Kris Abdelmessih, Co-Founder of Moontower AI and a seasoned options trader, shares his rich experiences from market making to trading volatility. He discusses the critical importance of strong sell-side relationships and effective risk management strategies. Kris highlights the challenges faced when trading volatile ETFs, particularly referencing the April 2020 crude oil meltdown. He also delves into insights about micro-edge strategies and the evolving dynamics of trading in today's technology-driven markets.
Kris Abdelmessih underscores the necessity of a market maker mindset in options trading to identify pricing opportunities efficiently.
The podcast highlights the critical importance of risk management practices and adapting to changing volatility profiles in options trading.
Deep dives
Insights from Market Making Experience
The discussion highlights the importance of understanding market making as a foundational skill in trading options. Chris Abdomosia shares his journey through a rigorous training program, which provided immersive experiences in mock trading and theoretical concepts like the Black-Scholes model. The emphasis on developing a market maker mindset helped him identify pricing opportunities in the options market by understanding how screens were framed and pricing relative to underlying assets. This foundational knowledge proved invaluable in executing trades efficiently, ensuring he could gain a micro-edge in the highly competitive environment of options trading.
Challenges in Trading Unique ETFs
The podcast delves into the complexities of trading offbeat ETFs, particularly in the context of commodities like natural gas and crude oil. Analyzing the April 2020 USO meltdown showcases the perils of mispricing in commodity ETFs when drastic market events occur. Chris discusses his early experiences with the UNG ETF, where he confronted problems associated with its premium to net asset value (NAV) amidst market volatility. These experiences illustrate how trading in unusual products requires deep understanding and adaptability to avoid significant losses during periods of instability.
Risk Management and Position Management
Risk management practices play a critical role in the successful execution of options trades, as outlined by Chris's experiences. He emphasizes the need to adjust positions based on the evolving volatility profiles, regardless of initial assumptions about whether volatilities are cheap or expensive. The value of understanding market relationships and the ability to pivot quickly in response to changing conditions ensures that traders can effectively navigate fluctuations in volatility and market dynamics. This approach requires a disciplined mindset that accepts losses as part of a broader strategy focused on value creation.
The Role of Technology in Modern Trading
The conversation underscores the transformative impact of technology in options trading and market making. Chris notes how the landscape has shifted, with sophisticated algorithms and computing capabilities becoming essential for price discovery, particularly for non-standard and illiquid products. As fewer market makers dominate, markets may become more fragile due to similar trading strategies and model dependencies. This raises critical questions about market resilience and the importance of balancing technology with traditional trading acumen, particularly in volatile environments.
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.
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