The subject at hand in this discussion is the unbelievable launch of options on IBIT, the bitcoin ETF. What I’d like to put forth is that the financial characteristics of the underlying asset – bitcoin - pave the way for IBIT options, already off to an amazing start, to become a critical industry risk management tool.

The unique risk characteristics of bitcoin and how they shape the option vol surface in IBIT will underpin the success of its options. Specifically, bitcoin has 3 financial characteristics that pave the way for tremendous option adoption. First, it is a high vol asset. Second, bitcoin exhibits a great deal of vol of vol. Bitcoin goes through sleepy periods and also those when the daily fluctuations are huge. And the third of the financial characteristics, perhaps the most important of them, is bitcoin’s nearly unmatched propensity for positive spot/vol correlation.

I am really bullish on this new and exciting options complex. I hope you enjoy this perspective and find it interesting. Be well.

The “flow desk” as it’s often called on the sell-side is about repeatability and scale in the service of institutional clients. It’s a competitive business with not a lot of margin for error, especially in a product like equity options where being on the wrong side of a misbehaving Greek could spell trouble. With this in mind, it was great to welcome Ali Samadi, Head of Flow Equity Derivative Sales at Nomura Securities International to the podcast.

Our conversation explores aspects of the salesperson / client interaction that make a relationship stick. Namely, Ali suggests that first and foremost, one must understand the client’s objective and tailor the coverage experience accordingly. As a derivatives expert, he sees opportunities to utilize the volatility surface not just in the construction of trades, but also as a source of information, as it may provide clues as to where investor interest is concentrated. We also talk about addressing the inherent negative selection risk for a sell-side desk. This includes the inevitable need to manage client expectations on what size can be transacted at a given price, especially when markets turn especially illiquid as they did on August 5th.

Lastly, we spend some time talking about training younger professionals, a pursuit Ali is passionate about. He believes the best way to help junior colleagues advance is to have them review trades in order to develop a sense as to what the right price is. Along with this, he encourages those in the early parts of their careers to diversify their skill sets, learning at least something about other products and assets classes. I hope you enjoy this episode of the Alpha Exchange, my conversation with Ali Samadi.

A major theme of Alpha Exchange podcasts over the years has been the impact that financial products that live and breathe within the markets have on asset clearing prices. Events like the crash of 1987, the GFC, the 2018 XIV event or the unwind of short variance exposure in March 2020 come to mind as examples. More recently, the substantial growth of leveraged ETF products has gotten a lot of attention, as a potentially amplifying factor with respect to underlying asset volatility.

With this in mind, it was a pleasure to welcome Mike Green, a partner and Chief Strategist at Simplify Asset Management back to the Alpha Exchange. Our conversation drills down on leveraged products written on MSTR, the bitcoin buying company. Mike first describes how a leveraged product’s rebalancing requirement resembles a short straddle, buying when the underlying rises and selling when it falls. He next makes the case that the two times leveraged long products, MSTU and MSTX, are unique in that they are large in size and written on an underlying that is extremely asset.

This creates the potential for vol amplifying feedback loops that result from the extremely large daily re-hedging. Mike believes the leveraged complex has contributed to the large premium of MSTR to the value of its bitcoin holdings. We talk as well about the costs being borne by the ETFs who have been forced to utilize the options market as the swap providers have reportedly limited the amount of leverage they are willing to provide.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Mike Green.

What follows are some of my recent thoughts on a favorite topic: the interaction between option prices and the assets upon which these options are written. Specifically, I share thoughts on price / vol spirals, which come in two flavors:  a) the asset plummets and vol explodes  b) the asset surges and vol explodes. In the first, which we might call "Melt Down", the asset nears a bankruptcy cliff as vol surges. See GFC.

In "Melt Up", there's typically some version of a short squeeze involved. Everyone’s trying to get their hands on the same thing all at once. And that brings us to MSTR, the bitcoin buying engine run by Michael Saylor. There are some important considerations for evaluating risk in MSTR, driven by the fascinating interaction between the stock and both the leverage ETFs and options that sit alongside it. Especially given the unique empirical and implied distribution of bitcoin, these products create powerful powerful feedback loops that ought to be understood.

I hope you find this discussion interesting and useful.

It was a pleasure to welcome Victor Haghani, the Founder and CIO of Elm Wealth Management back to the Alpha Exchange for an engaging discussion on those turbo-charged financial products called leveraged ETFs. Our conversation is focused on the large product suite built around MicroStrategy, a software company whose mission appears to be solely focused on the accumulation of bitcoin. Itself a stock realizing 75 to 150 vol, MSTRs two times daily return products – MSTU and MSTX – have experienced one month delivered volatility levels approaching 400.

Victor shares the recent work he and team have done to model scenarios for these products based on price and vol assumptions for MSTR. The punchline is that investors need to carefully consider the risk exposure they are getting and be prepared for potentially large losses should the underlying stock fall and volatility rise. In the course of our discussion, we contemplate the directionality of the MSTR premium to its holdings of bitcoin and whether that is itself linked to the price of bitcoin.

Lastly, we touch on a new product proposed by ETF provider Battleshares that targets a daily long/short exposure to two assets, for which the Elm team has built a model and posted on their website. I hope you enjoy this episode of the Alpha Exchange, my conversation with Victor Haghani.

Welcome back to the last installment of “20 Things to Do Before You Ask for a Price”.  This 4-part series has been geared towards illustrating how the equity derivative salestrader can be a meaningful part of getting two institutional counterparties to “yes” with respect to the transfer of option risk. The salestrader, sitting between the trader and the client, can quarterback the process by appreciating the context of the trade and contributing insights on the risk profile of it. Context is about the client, the underlying stock, the trade motivation and the risk environment. The risk profile is about the many nuances of different option trades and what they imply for how the sell-side trader will think about pricing and providing capital.

In today’s highly electronified markets, prices are streamed continuously by tireless bots with neither faces nor names.  But risk transfer still occurs the old-fashioned way as well – and these voice trades require superb communication, led by the salestrader.  If you are executing upon “20 Things”, you are adding alpha to this process. Below are Things 16-20.  I hope this 4-part series has been interesting and you’ve enjoyed the perspective.

16. What is the bid /offer is in vol terms?  For example, if an option has 30 cents of vega and the bid / offer is 50 cents, the vol bid/offer is 1.6 vols.  Bid / offers on long dated options often seem wide in terms of prices, but are not really in terms of implied volatility. This can be useful in defending your trader’s price.

17. Look at the combo. Check the implied vol on the put vs. the implied vol on the call of corresponding strike.  Are they reasonably the same?  If not, there could be a borrow issue or a dividend issue.  When put vol is much higher than call vol, a borrow issue is often present.  In instances where market is forecasting an increase in dividends, it is also the case that the put vol will be higher than the call vol.

18. Understand div risk. On long dated options, dividend risk is a big issue – especially for high delta options where the stock hedge is large.  Example: buying the Jan’25 35 puts in VZ carries a great deal of dividend risk – if we buy the puts and buy stock we are effectively buying the dividend stream which, if cut, is painful.  Use the Bloomberg function DVD and BDVD.

19. Know put/call parity. C = S + P = PV (K) – PV (Divs) and be prepared to use it to explain pricing to accounts especially on deep in the money or out of the money options.

20. Lastly, have an opinion on every single price you get.  You should have a feeling of what you think the price should be before you get a price.  Understand that traders are responsible for prices, but that your informed input is very important.

It was a pleasure to welcome Rocky Fishman, Founder and CEO of derivatives advisory firm Asym 500 back to the Alpha Exchange. An area of specialty for Rocky is evaluating systematic trading strategies, like vol targeting, that live and breathe within equity markets and potentially sponsor feedback loops.

The focus of our discussion, the growing universe of leveraged ETFs, a unique product set that has been on my mind and that Rocky has recently done a deep dive on. We start our conversation by revisiting the August 5th VIX event that saw the S&P options market turn highly illiquid as the prices quoted for deep out of the money puts reached unheard of levels. For Rocky, while the event came and went, there are lessons, namely that the tails can exert themselves suddenly.

With respect to leveraged ETFs, Rocky sizes the US universe as $135bln in assets under management for leveraged and inverse products, $120bln of which is in equity products. He walks through how both the leveraged long and inverse products on the same underlying, non-intuitively, are responsible for buying or selling in the same direction on the same day. These amplifying effects, unlike efforts to map the market’s gamma profile are unambiguous. As such, they are worth keeping a close eye on, especially as the ETF issuer’s daily required rebalancing efforts take place near the close of trading. Here, Rocky does observe both more vol and volume in the market near the end of the day.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Rocky Fishman.

Welcome to Part 3 of “20 Things to do Before You Ask for a Price”. To review, “20 Things” is a to-do list I developed more than 2 decades ago while running a derivative sales team. The desk committed a substantial amount of capital in pursuit of business, which made it easy to win trades but also easy to lose money in the process of winning those trades.  20 Things was about playing defense and offense simultaneously by requiring the salesperson to be an active part of the price discovery process. While the trader would ultimately make the price and bear the risk, the salesperson, through 20 Things, could be a valuable part of the process. The result: better risk taking and a more sustainable business.  Here are things 11-15.  I hope you enjoy and find this useful. I wish you an excellent Thanksgiving holiday.

11. Corporate action? Is this stock a deal name or subject to some other corporate action?  Use the CACS function on Bloomberg to look for corporate actions. Deal names can have very unique implied distributions and are difficult to provide risk capital into in option trades.

12. Evaluate the vol. What is the implied volatility of the name?  How does it compare to realized volatility?  How does the name spread versus index or sub-index volatility?  Run the GV function.

13. What does strike skew look like?  The skew may be indicative of the amount of gap risk potential in the name.  Run Bloomberg command OVDV SKEW and look at the spread in risk reversals on the OMON screen.

14. What is the shape of the term structure?  This can give a sense as to how much the market is willing to pay for an event (ie, earnings or an FDA announcement).  Run Bloomberg command OVDV TRMS.

15. What is the vol risk in the trade?  Is this a long-dated option on a high-priced stock?  If so, you should know what the vega of the option is.  Example: 10k F Jan’25 11 strike calls have far less vega than 10k MSFT Jan’27 430 call.  These very different options call for different kinds of dialogue with the trader and client. Use the Bloomberg OV function.

While the SPX has enjoyed a banner year in 2024, a series of risk events have mattered, including the August 5th spike in the VIX and option pricing uncertainty into the US election. Credit spreads have generally behaved in benign fashion, however. What will 2025 bring for the world of credit and what risks should we pay attention to? With this in mind, it was a pleasure to welcome Dominique Toublan to the Alpha Exchange. Now the Head of Credit Strategy at Barclays, Dom landed on a credit derivatives desk in 2007. With a deep background in physics, Dom quickly saw that while derivative products may utilize some of the complex equations that underpin the physical sciences, markets are prone to episodes of disorder with unpredictable outcomes.

Our conversation first considers the behavior of macro credit products in the period before and after US Election. Here, Dom shares that the same vol premium observed in equity options was visible in both credit spreads and credit implied vol as well. In the aftermath of the Election, Dom sees strong, ongoing demand for US spread product with a global buyer base looking less at whether spreads are wide or tight but for all-in yield, pointing to Taiwan life insurance companies for example. In evaluating the risk premium of credit spreads, Dom argues that while valuations are a bit tight, ongoing inflows should continue to support the market. Acknowledging there are some macro headwinds, he doesn’t see them as strong enough to be disruptive.

Lastly, we talk about the progress made in gaining credit exposure through a systematic, factor-based approach. Dom sees this as an exciting time of product development, calling it the equitification of credit. With considerably more data now available and with the advent of credit ETFs, the market has embraced portfolio trading, greatly facilitating risk transfer. Along with this, the credit market is incorporating the principles of factor exposure, long a part of the equity market.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Dominque Toublan.

We are back, with installment number 2 of “20 Things to Do Before You Ask for a Price”. It’s a to-do list for the equity derivatives salestrader who chooses to be a relevant and constructive part of the option risk transfer process that a buy-side client and sell-side trader engage in. Small trades – like buying a pack of gum – can be consummated quickly. Large trades – like buying a house – typically take a while. But large trades that are borne in a moment’s notice – that’s a unique thing with unique risks. Things 6 through 10 are about quarterbacking trades to completion in the context of being short information asymmetry.  I hope you enjoy and find this useful.

6. Is the order outright or delta neutral?  This dictates speed of response needed to the client. There’s more time on delta neutral orders.
7. Check option market depth. Evaluate the screen market using OMON function.  How wide are the screen markets?  Is the option better bid or offered? 
8. Check volume. Use the OMST function to see option volume in the name and that line today.  Check open interest in that line to see if the trade is opening or closing.
9. What is the option delta?  What is the share delta?  What is share delta as % stock volume?  Note that low delta options can be challenging to sell from a risk standpoint and that high delta options can be difficult from a stock liquidity standpoint.
10. Check earnings. When does the stock report?  Does this option order comprise a report date or other important release of company information?  Run the ERN function to look at historical impact of earnings announcements.