In this episode, we explore the world of options trading with Martin Vestergaard and Michael Cameron from Carmika Partners. The conversation begins with an in-depth analysis of the volatility spike that occurred in early August, as Vestergaard and Cameron share their insights on the market dynamics and the impact on their trading strategies. The discussion then delves into the growing influence of daily options and the challenges of navigating a highly electronic and technical market. Vestergaard and Cameron provide valuable perspectives on the importance of understanding current market conditions and adapting trading approaches accordingly. Listeners will get an inside look into Carmika’s quantitative approach to options trading, with a focus on modeling implied volatility and skew across the options curve. We also discuss their industry backgrounds, where volatility trading may be heading next, and more. Whether you’re an experienced options trader or looking to expand your knowledge, this episode offers a wealth of practical information and thought-provoking perspectives on the complexities in today’s options landscape. SEND IT!
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Check out the complete Transcript from this week’s podcast below:
Carmika Partners Unpack the August Volatility Spike and Complexities of Options Trading
Jeff Malec 00:06
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. Hello there. Welcome back. Happy October. Hard to believe we’re in the last quarter of 24 here, but we’re actually going to go back in time a bit today, talking about that weird vol spike in early August. One option printed a 500 ball in the pre market hours that day, according to our guests, Martin Vestergaard and Michael Cameron of Carmika Partners, and we’re doing it a bit different today, because we recorded with them before that vol spike, but I thought it was a bit pointless to have guys who trade vol and skew and options and not talk about what happened there. So brought them back on for quick talk through that spike and the hit they took, and then we’ll give you the whole original pod going through their backgrounds and the strategy. Sound good. Send it! This episode is brought to you by RCMs managed futures group looking at vol traders question about why one program or another performed this way or that during an event like early August. Give our team the specialist a call and get the inside scoop on dozens of funds and CTAs we work closely with. Visit rcmalts.com to learn more.
All right, everyone, we are back with Mike and Martin from Carmika, and like we said in the intro, did a pod with them last week of July, then right after that, we had a bit of a crazy last day of July, beginning of August, in the vol markets. So before everyone hears their full story and what they’re doing with the model, I thought it’d be good to bring them back on for a quick little talk. Uh, their program took a little bit of a hit. A lot of other vol traders took a bit of a hit, so wanted to get there look at what the market was actually doing those days before you hear the frills story. So welcome back, guys.
Martin Vestergaard 02:09
Thank you. Thanks.
Jeff Malec 02:12
All right. So let’s dive in. I don’t know who wants to take it first, but what? Now that we’ve had a month plus after that crazy ball spike. What was happening there, and was it even a ball spike? There’s a bit of material out there that was saying it was a bit of a head fake itself.
Martin Vestergaard 02:29
Yeah, I think what it our understanding of what it was. It was definitely a vix event, more than anything else. Obviously, the curve kind of moved around. But, you know, for instance, on Friday, you know, Vault started going up, and skew started going up. I mean, probably don’t need to explain this. Everybody is puts getting more expensive, relatively to call so, so people are grabbing forward downside convexity that started happening on Friday. So, I mean, what we did on Friday, we caught our risk a lot and, like, okay, went in with what we thought was a very tight book in terms of margin, everything coming into Monday, and then obviously Monday. I think one of the things that happened as well, which seems a lot of people don’t really talk about this, the SIBO didn’t really open until 230 so nobody could really trade. So when you look at the VIX, that pre market was up 150% relatives, nobody could really trade that because the option market, you know, things were quoted. I mean, daily options were quoted really, really, you know, really wide. And it was just basically the first two to three months of the of the S P curve that went completely autoly ballistic. I mean, from what we heard from a ball guy over here is supposed to be September, so this was obviously in August 5, the September 2500 put in the S P on that Monday, traded at 10 ticks. That’s the equivalent of 500 ball. I mean, I’ve never seen SMB above 100 ball. So
Jeff Malec 04:07
with the market down less than 5% what was the market down? Yeah,
04:11
mine’s probably down 4% Yeah.
Jeff Malec 04:14
And I think,
Martin Vestergaard 04:15
I mean, I think one of the bigger things to really have an understanding of, you know, obviously, when something like this happens, you think, can it go and happen again? And, you know, the old school guys would say, you know, when it happens once, it doesn’t actually happen again. But I think one of the reasons why this, from what I was saying, again, it was two OTC cold spreads that somebody had on with the banks, and the VIX that that obviously blew up when they started going up. But again, it was probably a little bit more of a head fake, because things obviously blasted back out. And what also didn’t seem to the back end, doesn’t really, wasn’t really reacting. And one of the, you know, the things we had on back then was we were kind of short a bit in the front and long in. The back, and that obviously didn’t work. So the thing is to think about, why can this happen again? And I my, my basic view is, I mean, we’ve just seen it in the last like two or three months. I mean, we’re seeing more of these erratic wall spikes where you really don’t get a underlying move, and a lot of times, for instance, what we really need, as we trade primarily skewed. So what we really need is we need a movement to come in the marketplace so you can have a gamma and whatnot set in. And if ball just sits and moves around the radically, obviously, if you’re short born, you’re going to lose money, and if you are long ball, it’s going to go up. But over time, even if your long vol the market doesn’t move, it’s going to be hard for you to pay for that long ball,
Jeff Malec 05:47
right? You’ll have that perfect timing,
Martin Vestergaard 05:50
yeah. So it does feel a bit to me like the market’s a bit broken. I hate to just say that, just because you kind of when you lose money, but there’s something very radical, how I think the bull market is, is is reacting, and my feeling is a bit, I think some of these daily options are playing in on it a lot. It doesn’t feel like there’s a lot of activity. And I mean, Mike, I think you have the numbers for the numbers of daily options that’s traded on the on the SIBO, on on, I mean, the amount of gamma and delta hedging that has to accompany that would have to be amazing. I mean, the numbers will have to be big. And I think the real question that everybody should answer is, let’s say the market actually, instead of being down three or 4% which it was, was down 10% and limit down, what will be the effect of all this daily stuff now, daily options on the VIX. I mean, so the reality is, one of the things as a risk scenario, and just kind of gotta have in place is irrational, big spikes.
Michael Cameron 06:56
That’s actually, sorry. Go ahead. Martin, no, no, sorry. Go ahead. Mike, I was gonna say, I was gonna say, actually, with, with all this that went on, right? So obviously, obviously, August was disappointing, and it was a vix led spike that we saw. We didn’t see kind of the same currency of move on, kind of the downside, right? So, as you mentioned, the downside was pretty shallow. Was like a four or 5% sell off in the s, p, so not really a massive drawdown compared to the level of vix that we saw. I think we saw spot vix touch 65 it never traded up there. But, you know, given that level, you would expect the market to be down at least 10% right as you kind of to it, and it wasn’t as we kind of talked to investors, it’s, it’s interesting, right? Because everybody wants the profile that you are long volatility, and we were long volatility coming into this event. So it’s amazing that we, we kind of had this performance results. Even though we were long volatility, what we had on was a spread. So we had, like, a a little bit of September, relatively small too, because we needed some carry. And we had talked about in the podcast all of that front month, short vol exposure that was out there, and against that, we had longer dated optionality, not not that far out though. I mean, I think June 2025, Martin was kind of the furthest that we had. So we modeled up that spread and looked at the ratio over time. And it’s interesting, right? Because even during covid, 2022 you know, our measurements and anticipations of where that spread would move was fairly contained, and we were fairly confident that we would get a nice result in a market drawdown. But this was just such a massive outlier and an abnormal event that had never taken place in the market. It was more than a six standard deviation event, and that was just something that was never modeled over time and couldn’t have been spotted, which is unfortunate.
Jeff Malec 09:13
One quick thing to Claire Martin, you were saying CBOE Not till 230 you’re talking London time, right? Yeah. It’s like, what was it closed here in Chicago,
Martin Vestergaard 09:24
you know what? They were prices on on screen, um, but they were, you know, 50 to 150 points. Why? Some of the daily option, that’s probably highly likely, why that that option ended up trading at such a stupid price, because somebody just had to do something. And there was no real liquidity. But liquidity started coming in as soon as the the floor picked in at, at, yeah, two so, 230 I gotta, what do? I gotta subtract six hours. So, yeah, 830
Jeff Malec 09:49
aren’t 830 Yeah, yeah. We talked with a large firm that was trying to sell those vix futures. They were seeing 46 or something, right? Trying to sell it. They, I don’t. Think they could actually get filled till 28 or something. So even in the VIX futures, that spike was a little unreal. So, you know, I
Martin Vestergaard 10:09
mean, I think the takeaway from this, obviously, when something like this happens, I mean, I’ve traded options for probably too many years, but I’ve never, you know, I’ve never had a, you know, real, any significant, you know, you know, loss, and most things like, yeah, we’ve had weird things happen. I mean, 2008 was obviously weird, but it happened in a controlled way. I mean, it was a massive spike in in VIX, and we saw covid, where we saw vix spike up as well. And, I mean, during covid, we were, I mean, that that particular day, I can’t remember how much we were, we have a lot and, I mean, it was just a very different move. Yeah, this was definitely associated with VIX. And for some reason everything else, just, I mean, it was like the correlation kind of broke down across the curve in some shape, shape or form.
Jeff Malec 11:05
There’s also, like, I think of it like an airplane, right? Of like, it’s the engine blew out in your crash landing, right? That’s Everyone’s panicking. It’s scary as hell, yeah. But versus, the plane just blows up in mid air and you fall into the ground, right? This was more of the latter, it just happened very fast.
Martin Vestergaard 11:24
You know, the lesson from it really is, you know, as much as I kind of mentioned the beginning, when something tends to happen. I mean, I remember one of the companies I used to work at, the guy always says, so stupid. We’re sitting here in 2005 and stress testing our portfolio in the 1987 scenario, or the 2000 scenario, because they’ve already happened. We need to find a new scenario to test on. And that’s obviously how the world works. We react to the current information, then everybody reacts to that, and then probably from positioning that it happens in some shape or form. But I think we have to really acknowledge that these markets are becoming incredibly electronically driven. I don’t think, I mean, I think market makers. And, you know, you have all the you have ETF, and you have all this other flow in there. You have short ball products, you have daily options. You have options on every single thing, and they’re all traded. And I think majority of the trading in the future is, it would not surprise me if that’s really just this delta hedging compared to people buying or want exposure to the market or want to, you know, do something else. And I think that makes it a very technical market. And I think that’s also one of the reasons why we’re seeing these. I mean, I think was it last week we had another where vix was up 17% of the market was down point seven. I mean, that’s, that’s we used to, at least not see those things. I mean, it’s and, I mean, I can say that it started in 22 where we had several days where market was down and vix was down. Does
Jeff Malec 12:56
it make you want to flip your whole right? Is it better be long the front end consistently, it’s too expensive to do that is that what you were saying about, you know, what
Martin Vestergaard 13:05
you obviously have to belong in some shape or form. So we kind of come up with what we think is quite a good way. Because I think right now, for instance, to talk a little bit current about the market. I mean, SK was very, very high. I mean, according to our own model, we are seeing skew touch up to the level we last time saw in 21 and 21 was an outlier we haven’t seen in a very long time. And I also think that’s part of the reasons why we get a market that’s really been sitting in a in a 5060, kind of point range. Market goes down, 1% goes up, 1% kind of sits there. But you got vix at 22 I mean, that’s obviously means the market can move, you know, 1.3 1.4% a day. And in theory, people should be okay if you’re short the gamma. But there’s obviously a bid to the ball, and it seems to be coming primarily through the skew.
Jeff Malec 14:00
So you’ve been doing this, you said almost too long two things, I think of there. One is it maybe just it’s permanently break even, right? Overall, any option strategy, we used to say that all is about short option sellers, like, oh, they’ll make money for five years, but then they’ll lose it all back. Right? Like, it almost makes me think, is any option strategy terminally break even, and you can do well for a while, until some dimension hits you. Like, what are your thoughts on it?
Martin Vestergaard 14:32
No, I think, I mean, obviously I think strategies all work for a bit, and then they don’t. I mean, and I think a very good trade example that is the dispersion correlation trade. It can work really well for a long time, and then all of a sudden it just does not, I mean, it will not compute. But then obviously that means there’s a time to it, because it’s different. You know, options obviously very different than a stock. If you buy a stock, and we all have these trading accounts where. Yeah, you want to start forever, because that’s where it goes, because you got wrong on it, but with options, I mean, it has to be some kind of quantitative measure on the realm of it, because they obviously have an expiration date. And I mean, so I think, like right now, for instance, it’s a bit tough right now because skew is so high, but you can’t stay up here unless we get a move. So the thing is, with options is it can stay, obviously high for a while, and so, but when we’re looking at like right now, for instance, the ball looks low, looks okay to us, but skew is what’s expensive. So you really want to run a book now where you’re long gone and short, short skew, and on that top time be long gamma, if we break out of the ranges. Because right now it seems like we got this range trading. But to go back to the questions now, I think every like, I think it’s the same thing with stocks. I mean, everything goes in and out of fashion. I think we just all anybody that really trades option, I really just have to be aware of the impact, I think, of this dairiness of options that’s coming in, because I do think it’s affecting the market in some shape or form.
Jeff Malec 16:15
And then Mike, maybe win here, how’s, how’s something like this weigh on the psyche of a manager of a CTA of a hedge fund, right? Of like, how do you keep your mental abilities and say, Hey, was just a blip, right? How do you keep confidence in yourself and in the model?
Michael Cameron 16:33
I think you have to kind of analyze the event, right, and figure out what went on. I mean, the reality is is, like, even the best trading models are going to be subject to kind of a loss at some point, right? So the essence of a good manager is how they kind of come back from that, learn from that, put different risk measures in place to kind of circumvent that from happening once again. And, you know, I think the model over time. I mean, you know, we’ve got a lengthy track record right, which can just be thrown out the window over one month performance. So, you know, I think it takes time to kind of when, when you do experience a loss, you know, I think people tend to back away and kind of our very short dated in terms of their thought process and thinking, but that just comes back over time, right, showing kind of what you can do, how the product performs, etc. Because the reality is, we got a great model when it comes to looking at, you know, the overpricing and underpricing of these out of the money options, right? Which is what we look at the skew is a unique model that really looks at the S, p5, 100, the most liquid index in the world, right? For index options, we get a lot of Intel just in terms of the way investors are kind of positioned, thinking about the market, etc, from, you know, the proprietary measures that we have on our side,
Jeff Malec 18:05
you think it’s possible that skew is can’t be right? Is it properly priced? Like the market’s saying what its price should be, right? So your your models are saying it’s highly priced, or that it’s high, quote, unquote high. But right? If the market’s saying no, this is where it should be given, right? There’s a question here somewhere. I’ll get to it. But say the market is putting in those zero DTE and all these other factors, and that’s why the SKU is priced there, right? And so it’s not actually high, it’s just where it should be given all these other factors.
Martin Vestergaard 18:40
That I know that that’s a valid point. But obviously the thing is, what, what? When you see the, you know, when, when the VIX kind of moves on, on a day to day basis, the VIX is essentially you gliding up and down the the ball, you know, the ball curve. So if you go down, you glide up that curve at the same time. Put options that are sitting further down has to glide down that curve. So, you know, when you tends to get too high, it’s just the dead at the money ball can’t go up by that amount, so that it does become a mathematical, you know, certain tier, yeah. But I think the reality, as you just said, if people gotten burned on this, and you know, obviously also now you got the Middle East, you got an election that there’s a lot of events going on. Yeah, things can stay out of whack for longer, you know, than than, than you know, than you think. But options do, on the other hand, have to expire. And obviously the thing is, you can, you know, you can essentially construct trades now with your shorts, do long ball and long gamma, and you pay very little for that gamma, so you’re basically getting that gamma, not for free, but you pay much, much reduced cost for it, because that skew is so high. And that’s how we are basically constructing the trades now, whereas the trades before were more like pure skew bets. So now. Now they’re basically assessed with long ball and and convexity against it.
Jeff Malec 20:07
Do you think a lot of zero DTE traders lost money that day? Or you think it was just one OTC that had to blow out?
Martin Vestergaard 20:15
I mean, obviously, if you were, you know, down at the local pop or in rotation, and you came back a few days later. I mean, you all were good, yeah, the mark to market on that day would have been horrible,
Jeff Malec 20:28
yeah? That’s always the frustrating part, the responsible people analyzing it took the hit.
Michael Cameron 20:34
What’s interesting is just the liquidity of the zero DTS, right? I asked I got from the SIBO, just the daily volumes that have taken place. And I mean, on that Friday and Monday, they dropped down dramatically. So, you know, people talked about the open interest, and how not the open interest, but just the daily volume in terms of percentage of total volume of S, p5, 100 options, and that was always 50% or higher, right? Zero, DT options, I think on August 5, that Monday, it was less than 26% so liquidity dried up,
Jeff Malec 21:13
yeah, which always makes me think it feels like there’s a period between that August 5 where there are a bunch of traders sitting there like, Oh, if it snaps back, we’re all good. And then if it, as you said, Martin, if it goes another 5% like some of your some of these other trades would have started to kick in, the long end would have started to rise right? So it seems
Martin Vestergaard 21:33
like exactly
Michael Cameron 21:35
we were holding out right, outright puts too that were further down, short, dated, uh, they just didn’t get a chance to kick in,
Jeff Malec 21:44
right? So I wonder if the part of the casino of the zero TT, they’re like, building in or waiting for that buffer, right? That’s the risk they’re taking on of like, let’s not panic if it’s pre market, if it’s such and such, just let it play out. But to me that
Martin Vestergaard 21:58
imagine individuals like, I mean, traders that sit at home in their underwear probably did okay, because they probably less, like, Ooh, I hope this thing. And then they were right, and they got bailed out by another by the dip, whereas the guy who probably sat and had a risk manager by his desk two minutes after this thing had to close it up, yeah,
Jeff Malec 22:20
which is just bad lessons, right? That’ll mean next time you’ll, you’ll buy the dip again, and if it legs a second time, that’s when the real, real trouble will start. Yeah, I
Martin Vestergaard 22:30
think that’s this thing with this market here. I mean, it has obviously been a buy the dip, and it has been the right strategy, for sure. I mean, it seems to be defying, you know, gravity, but that’s why we have a market here is very close to an all time high, and at the same time, you’re not having bigs anywhere near the lows. I mean, it’s sitting well in the middle of the range. And that should probably tell us something of what’s what’s going on.
Jeff Malec 22:58
I do do all I could do, not to sing the wicked play define gravity. There. They’re coming out.
Michael Cameron 23:08
You have the microphone.
Jeff Malec 23:10
Yeah, the movie’s coming out, right? It looks good. Well, thank you guys for coming back on. I think we’ll leave it there. Give us some color. And then for everyone, you can go now listen to the full pod where they talk about the strategy in more detail. Okay, that was the new recording we just did, talking about early August and the ball spike. Now we’ll go back in time and give the original pod with Carmichael talking through their bios and strategy. Send it again. All right, everyone. We’re here with Martin vestigarn and Michael Cameron from Carmichael partners. How are you guys good? How
23:49
are you good?
Jeff Malec 23:51
And Martin is in London. That’s correct, yeah, that’s correct, yeah. And Michael is traveling. You’re usually in London, Mike, but now you’re in Toronto.
Michael Cameron 24:01
I’m in between the two. I also spend time in Spain, but Yeah, that’s correct. I’m in Toronto.
Jeff Malec 24:08
What part of Spain?
Michael Cameron 24:10
Palma, it’s in Majorca.
Jeff Malec 24:12
That’s right. That’s right. Sounds exotic.
Michael Cameron 24:16
That’s nice. Can’t complain.
Martin Vestergaard 24:19
What’s the island where they’re kicking out the tourists. Now,
Jeff Malec 24:23
I got it, and then I’m a bit of a Tour de France nerd. We just came off the Twitter fronts. But Vesta guard, or vestigo, right? No. Vester
Martin Vestergaard 24:33
guard, also, you looking at the Danish guy? Yeah, in a row, I guess I unfortunately know nothing about it. Besides, I know that it was a Danish guy that won last year. I don’t even know if he’s on track to winning this year.
Jeff Malec 24:48
He got a spoil alert for anyone who hasn’t watched the replays yet, but he got second this year. Oh, he did, yeah, after he got in a big hurt. But they Yeah, that’s a big thing. They’re always like, it’s spelled. Guard
Martin Vestergaard 25:00
in February or March, didn’t he? So people thought like he shouldn’t really even be broke, like rips and whatnot. I think, yeah,
Jeff Malec 25:06
I think major, major breakage. But back at it. Um, alright. So people didn’t, if you came here to listen about the Tour de France, stay on. We’re going to get into all the good stuff these guys are doing. But Martin, why don’t you start out a little personal background, where you got from, how you got here.
Martin Vestergaard 25:27
Okay, you know, I studied in Denmark, and had a year abroad in 9596 and up going to us to study for a bit. And there I, you know, I was taking a class, a finance class about options. Went back to Denmark, finished out my degree in in, basically, financial engineering. And when I was done in 98 I decided to go to Chicago and try and get a job there, and I interviewed with a few companies and started out with a company which I don’t think actually doesn’t exist now, arbitrage got bought by knight in I think 99
Jeff Malec 26:19
I Think either No, I
Martin Vestergaard 26:20
think Knight was the one that one that had the trick. Blip, yeah, whoops, yeah. Where they the first flash crash we had? Where they went? Kip. We on that one. But I then started on the on the floor, working for a DPM. So for people that don’t know that, this in their primary market maker. So we were responsible for 16 or 17 symbols, and my job there was to run the ball curves and work with the traders in terms of managing the risk. I mean, the biggest symbols we had back then was North Zone network, which probably doesn’t exist now, again, one of the Canadian stocks, and then Broadcom and Charles Swan and obviously, Broadcom is, you know, now pleased, but I was there for about 10 months, and I realized the floor is just not me, you know, we you stood around 90% of the times, and 10% of the times, you know, obviously, was super busy. And, I mean, without saying too much, I think in the pit we were in that we were running if 80% of the people had an alcohol problem, I probably estimating that relatively low, but it was. It was a fun 10 months that’s and then left them and started at Hall trading, and I decided I wanted to go a little bit more into the engineering side. Long story short, went, you know, Hall trading went to, you know, London, because obviously at that time, this was 2001 there was a big electronic push in in Europe. And Hall was obviously one of the pioneers in electronic trading, and actually had a fantastic system compared to what, what I came from at arbitrage. So when you know, in London, that was the role, trying to help them build that out, and we were market makers over there on all the European indices, and left them in was that 2002 work to work for a hedge fund called Horizon asset limited. They were primarily turning credit. And what are they called crew asset swaps. So essentially, asset swaps are call options on, you know, options on credit so you build up like you do, you know. So we value those, and figured out that they they offered a lot of value. So instead of being long, the CDs say at 1000 points over, you could be long, it at 750 points over. So what you did, so horizon as it was primarily a converts art fund. So what you do is you get to convert, but you get rid of the credit element, and you just kind of own the equity asset element, but you have the credit element in terms of a call option. So that was interesting, and that was building out an auction business there as well. I then left them in 2004 or five, can’t really remember, went to another hedge fund called Horizon asset limited, where, no not the Centaurus capital, sorry, yeah, where my job was to be essentially a risk manager, but we ended up trading a lot of options skew, because Centaurus capital was an event driven fund, so their primary risk was, you know, a deal breaks and it goes completely. So it was very natural to use options to kind of hedge that so you can get that, you know, have some sort of payout. But obviously you can’t just sit and buy options, because, you know, then you’re going to go broke. So we, we had to come up with certain ways of doing that. And back then, you know, similar to kind of what we do now, we traded a lot of convexity in. Disease to kind of hedge the book. And then I left them to go and work with the third partner in our business, which is Manjit Mudan at a company that he had helped found called ADG. And there we were basically just prop trading whatever we could in options. I mean, we primarily focus on interest rates. So a Euro, dollar short Sterling, Euro, all that stuff, bit of commodities through the ETF, so gold and oil and then obviously S, P and Euro stocks and CAC and DAX and whatnot. But the thing is, you started finding out at this, this point in time, was liquidity in Europe, besides basically the Euro stocks index is, it’s not great. I mean, it’s nothing like what you see in the US. I mean, looking at the s, p, and yeah, then I left that. I think then 2012 and I think Mike and I kind of got in touch in 15, and he had, like an idea, because he had a family office that he knew out in California, yeah, and then, I think 17. I mean, I’m not good with the dates. I think we kind of started kamika partners. And then, yeah, that’s it.
Jeff Malec 31:15
Love it. And I’ve always been calling it Carmichael.
Martin Vestergaard 31:20
Carmichael, yeah, weird story, because we originally were called, like another name, convexity capital apartments, and then we figured out that somebody else had already taken that name. So that didn’t really work. So the point is, we were sitting overnight, Manji, and I was like, Okay, we gotta find another name. And maj was like, let’s look in Sanskrit. Because anytime you want to find something that involves, like convexity and partners, like all the names, I say, yeah, yeah, all the we went into Sanskrit and figured out that kamika or kamika, depending, you know, I’m not a Sanskrit expert, actually needs shield there, so that, you know, there you go. Nobody had
Michael Cameron 32:05
that. The protective nature of what we do comes out.
Jeff Malec 32:11
I’ll stick with Carmichael. That sounds like I’m not totally, totally off.
Michael Cameron 32:14
Might be interesting, because India is obviously seeing massive growth, so maybe a household name over there, right? No,
Jeff Malec 32:24
a few questions I’ll come back to but Mike, let’s go with you sure kind of your background, and then into the firm’s background as well, if you could.
Michael Cameron 32:32
Yeah. Okay, so in my career, I started off in the 90s. I started off my career in equity derivatives, sales, trading. I worked for the bulge bracket banks. So SOC Gen, Deutsche Bank. My last stint on the bulge bracket side was a baml, and really what I focused on was covering both pension plans and volatility arbitrage account. So providing them with, you know, trading ideas, typically, a lot of the relative value volatility managers were trading at the time index spread, so looking for cheap value in Europe and Asia, and spreading that against the US market. Also, dispersion at the time was quite big, so taking advantage of, you know, the implied to correlation levels. So it was great. I mean, I had a different range of clients, I got to see a lot of different flows. And it’s interesting, because, you know, after the financial crisis, a lot of those types of trades broke down, and I think the trading styles really adapted and changed. After that, I moved on to the ETF side, where I covered alternatives. So I headed up a it was a European based manager. I was based out of New York, and essentially I was speaking to a lot of family offices, RIAs, and really giving them investment solutions for some of the problematics that they were trying to address. So I spent four years of that. I met Martin and Manjit during my equity derivative sales and trading days, and we came into contact with a family office that I knew, which I guess is a segue to how the firm was developed. And essentially they were looking for an investment solution. So they had invested in terrorist funds in the past, and you know, those hadn’t really worked out. This is 2015 that we started talking about the idea the actual trading and product that we’re trading today came to fruition 2017 but the discussions started in 2015 so they’d invest in tail risk funds. They had this kind of like perpetual bleed to it. And then they were looking at volatility managers. And you. Know, volatility managers, when you get into kind of the space, there’s a lot of complexities. So, you know, it comes down to trust, and really, what they wanted was a liquid solution to giving them, you know, capital and a market drawdown so that they could take advantage of dislocated assets. So they had private equity, private credit in the portfolio, beta and real estate, right, which is a lot of the holdings that we see today with a lot of asset allocators. So they wanted something that was going to have minimum bleed, if not positive return, but do well during a market drawdown. So I introduced them to Martin Manjit, and that’s kind of how things got rolling. From there,
Jeff Malec 35:44
I love it. Um, it’s just popped in my head that your job would be infinitely easier these days. You’d just be like, yeah, we’re just, everyone’s selling volatility. Just get in there and do it your old job, right? Of selling option strategies.
Michael Cameron 35:58
Yeah, exactly. I mean, when you’re kind of sitting on the sales and trading side, you know, the job is to kind of generate flow. And obviously the short ball trade has been, people have been piling into that. But, you know, history repeats itself, right? So exactly it
Jeff Malec 36:16
rhymes. It doesn’t repeat itself, as the old saying goes. And then Martin, two questions I jotted down when you were given that one, where was the US school
Martin Vestergaard 36:28
that was actually, it was because, you know, at my dorm in in Denmark, it was a guy coming over, and it was a little bit weird. It was Northern Illinois University that was only there for like, a year, and actually took some accounting classes and realize the county is the most boring thing, yeah, ever on the planet. But they had an options and futures class, which I ended up taking, which was actually quite interesting, right?
Jeff Malec 36:49
Fortuitous. So it, I was going to guess it was there, or Idaho has a place or, right? It’s got to be something actually
Martin Vestergaard 36:56
into Cal, Illinois. And I remember the winter there, I got there. I mean, I’ve never experienced anything in the vicinity of being that cold. I mean, winter clothes in Denmark and it was just bodily useless.
Jeff Malec 37:13
Yeah, it gets that’s yeah, out in the plains out there, yeah. What
Martin Vestergaard 37:17
happened is, supposedly, when the corn gets chopped down the wind. It was obscene. I mean, people were putting stuff in the gas tank because otherwise the gas tanks were freezing up and I mean, it was just crazy.
Jeff Malec 37:37
And one question before we get into the strategy, both of you have kind of been in and around all these different types of options, right? Not just stock index options. So talk for a minute about is an option, just an option at the end of the day, and once you understand the dynamics of each market, you can trade that market. Or do you see massive differences in index versus non index options? And then, as you said, US versus European index options,
Martin Vestergaard 38:03
I think that liquidity wise, I mean, I think the US, you know, is obviously fantastic. I mean the S, P index and the E minis, I think the liquidity there is great. I think there’s a difference whether you’re trading index, which I can’t consider systematic risk, or you’re trading individual names, which is idiosyncratic. So obviously, when you’re at a bank and you are sitting on a desk, a lot of the flow comes in individual names, and a lot of times the flow, you gotta kind of assume, you know, all trading at this point in time, we’re sitting on the floor of Goldman Sachs. So you gotta assume, somehow the you know, it’s quite informed flow. And in an index, without assuming too much, the index is not going to go to zero, whereas an individual stock, obviously, very easily can go to zero or be taken out. So in an individual name, you just from sitting in that seat. You’re a lot more concerned about your sales than you will be in an index. So I think that’s obviously the difference with it. But I think it’s very important to understand whether you’re, you know, so it’s in terms. We also looked at credit options, so they were all OTC, and we looked at FX options, and, you know, so FX option market is super liquid, so it’s an enormous size. I mean, just fantastic size. And ball, you know, was, is much, was much lower than, you know, I haven’t looked at it for a few years, but it was much lower than index ball. So it’s like in seven and eight. I don’t even remember, but the yen and the Swiss franc. Every time the market puked, the yen would just everybody like the same thing. They are the freaking bankrupt. And it was the online of that carry trade. And we were, you know, it’s in tourism. We were like, s, p ball at this point in time. Was 20, but you could buy yen vol around. Nine when we started doing it, dollar yen ball, so you could go and buy call options or call spreads, had like half the ball. And the craziest thing we actually saw back then was Swiss Euro. I think the first clip we bought, we paid under four ball for Euro Swiss. But you looked at Euro Swiss correlation with Euro stocks index was 98 to 99% in 2007 2008 I mean, it was just crazy, and it told you that people were just borrowing money in Swiss Franc and buying eurostocks. And obviously, when you know, the thing blew up. And I remember we had a day where the yen rallied 15% against the Sterling. Yeah. I mean, it was brutal and but, you know, so we made a lot of money having that unwind of that carry trade on, because that really was how you were. In my mind, were hatching a book back then because it was very interesting. Without going into too much detail, we can go into that later, but going into 2007 and eight, like 2008 Well, everybody, everything blew up towards in the second half. Convexity was the wrong. I mean, it was very low. There was no demand for productions, none
Jeff Malec 41:16
before it blew up or after it blew up, before it
Martin Vestergaard 41:19
blew up. And even in, like, a few days into the blow up, no demand. I mean, because back then, everybody was like, private equity is going to buy this, going to buy that, blah, blah, blah, and that’s what they did. So everybody was just coming after the calls. But then it was, like a two day window, and the whole thing shifted. And, I mean, you got an enormous move up in skew, and it seemed like the market was a wash in, like, short gamma and short ball
Jeff Malec 41:46
that was needing to be covered super quick. And then you’re also, when you were on the floor CBOE, you were the guy who basically designed everyone had their sheets in their pockets, right
Martin Vestergaard 41:59
jacket? Yeah, I do remember standing up every day was hard as I mean, it was just, it was incredible. I mean, I was it’s a fun place. I’m happy. I tried it for the 10 months, or 11 months, or whatever it was, but it was not
Michael Cameron 42:15
for me. Love it. You kind of touched upon an important point. I think you’d asked is an index option, you know, the same as any other option, something to that effect, correct?
Jeff Malec 42:25
Yeah. And you’re in your background of doing a lot of different option things, yeah.
Michael Cameron 42:29
So I think, as it pertains to what we do, I mean, that’s an important distinction between us and others in the marketplace. So one of the things that’s most important to us is obviously liquidity, right? So we’re all we’re only trading index, exchange, traded options. I mean, having lived through kind of like the financial crisis of 2008 and watched a lot of the OTC unwinds with a lot of hedge funds and kind of the return stream that people were kind of producing up till that point, I think, given the fact that you know, both Martin and Manjit are market makers by design, liquidity means everything. So that’s number one, we only trade exchange traded. I think the other important point and distinction to what we do versus others, kind of in the the relative value hedge fund space is that, you know, we’re trading the most liquid index options in the world, but we’re not actually introducing other indices into what we do. So we only trade wood index. So the relative value aspect to what we do comes in terms of spreading that against different strikes. But the reason why we actually only trade the S, p5, 100 is during kind of market drawdowns and market sell offs, we aim to produce positive returns and provide this defensive mechanism within the portfolio, and by not introducing other products into the marketplace, we cut down on that basis and correlation risk is an important distinction. And
Jeff Malec 44:06
the issue is, you’re giving up those quote unquote obvious trades, like in the Euro stocks versus Euro Yen and things like that, where you see this cheap volatility. Yeah, yeah. I
Martin Vestergaard 44:19
think the problem with the FX options. I mean, it’s, it’s, it’s, I haven’t followed it for a long time, but back then it was solely OTC. So, yeah, credit party listed. I mean, it probably is the same thing today. I’m sure there’s something listed there. But the size you could do back then was just, it was, it was wild. I mean, it was, it was a fantastic market to trade. And Paul, you know? And the thing was, it was very you look at eurostocks and s, p, so Euro stocks feels like it’s bald guys, uh, Europe doesn’t have, I think if you walk around the street in Europe and you ask like a random guy on the street and says, Do you know the Euro stocks, 50 index? Yes, and people look at you like, Huh? What? A lot of people might not even know the S, P index, but they definitely won’t necessarily know that. But it’s a product where a lot of ball guys are in playing it. So it’s very efficient. And it’s, it is liquid. I mean, you can do a lot of size in it, but it’s, it’s just we don’t see the same opportunities you see in the US, I think the US, the fantastic thing with the S P is you got the VIX, you got triple long, triple short, ETFs. You got these massive stocks like Apple and Vita that’s just going up and up and up. And you got people, people around the world, doing something these two dump or buy a boatload of Vega, they go to S P, I mean, so you have all these actors, and you got daily options. You got, you know, there’s so much rope for so many people to hang themselves, so many times over. And I think that causes these a trading opportunities that we just see so many more of in the S P index then than the Euro stocks index.
Jeff Malec 46:02
Love it. I bet 40% four out of 10 might say they know the s, p in the US, if you’re walking down the street.
Martin Vestergaard 46:11
That’s probably Yeah. I mean, to be honest, you, I mean, without saying anything, I’ve in this term here with kamika, or kamika, however we’re going to pronounce it, I have met one or two people who you know didn’t really know it. So I think the Euro stocks 50 is just, I mean, nobody knows that one.
Michael Cameron 46:30
I think the big thing that people kind of underestimate on the s, p, just in terms of our conversations, is is just how much liquidity is in that marketplace, right? So, I mean, I don’t have the exact figures from SIBO, but it’s somewhere in the realm of over 1.2 trillion notional a day. So it’s a very deep liquid market
Jeff Malec 46:52
larger than the underlying, do I read that right? Or just the volumes larger than the underlying, the nominal volume, I believe
Michael Cameron 47:00
the nominal volume Correct, yeah.
Martin Vestergaard 47:03
I also think, I mean, the key thing, reason why you’re probably seeing that liquidity is because you got these individual stocks, like, you know, whatever the Magnificent Seven, or whatever we call them. I mean underlying liquidity, just in in individual stocks in the US, is fantastic, yeah. I mean, you can go on the screen and you know, so I remember, just as a little tidbit, when I was on them on the SIBO, that’s when they were these exchanges were open elsewhere, and these locals were obviously used to either turn themselves on race, which stands for retail, automated executing system, and then go down to the billy goat Tavern and sit down there and just trade on the bid and offer, and don’t even have to Do any delta hedging, which is always a night because the spreads were so wide. And then, you know, when a broker would come in, you basically give him the screen market, and maybe you have to approve 10 cents. But in that just 10 months I was there, a broker would come in, and he would have three or four exchanges in his headset. And a lot of times, you know, in the beginning the, you know, the locals and the pit will be like, we don’t want to participate in there, but then you realize, huh, then it’s just trading elsewhere. So spreads were definitely starting to come in. I mean, and I remember moving to Europe, we were trading Nokia. I mean, I think we were trading two cents, wide market in enormous size. So I think this liquidity that’s definitely coming to the marketplace. I mean, it’s great for the for the end user. You know, whether that’s high frequency or what it is, don’t know, but I think it’s, I think the end user is the winner in this, in this game, compared to in Europe. Because in Europe, I mean, I think, again, I might be overstepping a bit, but in euros dot 50. I mean, you don’t have, you might have real liquidity on the 10, maybe the seven, biggest name in that index, nothing like in the US, on the options, or overall, yeah, options, yeah, stocks probably okay, that they okay. But on the options, I mean, single name liquidity in Europe was that’s probably a handful. Yeah, even back then.
Jeff Malec 49:08
So we’ve started to touch on it a little bit. Let’s dive into the main strategy, the main thing you guys are trying to do you’ve mentioned, kind of be there in a market crisis. But how do you get from all this liquidity trade and S, P to that end point. But
Martin Vestergaard 49:23
what we basically do, we have a quantum model that’s been developed over X amount of years, where we try and model the option prices, or we aim to model the option prices in I mean, this model, we actually used that back in the days, so there’s a slight modification of that. So it’s probably been around for about 15 years. And what we can do is we can model essentially. We can price options, call options and put options across the curve. And given the fact that volatility is very much a mean reverting, mean reverting element, so a lot of people will. Can say, okay, ball is 16 and markets moving 20. So think that it’s cheap in terms of implied, we don’t necessarily care so much about that, because it’s more for us to sit here and say, Is the market overvalues, vol cheaper, expensive. I mean, we know whether it’s low or whether it’s high, but we’re not the type of people is going to go in and buy a lot of all we tend to play a lot more in in the wings of the options be, you know, of the curves and, you know, and that’s where our strength come in is, without getting too technical. But we can use, I guess we can use, a term like skew smile, yeah. So smile is obviously the, you know, how rich are put options versus call options would be the simple, simple way of looking at it. And one of us things come in in terms of modeling that So pretty much, I would say 80 to 85% of our trades are happening in, in, in, in the put wing, in in 10 to 30 delta, so pretty far out of the like, a decent amount out of the money, because that’s the element we tend to see that reacts, it’s the it’s the element you you can, you can own that obviously want to own skew if, if you know if, If ball is low and skew is low. But the problem, I think that the reason why we can do what we’re doing is because in the auction market, I think a lot of people, when they go in, they look at the option price and they just see, this is the price I’m going to pay for that. And they might look at that and say, well, they’re going to sell that. And they can look at that premium they get, and they can annualize it, and that’s how they value the trade. We obviously don’t necessarily care what the option cost, but we care about the underlying implied volatility. And when we compare that implied volatility historical data, like going back, say, 1015, years, and the same thing with a smile, and we can see we think that’s too high, that’s too low. So that’s where our, our edge comes in. And 20 like going into 22 and even, you know, in covid, which was a very interesting covid, was probably the truest Black Swan we have had in, I mean, last 87 probably, yeah, yeah. 87 Yeah. And the thing going into the, you know, 20 skew was actually very high. And in that sell off, when the market started, you know, obviously it new started coming out, and, you know, headlines and market reacted quite fast to it. Who knows? Options, relatively speaking, got absolutely mullered in in the move down ball went up. So what people saw, they saw VIX, you know, so they saw at the money ball go up. But the price of the put options versus that, the money actually went down quite significantly in in, in that, in that move, which is obviously a impressive given the fact that it was the truth of a black swan. But that gets to my point. The point was put options were probably mispriced going into that event. And I think most of the times, you know, obviously people must have been, you know, fearful at the time and getting long production. That’s what, for me, what option tends to do. It’s an emotional game, and people tend to read it really wrong and be positioned wrong when they go in for an event and they hear there’s a big event coming up, there’s a Fed meeting on Wednesday. We all gotta buy options for that. The guy who sits with the auction, head out. He’s going to be looking to, you know, Monday, Tuesday and Wednesday, going into that meeting, selling those options.
Jeff Malec 53:52
Do you feel like it’s the convexity of the options which allows people to be less precise, right? Like, hey, this has so much convexity, I don’t really care if I’m overpaying by a little a little bit for those puts right, versus you’re coming in and saying, Hey, go ahead, overpay. That’s, that’s what we’re looking for.
Martin Vestergaard 54:11
Yeah, no, I think it that that’s, that’s likelihood. I mean, the convexity, obviously, is, you know, I think it goes back to what I said before. I think a lot of people value options on, on the fact that just, they don’t understand the the underlying implied volatility. They just see the price. And they might think, Okay, 10 ticks for this. It’s fine, you know, I look at it’s like, it’s a salt cost, whereas, from a wall perspective, I mean, we rarely look at, you know, we can look at premium sometimes, but in general, we are much more, you know, what kind of skew parameters are we getting on here? Are we getting long or short skew? You know, what’s going to be the effect if skew moves up one basis points to our PNL. You know, obviously we can net. We will look and see. Are we net long or short vault, depending on the ball is. But the point is, if you’re short ball through skew. And in a very simple example, if the smile is obviously always steeper to the puts. I mean, in under normal circumstance, there will be times, but in normal circumstance, always steeper to the puts. And one of the things that happened when the put wing is very, very steep. As the market goes down, those put options have to glide down the curve and have to go on a lower ball. So unless the at the money ball goes up more than we glide down the curve. I mean that that put option is not going to work. Going to work on it, you know, on its own, it might work if you were just long that put option, but you’re not going to make as much of it as you think, because you’re getting a kick. You’re getting a drawdown from the lowering of the convexity. But obviously, the fantastic thing about options, if you buy an out of the money option, when convexity involves cheap and you get a big event, and not only does the volatility go up, but the convexity kicks up as well, and you get the download. That’s when you get these outsized returns and options. But most of the times when you’re going into events, options starts pricing this in, you know the sell off in 22 was a funny one, because during that sell off, I remember that every single day besides, like, from February and forward, they just couldn’t sell enough skew. And I think this was one of these years that for a lot of people, was a bit of a conundrum, in the sense that it was the year where we a lot of times sold vix underperform the market. And people like, how can the market be down 2% and VIX is down. And that almost comes down to a lot of people don’t necessarily
Jeff Malec 56:45
get in 22 or saying, Sorry, in 2000 Yeah.
Martin Vestergaard 56:50
So the market went down. Vix massively underperformed. And part of that is VIX is obviously, I mean, essentially, like a variance swap on, on, I mean, so it’s weighted with more puts than then, then calls, because it keeps you, gives you a Vega exposure constant as spot moves and you just got destroyed and you we had. That’s why we had so many times where market was down, Dix was down. I remember so many people, of these analysts written says, Mark is not going to bottom until we see a vix 50 event, but we never saw a vix 50 event. So I think it’s, it’s in the there’s a lot of, I mean, it’s a complex product, for sure. And I think it’s, you know, as I said, I think the reason why, I mean SMP is particularly driven in such a fantastic way, is there’s so many. I mean, even the vix index obviously has a ton of of liquidity, and a lot of different players in there trying to express different views. And a lot of that feeds straight into the S P as well, which just adds to the liquidity.
Jeff Malec 58:01
And Mike, if I’m trying to stupidly oversimplify it, would Can I just call you guys skew traders?
Michael Cameron 58:09
Yeah, I mean, I would say, I would say that’s pretty accurate. It’s a it’s a quantitative model that basically looks at up and downside skew right within the calls and puts, and then there’s a discretionary override to what we do. So the overlay comes in. I think this is an important distinction in terms of which volatility regime are we in. And maybe we shouldn’t be looking at the last 10 years of data, because that’s not again. You know, the market’s in a new paradigm now, and what’s relevant is how it’s been trading the last six months or a year.
Jeff Malec 58:48
And that’s totally just you guys in your experience, saying, hey, look, this is the normal models are out the window right now. This is a crazy time, or a very un crazy time.
Martin Vestergaard 58:58
I mean, we can still with our model, we can still fit, fit the market and and one of the things obviously going into 2007 and eight, we did see a market back then that as market went up, skew puts went down, and calls went up. I mean, this is kind of how you intuitively would think it should work. What we really have seen like in the last 10 years, is as the market’s gone up, skews gone higher, and the market gone down, skews come down. So it’s kind of gotten reversed around a bit. And obviously, I mean, anybody can kind of guess why that is. You know, it obviously makes sense. People are buying puts. When they’re going up, markets going down. They’re selling the puts, to some extent. But I also think that the problem that happened in seven and eight was particularly being in Europe, where a market closes at 430 what we would see at 430 as the market would come down, because we were at the time long gamma, which basically meant we’re going. To be buying. We were buying when the market was going down. We were selling when the market was going up. And at 430 we had to flatten out our Stu book we had. And you would see most of the times at the second half of Wait, market would literally do a mini crash at 430 and what a lot of people thought that was, that was the guys hedging variant swaps, because a lot of the structured product books blew up. And that negative convexity, I think, forced, like, from 2009 on where bank spaces said, you know, we can’t have that risk. We can’t be that short tails. So I think one of the things that that’s happened since then is the skew has always been at a perpetually higher level, because, at least, I mean, we learned something from from back then, in a sense that, you know, you saw how much the S P fell. And I’ve always wondered, because I remember being told by a guy on the SIBO that the AOL and the Microsoft pit could be more than 50% of the underlying shares trading to tell us just guys, they’re catching delta. So I wonder today, when you’re looking at a market today, how much out there is people buying stocks and indices, and how much of it is gold guys managing the Delta and the gamma.
Jeff Malec 1:01:24
And expand on that a little bit. Have we seen, right? The growth of zero DTE, the growth of all these alternative income mutual funds and ETFs in the US, which are essentially option selling funds, right? Do you think that’s driving more and more of this. I think some of those are covered call selling, so they’re not necessarily delta hedging. But
Martin Vestergaard 1:01:48
I think the covers call selling. That probably doesn’t matter that much. But I mean the zero DTE and the shorter dated stuff. I mean, if you are market maker and you’re being you know, sold options with a day or two to expiration, and you can’t hold that. I mean, you’re going to go out of business. You’re going to keep buyers. You have to sell something. But I reckon, you know, and this is again, just me guessing when the market, it seems like every dip we’ve had in the market for the last long time just gets bought. And I wouldn’t be surprised, that’s because the dealer gamma, I mean, they’re the first ones to go in and hatch, and they are there as a first off to just buy whatever, you know, Delta they have, and they’re short. And I think part of the reason, like, we’re getting these moves up in in some of these stocks, which have been quite impressive. I mean, just even look at GameStop, you know, obviously that’s slightly different story. But you know, it’s a big move up where, you know, we know that retail, you know, have been been long, you know, call options on this, and I wouldn’t be surprised if retail have been leaning towards buying call options on the index as well, and that, all you know helps you get these, these squeezes. Because a lot of times when the market’s going up, it feels like, I don’t know, I’ve been sitting through a lot of gamma squeezes in my life, and it does feel a bit like that. I mean, I particularly remember November last year, what we came out of October, the market was down a bit. And then in November, I mean, the first 10 days I came like, 10% or something like, like, like, a bad out of
Jeff Malec 1:03:24
Hell, yeah. I think through, through that end of the year, right? It was, like the largest 30 day move in history. I think, yeah. So when these market makers, right, I’m buying my Gamestop calls. I used to think, right, oh, I’m buying it from someone else who’s trying to sell the calls. But I guess all Wall Street figured out, like there’s not enough money to be made if we’re just waiting for someone to be on the other side of that trade. Let’s create the volume. We’ll sell it to you, Mr. Retail, right? We’ll sell you that call. That’s the market maker’s job. And then they have to, have to cover that risk.
Martin Vestergaard 1:03:59
Yeah, I mean, and that’s a question, where they cover it by trying, I mean, obviously it becomes an idiosyncratic risk, because Gamestop can do what Gamestop did. They obviously wiped out a lot of different people.
Jeff Malec 1:04:11
The movie’s Good. Did you guys watch that movie with us? Yeah, that’s
Michael Cameron 1:04:15
pretty well, it’s good. Yeah,
Martin Vestergaard 1:04:17
you know the guy that had zero lack of risk management. I mean, that’s unbelievable to get wiped out from one stock. I
Jeff Malec 1:04:23
mean, that’s, yeah, Melvin capital in the movie is Seth Rogen, who’s like, the perfect I don’t know anything about the actual guy, if that’s what his personality is, but Seth Rogen just seems like a an idiot managing money in that So
Michael Cameron 1:04:37
will there be a Gamestop, too, though, with a secondary IPO? Right?
Jeff Malec 1:04:41
It made me those producers, you know, I
Martin Vestergaard 1:04:45
don’t know what you would do if you want more to make. I mean, if you see it, I don’t know how big part of a book it will become. I mean, but you obviously selling vol that. I don’t know what the ball went up to. I think it went well above 100 Yeah. Yeah. I mean, it’s almost like you sell that and try and delta hedge it as well as you can. Maybe you actually sell the ball and run slightly long Delta against it instead of, I mean, it’s hard when you’re a market maker to go and buy 160 ball. I mean, you’ll probably go and buy it pretty much anywhere else, even though it’s obviously going to be so disconnected that you can’t buy it anywhere else. But, yeah, I’m not sure how to do that. It’s
Jeff Malec 1:05:28
against your DNA, right? Yeah, we’re not paying 160 so you’re trading the SKU. And maybe a simple example is kind of like a normally, 20% out of the money the puts would be, probably, say, 10. I’m just throwing random numbers out there. And the calls eight, like, what’s the what’s that spread look like?
Martin Vestergaard 1:05:53
We don’t trade the SKU like that. We actually do more like in, in just the puts. So, and everything we tend to do is relative value. So we don’t just go and buy individual options. We’ll never go and buy, you know, say, sell a call and buy a put to buy the SKU, okay, never do that. So we do, you know, and you let me know, well, we like to do structures like, you know, fly structure. So you basically, what you do is you spend x amount of premium, and that that that trade is a, so you are not net short options, you net flat options, but it becomes a relative value trade that sits in out of the, you know, in these, in these options you are interested in. So the interested options, I say, you want to sell skew, and that’s the 4600 put. You think that put is too expensive, and let’s say that’s about the 15 Delta put option against that you might be going and buying the 49 put one time you might be selling the 46 and in order to kind of cover margin on that trade and and make it, you know, so you’re not net short options, you might go and buy The 3800 put. So essentially, end up with a 121, which in auction terminology, is obviously called the bottom line. So that tends to be the way we’ll do it, because if we want to go do the other way, we get way too much Delta risk. And we don’t trade in our fund. We don’t trade futures. So basically, what we do when we do a relative value trade consisting of three different layers of options where we make our money is that that structure say we pay two ticks for that, or three ticks for that. We We can materialize that when that goes to five or six, assuming we get the who in the in the SKU correct
Jeff Malec 1:07:41
guys, you’re trying to get as close to a free free call option, even though it’s not a call, but as close to a free trade as you can get, waiting for that dislocation to snap out. Within
Michael Cameron 1:07:53
kind of our trading structure, we don’t take directional views on the market. We don’t take directional views on volatility. For the most part, it’s quite low. It’s purely taking advantage of, you know, the option flows that come from these directional market structures that people trade, which is that we see within the skew
Jeff Malec 1:08:17
is that so each of those trades is, is has a zero delta, or there becomes a little bit of delta in there, and then you have to put some
Martin Vestergaard 1:08:25
whole, the whole, by construction, when we put them on, tend to be zero delta, yes. And then the money is really made that we get the we get the convexity move right. Let’s say we are long or short skew, and the skew moves our way. We get that right, then the whole change in delta of that structure changes to what we want it to be. So let’s say, for instance, you have a put fly on where you’re short skew. So that trade on the surface of it would be flat the market, but as a skew comes down, it gets short of the market. And if you don’t get a sell off, you can materialize that. So we, we like to write, we like to write the delta exposure, if it’s because we got the convexity move right, obviously, if we get it wrong, and your short skew and convexity goes up, your your short skew traits become long, a lot of delta, very fast. And we then either it’s gotta go, because it’s we, you know, we basically cut things when the Delta moves against what we had decided to to move. I mean, we don’t want to sit and be long at boatload of delta, even if the market is down 2% because we’re not here to bet necessarily on a recovery. I like at the end of the day to be pretty, you know, flattish delta.
Jeff Malec 1:09:49
And so when, when you get those deltas, you don’t want, you’re not hedging them. You’re just saying we’re exiting the structure we put on, either
Martin Vestergaard 1:09:55
exiting or resetting it got to log in the game. Two, and
Jeff Malec 1:10:01
then that’s how you’re from a portfolio level, your positive convexity performing in a crisis type period profile is getting those structures becoming short Deltas and riding those in the direction you want.
Martin Vestergaard 1:10:13
Yeah. So 20 so 22 was a funny example. So 22 obviously the market was down, until, you know it was down. Can’t remember what was down 17% or something. I came it was down a decent amount. Yeah,
Jeff Malec 1:10:24
I think 20 at one point, yeah, yeah.
Martin Vestergaard 1:10:26
And basically, I think every single day, I mean, the skew just went down. And what happened? Like we would doctor trade, you know, long two puts and short, you know, short two, but as a relative value trade. And at the end of the day, that trade, just from the moving SKU, will be super short down. So then the market would trade down. You take it off, move it further down, reset it. And then same thing would happen. And there will obviously be the different kind of structures, but you know structures as essentially a shortage SKU, without taking any delta risk.
Jeff Malec 1:11:02
So worst case scenario for you guys is, like a sawtooth whipsaw stuff. So you’re like, getting too many deltas, you’re exiting or resetting that, then it comes back the other way. Then you’re exiting resetting that, and then back the other
Martin Vestergaard 1:11:15
way. Yeah. I mean, to be honest, you, the Delta risk is probably less false. I think, to be honest, you, one of the things that really drives our PNL is the skew. And obviously the problem that has persisted since 17 is that as the market’s been going up, skews kind of been going up, and skew was already high, and the only time where you tend to see a little bit of release or ease in skew was in sell offs until, like we saw here in this year, we had time a few months ago, I think skew hit back to one of the lowest levels. It was since the 2008 crisis, which is obviously interesting, that is starting to do that up here.
Jeff Malec 1:11:59
Theories why that is.
Martin Vestergaard 1:12:03
I mean, that’s obviously where you can look maybe some of the wall sewing that’s coming in. I mean, what we saw in May was a bit of a surprise. I mean, I think, you know, when I ran so Israel attacked, I ran on that Friday, or whatever, that Saturday. I mean, that Monday morning, the vault selling was just obscene. I mean, they couldn’t sell ball fast enough. And the question is, obviously, was it somebody that gotten long going into the event was just getting out but, I mean, I can’t remember in my career when I’ve seen ball being sold that aggressively in such a short period of time.
Jeff Malec 1:12:43
Just curiously, how do you, quote, unquote, see that you’re just seeing the pricing come down, down, down on the options you’re looking at. Yeah, you’re seeing like, huge offers and size coming.
Martin Vestergaard 1:12:56
We see it in terms of, we have a model that, basically, you know, model fits to the to the screen in real time. So we get live auction prizes into our risk management system, and we see those bits and offers on the screen. And what we basically do is we have assist with this curve. We try and match the mid value across the curve. But we do that because we have five parameters we move around. So skew is one of them, vol and, you know, a few others, and what we see then, I mean, you couldn’t lower vol enough. You had to keep lowering ball that day.
Jeff Malec 1:13:29
It’s not like a you mentioned the 4600 put before. You’re not seeing like, what’s the normal market 10,000
Martin Vestergaard 1:13:36
issue. I just look 11 times the ball model. Okay, look at everything involved in bold sense. Let’s
Jeff Malec 1:13:48
talk a little bit. You’ve mentioned The Magnificent Seven all this. Right, what’s the dispersion looking like, and how does that play into what you guys are doing, if at all, or just what are your thoughts on, it seems like we’ve gone super crazy of all these single names are still moving, still having lots of volatility in the index. Ball has come way down.
Martin Vestergaard 1:14:06
Yeah, I think you’re right touching on that. I mean, we don’t do dispersion, but I do know that. I do think that that has become a remarkably crowded trade over the last couple of years more, probably more than that. And obviously, intuitively, it has been a great trade is, obviously, you know, just to explain that people don’t know that obviously correlation is, you know, you simple example, you have an index with two names in it, one goes to zero, the other goes to 100 the index obviously doesn’t move. And that’s you being short correlation, because you short the index, yeah. So obviously, as correlation goes up, which it tends to do in crisis, like in seven and eight, and it tends to do it in, you know, it even did it, obviously, during covid. But the problem, obviously, was when you’re looking at the ball, there you were looking at through the VIX. But in general, I do think that. Has a massive effect as well, because dispersion guys are obviously selling index more as well. And on top of that, they’re buying the individual names. And they might not be buying the old 500 individual names. I don’t know what the Magnificent Seven now is of the S P, if it’s 20% of more than that, but I reckon you can probably buy the top 20 names in the s, p, and you probably got a good chunk of the market covered. So in essence, if skews coming down in the individual names, it’s going to come down the index. Because the there’s going to be art guys, there’s doing it. I mean, there are a few people out there trying to read about, you know, write about, what would potentially happen if the dispersion trade gets unwield, it’s obviously, I did see a chart a couple of weeks ago that correlation had come down to very, very low levels before the recent market turmoil. And there’s obviously a natural level for correlation to kind of, you know, be at, and we’re probably not at that level.
Jeff Malec 1:15:59
And is that? Is that a structural thing? Are they putting those trades on every day, right? It seems like it can’t get too far out of whack, because it’s a rather short term trade. Or no, am I confused on that?
Martin Vestergaard 1:16:09
I don’t know the maturity. I mean, when back in the days at Hall and Goldman, I mean every single index desk, what we were on? I mean, I was doing the OMX. So the omics is the Swedish index, and against that, we were trading the whatever the omics, 30 stocks that were in there. But the reality is you could probably only trade five of them. And then obviously DAX was, you know, 30 stocks. So they, they were all trading these individual names. However, you bought some individual ball, you know, you would go and sell the index against that. That’s just how you did it.
Michael Cameron 1:16:47
Yeah, most guys used to to kind of sell dispersion, you know, either six months out to a year and a half. I think people are running different types of dispersion books, though, right? They’re kind of legging into the single stocks and selling index against it. I mean, it seems like the overall underlying theme right now, though, is, you know, selling volatility, right? You’ve obviously seen that through covered calls, and the big growth of, kind of like all of these vol selling strategies is, you know, many people have seen through the Morningstar report, and I think the same thing is taking place at a lot of the multi strats with dispersion trading. So you know, when that trade comes undone in timing is obviously unknown. Can be quite ugly out there, right?
Jeff Malec 1:17:35
What? Um, what else are we seeing in the option space that’s of note, as you guys are looking at it, day in, day out.
Martin Vestergaard 1:17:46
It’s hard to say. I mean, I think the I think, I mean, it’s, it’s interesting. What we are starting to see a little bit now, a little bit now is skew has definitely come up a bit, and it’s, it’s reacting a bit more on the downside in terms of not necessarily being sold when the market’s going down. I mean, I think for me, I mean, that might not sound like a lot, but that’s a it’s tidbits of a change. Yeah. You know, the way I was schooled was, you know, market puts go up. When market goes down. I mean, skew goes up. I mean that that’s how it works. And since basically 11 and 12, I mean, we kind of seen the opposite, and I we’re starting to see, in the last like six to eight months, tidbits of more of a bit coming into skew. And I know if that means more of a normalizing. I mean, I think the jury is still out on these zero day options. From, you know, our understanding, at least, you know, what SIBO seems to be under the impression of, as well, is the biggest ball selling is these overriders. Yeah, that’s not going to have an effect. If the market goes down. That’s irrelevant. So I’m not worried about that. What I’m more concerned about is, you know, who’s playing around in zero day options? Because, I mean, I wouldn’t know. I mean, zero day option for me is just a lottery. I mean, I would even say, like a weekly option, unless you, you know, particularly in an index. I mean, who knows anything there? And now you’re coming out supposedly with zero day options on the VIX. So I think these things, for the time being, have probably had a strangely stabilizing effect on the market. I’m not sure they mean the jury’s still out, because we haven’t seen a big sell off, really, with these things in the marketplace,
Jeff Malec 1:19:48
that kind of begs the question is, is it because they’re in the marketplace that we haven’t seen a
Martin Vestergaard 1:19:55
big event, you know? And that could very well be, I do think. A lot of the trading in the market right now is actually either it’s CTAs out there doing arbitrage on futures, but I think a lot of flows come through the futures. I mean, look at the Russell 2000 What is it up like last this month, 10% or something like it was crazy. Yeah. At the same time, we have one of the biggest days where NASDAQ was down 2% and that was up 5% and obviously that’s an unwind of something that somebody had a trade on. And, you know, there’s a good news writer out there called the daily dirt, and after Dylan, and he’s been writing about that, that that unwind of that trade could actually be taking a lot longer than than that it should be taking. But I think you obviously at the same time here people who fundamentally says, you know, oh, okay, now it’s probably the time to buy Rosal 2000 without kind of looking at one getting is, I think a lot of the stuff out here is so technical. Mean, CTA is doing one thing, auction guys doing another things, and then obviously you have all these zero day stuff out there going on. Do
Jeff Malec 1:21:08
you feel like it’s harder than it used to be? Right? There’s more to competition. There’s more structures, there’s more durations, there’s more more of everything, more competitors.
Martin Vestergaard 1:21:19
You know what to us actually don’t feel, I don’t feel like it’s harder. I mean, we trade very differently than we used to do. We used to be the type of guy. Everything was done in the futures, and rarely you did trades that were down to neutral. I mean, you would go and look for the strikes that you wanted, and just, I mean, a lot of times you trade individuals or spreads or whatnot. We could also trade put twice. But everything was done in the futures. I actually think it’s there’s a nice, simply simplification element of it. Just doing the auctions, I feel like there’s a lot more opportunities than I’ve seen in a long time, a lot more.
Jeff Malec 1:21:58
Yeah, I just feel like you guys are masochists for that’s got to be the hardest game in the world, even if there’s more opportunities, right? You’re competing against, this is the pro, pro, pro, pro level.
Martin Vestergaard 1:22:09
Yeah, no, that, that’s true, and that’s to be honest you. I think that, as Mike kind of touched on before, I think one of our strengths is like, we just focus on one index. You know, back in the days, I remember we were at at ADG, and we were trading Euro stocks against S P, so one trade you would go and do is like, Oh, now skews up in Europe. You know, boom, sell, skew your buy it in S P, only for three weeks, maybe four weeks, take it off, make three or four skew points. You know, ball went like a ball above in Euro stocks, or whatever. You buy Euro stocks vol, and sell S and P, Vol, and you make half a ball. You do that. But I remember just in 11 and 12 like that spread just used to go like that, go out and it’s like, holy shit. When do I cut it? You know, it’s like, or when do I add to it? Yeah, the versions between names is just gone wild. And I think when you’re seeing a day like we saw last week where NASDAQ is down, whatever, 2% and Ross is up 5% I mean, if you’re trying to order that in bone space, I mean, you just you throw in the towel,
Michael Cameron 1:23:16
yeah, it’s kind of an interesting space, because obviously you’ve seen kind of the short sellers disappear, right? I mean, big household names that kind of disappeared as a result of this market rally. We’ve got a nice strategy, because essentially, in this slow, upward, grinding market, that’s obviously not great for a ball manager, because you need episodes of volatility, but we hold our own quite well mitigate the bleed through the relative value approach, and then when we get these periods of risk off market volatility type events, the strategy does you know quite well under under Those circumstances. So I don’t think there’s a lot of decent, you know. I think there’s a lot of market worry out there, just kind of where we are in terms of valuation levels, in terms of equity markets. I mean, you know, people are going to kind of differ in terms of of views on that, but I think in terms of having an uncorrelated strategy out there that’s truly uncorrelated to beta, I think it’s difficult to have products out there and and that’s what I think we’re doing. Well at does
Jeff Malec 1:24:31
the you mentioned before you saw these tail investors jump out of their tail protection because they didn’t like the bleed? Well, I kind of led the witness. I was going to ask, right? Was that the investor’s fault or the manager’s fault? Right? Did those tail products have too much bleed because the manager was doing something wrong, or was the investor tail phones are
Martin Vestergaard 1:24:53
just telephones are just constructed completely wrong, because there are definitely times. Where you should be long the tail absolutely and there are times where you shouldn’t be near it. If you were long details in 22 you just you didn’t do well. I mean, you had to be long. If you were long those tails, you had to be on ton, a short Delta for you to make money. Yeah, over, yeah. And I think that’s the problem. Obviously, the tail is kind of like, you know, when you go in and the market is nervous and SKU is super high, it’s like going calling out the insurance company when your house is on fire, and can I get a fire insurance? I mean, you’re going to pay for that, and it’s highly likely not going to work.
Jeff Malec 1:25:36
Yeah, I think the 40, we’ll go back to that, whatever that the 4600 put at the beginning of the year, right? Even though, when we were down 20% in October, whatever it was, the same price that it was at the beginning of the year, yeah, something like that. Yeah, 20% down move, you had no upside in in that put, which is a disaster. Yeah, that.
Martin Vestergaard 1:25:57
And that’s obviously where option can be a bit of a conundrum. I mean, we used to have the same going back to at Centaurus capital, I remember we would have, you know, obviously, we’re an event driven, so sometimes we had some information in stocks. And I remember we had a stock that an analyst was like, these guys are going to get bought. And it was on the front of the Financial Times, not going to mention the stock, but yeah, got bought over the weekend, and we had bought call options, and we obviously made a bid in the call options. But when you went in and looked at the call options on Friday, it was like, okay, clearly we are not the only one. Yeah, this is going to get bought, yeah. And, I mean, that’s, I think that’s the, that’s what, where options are pretty good because they they’re very emotional, and when people pile in because they believe something, they pile in, and then when it doesn’t work, they pile out. And that’s where we kind of sit in the middle of
Michael Cameron 1:26:56
that, yeah, tell funds are less value driven, right? I mean, our strategy is completely value driven in terms of these out of the money options. I mean, the mandate for a tail risk manager is they need to provide that protection no matter what. And I think the thinking of investors is, you know, this is going to work across all market conditions. And I think what we saw in 2022 is that’s not necessarily the case, right, where nothing really worked. And I that’s the big issue I have with tail risk funds, is there’s just this perpetual bleed over time. And you know, when you do get that market event, when it comes the expectations for what these products look to deliver might not be what they thought going into it, yeah.
Jeff Malec 1:27:49
And did that open up the space for relative value? Say, right? Like, hey, the tail risk is also a little bit of a relative value. Like, they can’t always be there for every down move, right? They’re just in one channel here. So right? My as an investor, I might be like, well, relative value, I can’t count on you guys in a huge down move that would be the pan, right? Okay, structurally, we still put this stuff together, and we think that, but I get what you’re saying, but that proved kind of like, well, tail might not always be there in the down move anyway, so maybe I take a look at these relative value guys that might not be there also,
Michael Cameron 1:28:24
yeah, I think, I think people kind of need to look and construct a portfolio with several of these products, right? Because the reality is is no strategy is going to consistently be able to deliver with 100% certainty that objective, there’s going to be things thrown into the equation which kind of could derail that so to have different managers with different style buckets with perhaps that objective to make money on the downside, I think makes sense for an asset allocator
Jeff Malec 1:28:55
such as our friends at mutiny, yeah. Yeah,
Michael Cameron 1:29:01
exactly.
Jeff Malec 1:29:08
Last thoughts, Martin, anything you want to Oh, I wanted to bring up whole so when you’re at hull trading, that’s Blair Hall we’re talking about, yes, yes. So we had a post, this is like 15 years ago, maybe, but there’s a cool post out on our blog of his, a picture of his trading card during 87 and I might mess up the story, right, but I think the the future, the s, p, was not, was basically limit down or whatever, wasn’t trading. He was in the MMI index, I believe, which was kind of the precursor to the Dow futures and bought like, 50 contracts or something, and that just created this ARB right of like, hey, Chicago’s moving in New York moved, and it came off limit. And that’s what started the the rally back from the 87 lives. So we’ll put a link
Martin Vestergaard 1:29:57
to them to go to. I met him a few times. I mean, he. Was quite he was quite a funny man. And obviously Hall was very much like quad driven. I mean, we So, for instance, if we ran a book where we had the 500 names in the s, p index, we had the index, I mean, our system. If we sold index vol, our system would say you should buy vol in this name or this name or this name. I mean it would same thing. You sold some futures that the system will tell you which of the 500 stocks should you buy in the index. I mean, it’s very quantitative. We have season that we had seasonality of ball in there. Like, when is when can you expect? This boring, what ball moves. But like I said, kind of model just sitting in the middle saying, ball’s cheap now, Vault’s going to go up now. And actually one of the things that blew my mind the most is like, because I remember, I think it was Blair Hall that came into the first one, I just got hired, and he was asking us, what do you think we lose the most money on? We were obviously orgasm, gamma, Vega, it’s dividends,
Jeff Malec 1:30:59
which is row, no, what’s the game? Yeah, that
Martin Vestergaard 1:31:02
essentially becomes a row because it’s obviously, ever, you know, that’s obviously the problem. I mean, everything’s priced on the forward, and the dividend gets moved from one term to the other.
Jeff Malec 1:31:15
And everyone’s like, what you guys are all like, oh, wait,
Martin Vestergaard 1:31:18
we were always on the wrong side of the dividend trade every time. I mean, I don’t think anytime in my life. I think I made money one time on dividend that was pure lot.
Jeff Malec 1:31:27
Now there’s dividend futures. You could Delta hedge your dividends or dividend future, yeah, yeah,
Martin Vestergaard 1:31:34
which obviously would be a different, different ballgame. But, you know, that’s, that’s obviously, I mean, I don’t even know what the liquidity is now, but and then that’s gotta be quite good. Yeah,
Jeff Malec 1:31:45
I think it’s pretty good. Awesome, guys. I’ll leave it there, unless anyone’s got some last tidbits to add. I think we’ve covered a lot.
Michael Cameron 1:31:54
Thank you, Jeff,
Jeff Malec 1:31:55
thank you for coming on, and we’ll talk to you soon. We’ll come visit you in in London. Martin, yeah, you should where about to you in London?
Martin Vestergaard 1:32:04
I’m actually in, I mean, our office is down on pole mall, but I’m in Camden. Okay,
Jeff Malec 1:32:10
I’ll pretend. I’ll nod my head like I know exactly where those two places are. But for those who know London, they’ll know it. Well, right?
Michael Cameron 1:32:18
Exactly. Sounds good. Appreciate your time. All
Jeff Malec 1:32:22
right, guys, thanks so much. Take care. Okay, that’s it for the pod. Thanks to Martin and Mike, thanks to RCM for sponsoring. Thanks to Jeff Berger for producing. See you soon. Peace
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
