Vol Arb, Rates Vol, Dispersion, & Risk Premium. Part II with Noel Smith

We’re back for part two with Noel Smith @NoelConvex – where we dig into the types of options and volatility strategies, he employs for his Convex AM hedge fund.  For the background on why he’s worth listening to on that front, listen to Part 1 about marketing making on the CBOE floor, Getco, and more here: https://youtu.be/XCeN56HgT68

Noel’s deep options expertise has led Convex AM to a four pillars approach to volatility trading: Vol Arb, Dispersion, Risk Premium, and Bond Vol Arb. In this episode, you will learn ideas and best practices from a lifetime of professional trading and how the Convex AM team bundles these four pillars to offer them to outside investors.

Noel also takes a deeper dive into the current macro environment we’re in and how it impacts his trading (or should we say how he lets it affect his trading), option and market maker gamma hedging, what exactly is Bond Vol Arb, how to trade it and why it is in a portfolio, and more! Plus, we couldn’t close out this two-part segment without a little fun. We ask Noel to play two truths and a lie. So, stay tuned to find out if Noel has done better in real estate or options trading, if he is actively working with Columbia University in their AI department developing their derivative model, and/or if he was the only market maker in the world on a few stocks.




Check out the complete Transcript from this weeks podcast below:

Vol Arb, Rates Vol, Dispersion, & Risk Premium. Part II with Noel Smith

Jeff Malec  00:07

Welcome to the derivative by our RCM alternatives where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Welcome to another week of May everyone where we continue to ask how far down will the market go this week? Why hasn’t Volpicked up much and where and when will the bottom be? Who knows? But we’ll keep bringing you a bottomless handle of hedge fund hot takes here. We’ve got Anthony Jiang from vino VAs for National Wine day next week then Charlie Maghera Chief strategist@blockchain.com to open up in June. For today’s episode reaching back two weeks ago where we had such a good time with convex AMS Nolan Smith, talking about the glory days of the trading floor make sure you go check out part one that we split the real talk about trading options involved in today’s market into this part two episode. In today’s episode we touch on where vol could be headed the rest of the year what rate vol arbitrage looks like and how no implements his four pillar vol trading approach. Send it This episode is brought to you by RCM vix and volatility specialists in its managed futures group. We’ve been helping investors access volatility traders like know Jim Carson and Chris Cole and Muni funds for years and can help you make sense of how and when volatility makes sense. As an asset class, check out the newly updated vix and volatility white paper at RCM alternative.com under the education slash white papers menu. And now back to the show.

Jeff Malec  01:39

All right, part two. So we’re going to dig into the strategy a little bit want to talk through that. But as a primer for that want to talk through part one, we talked about trading your own money, have another straight your own money. So tell me some of the biggest difference between you trading your own money to having money traded for you, in three now trading other people’s money?


Noel Smith  02:03

Also a very good question. They’re all pretty different. So from a marketing standpoint, thermal energy trading was very successful, we made a lot of money over many years, and anybody with a brain would want to have participated in those profits. But here’s the difference, the volatility of that p&l would probably be something that a lot of people would be very frayed, frightened by using specific examples, and Ron, I wrote zero on 911, September 11 2001, you know, we lost a lot of money. And that was a crazy time. And there’s other instances where, you know, who knows, I don’t even know that we had a positive Sharpe ratio for any chunk of time. So if you’re gonna, you know, evaluate our performance by that metric, you probably would have not made a decision, but you know, the way the p&l worked out, you would have been fooled not to. So when you’re trading your own money, when you’re driving your own car, you drive it differently. And then when things are, you know, really crazy, you know, say you’re in a police chase or something, you know, you’re gonna drive it more vigorously. When someone else is trading your own money, it’s way worse. And and, you know, you have to really find people that have a different moral set. Because when guys that are not moral get down, they kind of have a yellow attitude. They said, Okay, well, I’m either gonna get fired, or I’m going to make a billion dollars and, and it’s not on my mind. So I learned that the hard way I backed guys that ended up in a debit position, and then they just piled on risk. And they ended up getting fired. I don’t think anybody ended up making a lot of money out of lock.



Jeff Malec  03:38

Spread means to


Noel Smith  03:41

book a one way ticket. So I didn’t really like trading, having other people trade my money as much as I did. Almost all the profitability that came from Third Millennium came from the desk that you know, reran from


Jeff Malec  03:55

upstairs of the overall arching. Yeah,


Noel Smith  03:58

yes. So if you if you took all of our traders, I would say, you know, you could probably kept 80% of them and all of them were smart guys. All of them were, you know, came from good schools and whatever, had some kind of a pedigree, but not not all of them made money and it was frustrating. You know, I remember guys that were debit. You know, they come in late and leave early. To me it’s just like, What what are you doing? Yeah, you know, you got you got millions of dollars my money. Why are you here? You know, after the bell table, right? And why are you leaving early? What are you doing? Like, Well, I gotta go to my, you know, my, my, my dogs Bar Mitzvah, like, What are you talking about? You know, you’re in


Jeff Malec  04:32

the hole and your dog’s Bar Mitzvah.


Noel Smith  04:36

You know, just all these cockamamie stories and I didn’t really like being you know, the, the police, the dad, the dad of everybody. And you know, the guys that took their job seriously. They were much easier to deal with because they were a known quantity. And you could reasonably predict what they would do. When I when I was trading the idea that I wouldn’t be there by the open and I would stay after close. It was just like, it was absurd. Of course you would, you know, It was just like, common sense. Yeah, in some guys,


Jeff Malec  05:04

these guys were Millennials before they were millennials.


Noel Smith  05:07

Yes. And I was always surprised at how lazy otherwise very smart people could be.


Jeff Malec  05:17

So let’s dig into the strategy, you got it on the screen behind you there convex am convex Asset Management name of the firm, four pillars to the approach, volatility trading. So take us through the four pillars, then we’ll dig in on each.



Noel Smith  05:33

So for anybody that watched the previous segment, it gives context, that’s pretty irrelevant. What the point is, what the point of the firm is, is to take the best ideas, best practices from a lifetime of professional trading, and put them in a bundle and offer it to outside investors. It is the ideas that we feel are the most repeatable, scalable, and something that we can do. We’re not competing with you know, Gecko, or, you know, Cisco, Hana, or, you know, optiver on these trades. We are competing with other hedge funds that are trying to figure out which way Tesla’s gonna go tomorrow, which is a tough thing, in my opinion. So the point of the trades are to work in concert, so as to provide real alpha. And they, they do that. So going down the trades, as you mentioned, there’s four real pillars in no particular order. There’s Vallabh trade. There’s a bond, volare trade, a bond term structure, volatility trade, there’s a dispersion trade. And there’s a volatility harvesting tribe. They all do different things at different times in different volumes. And the reason they work together and separate is because they don’t really have much to do with each other, or necessarily the marketplace, you know, vix goes to five, that’s fine. If vix goes to 500, that’s fine. It can work either way. So we don’t really have a big opinion on you know, market goes up, we make money market goes down, we lose money. It’s just not like that. And in fairness, you know, some people think that market goes down, we make money. Also not true. We can, but depends on the ball path. And if the market goes down, if we make money for boats go up. So if they don’t, we don’t,


Jeff Malec  07:16

right. So not fair to say you’re a long ball program. But you’re not a shortfall program, either. You’re just a ball a neutral? Volcom.


Noel Smith  07:26

So we’re long voluntas. Yeah, if you if you look at the book in its full spectrum of prices, and zero and infinity, right, we’re definitely involved. So we don’t have any ability to have a spectacular blowout, because we have long volatility in warehouse. But it doesn’t mean that that does those strikes get violated. And those puts make money. Because like, even in 2022, the market has basically been going down not crashing. And it’s been very frustrating from a volatility standpoint. And then every now and then it’ll crash up. So it’s almost like the reverse of a normal thing. You know, typically you go up and crash down, now it’s been going down, crash up going on crash up. And so our puts, so our puts haven’t, you know, generated the the move that we otherwise would have wanted to.


Jeff Malec  08:16

And so it part of my brain after our first section was You only took four things away from all that.


Noel Smith  08:22

So there’s way more trades. So to your to your point, and maybe back to the cattle story. It’s not the cattle is a bad trade, cattle can be an awesome trade. And you can have you know, 10 sharp with cattle. And the thing of it is, you know, you’re the cattle guy can only feed him and maybe a couple other dudes, and that’s about it. If someone says, Okay, I think your cattle trade is amazing, here’s a billion dollars can’t do anything with it. Just it’s not usable. So scalability is a big part of it. You know, we want to be able to take a billion dollars if it’s offered to us. So, you know, maybe not a billion, but you get my point more than a couple of minutes, more than a couple of millions. So the points of


Jeff Malec  08:57

100 men.


Noel Smith  08:59

Yeah. So the idea is that is repeatable, scalable, and in best practices. So that’s why we pick the trades that we did, because they have enough room, so that if we’re doing them, we’re not interfering with the marketplace. And we’re not injuring our own prices, and violating our own models. If I want to go out and buy s&p 500, the size in which I would do it is not going to move the s&p 500. If you want to do that same thing in Occidental Petroleum, and you have even a $10 million position and Occidental Petroleum, you have to go out there and shop it and you have to go out there and do these things to participate so that you don’t move the stock. And it’s not that small of a name. That’s kind of my point. You know, there’s only a handful of names where you can really go out there and get aggressive and a lot of other second and third tier names. You can just outsize them pretty fast. I mean I move the markets almost every trade I do now. And I can’t imagine if we had you know several orders of magnitude larger than what we do have.


Jeff Malec  09:58

That was amazing me some of the Prop chop guys I talked to and they’re focused on just the largest names. I’m like, about, yeah, tell me about this. I’m trying to I think it was Krispy Kreme. This was years and years ago, like, nobody trades Krispy Kreme. What are you talking about? And I’m like, why not? My brain, like, it’s less traded, there’s more edge there. And he’s like,


Noel Smith  10:18

so that’s true. Um, you know, there’s been, there’s been a few times in my career where I’ve been the single person on the planet Earth that’s making markets and names. And when that’s the case, it doesn’t need to be that big, because I have literally all the dominion that there is to have. So when you know, in these particular names at that particular time, you know, if you saw a market in these options, there was one person you would talk to about it, me. And so I can move the Vols as much as I wanted to, to either lose less or make more.


Jeff Malec  10:46

What happens when you go on vacation? Nothing happens that


Noel Smith  10:49

market. I don’t even remember, it’s I don’t think I ever did that, because that doesn’t last very long. Typically, if you’re making a market and you’re the only guy out there, it really only lasts a couple of weeks, maybe more, but not much more.


Jeff Malec  11:04

So let’s go pillar by pillar volare. So give a quick example of a Vol Arb chain




Noel Smith  11:10

Cricket Cricket example of a verb to be like, you know, GM Ford, right? So you think Ford volatility is cheap, and you think GM volatility is high. And so you sell GM and you buy Ford and you hope that they both kind of compressed to their mean, and then you make money on both sides. That’s


Jeff Malec  11:26

buy and sell. The deltas are their vol


Noel Smith  11:29

involved. So say for instance, you think both are a 30 volatility, you know, and they enforce a 30 volatility and GM has a 30 volatility. And you think their correlation is point nine I don’t even know what it is. I don’t care. But you know, and for volatility is trading 25 and GM volatility is trading 35 So you buy 20 fives and you sell 30 fives and they both go to 30. That’s that’s the basic vlog and then you sprinkle so many other ideas on top of that, but that’s the core of it.


Jeff Malec  11:54

Yeah, and in my world of mainly vixen futures trades. Do you have example of like in the VIX, do you do any in the VIX itself?


Noel Smith  12:03

So the VIX is different, because VIX is the derivative of the s&p 500 of course, right? So you’re doing is you’re looking at vol and mass and this so I’m able to trade vix because I trade mainly the big products and mainly the most macro stuff. So the VIX and volatility of the major indices is mainly what I care about. So how that translates the futures world instead of spy it’s, you know, e minis aren’t Russell, same, same stuff. But vix and the VIX term structure is very relevant to the overall stability of the marketplace. So I look at all that stuff. And I have basically a matrix of different things that are derived from macro products and some secondary and tertiary products as well, to try to give me an overall opinion and then we look at that opinion in the VIX space, and we can translate that. Sometimes not even in the VIX space, but sometimes the VIX space, and typically we’re not like long vix or short VIX. If we’re going to do something in the VIX. It’s usually going to be an options or via butterflies.


Jeff Malec  12:58

And then a lot of naive vix ball arbitrators would just be like, if realized is high or implied tire and realize we might buy the VIX sell the s&p or bye bye right long, long short short. I don’t know if there’s a question there just it’s been in my experience been a tough trade post COVID crash for ball are so why do you think that is and how do you approach it differently?


Noel Smith  13:23

I don’t think volare has been a tough trade. I think that volare maybe within the VIX complex. It’s gotten a lot more progress in the last few years, and it’s probably had the prior forever years.


Jeff Malec  13:34

Thanks. I don’t care. Sorry. Yeah.


Noel Smith  13:37

Yeah. So Vallabh within the equity space, I don’t think is really been that difficult. Any more or less difficult, which is always to say it’s a little bit difficult. volare within the VIX space especially, has changed in the sense that the slope of the curvature and the contango or backwardation space space has been more violent, and the rate of change within the front has also been more violent. And what will happen is, if you are long, second and third month products, and then you’re short, the first month, the first month can go crazy. And then your second third month, do nothing, and then it goes right back. Yeah. So at that point, you have to decide what do you do? Do you do fade? Do add, do try the delta one instrument? And our answer has been to trade the delta one instrument, because if we think that, you know, in a backward dated state, the front month future is, you know, 38 the next month futures 28. And the third month future is 24. That’s tough, especially if you don’t know if somebody’s blowing out, you know, a lot of times that will precipitate precipitate a large volume of, or there’s


Jeff Malec  14:38

some kind of, you’re saying the naive approach or backward ated 3828 24. Sell the 38 by the 28 and 24.


Noel Smith  14:47

There’s a reason you can’t go to 48. Exactly. That’s the danger. Exactly. And you know, so the smartest guys that I know that have blown out, almost invariably have been due to some level of basis risk. they have some kind of a model that tells them if this than that. And I gotta tell you, that isn’t always the case. You know, that’s why options, I really liked them because your risk is known at the time of execution, unless you’re selling, right, if you’re just naked, short, a bunch of somethings, and those naked somethings can go someplace infinity. And that can be very bad for you. But if you if you are able to define your risk at the time of execution, then you know that it’s going to suck and but it’s going to suck within a certain parameter. And the trade is concluded.


Jeff Malec  15:31

But on the Vallabh, you always, by definition, have to be selling some right to beat the part that you’re selling volatility.


Noel Smith  15:37

We’re not always selling but in theory, we are always selling and buying, just because otherwise, if you just always buy vol, the theta can just blow it out, you know, theta can get so heavy.


Jeff Malec  15:50

Alright, well, you brought up some and we’ve talked, mentioned Ronen a few times, do you have any knowledge on what happened there? They blew up, they blew up and fix and fix. But were they doing some sort of Vallabh something rather,


Noel Smith  16:05

it’s the same thing I just said it’s basically business risk, right? You know, you think that you know, the the term structure will ascend at a certain level and the shape of that term structure will have will maintain itself relative to other parts of term structure. And you know, so you have a certain amount of Vega on the Vega never pays you, but the gamma blows out. And that’s how people blow up. And I didn’t work at Ron and I don’t want to say things that I don’t know anything about. But I know enough people in the Chicago trading community where I think I know what’s what happened. And that was it. It was a an essence of basis trade within the VIX complex for them.


Jeff Malec  16:37

We should write another book that 95% of all blowouts are gamma driven.


Noel Smith  16:43

Gamma is one of those things where it’s like, you know, you don’t worry about it until you know, you’re death’s door. Yeah.


Jeff Malec  16:56

Moving on dispersion. Sure. This seems to me to be where the pros separate from the ball tourists. So explain what diversion dispersion is or diversion if you want, but explain what dispersion is and how you think about it implemented, and an example tray.


Noel Smith  17:11

So think about dispersion, as you know, so you have a handful of marbles and you’ve dropped them into the mud, right? They go nowhere, they basically land where you dropped them, and they just kind of don’t do anything, then you take a handful of marbles, and you drop them onto a ceramic floor, and they’ll kind of scatter everywhere. With ceramic floors, a high dispersion, they kind of go everywhere. And the mud is a low dispersion that kind of just doesn’t go anywhere. Yeah, you have 100 Marbles, they all drop, but they all they stay within a very tight pattern versus kind of going in, in a very dispersed manner. So dispersion is a trade that is again, it’s very different than you know, picking stocks, because you can make money in dispersion, in almost any marketplace, you just have to be able to be right in the correlation. So what we do is we run a correlation algorithm, and we run it against where the market is trading and where the market implies it. And then we try to pick our spots and make money in it. So a dispersion trade in its most basic form, you think about you know, stock a stock B and sock index a B, and the dream is that you know, you are long volatility and in a you are long volatility and B, you are short volatility index AB, then the result is that you know, a goes up 20%, B goes down 20%. But index a B goes nowhere. So you make money on volatility sale on the index, and you make money on A and B individually. So you make money thrice. That’s the simplest dreamiest way to put it out to to have it out there. Market is much more clever than that. It’s much harder than that. Realistically, what happens is you make some money on your dispersion trade, as you model it. And then there’s just always every year, some kind of a thing that goes wrong in the equity space, whether it be a takeout, a scandal, a pre announce a miss or whatever else in the options market doesn’t properly price it. So you know, company gets taken out, the stock goes up 100% marketplace had no idea that was gonna happen and you make money in that little pro rata slice of your dispersion trade, and just having it on can make you more money than the model would otherwise imply.


Jeff Malec  19:13

And in theory, the faders should be cancel each other. They should be played at the same rate.


Noel Smith  19:18

Yes, this data in the trade is not that painful. It is a Vega weighted neutral strategy. So we also don’t have much of a Vega opinion.


Jeff Malec  19:27

And so that seems like it should be doing gangbusters right now. Right, like NASDAQ. There’s tons of these stocks down 80%. But the index itself is relatively what does it down 20. So I guess not. But at all things held equal. It’s not nearly as close as some of the single names so your instinct is correct.


Noel Smith  19:46

Our dispersion trade is positive for the year. Yeah.


Jeff Malec  19:51

And then that can only work in single names. Right. So do you have any practice versions? So


Noel Smith  19:56

within the futures complex, we don’t have an answer to the dispersion tray because it does require you to seek out filter and try to figure out what names have cheap volatility relative to whatever metrics you were posting them against. And then you sell index against it. And then you also kind of have to pick your spots. And then you also kind of have to figure out the macro part of it, which is, you know, sector dispersion and sector rotation, which is also quite relevant to the trade.


Jeff Malec  20:21

Why don’t I just buy all 500 names and sell the index phone? Right, so like warehouse, all that because one of them is going to pop out?


Noel Smith  20:30

Well, you don’t get 111 500th of the weighting. In addition to that the amount of slippage it takes, just execute that trade would probably totally negate and then take some of the money out of your model. So that would, you can’t do that for nothing. And getting out of it is even harder. And if you are right on that thing, then getting out of that thing, at that new price might be much more difficult.


Jeff Malec  20:51

Got it. So it’s almost right. It’s equal parts, the picking of the stock, not just what’s cheap, but what might have some catalysts that could move it.


Noel Smith  21:00

Through that clever, what we really are doing is we’re trying to figure out we’re trying to lean into sectors based on what we think from a macro standpoint. And we apply those in other words, if we think sectors are going to do well, we think that the volatility will compress, if we do less of them. And if we think sectors are vulnerable, we think the volatility will expand, we try to do more of them. So that balancing and rebalancing constantly factors into our model, in terms of, you know, a scandal or takeout we have the sectors


Jeff Malec  21:30

are Duggins, energy financials tech, yeah, whatever. And what happened in Cannes dispersion get hit on the other side, right. So if you for some reason, were short, the valand, AMC and GameStop. Right, that’s loaded versus the industry.


Noel Smith  21:45

Yeah. So you know, AMC and GameStop, were trading both of those as well, that’s a, that’s a separate category, that doesn’t really factor into dispersion does a little bit because AMC is in the Russell. But yeah, as correlation goes from a very low state to a very high state. So say that, you know, the marble floor starts screeching a little bit more and becomes more of a mud floor, and it says, correlation of one that tried to lose money as a function of where you put it on, and where it is now. And then how much time it takes and you have to figure out your you know, your, where are you in the trade, relative to where you put it on. It’s like everything, you know, it’s like, you know, time in place, it’s all irrelevant in the beam stops, by the way, those have been great, because, you know, what happens is, is that people are buying these street streaming out of the money strikes. And so what I do is I go out there, and I try to pay zero or less than zero for out of the money call spreads. So say, for instance, you have Gamestop trading, it’s like 130. Now, but 150 at the time, you know, you look at the 300 strike calls, right? They’re trading for 40 cents, but you can buy the three, the 290 strike calls for 40 cents. So what do you do you buy a call spread for nothing? You know, maybe maybe you get paid a nickel or something like that. You


Jeff Malec  22:57

buy them for less than zero? So that’s because you do the spread? Yeah, yes,


Noel Smith  23:01

you can, you can like to spread and you can get paid to take upside risk. Well, no upside risk, you can get paid to take, you know, upside gain. And then you know, because I don’t think Gamestop as any business where it’s where it is, I take those proceeds, and I buy supports, so I kind of can’t lose on the trade. And so those types of opportunities are there in equities that are otherwise missed in other index or macro products.


Jeff Malec  23:26

So why isn’t the AI world figure that out? Right? Why are their computers just hammering that, and anytime they see they can get a free trade, put it on, because


Noel Smith  23:34

you have to leg it, because the computers are out there doing that. And if you can treat it as a package for nothing, or less than nothing, it won’t exist because the arbit out. But if you will, if you will take the Legris for the worst, I’ll sell some of the three hundreds of and I have to wait to buy some of my 290s. But you just have to set your parameters so that they can do that automatically. But you have to take a leg risk got not that big of a risk.


Jeff Malec  23:57

So for whatever period of time, but you’re not going to sit there with that Legos for a week or even


Noel Smith  24:02

Oh, no, no, it’d be, you know, Howard the most the most it would be it’d be like three to five minutes, something like that.


Jeff Malec  24:07

Oh, okay. Yeah, not even hours, three to five minutes. Now. That’s, and then as you’re just so you run the dispersion, back tests, hard to back test. But if you ran that versus the other thing, these are uncorrelated.


Noel Smith  24:20

We don’t need to we don’t really need to run back tests on these things, because we’ve been doing them in real time. So I have real data as opposed to theoretical data. The dispersion trade has, it’s like every traded has times which does really well, in times in which it doesn’t do that great at all. And this has just been a time where it’s been a good trade. And conversely, like our vol harvesting trade, we don’t even have it on because it’s a bad time to do that to do that trade. Is it a bad trade? No, it’s a fine trade, but not when VIX is at 30. So it doesn’t we have it in our arsenal when vix goes to 12 in three 610 10 years, who knows? But right now is a good time for dispersion and a ban. Time for ball harvesting in six months time that may invert.


Jeff Malec  25:04

And good segue. That’s the third pillar risk premium. That’s where I was premium.


Noel Smith  25:09

So it was a trade I kind of invented in 2017, when the VIX was realizing or xSP was realizing six and a half and the VIX was a low of eight and a half or nine or something. And there’s basically nothing going on. And the only trade to make in that year was really sell premium. And that was a great trade for that. So what we decided to do was try to harvest that, you know, anybody who pulls up our chart of VXX, but before it got blown up by, you know, before it stopped issuing shares, but VX x, right, that chart does this, right, it just permanently dies, then you zoom in, and you zoom in a little closer, and you realize that every now and then it also goes up 100%. So that’s a tough trade, tough trade to have on. So what we try to do is participate in some of that. So in a risk defined manner, so that we can capture a lot of that depth of volatility, but also do it in such a way that if volatility does spike, 100% or infinity percent, we have a known quantity of risk on the table, so that we can incrementally lose money if we’re wrong, and then we re engage the trade so that we can, in aggregate, make money when we think that volatility is dying.


Jeff Malec  26:22

And that what does that look like that’s calls on the VIX or something like that?


Noel Smith  26:26

We’re typically long puts put spreads and calendars, sometimes ratios. So what we do as we try to engage on the fourth side of the VIX with options, and a calendar, iser, ratioed manner, so that we can make money when vix goes down. But if we’re wrong and vix goes to infinity, we’ll lose the premium, we’ll lose some premium. And that’s it. So sometimes counterweight that with other things as well. But yeah,


Jeff Malec  26:50

what do you think about the strategies are like, I’m going to just sell vix and buy calls to protect, what are the holes in that?


Noel Smith  26:56

Well, you’re selling volatility of x, and you’re buying a volatility of multiples of x, probably the problem with options and most people don’t really get their arms around this for a while is the market makers, especially in the options marketplace are very smart. And so you really have to, it’s about exceedance, you have to be able to exceed what their models are telling you. So you have to be able to either have better information, where illegal information, or just new information has to come in that was not previously modeled in. And that’s what I mean by exceedance. If you think that, you know, the reveal holds 44,000 people and you and I make a bet what’s the attendance of the game today? And I say 48 like, Well, why don’t we hold 44? It turns out it is 48 You lose money. Yeah. Yeah, your short strike has been violated because you know, you didn’t accurately you know, assess the standing room only crowd or whatever. There are ways to exceed, but if you don’t exceed what the other models have, you probably won’t make money. And so if you buy 100, Vol, but it realizes 100 Vol, nobody cares. If you buy 100 Vol and it realizes 90 volume, you lose money. So that’s what I mean by if you have vix versus vix calls. Now it’s a ratio that works. But the VIX hauls are basically s&p puts. So those things are crazy expensive. And you’ll see almost almost nobody go out there and just buy calls unless they’re really cheap priced calls. Now, that doesn’t mean they’re cheap in terms of their model value, but they’re cheap in terms of dollars. And those you will see trade but generally that’s the guy you know, the guy to London, you know, if you look at that, even that trade inaccurate, it lost money, you know, a year, and then he had a spectacular, you know, rip, and it paid for itself. But that was a losing strategy for a long time and not saying it wasn’t a losing strategy against his book. If you if you have a a billion dollar gross notional, and you want to go out and buy you know, 100,050 cent calls, fine. Now, you’re gonna spend a little bit of premium and you cover your butt. But you know, to think that you’re going to make a bunch of money by buying 50 cent calls, unless you have knowledge that nobody else has. I just don’t see how that makes money reliably, maybe here or there, right, idiosyncratically, but to say, that’s my, that’s my strategy. That sounds like a money losing strategy to me


Jeff Malec  29:18

or terminal breakeven at best. Exactly. And sidetrack here. So what do you think all these Robinhood option traders, retail option volume and all time highs? Like I feel like they still don’t get what you just said of? Cool. I think Tesla’s gonna beat earnings. I buy the calls, they beat earnings, I lose money on my call, like, what the hell happened? Well, the market makers thought it was gonna beat earnings to like it’s already priced into the options.


Noel Smith  29:43

It’s already priced in. So the assumption would be something like a Gamestop where market makers pricing you know, the at the money straddle for short time and it’s this and then they say, they say to themselves, okay, well, here’s the bid on the straddle. Here’s the offer on the straddle, and you know, we’ll make money no matter what. So then when everyone kind of get comes in and game in gangs up on the out of the money call So this goes into, you know, the vana trade, you know, the the tails of this distribution go like this, and everything goes up. So if you’re selling a, you know, a three Delta call on 100 Vol in the fall goes to 1000. Well, your three Delta calls into three Delta call anymore. Now it’s a 50 Delta call, and it just changes everything. So yeah, if you 100,000, people all go out there and they buy these tiny little calls, it can move the marketplace, it doesn’t mean that the math is broken, because the math is never broken. It’s just that, you know, if you if you go to a casino, and you get 10,000 people to hit a 19, and they all hit it doesn’t mean your casinos broken, it just means that they all got lucky. You know, it’s just, it’s one of those things fall is different, because the


Jeff Malec  30:43

changes the rules, they can’t hit on 19.


Noel Smith  30:46

There’s a critical difference here, volatility can affect the outcome of the thing. If you and I are in Florida, and we both buy hurricane insurance, it has no bearing on the likelihood of us getting hit by a hurricane. But if you and I are both size players in the s&p 500 vix market, and we buy tons of insurance, the relative likelihood of us getting hit with a crash is less, and it is less because we have that protection. And we can hedge that gamma. So it is an input into the model in the vol space, we’re in the hurricane space or the blackjack space. It is not an input there are mutually exclusive. And that’s a very core difference that a lot of people don’t fully understand.


Jeff Malec  31:28

Or sports betting verse horse race betting, right. So sports. Right, right, you get your line in you have minus eight on gold, right warriors, I bet the horse if everyone else bet some of my odds go to basically converge.


Noel Smith  31:43

Unless you get a fighter that’s willing to throw the throw the market or a player that’s willing to shift some points that it’s a pretty fair bet. But again, unless you are affecting the inputs of the model, then it’s different but volatility space, you are in fact impacting the inputs to the model.


Jeff Malec  31:57

So let’s dig into that what percent so right there’s debate out there with the convex convex the task guys not convex you guys basically saying that that’s not really that big of a thing like maybe it affects the market a couple handles, but it’s not like moving the market 10s of percent or anything. Right and jam on the other side would say Hey, this is a huge deal. modeling those flows where where do you stand not to name names, but where do you stand? I’ve impacted that input.


Noel Smith  32:28

Those guys are knowledgeable they know me and I know them so yeah, no problem. The vana charm terms that are being thrown around are not new. They’ve been around since I’ve been around well before then the idea that the marketplace will go up as a result of vol compression and or time vol compression, being vana and time being charm. And how those things affect volatility in the here and now is somewhat predictive and somewhat apt observation. And it is useful when there are no other other non exogenous events coming in. And you’ll find that those rules are violated around the same amount of time as other things like an at the money straddle, right. So if you go out and buy an at the money straddle, you would say that one standard deviation to straddle is this and no 67% of the time, you’re right. And then some other different percentage of the time you’re right by some other magnitude. You know, the Vanna trades tend to work out around that same mathematical distribution, and to use them as a guidepost as when to exit or enter trades can be useful to use them as a standalone strategy. I haven’t seen the math to support that I can hang my hat on that as a business.


Jeff Malec  33:52

Right, which and in Jim’s defense, he has other many other strategies. He’s not making it the sole signpost.


Noel Smith  34:00

But I think you know, there’s so many things that are unknowable, because your assumptions on those trades are that you know that the market basically has a risky on right, which isn’t necessarily the case at all for Tesla, or you know, GameStop or whatever else. So your assumptions as to what cards the other guy is holding are totally flawed. You don’t know what’s happening in the dark pool, you don’t know what’s happening in the OTC market, you don’t know any of that stuff. So unless you can get the fullness of that information, then your assumptions get weaker and weaker and weaker with each you know, whatever, whatever percentage of full information you have a


Jeff Malec  34:30

degree of freedom on the on what’s not showing in the actual volume. Yeah,


Noel Smith  34:35

I deliberately try not to use math terms. I feel like it you know, bores people. It tries to try so hard to sound smart and I try to avoid it.


Jeff Malec  34:42

I appreciate it. Yeah, I’ve forgotten all my math terms except a very slim few. The so like squeeze metrics, all those guys like putting together all those graphs pretty look at have some information, but how do you know if it’s the right information and at what time Same thing as any indicator, right? Like, okay, the Golden Cross or this or that like, exactly, exactly. So, so RSI it all the time some of the time what? Exactly, exactly.


Noel Smith  35:11

So, you know, if you look at every one of these, you know if see put Bolger bands around a squiggly line and says, Okay, if it reached reaches one standard deviation that should go down or reaches one standard deviation down, it should go up, that works exactly in line with the math. And every now and then it’s just that is wrong. And the magnitude in which instead is wrong, usually will either blow you out or blow your blow blow up the trade for whatever pro rata amount of money you had on it, or vice versa. So it’s just like selling it at the money straddle, it works exactly as often as you think it would based on the math. And or if you buy it at the money straddle, it works exactly as much as you think it would. Which isn’t to say that buying at the money straddles is, I think it is a bad idea. But I’m saying if you can come up with a justification for which I can you know, buying at the money, straddles only works in at times of exceedance. Right? You know, if the marketplace is pricing, a 20 Vol. And you know, you buy a 20 Vol and it goes to 30. Great, you made money. But now the marketplace is going to price a 40 Vaughn Good luck making it you know, you have to make incrementally more each time in order to keep doing that, which is a very tough gig


Jeff Malec  36:15

when you get Gamma Scalping in theory, right? Yeah,


Noel Smith  36:18

right, exactly. But then what happens is that as as the marketplace re engages you, then the crowd now either sell less or buy more, and then those the Gamma Scalping parameters will compress. And that is actually what happens is, is that that is the basis of where the van of trades and whatnot can be accurate, which is to say, if the marketplace is has, you know, a billion calls struck at, you know, 4500 in the s&p, and you know, that the marketplace in aggregate is long, the market makers are long a bunch of these calls, well, they will scalp each other, and then end up pinning, pinning is a real thing. It definitely exists. And if you know, those strikes and your assumptions are correct, you can use that as a place as a bogey, you know, kind of a spot where you don’t think it’s gonna radically blow through, again, barring some kind of new news. But in a no new news environment, with somewhat accurate assumptions on index. I think that vana and Trump are things that exist and can be useful.


Jeff Malec  37:20

And we’re talking like JP Morgan’s hedged equity program and stuff like that, like so just it’s disclosed. What were they trade with? Yeah, it’s in their perspective. So that strike is known, although at the end of 21, right, they said, Everyone thought it was gonna be I can’t remember the level 4250 something. And then but then they went to their brokers and basically, synthetically covered 4250s, I think is I remember the story. So there’s right that’s, hey, there’s new information, they don’t further prospectus. They don’t actually have to execute in that strike, they could do it synthetically,


Noel Smith  37:56

that trade is really just a nerf equity long book anyway.


Jeff Malec  38:01

I mean, yeah, a nerve.


Noel Smith  38:03

Well, yeah, you can say that, okay, if you have 100 units of risk, or you can have the same lower volatility, 70 units of risk, or probably more like 66 units of risk, it’s the same trade. So whether or not you hedge your book with these collars, or you don’t


Jeff Malec  38:18

get to 70% of the same or


Noel Smith  38:20

just use the same model or use less amount of money, then it’s kind of the same trade.


Jeff Malec  38:24

Well, where’s because you could take that other 30% and do something else with it go. fourth pillar, Bond ball arm. So this is a bit of a new one for me and our listeners. So tell us what it is how you traded? Why is it in the portfolio?


Noel Smith  38:45

Sure. So there’s the yield curve, right? We have, you know, twos fives, 10s 30s, ultra bonds. That’s the yield curve that you know, people talk about. So sometimes it goes this way, sometimes it goes flat, sometimes it goes inverted. That’s, you know, people say there might be a recession. But if you take the yield curve, and just ignore, and you look at just the 10 year notes, right, so we’re talking about the 10, year, note, futures, futures options. And then you just look at the volatility within these, which is to say the term structure, which is the Z axis in my hand example.


Jeff Malec  39:16

You’re not really good on that on the video, and it’s coming right at me. That’s like


Noel Smith  39:19

the old tech and city thing. That’s such an old guy joke. So the the yield curve, but you have the term structure, and then you look at the volatility surface within the term structure itself. The term structure will price volatility, just like anything else, whether it be Tesla or you know, anything. The differences is that trading bonds are typically easier than trading stocks because less wacky things happen in the bond market. And Tesla, like if Elon Musk’s decides to tweet something nuts right now, Tesla will go nuts and I have no idea. I have no control over Elon Musk. But the bond market tends to work with you know, the Fed, macro announcements, numbers that are posted like you know, FOMC tomorrow and jobs number on Friday, and so on. All those things have a historical precedent. So assuming the FOMC times, raises 5050 pips tomorrow, not 75. And the jobs number ends up coming in around 390. On Friday, you would say something like the Well, we think the bond market is going to move, you know, 15 ticks and at the money straddle in the next, you know, between the timing of the announcement, and then to K that in one second in one second increments, because if you look at the announcement, usually you’ll see all kinds of shots, right, up or down, down and up within, you know, five seconds. But then you decay it as that information becomes less machine read a more human read than that, we’ll come up to a generally a general move of the at the money straddle. And you can use historical straddles, to give you some kind of an idea of what that is. So if you think a jobs number is worth 15 ticks in the at the money straddle, and the other one is straddle is only priced at, you know, 12 ticks, that maybe you think that’s, you know, a buy, or conversely, you think that you know, 17, six is too much, maybe you sell it, and then you don’t want to be short a bunch of at the money straddle, so that you try to exit out somewhere else. So that you’re, you can capture maybe two or three ticks of straddle in that event, but you can cover your ass and, you know, 15, Texas rental somewhere else. So the idea is that when you look at the term structure of the options, you will see kinks and valleys, kinks and valleys. And it’s your job to kind of know is the kinks being generated by the valleys being wrong, or the kinks being generated by, you know, a sovereign wealth fund buying a bunch of notes because they need them? Is it generated by somebody blowing out and they have to change their position? There’s all kinds of reasons that the term structure can change on a very momentary basis, and you have to be aware of it and see what’s going on. Otherwise, what you do is you model a move just like you would a move after an earnings of Apple, right, Apple, you know, we think is gonna move four and a half percent on earnings. Well, they already moved 3%, the day before. So now they might actually go down. They did. It’s kind of the same thing within the bond market. The difference is that it’s very near term. In other words, you know, it’s like, you know, tomorrow next week, you know, nobody is trying to price the at the money straddle for the one year hence, job numbers does just the market for it just doesn’t exist. So it’s a way to keep you in constantly engaged,


Jeff Malec  42:17

they can’t get this month’s job numbers, right. Much less. Yeah.


Noel Smith  42:21

So think about this from like, from my perspective, as a guy that ran up a prop firm, you’ve got a guy standing in the bond pit, you got a guy standing in the Eurodollar pit, you got a guy trading Microsoft and other guy trading, know JPMorgan, right. And then there’s this big move in the bond pit or bond market that you notice you don’t automatically or however else you get the information. And then you start to reprice everything, you start to understand this stuff. And then as you see how interest rates and cash flows, and liquidity and form so many things, you start to, you know, like, see through the matrix, and you get a better idea as to what’s actually happening here. And then you’ve tried to find where you can find exceedance. And sometimes the answer is there is none. Like right now, we don’t have much on the bond trade, because the moves at 123 You know, what, how many straddles you want me to buy when you know, vol is at, you know, very local high and not really, since you know, you know, the 2020 pandemic, in the 2020 pandemic, they were pricing out of the money calls, like it was a negative 2% interest rate on the 10 year note, with those out of the money calls, I was talking to the guys in the office and like, you know, these are either the best sale I’ve ever seen, or we’re just dead wrong about where rates are gonna go. It turns out they were a great sale, but in 10s of 1000s of calls, traded in the 10 year note futures options, like deeply negative rates were going to happen, but now and that just that just never happened.


Jeff Malec  43:48

So and define the move index quickly for the listener.


Noel Smith  43:51

The move index was created by a guy I don’t know by name Harley Bassman and it is a proxy for the VIX. It’s not exactly the same because it looks at multiple tenors. But it is a proxy for the VIX in the bond market. So it is a cheap and easy way of looking at the bond market volatility. I don’t look at the move as much other than I look at the VIX, because I don’t look at the VIX as much as people think I do, because I can’t trade it. And I can’t, I can’t trade the move. So what I really care about is the term structure and the at the money straddles within the 10 year note options because I can trade those. And I use the move is just kind of like glancing over the side of my screen and see like what’s going on. Move hasn’t moved, so I don’t care.


Jeff Malec  44:31

What sort of 123 move in like Vic’s terms, just to give people some bearings.


Noel Smith  44:36

You know, actually, I don’t know what it means to I if I were to guess this is a guess. Like 50 a tie. It’s very high. But I don’t know I could probably figure this out on my head.


Jeff Malec  44:51

But that’s also because it’s coming from the zero bound right. So any increase in rates is a huge personnel.


Noel Smith  44:57

It’s different though because um rates have a different distribution than stocks because stocks have a log normal distribution. And the reason is, is because it’s not going to go below zero must oil. Whereas rates can go have totally, they can go up, they can go down and they can invert, okay. And they can invert via different different tenders as well. So it’s more complicated than that you have to look at where are the options price and where they’re priced relative to where they can go. And they also convex to the downside, if rates go to zero like they are, you know, last quarter, they’re still at a bond price, you know, and it’s just not the same. So if you have to think about the way the distribution is plotted, and you have to look at where the skew is, and where the stupid flip, so it is a more complicated trade. But it is less complicated in the sense that you’re not really subject to, you know, scandals. But there are things that are exogenous like wars or pandemics, things that can make the bond bond market go crazy.


Jeff Malec  45:52

Or generally speaking, is that is bond ball cheaper than equity vote? For sure. Yes, that seems like a no brainer. But so this is somewhat historic that right now it’s insanely honest.


Noel Smith  46:05

The at the money straddle for the 10 year note has been higher than the at the money straddle for the s&p 500 parts, times of this year. So in other words, that just the absolute value, not even handicapping it for risk for adverse parody, yeah, at the money straddle has been a greater price than at the money straddle within the equity complex, which is exceedingly rare. And that’s why, you know, these risk parity funds have just been getting wrecked, because not only are you know, the TLT or whatever down 18% And you know, NASDAQ’s down 19, spies down 12. You know, if you have a levered bond position, depending on where you have it, you know, what tenor of bonds you have it, you know, you could be down multiples of that multiple, but you can be done a lot more than that. Yeah.


Jeff Malec  46:46

Well, the next pod after years with the guys from resolve talking about this, I had this misconception to have, that’s not a risk parity portfolio. If you’re just stocks and levered bonds. That’s up. Yeah. So they’re like, a classic risk parity has commodities in that have done really well during this period?



Noel Smith  47:05

Yes. That’s actually why I like what you guys do. I’m not trying to like reverse plug you on your own podcast. I think that what you’re doing, which is, you know, there’s this ludicrous misconception that, you know, alts, or anything that’s not 6040 I just totally disagree with that. I mean, you can make money in so many different ways with size that is mathematically verifiable, which is why you know, momentum strategies work, commodity strategies work. There’s all there’s a time and a place for all of these things. You know, like lumber lumber was super hot, and it’s still high, but it’s come down. Is lumber a good trade? Is it hot? Yeah, then it’s a good trade. If it’s not, then it isn’t. And to to ignore that alpha, to me is just, it’s a waste of energy.


Jeff Malec  47:49

I agree, which speak into which so why not take this bond Vallabh and extended into crude Vallabh or Swiss franc, volare, like, Go into all these other different markets that could have the same dynamic?


Noel Smith  48:03

So crude is different? And so the answer is, I’ve given a lot of thought to that, and I’ve failed. That’s the short answer. And why have I failed, because I don’t have the data, or the data that I have access to is too unreliable, for me to, to use it as a business. You know, if I get in front of an investor, Everybody I talked to you, then I talk to zero mom and pops, right? I only talk to professionals. And they know that I wouldn’t talk to mom and pop but they just don’t know or understand what I’m doing. So I talked to guys that are extremely knowledgeable in this stuff, and they want to see the data. Nobody cares about what I think everyone went cares about what I can prove. And I can’t put together a cogent argument as to the, you know, the West Texas Intermediate spread versus Brent versus Abu Dhabi. And we will look at that we will fly a helicopter with an IR scope within Cushing. There’s so many factors in that that I have no good intelligence on. Versus Can I look at the jobs number for last 20 years and come up with an at the money straddle way easier.


Jeff Malec  49:06

There’s one, you might see that kink and crude oil and have no idea why it’s there. Or you have no information and so you don’t want to put that trade.


Noel Smith  49:14

I consider it to have no superior information. I only want to trade things when I feel like I have an edge. And if I think it’s a it’s a coin toss, then I feel like it’s ranked speculation. Anybody can go out and be long West Texas, right? Or Brent? Or as or the spread or the crack spread. But unless I have information that gives me some kind of an idea as to where that’s gonna go in exceedance terms that I really can’t look at investor is flipping


Jeff Malec  49:43

a coin at GameStop calm maybe, maybe I could maybe leads by more than it’s expected to be


Noel Smith  49:51

in that doesn’t mean you can’t get lucky. But it is not a business. It is a trade and as a trade that might get lucky. But it is not a business.


Jeff Malec  50:02

Finishing up, we’ve talked a little bit you have these macro views. And so is the macro and forming the trades are this is all completely automated and mechanical? Or do you have some of these macro thoughts that inform the trades?


Noel Smith  50:16

It is both the there’s the hearing now, which is the flow, the liquidity. And then there also is just that I consume as much information as I can get my hands on. And I’m I am a human being and I still like, you know, I pay attention to what’s going on the world around me, you know, do I think that Russia is gonna invaded Ukraine? Do I think Ukraine is gonna invade Texas? I mean, I have no idea, right? So I try to figure all these things out. And what does it mean to inflation? What is the pro rata effect inflation will have on my Bond put spreads? Well, if we think inflation is eight and a half, and we think it’s going to abate to six and a half, that’s different than if it goes to 12 and a half. So I’ve tried to price all of these things in and if I’m, if I have too much bond exposure relative to my equity exposure, and but inflation, I feel like you go to 15. But if it does go to 15, how long can it stay there? Because that’s like, you know, picks up 50. So it’s got it needs so much more energy to stay up there. And it’s so it’s very difficult to maintain those levels. So everything informs everything else, which is really takes us back to the beginning of our conversation. How do you get this information? Well, for me, I got this information by financially backing guys and other different products, and learning some of that stuff and scraping some of that IP. And then hiring guys directly, you know, I hired a guy does nothing but dispersion out of a West Coast firm. And I was already doing dispersion. But he improved my trade. And I got IP that I otherwise wouldn’t have had had I not employed him. And that’s kind of how this process for me at least has happened. And that’s how the trade becomes informed. So as you’re looking at inflation data, you’re looking at the jobs number and you’re you’re trying to understand what’s going on. It’s not so much that I’m trying to frontline Powell tomorrow afternoon. It’s more that I understand that if he comes in and raises 100 pips, it’s a very different proposition. And if he does nothing, it comes in at 50. Does at expectations, no exceedance. So with that, I say we rally a little bit tomorrow. But I also look at the amount of options that are coming off the books and how much volatility that will compress. And it’s not as much as it was prior. So do I think we got 5%? I don’t, I don’t think there’s enough sauce in the rocket to get us up there. Do I think we could go up? You know, a couple percent sure. But I don’t think it was a we’re talking. Yes. Otherwise, I wouldn’t be more likely to sell something like a 4700 strike call, which I do have. So there is a mathematical and mechanical reason that some of these things are justified, and everything informs everything else. So but interest rates are one of the most important things to get right. And I think that it is a difficult thing to understand because you have to understand a lot about a lot. But interest rates bleeds into housing, commodities, you know, tech versus value, you know, that’s just a modified duration trade, right? You know, how much zoom Do you want right now or peloton or Netflix? versus, you know, Berkshire Hathaway or something like that? There’s just a totally different trade.


Jeff Malec  53:18

But help me explain that. I don’t know if you know, but like, tech doesn’t like higher interest rates. But they’re not spending borrowing tons of money to like build out capital, infrastructure and whatnot, right? Like,


Noel Smith  53:30

when they issue when they issue bonds. What do they do with that money? Yeah, reinvested into the company, but they buy back their stock, yeah, that this is part of the bookcase. So if you can service the debt, as certain percentage that you have less, you have a concomitant move of payment ability at a higher rate. And what that might do is attenuate some of your stock buybacks. And then we’re also a stock buyback does is it is a compressor is a compressor of volatility, because you are an agnostic buyer of stock, depending on your your your flow desk agreement. So that all bleeds into everything else because that is also a function of volatility, and also the credit market. If you look at the credit market spreads, they’ve widened as well. So think about like Jeff Malick stock, Jeff malloc, when he’s got tons of cash and tons of access to credit, then Jeff Malik stock when he’s stressed out he’s got no credit. Yeah, they’re different. So the volatile the volatility of Jeff when he has no money and no credit is much higher than when he’s flush. Right and so he so you have the exact same capital position but you’ve ever ever reached at well, having Rich Dad is evolved compressor, because you know that if you end up in jail, your dad will probably come get you which is a lot less volatility than going to you know,


Jeff Malec  54:45

and Rich Dad is cheap interest rates. Yeah, exactly. Get that money’s


Noel Smith  54:51

exactly my access to the to the corporate debt market is greater at zero interest rates on the Fed Funds level versus As you know, 5% at the Fed Funds level is totally different proposition


Jeff Malec  55:04

even but they don’t have to, like you spent build a factory or anything. That’s the weird part to me like you’re a software business, you don’t really have these capital needs. But I seriously on stock buy them. They’re different.


Noel Smith  55:15

And that’s also the bull case. Because if you look at, and this is something that very few people understand about the marketplace, at least, nonprofessionals, why do stocks go up? more buyers than sellers? Great. Who? Who is buying the stock? The answer, almost invariably, is US public pensions, where the US public public pensions get their money from taxpayers. So if you look at what’s really happening there, the more stability there is in the tax base, the more money there is to allocate from taxes to the credit markets, the credit markets are in turn, gobble up corporate debt, and that corporate debt is in turn used to buy back stocks. That still happens. And it’s happening now at a greater rate than it was even happening. Definitely last year, because we were in a blackout period. But, you know, for many, many years, really since the 90s. And that is something that is a strong bull case, for for stocks in general.


Jeff Malec  56:17

Any other pillars you thinking of adding, or you’ve got it the four for now?


Noel Smith  56:22

So there’s, there’s really two non pillar pillars. They are macro awareness. And then just what are proprietary technology is a way to mitigate risks, either by being short the marketplace or avoiding the marketplace, either moving to the sidelines, or going the other way. And that this actually answers the question that never answered from before, which is what’s the difference between running your own money versus having somebody else trade your money versus running somebody else’s money? They’re all different. And in general, running other people’s money is worse. I know this, this hurts my marketing, but I don’t care. It’s just, it’s just true. It’s just true for you, because you have to vote against the alternatives for those people, right? So if you’re thinking about giving money to me, you have to consider the alternatives. And if the s&p is up, 40%, I’m up for what you say, Okay, well, SP has been doing better. So I’m gonna give it to the s&p. When you are, right, like right now the market is down 12%. If I just went out and put put all our chips on the s&p 500, I’m guaranteed to outperform by 12% right now. Is that is that? Is that a good thing to do? I would say no. But it’s an accurate mathematical thing in the sense that the statement is true.


Jeff Malec  57:34

Right? It’s like Game Theory verse trying to do what’s best for the clients.


Noel Smith  57:38

Exactly. And I think that investors should understand what they’re doing in sense that they should understand that the person they’re giving the money to understands that and is trying to always generate alpha on a real level meeting, risk adjusted return. And sometimes, you know, sometimes you’re going to help up performance sometimes you’re not, but the idea is that in times of stress, that you’re really adding value and you’re not just a beta monkey


Jeff Malec  58:05

What was our other monkey from before can’t remember


Noel Smith  58:07

execution monkey execute? Monkeys everywhere? Suppose it’s crazy. It’s like six boards right


Jeff Malec  58:19

all right, we’re gonna close it up two truths and a lie or fun little bit here at the end give us two truths and a lie about yourself past trades, experiences brushes with death, whatever you want. I’ll see if I can only


Noel Smith  58:33

I wrote a couple of these down. I was thinking about this. Okay, I got to come up with a theory so I can make this a more of a good, good quiz.


Jeff Malec  58:51

You could do something about the what is that a banjo up above the screens. That is Mendola. Amendola, so it’s gonna say not not to


Noel Smith  59:01

be confused with the mandolin. It’s like a viola as opposed to violent. So I play most things with strings. You can’t see the rest of the room. But there’s guitars everywhere. I like everything from banjo music to death metal. Should have made that a quiz.


Jeff Malec  59:16

That’s Bruce Hornsby song. Right. mandolin rain.


Noel Smith  59:20

Yeah, yeah. So to me because I’ve been playing instruments since I was in junior high. I become now it’s where it’s kind of like trading, like I’m sector agnostic or product agnostic. I’m almost genre agnostic, like somebody who is a talented musician, whether it be bluegrass, metal country or whatever else, I can just appreciate the musicianship up. You know, I’m like, Okay, it’s still hard to write cool music and it’s still hard to arrange cool songs. So to me, that’s very interesting. And, you know, you can do that in any genre, and I still think it’s cool.


Jeff Malec  59:52

My brother’s surf rock. I’ll send you I’ll send you one of his albums. Yeah, wait, I had it. It wears on me and I’m like, Alright, seems like you’re very skilled at how you’re playing that guitar. But he’s lead guitar too. So it’s constant, right, like, so


Noel Smith  1:00:08

I was just actually learning the theme to the movie endless summer and it’s a fun little surf rock tune. Night. My roommate in college was a surfer from San Diego. So I got a lot of surf music.


Jeff Malec  1:00:19

You’ve wasted to him that you play 50 instruments and that you had a surfing roommate and Sandy.


Noel Smith  1:00:25

I’ve actually wasted all my, my good. Good. True True Lies. Okay, so I’ll go to to start out with, um, I’ve done better in real estate and non stock options stuff. Period. Okay, next. Next is I’m actively working with Columbia University, on their AI department on derivatives modeling.


Jeff Malec  1:00:53

Columbia, New York. Yes. Not Columbia State and South Carolina.


Noel Smith  1:01:01

Or I actually used to live there are a Columbia College. South Michigan Avenue.


Jeff Malec  1:01:07

Yeah, exactly. All right, we got a third




Noel Smith  1:01:12

or to give away my third, which was, if I was the only market maker in the world on the stock market, I already kind of told you.


Jeff Malec  1:01:17

So third, only market maker in the stock true. What was the stock? Can you remember,


Noel Smith  1:01:22

there’s a few. So typically, when stocks how that manifests is a new stock will be issued or there’s a spin off right? Like us robotics was spun off from I think is micron or something very structured my memory here.


Jeff Malec  1:01:38

I own like 40 chairs, a Smuckers spun up at us.


Noel Smith  1:01:43

So then you know this is coming. And then you know, if it’s a weird little pit, that’s the corner over by the bathrooms. It just gets allocated that way by the CBOE committee. And you literally just walk over there. And you say, poof, I’m the market maker. And then if the other guys are there, I don’t even know how to market. So how that really, really, really happens is that the names are hard to borrow. And so the risks are different for the guys can go out there and say, Okay, this is the next Apple, it’s a 30 Vol at the money straddle this is a piece of cake, it’s not like that, what happens is you can’t get the stock, you don’t know how you know, the ball rate is you don’t know what the price is gonna change. And those then you look at the synthetic market, it’s totally different. In other words, the put call parity is blown up. And you have to figure out what the pro rata risk is in the reversal, which actually superduper dovetails into vom again, how they’re able to how we’re able to first see and totally avoid losses during vom, again, was in the reversal market. What happened was, in my experience, is you would see VX X and things sex, why those reversals will start to get quoted in the broker market. And you know, the reversal normally is like, you know, 20 cents, and then it goes to 25 and 35. That’s the telltale sign that whoever is the issuer can’t get more, they’re not issuing more than they can’t get the bar was getting tighter. And that usually means if something is getting harder to borrow, it’ll get more volatile. So that was like the exact first red light and there’s many red lights as to why if you’re a pro, you should not have been involved in those products at that time. But that was the first thing I’ve never heard anybody else publicly talk about, which is the reversal market was Johnny on the spot. I mean, that market was very aware of the fact that new shares were getting tighter


Jeff Malec  1:03:26

in those names. And in those names,


Noel Smith  1:03:29

right. Then if you just had a general awareness of volatility, like how much notional Vega would it take to balance these things between four and 415? On the list, everybody probably knows by now, but anybody who’s really paying attention should not have been clipped by those two products.


Jeff Malec  1:03:46

All right, we’re gonna let these listeners go before we make them spend the night I’m going with Columbia University, true and real estate versus stock options? False.


Noel Smith  1:04:00

Correct. I’ve never had money. I’ve never made money in real estate, which nobody in California believes because everybody in California makes money in real estate. But I’ve I’ve had several real estate ventures I think I’ve lost money in all of them.


Jeff Malec  1:04:12

So you get my dad except his his because he’s been divorced for time. So you never want to sell. Right? You never want to be forced to sell.


Noel Smith  1:04:21

Yeah, like my condo in old town I sold at a massive loss and I had that thing for 20 years. nuts to think about


Jeff Malec  1:04:29

cargo we did same thing our old down condo and the price went up slightly. But the the assessments was like started at 250 a month or something by the time we moved, it was like 900 a month. So the cost of owning it like exploded so the new person coming in it costs way more to own it. So they’re demanding that lower price meant,


Noel Smith  1:04:51

of course, yeah, yeah, the Columbia thing. I’ve just been actively working with their AI department trying to model some of this exact stuff. We’ve been talking About specifically than a charm and just flows trade and whatever else. And we’re using the resources of the university, to outsmart the Smarties. And that’s what we’re trying to work on.


Jeff Malec  1:05:11

Some, when will that be released or put out in a paper?


Noel Smith  1:05:15

Probably not. And if it’s useful, we’re just going to use it. I’ll talk about it, you know, measure measure pace, but this way if I start writing white papers on it, because I’m not making money with it,


Jeff Malec  1:05:25

got it. That’s that other piece of research, as soon as a factor gets a white paper written about it, right, it’s no longer a factor doesn’t work anymore. Exactly. Exactly. All right. No, thanks so much. We’re definitely going to come visit in Tahoe. So I just got to decide whether I want to do some areas on the bike or some areas on the snow. So we’ll decide which is which. And I mean, why choose Why Why choose both? Can you do both sometime in the late spring,



Noel Smith  1:05:55

Maybe you can vote you can do both? Well, until this past weekend, you could do both in the same day, which I have literally done. So. I live at 6700 feet, and so I can bike. But if you go to like 7000 feet, which is not that much. There’s snow. So you could go you could go to Kirkwood last week, and you can bike all around town.


Jeff Malec  1:06:13

Wow. All right, done late spring. Thanks so much for your time. Tell everyone what’s the website where they find you?


Noel Smith  1:06:21

Convex AM, which is convex asset management, but just convex am.com.


Jeff Malec  1:06:26

And on Twitter, you’re doing a little bit more Twitter now. Right?


Noel Smith  1:06:30

I know recently, um, it’s I think it’s an all convex. I don’t even know my own handle.


Jeff Malec  1:06:35

I think we’ll put it in the show notes. You’re gonna have to figure it out. But


Noel Smith  1:06:38

I read here and there, but it’s anybody can see I have like seven followers. Trump tweets.


Jeff Malec  1:06:44

All right, well build that up after the thanks so much. We’ll talk to you soon.


Noel Smith  1:06:49

Thanks for the time today. Appreciate it.


Jeff Malec  1:06:55

Thanks Noel Smith and come back and for dropping his knowledge. Thanks to Jeff burger, our producer for the show. And thanks to RCM for supporting See you next week.

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