Danny Dayan has spent more than 2 decades in markets, developing a top-down process that seeks to find opportunity in derivatives markets. In his search for value in option trades, he marries a study of the macro landscape – including the economic backdrop, the evolution of inflation and the Central Bank reaction function to incoming data – with expertise in understanding how to implement and risk manage a derivatives portfolio. With experience across the major asset classes, but a long history in rate derivatives markets, Danny shares his perspective on the fascinating world of pricing in the US Government bond market and the giant options complex built around it.
We start by reviewing the launch of the hedge fund he founded, DWD Partners, in late 2020, a time of epically low rates and skinny option prices. We walk through key developments, including the expiration of the Fed SLR in 2021 that ultimately played a role in the implosion of SVB and an explosion of the MOVE index, which nearly reached 200 in March of 2023. We spend the bulk of the discussion on how Danny sizes up present-day prices and risks. Here, he sees the market priced for substantially more cuts than will materialize. In this context he outlines options trade to do in short-dated rates that both generate and require option premium. We talk as well about the back-end of the yield curve and the explosion of government debt. Here, he argues that the term premium for taking duration risk is insufficient. Lastly, he advocates for FX option trades, highlighting the potential that both the Euro and Canadian dollar decline as their respective Central Banks ease policy at a faster rate than currently anticipated relative to the Fed.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Danny Dayan.