Why hasn’t “VOL” done better amidst stock market losses in 2022 with Logica’s Wayne Himelsein

Despite the market being down substantially this year, bouncing around inside of bear market territory, it’s been a bit of a challenging year for long-vol traders. Simply put, the Vol spikes we’ve become accustomed to getting with a down market haven’t materialized as much.  While the retracement of vol on bounces higher in stocks has remained. it’s hard not to think, “What is going on?!’  And that’s why we’re putting Wayne Himelsein, CIO at Logica, in the ‘Vol’ seat to share what he’s witnessed in 2022.

In our final episode of 2022, Jeff and Wayne delve into a variety of topics like; the lack of Vol sensitivity, contagion risks, and feedback loops, digging into Logica’s straddle strategy, paying for long-term exposure, problems with machine learning, and is there enough data for machines and quants to work with when it comes to volatility? Tune in to see if this new Vol regime is our new normal — SEND IT!

Follow along with Wayne on Twitter @WayneHimelsein  and check out Logicafunds.com for more information



Other Derivative episodes with Wayne:

Wayne Himelsein: The Human Behind the Hedge Fund 

The Volvengers: Wayne Himelsein (Iron Man) & Mike Green (Captain America) on the Derivative




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

Why hasn’t “VOL” done better amidst stock market losses in 2022 with Logica’s Wayne Himelsein

Jeff Malec  00:07

Welcome to The Derivative by 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. Okay, everyone after a few weeks of radio silence there and then extended Thanksgiving break, we are back with a pot on a Thursday, battling a little bit of whatever this non COVID flu is that’s going around but the show must go on. So happy December everyone and Happy Holidays. This sadly will be our last part of the year as we reset and reorganize is scheduled to bring you a slate of great guests next year. If you’ve got someone you want to hear from a topic you want us to dive into, send us a DM on Twitter at RCM alts or throw it in the comments on YouTube or Spotify or Apple or wherever you listen on to this closing episode of the year. We bring back our first ever guest on the derivative. We’re talking with Wayne Himmelstein, founder and CIO of logical Capital Advisors. My first ever question on my first ever pod was Why don’t you spell advisors with an E. So hopefully we can see just how far we’ve come in this one, and get a few more a little bit more intelligent questions. When digs into why it’s been a bit of a weird year for volatility, different definitions and ways to think about skew. Why machine learning is so tough in and around vol spikes and talks through what the new year may bring. Send it This episode is brought to you by RCMs vix and volatility specialists and it’s managed futures group. We’ve been helping investors access volatility traders for years and can help you make sense of this volatile space. And when I did that, check out the newly updated vix and volatility white paper at RSM Altstadt calm under the education menu than white papers like and now back to the show Okay, we are here with Wayne Himmelstein. How are you Wayne?


Wayne Himelsein 02:03

I’m good how are you?



Jeff Malec  02:05

Good It was fun because I just saw you last was that just last week? Yeah


Wayne Himelsein  02:10

yeah yeah your your visit to La


Jeff Malec  02:13

visit to LA was fun and it was perfect weather when weather didn’t rain almost made me want to move there. But yeah, I don’t know. Some of the crazies I see down on Venice Beach made me think otherwise.


Wayne Himelsein  02:25

Oh, really? That’s the whole fun of it is yeah, the Venice Beach environment.


Jeff Malec  02:30

The kids love it but they’d complain about the smell and I was trying to explain to them what the marijuana smell is and what what that’s about and they’re like well I don’t know I just don’t like that smell.


Wayne Himelsein  02:40

Yeah, there’s a lot of range of smells on Venice Beach. The big range that’s the one you picked up and yeah, that’s definitely pretty. I’ll say the majority straw might be in that genre


Jeff Malec  02:54

Yeah, so love it down there then we went down to Orange County which was equally as good I didn’t get to get in the water as I wanted to do and go surfing but next time the weather it’s too nice.


Wayne Himelsein  03:04

I mean wait waters sorry go ahead.


Jeff Malec  03:06

I was saying the waves were too small. Oh so but


Wayne Himelsein  03:08

yeah, and the water happens to be freezing. So everybody talks about Southern California oceans and the beautiful to look at but crazily gold to get into so it’s amazing as East Coast like I said I was going to Carolina in the summer South Carolina they’re beautiful warm water so it doesn’t have the the popular appeal of Southern California beaches but honestly the water is so much warmer and nicer to to be in so it’s like one of these hidden unknown gems versus the popular opinion


Jeff Malec  03:42

yeah the I just just watching that new Chris Hemsworth documentary on a National Geographic on Disney plus and he second episode it’s all about shocking your system with the cold All right, okay sets your immune system so it goes to the Arctic Circle. And trains like staying in the water for three minutes and then he swims across a channel with just a bathing suit know when he was surfing in that water it was like it was cold watching it and the recommendation at the end was to shower every end of your shower for 30 seconds to do cold water


Wayne Himelsein  04:15

and the shock supposed to be good for your system just to like get your it like a system go in or something like


Jeff Malec  04:21

that. I think it like tells your body to worry about that shock instead of like the little aches and pains and reset I see sounded a little bit of crockpot science but yeah, it was entertaining to see him surf in the Arctic Circle.


Wayne Himelsein  04:35

Yeah, seriously. We’ll leave sounds Yeah,


Jeff Malec  04:38

he’s that’s the word right? Yeah, yeah. And you’re you’re there in the bunker. I got to meet you at a nice outdoor coffee shop but you’re back in the bunker.


Wayne Himelsein  04:47

I’m back in the bunker. That’s this my safe zone.


Jeff Malec  04:50

I wanted to come visit there because I envision it like some evil lair and go in the front floor. Then we’d go down like floors and floors like 17 floors down is it On the heat of the earth


Wayne Himelsein  05:02



Jeff Malec  05:10

so let’s, let’s get down to business. dive right in. It’s been a bit of a difficult year for a lot of long ball traders, which we were talking about out there. Yeah, it’s a sell off. So you’ve had a lot of great charts and your monthly commentary and whatnot. So kind of tell us what you’ve witnessed from your seat. And in relation to your models of why and how it’s been kind of a hard, long ball year.


Wayne Himelsein  05:33

Yeah, absolutely. That’s it’s easy to talk about, because we’ve been going through it for some time now. So there’s lots of different versions of hard vol. I mean, long haul is not easy. At the get go. Right? It’s, you have this constant headwind of long optionality is obviously both theta and Vega are usually against you theta, just the cost of owning an option and Vega with the market usually going up it’s this this vol is somewhat negatively correlated to equities upside. So you have this drag against you in multiple ways. And so it’s always a challenge to own vol. But then you come to a year like 2022, you get actually two things that have been hurting, quote, even worse, making long vol exceedingly difficult. So one of the I’ll say two different sides of it. One side is the lack of reactions. So the lack of sensitivity to downmarket behavior, so equities downfall should pop and that down equity versus upside pop that negative correlation that we also rely on in the vol world is I mean, it’s kind of there, but it’s not it’s certainly not as sensitive. So that’s one side of the coin we can talk more about. And the other side is that on the little recovery rally on the s&p, after a little down, vol crushes even more heavily right so you get hurt on both sides, like s&p is down 2% One day, say in this year 2022. And instead of vol or VIX, we’ll use vix as a proxy for implied vol. Obviously, it’s just one part of the surface, but it’s an easy way to talk about it. So VIX, in this example, s&p is down 2% vix in historically might be up a point and a half to two points. This time it’s up 50 pips, right. So you had this lackluster reaction, really almost like doesn’t pay attention to what the s&p is doing. So that doesn’t help that doesn’t give you much of a pop on your options your Vegas not really lifting to give you a pick up where you where you would otherwise expect it. Then the next day s&p is up a percent and a half and VIX is down a point and a half, right? So it certainly crushes in line or and then some but it doesn’t gain in line. So the summary of that is that you get hurt by not having that reaction you expect on the way up and then you get double hurt that if the market bounces dare to evolve, gives it all back. And ironically, if you look today, I was just noticing this VIX, year to date is basically flat. I mean, it’s yes plus minus a pointer here there. I think if I go to go to chart right now, just to price just to look at it really quickly. vix on 1231 21 was closed at, I guess 17 and a quarter today it’s 18.8. Right? So it’s a point and a half ish difference.


Jeff Malec  08:29

I mean, market is still down whatever. 13 14% 14% on


Wayne Himelsein  08:33

the year, right. s&p is down and VIX is literally unchanged. Or not, you know, or there abouts close enough, right. It’s just so and yet we did see these moves. Once in a while. There’s a call it three major leg downs in the in the s&p, January, June and then in September was the third leg down. And each one of those times vix tried to run up a little bit ran from the low 20s to basically 30. So you had this this minor gain, but then the next few days SMP rallies, it just gives it all back. And so there’s no traditionally, vol is known to cluster right. So once it pops, it kind of hangs out there maybe waits for a new level up. This time, there’s no clustering It just ran up and crushed back down. So I guess we’ll call that the third problem. Right? So problem number one, no sensitivity, no popping. Problem number two giving back much quicker than we expect. And related to number two is number two and a half or three is not clustering, not hanging out. When when there’s a bad environment. So all those things together make for a difficult year from long haul.


Jeff Malec  09:46

So I wanted to say why but I’ll try and be a little more intelligent than that. But we’ll get to the why but is is it too naive or too simplistic to think about out of like, hey, the VIX Add 25 was expecting 2% daily moves. That’s why it’s not moving because the moves are inside the range of what the VIX is telling you. Right? Of


Wayne Himelsein  10:10

course, so since realized versus implied, right, so realized was up. And so you need realized to keep on going for, theoretically for higher implied right. So you need you need something outside of what that’s what people have come to see as normal. You need that to be increasing for there to be a new, wider band, or new, higher implied. Yeah, I mean, that’s part of it. Sure. But that never was an issue when something’s going really wrong, right? I mean, let’s talk about the obvious, you know, occasions where vix or IV ran up to 8090 100, right, whether we go to the GFC and O eight, or whether we go to COVID. or more recently, and some of the in between events, when there’s a serious event in the world. People aren’t necessarily looking back at where the the normal is, it’s more this unbounded uncertainty of what Wow, anything could happen from here. So that that moment of panic or stress that leaves the potential wideness open hasn’t happened, right. And so when you say as to the why we believe the reason for that is because literally what I think what I just said was there’s not an unbounded uncertainty, there’s a bounded uncertainty, right? So the uncertainty is not oh my gosh, the world might end, which was the initial panic. And for example, in February, March of 2020, that’s like, Okay, this crazy virus we’ve all never seen before is going to kill half the world. We just didn’t know anything. So you had, quote, unbounded uncertainty?


Jeff Malec  11:43

Or the GFC? What are the GFC? Who knows? What’s an AI G’s book? How how many people are infected? How


Wayne Himelsein  11:50

many? Who knows the dominant right? I mean, when when bear fell, and then Lehman funny, I mean, it’s just honestly, Citibank, who was next was the question, right? And was this gonna take down the entire financial system? Right? So there’s, there’s the floor is unknown. In the recent environment in 2022, we’ve seen em described what we’ve called the bounded uncertainty, which is it’s uncertain, but within very strict or almost tight lines, right? It’s like, okay, well, the Fed raised 75 pips. And if it’s, you know, feeling one way, it goes to 100 banks, and it’s filling the other way, it goes to 50 banks, right, hawkish or dovish. And so the at the end of the day, we’re literally at 25 basis points plus minus the expectation, right? Yes, had the Fed come out and said, Hey, we’re raising 200 basis points instead of 75 bits, well, then there’ll be shocked because what’s gone wrong, but not only has it not been 100 pips or 50 pips, which would have been plus minus 25 off of the it’s been right at the expectation of 75, which is where the bond market priced in, right, 75% likelihood, right? So


Jeff Malec  13:00

it’s, it’s in what they were telegraphing, like what they


Wayne Himelsein  13:03

were telegraphing. Right. And then so it’s the same thing with the Fed. It’s the same thing that with all the numbers leading up to the Fed decision, the trifecta of influence, the three numbers or variables that we all believe matter most right is GDP and, and CPI and unemployment, right. So it’s, we want to see jobs, and we want to see less inflation and growth. So each time those numbers come out, it’s the same thing. I was like, Oh, the expectation is, you know, unemployment at 200,000, whatever the number is, and so instead of 200, it’s a 190. Like, oh, well, we’re 10,000 off. Right? And, and so it’s just not wide enough around it. And of course, once again, had we had a shocking number as suddenly 200 is now zero. Well, then now we have 100. You know, there’s no unemployment, right? So now we have a problem. And are now we have a shock moment. But 200 versus 190. Okay, missed by attack. And once again, this bounded bounded highly bounded uncertainty is just not enough to shake people up, and therefore not enough to create this potential wider variance than we’re expecting. Do


Jeff Malec  14:13

you think what I’ll call the apple effect, is there like, an apple effect of, hey, Apple’s not going to be affected by all this bad stuff? They’re gonna keep printing money, and it’s in everyone’s portfolios. And it’s a huge part of the s&p and right, that’s why it’s there’s no contagion for these darling stocks that people hold. And so they’re going to kind of keep that bounded of read. I know, there’s no uncertainty in Apple based on all these events. So I’m just going to continue to hold it.


Wayne Himelsein  14:40

Well, I’m sure that that makes some sense. I haven’t thought about that much. But to me, the contagion is in the cost of capital, right? I mean, if rates go up and up and you know that people can’t, people, companies can’t service their debt, or it gets too expensive for them to invest in r&d or whatever. If you’re talking about attacker growth. It’s at Apple doesn’t have a problem, right? They’re sitting in so much cash, it’s, it’s you’re actually earning more on their cash. They’re like, Oh, great, we


Jeff Malec  15:07

have new credit, they should just retire. We’re not gonna do any more phones. We’re just gonna buy


Wayne Himelsein  15:11

more right? Oh, great. We’re earning more on all this cash we’re generating. So but in general that I think that the contagion risk is around the carry, right. And that affecting for obviously if one major company came out tomorrow and said, Oh my gosh, or this is you know, we can’t restructure our debt and we can’t service it and we’re done. And at some s&p name, that’s the beginning of unbounded uncertainty, because I Oh, who’s next? And what’s the new domino it who’s the next AIG have that problem? Right? So now we get to the darlings, to the darlings. Yeah. So some of them, obviously, we’ve seen there’s been layoffs, right Amazon and go down the list that all laying off 10,000 plus people, right, so they’re curtailing some of their growth initiatives. And that’s maybe it’s just again, it’s the equation, it’s not worth the capital at this cost. And whatever reason, so therefore, it seems like to both of our what we’re saying is, it’s not going to hurt the Darling stocks as much because they’re in good cash positions. They’re not debt heavy. They can they can manage their their their their their expenses. But I think elsewhere, there might be this effect, this cost of money effect. And if that’s the case, I don’t know that the Darling save the market. Right? If that gets to be an issue, it’s contagious. Even if Apple safe. There’s a bunch of others who are not. And I feel like that might be wide enough or broad enough to have an effect. I’m not saying that it is in effect, and we don’t know yet. But it I don’t know that the darlings can save us. I guess that’s that was your original question. Yeah.


Jeff Malec  16:47

And then part of what we talked about out there, the energy stocks sort of saved us. Yeah. As a collective US market. I was right of if they hadn’t been if the war had been an oil hadn’t been high. And energy stocks hadn’t held the market up. It might have been more contagion and a sharper, so absolutely.


Wayne Himelsein  17:04

Yeah. Yeah. I mean, that was the definitely the sector of 2022 was energy. Yeah.


Jeff Malec  17:11

And then for me, if if you’re out there listening to this, and you’re huge into the NASDAQ, and a bunch of tech names and growth names, like you’re talking about, they’re probably sitting there saying, What are you talking about? There was huge contagion, right, like, half of my book was marked down 80%. Like, all those high flying growth, stocks just got hammered. And we’re down huge, worse, some say than the.com. I guess some didn’t all go out of business. But I don’t know if there’s a question there. But it’s interesting to me of like, nobody’s really talking about that, like you see the numbers, but it hasn’t been like, it hasn’t flowed into Main Street. It hasn’t gone wide in terms of effect and volatility especially.


Wayne Himelsein  17:52

Yeah, that is interesting. I mean, to your point, there’s many brand names in the tech sector that are down 5060 70%. It’s Yes, this would have been major conversation. I wonder if part of the reason that’s not such a big discussion is because that basically just gave back 2021. Right? It’s yeah, like when people up so much on their apple from eight years ago, that is does a little, you know, even 50% is that they’re still ahead on the position. Yeah, it’s still painful. But I don’t know how many people were necessarily counting it along the way that now it’s just still, you know, they’re up on it. So it doesn’t feel the same. I don’t know if that’s an answer. But just what immediately came to mind. But you’re right. There’s been some severe sell offs in various sectors, and has, you know, and it’s certainly not been it’s not felt like a contagion. And the bond markets haven’t woken up and said, we feel like there’s real risk here. And it’s, I think it just because overall, we all know, it’s a product of the same larger economic issue. It’s like a slow turning over the economy. It’s not necessarily this immediate breakdown that we’re gonna say the GFC Oh, eight was, it all kind of started happening like day after day, companies folding. And this just seems much slower? I guess that’s maybe what I feel about it. And so, you know, those stocks that are down those big percentages, it didn’t happen in one fell swoop like a COVID or a GFC. It happened kind of gradually so that the grind lets people adapt to their losses each month, right? Oh, this month, I was only down six. The following month, I was only down another five, you know, and then you look back and like Well, I’m 60% on the year in this particular position, right. I mean, the way it happened didn’t feel panicky.


Jeff Malec  19:40

And what are your thoughts on right so long held market axiom of the market will do what causes the most pain? So do you think in the vol space a lot of people were conditioned off like we were saying GFC Coronavirus etc to be like I want to be hugely long Vega. That’s right. I’m gonna get all my convexity, as long as begun looking for the vol spike in a down market to protect against the down market so that the market in a weird way some controlling hand said okay, we’re not going to give you that vol spike because too many of you have that exposure.


Wayne Himelsein  20:14

Yeah, I’m not listening. It’s not a controlling hand, but it’s it’s the I mean I markets to me our supply demand is that it’s consensus of market participants, right. So it’s what’s happening between buyers and sellers. And that’s what’s resulting in activity we see. So yes, we in prior years when there was I think it’s what I’ll say to the your comment is that it’s a self fulfilling kind of reaction, right? Or it’s a feedback loop. Let’s use those words, right. So in oh eight or any other major times, you know, even in late 18 vix like the end of 18 correction vix spiked up to the high 30s. But it didn’t come from much lower came from 15. Right. So here, the spike might have made it to 30 pivot came from 22 or 23. Right, right. It’s still not not there’s not a lot of, you know, available upside when you when you’re starting so much higher. That’s I guess, we’ll call that a third or fourth problem, right, it was starting at a higher median, level or higher level in general. So go back to the feedback loop is when it did react in prior events, it became trustworthy, oh, false, credible, this is this works great, it’s gonna, the markets gonna go down. And this thing we hold over here is gonna go up a lot and pay for all our losses. Great. Then you have January of this year, the first leg down on the s&p, and there’s barely a spike in volume, right. So this first signal of it not behaving or not being sensitive to equity downside, it alerts everyone, wait a second, I have all this vol on my books. And it’s not really it didn’t really help in the first leg down. So it becomes this want to sell it. And so they’re selling into the event. So then by the time the next leg down comes in June, there’s this expectation is already it won’t run. And so instead of the sellers starting VIX, 32 now they’re starting at 31 and 30, and 29, because they want to get in front of the prior sellers, right? Because it’s shown the last time do not recommend everyone looks at the second leg and say, look, it was even worse than the first now falls doing nothing. Right. And so by the September down the s&p of whatever it was 10 to 15% in that range. September moved down vol was even lower of a high than it was in June in January, right? It’s because it became it went from credible, reliable to unreliable, not doing anything and so every next pop became a seller’s opportunity or a holders opportunity to liquidate some of your your holdings.


Jeff Malec  22:37

I was gonna ask, do you think the selling is people already had warehouse that as risk protection in they’re selling some of their protection?


Wayne Himelsein  22:44

People who had warehouse I think there was a lot of warehousing in prior years. For example, in 2001, I think there was warehousing of all for what the markets seeming to happiness at that point, right? Then we come into 22. And the January event is like all these people have been warehousing are not getting the payoff they expected. So then the unloading of the warehouse starts, right? Or the unloading the inventory starts, and then go back to what I just said before then June comes the next leg and like I know everyone who has it originally Oh, now we gotta get out of it quicker, because everybody knows certainly not working in some of the time we’re here. Now. It’s it’s become untrusted and unreliable. And you know, do we even believe and I’ve had related questions with or discussions with some of my own LPS is, you know, can we depend on the negative correlation between s&p and vault? Well, you know, if SP goes down, vol will go up. But like, that’s, that’s a core premise of long haul, right? That’s what we all sit in rely on. So in my view, I look at all of this as great. I mean, it didn’t work this year. But there’s no there’s no. There are some reasons that can explain it. But there’s no way that the human behavior of pure panic can change what vault does next, right. So if tomorrow comes not COVID-19, but COVID 20, right, some new variant that is much more deadly than the first suddenly, this new unbound uncertainty arrives and of course, are the contagion from from from from expensive debt, right? in corporate America, if any of this starts tomorrow or next week? There’s no reason I believe that humans are saying like, Oh, we’re not going to panic, that seems very manageable. It’s just that’s not how we behave. Right? So to some degree, we might summarize and say that the feedback loop is creating a coiled spring of payoff, right that that the more people are not trusting it, the more it’s actually going to run because there’s no sellers left. So if there were not if because when there is that next panic event, because there always is right whether terrorism or go down the list of of bad things that can happen in the world when that next event trade There’s now everyone’s sold out of the inventory. They don’t believe it anymore. It’s actually got tremendous upside to run without that selling pressure. So I’m more of a long vol holder now than I’ve wanted than I might have been three months or five months ago.


Jeff Malec  25:14

But it’s weird to think of it coiling and everyone I think equates that to vix at 15 or 12. Are we like 2017 type? Really low level? Okay, so


Wayne Himelsein  25:25

we’re at at 19 today, right? Yeah, sure. But but there’s it that doesn’t, those are kind of separate. So yes, vix cheap is 1112. That’s, that’s cheap, buy all you can because your downside is so limited at that point, right. And so, you know, we all buy vol for its right skew behavior, when you’re buying it at 30. You’ve got as much left skew risk as you have right? Skew payoff, right? Yeah, you’re kind of some symmetrically exposed. That’s not the ideal value of Vault, the value of Vault is fat, right tail. So when you’re down at 1011 12, you’ve got a fat right tail and barely anything on the left, like, if you could the floor of all is let’s call it about 10. Right? Obviously, vix can trade nine at some, you know, one day of the week. But generally speaking, we’re not going to get that much lower. So it’s nice. So when you’re here, going back to where we are now at 1819, below the historical realize that about 16 on the s&p, then yeah, it’s a tad expensive, but it’s if there’s less sellers above, it’s safer to own now it’s closer to the historical 16 level. So it’s, it’s not as good as it could be in 11. But it’s of course better than it was at 24. Plus, a lot of sellers wanted to get out of the inventory.


Jeff Malec  26:48

And take a step back and give us for those too lazy to go back and listen to our previous pods with Wayne, give us what you do have it’s a little bit different than most long ball strats in a sort of short, elevator, pitch version, if you can. Sure. Yeah. Then we’ll dig in on some of the pieces. Yeah,


Wayne Himelsein  27:10

I mean, we trade Hall. That’s what we do. That’s the shortest elevator pitch, we can go with it. So how do we do it different from


Jeff Malec  27:18

has that ever worked? If you ever been in an elevator and said, We trade both because like cool, call me, you know,


Wayne Himelsein  27:25

my thing been on a staircase. Never been in that situation. So how we’re different to most is really the interesting thing to talk about. So generally, the vol world, our spread trading world, so you want to be long haul, and you get there by you want to pay for that long haul. When you buy long haul and you need something to pay for it, it’s expensive, and it bleeds, right. So the general way to pay for it is some form of a spread. And it’s usually either the calendar, so you’re going along the surface in time, or it’s a money to spread, right so call it a put spread your your long at some level and your short above or below that level. And you’ve got some some some in between that you’re trying to profit from where the vol you’re selling is paying for the volume long. And obviously the net long haul is the objective, right? So you’re gonna sell a bunch of all either on calendars, or moneyness, or some idiosyncratic interesting vol that you’ve sold that you think is overpriced, and you’re going to use that to get net longer a bunch of all that’s going to help you involve spikes. And so we’ll call that the net long haul book. Whereas we are gross long haul so it’s 100% Long Haul we do not have any short legs, we don’t sell any calendars or money to spreads, we’re just long haul buyers and traders, we will buy options that are cheap and monetize as they get more valuable and try to buy them back when they dip again and if you will just swing trading long haul positions and so at the end of the day, we hold the long haul inventory we make money on scalping and trading along the path and we have no short leg to counter the behavior that we expect from vol ie when it spikes there’s nothing spiky against us which would happen if you’re in a spread of course


Jeff Malec  29:23

and then the my follow up because you’re explaining how those other guys pay for that so how do you pay for that right it seems too good to be true like oh I can get all this long ball without having to short exposure but you have to pay for that somehow


Wayne Himelsein  29:35

right so our trading approaches pay for it right our scalping and trading our and our if you will stock picking and I’m gonna call it that but I can drill down on that. So scalping trading is very specifically Gamma Scalping is trading the the wiggles of vol itself, if you will follow vol right so vol has volatility and moves up and down. And so if you You were a trader that you’d want to buy lower levels of vol and sell higher levels of all. And because there’s gamma embedded in IE, you’re convex to upside and concave downside. So you’re you do you have an asymmetric payoff structure, which helps you as a trader, right? If you ask any trader forget about options for a second, you ask any trader who trades any stock, they trade, Apple, Netflix, whatever, right? They want some high fall stock. And on average, or in general, they’ll tell you that they want to get in when there’s perhaps three points upside and one point of downside like a three to one risk reward bet that they see. And they might see a technical trade up on the chart and say, oh, there’s about three, four points to gain and my stop is a point below. So they’ve taken that asymmetric payoff, but they’ve done it linearly, right? It’s a linear movement of the underlying. Whereas by design, we have that asymmetry in the in the shape of what we’re trading. So we have that natural asymmetry, we still look for those upside downside ratios to be good for the underlyings that we pick. But in addition, we’ve got the convexity slash concavity of the instruments we’re trading. So lay on being a good trader, ie having good asymmetry in each one of your trades, plus the asymmetry of options themselves organically. And you get you turned scalp, scalping into Gamma Scalping. And if you’re good at that, you make money. And so you can hold this inventory, or I can hold 100 puts on the s&p, but today, I might have scalped 20. And so we began the day at 90, and when then we bought 20. And then we sold five, and then we bought six, and then we sold 12. And we ended the day at 80, for whatever Right. And, and so those buys and sells made us seven cents day, and it didn’t I’m just giving you is proxy. And so you do that enough times every day, you hopefully if you’re good enough, you pay for the data.


Jeff Malec  32:01

If you’re losing on those trades, you basically can’t lose on those trades, because they’re part of you’re just taking off exposure. Right. They’re not added if you’re not on top of the exposure that trading.


Wayne Himelsein  32:11

Yeah, I mean, you’re modulating your long inventory. Right.


Jeff Malec  32:14

So when you were saying that I was worried you’d be like, right, in the risk to me is like, Okay, I’m going to trade in order to help pay for theta. But the risk is I lose on that. Now I have the theta plus the trading losses.


Wayne Himelsein  32:26

Oh, absolutely. So yeah, that’s the headwind is we already have the headwind of long haul, right, which is theta. And generally in other markets, it’s Vega right vol itself is, but so we have these organic headwinds, and then we have a headwind of not producing or our alpha going wrong, right. So if our alpha generation is positive, it has to be first enough to cover the hurdle of our of our headwind. And then when it’s wrong, now we’re additive to your point, we have three things going wrong in the organic cost plus the cost we created by trying to meet or beat the cost, right? Yeah.


Jeff Malec  33:03

Yeah. to you that cost is less and less spiky than having a spread trade on where one leg might do some crazy stuff. And right, that’s the theory behind it.


Wayne Himelsein  33:15

Yeah, that’s the theory behind our not liking spread trading. And I want to say don’t like, I mean, it’s very common in the world. It’s the pick up any option book, and it’s all about the spreads you could put on right? Yeah. And so it’s nothing. It’s such an industry standard. For us. Our mindset, our philosophy is that it’s to some great degree counter thesis, right? The whole point of long vol is to get the pot, right. So if you’re long, or if you’re in a spread, right, by definition, your long pops and your short pops against you, right. That’s what vol does. Right? It pops. So we’re in it for right skew. So you’re going shorter, right skew instrument, which is less skew, but that’s what you don’t want. So what I don’t understand, I guess what feels Karen thesis is everybody who wants a long haul, wants it because they already have negative skew in their book, right? So if it’s so predominant in already what they’re holding, then while they’re gonna go add some additional negative skew to own the right to the positives, you know, you’re just trying to add positive skew, that’s just


Jeff Malec  34:21

do less positive skew. If you’re worried, right? What’s that? I’m saying you just do less positive skew exposure, and not trying to do ramp it up and do the left tail to get the right tail. Right.


Wayne Himelsein  34:33

If you’re gonna do that, let’s say you own a book of multimarket neutral and market neutral is pretty stable, but it has negative skew in liquidity events, right. So then you’re going to add some spreadsheets when you’ve added more negatives, why not just add more market neutral on bison right skew? Like do what you know well, and they just by pure right skew, that’s gonna have no hindrance to that upside when it happens. And I’ll tell you the other major thing is the basis risk because you’re oftentimes in the spread trading You’re not You’re trading things that are potentially like, oh, this seems expect this seems expensive. So I’m going to sell it to buy this right. So let’s say the buy is the index. Let’s say you’re buying s&p Vol for your portfolio protection. And you’re like, you’re trying to find some expensive vol to spread against that. And you say, Okay, we’re gonna sell some, some biotech vol, because that’s overpriced, right? And so you do that in January of 20. Right? And then COVID comes greatest thing. Everybody wants to be in his biotechs. Right. And so your biotech vol, your short loses, right? And your long, of course, pays off. But it’s it’s this double whammy, right? Because you took basis risk or idiosyncratic risk around the other, the other leg to pay for your lines are dispersion risk, whatever. There’s many ways to describe that relationship. But that’s another problem. Or if you go, for example, in calendar spreads, you’ve got backwardation versus contained on risk, right, you’ve got the shape of the of the time curve. And so you could be right. But then if you’re wrong in some other dimension, it hurts your payoff for what you were trying to protect. And it’s actually happened a little bit to some of the VIX traders this year, who trade the calendar, right? It’s because of the weird shapes. And so you’re like, how can you protect when you’ve got this other thing as bases that you’re that you need to go in your favor? To do the to protect what you’re trying to protect? The first part of your job, right?


Jeff Malec  36:25

And what about you guys do a little bit of this, but some of the worst performers in the ball space is your use, right? index files too expensive, kind of similar to what you just said. But opposite of they’re saying index files too expensive. So instead of going out and selling some other expensive Oh, I’m gonna go find other cheaper vol in hopes of getting a spike there instead of paying up for the index file. So if that


Wayne Himelsein  36:47

thing happens to spike, right in bytes, right, so you’ve accepted some new basis or as we went along only, not only to primarily index vol. And when I say primarily the grand majority and index and also s&p, right, because we don’t want basis risk, if the job is to ensure downside, then you have to be the market. Right. And so the question becomes, you know, how to minimize the cost of long s&p Vol. Right, that to me, that’s the question I don’t like, should I say, Oh, let me buy some. I don’t know, some other vol. I could find out there. Well, what if that’s not the thing that pays off when the market goes down? It’s just not it’s not worth it when you’re in the business of, quote, insuring risk. And, and I say, quote, because it’s not pure insurance. It’s yeah, it’s like an insurance, right?


Jeff Malec  37:38

It’s an What about insurance. Some of the best performances here have been using complex options. So I like to call them parlay bets, right? Like, okay, if the s&p is down if bonds are down, if your UPS down. Yeah, instead of this paying two to one, it pays eight to one, and gambling parlance. But yeah, what are your thoughts on that strategy as a whole? I know, you guys don’t look into that. But But I guess why not? Similar to what you’re saying? Like there’s basis risk.


Wayne Himelsein  38:05

There’s, you’re adding dimensionality, right? It’s you’re adding more things to worry about just go let’s go with a simple. So however complex, you get, each level of complexity is adding not just basis risk, but some other dimension that you then have to understand and track and worry about, right? So go with a simple idea of a calendar spread, right? Your or even simpler, that is a money to spread on the same than the same month. Right now you’ve introduced skew risk, right? So you buy at the money, there’s no skew, you’re just dealing with expensive or cheap vol. Right? So you have one dimension, your training is all cheaper, expensive, and you could analyze that to a to a till your mind is numb, right? Then you say, Okay, we’re gonna go out on the wings a little bit. Well, okay, so now you’ve got his vault cheaper, expensive, and askew, high or low, right? So you’ve got compression or expansion of SKU as their second dimension of risk. Next to is vault cheaper, expensive, because you could have vault getting cheaper but SKU getting more expensive, right? And so


Jeff Malec  39:08

and be in the same spot, and be in the same


Wayne Himelsein  39:10

spot. Exactly. So by introducing additional dimensions slash complexity, you’re you’re you’re I mean, we can talk about in so many, there’s so many analogies to this. The old the oldest analogies, the three planet problem, right? It’s like we can figure out the relationship of gravity can figure out how the the earth is gonna go around the sun, but introduced the moon one, one more body, and no one can figure out where anything’s going to be next, right? Because it just gets the problem mathematically gets too complex. It’s they, you know, they call this three planet problem. So the problem was introducing new dimensions of is not only the summary idea of basis risk, but it gets more complex than I believe people can fully get a handle on. And so when that event comes, you don’t necessarily know when and how You’re going to be wrong, because of the additional conditions on your insurance.


Jeff Malec  40:05

Right to me, how do you know? If the payoffs Correct? Correct kind of where you’re saying, yeah, how do I know there’s more


Wayne Himelsein  40:12

path dependency?


Jeff Malec  40:15

Right? And then my gambling parlance, right? If it pays out 10 to one, but the true odds are 16 to one, but the house just took six to one away from me, right? You want like maybe


Wayne Himelsein  40:26

10 to one, but given the set of seven if them’s right, or like a layered conditional tree, right? Well, it’s 10 to one, but it’s assuming a, b and c, is that really a 10? To one? Yeah, it’s 10 to one on paper. But the paper like has to be twisted in a certain way and flown like a paper airplane across and land exactly on the right spot on the ground, right.


Jeff Malec  40:58

And now, we’ve mentioned skew in a few different ways here. So I want to make sure, I don’t know for all those who watch smartlace You ever hear that podcast, with Justin Bateman? And they always refer when they’re talking like inside baseball, they go for the one of the guys sisters, Karen, I think for Karen skew means. So for kick. So for Karen, if you could encourage their sister in Milwaukee or something, okay, Sean, Wisconsin. But for Karen can like we were talking skew in terms of the curve, but also right and left skew in terms of the distribution of returns. So maybe if we could clean that up a little bit, how those are the same how they’re different.


Wayne Himelsein  41:35

Yeah, I mean, they’re the same, but they’re not thought of, they’re the same and not the same. So skewed distribution is just the, the tilt of the distribution that kind of points in, it gives them a fat tail on one side of the other. If you have the way I love I think it’s a lesson I got decades ago, it’s just if you push your if you take a normal distribution, you put your thumb in on one side, the area under the curve always stays the same, the same amount of stuff under the curve, but you want to redistribute that weight. And so if you put your thumb in and the right side will kind of pop out, right? It’s like squeezing in a water balloon and it pops out over here, right? So you can put your thumb on the on one side and get right skewed or the other side and get left skewed right, ie a fat right tail or fat or long right tail or a fat or long and or long left tail. Because skewed can be fatness or less. It’s just more weight on that tail. Ie more outlier events on that side than we would expect.


Jeff Malec  42:37

And how you were talking about it. You’re always targeting right skew in your performance, which may be targeting left skew in the markets performance but right you and your performance have. Right a lot of small losses in exchange for some big outlier game. Yeah,


Wayne Himelsein  42:53

I mean, payoff structure is one where I’m I gave the example earlier. It’s incredible right? Skew is vix at 10. Right? And we all know vix can go to 100 it’s done it right. And at 10 I don’t think any of us believe vix can go to five. Right? I mean, it’s is it possible? Sure anything’s possible. Let’s let’s understand that the world


Jeff Malec  43:15

maybe the futures go negative,


Wayne Himelsein  43:16

like yeah, maybe right. I mean, oil went negative right? Some time ago, right. So but let’s just talk in general major. The all known circumstances, like 10 is pretty much the floor on VIX, right? So if you’re 9.8, whatever, right? So you’re buying it at 9.9. You’ve got 90 points of upside, and maybe 10 pips of downside that is the most right skewed situation you can put yourself in. And so that gives 100 to one payoff structure, if you will, right. And I’m using very general numbers, I’m just trying to point. And so that’s what we look for that. Just to summarize that in a word is asymmetry. Right. So we look for the maximum asymmetry upside versus downside it’s a ratio, it’s skew. You can talk about an eight ways mathematically it’s asymmetry. Right? So that’s different in on people so skew on the on on the on the


Jeff Malec  44:15

crowd, which is which has been all over Twitter recently skews at all time lows, all this stuff, it’s a buy opportunity, all this so I kind of want you to debunk some of that as a signal as well as you’re explaining what


Wayne Himelsein  44:26

I mean. So before we get into debunking this signal, right, so that there’s different what the price of that option should be, as you go along the money this chain right. So you start from at the money and you go down to out of the money in the money you get further out right at the quote wings. So under a normal assumption, right, ie a normal distribution where there is no skew or fatness on the tails, it’s gonna get there. Those options should get cheaper and cheaper, but they’re that option way out there out of the money should be priced at 440 He’s talking about penny. And it’s actually trading at 10 cents, right? So it’s implied vol. The price it’s trading at is how it’s showing skew. It’s it’s showing that the market believes it’s so much more likely that that can happen, that it’s not worth a penny, it’s actually worth 10 cents, right? And so that’s that’s the that’s where you get this skew is higher IV or higher pricing of alimony options, because the market believes that the normal assumption is not right. And that is true. It’s not right. The normal assumption is not true in equities markets can correct much deeper than normal distribution would would imagine, right? Or what would dictate. And it’s funny when I read in the papers years ago, like it’s, there’s some big drawdown and it’s a way towards 2020. Like, and some article says, Oh, this was a eight sigma event. No, it wasn’t, it’s not an eight standard deviation event. It’s an eight celebration event, if your assumption was a normal distribution, given the skewed distribution that we all expect, it’s not an eight sigma event, it’s maybe a one and a half or two or what right, given the actual shape of the distribution. It’s only eight segments if we assume this could never happen, or if we assume normality to be specific. So with that being the case, we’re now we get into what is the right skew? So people are saying, well, skew is cheaper. So skew was more expensive. The market at prior times in history believe that there was even greater likelihood of for example, a 20%. gap down, right, where today it’s use gotten cheaper. So the consensus opinion


Jeff Malec  46:33

is real quick skew pricing is the put minus the call, is how people refer when it’s cheaper. It’s that that premiums, yeah, I mean, if you


Wayne Himelsein  46:43

look at the whole options structure, it’s kind of a you write and hear the call and the put on either side. And so I mean, you could do could put mines call, you could some you could, I don’t know how different people can do it in different ways. But this whole thing is kind of flattening out, right? But it floods out a different, there’s the smile, they call it. And then a lot of options look like what’s called a smirk because the call side traditionally doesn’t have as much skew as the put side, right? Because markets don’t pop up 20% As much as they can pop down 20% overnight, right? And so you have you have different different skews shapes to upside versus downside or call skew versus put skew. And so that, if I’m doing it, I’m just looking at puts you versus puts you in Costco versus cost view, right? I’m not summing or adding or doing any, because they’re independent behaviors. But so I’m not sure who in the market is talking about it. But there’s different ways that different professionals might talk about it. But let’s talk about Putski because that’s what really we care about. So put skew if, if there’s this Black Scholes pricing, and that’s assuming a normal distribution price is far out of the money put in a penny. And historically, there’s so much worry over over risk that the market was willing to pay. Let’s go extreme 50 cents for that option. So it’s 50 times the price. So it’s implied vol as high skew. Now it’s come down to just for you easy number 10 cents. And everyone’s like, Oh my god, it’s so cheap, right? Yeah, it’s cheap relative to the 50 cents high we saw, but it’s expensive relative to the normally assumed penny that it’s actually worth if we assume normality, which we know is not true. But so now the question becomes, what’s the true value? What’s the right value? Right? That’s your concept of debunk. How do we assess value here? Well, the answer is we don’t know. There’s no, right? Because it’s all relative to what is the standard? What is the distribution within the tail? Right? You can call that conditional variance or CTE tail expectation. There’s different mathematical tools. But the premise behind all of them is that you have enough data points to tell you what is the norm of tail events, right? So will the market correct 70% or 24%? We have no idea that that’s ridiculous. Like we’re dealing in events that have happened 22 times in the last 100 years, right? And up from the 22 sample points. We have different magnitudes. We have different rates of happening. COVID happened in three weeks, and GFC happened in seven months, right? Both of them hit 30% declines. There are different recovery rates, different decline rates, different different some gaps, some slid down, right, some waited and gap, some were step stepping down, etc, etc. So all these different behaviors translate to I’m not sure nobody can be sure whether Yes, we can all be sure that normal assumption of pricing of a penny for that out of the money option is wrong. But is it worth seven cents? 12 cents or 50 cents? We don’t know nobody can say they know. And so the new cheap might not be cheap and might be that if the market you know if there’s really no GFC pending, right ie a 50% sell off pending. And that’s really super unlikely. From here, then the max drawdown 2030 price is that thing at eight cents? I don’t know. I just And I’m talking really broadly to make the point once is there is no right price of a distribution of events that have that has 20 data points in it. Right. And so we don’t know fair value. But we do know it’s cheaper than it once was. Right?


Jeff Malec  50:23

Or right. I think that’s part of the cheap kind of implies that you’re getting a value, right? Oh, I got it. I got this for cheap. I got a deal on it. When it should just be quoted, like it’s, it’s price is lower than it used to be.


Wayne Himelsein  50:35

Right? Its price is lower, or cheaper than it used to be. Yeah. And at 10 cents, using the same example we’ve been talking about, we might say that the theoretically fair pricing if we studied the distribution of tail events in history, maybe the fair pricing is seven cents, you know, but if that fair pricing is 11 cents, and so I’m gonna say oh, look, it’s cheaper than every event that’s ever happened by one penny. I’ll say yes, but those are all outliers. So the next event could make it worth less. Right.




Jeff Malec  51:04

Right? It’s like the CPI everyone’s getting when that new one comes on that data sets too small, too. Right? It swings. Which brings me to interesting concept people trying to do AI and machine learning on big spikes in these markets, right? If you only have 22 out of 100 years, is there a big enough data set in order to run those models? In your opinion?


Wayne Himelsein  51:33

Absolutely not. No. I mean, there’s, I’ll say, the way we like to look at it is there’s reasoned behavior, which we can all we can study, we’re experienced. I mean, I’ve been in markets for 27 years training. I kind of understand by now I’m how they behave. I’ll use that word. Right. And I understand how humans behave. Right. So when I said earlier do I believe that can be a new bad event in the world next week? And vol not spike? crazily? No, because I believe humans panic when really bad stuff happens and and panicking is in our evolution, right? So that’s not changeable. So if we, if we go theories like that, or premises like that, we can say, Okay, we believe volume will spike and extreme events when panic ensues, given enough of an instigator. And once that happens, Vault tends to decay slower. Because people are unsure as when it’s going to end right so Vall has this fly up and kind of slow decay behavior that if you look at Vault pop charts over the last 1020 30 years, that’s what it’s tended to do. That’s not that you’re looking at a 20 data points and saying oh look empirically it does this you’re saying no. reasoned it does this is why this seems to be the view we’re looking at. And so if we believe that human behavior persists then let’s make the assumption that vol will pop quicker and decay slower. So yeah, does that make sense or


Jeff Malec  53:10

Yeah, definitely. Yeah. I wanted you to bash on the machine learning guys a little more but um Oh sure. I can do that.


Wayne Himelsein  53:15

But let me give you one giant batch of learning for you know for example, in the vol world is all yours of all up until December 31 2021 The prior 20 years vol distribution was unlike 2022 So if you had machine learned everything until December 31 of 21 you’re like Okay, I’m ready to start a ball fund because I did eight years of machine learning boom you’re down huge. That’s the problem


Jeff Malec  53:45

is and if you fast forward if you train adjust on the last three or six months or something so it captured 22 Now 23 or 24, you’re gonna get taken to the woodshed I’ll


Wayne Himelsein  53:56

go even more extreme than that. If you machine learned 2022 which is vol having short pops and quick sell offs. You become a mean reversion vol trader, right? Which what’s going to happen when that next panic event happens? There’s not reversion at 30, there’s spiking to 5060 and you get short squeeze to death. Right? That’s the problem is you can’t learn reversion of an asset that’s based on human panic, in my opinion, right. And so a machine would have learned to revert vol, every time it pops to 30 sell it, sell it off, get short. I don’t know about that. Right? I don’t want to be around for that next event where that’s what you were trained.


Jeff Malec  54:35

Or in theory, you could train it to if it’s only long to not right be like hey, learn on this but only go longer than it’s so let’s go with that


Wayne Himelsein  54:45

risk though. You’re only long but if you learned in 2022 or a machine learn long volunteering to you would sell out of all your inventory in the low 30s. Yeah, and so spikes from 30 to 40 away. I don’t have anything in my inventory. You Um, he was supposed to stop that that level, that was the top right, I


Jeff Malec  55:03

was gonna reload at 22, I was


Wayne Himelsein  55:05

gonna reload at 22. I couldn’t reload, it never went back. Right? These are the problems with machine learning. So there’s, you know, we have this unique variable in our model, we call it phase shift, which is when it switches from reversion to expansion. That’s how we look at it, right? So mean revert mean, Revert, mean, Revert, and then the next time is a panic, boom, it shoots to, that’s what we want vix at 90 Wherever it’s going to go as the high. So how do you know when you’re flipping from a reversion to expansion, you know, it’s a it’s a, there’s a probability there’s a there’s a behavior. So, Revert, Revert, but have some ready for next. And as soon as it’s an expansion, do something else, you know, for example, stop selling your long inventory, right, as you’re expanding vols expanding, it’s not reverting. So to me, that’s a really that probabilistic transition. And the modeling around that is fascinating, because there’s very few samples, or there’s little data, sparse data in history to work from. So it’s very much human behavior based, and what we can use and identify as as switches to model that behavior. And when we think the decisions should be made, I enjoy that part of our business. Because vol is very mean reverting until it’s not


Jeff Malec  56:23

until it’s not that you want to own. And along these lines back when you were on Twitter. So first, tell us why you don’t do much on Twitter anymore. We miss you. But back when you’re on Twitter, a few of your threads were about hey, quant is great modeling stuff, like you just said is great. It works. It helps. But it’s not the end all be all, you still have to have a human. You still have to have the brain, you still have to know the why. touch on that a little bit of what you were kind of digging into them.


Wayne Himelsein  56:51

Sure. So I think all of that really goes back to the last three questions. We’re I mean, not the last three, but I was gonna say three paragraphs are a bunch of stuff we just said. Yeah. About a ml AI learning, right? So if you’re a quant and you model to vol two the last 10 years, you You did not that great and 2022. You know if you’re a quant and you model 22 And two and said this is the new vol and now you’re not prepared for what calm for some major panic event? For what long? Vol is good for right, then you’re not prepared for that? Because you you think that top is much sooner than that. So that all of that discussion begets this, this truth to me that you can’t the markets are amazing for empirical research, there’s a lot of data. There’s a lot we can learn from observing that data from tossing that data in different ways and looking at potential patterns that arise. But then concurrently, I feel like it the regimes change and market behavior and structure changes so much and just kind of throws it in our face. You think you knew you think you know a lot? Well, here’s a whole new world for you, Wayne, right? That’s what the market is speaks on on a relatively frequent basis.


Jeff Malec  58:09

I totally attack controlling hand the invisible hand. It’s right. And so what’s a sniff? Yeah, let me let me pull your strings this way. You haven’t expected that?


Wayne Himelsein  58:18

Yeah, so the puppet master market is, is one that rather than a hand, it’s that there’s so many people trying to eke money out an ARB the same things that when there’s clustering or mass around the same and efficiency, then then then it’s no longer work. So I think that’s more of the driver of, of the invisible hand is just people doing the same thing because it gets too easy. And then and then it because everyone’s doing the same thing it breaks. So either way, that begets an inability to rely on past data on empiricism. Right? And so, to me, it’s there’s, there’s tremendous value in empiricism. And then there’s, of course, what we have to understand about what we’re looking at and understand what could change and what could go wrong and ask lots of questions from understanding that the human behavior, the human condition, etc, etc. And so that’s what we believe. And that’s why we infuse both into everything we do.


Jeff Malec  59:22

Say you don’t turn off your computer’s firewall, your clients, you just say, Hey, you gotta look at it from both sides.


Wayne Himelsein  59:29

Yeah, absolutely. And I love There’s this quote, actually, and I don’t know if I remember the exact quote, I’m a big quotation person, but it was Dwight Eisenhower, who said something to the effect of I found that before going into battle, planning is essential. The plans are useless. Right? It’s the same thing, right? You’ve got to model it all out. But when you’re in battle, it’s like you have your modeling so you can look at it but then you have to deal with what is now happening which might be different than yours. model


Jeff Malec  1:00:00

for nothing else to be like, Well, we know that plan didn’t work. Right. Exactly. And it worked. Yeah. Here’s 17 others we can try. Yeah,


Wayne Himelsein  1:00:08

yeah. Here’s, here’s what Yeah. And they are tell us to other plans that didn’t work. But this is similar. So we kind of have a have a boundary to what we’re going to do based on the few plans that almost worked, or something like that.




Jeff Malec  1:00:27

And then I want to end on your you gave your elevator pitch on what you guys do without talking about a straddle? Oh, yes, I do. Intentional or no,


Wayne Himelsein  1:00:38

not intentional. I think I struggle the struggle.


Jeff Malec  1:00:43

I write I’m always explaining what to do as they do a straddle they buy Yeah, sure. individual stocks, they buy the puts on the s&p?


Wayne Himelsein  1:00:50

Absolutely, there’s there’s many ways to talk about what we do. So the primary thought I put out there that we’re not spread trading, we’re only long haul. So now you ask the second question, well, how are you long haul Are you buying all out of the money puts in five years from now? Right, that’s one way to be long haul. And so our long haul positioning is a straddle which is effectively and more front months or near term options. And a straddle is being at the money around the underlying so in our case, the market the s&p, so your long calls long puts close to at the money on the s&p, you’re straddling it, which of course is where the word comes from. And, and so by straddling it, as soon as one side moves enough, your your half of your book starts paying off with convexity, and the other half starts mitigating your risk with concavity. Right, so let’s say you own 100, puts in 100 calls at the money. And so you’re conceptually agnostic to which way the market goes, as long as it moves enough, right. And so the next day you come in, and you’re and the market gaps down 10%. So great, your puts went from $1, to wherever in five bucks, and your calls went from $1 to zero, they’re gone by, but it doesn’t matter that you lost a buck, because on the other side, you made five, right, but so your AC asymmetry is designed upfront, and you’re just waiting for enough of a move in either direction. But of course, that position to hold is very expensive. So now you have to find ways to carry it.


Jeff Malec  1:02:26

But now that seems to be the same thing we’re talking about with the spread train. But the spread is different, because you can have a symmetry against you on the short side.


Wayne Himelsein  1:02:35

Right. And so here you have positive asymmetry in both directions. So you have convexity for you, and concavity against or against you quote. So in other words, I’m longer call on longer put market gaps down, my long put is convex to the gain, it’s going to have right skew, right. And my long call, which is the business that I’m wanting is losing, but all I can lose is that dollar, Mike. And when that dollar loses a lot, it’s down to 20 cents. After that, I can only lose 20 cents, right? And so I lose less and less and less as the market collapses on my long call because I’m only in a little bit of premium. And my dollar premium on the other side keeps on expanding to $5 $6 $7 all the way up, theoretically to infinity. Right?


Jeff Malec  1:03:22

And you could and you can make money on the call side as well. If there’s big the other way


Wayne Himelsein  1:03:27

around. Yeah, sure. The market can go up and up and your your put shrink less and less and less. They’re concave to that gain and your while your calls are expanding convex hulls. Right. So having convexity to your profit and concavity to your loss is having positive asymmetry in both directions in gain and loss. Whereas the spread train has convexity to your last loss positions. Yeah, right. It can gap against you works. If you’re, for example, go with some trades people might do is short at the money to go along the table. Right? So there if there’s not enough of a correction, if you’re long a 30% tail and you’re short at the money, the market gaps down 10% Or falls 10% however way it falls, you’re at the money has lost more yet, then you’re out of the money has started kicking in because it’s attachment point is another 20% out, right? And so you’re down when the market is up 10% Or sorry, when the markets down 10% on your put spread. And in that way it’s a it’s in my view, counter thesis risk more than it is counter positioning. I would say a straddle is more of a hurdle to making money. Whereas I eat a calls our hurdle to your puts bang off. And it’s a fixed hurdle with a fixed downside.


Jeff Malec  1:04:48

And then you have a twist that your calls are single name stock calls, that you’re trying to say hey, if I’m just but I guess I’ll ask a different way if you just did s&p versus Repeat calls and put straddle still viable still works. You just think, a little better


Wayne Himelsein  1:05:05

for a portion of our book, but we don’t have for the whole thing. Right. So that works. But that is solely dependent on timing, right timing alpha. So you have to trade the s&p well enough in both directions to make money on scalping those two sides, right. So if you’re SPX by SPX, your put SPX puts by SPX calls, you have to properly trade the s&p, right, so it’s all about timing alpha. What we do internally is we have all s&p for the downside, because we don’t want basis risk on any downside event. But on the upside, part of our portfolio does trade the market but part of it to your point it picks individual positions or sectors to beat the s&p Right. So our alpha there is not timing Alpha. It’s selection alpha, right? It’s can we, for example, we talked about energy earlier, we picked some energy names, or positions earlier this year last year. And so where they’ve been the winner in the s&p that call upside has beaten the s&p, right. So it gives us idiosyncratic opportunities to make money different from the market. And it’s not as much basis risk, because that’s not all we’re depending on if things go wrong, because that’s the call side of the book. It’s not the put side. So it’s just another source of alpha to generate the p&l, we need to carry the straddle or to carry all that long vol.


Jeff Malec  1:06:28

And then you said you pick the stocks, but you’re not sitting there in your bunker with your barons out saying Oh, energy, I might add some of those, right. So there’s a sophisticated model behind?


Wayne Himelsein  1:06:38

Yes, I have not picked up a Barron’s since perhaps the 1990s. I don’t know if that’s good or bad. But that’s the truth. I don’t read anything about media or financial news or stocks. I don’t watch CNBC. And this is not what we do. We’re going back to quants. We’re quants. Right. So we got lots of data. We have models. And so how do we do this talk to me, we have a screen that screens a universe of positions, the s&p 500 and the whole big universe of sectors and ETFs universe to find positions that have certain behaviors that are that have, you know, built this model over. I mean, it was actually first 20 something years ago, when I first built this model, that is a looking for relative strength effectively in positions. It looks for positive asymmetry, and we and then we find cheap options to express that payoff, ie cheap call options to buy energy in some way. Right. And, and so we we use this equity picking model, which screens for technical price volume, behavior to find strength, and then we find the cheapest way to buy that strength through call options. And, of course, get this payoff on the one side of our straddle. Yeah, so that answers your question.


Jeff Malec  1:08:02

Right? Well, I’m leading the witness, because I know the answers already. But the what I’ve liked about it, right. And I don’t want to say an argument, but I was pressing you three years ago, like Well, hold on, and that was that was that was that late 2020? Or was that 21 When growth and value just had like a to quote your Yeah, that was my move.


Wayne Himelsein  1:08:22

Right? It was crazy. That was the late 20. That was the election around November of 20. Yeah, yeah. Where? Because of the election, it was around the election time. Yeah, growth just sold off. Huge. Huge. And value rally huge is one of the greatest dispersion days of growth versus value that we had seen in decades. Yeah.


Jeff Malec  1:08:40

Yeah. So in that way, you’re taking a little dispersion risk, right. Of if there’s that quick shift, your stocks you pick versus the s&p, you have a little bit of risk there on?


Wayne Himelsein  1:08:50

Yeah, I would say absolutely. We’re taking on that dispersion, we’re taking on that, if you will, regime shift risk, right. And especially if it’s quick, if it’s slow


Jeff Malec  1:09:00

with the model will be to your benefit. Yeah, yeah,


Wayne Himelsein  1:09:03

it could be to the benefit, right? Because the model will move out of those names into the other names. It transitions itself by finding the new strength. And but that takes months, right? So if that event, or that shift happens in a day or a week, it definitely does hurt us.


Jeff Malec  1:09:19

Right. And we’ve seen it in real time, it was in growth than it was in value. It was an energy that was right. It definitely is dynamic.


Wayne Himelsein  1:09:27

I love how we’re putting energy outside of growth or value.


Jeff Malec  1:09:30

It’s just energy.


Wayne Himelsein  1:09:31

It’s got its own realm.


Jeff Malec  1:09:34

But you don’t consider yourself a dispersion trader, right. So that’s where and to be short, that dispersion is not really short it but it’s there.


Wayne Himelsein  1:09:44

I mean, it’s there as a byproduct of the our portfolio construction. Right? So let’s start high level and say you cannot make any money in the markets unless you have some risk. And everyone tells you that, you know, we’re low risk. The question is, what is your risk? Don’t say you don’t numbers just understanding what it is right? And so obviously there’s many areas we have cost of carry risk. If just feta start there we have to we have a hurdle to meet from overestimate, even if our trade makes 20 pips next month, if theta was 25 pips, we’re down, right. So we have a high bar to to cover. So obviously, that’s just being long options. So in that vein, we can go down on risk dispersion is one of our risks because of how we’ve chosen to make money. And in my view, that risk that we’re taking this dispersion risk is, our upside is far in excess of that risk. So we’ll call it once again, asymmetry in our favor, I see way more opportunities where that picking system that seeks that strength, even though it can get toasted in a quick rotation. Given how infrequent quick rotations are, it’ll make more money over time than the times it loses. Yeah. And you saw


Jeff Malec  1:10:55

that in that time we’re talking about it wasn’t a huge rate wasn’t like you’re down 20% or something, it was just a mere flesh wound.


Wayne Himelsein  1:11:05

It was probably around 2%. I don’t remember exactly. No, not 20%. That’s not Yeah, no way. But I mean, I say No way. Because we have different pieces of portfolio, it’s contained within a portfolio construction boundaries don’t that that whole model in itself is 30% of our up capture of our call side. So it’s 30% of half, it’s 15% of our book, right? At the end of the day, it can’t do that much damage. And so, yeah, we take things with known boundaries, we have a portfolio construction, we know where risks live, and each module of our portfolio, and collectively all of that is what we do to make money trading long haul. And so you know, and we all will have to take our risk summer and yes, we have that risk, we understand that risk. I’m not going to trade away that was because I liked that risk for what else it gives us all Yeah,


Jeff Malec  1:11:57

and as far as the time as our similar friend Jason Buck would say that’s the ultimate risk controls position sizing right? So examine if even if everything I’m doing is wrong and out of control. It’s just that small piece of the portfolio. Exactly. I’ll end it here with I didn’t prep you for this but this year we’re asking everyone for their hottest take she already gave a pretty hot one on AI You got any other hot takes something doesn’t have to be market related that the rams are never gonna win another game. I don’t know if you’re a big football fan.


Wayne Himelsein  1:12:36

Not really a fan. Um,


Jeff Malec  1:12:38

that Santa Monica is overrated.


Wayne Himelsein  1:12:41

No, Santa Monica is underrated. Don’t move there. There’s no rating is like that’s that’s high enough for this town. I mean, that that vol is anomalous this year. How about that? Right? I just find it funny that people like oh, it’s I mean, I’ll say it’s it’s misbehaving, what does it even mean? Right? It’s like our ball is dead, or it’s, it’s just it’s doing what it does, right? It’s behaving in the way it needs to behave, or it behaves. This is just a version of all that we weren’t used to in the last 10 years. And have we been trading Hall for 700 years? We would have seen this many times before. The 1420 twos, right?


Jeff Malec  1:13:25

This is a 1492.


Wayne Himelsein  1:13:26

The 1490 twos This is Columbus vol. We could call it right. And so I just I find it I guess, to me, this the popular like, everything’s terrible or everything, or evolved doesn’t work anymore. I mean, statements like that. I just, this is just silly. It’s just a different regime, we have to adapt to it. And if we’re better to adapt, there’s still going to be panic in the world, there’s still going to be events that come up and crises. And who knows when and this is not an anomaly. This is just what we are going through. And if this is the new, the new normal, then we trade it for a while, but it’s likely not the new normal because there is no normal. That


Jeff Malec  1:14:07

heartache there is no normal. Yeah. Awesome. Thank you so much, Wayne, we had our troubles getting this scheduled. Sure. Yeah. But we did it. We got it done.


Wayne Himelsein  1:14:18

Yeah, actually, I want to slightly amend that last or append to there is no normal. There is no normal intelligence.


Jeff Malec  1:14:29

Right. Each one’s different. And


Wayne Himelsein  1:14:31

yeah, and every every or is there no, no line risk and the way risk plays out? Yeah. Anyway, sorry. Go back to the your closing. I was putting her up there close.


Jeff Malec  1:14:45

It was no worries. And I wanted to I wanted to close by saying many sophisticated investors share your view, right? Because you guys are moving on going past 500 million or so in the near future here. So Congrats on all this success. It’s been fun to watch you along the way. So congrats on the success and convincing people although maybe they’re convincing you versus vice versa that hey, ya know, we know there’s not a normal ball event and we need to be there for it.


Wayne Himelsein  1:15:15

Yeah, I think we’re convincing each other. Right. So we’re all holding hands and trying to make the best of this wackiness.


Jeff Malec  1:15:24

And it takes longer than an elevator run.


Wayne Himelsein  1:15:27

It does.


Jeff Malec  1:15:27

It takes a long stairwell. Yeah, yeah. There you go. All right, Wayne, thanks so much. We’ll


Wayne Himelsein  1:15:33

talk to you. Thank you. Okay, take care.


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