Alpha Exchange

It was a pleasure to host a discussion with Meb Faber, the Founder and CEO of Cambria Asset Management. Our conversation begins with the question of whether it’s a good idea to buy the market at an all time high. To this, Meb argues it’s actually a great idea, pointing to the data and that markets in an uptrend continue to move higher.

We incorporate the notion of a trend following strategy, which Meb illustrates can be helpful in managing the inevitable and substantial drawdown which forces many investors out of the market and destroys the value of compounding in the process. No strategy is perfect, and trend following can underperform during sideways, choppy markets. But it has proven important to cut off the deep left tail with reasonable success. We also explore the work Meb has done on shareholder yield, a strategy that he’s passionate about and argues works particularly well in foreign and emerging markets.

Lastly, we talk about that a vastly under-appreciated aspect of return generation in investing: taxes. The team at Cambria is doing some interesting work on this front, utilizing a feature of the code that helps investors diversify risk in a tax efficient manner. I hope you enjoy this episode of the Alpha Exchange, my conversation with Meb Faber.

Is Trump in the price? Wall Street is asking this question. In this podcast, I walk through how the market prices implied volatility around the US Election, focusing on the SPX, TLT and even DJT. As option premiums are much higher than justified by recent realized, there’s an enormous vol risk premium, the result of a withdrawal of vol supply. There’s interesting information coming from betting sites like Polymarket and early voting data as well that might help us better understand the election probabilities and the implications for how the market prices options. Lastly, I consider the relatively rare co-existence of a high VIX but low SPX implied correlation and what that means. I hope you enjoy this discussion and welcome your feedback. Have a great week.

In this short podcast, I make the case for doing what doesn’t come naturally - taking defensive action when times are good. The first portion of the discussion assesses event risk premium into and after consequential macro events like Brexit and prior US elections. The main shared attribute is that implied vol remains elevated into the event, even in the face of muted realized volatility. A second attribute is that post event, implied vol falls. While the same playbook may be relevant in 2024, I argue that overlaying market-based insurance via SPX put spreads out to year end is compelling given the pricing and unique set of forward-looking uncertainties coming our way and the reality that liquidity conditions can change very quickly. I hope you find this podcast interesting and useful.

In China, the “vol shot” heard round the world occurred recently with the Chinese government throwing the kitchen sink at the economy and market, seeking to revive the relatively lifeless patient. As it usually does, at least temporarily, it worked. Insofar as asset price reaction that is.  An explosion in volumes ensued as did the classic “stock up vol up” dynamic made most famous in 2021 during the Meme stock episode. In this short pod, I review the five characteristics of price/vol spirals, their implications and how these unique episodes resolve themselves. I also cover US Election risk and how its impacting the VIX. I hope you enjoy and find this useful.

Option prices - by incorporating time (expiry) and distance (strike) - give us many more dimensions than a mere flat price like the SPX or a single stock. If the stock market speaks, then the option market sings. It's my strong contention that option prices are singing out loud right now, begging for attention. The market was largely unchanged on the week, but there were some meaningful developments in the price of options – on gold, on crude and on the VIX – that tell us something about an emerging discomfort and perhaps a view that stock prices at all-time highs do not have much margin of safety in this environment. What I highlight in this podcast is that hedging costs can be a function of the market's ability to provide the capital to absorb loss. The Election and a very unsettling geopolitical backdrop make this more challenging.  I hope you find this helpful.

The gamma and theta characteristics of ODTE are attached at the hip. But the zero day to expiration straddle on last Wednesday’s Fed day was no normal ODTE. We might call this straddle a OTTD straddle. Zero theta to decision. The Fed decision isn’t just a date on the calendar. It’s a specific time of day on that date. It’s not like NFP which comes out before the market opens. It’s not like NVDA earnings, which come out after the close. Powell and his Fed teammates have decided they want to give us the goods during the trading day and on Fed days, “Ain't nothing going on but the rent” becomes “Ain't nothing going on pre-event.”  I discuss the unique behavior of intraday option pricing on FOMC day and also how to think about the VIX floor as the US election comes into closer view.  I hope you enjoy and find this useful.

Most of the discussions on the Alpha Exchange podcast consist of guests sharing views on market risk and portfolio construction. To be sure that leads the conversations down the path of monetary policy, positioning, inflation and growth. There’s a great deal of consideration around the price of optionality and the correlation of assets.

But what about insights on the nitty gritty of getting into option trades, being a liquidity provider to the Street and then risk managing those positions?  Enter, Kris Abdelmessih, who spent well more than a decade doing just that. Now the author of the Moontower Substack and the founder of Moontower.ai, Kris looks back at his time on the market making front, starting with his formative experience in the renowned Susquehanna training program and ultimately trading volatility at Parallax. We talk about how he sought micro-edge by maintaining sell-side relationships, getting into positions as cleanly as possible and then having a dispassionate process for unwinding trades for which the vol profile was no longer suitable to own.

We also gain his insights on perils of trading off-the-run ETFs like those on natural gas and crude oil, with the April 2020 meltdown in the latter, an important case study. I hope you enjoy this episode of the Alpha Exchange, my conversation with Kris Abdelmessih.

“Elections have consequences”. So said former US President Barack Obama. He probably didn’t have our trusty fear gauge, the VIX, in mind, but he may as well have.  We are one day away from the US presidential debate. I am not sure this one can deliver the same fireworks that resulted from June 27th. It may devolve into a food fight, with each side hoping to land a definitive blow. What I’ve learned about election risk with regard to derivatives through events like Brexit, the 2016 and 2020 US elections and certainly this one as well is that the clearing price for volatility is impacted by a decline in the willingness and ability to supply it to the market. The result, a VIX stuck at a reasonably high level. I hope you find this discussion enjoyable and useful.

Three hundred odd years ago, Sir Isaac Newton told us that “no great discovery was ever made without a bold guess.” My sense is he didn’t have the order book in Emini futures in mind, but his words do translate well to our world of financial instruments. In this short pod, I revisit the events of August 5th, a day when prices normally well discovered went dark. The implications are real and we ought to learn from this short-lived but real episode of instability. As we approach the “4 E’s” – employment, earnings, the election and the easing cycle – there’s a good deal to consider with respect to playing defense in markets.  I hope you find this interesting and useful.

Now the Chief Market Strategist at StoneX, Kathryn Rooney Vera comes from humble beginnings. As a teenager she cleaned houses in order to contribute to her family’s finances. In college, she changed her major to finance from liberal arts, seeing a more direct path to a well-compensated career. She would ultimately settle into the study of economics, a craft she continues to refine today in support of colleagues and clients at StoneX.

Our discussion surveys the process Kathyrn uses to find value in markets. She focuses on forecasting growth and inflation, the Fed’s response to these variables and the construction of trades that will capitalize on them. We review some of the recent cross-asset volatility and the role that positioning played. Kathryn rightly suggested that clients utilize protective option strategies in the period prior to August 5th.

She has also seen value in curve steepeners, embedding a little bit of the Sahm Rule notion that the Fed may find itself behind the curve. Lastly, she sees a favorable setup in the utilities sector, providing both the traditional defensive property through its linkage to rates as well as embedding an AI play that can empower it should the boom continue.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Kathryn Rooney Vera.