Mandy Xu, Head of Derivatives Market Intelligence, Cboe Global Markets
Apr 8, 2024
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Mandy Xu, Head of Derivatives Market Intelligence at Cboe Global Markets, discusses product innovation in options trading, the GME short squeeze, option pricing dynamics, mechanical flows, growth of option income funds, and the debate on ODTE risks in the market.
Product innovation in derivatives market since 1973, including the GME short squeeze in 2021.
Discussion on low realized correlation and high market dispersion impacting volatility and strategies.
Insights on zero-DTE trading strategies, highlighting diverse options market growth and dynamics.
Deep dives
Product Innovation in Derivatives Market
The conversation with Mandy Zoo explores product innovation in the derivatives market, including the first option trade on the CBOE in 1973. Discussions range from the short squeeze in GME to present-day option pricing and the impact of mechanical flows. Mandy suggests that market stability is influenced by low risk readings and the rise in AUM for income generating funds.
Dispersion and Correlation Trends
The podcast delves into the low realized correlation and high dispersion in the market, notably discussing how extreme both have become. With indices like DSPX tracking dispersion and various correlation measures, the conversation highlights the impact on volatility and investor strategies. The focus on dispersion and correlation dynamics provides insights into the evolving market landscape.
Insights on Zero-DTE Trading and Option Income Funds
Insights are shared on zero-DTE trading strategies, emphasizing a balanced mix of hedgers, income generators, and intraday traders. Notably, the dominance of call option buyers and the minimal impact of option income funds on volatility are discussed. The rise of derivatives-centric mutual funds and ETFs is also explored, showcasing substantial growth and diverse strategies within the options market.
Empowering Women in Finance
The episode touches on the progress and initiatives aiming to empower women in finance. Personal insights highlight the importance of mentorship and sponsorship for career advancement. The conversation with Mandy Zoo underscores the significance of having sponsors who advocate for career growth, alongside mentors, in driving success for women in finance.
Evolving Market Dynamics and VIX Term Structure
The discussion delves into evolving market dynamics, such as the VIX term structure, showing a pronounced hump anticipating the US election. Insights on volatility risk premiums and dispersion futures shed light on the market's anticipation of event-driven uncertainties. The episode concludes by exploring the interplay between market dynamics, VIX futures, and political events.
Closing Remarks and Feedback Request
In wrapping up, feedback is encouraged to enhance the podcast's direction and contributions to the investment community's risk understanding. Dean Kurnut thanks the audience for tuning in and highlights the goal of leveraging conversations to benefit listeners. The invite to share feedback signifies a commitment to continuous improvement and relevance for the podcast audience.
After a 13-year career at CSFB where she would ultimately head the firm’s equity derivative strategy effort, in 2023 Mandy Xu moved to the CBOE where she’s now Head of Derivatives Market Intelligence and swimming in interesting, complex data sets. Our conversation surveys product innovation, going back to the first option trade ever on the CBOE, call options on July 1973 Xerox, through today’s vastly electronified ecosystem of trading in cross-asset risk exposures.
We briefly review the unbelievable short squeeze in GME from 2021, and here Mandy asserts that today’s exposures are considerably more balanced than the Meme episode in which the retail stampede engorged on call option premium. Our discussion moves to the present-day backdrop for option pricing and the potential impact of mechanical flows resulting from vol being bought and sold in the market.
Noting the substantial increase in AuM for overwriting and option income generating funds in both the mutual fund and ETF complex, Mandy is skeptical that this growth is solely responsible for the low clearing price of measures like the VIX and put skew. Instead, she points to low risk readings in other asset classes, including credit implied vol, as more likely driven by stable macro fundamentals.
We spend the remainder of the conversation on the much debated topic of ODTE and whether there’s an accident waiting to happen. In Mandy’s role at the CBOE, she sees option flow data with great granularity and in the ultra-short-dated category, she sees considerable balance in use cases across hedgers, income generators and intraday traders. The result is a healthy mix of buyers and sellers and, at least for now, a low risk of Volmaggedon 2.0.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Mandy Xu.
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