There’s no Stupid Options questions, just Stupid Options Courses, SurgiFi attends Benn Eifert’s Class

Summer’s nearly over and class is definitely back in session for this episode, as we’re about to get schooled on options and trying to separate the scams from the science. This week we’re delivering the long-awaited episode with Dr. Benn Eifert(@bennpeifert), a Derivative appointed Jedi of Volatility from QVR Advisors, and Dr. David Rhoiney(@FiSurgi), who overcame being homeless to become a robotic surgeon who is learning the financial ropes and sharing his journey on Twitter from Surgifi.

David has questions: what do you do with all the Greeks, can’t you tell a trend is starting by analyzing options volume, what about skew?  And Benn has the answers in this entertaining 70-minute lively back and forth. They touch on being an independent thinker like David to come to your own investing conclusions, whether the options courses out there are knowingly selling lies, or more innocently peddling luck and lottery tickets. Why Black Scholes doesn’t really do anything except normalize prices…meaning there’s no secret math that lets you ‘figure out’ options. How trend following only works 25% of the time, Nancy Pelosi’s high fee LEAPS trades, Nassim Taleb’s tail hedges, why it counterintuitively makes sense to add a losing asset to your portfolio, and so much more! Plus, we discuss should retail investors walk away from options and how not to get caught up in the index funds cult — SEND IT!


Check out the complete Transcript from this week’s podcast below:

There’s no Stupid Options questions, just Stupid Options Courses, SurgiFi attends Benn Eifert’s Class

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. Happy Tuesday, everyone coming to you a few days early this week after a week off from my summer vacation, where I ate my weight and oysters, lobster and clams. Good work. Northeast, you really know how to serve up the melted butter. But with summer vacations wrapping up, it’s time for school and we’re getting into the spirit with today’s episode, where we have the professor of Vol himself Dr. Ben Eifert. Teaching us all up and answering some questions from a pupil he admires and respects for not taking what YouTube has to offer, but instead seeking out his own version of the truth. That’s Dr. David Rainey better known as on Finn twit as certify. We had fun on this one with surgery by throwing vulnerable to the wind and asking the question some may be afraid to ask and bend finding new and ever inventive ways to say no, that’s dumb run the other way and terrible idea. He never actually said any of those things, but it was implied. We also had surprised Poppins by both of their little boys do cute. And I probably talked as little as I ever have. So if you’re into that this is your pod, send it. This episode is brought to you by our Sam’s Lunch and Learn series where we highlight different hedge funds and mutual fund managers specializing in unique alternative styles and strategies. Unlike the pod where we do somewhat similar thing, here’s open for questions. So pop on into those and ask these guys as many questions as you have similar to what we did here today. Head on over to Twitter and find at our Sam alts to sign up for this week’s on Jordan where I have my friend and fellow secret truth Jason buck, talking to volatility in a portfolio setting which we get into a little on this part as well. Now back to the show. Okay, class is in session. Welcome, Ben. Welcome, David.


David Rhoiney  02:01

Good to see you guys.


Jeff Malec  02:03

I’ve continued my one part episode tradition of trying to match Ben’s style with the shirt game here last time he had a hoodie so I went and changed into a hoodie. So I couldn’t puncher sorry, David, you want to go change quick.


David Rhoiney  02:19

So here’s the crazy thing. I used to have shirts like that. And then my wife said you’re getting rid of all of them. And when I left on to Cuba while I was gone, they magically magically got by the movers. Let’s just put it that way. Really sweet Hawaiian shirt that she was never a fan of. That is gone. Bye. Bye.


Jeff Malec  02:45

I love it. So we’ve all got questions. Ben usually has answers entered David learning the ropes and sharing his journey via Twitter and substack at certify. So David, you found options, Ben, you know, options. And I threw out the idea be interesting to sit back and listen to the q&a between the two of you. So let’s let the Teach begin. Fire away, David.



David Rhoiney  03:07

Yeah. So first off, Ben is the guru of all things volatility in my opinion, right. Matter of fact, when I was learning options, I just searched Ben Eifert name and my podcast Apple podcast app, because he’s in AI. Do you have the most odd lots appearances? Because majority of them are lots of appearances. Do


Benn Eifert  03:32

I think I’m tired now again, for with at five with a couple other guys with Matt Levine and maybe somebody else but yeah, well, I was behind until a couple weeks ago.


David Rhoiney  03:42

That’s that’s a good company to be in. But I mainly wanted to learn options. Not necessarily to do it myself. But I wanted to know why people are say it’s good versus it’s bad, right. And I and the biggest thing is, there’s a lot of crap out there for retail investors, specifically, if you go on YouTube, and you just search options. I mean, there’s so much stuff and then during Oh, absolutely. And during the height of the pandemic. I mean, let’s just be honest, man, when the market was going crazy, like Ray Charles could make money by just throwing something at the market, right? Because everything was just turning into gold. And people were selling all these options courses. And then I knew something was wrong. And I was having people coming to me saying, oh, yeah, you have to try this strategy, where I just sort of rotate some things, but I’m like, I heard of these things called Greeks, like are you not paying all of those things don’t matter? And I’m just like, Ah, I don’t know about that. Right? And so I posted on Twitter, I was like, hey, you know, I really want to learn options. Where do I get started? And the guru, Ben said, Hey, you gotta read the Nambour book. If you’re going to be smart about it, and you really want to learn this stuff. Start with the NAT number book. If you can understand this, then then you can start to get your head wrapped around options trading. And so I went and bought the book. And this ideally, I’m assuming this is part of some financial engineering like textbook for a class, right? Because this is high level stuff. And I took my time and I freaking highlighted pages. And I studied it just like I wouldn’t medicine, right. And so what it came down to the short term conclusion is one options are complicated, too. Why would anyone in retail ever do this? But if you’re going to do it, like, where do you even get started? Right? So how do you wrap your brain around? When a retail person should even consider even starting getting options exposure?


Benn Eifert  05:52

Totally. I mean, you know, first of all, I think, you know, part of the reason why this is fun for me to do and why we talk on Twitter is like, you know, you’re very smart and reflective guy, right? You’re a surgeon by training, but like, you want to understand concepts and arguments from first principles. And you’re very anti, like, taking a conclusion or a common piece of wisdom that somebody offers at face value, right? Even if you think they’re probably right, like, you don’t want to be done there. Right? Like you’d like to kind of engage almost in this like discourse, like in philosophy or whatever, and, like, build up knowledge from like, the bottom pieces, and like, kind of make the connection in your brain where you’re like, Okay, now I really understand this, right. And I think that that’s something that a lot of people just don’t do, right. And so as a result, a lot of people actually don’t understand, but things that they, you know, they say, or they think that they believe. So I think that that’s, you know, really cool. And I think that’s why, you know, it’s fun to you know, get into this stuff with you. So,


Jeff Malec  06:50

is that why you gave him a book? Six, six feet thick? Yeah, exactly.


Benn Eifert  06:54

And, you know, like an analogy a little bit, you know, something that I will deal with, but it’s like when I, when I teach Junior quants, you know, from to do you know, what we do? I think it’s essential to like, force them to initially write the code to construct like, the standard analysis concepts, like covariance, or linear regression, or maximum likelihood or whatever, like, from there Ross components of linear algebra, and like, build up to like, those analyses. And people are like, well, but you can just like, download the thing that does that. Like, why would you do all that work? And the point is, like, it’s because dealing intensively with actually understanding the building blocks to like, get there actually makes you understand what you’re doing, like a million times better, right, as opposed to just being like, Oh, well, okay. Somebody told me that this works. And I can just, like, use this thing that works. Right. And so I think, you know, that’s like, I think, you know, David really came at the space again, and you just said this, right? But not because it’s like, oh, I want to learn, like some ways to make money or something, right? Because, you know, fast forward, but like, that’s, that’s not how it’s gonna work. Right? It was more like, I want to understand this. This is interesting. Like, I’m a smart intellectual guy. Right? And I really like that. Yeah, I


David Rhoiney  08:16

mean, for me, the, let’s just be honest, right? The majority of the money made in the market for a retail investor is going to be a hands off, like sitting on, you’re like really monitoring your behavior. And a perfect example, is like the classic story of the person that just like, hey, I kind of like XYZ company, I’m just going to keep buying. And I’m never going to sell because I like XYZ company. And they didn’t pay attention to the market through all these downturns and all these crazy little news cycles to Jim Cramer’s of the world who liked to spout nonsense on TV. And then after a while, they’re like 89 years old, and then they pass away. And then everyone’s like, Oh, they just happen to own 1000s of shares in this company, and they’ve owned it from 30 years, and nobody knew. And then they turned out to be uber rich, right? So buy and hold is by far the biggest thing for a retail investor, in my opinion, right? However, I know that not everyone’s going to be swayed by doing that, because it’s boring. There’s nothing exciting about that. And to be honest, options to me is like playing in the NBA, right? Like that’s fast paced, it’s exciting. Like, that’s the sexy thing. And like, I’m the most unsexy individual you’ll you’ll get, but I kind of want to understand, like what’s going on, right? And so with options, trading stuff, half of it is one, like, how do you manage actually paying attention to all of the Greeks or do you even need to or do you just pick one and go, I’m going to focus on this note very, very well and know how to get in and get out, like, how do you keep them all in your head? Or do you even need to?


Benn Eifert  10:07

I think you got to back up for a second and just start with like, what are you actually trying to achieve? Right, as opposed to kind of like, what Greek are you looking at? Or like, what are you doing? Right? So it’s like, I think, maybe just, you know, one starting point, right is like, as an investor, in general, right, you should theoretically get paid over the long term for taking risk and providing a service of some kind with your money and your capital. Right. So it’s like, that’s why, you know, owning equities or credit, right, you’re providing capital to businesses, you’re taking the risk of, you know, the world falls apart or whatever. And like, you get paid for that over time. And like, owning government bonds, same thing, you’re providing capital to governments, you’re taking some interest rate risk, right? In, you know, the derivatives world, it’s a lot more multifaceted. I mean, I guess the, the analogous thing, and you hinted at this a little bit, is probably something like, overtime, you’d think theoretically, you should get compensated for, for selling options, because you’re providing insurance to people and organizations that needed or the want to, but like, there’s a lot of nuanced cautionary point, points embedded in that and you know, we can we can talk about that, right. But like, that’s the first level thing is just, if you’re an investor, like, why should you think you should get paid, you know, on your money, it’s because you’re putting capital to work doing something that is providing a service to somebody, right? If you’re thinking about anything that’s like, feels like short term speculative trading, like your starting point is probably that, you know, there’s no, there’s zero expected return to whatever you’re doing. And then there’s negative expected return after you factor in that there’s like pretty material trading costs and a lot of cases, so especially in options, right, if you’re going into your brokerage account, and trying to buy and sell options, as a retail investor, like you’re going to be paying lots of money to market makers, and that’s just straight out of your pocket, right? And so, when you think about the question of, you know, hey, I’m a retail investor, I want to do something and options, the first question you just have to ask is, what is it that I’m trying to do? What is it that I think I’m going to be achieving? Right? Is it that you’re trying to do that, that thing that we kind of talked about putting capital to work and trying to try to get paid for that, and you’re looking at some kind of, in that case, probably careful option selling strategy, in which case, there’s a certain thing set of things you’re going to think about, right? When you’re trying to do that, is it actually that you have some particular views on stocks that you like, and you’re trying to use options to express those views in a different way? Right, so if you just own a stock, you’re like, Okay, I’m gonna get paid the dividends. And if the stock goes up, I’m gonna make money, you might have a more specific view, like, well, I don’t really think you know, that the stock is gonna go up that much. But I really think it shouldn’t go down that much. And maybe, you know, maybe you want to your, your view fits better with selling, put spreads or doing something, something like that, right? There’s a whole category of like, using simple option trades, that correspond to your view on on a stock. And again, that’s hard, but like, there’s gonna be a different set of things you’re thinking about, you know, if you’re doing that, right, if you approach options, you know, from, there’s a whole lot of options in the world. And there’s a whole lot of Greeks and like, what should I look at, like, you’re just going to kind of be lost, right? You’re going to start with like, what is it that I’m trying to do? And why and why does it make Why do I think it makes sense? And then what do I need to know in order to do a good job of doing


David Rhoiney  13:33

that? Well, so you brought up we’ve had obviously me and you’ve had a ton of conversations in the last like, year and a half I can I basically call you a friend now. Because I mean, we talk about random stuff, right? And, you know, you mentioned something before, he was like, hey, you know that the options stuff doesn’t really matter. Because like, you have to start with this case of like, what are you trying to achieve, then you go look for the trade to get you to the point that you’re trying to get at, right. And I feel like there’s a lot of technical details and options that can easily you can drown in and you can lose what the big picture is like you get lost in the forest for like the trees and stuff, right? Like you can’t be able to see what your ultimate goal is. And I mean, in the book, it talks about like, if you’re going to for directionality you need to look at here or if you have a market sentiment, you need to look here. The interesting thing that really intrigues me from an option standpoint, and it’s still kind of confusing, right is it gets thrown around as jargon a lot. It’s like, it talks about risk premia, right and no and honestly, I’m not even 100% sure that everyone understands has the same definition of what risk premia constitutes, because if I talked to one person who’s a financial advisor, I talked to someone who’s an investment manager or asset manager, whatever they all discuss premia in a different context, right? It’s not really in my opinion, I haven’t found a great way to quantify what risk premium is. It’s just basically like, Hey, I should kind of get paid for like taking on this risk. And the thing that I look at so far, and with my little novice knowledge from reading this giant textbook, is I rather be the sort of the person that’s dealing out, like selling insurance or being on that side, right? Because I don’t think I would ever know enough and be able to track enough to actually trade these things effectively. The other thing is, I feel like this is a space where and please correct me if I’m wrong. If you’re doing it in very small sums, then they’re really the hassle isn’t worth it, right? Because the trading costs that you don’t have to really that you aren’t really appreciating as a retail investor. Like if you’re doing this through your fidelity account, right? You have no idea what’s going on in the back end. And from the people that I talk to who do this professionally, they’re like, Yeah, this Interactive Brokers account and I talked to these people, and I’m like, I didn’t even know that stuff existed, man, like, why do I need to care? If I’m a retail investor? Why do I care about the bid ask spread? Well, it turns out you need to care about the bidet spray, because that’s how you save money. And this whole thing is about preventing your money from going places that you don’t want it to go. Overall, part of like, how, as a retail investor, like everyone talks about, like, the professionals talk about this bottom up approach and top down approach, like what the hell do people even mean about that, right? Because, again, that’s something that I think varies to what I’ve seen so far, and vineyard economists, like economists take this sort of macro view, like, they look at everything, and then they sort of funnel it down to figure out specific scenarios. But, and please, excuse me if I’m wrong, but economists are like weatherman to me, like, they’re going to get that shit corrected once or twice in the world, excuse me for cursing. But like, if you look at the weather, man or woman, like they’re not correct all the time. And they shape the narrative. So if I know I’m not going to be correct, how can I even determine what options even look at? Right? Because it’s like reading tea leaves, I can be 100%. Wrong. And as a person who likes to analyze numbers, and that doesn’t give me a warm, fuzzy feeling that I can even be correct.


Benn Eifert  17:36

Yeah, I mean, I think that’s right. So you know, back to the kinds of things that, you know, what goal are you trying to achieve? And what kinds of things can you be doing? Right? If you don’t think you have a productive way of coming up with a particular directional view and timing on a stock, which, by the way, is the right view? Because that’s really hard. And like, you know, why should you fit? You know, that’s obviously what long short equity people are doing all day. And it’s difficult for them to like, have a good sense of whether Facebook’s going up or down and over what time frame or whatever, and then come up with a good option straight to start with, right. So as a starting point, if you don’t think there’s a good reason to think that you’re going to be able to form a particular directional view that is is is reliable, but you shouldn’t think you should be trying to punt around option trades. In those kinds of cases, right? You know, to to your to your earlier point, you know, the concept of risk premium, you know that the concept is straightforward enough. But the but quantifying risk premia is not easy, right? So you can look at for even just an equities, which are much simpler than options and derivatives, right, you can look, okay, I’d like long winter long term US equity return. You can look at long term historical equity returns in the US, you can say, Oh, well, like over a very long period of time, US stocks made like 7% per year or something, right? But that, of course, varies massively over different time periods, even pretty long time periods, like 10 years, 20 years or whatever, right? So it’s like, does that mean that you can buy some, buy some s&p index exposure? And think you’re gonna make 7%? Like over the next seven years? Like, of course not, it’s like a big old distribution around that, right? And then on, you know, in options and derivatives, it’s even more complicated. So like, yes, you should think, on a standalone basis that providing capital to people who need in providing insurance to people who need insurance should be something that you should get paid overtime for. But the variation in that risk premium over time is massive. And that’s something that I talk about a lot and have talked about a lot like there was a time period from call it like 2017 to 2020, where it was very clear to a lot of options and derivatives people that actually there had been so much naive acceptance of the idea of volatility risk premium and So many people, by the way, including very large, humongous institutions with massive amounts of capital, just blindly selling options at any price that there was a negative risk premium and options, you were actually expecting to lose money and have a negatively symmetric bad insurance profile. So like, if you’re selling, you’re just completely crazy to be to be selling options in that kind of scenario. And so, no, it’s one thing to have this concept of like, okay, long term, theoretically, there should be this risk premium in different asset classes, it’s a different question of, can you reliably quantify that at a point in time, you know, given what’s going on in the world, that’s really hard. And, you know, it’s hard for people like us who have a enormous amount of infrastructure and resources, you know, much less, you know, for an individual investor who’s got a lot of other things to do


David Rhoiney  20:45

with money. I’m sorry, go ahead, Jeff.


Jeff Malec  20:47

I was just gonna say it would be fair to say, like, part of me is David’s coming at it from, hey, trade options, and you can make this money, right, it’s almost a level up of the courses. Everyone’s saying, just the trading of the thing, is what makes you money. And we’re kind of backing out and saying, No, you need to have an idea of what you’re trading not just options by themselves, it’s no different than trading Beanie Babies or, or crypto or whatever, right? Just the trading itself doesn’t, because their options doesn’t lend itself to some other premium that you can make, just because their options.


Benn Eifert  21:17

Yeah, it’s totally the opposite as a as an almost any investor, you’re going to pay a lot more transaction costs and spread to market makers and exchanges to trade options than anything else. So you’re going to be losing a lot more money, you’re sort of doing stuff in options, right. And that should be like your starting point is why do I think that I can actually overcome that for some very specific reasons, because of some, you know, something that I understand about the markets and you know, your bar for thinking that should be very high, right?


David Rhoiney  21:49

Try to, like with concepts that are things that I don’t understand 100% of the nuance, I try and get it to things that I know I understand, understand reasonably well, right. So this is a reason why I like I remember I asked you, I was like, hey, you know, what is there like a formula that people use? Or and you’re like, Hey, man, the math is actually very simple. And I’m like, but it has to be like something like, I’m trying to get to like the math, right? Because I can translate math, right? I’m an applied math mathematician by my education like, Okay, let me just look at the math, I can explain that. However, the thing is, I’m looking at like these Black Scholes formulas, the put put call parity stuff, and I’m just like, there’s no effing way that anyone’s calculating this stuff when they’re making a making these decisions, because they’re happening too fast, right? And there’s not enough data. And I mean, maybe I’m not smart enough to figure out the algorithm that can dynamically do this on a second millisecond basis. But I, there’s, which leads me to say that, you know, there’s a lot of nuance here, and people are doing this based on experience, right? So then I’m like, Well, if that’s the case, implied volatility is a calculated thing, right? Because that’s just based upon historical data. But how are people making decisions going forward? Which are essentially best guesses on historical data if the market doesn’t, like historical prices don’t predict, like the Ford Performance. So that doesn’t sort of add up to for me, it’s like, an equation, right? So that if, if the past does not equal the future, then why are you looking at past data? Does that make sense? There’s


Benn Eifert  23:47

a, there’s a couple different questions there. I’ll try to kind of separate them and unpack them. So I think the first thing is kind of a question about, you know, capabilities and technology, infrastructure, or whatever. And that comes back to your kind of point about, like, individual investors who have stuff to do versus, you know, I mean, obviously, people like us, and the people involved in this market, who are specialists have extremely large technology, technology infrastructures that see all, you know, see, calculate anything that you need to calculate in extremely low latency constantly in really sophisticated ways. Right? So like, and that’s just like, whatever, like, is the same thing as like, you know, Google’s real time ad options or whatever. Like, could you be like, I’m gonna go compete with Google in the real time at auctions market, like, like, why would anybody ever think that right? It’s like, you know, there’s a huge amount of money spent and infrastructure spent, you know, doing this kind of stuff. So that’s, that’s one piece. The next piece is what is implied volatility. It’s just a normalized price. It’s not it all literally, it’s just saying, well, there’s different maturities of different options, and there’s different underlying with different, you know, prices or whatever. And it doesn’t tell me if you tell me, I see an option that’s trading at $171.25. What do you think? Like, that doesn’t tell me anything, right? Because it’s like, well, I don’t know, is that is that a lot? Is that a little leg? It depends on a million different things that you didn’t tell me, right? If you tell me that, you know, the implied vol on this particular option is 72, that tells me more information. And that’s more comparable between a one year 20% out of the money option on Tesla versus three months, you know, 10% out of the money call option on you know, Microsoft like, that gives me a lot more information about how to compare those things. But that’s literally all it is, right? Black Scholes is just normalization, that’s kind of like a z score and some, you know, multi dimensional space, that just gives you an accounting framework for understanding option prices in a in a normalized way. Right? It doesn’t tell you anything about like, is that option expensive or cheap or anything, right? It’s literally just, it’s literally just simple data manipulation. So getting so then to all of your questions about well, like, how do you know what to do doesn’t tell you anything about what to do just gives you a clean that whole technology, infrastructure, literally all that it does is just give you a quick clean picture of what the prices are right now. And if you don’t have a clean picture of all the prices, right now, when you’re like trying to do something sophisticated, obviously, you’re not going to do a good job of it. Because you’re just you know, you don’t even know what the price is, how are you supposed to know what to do. But knowing what the price is doesn’t have anything to do with understanding what again, back to what is your objective? What are you doing? Right? So we talked a little bit about how, you know, investors, you would think make money putting capital to work taking risk, in that those kinds of things, you know, some kinds of institutions, so like some like market makers, right, we get paid for other things, right? We people get paid to provide primary liquidity, right. And that’s when retail investors go and trade with market makers, market makers are getting paid for providing that liquidity by earning bid ask spread, right. And then people like us get paid for identifying and understanding dislocations in market prices that come from big transactions that people are doing that are making things kind of have the wrong price. And for understanding that and providing liquidity to that and warehousing basis risk, like those are the kinds of things that people like us get paid to do. Like those are not really things that are accessible to, you know, to people who have, you know, a lot of other stuff to do, and like having been doing this for 10 or 20 years or whatever, right? And there’s not like, so the problem of, can I count, you know, even if, even if you had a technology infrastructure that could tell you what the implied volatility is of everything in real time, right? There’s another huge gap from there to like, Well, what do you do with that? And how is it that you think, what what are you going to get paid for doing and how and why.


Jeff Malec  27:51

And for you, for you guys been like people like you, you’re have your model calculation that saying what you think the price should be, and then what the actual prices? And then can see that dislocation said, somewhat fair representation?


Benn Eifert  28:07

In some in some very high level sense, yes, it’s not, that’s not in practice what it really looks like, it’s not like this option is worth $12. And it’s actually 13 $13. But But, yeah, we what we think about is, how do you think about different very specific kinds of dislocations? How do you wonder where did they come from? How do you identify them and quantify them? And how do you how do you take them?


Jeff Malec  28:30

But I think that’s important point. I think retail in the course is out there selling this or like, Hey, you can find the magic formula that lets you get the true value of this option.


Benn Eifert  28:40

In total nonsense. Yeah. I


David Rhoiney  28:42

mean, after reading this book, it’s 100%. Nonsense. There’s no way there’s no magic formula. And then, and I’ll caveat this, when I first started to ask about options to Ben Ben was like, he was like, David, you’re a surgeon. Don’t waste your time on this stuff. It’s not worth it. You have other ways. I’m like, Look, I just kind of want to know, right? And he’s 100% Correct. I now that I’ve read this book, I have no desire to ever even look at options ever again. Right? Because the reality is I don’t have time. Like I read probably every morning like and I stole this from Barry Ritholtz is, I asked him like, hey, you know, how do you keep track of what’s going on in the market? And he told me his setup on like, what articles he reads and how he set up his. So I do the same thing. So I literally go to my Google News Feed that I like, set up all this stuff. And I just read through that stuff. And I’m done. I don’t even pay attention to what happens in the market, because I don’t have time to sit there and do all this stuff. And so I’m just confused how someone, let’s just call them Jane. Right? How Jane goes to work and is supposed to put on an options trade in the morning. Be able to watch this while she is taking care of whatever she’s doing at work, and then magically can close the trade right when she needs to close it to make the amount that she wants to make. And I just don’t see that scenario, right? Unless you’re doing this full time. And then I talked to people who are professional investors. And they go, Yeah, I don’t do this for my personal account, it’s not worth it. And then I’m like, Well, if they are doing it for their personal account, why the hell would I do it for my personal account?


Benn Eifert  30:31

Totally. I mean, I think if they’re, you know, there’s a couple of different things that I like doing and try to achieve with substantive content on Twitter, there’s obviously also a lot of non substantive content, as you guys know. But I think the most the single most important of those as it faces, you know, the sudden, the huge amount of people that follow me who obviously, mostly aren’t specialized derivatives, people, because there aren’t that many specialized derivatives people is like, you should come away thinking that, like, I don’t want to touch any of that stuff. Right? Because, you know, it’s complicated, it’s harder, it’s harder than then people make it seem and all that stuff that seems really easy and obvious, and how it’s like, there’s like this get rich quick magic is obviously lies, right? And I think that’s really important.


Jeff Malec  31:18

But is it lies? Or is it luck? Or both? Right? Because you can see what were the headlines today, some kid made 100 and 10 million, right. And, and beyond options, and all that stuff. So it’s like, part of me wants to say, Yeah, are we too smart by, you know, too clever by half to quote, whoever that is, but and we’re like, trying to think of all this fancy stuff when someone just buys these teenis. And it’s more of a lotto ticket type investment, right? If they know that. Is that so bad?


Benn Eifert  31:48

Yeah, and like, you know, I haven’t looked at but you know, that kid. I think framing it as a kid thing is a little weird. He had like 25 or $30 million, or something like that he was investing, right. And so like, he bought some call options, and they went up, but like, you know, and I don’t know how many I know. So having watched closely and commented a lot on the GME, AMC stuff back last year, you know, you see this kid, again, kid who but I can tell you there are a lot of people who made a ton of money doing similar things in GME because it was sort of the first time anything, we’d really seen that particular dynamic happen. And there were a lot of hedge funds, making really bad risk management decisions on the other side, and sort of providing, you know, these people this opportunity, a lot of them then turned around and lost all that money, or, you know, most of that money. Having thought, hey, look, I’m really good at this. I’m smart, like, look how good at trading options I am and then got crushed over the next year or two doing because, again, like, you know, that was a very unusual moment in time. And there’s still little bits of that coming out. And actually, I think some of the people that were involved in those trades early on, were quite smart and quite thoughtful and actually much smarter about how they were thinking about them than the hedge funds on the other side. And that was like a really cool story. And I’ve talked about that a lot. But the right lesson to learn is not you know, short term punting around in big size on options is going to it’s going to make you rich, right? I’m sorry.


Jeff Malec  33:22

Cago term for it is terminal breakeven, right of like, hey, eventually, in these trades, sure, you made some money, but eventually you’re going to come back to break even if not worse.


David Rhoiney  33:32

You know, it’s interesting. So I always, I like going to Vegas and in gambling, right, but I try and sort of narrow the amount. But if I if I get a big win, I try and walk away from the table, which is kind of tough, right? Because the minute I do that, if it happens early on, and then I usually will my wife would do like, well go do something else. Right? Or how about you just go gamble again, because you’re over here, you’re hanging out and just needs to do some stuff. You’re too bored. Right? And then I ended up back at the table and I lose it all I give it back to the to the casino. Right? And I kind of feel like the same thing happens with those folks is we start to think you sort of get lulled into thinking that you are very good at something because you did it like great the first time around in reality, it was just luck. And then when it comes time to like actually so some skill because while you were weren’t paying attention, the whole dynamic shifted and your thesis on why you got it correct. The first time was 100% Wrong. And you’re sitting there trying to figure out what what did I do wrong? I’m doing the same exact thing. Well, it turns out you weren’t even correct the first time. You just got lucky. It was a random occurrence. So like, I personally don’t ever envision a scenario where I would want to play that game. I do think there is a scenario where I would want options exposure. And that is my ability for some One thing that I go, I’m already longing to get even more exposure over time, right? Because it does allow me to leverage up. And maybe I’m thinking about that in the wrong scenario. But I think it gives me leverage exposure of a certain particular entity that I personally, I, majority of the stuff that I do as a retail investor is pretty much all index funds. Most people think on Twitter, I don’t like index funds. I actually like index funds, I, I limit the amount of exposure to individual names and certain accounts that prevent me from going swinging too far left or right, and like getting into that casino mode and putting more in, right. And typically, those are like IRA or something like that, that I can only put a certain amount in per year. But I go on the micro cap side, right. And those are names that I go after, because I always get worried that now that I’m starting to get a peek behind the veil of how this stuff works, that I don’t want to be on the other side of QBR advisors, right? Who are buying this stuff, or Blackrock or whatever, these giant institutions. So I go into stuff that they can’t necessarily access with these larger funds. And it’s mainly just retail investors, hopefully. And but when I look at the options market, like for some of these names, it’s like non existent, sometimes the value is like 10 orders, right. And I kind of feel like, especially after reading this book, another component that people don’t pay attention to is you actually need volatility in like Valium to go across on both sides to even be able to get in and out of these trades. Like, it’s great if you identify something, but if you can’t get out of the trade, it doesn’t actually matter.


Benn Eifert  36:53

Yeah, absolutely. I think, you know, one way to think about, you know, who are you interacting with, in the options market, with with very high probability, if you if when, if you have an option execution, you just trade with the market maker, right, that’s just kind of how it works. And in including, and micro cap names, and that market maker, you know, might be a smaller Chicago firm, or it might be Citadel securities, or James Street or whatever, right. But those are the people that have bids and offers out in, even in those small, funny micro cap names that where there’s only a, you know, 20 lot, and it’s, you know, 30 cents, that 90 cents, or whatever right is is, you know, those folks have their universe of every single company in the world on their listed on us exchanges, and you know, which have option markets, and How wide should they be? How much does the stock move? How, you know, what are all the probabilities involved or whatever, right. And, you know, when you, when you trade with them, it’s because they think there’s enough ads relative to theoretical mid market and where you’re, you know, open to trade that they’re happy to trade with you, right. And that’s what that’s the money that you’re paying them. And that’s how they make their make their living in much more rare cases, but occasionally, it’ll be that, you know, our firm or somebody like us, specifically wants to buy the options that you’re trying to sell, or vice versa. And we’re out there bidding more aggressively than the market maker to try to buy those options. And that’s kind of, you know, the case that you said, where it’s like, there’s somebody that you’re worried might be more informed than you then that’s trying to, that’s trying to get that that position. And by the way, that’s the case where you’re gonna get a fill that looks like a better fill. Because take that example of a pretty illiquid option, that’s 30 cents at 90 cents, right and mid market at 60 cents. It might be that if you get out there and you you bid, you want to you want to let’s say you want to buy that option, it might be that if you get that get out there and buy some been 75 cents or 80 cents, so a little little below the offer, you know, Citadel might still fill you because they’re like, Oh, well, that, you know, that’s still enough enough spread for us, we’ll take that trade. Ben might fill you in the market at 60 cents, if I actually want the other side of that of that position. The difference there is like prep. Presumably I’ve thought about why I want to buy that option, whereas Citadel is not trying to be an automated market makers aren’t trying to buy or sell a position and hold it. They just want Okay, is there enough spread? Do I think I can get out all that all that kind of stuff.


Jeff Malec  39:13

In there, there’s almost no chance that Dr. David in Seattle is on the other side of that train. In those owners,


Benn Eifert  39:20

there’s very little chance it’s possible that some other individual investor is like, hey, I want to buy into a lot of that option. But the probability that you’re both trying to do that, like at the exact same time,


David Rhoiney  39:29

it’s very rare.


Benn Eifert  39:30

It’s just pretty low, right.


David Rhoiney  39:37

It’s speaking of probability, I mean, majority I was. It’s interesting to find out that majority of this works off of because you mentioned normalized curves, right? Specifically, implied volatility is more of a normalized curve, right. And which is interesting, because we always in math, science, medicine, whatever everyone shapes these things. So look like bell curves. Well, we know in actuality, they don’t actually resemble a true normalized distribution. And so I’ve heard the prior to reading this book, I used to always hear you talk about skew like, is it skewed this way or skewed that way? And I knew it from a mathematical standpoint. However, what does that actually look like? In every day? Like how do you take SKU into account when you’re thinking about, like purchasing a certain option?


Benn Eifert  40:32

Sure. So maybe first just to start with, you know, back up a little bit. So there’s no assumption about normal distributions and anything related to options ever. That’s important. So Black Scho- and people get confused about that, because they see Black Scholes formula, and they’re like, this thing is a normal distribution. But again, back to the point where literally all that Black Scholes implied volatility is telling you is just, it’s just normalizing a price in a in a comparable way. And the whole point is that the at the money option, where the strike price is right at the forward or at spot might be 30%, implied volatility and 5% of the money put might be 35%, implied volatility and 10% of the money put might be 40%, implied volatility, right. So that’s skew the definition of skew, there’s different measurements, but it’s effectively going to be how different are the implied volatilities of options that are further out of the money versus closer to the money and in the upside call wing versus the downside, put wing right. And you could think of it as the, the option price is all of the option prices and all therefore all of the implied volatilities for a particular maturity in a particular stock, tell you completely what the implied probability distribution of future values of the stock are at at that point in time, right. And it has nothing to do with normal distribution, it is what it is, in general, it’s like some very fat tailed kind of skewed thing that you could think of as like, this is what the market is saying, the full probability density of where the stock might be in grievances. And if you have a, if you have a intelligent way of coming up with, you know, your how your view is different than the market, then maybe that’s the thing. That’s very hard to do. Right. But so that’s kind of the first thing is that skew is literally, here’s how implied volatility is different at you know, this strike versus the strike versus this strike relative to the money. And what the full skew curve across all moneyness points are all strikes is telling you is what is the probability distribution of that stock going forward? And then, how do you take that into account? Again, if you back up, it’s like, well, what are you trying to What are you trying to achieve, right? And then that tells you how you think about it. You know, in our case, we think about things like, you know, SKU gets very wonky, but like SKU tells you a lot about or the economics of skew are all about how implied volatility tends to move as spot prices move. So if you think about the S&P 500 typically okay, if the equity market is down, typically implied volatilities are rising. And if the equity markets up, typically, on average, implied volatilities are falling. And what the shape of the skew curve does mathematically is it actually tells you what the market is implying about how much implied volatility is going to rise on average, if the equity markets falling, and vice versa. And that’s something that, you know, we might we might see dislocations in or have a view on, but like, you know, that’s a not again, to your point, not something that anybody should care about, except out of pure intellectual interest. If


David Rhoiney  43:45

I care about it. It’s more of an intellectual curiosity, like, for instance, when I see like, like these different curves and like, like areas on the curve, I always think about, well, what is the derivative of that right look like, right? Because typically, and I and sometimes I call it like velocity, right? Because it’s really just a change in something over a change in time, or rise over run, whatever you want to call it. And it’s sometimes I think it can be sort of a smoother transition to look at stuff as opposed to the choppiness and noise that occurs underneath. And so when I when I think about implied volatility, I’m like, you know, that that can probably be choppy over time. And so what does the derivative of that look like? What does that curve look like? That’s the math I haven’t really seen so far. That sort of tracks these things over time is if there is an ability to actually extract some inference of where the markets headed from that.


Benn Eifert  44:46

So in general, you know, I would tell you, there’s very little information in implied volatility about where the market is headed, other than the most kind of obvious insights, which is that over If If s&p 500 implied volatility is really high, it’s probably because we’re like in the middle of a market crash. And then, you know, if you if you sort of think that, ultimately, like, the US is a place that doesn’t fall apart, and like, you know, the Fed or the government or whatever, kind of like, you know, deals with the banking system or whatever is going on, then often historically, that has been the case that if the markets crashing, then it’s, you know, reasonable time to buy equities or whatever. But like, look, that I think that the end, there are people who will tell you otherwise on Twitter, and you know, we can talk about that. But like, if somebody’s like, look at this thing that I know about the Z score of the slope of the skew curve, you gotta buy stocks, just like, delete. No, just delete.


David Rhoiney  45:44

You got it. You got to auto block those folks, then.


Jeff Malec  45:47

Is it fair to say the implied vol tells you something about the demand for below the market? Right, if you have that view, and you have more implied vol. and the downside, is that saying there’s more demand on the downside. For those?


Benn Eifert  46:01

It does mean that and then the question is, what’s the demand driven by? And usually, it’s kind of the fundamentals driving volatility in the markets? Like, why is implied volatility going up? Well, because some combination of people are buying options because they got worried or because realize volatility is rising a lot. And the value of options is a lot higher, and it’s a forward looking thing. And you know, same with skew, right? If skew is going up. So downside is getting bid relative to near the money or upside, it means people are large market participants are out at some combination buying downside right now we’re selling upside. And there probably is a reason for that. And, you know, it’s, that doesn’t mean that it’s getting more expensive, maybe it’s actually getting cheaper, and they should be buying more of it. Right? There’s no the all of the obvious one very important rule of derivatives is there is no obvious wisdom, right? This like this thing went up. So it must be a sale or, you know, voc implied volatility is low. So it must be a buy or like all of that kind of stuff. But you just see all the time. It’s all wrong. And you forget that you ever learned about I mean,


David Rhoiney  47:08

it’s interesting that you say that, right? Because, like, I mean, I think I’ve told you, I’ve been reading a lot about churn following. This is like, the thing that I’m really been looking into. I was reading myth favors paper. It’s more like a book, I think 70 pages long, but I find it interesting. So I do in like it, maybe I’m completely wrong, please correct me on this. If I am, let’s say I’m looking at a certain sector. And I see that certain names, the options, like a certain side of the options are starting to get very expensive. And there’s a lot of value in going across for a certain timeframe. Let’s just say a six months from now. And am I wrong in making a educated inference based upon options call Valium, or or put valium to tell me like, Hey, this is where the generalized market is thinking that this is going to hit. Right. And so taking that pitch a position as a retail investor, which is easier in the underlying equity market, is that wrong?


Benn Eifert  48:18

I don’t think there’s any robust information in looking at simple publicly observable things like call or put volume in like the direction of stocks, right. And the world would be crazy if there was, well, I mean, that wouldn’t make any as a starting point, like, Well, they didn’t ever expect that. You shouldn’t expect it to be true robustly. No, the world is not crazy. In that way. The world is crazy, and like unpredictable, weird stuff happens that you haven’t seen before. And whatever the world is not crazy in the sense of it’s really easy to predict what’s going to happen to stocks, and you can just kind of do that. Right? Well,


David Rhoiney  48:50

I don’t I don’t think I don’t think it’s a prediction though, right? Because like we’re talking about if, if you have 100 people in a room, and they get asked 100 questions that are yes or no. Right. It’s in their common sense questions. Right. The majority of the people in the room are if they have legitimate common sense. Well, we know common sense isn’t common, right. But they’re going to answer the question on average the same, right? And so if you’re saying that if the consensus from everyone, like the average consensus is in a certain direction, right, then the likelihood you’re more likely than not, if you are following the consensus to be on the correct side, right. Now, there’s over time, obviously, there’s going to be instances where the consensus was 100%. Wrong. And whoever’s in the contrarian group was correct, right. But over time, that’s going to happen less frequently than the consensus grouping Correct. Like if I say two plus whatever is For, like, you obviously know, the majority of that group is going to get that correct. Right. So this is more of, I don’t really know what direction is going. But there’s a bunch of smart people who are thinking it’s going this way. And if I follow the trend of the smart people, then more likely than not, I’m going to end up on the correct side.


Benn Eifert  50:21

I don’t think there’s any evidence for that or reason to think that that’s true. Right? And I think the key conceptual insight is that, you know, markets are forward looking and they price things in, right. So if like, we all think something like that’s already in the price, right? By definition that we did those trades, right? It’s not like, oh, we all think something and it’s sort of likely to be right, and it’s not in the price, yet. It’s in the price, because we all think, right? And then when you go and look at historical data, there’s a lot of different ways to do this. You can look at like just the smart people, you can look at like hedge fund positioning, you can look at all kinds of stuff, following like the hedge fund position, smart, long, short, equity positioning does not make you money overtime, right? Like, there’s literally no evidence for this kind of phenomenon. And you shouldn’t expect there to be right, because that’s like, the whole thing about financial markets, you have to think of, it’s kind of like when you explain to you know, like my mom, like, Oh, I saw this thing on TV about how there might be a recession, does that mean we’re supposed to, like not invest in stocks, and like, maybe maybe there’s some very deep analysis you can do about how actually, you have a very different view than like, the consensus or whatever. But like, if there’s something that, you know, we all kind of know about, and like, there’s some consent, some view on it, and like that view is reflected in the price already, just because you kind of know that something is going to happen, and other people know that something is going to happen, like doesn’t mean that then the price is going to change in some kind of predictable way. Right? You see this all the time with with macro and with with market announcements, and like people are always confused about it, it’s like, you know, there are there’s expectations about what the CPI number is going to be or whatever, right? And then there’s all the commentary on like, the range of things of places that it could be, and there’s the official forecasts, and then you could have the CPI number come out, you know, materially higher than that. What was supposedly consensus expectations, but like bond yields fall or whatever. And that’s because actually, like, people thought that it was going to be it and they were positioned that way. Right. So like markets are forward looking and like, they’re not, I think the key thing way to think about it, it’s not that market efficiency means like markets are right, right, like in any kind of deep sense. But what it means is, it’s not that easy to just sort of like, have a good sense of some particular thing that’s going to happen, or that some stock might be overvalued or that the CPI is going to do X and like, therefore be able to make money on that in a reliable way.


Jeff Malec  52:34

I think would buy the rumor, sell the news, right? But then David, you might have been saying something a little different. Like kid you, to me, like trend following. If I use option volume to identify a breakout of a new trend for me, right. Yeah. So I Yeah, but


David Rhoiney  52:53

that’s what I mean. It’s like, like, the matte paper specifically looks at paper, 10 months, simple moving average, right? That’s, that’s relatively simple math, right? 10 months over that time series. And it looks at six months, and all these other breaks down and it looks at these different asset classes. And my thing is just like, well, you know, if there’s to be the smart, super smart money, that in on the institutional side, there’s smart guys like Ben ifre, they’re doing options and and bonds, right? Because bonds is like, the super smart guys that can price these things in their head. Yeah. So if I look at the trends that they’re following, right, the trend in that market, is there a way to use that as a signal to reflect into the equity market? That was just the thing that popped in my head? Like, is that possible?


Jeff Malec  53:46

than saying no? Politely?


David Rhoiney  53:49

Yeah, Ben, Oh, Ben, Ben tells me I’m Ben, Ben knows that he can flat out tell me I’m an idiot, and then move on to something else. But in here,


Benn Eifert  53:59

I think it’s worth it’s worth I’m sorry, go go go for it. I


Jeff Malec  54:01

just gotta say I do trend falling all day, every day, like the average reading a portfolio of 70 markets, the percent correct. of a trend signal was probably 26%, or something along those lines. So a trend signal is more often than not three to three to one. Incorrect. It’s a false breakout. Right. So just because all these smart people got into a trend doesn’t mean that trend is going to persist. More often than not, it doesn’t it’s a false breakout, but they risk very small amount on each of those false breakouts to and when they do catch it, they ride it for weeks, months, years. And that’s how they overcome the right so the terminal effect has it’s a it’s a winning trade because they make more money when they’re on their winners, which are fewer than on their losers, which are more often.


David Rhoiney  54:48

Well, so you just brought up a good point on the concept of risk management, right? Because that’s really what risk management comes down at least the way I’m understanding it based upon talking to all of you smart folks. And I don’t think as a from a retail perspective, that’s something that gets talked about or really taught very well. We just get told just to put your money out there, right. And so what ends up happening is people go bet the farm on one thing, and then they lose it all and they can’t play the game anymore.


Benn Eifert  55:20

You see that I think quite a lot in certainly in the aggressive retail options, speculation dynamic of the last few years. And we talked a little bit about it. And it comes back to how some folks made tons of money, for example, on GME in January of 2021, and then gave a lot of it back. But I think options particularly complicate the risk management dynamic because options are more complicated, right? You’ll have people who maybe have some notion of how much risk are they taking when they own a certain amount of equities, right? They’re like, Okay, well, I have $100,000 in my account, and I own whatever I own $50,000 in equities, or I own 100. Or I’m actually borrowing some money, I owe $150,000 in equities, and maybe they can kind of handicap that risk effectively. How does that translate? When it’s like, okay, now I own, you know, option one week 10% out of the money option contracts on, you know, with what size? And I think on like, that’s something that is very poorly understood by typical people who are like getting into Options, and they can lose a lot more money fast than they think. Right? Because they’re like, hey, look, this is only, you know, I have options on 100. I have, you know, $100,000. In my account, I put $50,000 of it in the option premium. That’s kind of like buying $50,000 of stock? No, it’s not, you could just lose all of that, like in three days.


David Rhoiney  56:39

Right? Well, there’s a concept in there that Nana Berg talks about, like different, like dynamic hedging, where if you aren’t paying attention, that you’re basically going to go through your money very quickly, because you keep buying, buying buying to stay Delta neutral. Which I was like, why would anyone want to do that? Like, I don’t want to do that, right. And it talks about, like, sort of selling off to sort of maintain your position. But then it also comes back to what you talked about, like, you have to know why the EFF you’re doing this to start with,


Benn Eifert  57:12

you always start with what is your objective and why? Right. So I mean, a market maker who gets lifted on some Tesla stock is going to tilt their head, because they’re what they’re trying to do is they just sold this option, and presumably there was some bid offer spread that they captured. And they’re going to be trying to get out of that option, it’s going to take them some amount of time, they have some kind of portfolio of risk, right. And they don’t have any view on where Tesla is going, like that’s not their business, they don’t know they don’t care, right, they just want to be completely neutral to the direction that Tesla is going neutralize that first order risk of the option position, if they get lifted on a call option, right, they’re short, the stock if they’re short, the call options and other need to buy the buy enough of the stock back to kind of neutralize that move. Now they still have that’s still a risky position, they still have risk exposure in a short option, short call option heads with long stock, it’s a much less risky position than an outright naked short call option. Because if you know Tesla was just to drift up, and you’re short, a call option, you’re just going to lose a ton of money, right? But now their exposure is going to be to second order factors like well, how volatile is Tesla stock over what period of time and again, they’ll be trying to offset that within their portfolio by the ranges of different options that they might be long or short. And they’re going to be trying to work that down over time, but they’re absolutely going to Delta hedge whereas, you know, a retail investor who likes Tesla stock and wants to buy the call options because they think Tesla stock is going to go up like of course it’s not going to Delta hedge the stock they shouldn’t that’s not the point they’re trying to buy that call option to get their upside exposure


David Rhoiney  58:50

so the world’s greatest investor, Nancy Pelosi likes to buy leaps, and she’s very successful at it. Like it helps to have the insight into that is also true. Like why would someone want to buy a leap right like why not if you’re gonna go along, why not just buy the underlying


Benn Eifert  59:16

So Nancy Pelosi is just getting ripped off by her Hi Fi broker financial advisor who’s getting a bunch of spread on that is the answer right Nancy Pelosi would be making more money buying stocks than buying she’s bought right like when you look at those positions they’re typically deep in the money long dated call options which is something that you shouldn’t you should never under any circumstances trade a deep in the money long data call option because the bid ask spread on that is very wide. You never bought like very deep in the money options are not liquid things out of the money and near the money options are liquid things, the the nature of that position, back to put call parity, it’s essentially the same as owning stock buying a put option, right? Because with a deep in the money call option, it’s like it’s mostly like stock unless the stock goes down at time, in which case, you’re gonna lose a little bit less money being long the deep in the money call option. So as a starting point, if you want that payoff profile, you should be long stock and long the put not long a deep in the money call option. The the there’s a lot of extra bid ask spread being paid to market makers and to exchanges and somebody’s getting a big fat commission on that trade. And that’s why it’s being done. Right because because actually, she’s not a sophisticated investor, she’s a very rich lady who’s getting taken advantage of and don’t feel bad for by any means. I don’t. We don’t even feel bad for Nancy Pelosi. But this is what it’s like. That’s, that’s not smart trade structuring. That’s, you know, somebody’s getting getting ripped off.


Jeff Malec  1:00:51

And as we take away from this of like, hey, retail, run away, a lot of will be like, cool. My advisor in Toledo is going to sell these call options for me. And I’ve got to figure it out. Because I know I can’t do it myself. So talk a minute, if you could, then about that of like, that person likely has no even better idea than you do.


Benn Eifert  1:01:10

Yeah. And this is something that Dave and I talked about, right. So there’s a an important role. I think, in some cases for financial advisors, I think the important role there is really, ideally keeping you from doing dumb stuff and helping you think about a plan for your wealth and your assets. And there’s some compensation for that. And like, that’s good, giving you tax advice, you know, all the other kinds of things. You know, financial advisors are not options, trading specialists, and you shouldn’t expect them to be in nor are they necessarily you should you should you even think of them as like stock picking specialists. That’s not their job. And that’s not their role, right. And if you’re a financial advisor is putting you into a bunch of weird derivatives and options stuff. The reason that they’re probably doing that is they’re getting paid big kickbacks on that from whoever is selling the product. And you should take that as a huge red flag.


David Rhoiney  1:01:59

So here’s my other question, right? Because there’s a guy who is infamous on Twitter that seems to love him. I’m pronouncing his name correctly. Who has some interesting books that I’ve also read? And I’ve quickly forgotten. But he’s, he talks about tail hedging, right? Which, to me, like kind of makes sense. But then it kind of doesn’t make sense, right? Because if you’re constantly it’s like, it’s like walking outside, right? Like, we know that the risk of being in a car accident is actually its relative is higher than what people think. Right? But it doesn’t stop us from driving. We just sort of drive, right? Because if you’re really worried about getting hit by that car, you would never go or getting into an accident, you would never get in your car. So why would I pay for a losing strategy just to have protection against a wanton wherever that? Now I know, the argument is that these like never events tend to happen more frequent. I think that’s the other argument I’ve heard is like, it happens more frequently than we actually pay attention to. But over time, how much money like does it shake out over time that you’ve actually not even broke even even when you have an asymmetric payoff?


Jeff Malec  1:03:25

So post thread on this?


Benn Eifert  1:03:27

Yeah, you can read all kinds of stuff that I that I wrote on this. So I think the first thing is we have to differentiate, should you actually be thinking about this and trying to do this as an individual investor is a different question. But let’s just talk about the concept for a second. I think the right analogy, actually, so what you said like not driving your car that will be not having an investment portfolio, right. That’s not a tail hedging thing. Tail hedging is like buying, you’re buying car insurance, right? So like, you drive your car, and you have insurance, because you’re kind of like, well, I have this nice car, and it’s like, if I record, then that’s going to be 70 grand, and I don’t really want to be out of pocket 70 grand and so like, I’m gonna pay an extra grand grand a year or whatever for you know, right. So that’s the analogy to to tail hedging. The and then I think the the very short version, again, go go read a lot of that stuff, right. But the very short version is so if you think of an investor, they’re going to have some kind of investment portfolio. The when the once every whatever it is five or 10 years where equity markets just completely massively meltdown. The the key question is, if they have an efficient source of a lot of strength in their portfolio in that scenario, there’s a very strong complementarity between the tail hedge and the portfolio and that precisely when your portfolio is losing a ton of money, that’s one of the tail hedges making a ton of money. And you can’t actually if you’re thinking about the long term performance of your portfolio and comparing just an equity portfolio to With an equity portfolio with a tail hedge that you’re rebalancing, together with the equity portfolio, you can’t analyze those two things on a standalone basis, this the return average returns of this thing, plus the average returns of this thing do not equal the average returns of the portfolio because of the covariance effect between the two. And you can end up so that that tail heads will always be a money loser on average over time over long periods of time, otherwise, the world would be crazy. And again, yes, the world was crazy, but not in that way. But the end result of the whole asset allocation, you can end up with lower risk making the same amount of money over time or more money over time, because of that complementarity effect. And it depends on lots of details and nuances and stuff. But there’s sort of a fallacy in this thing loses money over time, therefore, it shouldn’t be in a portfolio, my portfolio will do worse with it. And that’s not good. That’s another correct logical statement.


David Rhoiney  1:05:50

Well, so how, as a retail investor, do you even tell hitch, right like that? That’s the that’s the thing that comes down, right? Because there are people who say, and I mentioned this before, like, as a retail investor, you should be long only, right? But you also have risks that you need to worry about for worry for, like how do you even implement a tail hedging strategy, other than paying some mutual fund to quote unquote, provide you that type of exposure or some ETF? Right? Like, how is that is that a thing that retail investors should even be concerned about?


Benn Eifert  1:06:28

I think if one, if one, in a position of a retail investor wants to think about this, I think thinking about some kind of ETF or fun product that does that, and does it well, and relatively inexpensively is the only way that you should think about it, I think it’s incredibly complicated and difficult to think about your equity portfolio and different things that you can do to hedge the tails of that portfolio and how you’re going to do that and how you’re going to rebalance. Like most institutions can’t do that at all, much less like an individual investor, it’s really hard. And so I think the right answer there is to look for, what are the available opportunities to to effectively get that to get a portfolio that has a tail hedge attached, you know, via via, you know, some kind of ETF or, and there’s a few things, you know, and there’s a few things out there. Now, it’s not as big of a marketplace, as it should be, you know, simplify has some some stuff, a few other people have some stuff. I think that’s ultimately the thing to look at.


David Rhoiney  1:07:26

Why do you say it’s not as big of as a marketplace as it should be?


Benn Eifert  1:07:31

I think it’s just a new, it’s just a relatively new space and idea, right? But you kind of can buy an ETF that has strategies with options, overlays on it, and things like that, right. But these things just haven’t been around for that long. And the first generation of a lot of like, mutual fund products in the option space, by the way, were very terrible option selling funds that performed very poorly and had very high fees and that brokers were putting they’re putting people into part of it comes back to, you know, what we talked about with financial advisors and brokers, which the incentives in retail distribution of these products are terrible, right? It’s not like, what’s a really good product that, you know, my client really needs its product pushing from foreign companies and getting the kind of retail dumb money in by getting by paying middlemen to sell it to them. Right. And so that’s kind of how you end up with bad and inappropriate and unsuitable products.


Jeff Malec  1:08:28

And then you have, but like JP Morgan hedged equity 18 billion or something, right. So you do have some big players, but I would assume you would think that’s,


Benn Eifert  1:08:36

that’s not a that’s not a tail hedge product, right? It’s good or bad. That’s a collar product, which is in no way tail hedges, right. It’s selling out all the upside to the equity market by selling a call. And it’s buying a put spread against that. And it’s going to have some kind of performance characteristics. Mostly, like just owning less equities with with less beta. Right, which again, it’s a thing that’s a different thing than than a hedge, though.


Jeff Malec  1:08:57

But I think, why it hasn’t been as big as because of the reasons you mentioned, people that don’t still understand, like, why would I had this losing thing into this winning thing? Doesn’t make sense. Yeah.


David Rhoiney  1:09:06

So I I’ll dive more. I think I read that thread before, but I didn’t have obviously that was like I think is I forgot when I read that thread. But like I understand more about these concepts now. So it’s almost like we have this concept in surgery, right? So like, if I’m teaching surgery, General Surgery five years, right? And so your intern years, your first year, when you when I teach you how to dissect right, your eyes can’t see the fine detail. You just like you’re just overwhelmed. You’re deer in the headlights, right? So but then you get experience. Then the next year your eyes change, you start to see a little bit more detail. Then the next year your eyes changed some more and you see a little bit more detail. I think the same concept has happened to me over time. And that if I took David today versus David last year, the amount of knowledge I’ve gained in that years like David last year was dumbass So excuse my language compared to where it is today because I read so much more. And I talked to more people and I’ve gained. So like, I think going back to try and read more the tail hedging strategies, kind of kind of will make more sense to me today. Because one of the biggest things that I realized that I didn’t really understand is like the performance characteristics of different asset classes, and the covariance or the variance and how they interact with each other, right? Because what you get told is, and I really hate this, there’s the cultist of the Bogleheads, hey, go buy this ETF that will give you this exposure to this and then you want some emerging market. So go get this international thing, and then get yourself some bonds. They no one ever talks about, like, Hey, what is the performance characteristic of this asset class do against this, like, we don’t want them actually going in sync, because then you’re just going to your portfolio, it’s just going to go up and down like this, we actually kind of want more of a steady state and to narrow the variance of it occurring over time. But I think those are things that don’t get explained to retail investors enough. Maybe it doesn’t have to be but then you have people like me that actually want to know. And then the information is not available.



Benn Eifert  1:11:24

I would say by the way, there’s a lot of there’s a lot of institutional investors that don’t really think deeply about portfolio construction interactions with portfolios. It depends. There’s a lot of institutional investors that do but yeah, I think there’s a line of thinking, I think that got very popular. That was maybe in some ways a reaction to like, what you would call the endowment model, which was like, really think about portfolio construction and do all this different kinds of stuff. Which was, well forget all that, like, let’s just do highest conviction, invest in like 10, stock pickers, and they’re the best bottom up stock pickers and like, over the long run, we’re long run focus, that’s all we have to think about. And I understand where people are coming from. And if you want to make an explicit decision to just do things really simply for a variety of reasons, like that’s perfectly reasonable, but like the I think that way of thinking has caused a lot of folks to lose the portfolio construction intuition about how different assets interact with each other. And the way that you know, adding more things to a portfolio that act more or less just like other things in your portfolio doesn’t have very much versus adding things that are that are really complementary.


Jeff Malec  1:12:39

Finishing up here, this has been fun. Thank you. Let’s get your each of your hottest takes to finish up. Ben, I think just put his in an op ed, but tell us something you believe everyone else thinks is wrong. Something everyone else believes you think is wrong, that Tom Brady sucks. Whatever, whatever your hottest steak is?


Benn Eifert  1:12:58

What is what is my hottest steak? I mean, I think well, certainly one of them. And we already said it, right? But it’s that you know, the biggest takeaway from you know, all of this kind of conversation. Isn’t isn’t. Let’s get really excited about skew. It’s like, this stuff is intellectually interesting. Maybe it let’s engage with it, but like, let’s walk away from, from a retail individual investors perspective, from any notion that it’s like, Hey, I should like get involved with the space to like, make some money because I heard you can make some money in the space. Right? I think that’s just a very dangerous way of thinking. And it’s like, exactly what you know, a lot of people on Twitter want to hear right. But I think it’s just going to run straight the other way.


Jeff Malec  1:13:42

Love it. David, are ya?


David Rhoiney  1:13:44

Oh, this is my time to shine. Okay, my time to shine. Okay, so let me let me start with the non financial heartaches. I don’t think they’re heartaches but let’s start with the non financial outtakes one steak is overrated. Let’s just make sure everybody understands it. Okay,


Jeff Malec  1:13:58

I’m on your I’m on the same page I’m saying are nice pork chop to say


David Rhoiney  1:14:01

exactly. 100%. So steak overrated to chocolate chip cookies are the devil’s nipples. Okay, stay away. Stay away from three a soft oatmeal raisin cookies the best thing you can do nutritionally keep your GI tract and it’s just extremely tasty. Okay sugar that it is does have a lot of sugar so don’t eat it a lot or you will be coming to see me because you’re gonna be diabetic and I can take something out right for not everyone needs to invest in index funds. Right and and and that’s just the reality 100% of what you have to do does not have to be index funds. And I think the bobbleheads are just as bad as the crypto whoever as your Dave Ramsey who are they’re all Colts. Right? The fact of the matter is in a cult I define as folks who refuse to believe anything outside of what they’re doing is like, it can be possibly good. So I will want to 100% never be on board with being part of a cult. I like index funds, but 100% of what you have to do, or whatever. And then three or five. Crypto isn’t cracked up to what people want it to be. And the narratives around crypto are 100%. Like ridiculous. Like, the fact of the matter is, and I take umbrage with this, because just like insurance in the whatever, the African American community was sold insurance constantly, like we’re one of the biggest buyers of insurance, right? Like life insurance, you talk to us about life insurance, it gets sold as an investment. Well, it turns out in the crypto community, guess who was buying the majority of the crypto stuff? African Americans, right, like we may not have been making a ton of money on it, but my community has sold a lot on so as far as that I’m not a huge fan of crypto. I think it does have some future application. But right now, it’s a bunch of freaking nonsense.


Jeff Malec  1:16:10

Waiting here. There’s options on crypto.


David Rhoiney  1:16:12

Oh,yeah, don’t even get me started there.


Benn Eifert  1:16:16

Good times you guys.Thanks, man.


David Rhoiney  1:16:20

Thanks. Thanks, you guys.

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