2021’s Vol moves, 2022’s outlook, Meme stocks, Option Flows and KAI with Cem Karsan

We’re kickstarting the 2022 season of The Derivative with fan favorite – Cem Karsan. In this episode, the FinTwit star better known as @jamcroissant and his calls on Gary and Gamma and Vol and Vanna, digs into the interesting 2021 Vol moves, what 2022 may look like in the vol space (not good…or good, depending on your positioning), how he actually trades flow and options in his Kai hedge fund, as well as a journey through all the things that make you go ‘hmm.’

Tune in as Cem also highlights the three trading strategies that make up his firm’s offerings,  a slightly different take on omicron, how he views the market’s movements as waves driven by flows, and more. Plus, as a bonus, you’ll find out how Cem got stuck in a Bolivian salt flat!?

Topics discussed in this episode include:

  • How COVID accelerated a lot of trends in our lives, including the acceleration of VOL and VOL products
  • Option volumes dwarfing the actual volume of the things that they are on top of and tracking
  • What it means to have two-sided skew
  • How to play Meme stocks, and more!

Find the full episode links for The Derivative below:


Additional resources discussed in this podcast:


Check out the complete Transcript from this weeks podcast below:


2021’s Vol moves, 2022’s outlook, Meme stocks, Option Flows and KAI with Cem Karsan



Jeff Malec  00:16

Wow!  Time flys.. This pods been around so long I remember doing them in person in the studio, but we all made it here in season three of the derivative. This is brought to you by our teams managed futures group. Managed futures had a comeback here last year when the spike in commodities and inflation top in our sands professional team of advisors helps investors better do the due diligence. Do the due on hundreds of professional managers in this space. Check out everything RCM does@www.rcms.com RCM alts.com. And while you’re there some intel to go with today’s path, focusing on volatility trading, check out our newly updated vix and volatility white paper, just click the Education tab then white papers. Okay, under the pod with Jim Carson, which was a gym, soon to do, they’re talking through some of the highlights from our perspective in 2021. What he sees in store for 2022 Not good. And how he trades Vaughn options in the game of flows. He’s become known for inside of his chi hedge fund. Send it Okay, welcome back, everyone. Happy New Year. We’re recording this a little before the new year, but you’ll listen to it in the new year. But we’re here with the one and only Jim croissant or Jim Carson is he’s better known. Welcome back, Jim.


Cem Karsan  01:36

Thanks for having me. Good to be back.

Jeff Malec  01:37

Yeah, and I think birthday wishes are an order. This will be at around the January 6, or seventh

Cem Karsan  01:44

January 7. Yep.

Jeff Malec  01:45

All right. Well, we had to ask how old you’re going to be.

Cem Karsan  01:49

Much like Yoda 100 years old,

Jeff Malec  01:53

somewhere in between 30 and 900.

Cem Karsan  01:56

Maybe it’ll be 45 flavor.

Jeff Malec  02:01

There you go. All right. So we’ve done the fold gem experience back at the beginning of last year, we’ll put links to that in the show notes talking through what vanna and charm and Gary and all that as well as your band as a market maker and more. So be sure to check that out. We’ll put it in the show notes, anything from those old pots that we didn’t cover in terms of your background or anything you want to touch on.

Cem Karsan  02:27

Now, I think most people know, you know how to market a company that was one of the biggest in the s&p 500 and kind of traveled traveled the world kind of Turkish American born in London kind of all over I think people are most of the story. But yeah, I think I think we covered it mostly. Yeah.

Jeff Malec  02:48

So here, our first part of the new year, I kind of want to do a 2021 review. And being who you are kind of focused on the vol space and what transpired there. So we’ll hit a few highlights and get to know your thoughts. And I want to dig into both what they were at the time when things were happening. And sort of what they are now after you’ve had time to reflect in the markets kind of shown what was actually going on. So I’ll just leave it open ended frame like you go ahead and start off kind of what you think are the three main I’m hesitant to say market moving events, but kind of the three things that made you go, Huh, which what was the name of that band back in the day crash test dummies? Isn’t it? Things that make you go hmm,


Cem Karsan  03:30

yeah, so I think you can’t talk about 2022 in the VA space without talking about kind of the meme of activity. GME, right, AMC kind of all the upside call squeezes, you know, mark it up vol up a lot of times these names. I think that kind of dovetails into just broadly, kind of the adoption of all buy retail, the access. And I think that’s probably the biggest story. And it’s a huge one in the vol space. Because a lot of people seem to think that’s a cyclical story, right? That’s going to go away after things reopen. And this is temporary. And we’ll get back to normal. Very much the camp that you know, COVID accelerated a lot of trends in our lives. I think one of the things that is very much accelerated is adoption about volleyvol products. I’ve spoken about this before, but I think there are superior products they allow you to not only like stocks and bonds, but up and down but really allow you to bet on the whole distribution. I think people have woken up to this in a sense. They’re powerful ways to bet on convexity. And I think we’ll get to this later but I think you know, we’re getting into a time when things are a bit more you know, tail heavy as I’ve talked about, and in that type of environment options are also more adept at you know, now navigating those types of scenarios. So, I do think that people have educated themselves a ton of all space. So you know, we’ve been involved in that as a view. And I think that adoption in education will carry over to more and more kind of usage of these products into the future. So we’ve seen a secular trend for some time, but it’s really accelerated. And I think you’re gonna see more that kind of, until there’s, you know, more regulation more whatever we’ll see if it when that happens, or what it takes. But in the meantime, I expect to see a different kind of markets isn’t your grandma grandpa’s market, I think we will see more squeezes, I don’t think GME and AMC will look back at those as anomalies as much as kind of how the market seems to function now that that vol products are much more involved. So that’s one. You know, like I said, that dovetails into kind of what we’ve been seeing recently, which is another big trend, an important thing that’s gone on in 2022, is that markets have become much more tail heavy, Vala Vol has increased dramatically. You know, we’ve seen that very recently, I talked about this kind of pretty openly about how it’s become a lepto, kurtik market, you have a lot more kind of tail events, and things move a lot more quickly. There’s just a lot more leverage in the system.



Jeff Malec  06:19

So you mentioned that the pandemics accelerated everything, including options trading, but those seem like two different stories, right? Like the move to online shopping the move to all that that makes sense of why that accelerated? But do you think we were gonna get here anyway, in the next 10 years in terms of adoption of options, and it’s it’s less like a technological thing, in my opinion, but more of just a people’s brains are advancing to get that. Right, they want more and more and more, they want the full suite. So I don’t know just popped in my head. Have you think about this? Yeah, I


Cem Karsan  06:51

mean, I would put it in the I guess it analogy, I would say, work from home as accelerated. Right? Why, like that was a trend that was happening, it probably would have played out over the course the next decade. But there was a excuse for people to work from home. And now people realize that this should have been how it is all along. And now, you know, it’s become a thing. Right? And that’s not going away. Right? I think it’s the same thing with vault basically, you know, I think people were adopting it people is a superior product, more flexible, there’s more access now. And people being at home, having more time, managing their portfolios, also having more disposable income right there, the fiscal policy we’ve talked about is lined a lot of people’s pockets and allowed them to kind of speculate a lot of millennials on down have had less disposable income until recently, like, I think that’s a big part of the desire to catch up and, and do things that are more kind of convex. And we’ve seen that whether it’s in crypto or in volatility products. And so I think, you know, this, this kind of being at home, the access really accelerated a trend that was already in place. And again, now that people are getting educated, there’s these network effects, there’s more volume, there’s more participation, there’s more access, I think, you know, it’s here to stay. And if anything, it’s going to continue to accelerate. You know, I think it’s, I’ve tried to talk about this before, and I’m on the fringe on this one, but I do think it will eventually become the underlying, you know, product.


Jeff Malec  08:18

And let’s dive into it. So you’re saying that options, volume will dwarf the actual volume of the things that they are on top of that they’re tracking.


Cem Karsan  08:27

Sounds crazy. notionally, we’re already there. We’ve already had notional volumes higher than equity volumes themselves, throughout this year. I personally think, again, it’s not even close, you know, in terms of these products, being superior to betting, on underlying outcomes. If you look at, you know, what’s happening ultimately, on the on the, you know, on the effects of the market, there’s a much more time element, right? When you want to bet on things, how you went about that? What percentage out of the money, what tails, you want to bet on? What part of the distribution and, you know, as, as a market, we’ve gotten so factor, everything’s financialized there’s a factor ETF for everything. There’s a, you know, automation for everything yet, we are still betting on up and down, we’re still playing in two dimensions. And for me, it’s the adoption is already happening, people are waking up to this, and I think it’s just a function of time education, and, you know, participation. So yeah, I do think it is, you know, it is the full picture underneath the summary, which is the asset itself, in terms of financial asset, and eventually I think that’s where things are heading.


Jeff Malec  09:39

That’s great. And do you think, um, knowing what you know, now versus when, when there was Gamestop that was last January, right? Was it ended? So, right at the time we talked about, that’s the citadels of the world, the market makers, the gamma play the dealer flow. Have you since you know, there was a couple pages First that came out that kind of talked around that have you sensed that confirmed what you thought? Or is it a little different than you thought? Not as simple?


Cem Karsan  10:07

Well, I mean, if you look at the congressional panel, like the that kind of looked over it, they basically claim that gamma had nothing to do with it. Yeah, it was want to go ahead and disagree with that. Obviously, their analysis is a little kind of looking through a keyhole. I don’t think, you know, Congress fully understands how these things work. But, you know, that said, your original question that would have expected it or and, you know, I think we, there’s so much leverage in the system, this will go to that kind of that lepto kurtik. Environment comment I kind of I’ve talked about, you know, the Fed has been the only solution up until the last two years to, to solve the economic issues. So the Fed has been the only reaction function to the economy. And they essentially have one mandate, which is to use monetary policy to control price inflation and maximum employment, but one tool, and that tool is just more cap money to capital, more leverage. And ultimately, there’s so much leverage now, after 40 years of pushing money into the system, that now that inflation is a potential problem. You know, how do you how do you resolve that? Right, you have a you have a lot of money in the markets, a lot of speculation. And now individuals have that access to via fiscal policy. So it’s a very dynamic, you know, I guess, explosive environment. There’s, I think we saw it in Feb March of 2020, I think we’re gonna see more of that doesn’t mean, you know, that the world is ending, we’re just going to see a much more kind of fat tailed market going forward. And I think that will change how people position.


Jeff Malec  11:55

And I think that’d be on both sides.


Cem Karsan  11:58

I do, I think we’ll probably see a right tail before we see a light left tail. And, and, you know, ultimately, I think we both know, since the beginning of time, you know, kings have been shaving coins. Right, the inflationary response is the easier path out from these valuations. You know, I’ve talked about this before, and we can talk about macro more, but 68 to 82. You know, the period right before monetary policy was everything, you know, before supply side economics was driving the economy, you know, we had significant inflation. And, you know, I think the market, you know, will go nowhere for the next decade or so, after the next blow off. But ultimately will lose 70% of its value in inflation adjusted terms. That’s generally how this works. Nominally, you know, the markets don’t go anywhere people can live with it. They don’t, they’re not happy. But the inflation to help us monetizing growth, wealth is kind of monetized kind of where we are in the leverage in the system.


Jeff Malec  13:07

Talk a little bit about some of the underlying factors there. So there’s this meme stop movement, there’s the gamma play. And that’s what is that one of the derivatives that we’ve saw call volume way up with a call skew became a thing, right? We’ve seen a lot of days stocks up follow up. So talk through a little bit that as a vol trader, like what’s, what’s the downs are not necessarily the downside, but what’s made it hard. What’s different, given this new, new kind of regime where you have on the upside on the call set?


Cem Karsan  13:38

Well, it’s things one, we’re used to in the equity space for 95% of the time, skew being to the downside, right. And now in a lot of these products, you have two sided skew. So that’s a challenge for those that aren’t flexible, or understanding kind of positioning in the marketplace. It is a huge opportunity. I mean, it’s been an opportunity for us, you know, for the first time where it really seeing big enough call volumes and call buying to create two sided flow. Meaning, you know, in some names, you’ll have Vanya and charm flows, which I talked so much about, right, as short. And, and, and the index is you’re still seeing them long and this awkward, this creates a way to kind of get out of to, you know, to different parts of the market. Right and trade them on a rotational basis. I think we saw another, I think it speaks to the amount of rotation we’ve seen this year. I think we’ve seen a dramatic amount of kind of underlying dispersion in the market. I think we’re going to continue to see that because of these dramatic flows in different parts of the market that are very leveraged, you know, in the option space. So I think that’s, that’s been an opportunity. I also think, you know, it’s been an opportunity in the sense that it allows for relative valuation positioning across the market in ways that that you wouldn’t have seen before, that would have been much more monochromatic, right, much, much less kind of dynamic opportunities. So, as a vol trader, I think it’s a, it’s a signal rich environment. It’s a, you know, great footvol arbitrage, as well, you know, reminds me a lot of 9899 2000 on steroids, right. And that’s a good thing. That’s a good thing. We’re, you know, I think we’re amidst a big boom in the vol space and lots of lots of different ways.


Jeff Malec  15:32

And explain what two sided skew means for a second, if you could, for the listeners. Yeah,


Cem Karsan  15:37

yeah. So skew. In the option space, we’re talking about implied volatility skew. So every strike has implied vol. Right. Skew generally refers to how the downside options in the market are this equity versus the upside. Generally, because the world has long stock, they, the markets, take the elevator down and the escalator up, right. And people also hedge to the downside. So that creates a higher implied vol to the downside and skew to the downside. Now, higher,


Jeff Malec  16:08

higher price, essentially, we’re saying like those options are priced higher than they technically should be. Because there’s more demand for it.


Cem Karsan  16:15

Correct? Correct. Both on a Realized basis, and implied basis, they’re higher, you know, markets do move faster, historically, to the downside, broadly. But as we, as you mentioned, and as we’ve seen, that’s, you know, certain names that’s starting to do the opposite. reflexively, all the call buying is leading to, you know, convex moves to the upside. You know, so that’s, we’ve seen two sided skewed, so in some products, that the upside are more expensive than the downside, you know, and that that’s always been the case and commodities or interest rate derivatives are several other products, but in equities that’s, that’s a relatively new phenomenon. And, and fairly rare, and it’s been much more consistently happening in certain names as we know.


Jeff Malec  17:02

So that was number one, the Meme Meme stack. I had a listener wrote, and he’s like, I said, meme. I don’t know what I was calling it, but he’s like, it’s meme. It rhymes with beam. Like, okay, mean. So number one, the meme stack. Revolution. What cut? What he what’s next? 2020?


Cem Karsan  17:23

Yeah, so 21, Vol, Vol, Vol, boom.


Jeff Malec  17:26

All right, I keep saying 2020 2021. Right.


Cem Karsan  17:30

So well. You live in the past man. Yeah, I bought a volleyvol boom. You know, again, I talked about the leptokurtic distribution. But you know, you’re really starting to see the skew and convexity in the market, not just on a Realized base. But on implied vol basis. Again, I’m kind of repeating myself a little bit here. But I think it’s important thing going forward as well. It’s a significant change in markets. And I think it is going to change kind of the next couple years, we’re going to be talking more and more about this. And real


Jeff Malec  17:59

quick, lepto kurtik is taller heads, fatter tails,


Cem Karsan  18:03

that’s right, that’s fine. So when we get when we get those moves, they’re much more frequent and fatter, more likely, you know, big events that are unexpected. So those, those lepto, you know, those of those those types of things are happening primarily as a function of, like I said, the leverage in the market, but also, because you have these, you know, different participants in the market, you know, doing unique things, you have more participation broadly in the in the, in the vol space, which is also affecting these outcomes, like we talked about with the mean names. So you have a kind of a wild west kind of market with a lot of leverage a lot of money. And it’s, it’s creating really outlier outcomes and markets are moving in unique ways relative to history. You know, I think that’s an important point. And that’s why you’re seeing implied, you know, vol vol, going significantly higher, because realistically, that’s markets have changed the distribution under which they they move recently, and again, until we kind of have a period of de leveraging in some way. You know, I think we’re likely to see more of this, you know, it’s a fragile market underneath the, you know, underneath the hood, and I think people need to be aware of that.





Jeff Malec  19:24

And what, so that’s that vol of vols look like, like, what are some of the stats that you’ve seen there?


Cem Karsan  19:30

I don’t have the stats in front of me, but you know, it was a I think 115 I think, you know, just recently on December 2, I mean, you might have some of the stats for you actually.


Jeff Malec  19:44

In generally volleyvol is how vol itself is moving right? The volatility of the VIX will use as a proxy. That’s right. Yeah. So I do have some of those stats right on that day after Thanksgiving in the next two days, right the the ETF the VX X was up 27%, Down 16% Up 15 and a half percent. So that vol on those types of move is through the roof. That’s what we’re saying.


Cem Karsan  20:10

That’s absolutely right. And the pricing of it as well. I mean, it’s, it’s, you know, an interesting point here, which would probably be my third kind of vol comment which kind of dovetails into this is if you look at realize vol this year, it’s very similar to 2019 the actual daily realize vol as has been about a 19 You know, vol, you know, on a daily basis, get the median VIX, right has been trading at 26, as opposed to kind of at 19. Back in 2019. So you have a you have a situation where, you know, the the vol risk premium has been dramatic. And for vol sellers broadly, that’s been very profitable this year. And the broad argument is, you listen to the Goldman Sachs’s of the world, and the research is that, you know, this is Oh, post 2020 This is you know, that’s when you want to sell insurance, right after a big event. And it’s likely to remain high for a while, you know, go monetize that vol. And I, I would just say on a risk adjusted basis, however, it doesn’t look as good, right, because when you start looking at the vol, a vol and how quickly some of these vol events are playing out, and the risk underneath, even though those mean, kind of realized vols are relatively low, the distribution of outcomes are different. So we’re you know, and so the risk of selling vols, actually, you know, much higher, and even on a tail,


Jeff Malec  21:44

even in the, even in 2021, you’re not just saying over 10 years, you’re saying in 21, even that Volvo made it a


Cem Karsan  21:51

I’m saying in 2021, that vol has been significantly higher. And even though the VRP has been high, as long as you’re willing to kind of hold close your eyes, kind of monetize, you’ll do fine. But there’s been a lot of tail kind of moves in implied volatility, as well as tell moves on a Realized basis that need to, you know, you know, on a day to day basis, that that have really caught, you know, been on a risk adjusted basis a problem for traders. So, I think, you know, again, I think this, again, the tails are gonna continue to be a problem that said, I think the middle of that distribution is going to continue to stay high relative to, you know, what the realize will be. So, you know, that has a lot of knock on effects for positioning and, you know, opportunity set.




Jeff Malec  22:39

And is it too simple just to think, then I’ll just sell that middle part and buy cheap wings, right? What’s wrong with that simplistic attack? Approach?


Cem Karsan  22:50

Yeah. Unfortunately, you know, it’s a matter of getting that part of the wing. Right? Right, what part of the wing is going to happen, and when timing is everything, you know, there are structures, which I won’t go into intimate detail in here. But that ultimately, you know, will allow you to kind of benefit from when you get that move, without being long skew is already high, right? If the implied volleyvol is also trading high SKU is high. So they’ll allow you to take advantage of that while still getting tail, you know, exposure and selling yet. So we you know, there are these W type trades, right, you know, that do very, very well in this environment. And those particular have been, you know, again, are being the distribution of


Jeff Malec  23:36

the Sombrero or the Batman or the there’s a lot of fun names for that. Yeah. And have you seen, are you you’re saying gold man, everyone’s out like this is the time have you seen massive institutional flow into short vol or is there a worry is there you know, it’s seems like to me outside looking in, it’s not back to the pre vix mageddon 2018 levels?


Cem Karsan  24:01

No, I mean, we’ve talked about this before, I think, you know, there’s always this kind of this reality of, you know, August 15 Yuan devaluation people got blown out, right. 16, kind of, you know, much less of a vol response, right, in markets and this year, you know, the skew being high and volleyvol being high, even though we’ve had daily big kind of crazy moves, has, has drawn a short term floor, right under some of these downside moves in particular. So, you know, I think, you know, if you, if you asked me, I think, you know, that’s we’re getting to a point where that’s going to resolve itself in the next six months to a year, just like that. 16 ultimately led to, you know, in 2017, vol control And leading to, you know, 18x IV blow out there, you know, X IV blowout that leading to kind of the vol compression of the late 18, which eventually led to 20, march 2020. I think there’s another one coming here probably in the next year, after people start selling vol a little more aggressively. But yeah, so at this point, people have been kind of able to come out and, you know, sell vol. And, and, you know, the hedging has, has been enough so that the skew is


Jeff Malec  25:32

right, but we do enough pods talking about implied 26 and realize 19, there’s going to people like, huh, let’s capture that. So a few more the ones that I’ve seen, we’ll just go through quickly like these, the proxy hedges, as I like to call them, right. Some people think, hey, this skews too high, that puts us to I, I’m going to own bonds instead, or I’m going to own gold instead, right? Positive carry hedge? Like, what are your thoughts on generally why you don’t do that and your strategies, but in specific, you know, why that didn’t work this year?




Cem Karsan  26:09

Yeah. So Well, this year, outside the equity space has been very interesting, right? There had a lot of, you know, whether it’s point 72, or, you know, you know, a bunch of other names that we as anyone who have completely shut down vol trading in, in, like interest rate derivatives, for example, Euro dollars, had a ton of risk, especially here late in the year, you know, starting in September, on out. Also, you know, like I talked about distribution, like the, you know, has been throughout the, throughout the equity space, even you’ve had growth versus value kind of really bought and heard a lot of long, short managers. So, there been a lot of unique under opportunities under the hood. That said, on the index level, right. And broadly, you know, it’s been a bit more placid an opportunity to sell. So I, you know, the more traditional kind of hedges? I don’t think I’ve worked, because, you know, the reality is, those names, you know, those approaches are, are kind of where the positioning is, and where that positioning is reflects the week doesn’t work. Right. You know, I think we’re going to continue to see, you know, again, in the index as people are hedged, right, so you’re gonna continue to see a situation where the indexes is not where the hedge works. And the short term, same with a lot of those other kinds of approaches.


Jeff Malec  27:41

And you’re saying even that’s in the s&p itself like that, it’s so explain that Omar, you’re saying in the index, you’re saying in the s&p itself?


Cem Karsan  27:51

The Hey, yeah, so I think, Yes, correct. If you think about it, you know, the world is leveraged long assets. You know, everything is priced to perfection, and people are hedging that on their tail, you know, essentially buying index small, right? It’s cheaper, it’s more statistical, like they’re looking, they’re looking at hedging a broad market downturn. And, broadly, what that does is that makes it so that the indexes is not where the vol events are, ultimately, kind of occurring doesn’t mean markets won’t go down. It just they’ll go down slowly, right. And more methodically, when they do and they’re generally supported. Whereas you could still see that kind of massive move, like we have since February, right under the hood, you know, a lot of stock a lot of growth names top to February, right. And you have a massive rotation that’s happening where there’s real stress under the hood. I think we’ll get to it probably later in the show, like the predictions, but you know, I think this holiday season is very important into January. You know, I’ve talked about this and other venues, but I think we’re really seeing real underlying stress in this market. It’s something that people don’t talk that much about, and by the time this comes out, we’ll have already probably know what happened during this period. But um, you know, but the reality is, there’s been real throughout October, November December has been real underlying stress underneath the hood, but the indexes attended held up the market. And


Jeff Malec  29:25

sorry, just you’re saying that’s like a structural Hey, Joe sixpack, I’ve got $2 million in equities. I’ve got all this downside tail protection on the s&p so when markets start selling off I don’t panic because I have the hedges in place. So I don’t panic sell and drive further selling.




Cem Karsan  29:43

That’s the yeah reflect reflexivity is everything in a market that’s based on liquidity. And ultimately, who has what and who has to sell when and this is why markets kind of try and find the biggest pain point for everybody. Right? You know, if you’ve been in these markets for a while, you know where the most painful trade is where the market will generally go for the, for the whole. And my view is that the most painful trade for this market is a continued unwind of kind of growth names and, and, and, and the over kind of the loved hedge fund names, right. Whereas kind of hedges broadly don’t perform well, and particularly the indexes, right? You have to be in kind of in those single name places. And, and so the vol has been well supplied, broadly, in the indexes, they’re there, people are hedged. They’re, broadly you have the flexibility and charm effects to that are supportive skew is already high. And all of that leads to a difficult kind of, you know, the indexes are more pinned, when they do go down, the skew and vol does not perform. And ultimately, that is, that’s a pain point. That’s a situation where people are losing on two sides of the coin. You know, we’ve definitely seen that lately. And I think we’re gonna see that for a while. But again, that’s kind of a lynchpin, where you have to be aware of was once that it’s linchpin kind of gets pulled out to what, what does that mean, do we eventually have a first kind of 10% plus correction, and as market since that, that bottom in 2020. And so I was saying, we’ll get to this later in the show, I’m sure. But, but that, that, you know, this period, which should be very bullish, you know, there’s November, December, January, period, which hasn’t really been yet again, we have a couple of weeks left under the hood here, if we can, we can get that beginning of that, that melt up. Here, that’s very, very, you know, what you what you hope for and expect during this time, but if we don’t generally get to a more dangerous time for volatility markets and, and less support and, and we could see some interesting action in the new year.


Jeff Malec  31:58

Got it? And I’ll end with one more 21 You were a bunch of your tweets were around Icahn, what was he doing? Selling a bunch of points, buying a bunch of points?


Cem Karsan  32:09

But, uh, yeah, there’s a, there’s a couple of big players that I’ve kind of, you know, introduced more broadly. Icahn has been one of them, you know, he’s been trading for 30 years, in the vol space. You know, as long as I’ve been here, you know, he’s come in at opportune times and, and sold out of the money puts in the indexes. He doesn’t on the many side. So on the futures, you know, he has a certain footprint.


Jeff Malec  32:34

And so right, so you don’t necessarily know it was him? But you know, it was him?


Cem Karsan  32:41

It’s yeah, yeah. It’s, it’s like, it’s quite clear. Yeah. But the point is not who it is really, just as much as this guy is a consistent player. That doesn’t, that’s very good. Yeah, people who know also see it as a signal. So it as a reflect, you know, what reflexive effect, right, a cascade effect to it as well. But it also comes in and provides downside support in the market in the vol space, generally. When there’s stress, which allows the market to kind of be satiated, kind of brings down that skew. And again, can take that start that bond charm cycle back when Bond does pop. So those are generally very good moments when that when he comes in.


Jeff Malec  33:24

Usually the dealers are selling there to the right, people are buying the protection on the way down, and he’s coming in, and now the dealers have to buy the market.


Cem Karsan  33:32

Yeah, yes. He’s balancing the market right on and now and that, that then affects kind of the supply back the other way, right. It’s also ultimately a pin, right brings the vol down, makes it less stressful, they when the vol has come up, the amount of move that needs to happen after that move, increases right for for the move to continue for vol and play vol not to come down. And when you provide that vol to the market, it helps slow down the market itself, ultimately tends to make that implied log, come down and starts that rotation back where that those bottom, bottom flows, come back in and then can be supportive again.


Jeff Malec  34:13

What time was that? When did we see that come in? And come in a couple?


Cem Karsan  34:17

Yeah, he’s come in a couple of times. Most recently. He came in in November. And he sold the December 3800 puts that were about a month out. You know, he sold them about 20,000 times 30,000 times. Again, it’s not an overwhelmingly big trade. It’s just the timing of it when he doesn’t tend to be very good. And it tends to also be at a moment when volume is high enough. And you know that supply reflexively also helps, you know begin a loop of of support. Now it hasn’t always been on the exact bottom of the markets but in terms of selling vol it’s been very good timing. And eventually he’s been right every Every time so yeah, he’s, uh, he’s a good one to look at. You know, there’s a lot of other big big trades out there, you know that, that have had a major effect that we’ve kind of introduced the importance of, too, you know, on social media,


Jeff Malec  35:16

let’s talk about the other one that was news there and 21, which was the big JPMorgan edge equity, that’s eight 18 billion, I can’t remember what it is now. But 18 million 18 billion markets were down, everyone was like, they’re gonna have to roll this. These strikes. I can’t remember what the number was. But then they did a little game theory, right. And they just did a spread around that and didn’t come into that actual strike.


Cem Karsan  35:41

So no, they didn’t come in. They didn’t come in Jeff. Yeah, no, they actually ended up having to. So they always come in, it’s in their perspective, they have to


Jeff Malec  35:50

Yeah, I’m synthetic that arrived at the same place. But they didn’t come in at the exact strike. But I looked at it.


Cem Karsan  35:57

No, they did it. But they, what they started doing is they will trade it early in the day. And then by the end of the day, they rebalance it to the strikes that are accurately on day, and we had a big move back in September on the trade day. So they traded it, and then they had to re balance the whole trade, you know, 55 points, you know, at the end of the day, so that maybe that’s, maybe that’s the thing you’re referring to. But no, it’s a is I have to go look again, but I think it’s is it 10 Delta, the 40 Delta, I forget what the put spread is, I’m actually forgetting what the delta is. But it’s or it’s a percent sorry, it’s the, the 5% to I believe, 20% out of the money put spread that they have to buy, and then whatever that premium is, they have to they go sell a call, that’s equal to that premium. So the whole package is $0. Right, as a hedge, but, you know, because of the, the markets front running this and prepared for it now, broadly, that call is coming closer and closer. It’s almost at the money when they trade it now. Oh, yeah. And on top of that, you know, the the trades gotten bigger. So it’s a bigger, you know, it’s it’s now 15 to $20 billion, have a trade that happens kind of all of a sudden, which has a bigger effect on the market. I think the important thing to talk about here, which I haven’t talked about as much and has those other meetings, full effect poured a note this is coming up, you know, in a week, right? They’re gonna trade be trading this on December 31.


Jeff Malec  37:39

Liquid week, in a very illiquid week at the end of the year.


Cem Karsan  37:41

Right. Definitely important to note, and I think you’ve been seeing a lot of vol compression. In preparation for that as well. Mind you, I think this last little blip up here. And the support we’ve seen in our kind of expectations of this, this rally here have partially had to do with this not exclusively, but does have it does play a role here into the end of the year as well. But important thing that I haven’t talked about as much, which I think is very important about this trade is I think it showcases how illiquid markets are and it ties in this lepto kurtik thing I’m talking about not only is there tons of leverage, but the liquidity has dramatically come down in the market. The size of the market, the US domestic equity market is $50 trillion. Right? The US that’s the US International, it’s closer to 100 trillion, right? Total global long assets, including, you know, commodities, real estate, etc. 450 $500 trillion. Okay, these are long math. Right now, little of this is trading on a day to day basis, right? If you think about the fact that an $18 billion trade in the context of a $50 trillion market important $5 trillion long acids is having a sizable and meaningful at all effect on market that speaks to how little liquidity there really is in the market and how little it takes again, we’re talking about the Carl Icahn trade, it’s a 20,000 we’re talking about billions of dollars in the context of a, you know, a market goes up, the market goes up 1% and a 50 trillion. That’s $500 billion. Yeah. Right. So like, you know, it’s fascinating to when you start thinking about how little it takes to actually kind of move this massive market and the value of everything. And so I think that’s important when we’re talking about this lepto credit market, and how much leverage there isn’t a system yet how little liquidity there actually is. I think the two things combined really add up to an important picture that I think people don’t fully appreciate. So yeah.




Jeff Malec  39:51

How do you square that with like options volume at record highs and, and all this interest in derivatives we talked about in the beginning, but then not coming through to the actual liquidity when it’s needed, right? Those seem counterintuitive, though it seemed cross with one another.


Cem Karsan  40:05

Yeah, I think majority of the people who are speculating or placing directional bets, right? Not the majority of the liquidity, you know, real liquidity, if you look at it, I think it’s about $700 billion a day change hands and markets, right? That’s kind of the average volume. You know, if you take half of that, because it’s two sides, 350 billion, right. But like, most of that is just people, you know, high frequency trading, kind of, you know, in and out, kind of scalping and, and the reality is the actual pushing of markets, the actual kind of thrust of okay, I’m actually a buyer or I’m a seller is really that, you know, $50 billion type number in a day, if not lower. And so when it comes to options, you know, people are able to exert given how low that liquidity is that much more emotional leverage and pressure in a very illiquid market. And I think that’s what we saw on GameStop, and MC and right and how we’re seeing in Tesla, right, like, you know, that we’ve seen in Tesla for some time, it’s just these markets are very illiquid, compared to the amount of notional leverage embedded in these products.


Jeff Malec  41:20

It’s another way to say that just there’s no longer the big banks, the big players that are willing to step in and take a directional risk, like they’re in there playing but as you said, very short timeframes, very defined risk models, they know that they want to get out of the market, and they’re just going to take that on and nothing else. When perhaps 1520 years ago, there was a trader who’s like, Oh, I love this, I’m going to take this risk. And the departments weren’t aligned, and they were going to let him take some big risk and perhaps blow out the bank. Right. Yeah,


Cem Karsan  41:49

that was definitely, you know, that’s the probably the biggest factor, right. That said, I think it’d be silly, like, like, it was always incredibly liquid too, right? I think there’s always been a dearth of, you know, a lack of liquidity to some extent. I mean, I remember 20, some years ago, being in the pit and taking down a big order and, and sending my futures into the market, right, and moving the market by 20 basis points, right. Like that was like it. Exactly. That’s I mean, is the fact that, you know, trades like that can have that kind of effect, I think, you know, it’s always been probably liquid, but more illiquid than ever, especially given that leverage, you know, bigger issue than ever.


Jeff Malec  42:35

I’ve told that story in the pod Before, we used to trade this trend following system called a aberration, I think. And right, it was sold commercially through like, technical analysis of stocks and commodities magazine and stuff like that. So when it had an order in palladium, and it would rate you’d get the end of day prices, it would generate an order, it broke through the high in palladium. Palladium was like limit up the next day, right. And it’s just from probably like a couple 100 people across the world that bought this system. And we’re running it on their TradeStation or whatnot, and put in an order to buy to palladium. But all of a sudden, you right, you have 600 light coming in overnight, or first thing on the open and on in a thinly traded market and boom. Let’s move on you’re, you change the name of your company. Since last we talk, now known as chi advisors, and offering a bunch of different a bunch seems wrong but offering multiple different programs. So tell us about the new name. And in the new programs. Let’s start with the name.


Cem Karsan  43:38

Yeah, so Kai means ocean in Hawaiian. It’s also my son’s name. Not to leave my daughter out of it. Her initials are my a k. So they’re, they’re, you know, they’re, they’re both equally represented there. But yeah, that works out. So the but the, the reality is, you know, we had a big institutional client as a long vol, you know, player, primarily significant one through 2020, as you’re supposed to do with long vol, you know, they monetize that position and July of 2020, after a big return for us, in the, you know, March to April 2020. Period. And


Jeff Malec  44:20

we shouldn’t have been so good


Cem Karsan  44:22

with love All right, yeah. When you make money other people redeem but that’s your the Exactly. So, but the, you know, part of that now, we have the ability to kind of launch several other, you know, both the open capacity launch our vol neutral product, which we had traded prior to the public, as well as launch our dealer flow strategy, which we’ve talked so much about kind of social media and even with you about kind of taking advantage of this dealer positioning, right and taking net position, so much less of a vol arbitrage approach and a much more directional market timing approach based on understanding the underlying position. In the volatility market, so a new approach that we use the background of our vol our products for some time, that we were able to spin out as a separate, much more dynamic strategy. And we’ve had great success with that, since launching that in 2020. And that’s kind of launching these new products publicly, you know, instead of having kind of major manage accounts for institutions was kind of the pivot that really kind of led to the new name and kind of kind of the new branding and oceans, right, you know, these are their waves of, you know, bought flow. And these, you know, obviously, that’s kind of where that was, you know, what the name is alluding to, and what’s important.


Jeff Malec  45:37

So the show there’s three main programs now, the long vol, which you’ve run for years and years and years, Vol, neutral, and dealer fun. So let’s correct Yeah, let’s just spend a little time on each so long vol, same thing or else has been doing your what what’s going on under the hood there.


Cem Karsan  45:56

So all so the vol neutral, to be clear was our first product when I left market making I actually you know, typical for a market maker to kind of trade vol neutral, right to really arbitrage by definition is taking nets, your net positioning to zero, right and try to extract the yield. So our first strategy was actually vol neutral. You know, for our big institutional client came in, they wanted long vol, we, we gave them long, it would create an alarm vol product for them and eventually end up being our long vol product. So the vol neutral is really bringing back a product we, which is absolute return vol arbitrage that we originally had new improved however, it because with that long vol, we also added this dealer flow, you know, strategy underneath the hood for market timing, you know, as a predictive piece, and that’s really been put into both vol arm strategies as well. So the long vol not only has does a relative value, what’s high, what’s low and domestic equity, you know, volatility, but it also does a what’s the most likely outcome given dealer positioning under the hood now, you know, construct a delta, you know, vol, you know, that an antic you know, positioning that you want both for long vol or vol neutral, depending on the strategy. So those two, use the same two engines, right, that that relative value market maker framework, and that, you know, that predictive dealer flow, you know, distributions of outcomes, both for underlying markets, and volatility surfaces. So, those two engines, then we construct a portfolio with to get kind of optimal positioning,


Jeff Malec  47:31

and then the long vowel pays. So that’ll be short Deltas, or just long vol, it’s just


Cem Karsan  47:39

long, long, Delta neutral at baseline, but it has embedded convexity. So all scenarios have to have a certain amount of embedded convexity, you know, it, the, I think the key part there, when you think about it, is, you know, a lot of long vol tail funds are essentially, you know, have a lot of burn to them, like the long they’re, you know, you’re talking about a situation where, one in two years, they may get that, you know, 100% TYPE 150% TYPE return, we’re really like, not a universe, so, or a tail fund strategy, we are really winning 25 to 30% of the time, right, and, and have a positive expectancy over the long haul. And that’s what we’ve done, at least in our history. And so, you know, our view is, it’s really insurance for credit, which is a pretty rare kind of thing to get into portfolio. So that’s, you know, get a different approach. But, you know, you want to have your capital there for the time that the big vol event happens, right. And our strategy really does allow for that to be the case, again, not not looking at, you know, 150 200% type returns when it happens, looking for convex returns, but, but still not that, you know, that kind of a tail product, but


Jeff Malec  48:52

then the flip side is that you’re not using the whole account buying premium either, right? That’s correct. Which is usually how you get those 200% returns. And then so right then the vol neutral is actually Delta neutral as well. But is that actually vol neutral? It’s got


Cem Karsan  49:07

it is it’s vol neutral, it’s skew neutral, it’s normal neutral, it is, you know, has long, it always minimum linear convexity on all, you know, on all scenarios, so it’s really trying to strive much like a market maker would for net neutrality. Now, that doesn’t mean it doesn’t have some gross exposure, right? You know, what tends to happen when you limit the net exposure on a relative value strategies, your gross exposure goes up. So it has, has a bit more gross exposure, as you’d expect from a vol arm strategy, but very non correlated,


Jeff Malec  49:41

long term capital management rings in people’s heads when you say that, but uh, right.



Cem Karsan  49:45

So I think the key here is it’s always long units, always long convexity, it really is, you know, not only does it have Max risk constraints, it has, you know, N bar Max, you know, a VAR constraint that’s fairly conservative. But I think the important part here is these strategies, if done, right, are one of those few strategies that are that are you can have your cake and eat it too, in the sense that it’s an absolute return strategy that has a nice long term, you know, historic pause, return, but it does very well in a bearish market. And secondly, there’s market you have that’s when market makers do well, that’s when vol arm strategies do well, because there’s the relative value spreads blow up. So a mid February to mid March 2020. It’s not going to make a lot of money on the crash, right. But late March through April, you know, much like our strategy, it’s going to do very, very well after kind of that event, or as you’re going through a secular downturn like, Oh, 70809, right, those types of periods, lead to very positive returns and involve relative value trading, if you have a good mousetrap. You know, what to do, obviously, as market wins,


Jeff Malec  50:52

yeah, without giving away too much the secret sauce help us understand what that looks like. So you’re selling what you believe is overpriced, implied vol. and buying what you believe is under relative to that buying the other something related, implied vol and waiting for that to come in.


Cem Karsan  51:09

Right? So there’s imagine there’s two engines, I guess the first one has a market maker framework, what does that looking at volatility surfaces, across the equity space finding where the best opportunity is at any given moment, right? For you know, and not just across volatility space, but also within each product, what’s high and what’s low, what represents an opportunity based on the complete universe of information, so I’m not


Jeff Malec  51:33

stock level, right? You’re still on,


Cem Karsan  51:35

we’re primarily focused on the indexes to the extent we do single name, it’s for dispersion, right when the opportunity presents itself there, but if that’s even in a basket, so again, we’re playing a statistical game, we’re looking at relative value, we don’t want to be taking idiosyncratic risk, you know, so that said, you know, there are massive opportunities on the index level, even on a basket, single stock level, when, when you kind of look on a relative value versus one another, both have muddiness and time, right and across product, as well. So again, those are tight when there’s not a lot going on, when it’s not like stressed when there’s a lot of liquidity. When there’s less liquidity, when there’s more stress in markets, that represents more opportunity in the space. So there tends to be much better, you know, forward returns, and on an annual basis when, when there’s more kind of stress in markets, and a downside type market. So this, these are great products to plug into your portfolio to diversify by not only on a non correlated way, way with absolute return, but also without paying that risk premium, really getting those nice returns in those downturns. So, but that is not a long Vol hedge.



Jeff Malec  52:42

Yeah, that seems counterintuitive to like, oh, the you don’t want to put on long vol during after the spike. But you’re saying here? No, then those opportunities kind of present themselves? Because everything’s a little bit blown out. Right. So how do you square those two?


Cem Karsan  52:56

So after the kind of risk happens, right, think about that March 2020, as an example, that’s more recent in people’s mind, you have the valuations of these vol, derivatives are all over the place. Right, the opportunity is due to illiquidity and stress and people get blown out, right. And this creates opportunities on around to value basis, right. And it’s time like, Oh, 70809, for example, you got deals opportunities month after month, after month, right, you had suppressed in markets, you know, and on a rolling basis, right, that allowed for monetization of relative value opportunities on a risk adjusted basis that are incredibly hard to find at a time, you know, types of passivity, so. So those are great opportunities for the strategy is absolute return, it makes money, you know, and on an annual basis in most environments, right. But it does significantly better when there’s higher opportunity, more opportunity set, and that that’s why it tends to have on an annual basis and a more negative beta, these Vallabh strategies probably do. So they’re great things a plug in portfolio, if you have a seasoned professional that knows what they’re doing. You know, it’s a great strategy to plug into the portfolio. Again, I had my success. Oh, 70809 as a market maker, you know, those are the those are the periods when, you know, vol traders that they know what they’re doing and they’re good. They really succeed. Those are involved ARB strategies do well, if they’re real volarb strategies. The problem is, there’s a lot of, you know, quote, unquote, vol ARB out there, which is, you know, you know, you mentioned long term capital, you know, it’s, it’s, it’s not kind of systematic, it’s not real arbitrage, right, you’re not really going out there and, and keeping net exposure to zero. You know, I think the key is, keeping it simple, like we do, don’t go into idiosyncratic risk, don’t go into, you know, make sure that you really are net exposure of zero, you know,


Jeff Malec  54:47

way too, too into the weeds here, but how often are you like delta hedging that and keeping it actually at zero because I’ve seen a little bit of that in the due diligence process of like, yeah, we’re Delta neutral and like, on a monthly basis, right, they might be doing it Every three weeks or it’s arbitrary, there’s a lot of weirdness under the hood when people say delta neutral,


Cem Karsan  55:06

absolutely, we have. So first of all, Delta neutral itself is a weird thing, right? Because how do you determine delta neutrality, if you assume a log normal distribution, you may be delta neutral, but then all of a sudden you assume a, a leptokurtic distribution, or you have a a very different, you know, again, we have this dealer flow dynamic where our distributions of underlying, you know, opportunities are very different from what the market may be assuming. So our deltas may be neutral, and are kind of based on our distributions, right. But, but to your kind of layman in a look like we’re long, or we’re short, you know, so we really do have these two engines. One, again, is, is a predictive piece, and we’re going neutral to that distribution, right. And the other one is, is relative value, you know, at given static, where the universe of opportunities are what’s high, what’s low, so, so we really do have these kind of two separate drivers of profitability and alpha there. And they’re both kind of unique and non correlated, and a lot of ways to,


Jeff Malec  56:08

and and how do you, you mentioned before, like, there’s not as much opportunity in the index itself? Because it’s kind of overplayed. I can’t remember exactly what we said, but how do you square that with like, you’re dealing in all the indices themselves? To be clear,


Cem Karsan  56:23

I was saying, hedge hedging. Right. If you’re a long, you’re going long vol, right? The opportunity is, you know, tends to not be as strong right? As opportune in the indexes now, right? I think there is a, there is a, particularly in the s&p, there’s a lot of hedging going on there right now, which reflexively makes it less, you know, less where the tail is going to be. You know, that said, that doesn’t mean the relative value opportunity can’t be reflected there. Right. Again, I think, in particular, I think we’re likely to see a period periods, like we have seen where dispersion is going to be a good opportunity, where, you know, index law is more likely a short even though it may seem cheap, right? To be long, you know, in other single list, kind of baskets or, you know, across other parts in the market. You know, again, I think you’ll see more rotation under the hood, you’ll see some underlying volatility, but ultimately, I think, you know, in the short term, on an index level, it’s, it’s less likely. So these are these represent opportunities. My point? Yeah, all arbitrage doesn’t mean your long vol, or short bond means you’re looking at relative value opportunities.


Jeff Malec  57:41

And then, so the second engine, the dealer flow, right, you’ve kind of over the last two years, made your name on that, so to speak. Let’s, I think it’s well car, but what are some of the limits of that? Right, like,


Cem Karsan  57:54

so you can’t? It’s not a perfect indicator, it’s not always going to be game over? Or is it? You tell me, but I know. Go ahead. Yeah. Yeah. And I think the important thing to note with deal flow is deal flow isn’t everything, right? It is, it is important. And it is a growing component of kind of, you know, why markets are moving the way they’re moving? I think if you’re not paying attention to it, I don’t think I have to belabor these points. At this point, I think, you know, a year and a half or two years after starting to talk about it, we’re starting to see, you know, you’ve seen post exploration windows where you’re regularly getting these draw downs, right, this isn’t a coincidence. The reality, though, is, you know, a certain thing that represents a certain percentage of an outcome, right? And you don’t know everything, that’s powerful. Not only that, it that it helps you predict the future and also predict what’s likely to happen. But it’s powerful in that when it doesn’t happen, it also tells you much about what you don’t know, right. And I think that’s a subtle thing that’s hard to get, right, if you know what the other components are, but you can’t, you know, know, explicitly what that you know, how those things are going to respond when you have periods of flows that, you know, should be a certain way, and they don’t react, and I was referring to this in terms of this part of the year, right. You know, and how this part of the year is important, because we know certain things about not only vol flows, but also, you know, flows coming into an illiquid market at the end of the year, beginning of the year. And so, you know, there are there are old averages that are built around these things that people don’t fully understand. But But ultimately, the point here is, yeah, Santa Claus will rally January effect, right, all these things that, you know, we can go on and on about magical constructs, they happen for a reason. We can talk about seasonality, a little bit if you like, but, but ultimately, you know, these are holiday periods. When you know, there’s less involvement in markets, the more illiquid, there’s less time, you know, in time matters for derivatives. So these charm flows are accelerated, you know, so you have an illiquid market, a lot more percentage kind of buyback, because it’s happening faster. These effects are very strong and important during an entity appeared, we are also about to get, and we talked about the size of markets $50 trillion, US domestic market, right? We made 20 20% or so this year, right? That’s about $10 trillion, and valuation increase in the SMB. How much of that goes to work on Jan? One? Oh, maybe 10% of it? Yeah, something like that. Right. That’s a trillion dollars, we’re talking about a JPMorgan trade of $18 billion, pinning the market, right. So there’s a period here of not just positive flows that are coming, but also an acceleration of time, and Charmin Vanya flows, you know, in these periods, those also those holidays, both times we will don’t think about this, it’ll Thanksgiving, and Christmas come right after major explorations, right, which is a period of otherwise weakness, so that’s stabilizing, and a period of otherwise, where you’d have risk. So you have these monthly positive on a charm close, and you’ve got these holidays with vol well supplied, and then time accelerating, right. And then you have these big flows into the end of the year, very positive seasonal time, for reasons structurally. So a lot of people don’t understand what underpins that season, I but my point is, these flows are things that you can understand and you can track, and that if you know what you’re doing are a real edge. But that’s not the whole story. But the whole story, the rest of the story kind of speaks to you a bit when these things don’t come to pass. Right. And it tells you something about the structural underpinning and the stress otherwise the market, and that’s why earlier, I was talking a little bit about kind of how this is a very important two weeks and, and watching what happens in this context being a lot more than people think this is why that January Effect people talk about the first week of the year goes right. It’s kind of how the whole year says something about the year. There’s It sounds crazy, right? You know, if you don’t understand these underpinnings, it makes no sense. But there’s real, there’s real logic, actually, there’s real reasons that that that tendency exists.


Jeff Malec  1:02:15

So what would you say to some volarb, then that doesn’t look at dealer flow at all? Right? And just says, No, it’s just in the math, it’s just in the price. Like that stuff’s all overrated. That’s not what’s gonna like, I don’t want you to get anyone in trouble. But yeah.


Cem Karsan  1:02:33

I mean, look, it’s a, you’re playing yesterday’s game, right? Yeah, the reality is, the reality is, you know, there’s, there’s a much bigger game going on, as this as these, it’s always been going on. But as these products become a bigger, bigger part of markets, it’s not just volatility traders, I speak to, I speak to money managers writ large, you know, if you’re trying to trade based on fundamentals, I think, or even just flow not even looking at options and vol and these effects, you know, you’re missing a dramatic percentage of what’s going on under the hood.




Jeff Malec  1:03:10

And another way, as I think of it, right, you’re playing the players, not the game, playing the game at the same time, but if you’re not playing, right, if you’re a good poker player, you can’t just play the game can’t just play your cards, you got to play the other players. Right?


Cem Karsan  1:03:22

That’s well, I’d say the, I’d say the players are the game, right? It’s a market at the end of the day, there are buyers and sellers. That’s what determines price. And if you don’t have you know who the buyers are, and you know who the sellers are, you know, you’re gonna end up at a bad better place and understanding what price should be.


Jeff Malec  1:03:42

2022 prediction, so you’ve touched on some stuff touch that this beginning of the year period, end of the year periods going to be laid out on fire. What do you got for some? What are we going to do now?


Cem Karsan  1:03:55

Now I can get into some kind of a macro stuff, which I kind of enjoyed, too. You know, I think everybody’s probably sick of hearing about Omicron. Right. But I think Omicron is a big deal. It’s not a big deal. In the way people think it’s a big deal. It’s a big deal in the sense that people are going to we’re going to finally reach herd immunity, it’s going to happen. So my prediction is, is whereas we’d had fits and starts by playing this kind of hammer in the dance game. But you know, we’re not gonna overwhelm the system. We’re gonna back away we’re gonna come back in, we’ve extended this whole process and this economic the economic kind of pain with it. I think, you know, this is not a political statement. I’m just, you know, but I think the Omicron kind of, if it looks like it’s a little early to say but if it looks like it’s a you know, as relatively mild, again, very contagious, but you know, less virulent and less deadly. If that is actually the case, especially Given that we know more now about how to treat patients, we’re also better prepared than we were, you know, a year and a half ago, combine all those things, this is going to accelerate the process is my view. And acceleration of that process is a huge deal for the economy. For the markets, what does that mean for the economy in the markets? Let’s kind of dive in a little bit. One, you know, the economy is going to probably accelerate. Its, is my view, I think there have been people who have a different view, you’re gonna see that inflection going into the spring? Is that now a lot of people like, oh, the economy is gonna accelerate, that’s great. Go buy stocks, I’ll actually argue that, you know, much like the economy and markets have been a bit unhinged from one another for the last year and a half. I think they they continue to be the economy is not the market, I would, I would actually stress it’s a bit of the opposite. I think now that Omicron is likely to come in, we’ll get likely to get a herd immunity, and we’re likely to kind of reopen in the spring. I think the Fed is going to have to accelerate tapering, I think you’re already starting to see it. You know, and when fed, the Fed can begin to really take liquidity off the table. And this market has has a tough road to hoe. Like a really, I really think it has headwinds.


Jeff Malec  1:06:24

It feels like a classic, buy the rumor sell the fact right, like, hey, right here. So we get that crisis fuel rally now it’s time to sell.


Cem Karsan  1:06:37

Absolutely. Well, I hope so. I think that’s a big deal. Yeah. Yeah, I think I think ultimately, you know, again, good news for the economy. And I actually think this isn’t just a one year thing. I talked about this pretty broadly. But I think we’re really starting to look at a decade before us and again, not a to be all doom and gloom. But we’re, you know, we’ve had 40 years where the interest rates have gone top left to bottom. Right. And the assumption has been, because that’s what’s happened for 40 years, that that will continue. I think we’ve dragged along the bottom in terms of interest rates until recently. But, you know, the fiscal response, the $12 trillion, that’s in the system is having an inflationary effect. It’s not just the supply side, kind of hold ups from COVID. I think, you know, getting the Fed has done about based on transitory. I think, you know, I think they’re real. If you look at wage growth on the bottom, it’s dramatic. We haven’t seen anything like that for two years. There’s a, there’s a lot of people who are not willing to work for the same price who are having major labor pressures, particularly on the low end. And that’s part of what’s driving that supply problem. I think that’s what people are missing with that supply side response is that a lot of the, the, the problems are actually because there’s not enough labor, there’s not enough people willing to do the jobs that need to be done. Whether it’s, you know, shipping or factories or wherever, as well. So, so I think, yeah, I get I think inflation is not really about runaway inflation, but much higher than we’ve seen, you know, at least it’s going to be something where the Fed has to worry about their dual mandate, as opposed to their, their single mandate for four years, you know, 40 years, they’re no longer just worried about maximizing employment, but they have to worry about price stability going forward. And I think that’s really going to be a tough situation in the next decade, I think you will see a gradual increase in inflation and interest rates and normalization, I think that’s really bad for a liquidity be, you know, for two reasons. One, there’s now somebody something competing, as interest rates go higher for poor returns, the longer you decrease that Tina effect, right, but be you also have just less liquidity less money chasing assets and more money chasing goods. And that’s ultimately not good for stocks. You know, multiple contraction tends to be what happens during those periods.


Jeff Malec  1:08:59

And you think that on in the vol space, but in particular, that, how does that work out?


Cem Karsan  1:09:06

Yeah, I mean, if it doesn’t, this is the thing about inflation. And this is the thing a lot of people miss on the vol space, is volved, most of these products are priced in nominal terms, right. And so you could get a situation very much so that we’re markets, you know, in real terms really have some pain. Right. But in nominal terms, it’s a kind of a more gradual, kind of decline now that you’ll have periods of volatility in between there, we’re not going to transition there, you know, just smoothly. So I do think there’ll be some vol along the way, some real opportunities, especially early on in that that kind of decade long process. But eventually, I think, you know, you look back again, as you know, I encourage you to look at 6882 as a as a timeline, but you’ll eventually have a period where you Markets wouldn’t have not gone nowhere with, you know, several 20% type declines, you know, in several 50 60% type rallies with much, much ado about nothing right. So, and that itself represents massive opportunities in the vol ARB space, because, you know, there’s so many assumptions to the skew and the acceleration of markets to the upside, right, that actually create other good opportunities in a vol harbor world, where that’s not the trend.


Jeff Malec  1:10:32

And just to be clear, these views don’t inform the trading and the models, right. Like, it’s correct. Yeah. Which is a shame.


Cem Karsan  1:10:44

I will say these, the only way that these do affect the trading is that they are we do have macro factors like interest rates and assumptions on those that have, you know, our distributions are weekly with daily Pat. So very little effect, right. But if you have a year long, multi year, kind of effect that, you know, that does have some minor effect on our predictive dealer flow


Jeff Malec  1:11:09

with interest, interest rates are part of option pricing, what been zero for so long right there. People probably forget, got any other predictions or move on?


Cem Karsan  1:11:22

I think the only other thing that I think people aren’t yet talking about, which will become a bigger thing here is we have thought as much about politics. You know, the midterms will be coming next year. It doesn’t look good for dems, right? You know, I would argue that the next. Again, these are bigger predictions for the next 10 years, you’re going to have a lot a bunch of four term, you know, four year, one term presidents this is what happened the last time interest rates went higher with Ford, and Carter, right. I think I think, you know, I think Biden’s gonna end up being a poor, you know, you know, the Dems likely are likely to lose, you know, much like a lot of times that happens, lose Congress in this midterm. I think that will, at first people will think, okay, less fiscal, you know, that’s, it’ll be kind of a positive, but I’m guessing that this, this demand on the next drawdown in the markets for more relief to people is going to come again, whether it’s right or left, I think that’s probably how we moved as a as a population. So in the short term, I think it’s, it’s, it’s probably seen as a positive on markets, you know, next year after kind of a tough year, this year. And then I think, ultimately, you know, going into the next kind of multi year period, I think you have another kind of retracement down when people realize there’s more fiscal coming rates are probably going to continue to go higher, you know, over the long run. So this is going to be a rolling kind of slow back and forth up and interest rates normalization. And I think the first step here with the midterms is is a little view of less inflation in the short term, which will be a relief to markets that are going in the next six months going to probably have some pain related to the Fed taper.


Jeff Malec  1:13:14

Yeah, we’ve talked about this before, I think the genies out of the bottle on that, right, I think we’re already basically at basic income. And they’re just gonna keep saying we need another we need another guru. And I’m not even sure that’s a bad thing. Like, right? Well said, all time highs, everything’s, everything’s going swimmingly? Well, besides the little inflation problem, right. Besides that?




Cem Karsan  1:13:39

Yeah, there’s no easy solution. I think the reality that people miss a lot of the time is that what the Fed has done, which is allowing free markets to kind of work is is, which is supply side economics essentially, has been GDP maximum, it has created greater growth has created a technological revolution. Now the problem is, it’s also created because the cost of that which has created inequality, but it’s been able to do that, because it hasn’t created inflation. Now, you start dealing with inequality, you start dealing with media and economics, there is an inflationary problem. And we’re getting back to kind of the old economy, right. And, you know, so much harder to grow things the way we’ve been growing with the leverage that we have in that type of a world. So yeah, to your point, I think, to the extent we are being forced to deal with inequality, we are going to have a tough time in market given where we are.


Jeff Malec  1:14:33

Although it was a tweet today, the last two years has been the biggest right the bottom 50% is has increased in wealth the most? Like I think it was 40% of the top 1% was 27.


Cem Karsan  1:14:46

Very, very low level. Yeah. Yeah.


Jeff Malec  1:14:52

A couple of Chicago questions for fellow Chicago guys. So what’s your thoughts? We’re getting a little political here but that Chicago Crime all this? Are you bailing? Are you holding steady? A couple of my friends are like hiring private security to drive around their block. Like it’s getting a little Yeah.


Cem Karsan  1:15:08

So I was I lived in I lived in Bucktown. Before until recently I sold my place to be the old town, right by my kids school by the lakefront. As I after I left, I found out that in our neighbor old neighborhood, they hired, again, private security for the neighborhood. So yeah, absolutely kind of strange. A Hall of Mirrors. I’ll tell you, it’s weird. I mean, you know, this being in Chicago, if you didn’t look at the news, you probably would know, right, it’s not like it, there’s also a lot of, you know, we live in a city that’s very de facto segregated. There’s different pockets that are very high crime and, and, you know, then there are others where you wouldn’t notice it as much. That said, it’s obviously been an issue. I think, this speaks to kind of the inequality problem, right, that we were just taught. And, you know, it’s, it’s easy to point the fingers in a lot of directions. So I’m going to kind of stay away from the political piece. But I think I think the reality is, you know, if you address the causes of the problem, the inequality issue, I think you’ll eventually kind of solve the bigger problem. So I’m hopeful that in the years to come that this will be less of a problem here,


Jeff Malec  1:16:21

versus this all hiring security guard. And to wrap up new this season, we’re asking guests for two truths and a lie. So tell us some income, some interesting tidbits about you. And I’ll see if I can suss out the real ones.



Cem Karsan  1:16:42

All right, I got a couple for you. All right. I got I got four for you here.


Jeff Malec  1:16:47

All right.


Cem Karsan  1:16:49

Just because I couldn’t decide I was hit. I was once I was once stuck in the Bolivian salt flats and rescued by contraband, you know, police and the holding software. It’s another one another one. I was the mascot for my high school. Which was I was which was Andover. You know, boarding school. I mean, it was a gorilla. It was a gorilla. It was a gerbil Ganga Yes. I once performed ceremonial rites with the Indians and copper King at the base of the king. And then I fell out of a four storey building and survived. Oh, well.


Jeff Malec  1:17:47

I think I gotta go with you fell out of the four story building and survived as the as the lie.


Cem Karsan  1:17:54

That’s true. That’s true. Story. four story building.


Jeff Malec  1:18:00

What? How old are you?


Cem Karsan  1:18:02

I was in Chicago actually was one of those things in the newspaper. I go pick it up if you really want to go look, but I was like, one of those routes to 2005. Yep. Rooftop. kind of gave way. And two of us for four. Yep. That was Windex. Right, the railing gateway.


Jeff Malec  1:18:21

I remember that. Was like regularly village or something. Yeah,


Cem Karsan  1:18:24

not that one. It was the year after that. And it was actually in the newspaper because that one had happened the year before. It was a big deal. And it was like this still hasn’t been fixed. You know?


Jeff Malec  1:18:34

But yeah, four stories. Do you break anything?


Cem Karsan  1:18:37

I did. I brought my spiral fac fracture to my tibia and my broke my shoulder blade but I luckily the shoulder blade is your your densest bone in your body. You learn something every day so and the tibia is the furthest thing from your head. So I fell the right way.



Jeff Malec  1:18:57

all right, you got me? I’m gonna go gun got the gorilla. That’s true. Go for two ceremonial rites.



That’s true. Ah.


Jeff Malec  1:19:13

The Bolivian so flat there probably isn’t even.


Cem Karsan  1:19:17

I, I cheated. They’re all true. All right, done.


Jeff Malec  1:19:26

What What were you doing in the Bolivian Salt Flats.


Cem Karsan  1:19:29

I lived in South America, the GT my junior year of college and Chile, in Santiago, Chile. And there were riots. Pinochet had made himself a lifetime Senator prior and the riots counter Pinochet and it’s a very activist kind of South America that you know, especially at the at the school, I was up and so a bunch of Chilean kids came and tapped me on the shoulder and we’re like, you know, you don’t want to be at school tomorrow. It’s gonna be gonna be real to us. Like okay, something I’m definitely coming to school tomorrow. So, no, it was so lovely Molotov cocktails and tanks. They close the school, but it was just after the midpoint of the school year. So they I still got kind of credit, right? And then we had probably the best education of all because we hopped in a car and traverse South America for a good three, four months. And yeah, that was an incredible experience. At one point. Like I said, I, we were in the Bolivian South Platte, salt flats is the highest plateau, you know, in South America. Beautiful place, but needless to say, a Toyota Tercel doesn’t do too well. In off road environments.


Jeff Malec  1:20:41

And so, yeah,


Cem Karsan  1:20:43

so yellow breakdown, and it’s literally the middle of, you know, nowhere. There’s nothing out there and for like about a day we were just stuck, like, you know, in the middle of this software. Wow.


Jeff Malec  1:20:55

Butch, Butch and Sundance. I love it. Alright, jam. Well, Happy Holidays to you. Happy New Year, Sam. Day. Thank you. And we’ll talk soon. It’s been fun.


Cem Karsan  1:21:09

Yeah, look forward to be in touch. Yeah, thanks for having me. Yeah, it’s always a good time.




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