Alpha Exchange

As we cue up some new guests for the Alpha Exchange, some reflections from your host on the Black Scholes model and its 50th anniversary. No model is perfect and traders must grapple with real world frictions not entertained by the model. I discuss how option market participants make adjustments and why. Hope you enjoy! 

In a world bubble for the Alpha Exchange podcast, the words vol, carry and convexity would be prominent. And in this episode, featuring Amy Wu Silverman, the Head of Equity Derivatives Strategy at Royal Bank of Canada, we dive into these concepts head on. First, we learn about Amy’s experience in structured rates when, in and around 2007, Fannie and Freddie were the go-to credit to which all kinds of complex instruments were attached.Reflecting on how wrong this ultimately went, she tells us that it often takes the experience of crisis to help us appreciate ways in which market realities can deviate violently from the textbook. We explore some of Amy’s framework, which leans into the value of market prices in helping establish consensus and forming a starting point for investors to map their own distributions of outcomes versus that implied by the market.We then talk about option prices and market risk dynamics today with attention to the huge surge in NVDA and the impact on both option vol surfaces and passive indexation. Amy sees risk in the exceptionally narrow breadth that the surge in NVDA is part of.I hope you enjoy this episode of the Alpha Exchange, my conversation with Amy Wu Silverman.

There's always a bull market somewhere, and in today's climate of hyper short termism, both volume and commentary are thriving in the land of zero days to expiry options. While the risk characteristics of ODTEs are generally agreed on, the directionality of the flows and resulting positioning remain subjects of vigorous debate. With this in mind, it was a pleasure to welcome Nitin Saksena, the Head of US Equity Derivatives Research at BofA Securities, to the Alpha Exchange.Before embarking on the work that Nitin and team are doing to better understand these ultra short dated options, we survey the landscape of cross-asset vol. Here, Nitin notes that options on certain currency pairs - for example in the Canadian dollar - score on the cheap side on a nominal basis. On a relative basis, rate vol remains substantially high compared to SPX vol as the MOVE index is just 20% off its Covid high while the VIX has declined by 80%.Next, we turn to the risk implications of the substantial flows in daily SPX options. Given the convexity, there are scenarios imagined by some in the industry in which an unwind of wrong-way exposure can accelerate price movements in the index. While respecting the logic of the analysis, Nitin pushes back on the degree to which the flows are one-way, seeing a balance of trades on the long and short side of options. Still, he cautions that because these instruments and the resulting risk exposures are new, we should be carefully monitoring them.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Nitin Saksena.

The hedge that carries positively but delivers convex returns during a market panic is about as elusive as our lawmakers coming together in bipartisan fashion. As head of option strategies at AQR, Roni Israelov not only confirmed this but saw in the empirical data distinctly unpromising results for hedging strategies that utilized put options.Trained with a PhD in Financial Economics from Carnegie Mellon, Roni has spent his career researching complex topics in markets. We explore his paper “Pathetic Protection” and the challenges that arise from paying option premium to reduce risk. Roni sites the path dependency of options as introducing sometimes significant variability in the effectiveness of a program. He also sites the equity risk premium and the vol risk premium as headwinds for success.Our conversation shifts to another interesting topic, “rebalance timing luck”, work that Roni has done in collaboration with Newfound Research. The finding - that the performance of mechanically rebalanced strategies – can rest heavily on the date of rebalance, is especially the case for option strategies like the giant put spread collar on the SPX that is rolled each quarter.Roni is now the President and CIO of NDVR, a firm providing optimized portfolio solutions to individuals, using academic research, technology and tax efficiency. I hope you enjoy this episode of the Alpha Exchange, my conversation with Roni Israelov.

Welcome to a special edition of the Alpha Exchange, one in which your host and guest are one and the same. Above all, our conversations on this podcast are aimed at helping you think about risk. After all, it was the Spanish philosopher George Santayana who famously said, “those who forget history are doomed to repeat it.”This podcast has three parts. First, an update on a project I’ve been working on, MacroMinds. I created this foundation back in 2019 to raise funding for causes in the NY area focused on student education. Our “business model” is simple – host a once a year, highly differentiated symposium featuring industry leaders who share their insights on the remarkably complex world of investing. On June 7th in NYC, we are doing just that, and I could not be more excited about our incredible agenda.Second, I review a couple of prices in the world of optionality and what they mean in the context of today’s risk dynamics. Specifically, I discuss the fast widening level of CDS written on the US as the reference asset. In the context of the unfolding debt ceiling drama, this instrument is worth keeping an eye on. Next, I review the change in the volatility surface on gold, specifically the emerging bid to upside calls.Lastly, I review some work I did a number of years ago, which I call, simply, “Ten Handy Facts on Vol”. These are characteristics of the behavior of volatility in asset prices and the options that are written on them. I hope you find some value in this exercise and I thank you for listening.

What has experience taught us about consequential market risk events? First, volatility in asset prices can materialize when a strongly held consensus view is shattered. Presented with “new news” – about defaults, about inflation, about earnings – investors may be forced to shed exposures, right-sizing their risk allocations to this new state of the world. Market vol episodes can be especially protracted when the attendant uncertainties do not fit neatly into an Excel spreadsheet.Here, the US debt ceiling checks the boxes. And against the backdrop of an emerging standoff, it was a pleasure to welcome Libby Cantrill, the Head of Public Policy at PIMCO, to the Alpha Exchange. Our discussion explores the sometimes chaotic intersection of politics and markets and the way in which her work is utilized by risk takers at PIMCO. We spend the bulk of our conversation on the debt ceiling and here Libby lays out how the 2023 version has important differences from the 2011 version, specifically in the degree of leverage that the Republicans had then versus now. While of the view that a default is avoided, she sees it as a last minute agreement almost by necessity and with that some market disruption may occur.We finish with a discussion on where 150 million Americans are spending their time, TikTok. Libby helps frame this out in the broader context of the intensifying geostrategic rivalry between the US and China. Noting that “tough on China” has become a bipartisan view, and with the recent spy balloon incident in mind, she sees more catalysts for decoupling on the way, further tension and the potential spillover into the market.I hope you enjoy this episode of the Alpha Exchange, my conversation with Libby Cantrill.

25 years post the chaotic unwind of Long Term Capital Management, there are lessons a plenty to be gleaned from this event. With this in mind, it was a pleasure to welcome acclaimed writer Roger Lowenstein, author of the famous book “When Genius Failed”, to the Alpha Exchange. His work is a compelling chronical of the vast success but ultimate failure of this storied hedge fund.We discuss some of the philosophical underpinnings of the firm’s risk management framework, focusing on the influence of Nobel Prize winners Myron Scholes and Robert Merton. We review some of LTCMs favorite trades and how in reality they were far less diversified than they appeared. And we discuss the rescue, a messy episode involving banks, the Fed and Warren Buffet, kind of.I hope you enjoy this episode of the Alpha Exchange, my conversation with Roger Lowenstein.

Welcome to the Alpha Exchange Q1 2023 Review, in which we assess some of the trends in market risk that have recently been important. We discuss gold, the performance of VIX ETP strategies and the return of traditional risk on/risk off. We also spend time dissecting changes in the shape of the S&P 500 Index volatility skew and commenting on that well known put spread collar. We finish with some information on the MacroMinds Investment Symposium, an event taking place on June 7th in New York City that raises critical funding for education focused charitable organizations.  Thank you for listening.

I like to say that you learn the most in markets by studying the periods when things go horribly wrong. And in this spirit, Alpha Exchange guests are often asked to reflect back on risk events of great consequence. 2023 marks the 25th anniversary of the LTCM fiasco, an event too long ago to matter for anyone under the age of 40, even as there are valuable lessons to be had from this giant portfolio unwind. As we look back on this vol event from 1998, it was a pleasure to welcome Nicholas Dunbar, author of “Inventing Money: The Story of Long Term Capital”, to the podcast. With a background in math and physics and with a long stint at Risk Magazine, Nick was well equipped to explain how the effort to conquer markets through the science of derivatives ultimately failed. Along the way, he provides a brief history of how option theory has developed, brings to life key players in the story and dives in to technical details of LTCM’s trades. We learn about the dangers of models, leverage, hubris and crowding all at once.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Nick Dunbar.

There are lies, damn lies and statistics as the saying goes, and about the latter, Adam Parker knows a thing or two. Armed with a Phd in stats, he began his Wall Street career as a semi’s analyst at Sanford Bernstein in 1999. Reflecting back on the deep dive research the firm was known for, he notes that today’s rapid fire information environment requires especially efficient communication to clients.We look backward to gather some insights on how Adam’s framework and process came to be. Markets teach lessons and for Adam, it is the recovery periods – March 2009 and March 2020,  for example – that illustrated the need to look past headline negativity and embrace risk when it was difficult to do so. He shares as well the challenges inherent in determining if change – in margins, in profits and stock price, for example – is structural versus cyclical.We shift to Adam’s founding of Trivariate Research, a firm providing top down investment strategy to institutional clients. First, we review some of chaos that ensued 3 years back during the pandemic and learn of some of the factor work that isolated work from home versus re-opening, a theme further distilled by adding a high and low quality factor to each. Next we talk about crowding, an area of focus at Trivariate. Here the team collects data on ownership among a prominent group of stock pickers, aimed at identifying both conviction as well as bad crowding.We round out the conversation by further exploring crowding, but in the context of hidden, overlapping factors. Here Adam talks about his work in the area of signal correlation and how factor sensitivities of sets of stocks can vary substantially over time. The result is a “handle with care” approach to interpreting model outputs. I hope you enjoy this episode of the Alpha Exchange, my conversation with Adam Parker.