survive until that actual event. So that's a traditional credit markets causing massive liquidity, panic. We just, you know, the whole world refinanced two years ago at really low rates so that there's a little bit of a runway. That's all I'm trying to say on that side. What I think is interesting short term, I don't necessarily think it causes like extreme panic, but could definitely put pressure on asset prices is essentially retirement plans and the defined contribution space, again, 401ks, IRAs, you can't sit on that money forever. There's mandatory distributions once you get to retirement age. And again, government's constructed this because the point of them is to use them for retirement. They don't want them to only be saving vehicles.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Particularly by Bitcoin at the all time highs in Bitcoin, is that a sound fundamental strategy? Is that a recipe for financial success? No. But if you actually look at the execution, and I have, they issued convertible debt at very low things that not paid back until 2027. They issued bank debt that it was actually at fixed rates, not due until 2026. Only a small portion is actually floating rate. And their maturity is not, you know, they don't have to pay the money back until 2026. So not a MSTR buy recommendation by any means, but I'm just saying that it's just an example of how companies took advantage of the ridiculously easy monetary conditions of 2020-2021.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Just bringing us back to our duration point when companies issued low-term fixed rate debt that is not due until 2035, that is a very good protection against them because they don't have to go back to the trough. I mean, maybe some do because they're losing so much money, but. Good example of micro strategy, the company that put Bitcoin on its balance sheet is borrowing tons of money to buy Bitcoin.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“It's when they actually have to refinance the next time that's the problem. And the answer is because most of that refinancing, if you will, took place in 2020, 2021, like we got a little bit of time before they have to do it again. It's all there. It's a problem waiting to happen. Like if things aren't great in two years' time, like it will happen. True. And sorry, sorry. Tomorrow. Just bring it up.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Forever, like when those types of resets start happening or get close to happening, that's where you can get extreme stresses and credit markets. But again, that's probably a 2024, 2025 problem.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Well, two different. So phase two, if they were to ever happen, really need credit markets to break, right? That's always going to be the source of dramatic illiquidity in where leverage sits. We haven't really had much stress there yet. You know, we'll see if we actually start getting the rash of defaults, which then leads to forced unwinds and levered product in the credit space. Ultimately, I think that's probably like years out. Like now, like many, many, many years, but like 18, 24 months. Like if we keep having this pressure, then we'll start seeing defaults. And even like, you know, mortgages, right? Like people start getting resets. Hey, I really liked refinancing in 2020, but I chose the five-year arm because the rate was 2% rather than the 30-year fix because the rate was 3%. And I want to pick the 2% over. It's lower and rates stay.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“February, you know, and even the first week of March 2020. Same thing. Volatility did not expand. Like we were falling every day. We're moving a lot. It was not feeling very good out there, that phase one. Volatility on those, you know, one year out of the money S&P 500 budgets didn't move. Like even through that kind of traumatic event, then we hit the illiquidity point and it exploded. So it's the phase one, phase two concept is our expectation is for very benign, even potentially falling implied volatility in the phase one because of the market mechanics, but then phase two, you know, that's different.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Second leg is everything's breaking. All hell breaks loose. There's illiquidity everywhere. Of course, volatility is going to explode in that situation. So like, you know, the walkthrough, real terms, like December 2018, we were selling off 3% every single day, 20% drawdown, implied volatility on those options, like one year, like out of the money puts, fell over that month. And that's, again, it was orderly. Like we haven't gotten, we were still phase one. If January 2019, like we fell another 20%, Vaughl probably would have exploded. But that's not what happened. We recovered.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“There's an entire autocallable space in the structure product market that also has similar types of reaction just without going into autocallables because that's a too fun one. Essentially that they like the hedgers of autocallables own volatility to hedge their buck when things go from way out of the money to like closer to the money their risk becomes more market movement rather than volatility. So they switch their hedge from owning volatility to basically delta hedging risk. We'll leave it there. But again, they are become actually net sellers of volatility when the market moves. So that's why first move, there's no panic. We're just drifting lower. There's a lot of reaction function that actually creates people that sell volatility. So that's our expectation for first leg.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“And there's a lot of products in the vanilla space as a color, puts for collar, things along those lines, that that is a reaction function or it goes down. You go ahead and liquidate it to go buy something else. That puts pressure on it.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“A super simple example would be if you had a defined outcome ETF, you own the S&P 500 and you're selling a 10% out of the money call, whatever premium you collect, use that to buy a put, right? We'll call it 15% of the money you're doing this at one year time. Market falls 20%. What do people do with those define outcome ETFs? They probably sell them because you're like, oh, like I had it for this event. The events happened. Let's go ahead and go back to Sony S&P 500. I can buy it down a bunch, right? Like I don't have any exposure. I'm through my put strike. You know, that's not exactly like the price, but like that's how people think. And so if you're selling that evidence, what does that mean? You already long a put? Like, you got to sell the put. You're going to sell S&P, but you're probably buying SP on the other side. But the point is you're probably selling.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Liquidated as in sell those options. So it means the price of those options goes down, which means the inherent implied volatility of those options goes down. What's an example of an ETF or a structure that would own those things? Yeah.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Liquidate those options when the market falls. So if they're going to liquidate those options when the market falls, it's obviously going to put pressure on volatility to actually go down. Liquidators in selling.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“What's out there is essentially phase one of a drawdown. We actually expect volatility to fall. Now, what does that mean? I just told you there's a bajillion ways to find volatility. We're talking about something very specific. Our view of when I'm saying the word volatility for this conversation is longer dated, like somewhat media options. Like I put a number to it, say like next year, December 2023, like, you know, live what I have in my book, like, you know, 3,300 strike puts. So like out of the money, but not super extreme, like a year out, I expect the implied volatility on those specific options to fall in the first leg down. Now there's just tons of structured products, mutual fund type products, other ETF type world products that naturally”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Survive and keep their bucks. I think it's been pretty well publicized, but you're like, you know, banks in the US are incredibly overcapitalized. They have too much money. They can't lend it. They can't figure out what to do. If you look at the overnight window, it's trading below Fed funds, like they're way overcapitalized. So again, you have another natural person that during a panic becomes a buyer of all that terrorist type of protection just to survive. And they're way over capitalist states. So they're not a natural person. Even if the market were to crash another 20%, they're likely not there. They're totally fine. They're way overcapitalized. So your main two folks from a flows driven market that will participate because they need to probably don't need to. Like even if things keep on going poorly, so shifting nicely into like the phases. So our expectations, like as a firm from our, you know, experience and knowledge base.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Let me finish one thing on the previous point and I'll move on nicely. So the last one is the other place where panicky buyers of extreme tail risk stuff tend to come from are banks, right? Like banks have a bunch of leverage embedded in them and like one-way risk and like when everything goes wrong at once like they need to buy something to”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“If anything, they've probably been net sellers because simply you're like, I'm meant to have a market beta 0.7. I'm sitting at a 0.25. Do I want to buy equities and get it back to a 0.7 at some point in the future? Like, yeah. Like where, I don't know, like down another 20% from here. That means they're a natural participant to actually sell that volatility to other folks because I'm willing to take more risk if we ever get down there. So sure. So if anything, I would say that community has probably been net sellers. Net sellers of”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Nothing like I have 200% of edge now in all my positions, so I'm willing to pay whatever the price is essentially to maintain where I'm at. So like that's kind of like the behavioral side of why a vol guy would be like, hey guys, like these options are really expensive. And the manner says, I don't give a shit. Like the amount of edge I have in all my longs is so extreme. Like go ahead and buy whatever it is to make sure I survive to like see that come to fruition.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT