March 21, 2025 • 25 mins
Last week, the US market sold off sharply. The S&P 500 fell as much as 3.6% on Monday alone, entering technical correction territory. Momentum trades were hit particularly hard and stocks that had been winners for years suddenly became losers, while ones that had been losers suddenly outperformed. Perhaps the strangest thing though, is that volatility didn't really surge as things sold off. The VIX — sometimes called Wall Street's "Fear Gauge" — went up, but it didn't even reach levels that we saw in 2024 or 2022. So what happened? And why was the selloff so short and kind of strange with the lack of vol? On this episode, we speak with Charlie McElligott, Nomura strategist, about what exactly has been happening.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
It's good. It's good.
Speaker 3 (00:09):
You know, markets are fun and as we said, springs.
Speaker 4 (00:13):
Here, Yeah, markets finally got interesting.
Speaker 2 (00:16):
Oh man, I mean I have so many thoughts.
Speaker 3 (00:18):
Oh good, all right, if you can't tell from my
normal stream of consciousness operations.
Speaker 4 (00:23):
You know how I know it was bad, Joe go on.
It was one of those weeks where we talked about
negative gamma quite a lot's.
Speaker 1 (00:32):
Pretty interesting gamma again.
Speaker 4 (00:34):
Interestingly, we didn't talk that much about standard deviations, which
is kind of funny. Normally those two kind of go
hand in hand, but not last week.
Speaker 3 (00:41):
It was weird.
Speaker 1 (00:42):
What's gamma again? I feel so dumb because I know
we've talked about gamma and it's just one of those
things like what.
Speaker 4 (00:47):
Is it again? Should we get you a refresher?
Speaker 2 (00:49):
Yeah?
Speaker 1 (00:50):
I need one of those Guide to the Greeks books
or something like a little like laminated card that I
can want.
Speaker 4 (00:56):
Someone should do a coffee table.
Speaker 1 (00:57):
But yeah, yeah, guide to the Greeks like Greek stuff
these days, you know, because I'm into like ancient history
and everything like that. I know what alpha is, I know.
Speaker 2 (01:05):
What beta is.
Speaker 1 (01:06):
After that, I started to get a little dicey. I
did a deadlist.
Speaker 4 (01:11):
I'm both the most popular trader and most successful trader
at Citadel.
Speaker 1 (01:16):
That is going viral.
Speaker 4 (01:17):
Uh barges.
Speaker 1 (01:18):
This is an after school special, except.
Speaker 4 (01:20):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve in the.
Speaker 1 (01:25):
US Black Goal. These are the important question.
Speaker 4 (01:28):
Is it robots taking over the world? No.
Speaker 1 (01:30):
I think that, like in a couple of years, the
AI will do a really good job of making the
Odd Lots podcast. One day that person will have the
mandate of Heaven.
Speaker 4 (01:39):
How do I get more popular and successful?
Speaker 2 (01:42):
We do have.
Speaker 4 (01:45):
You're listening to lots More, where we catch up with
friends about what's going on right now, because.
Speaker 1 (01:50):
Even when the Odd Lots is over, there's always lots More.
Speaker 4 (01:53):
And we really do have the perfect best Oh the definition,
I feel like I've done this before. But gamma. Gamma
is the option sensitivity to the change in delta, and
delta is the option sensitivity to the underlying price. So
(02:15):
gamma is like the change of the change. It's a
function of the underlying price. But it's second order, and
I guess negative gamma that's when delta is the opposite
direction to the stock price movement. So delta goes down
if the underlying asset price is going up, and then
(02:35):
it becomes less negative if the underlying asset price is falling.
And we usually see people talk about this during market
selloffs because all the options traders have to basically sell
or buy stuff to hedge all that changing exposure, and
the suspicion is always that that hedgeig activity are pushing
(02:55):
the market in one way or the other. I think
that's it. Okay, I did it, Charlie. You should write
a book, a coffee table book on the Greek letters.
Speaker 3 (03:06):
I'm liking this, like Spartans versus Romans, history vibe or regard.
Speaker 1 (03:11):
Yeah, that's very you I feel that's very Yeah.
Speaker 3 (03:13):
Yeah, it resonates.
Speaker 2 (03:15):
It resonates. Could have something to do with the beard.
Speaker 3 (03:18):
Well, if you just think about it with regards to
who is long and who is shortened option at a
certain level. And that's so much of what we're asked
to do, you know, in our job is to get
a sense for where these potential acceleration points or potential
gravity points are. And you're looking at the whole spectrum
of strikes across the S and P index options, and
(03:39):
you're then doing your kind of risk calculations and your
Greek's calculations, and you net out all of those strikes.
You have to identify calls sold, call spot puts sold,
put spot, multi leg tracks.
Speaker 2 (03:50):
It's it's quite complex.
Speaker 3 (03:51):
I think in the past there's a lot of false
narrative because people made kind of two core assumptions on
dealer positioning before you had the actual exchange tagged data
which now gives you the actuals. Those two prior assumptions
are the dealers are short puts to hedges and long
calls from overriders, these VRP of all sellers that you
(04:12):
hear so much about these days, that create dynamics where
the market is trapped in long gamma, right, because we're
constantly dealers are constantly getting stuffed from these premium collectors.
But short gamma matters because that's where you get these
potential jump off points where you blow through level or
a dealer is short a strike and then you get
that prevailing market move is fed into so that matters.
Speaker 4 (04:36):
In case you can't tell, we are here with Charlie Mcalligant.
He is of course, a strategist over at Nomora the
person to talk to when it comes to this kind
of market technicality. And we are recording this on March nineteenth.
We're either stupid or brave for doing this, like right
before a FED decision. I'm going to choose brave because
(04:58):
the bar is fairly low now.
Speaker 1 (05:00):
Well, and like so in my view is like there's
been so much volatility lately, Tracy, regardless of what happens
in the forty eight hours between now and then, there's
enough to talk about, Yeah for sure.
Speaker 4 (05:10):
Okay, So, speaking of what happened last week, you mentioned
specific points at which the sell off can accelerate, and
I think in your notes you had like five thousand
and six fifty and five thousand and five sixty something
like that as your points on the S and P
five hundred at which point the sell off could accelerate.
(05:32):
We did get to a low of like five thousand,
five hundred on the Thursday, but we saw stocks recover.
Why did that happen?
Speaker 3 (05:41):
So there was two large short gamma strikes in the
S ANDP index options diaspora for dealers, and I think
it was I think it was fifty six hundred and
then fifty five sixty five particular level, which is part
of this large listed trade in the market that is
well socialized out there that at the end of this month,
(06:02):
so not this week's options expiration, but the end of
this month, the March quarterly exists and is part of
something called a put spread collar where a call is
sold out of the money to then help finance this
put spread in the market. And that fifty five sixty
five is a short strike, which means that in this
(06:23):
case it looks like short gamma. I think the fact
is about that, however, and thus this idea of well,
at this point in the month, where it's still a
few weeks out from happening, it could in fact potentially
behave as you would think, is this acceleration point through it?
Once you did, you kind of bounced around it held
three or four times, and.
Speaker 2 (06:44):
It kind of crashed through it.
Speaker 3 (06:45):
The thing is is that the market knows that this
trade gets rolled and rebalanced, i should say, into the
next quarter's trade at the end of this month, and
you know that there is going to be a ton
of vega for sale as part of the and so
then this strike in some ways actually ends up looking
quite dissimilar from your typical idea of short gam as.
Speaker 2 (07:08):
This acceleration point.
Speaker 3 (07:10):
Depending on where the market is at the time of expiration,
which will affect what the client does with those strikes
and sets the new putspread collar. But I think the
larger conversation that I want to have about VAW is
that much of the incoming has been about why is
VALL actually seemingly unresponsive?
Speaker 4 (07:28):
Yeah, so the VIX, Like I know, the VIX went up,
but I think it went to like twenty nine, and
you compare that to like it was above eighty in
twenty twenty and even in twenty twenty two it was
like thirty six or in the thirties. VALL was really
quiet in twenty four.
Speaker 1 (07:44):
Yeah, August twenty twenty four got nearly four anyway.
Speaker 3 (07:47):
Yeah, So the last time I was in here was
after that August shock, and that was it proper as
as I kind of framed it at the time and
still will, the world was aggregated around this soft landing
viewpoint and all of a sudden in the span of
one day's worth of data, but it was really even
a week of data of labor data sixty five. Yeah,
(08:08):
and that was because we repriced the left tail. All
of a sudden there was a hard landing risk because
the labor data shocked us. You know that U rate
jump and then the NFP miss. The difference at this
time around is that since the election, right, Donald Trump
is the personification of a gamma agent.
Speaker 4 (08:26):
We are the only person I know who describes Trump
as a gamma agent.
Speaker 1 (08:30):
Everyone knows the terms, right, but I'm a living personification again.
Speaker 3 (08:34):
And I think, look, his mandate is to break status quo.
And we talked that last August shock about the idea
that the concept of a carry trade because we were
being asked about the carry online, which is kind of
like this false narrative. But the idea of any sort
of carry trade or positioning high sharp ratio trade right
a high risk adjusted return is that you need a
(08:57):
period of low volatility to kind of aggregate that position,
to build that leverage into the trade because it keeps working,
the wall is low, the price keeps working higher. That
builds the leverage in the system that hence builds the risk. Right,
stability breeds instability. In this case, Donald Trump, even if
the market was misidentifying the macro of his policies at
(09:18):
the time, which we should talk about, Oh.
Speaker 1 (09:20):
You're just never going to get that risk build up.
Speaker 3 (09:22):
Well, in this case, starting November, you know when it
really took shape.
Speaker 2 (09:28):
And I think the market had.
Speaker 3 (09:28):
Been sensing certainly since kind of the summer skew was seepening.
Skew matters, right, just as a relative measure of kind
of demand for downside versus demand for upside put skew
which is like deep out of the money downside relative
do not the money put was jacked ninety something percentile
because of all of the potential chaos agency expensive. The
(09:50):
fall was already quite expensive going into this scenario, even
if maybe the macro catalyst went wrong way and I
think there's two big things that happens, So let's talk
about this past.
Speaker 2 (10:01):
Week or really was past three weeks.
Speaker 3 (10:03):
Yeah, you had crowded narratives and crowded thematic positioning.
Speaker 2 (10:08):
With a lot of leverage.
Speaker 3 (10:10):
Right, that is what the prime broker's data shows and
frankly still shows like gross exposure your lungs and your
shorts in aggregate still kind of ninety something percentile was
one hundred percent of coming into the year. Though we
also had high nets, So you had a lot more
long than short either way, a lot of leverage in
the system.
Speaker 1 (10:43):
Give us like a little zoom out. Basically from mid
November to as you said, about three weeks ago it
started turning. I think the peak on this February nineteenth
or something like that. Yes, but talk to us just
about that sort of kind of an upcrash in the
wake of the people loading into everything risky, from crypto
to Tesla and everything. Yeah, what was going on there?
(11:07):
And then how extreme did that get?
Speaker 3 (11:09):
Yeah, I mean that's the perfect segue here, because like
in the sense that the post election narrative, and remember
the rates sell off beginning in September, when the market
really got their arms around seemingly some of this polling
that was showing much more credible kind of Trump lead. Yeah,
the rate sell off, meaning yields going higher, was about
this idea that regardless of who won, but particularly if
(11:32):
Trump won, that we had become both sides become economic populous,
and that fiscal dominance was this overriding theme where like,
we don't have a tolerance for pain as a society.
We saw the kind of the steroidal impact of fiscal
stimulus in the post COVID world, which kind of was
the tiebreaker for finally getting an inflation shock as we
(11:53):
all experience. So this idea that he was going to
take an already strong economy and overheat it with d
with tax cuts and these other stimulative measures completely had
the market thinking about further extension of US exceptionalism. Right.
This ability to outperform rest of the world for a
whole number of reasons, which is a separate podcast, but
(12:15):
like positioning was like long US assets, Europe was going
to be cutting sooner because they were feeling the brunt
of the slowdown force more so there China had all
sorts of issues, right, rest of world struggling US exceptionalism
and part of US exceptionalism not just kind of like
global hedgemon, strongest economy, deregulation, all these stimultive measures in
(12:36):
the pipes was also too. This idea of tech innovation
and tech innovation was the story of last year, in
the last two years, with the last ten years was
with regards to AI, right, Yeah, it used to be
fang back in the teens, right. So this idea of
megacap tech, all those things that made people, you know,
the completely dictated stock market last year like MAG seven,
MAG eight thirty five percent of the S and P
(12:58):
five hundred and fifty percent of the NASDAC. Concentration of
all of these kind of tech and disruption themes in
the market that was a big part of the US
exceptionals and trade. Well, guess what those trades are really crowded,
they're really loaded into And two shocks happened. The first
shock was the market and this is why I started,
you know, going out and talking about hedging for downside
(13:21):
in February. Was this idea that the market I think
was misunderstanding the phasing or the sequencing of a Trump
economic plan, which was you've got to do the painful
stuff first in order to get to the stimulative stuff later.
And that's spread that time spread, you know, you had
to kind of try to engineer a slowdown to then
(13:42):
be able to get the rate cuts via the disinflation
that he is trying to create, which ultimately you know,
this idea of like fiscal contraction to potentially then fiscally
expand and say the other shock, it's.
Speaker 2 (13:56):
Lost in the wash here.
Speaker 3 (13:57):
And this wasn't just a Trump growth scare, right, we
are growth scare every Q one into Q two.
Speaker 2 (14:02):
That's an artifact of the post COVID at KO. Right.
Speaker 1 (14:04):
We had a good piece from Neil about Duo about
that any.
Speaker 3 (14:08):
Yeah, so that matters, right, you know, that was part
of my thesis, like, look and see the trajectory. We
have these overheated animal spirits Q one numbers and then
this seasonal adjustments kick in and we have a growth.
Speaker 2 (14:17):
Scare in Q two or into Q three.
Speaker 3 (14:19):
But the other element here was the deep seek story
and tech innovation in that market concentration. And guess what,
there's all sorts of those names aren't just massive parts
of index and massive thematic parts Retail investors and hedge
fund longs and things like that, think about their impact
in the leverage GTF space, which has just absolutely grown massively.
That's a source of synthetic negative gamut in the market,
which you know, on the end of day rebalancing into
(14:41):
an update, they've got a ton to buy at the
end of the day. And eighty percent of those assets
happened to be concentrated in kind of like concentric tech
disruption circles. So you add in this massive rethink on
what had been the perpetual motion machine of Ai Capex
and that deep seak shock, IDIA trades down seventeen percent.
Kind of after that realization that weekend of what we're
(15:04):
looking at, all of a sudden, a massive valuation shock
in an earnings repricing effectively.
Speaker 1 (15:11):
Tracy, did you see this from Eric Belcunis yesterday? Vista
shares filing for an animal spirits ETF A and I
am in a two x animal spirits ETF wild, which
will hold the five fastest growing two X single stock
ETFs at any given time.
Speaker 4 (15:28):
Isn't that just called momentum?
Speaker 1 (15:30):
Yeah, but that's not that momentum isn't enough.
Speaker 3 (15:33):
It's momentum with leverage, and guess what, there will be
options on it too. So there's synthetic negative gamma and
actual real negative gamma. So the final point here is
you had these two shocks to what consensus was, consensus
positioning and consensus narrative. Now, all of a sudden, this
realization that Phase one is going to have to engineer
a slowdown to get the stimulative stuff that Trump wants.
Speaker 4 (15:54):
Yeah, isn't that weird? Like why are we crashing economic
growth to boost economic growth?
Speaker 2 (15:58):
Well?
Speaker 3 (15:59):
Because I think in this case, like there is something credible.
Speaker 2 (16:03):
To the idea that the deficit.
Speaker 3 (16:06):
Spending was a market concern, right, I mean, think about
what rates were doing last year when we were talking
about fiscal dominance. What's ironic here is that you then
get punished for trying to address it. So look at
Europe for instance, and this is like a big trade
in the market right now. It's like very simplistic, but
this is the way that acid allocators.
Speaker 2 (16:23):
Think and move.
Speaker 3 (16:24):
Right, who's fiscally contracting and tightening and who's fiscally expanding
and stimulating Europe?
Speaker 2 (16:30):
Right?
Speaker 3 (16:31):
Trump said, Look, we might be talking about the end
of Breton Woods post World War II packs Americana here, right,
We're no longer going to protect you for you to
buy US dollar assets and use our currency. So guess
what Europe has to go out create this financing and
with that, all of a sudden, now they are a
fiscal expander after years of being the.
Speaker 2 (16:54):
Shift.
Speaker 3 (16:55):
It's a real potential regime shift. Even though I think
this ultimately creates the conditions where if you do kind
of crash the economy and you can't stick the landing
on this engineered recession, then you inevitably have to fiscally expand,
and that's why I think a lot of these like
long Europe long China trades.
Speaker 2 (17:14):
Will be quick to move their feet.
Speaker 3 (17:17):
I can't say this is a tectonic, permanent structural shift yet,
because the worst it gets for us and we get punished,
and you have fiscal tightening and markets sell off and
all those bad things to create a negative health effect,
which in the short term help get the disinflation, to
get the FED cuts right, to get the stimulus through right.
This is all part of this kind of second order
thinking that you need to be looking into.
Speaker 4 (17:51):
Okay, so we had a wild but not disorderly sell off.
Sounds like my high school report card, but I imagine
it was still painful for certain investors. So we just
mentioned momentum like that must have been painful. Multistrats must
have had a hard time because we saw a lot
of the over performers underperforming and the underperformers suddenly overperforming.
(18:16):
How was it give us some like market color?
Speaker 2 (18:19):
Well in some of those.
Speaker 3 (18:21):
I mean, you look at the biggest multistrats that have
been one hundred percent of the net alternative investment or
hedge fund inflow over the past X number of years. Right,
So like long short isn't where it's at anymore. It's
about the market neutrals, and that's just speaking to their
equities components. But of course they have these other risk
diversifying strategies with incredibly tight risk management tight stops, and
(18:44):
that's how when you apply a lot of leverage to
these small controlled market neutral gains, you then get these
incredible annual returns that those biggest shops have been posting.
But the fact of the matter is crowding happens, and
leverage on top of crowding happens, and then shadow level
it happens with leverageddtfs, leverage on and all control target
(19:04):
volatility and CTAs and all that stuff is synthetic negative
gamma in the market.
Speaker 2 (19:09):
So and even where you know.
Speaker 3 (19:10):
There's a very well publicized loss with regards to index are, uh,
you know at one of these funds whatever, I think
that was probably negatively impacted. They have to model out
the flows across the diaspora of things out there at
the end of the day to do their index ads
and deletes. Well, they're probably getting screwed with by a
lot of the leverage GTF flows the end of the
day that are completely nuking and creating these big overshoots
(19:31):
and these big negative gamma type moves. So the long
story short is that for the month of February, let's say,
talking with people deep in the inside, senior traders and whatnot,
these were losses one month losses that people had not experienced,
that have been there, you know, four or five type
years in places that just don't lose money.
Speaker 2 (19:48):
They just stop you so effectively.
Speaker 3 (19:50):
Now it is a tribute to the model, however, that
there's no blow ups, there's no ltcms here. I mean, yeah,
they didn't make money. They might have had worst month
or in the start of March with also you know,
going the wrong way too, but you're not going existential here. Yeah,
So that actually speaks to the model working. The bigger issue,
and I think the bigger thought process takeaway here is
(20:11):
that when you have trades over a period of time
or built on the status quo of us exceptionalism, right,
that is effectively a carry trade. And we had leverage
built into the system for fifteen years of QE. We
had leverage built in the system from modern monetary theory
and the outright money drops that we've done over the show.
(20:32):
Oh that's your fault, so maybe yeah. So, I mean,
all of these things created this ugly de leveraging effect
even at market neutral shops.
Speaker 2 (20:41):
The good news is it wasn't a VALL feature.
Speaker 3 (20:44):
It wasn't a VALL event because we were already hedged.
That's why SKU was high. Implied VALL was high. All
the put SKU was high, so it didn't become a
VALL event, which is where you get some of those
accelerant flows to kick in.
Speaker 4 (20:56):
On this note, I have a slightly weird question, but
could we ever get to the point where the volatility
complex is so large and so in demand that you're
just never going to have a volatility event like we
saw in twenty eighteen something along those lines, because everyone
is paying through the nose for downside protection.
Speaker 3 (21:16):
Well, I mean, ironically, it's when you're well hedged that
you then have a condition where you can create the crash, right,
which means that dealers are short all these puts.
Speaker 4 (21:26):
I think, I guess you have to have sellers on
the other side too.
Speaker 3 (21:28):
Well, that's the big thing that we've conditioned the behavior,
whether it's you know, fed stepping in that moral hazard dynamic,
or nowadays politicians fiscal stepping up, whether it's Silicon Valley
Bank and seventy different new five letter acronym liquidity special
features in the market that put out fires. And that's
why the back test on VALL selling strategies and the
(21:50):
AUM in VALL selling strategies just keeps working like you
sell the Panics. And that's what ultimately what ends up
happening when you have this short optionality dynamic in the market,
whether it's dealers short reel downside hedges, or it's CTA
trend flipping from along to a short and having to
sell more of the lower it goes, or target volatility
(22:12):
funds is like a hedge overlay doing the same thing,
or leveragedtfs. You know, you get the point. Now, what
ends up happening is that it's the option sellers that
stop the problem because they come back in.
Speaker 2 (22:24):
They give dealers back.
Speaker 3 (22:25):
Their gamma, They sell optionality, they sell rich vall. The
market stabilizes, ranges compress. You need to keep feeding volatility.
Volatility is mean reverting and if you can't keep having
daily one and a half percent moves, which is a
big ask. You need persistent new bad news otherwise realize.
Volatility compresses ranges, compress vall. Sellers feel more confident, they
(22:50):
fill in. Dealers get long gamma. We stabilize. People start
covering their monetizing their hedges. They take those off. That
creates delta to buy. The market starts rallying people by
short data upside it, squeeze it. That's the cycle that
we're on, like this really short term ecosystem. But valse
sellers are I would say, the bigger players now than
(23:10):
hedge buyers. And that's a real footprint of the past
twenty years ever since QE, where the previous buyers of
volatility were real asset managers like long onlyes and things
like that. After QE, a lot of those folks, big
pension funds became sellers of volatility.
Speaker 4 (23:27):
Yeah, this was Bill Gross's thing when he stood up
on stage and said, everyone sell volatility. That's like the
only trade right now because nothing is happening, right you
have to you have to bet on nothing. Yeah.
Speaker 3 (23:39):
Maybe one other point I would make on volatility. The
reason that it got so wacky in August, for instance,
was the fact that conditioning that says sell the rich
vall and remember like the non farm payroll and U
rate data was that Friday, and we crashed hard, but
everybody was so conditioned that we closed the market that
day with anybody in the VALL space saying I want
(23:59):
to be short ball, short delta, I want to sell
this rich vall, but still think the market normalizes here
because we can't maintain this richness in volatility. Well then
the NICK opened down twelve percent because it was like
a kind of a hot leverage trade at that time,
and it was the second day that got people stopped out.
The other point here too was that that day of Friday,
(24:22):
one of the largest ball players in the market, thinking
that they were doing themselves a solid and hedging by
buying vix calls, ended up creating their own demise in
a sense because that created some of that short vixed
convexity that then really went wild over the span of
the next day and a half and created a bigger
issue within the ball complex. So this is the idea
(24:44):
that when you have buyers of hedges, they actually create
the conditions for the crashes.
Speaker 4 (24:50):
Well, I guess we'll see what happened with meeting and
we'll see.
Speaker 1 (24:53):
If there's like a big regime ship because it's eventually right,
maybe something will change, maybe I mean maybe one day,
mean reversion, welcome to an end.
Speaker 4 (25:02):
The volatility is mean reverting normally maybe, but what if
we just get it or not normal times? So we'll see.
Speaker 1 (25:14):
Lots More is produced by Carmen Rodriguez and dash El Bennett,
with help from Moses Onam and kil Brooks.
Speaker 4 (25:19):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (25:24):
Please rate, review, and subscribe to Odd, Lots and Lots
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Speaker 2 (00:08):
It's good. It's good.
Speaker 3 (00:09):
You know, markets are fun and as we said, springs.
Speaker 4 (00:13):
Here, Yeah, markets finally got interesting.
Speaker 2 (00:16):
Oh man, I mean I have so many thoughts.
Speaker 3 (00:18):
Oh good, all right, if you can't tell from my
normal stream of consciousness operations.
Speaker 4 (00:23):
You know how I know it was bad, Joe go on.
It was one of those weeks where we talked about
negative gamma quite a lot's.
Speaker 1 (00:32):
Pretty interesting gamma again.
Speaker 4 (00:34):
Interestingly, we didn't talk that much about standard deviations, which
is kind of funny. Normally those two kind of go
hand in hand, but not last week.
Speaker 3 (00:41):
It was weird.
Speaker 1 (00:42):
What's gamma again? I feel so dumb because I know
we've talked about gamma and it's just one of those
things like what.
Speaker 4 (00:47):
Is it again? Should we get you a refresher?
Speaker 2 (00:49):
Yeah?
Speaker 1 (00:50):
I need one of those Guide to the Greeks books
or something like a little like laminated card that I
can want.
Speaker 4 (00:56):
Someone should do a coffee table.
Speaker 1 (00:57):
But yeah, yeah, guide to the Greeks like Greek stuff
these days, you know, because I'm into like ancient history
and everything like that. I know what alpha is, I know.
Speaker 2 (01:05):
What beta is.
Speaker 1 (01:06):
After that, I started to get a little dicey. I
did a deadlist.
Speaker 4 (01:11):
I'm both the most popular trader and most successful trader
at Citadel.
Speaker 1 (01:16):
That is going viral.
Speaker 4 (01:17):
Uh barges.
Speaker 1 (01:18):
This is an after school special, except.
Speaker 4 (01:20):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve in the.
Speaker 1 (01:25):
US Black Goal. These are the important question.
Speaker 4 (01:28):
Is it robots taking over the world? No.
Speaker 1 (01:30):
I think that, like in a couple of years, the
AI will do a really good job of making the
Odd Lots podcast. One day that person will have the
mandate of Heaven.
Speaker 4 (01:39):
How do I get more popular and successful?
Speaker 2 (01:42):
We do have.
Speaker 4 (01:45):
You're listening to lots More, where we catch up with
friends about what's going on right now, because.
Speaker 1 (01:50):
Even when the Odd Lots is over, there's always lots More.
Speaker 4 (01:53):
And we really do have the perfect best Oh the definition,
I feel like I've done this before. But gamma. Gamma
is the option sensitivity to the change in delta, and
delta is the option sensitivity to the underlying price. So
(02:15):
gamma is like the change of the change. It's a
function of the underlying price. But it's second order, and
I guess negative gamma that's when delta is the opposite
direction to the stock price movement. So delta goes down
if the underlying asset price is going up, and then
(02:35):
it becomes less negative if the underlying asset price is falling.
And we usually see people talk about this during market
selloffs because all the options traders have to basically sell
or buy stuff to hedge all that changing exposure, and
the suspicion is always that that hedgeig activity are pushing
(02:55):
the market in one way or the other. I think
that's it. Okay, I did it, Charlie. You should write
a book, a coffee table book on the Greek letters.
Speaker 3 (03:06):
I'm liking this, like Spartans versus Romans, history vibe or regard.
Speaker 1 (03:11):
Yeah, that's very you I feel that's very Yeah.
Speaker 3 (03:13):
Yeah, it resonates.
Speaker 2 (03:15):
It resonates. Could have something to do with the beard.
Speaker 3 (03:18):
Well, if you just think about it with regards to
who is long and who is shortened option at a
certain level. And that's so much of what we're asked
to do, you know, in our job is to get
a sense for where these potential acceleration points or potential
gravity points are. And you're looking at the whole spectrum
of strikes across the S and P index options, and
(03:39):
you're then doing your kind of risk calculations and your
Greek's calculations, and you net out all of those strikes.
You have to identify calls sold, call spot puts sold,
put spot, multi leg tracks.
Speaker 2 (03:50):
It's it's quite complex.
Speaker 3 (03:51):
I think in the past there's a lot of false
narrative because people made kind of two core assumptions on
dealer positioning before you had the actual exchange tagged data
which now gives you the actuals. Those two prior assumptions
are the dealers are short puts to hedges and long
calls from overriders, these VRP of all sellers that you
(04:12):
hear so much about these days, that create dynamics where
the market is trapped in long gamma, right, because we're
constantly dealers are constantly getting stuffed from these premium collectors.
But short gamma matters because that's where you get these
potential jump off points where you blow through level or
a dealer is short a strike and then you get
that prevailing market move is fed into so that matters.
Speaker 4 (04:36):
In case you can't tell, we are here with Charlie Mcalligant.
He is of course, a strategist over at Nomora the
person to talk to when it comes to this kind
of market technicality. And we are recording this on March nineteenth.
We're either stupid or brave for doing this, like right
before a FED decision. I'm going to choose brave because
(04:58):
the bar is fairly low now.
Speaker 1 (05:00):
Well, and like so in my view is like there's
been so much volatility lately, Tracy, regardless of what happens
in the forty eight hours between now and then, there's
enough to talk about, Yeah for sure.
Speaker 4 (05:10):
Okay, So, speaking of what happened last week, you mentioned
specific points at which the sell off can accelerate, and
I think in your notes you had like five thousand
and six fifty and five thousand and five sixty something
like that as your points on the S and P
five hundred at which point the sell off could accelerate.
(05:32):
We did get to a low of like five thousand,
five hundred on the Thursday, but we saw stocks recover.
Why did that happen?
Speaker 3 (05:41):
So there was two large short gamma strikes in the
S ANDP index options diaspora for dealers, and I think
it was I think it was fifty six hundred and
then fifty five sixty five particular level, which is part
of this large listed trade in the market that is
well socialized out there that at the end of this month,
(06:02):
so not this week's options expiration, but the end of
this month, the March quarterly exists and is part of
something called a put spread collar where a call is
sold out of the money to then help finance this
put spread in the market. And that fifty five sixty
five is a short strike, which means that in this
(06:23):
case it looks like short gamma. I think the fact
is about that, however, and thus this idea of well,
at this point in the month, where it's still a
few weeks out from happening, it could in fact potentially
behave as you would think, is this acceleration point through it?
Once you did, you kind of bounced around it held
three or four times, and.
Speaker 2 (06:44):
It kind of crashed through it.
Speaker 3 (06:45):
The thing is is that the market knows that this
trade gets rolled and rebalanced, i should say, into the
next quarter's trade at the end of this month, and
you know that there is going to be a ton
of vega for sale as part of the and so
then this strike in some ways actually ends up looking
quite dissimilar from your typical idea of short gam as.
Speaker 2 (07:08):
This acceleration point.
Speaker 3 (07:10):
Depending on where the market is at the time of expiration,
which will affect what the client does with those strikes
and sets the new putspread collar. But I think the
larger conversation that I want to have about VAW is
that much of the incoming has been about why is
VALL actually seemingly unresponsive?
Speaker 4 (07:28):
Yeah, so the VIX, Like I know, the VIX went up,
but I think it went to like twenty nine, and
you compare that to like it was above eighty in
twenty twenty and even in twenty twenty two it was
like thirty six or in the thirties. VALL was really
quiet in twenty four.
Speaker 1 (07:44):
Yeah, August twenty twenty four got nearly four anyway.
Speaker 3 (07:47):
Yeah, So the last time I was in here was
after that August shock, and that was it proper as
as I kind of framed it at the time and
still will, the world was aggregated around this soft landing
viewpoint and all of a sudden in the span of
one day's worth of data, but it was really even
a week of data of labor data sixty five. Yeah,
(08:08):
and that was because we repriced the left tail. All
of a sudden there was a hard landing risk because
the labor data shocked us. You know that U rate
jump and then the NFP miss. The difference at this
time around is that since the election, right, Donald Trump
is the personification of a gamma agent.
Speaker 4 (08:26):
We are the only person I know who describes Trump
as a gamma agent.
Speaker 1 (08:30):
Everyone knows the terms, right, but I'm a living personification again.
Speaker 3 (08:34):
And I think, look, his mandate is to break status quo.
And we talked that last August shock about the idea
that the concept of a carry trade because we were
being asked about the carry online, which is kind of
like this false narrative. But the idea of any sort
of carry trade or positioning high sharp ratio trade right
a high risk adjusted return is that you need a
(08:57):
period of low volatility to kind of aggregate that position,
to build that leverage into the trade because it keeps working,
the wall is low, the price keeps working higher. That
builds the leverage in the system that hence builds the risk. Right,
stability breeds instability. In this case, Donald Trump, even if
the market was misidentifying the macro of his policies at
(09:18):
the time, which we should talk about, Oh.
Speaker 1 (09:20):
You're just never going to get that risk build up.
Speaker 3 (09:22):
Well, in this case, starting November, you know when it
really took shape.
Speaker 2 (09:28):
And I think the market had.
Speaker 3 (09:28):
Been sensing certainly since kind of the summer skew was seepening.
Skew matters, right, just as a relative measure of kind
of demand for downside versus demand for upside put skew
which is like deep out of the money downside relative
do not the money put was jacked ninety something percentile
because of all of the potential chaos agency expensive. The
(09:50):
fall was already quite expensive going into this scenario, even
if maybe the macro catalyst went wrong way and I
think there's two big things that happens, So let's talk
about this past.
Speaker 2 (10:01):
Week or really was past three weeks.
Speaker 3 (10:03):
Yeah, you had crowded narratives and crowded thematic positioning.
Speaker 2 (10:08):
With a lot of leverage.
Speaker 3 (10:10):
Right, that is what the prime broker's data shows and
frankly still shows like gross exposure your lungs and your
shorts in aggregate still kind of ninety something percentile was
one hundred percent of coming into the year. Though we
also had high nets, So you had a lot more
long than short either way, a lot of leverage in
the system.
Speaker 1 (10:43):
Give us like a little zoom out. Basically from mid
November to as you said, about three weeks ago it
started turning. I think the peak on this February nineteenth
or something like that. Yes, but talk to us just
about that sort of kind of an upcrash in the
wake of the people loading into everything risky, from crypto
to Tesla and everything. Yeah, what was going on there?
(11:07):
And then how extreme did that get?
Speaker 3 (11:09):
Yeah, I mean that's the perfect segue here, because like
in the sense that the post election narrative, and remember
the rates sell off beginning in September, when the market
really got their arms around seemingly some of this polling
that was showing much more credible kind of Trump lead. Yeah,
the rate sell off, meaning yields going higher, was about
this idea that regardless of who won, but particularly if
(11:32):
Trump won, that we had become both sides become economic populous,
and that fiscal dominance was this overriding theme where like,
we don't have a tolerance for pain as a society.
We saw the kind of the steroidal impact of fiscal
stimulus in the post COVID world, which kind of was
the tiebreaker for finally getting an inflation shock as we
(11:53):
all experience. So this idea that he was going to
take an already strong economy and overheat it with d
with tax cuts and these other stimulative measures completely had
the market thinking about further extension of US exceptionalism. Right.
This ability to outperform rest of the world for a
whole number of reasons, which is a separate podcast, but
(12:15):
like positioning was like long US assets, Europe was going
to be cutting sooner because they were feeling the brunt
of the slowdown force more so there China had all
sorts of issues, right, rest of world struggling US exceptionalism
and part of US exceptionalism not just kind of like
global hedgemon, strongest economy, deregulation, all these stimultive measures in
(12:36):
the pipes was also too. This idea of tech innovation
and tech innovation was the story of last year, in
the last two years, with the last ten years was
with regards to AI, right, Yeah, it used to be
fang back in the teens, right. So this idea of
megacap tech, all those things that made people, you know,
the completely dictated stock market last year like MAG seven,
MAG eight thirty five percent of the S and P
(12:58):
five hundred and fifty percent of the NASDAC. Concentration of
all of these kind of tech and disruption themes in
the market that was a big part of the US
exceptionals and trade. Well, guess what those trades are really crowded,
they're really loaded into And two shocks happened. The first
shock was the market and this is why I started,
you know, going out and talking about hedging for downside
(13:21):
in February. Was this idea that the market I think
was misunderstanding the phasing or the sequencing of a Trump
economic plan, which was you've got to do the painful
stuff first in order to get to the stimulative stuff later.
And that's spread that time spread, you know, you had
to kind of try to engineer a slowdown to then
(13:42):
be able to get the rate cuts via the disinflation
that he is trying to create, which ultimately you know,
this idea of like fiscal contraction to potentially then fiscally
expand and say the other shock, it's.
Speaker 2 (13:56):
Lost in the wash here.
Speaker 3 (13:57):
And this wasn't just a Trump growth scare, right, we
are growth scare every Q one into Q two.
Speaker 2 (14:02):
That's an artifact of the post COVID at KO. Right.
Speaker 1 (14:04):
We had a good piece from Neil about Duo about
that any.
Speaker 3 (14:08):
Yeah, so that matters, right, you know, that was part
of my thesis, like, look and see the trajectory. We
have these overheated animal spirits Q one numbers and then
this seasonal adjustments kick in and we have a growth.
Speaker 2 (14:17):
Scare in Q two or into Q three.
Speaker 3 (14:19):
But the other element here was the deep seek story
and tech innovation in that market concentration. And guess what,
there's all sorts of those names aren't just massive parts
of index and massive thematic parts Retail investors and hedge
fund longs and things like that, think about their impact
in the leverage GTF space, which has just absolutely grown massively.
That's a source of synthetic negative gamut in the market,
which you know, on the end of day rebalancing into
(14:41):
an update, they've got a ton to buy at the
end of the day. And eighty percent of those assets
happened to be concentrated in kind of like concentric tech
disruption circles. So you add in this massive rethink on
what had been the perpetual motion machine of Ai Capex
and that deep seak shock, IDIA trades down seventeen percent.
Kind of after that realization that weekend of what we're
(15:04):
looking at, all of a sudden, a massive valuation shock
in an earnings repricing effectively.
Speaker 1 (15:11):
Tracy, did you see this from Eric Belcunis yesterday? Vista
shares filing for an animal spirits ETF A and I
am in a two x animal spirits ETF wild, which
will hold the five fastest growing two X single stock
ETFs at any given time.
Speaker 4 (15:28):
Isn't that just called momentum?
Speaker 1 (15:30):
Yeah, but that's not that momentum isn't enough.
Speaker 3 (15:33):
It's momentum with leverage, and guess what, there will be
options on it too. So there's synthetic negative gamma and
actual real negative gamma. So the final point here is
you had these two shocks to what consensus was, consensus
positioning and consensus narrative. Now, all of a sudden, this
realization that Phase one is going to have to engineer
a slowdown to get the stimulative stuff that Trump wants.
Speaker 4 (15:54):
Yeah, isn't that weird? Like why are we crashing economic
growth to boost economic growth?
Speaker 2 (15:58):
Well?
Speaker 3 (15:59):
Because I think in this case, like there is something credible.
Speaker 2 (16:03):
To the idea that the deficit.
Speaker 3 (16:06):
Spending was a market concern, right, I mean, think about
what rates were doing last year when we were talking
about fiscal dominance. What's ironic here is that you then
get punished for trying to address it. So look at
Europe for instance, and this is like a big trade
in the market right now. It's like very simplistic, but
this is the way that acid allocators.
Speaker 2 (16:23):
Think and move.
Speaker 3 (16:24):
Right, who's fiscally contracting and tightening and who's fiscally expanding
and stimulating Europe?
Speaker 2 (16:30):
Right?
Speaker 3 (16:31):
Trump said, Look, we might be talking about the end
of Breton Woods post World War II packs Americana here, right,
We're no longer going to protect you for you to
buy US dollar assets and use our currency. So guess
what Europe has to go out create this financing and
with that, all of a sudden, now they are a
fiscal expander after years of being the.
Speaker 2 (16:54):
Shift.
Speaker 3 (16:55):
It's a real potential regime shift. Even though I think
this ultimately creates the conditions where if you do kind
of crash the economy and you can't stick the landing
on this engineered recession, then you inevitably have to fiscally expand,
and that's why I think a lot of these like
long Europe long China trades.
Speaker 2 (17:14):
Will be quick to move their feet.
Speaker 3 (17:17):
I can't say this is a tectonic, permanent structural shift yet,
because the worst it gets for us and we get punished,
and you have fiscal tightening and markets sell off and
all those bad things to create a negative health effect,
which in the short term help get the disinflation, to
get the FED cuts right, to get the stimulus through right.
This is all part of this kind of second order
thinking that you need to be looking into.
Speaker 4 (17:51):
Okay, so we had a wild but not disorderly sell off.
Sounds like my high school report card, but I imagine
it was still painful for certain investors. So we just
mentioned momentum like that must have been painful. Multistrats must
have had a hard time because we saw a lot
of the over performers underperforming and the underperformers suddenly overperforming.
(18:16):
How was it give us some like market color?
Speaker 2 (18:19):
Well in some of those.
Speaker 3 (18:21):
I mean, you look at the biggest multistrats that have
been one hundred percent of the net alternative investment or
hedge fund inflow over the past X number of years. Right,
So like long short isn't where it's at anymore. It's
about the market neutrals, and that's just speaking to their
equities components. But of course they have these other risk
diversifying strategies with incredibly tight risk management tight stops, and
(18:44):
that's how when you apply a lot of leverage to
these small controlled market neutral gains, you then get these
incredible annual returns that those biggest shops have been posting.
But the fact of the matter is crowding happens, and
leverage on top of crowding happens, and then shadow level
it happens with leverageddtfs, leverage on and all control target
(19:04):
volatility and CTAs and all that stuff is synthetic negative
gamma in the market.
Speaker 2 (19:09):
So and even where you know.
Speaker 3 (19:10):
There's a very well publicized loss with regards to index are, uh,
you know at one of these funds whatever, I think
that was probably negatively impacted. They have to model out
the flows across the diaspora of things out there at
the end of the day to do their index ads
and deletes. Well, they're probably getting screwed with by a
lot of the leverage GTF flows the end of the
day that are completely nuking and creating these big overshoots
(19:31):
and these big negative gamma type moves. So the long
story short is that for the month of February, let's say,
talking with people deep in the inside, senior traders and whatnot,
these were losses one month losses that people had not experienced,
that have been there, you know, four or five type
years in places that just don't lose money.
Speaker 2 (19:48):
They just stop you so effectively.
Speaker 3 (19:50):
Now it is a tribute to the model, however, that
there's no blow ups, there's no ltcms here. I mean, yeah,
they didn't make money. They might have had worst month
or in the start of March with also you know,
going the wrong way too, but you're not going existential here. Yeah,
So that actually speaks to the model working. The bigger issue,
and I think the bigger thought process takeaway here is
(20:11):
that when you have trades over a period of time
or built on the status quo of us exceptionalism, right,
that is effectively a carry trade. And we had leverage
built into the system for fifteen years of QE. We
had leverage built in the system from modern monetary theory
and the outright money drops that we've done over the show.
(20:32):
Oh that's your fault, so maybe yeah. So, I mean,
all of these things created this ugly de leveraging effect
even at market neutral shops.
Speaker 2 (20:41):
The good news is it wasn't a VALL feature.
Speaker 3 (20:44):
It wasn't a VALL event because we were already hedged.
That's why SKU was high. Implied VALL was high. All
the put SKU was high, so it didn't become a
VALL event, which is where you get some of those
accelerant flows to kick in.
Speaker 4 (20:56):
On this note, I have a slightly weird question, but
could we ever get to the point where the volatility
complex is so large and so in demand that you're
just never going to have a volatility event like we
saw in twenty eighteen something along those lines, because everyone
is paying through the nose for downside protection.
Speaker 3 (21:16):
Well, I mean, ironically, it's when you're well hedged that
you then have a condition where you can create the crash, right,
which means that dealers are short all these puts.
Speaker 4 (21:26):
I think, I guess you have to have sellers on
the other side too.
Speaker 3 (21:28):
Well, that's the big thing that we've conditioned the behavior,
whether it's you know, fed stepping in that moral hazard dynamic,
or nowadays politicians fiscal stepping up, whether it's Silicon Valley
Bank and seventy different new five letter acronym liquidity special
features in the market that put out fires. And that's
why the back test on VALL selling strategies and the
(21:50):
AUM in VALL selling strategies just keeps working like you
sell the Panics. And that's what ultimately what ends up
happening when you have this short optionality dynamic in the market,
whether it's dealers short reel downside hedges, or it's CTA
trend flipping from along to a short and having to
sell more of the lower it goes, or target volatility
(22:12):
funds is like a hedge overlay doing the same thing,
or leveragedtfs. You know, you get the point. Now, what
ends up happening is that it's the option sellers that
stop the problem because they come back in.
Speaker 2 (22:24):
They give dealers back.
Speaker 3 (22:25):
Their gamma, They sell optionality, they sell rich vall. The
market stabilizes, ranges compress. You need to keep feeding volatility.
Volatility is mean reverting and if you can't keep having
daily one and a half percent moves, which is a
big ask. You need persistent new bad news otherwise realize.
Volatility compresses ranges, compress vall. Sellers feel more confident, they
(22:50):
fill in. Dealers get long gamma. We stabilize. People start
covering their monetizing their hedges. They take those off. That
creates delta to buy. The market starts rallying people by
short data upside it, squeeze it. That's the cycle that
we're on, like this really short term ecosystem. But valse
sellers are I would say, the bigger players now than
(23:10):
hedge buyers. And that's a real footprint of the past
twenty years ever since QE, where the previous buyers of
volatility were real asset managers like long onlyes and things
like that. After QE, a lot of those folks, big
pension funds became sellers of volatility.
Speaker 4 (23:27):
Yeah, this was Bill Gross's thing when he stood up
on stage and said, everyone sell volatility. That's like the
only trade right now because nothing is happening, right you
have to you have to bet on nothing. Yeah.
Speaker 3 (23:39):
Maybe one other point I would make on volatility. The
reason that it got so wacky in August, for instance,
was the fact that conditioning that says sell the rich
vall and remember like the non farm payroll and U
rate data was that Friday, and we crashed hard, but
everybody was so conditioned that we closed the market that
day with anybody in the VALL space saying I want
(23:59):
to be short ball, short delta, I want to sell
this rich vall, but still think the market normalizes here
because we can't maintain this richness in volatility. Well then
the NICK opened down twelve percent because it was like
a kind of a hot leverage trade at that time,
and it was the second day that got people stopped out.
The other point here too was that that day of Friday,
(24:22):
one of the largest ball players in the market, thinking
that they were doing themselves a solid and hedging by
buying vix calls, ended up creating their own demise in
a sense because that created some of that short vixed
convexity that then really went wild over the span of
the next day and a half and created a bigger
issue within the ball complex. So this is the idea
(24:44):
that when you have buyers of hedges, they actually create
the conditions for the crashes.
Speaker 4 (24:50):
Well, I guess we'll see what happened with meeting and
we'll see.
Speaker 1 (24:53):
If there's like a big regime ship because it's eventually right,
maybe something will change, maybe I mean maybe one day,
mean reversion, welcome to an end.
Speaker 4 (25:02):
The volatility is mean reverting normally maybe, but what if
we just get it or not normal times? So we'll see.
Speaker 1 (25:14):
Lots More is produced by Carmen Rodriguez and dash El Bennett,
with help from Moses Onam and kil Brooks.
Speaker 4 (25:19):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (25:24):
Please rate, review, and subscribe to Odd, Lots and Lots
More on your favorite podcast platforms.
Speaker 4 (25:30):
And remember that Bloomberg subscribers can listen to all our
podcasts at free by connecting through Apple Podcasts. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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Decisions, Decisions
Welcome to "Decisions, Decisions," the podcast where boundaries are pushed, and conversations get candid! Join your favorite hosts, Mandii B and WeezyWTF, as they dive deep into the world of non-traditional relationships and explore the often-taboo topics surrounding dating, sex, and love. Every Monday, Mandii and Weezy invite you to unlearn the outdated narratives dictated by traditional patriarchal norms. With a blend of humor, vulnerability, and authenticity, they share their personal journeys navigating their 30s, tackling the complexities of modern relationships, and engaging in thought-provoking discussions that challenge societal expectations. From groundbreaking interviews with diverse guests to relatable stories that resonate with your experiences, "Decisions, Decisions" is your go-to source for open dialogue about what it truly means to love and connect in today's world. Get ready to reshape your understanding of relationships and embrace the freedom of authentic connections—tune in and join the conversation!