Mandy Xu, Head of Derivatives Market Intelligence, Cboe Global Markets

[00:00:00] Hello, this is Dean Curnutt and welcome to the Alpha Exchange where we explore topics

[00:00:07] in financial markets associated with managing risk, generating return, and the deployment

[00:00:12] of capital in the alternative investment industry.

[00:00:20] After a 13-year career at CSFB where she would ultimately head the firm's equity derivatives

[00:00:25] strategy effort, in 2023 Mandy Zoo moved to the CBOE where she's now head of derivatives

[00:00:31] market intelligence and swimming in interesting complex data sets.

[00:00:36] Our conversation surveys product innovation, going back to the first option trade ever on

[00:00:41] the CBOE, call options on July 1973 Xerox through today's vastly electronified ecosystem of trading

[00:00:49] and cross-asset risk exposures.

[00:00:51] We briefly review the unbelievable short squeeze in GME from 2021 and here Mandy asserts that

[00:00:57] today's exposures are considerably more balanced than the meme episode in which the retail stampede

[00:01:03] engorged on call option premium.

[00:01:06] Our discussion moves to the present day backdrop for option pricing and the potential impact

[00:01:11] of mechanical flows resulting from vol being bought and sold in the market.

[00:01:15] Noting the substantial increase in AUM for overriding and option income generating

[00:01:20] funds in both the mutual fund and ETF complex, Mandy is skeptical that this growth is solely

[00:01:25] responsible for the low clearing price of measures like the VIX and PUTSQ.

[00:01:30] Instead she points to low risk readings in other asset classes including credit implied

[00:01:35] vol as more likely driven by stable macro fundamentals.

[00:01:39] We spend the remainder of the conversation on the much debated topic of Xero DTE

[00:01:44] and whether there's an accident waiting to happen.

[00:01:46] In Mandy's role at the SIBO, she sees option flow with great granularity and in the ultra

[00:01:51] short dated category she sees considerable balance in use cases across hedgers, income

[00:01:57] generators and intraday traders.

[00:02:00] The result is a healthy mix of buyers and sellers and at least for now a low risk

[00:02:05] of volmagedon 2.0.

[00:02:07] I hope you enjoyed this episode of the Alpha Exchange, my conversation with Mandy

[00:02:11] Zoo.

[00:02:13] My guest today on the Alpha Exchange is Mandy Zoo.

[00:02:16] She is the head of derivatives market intelligence at the CBOE.

[00:02:21] Mandy it's great to reconnect and it's a pleasure to have you as a guest on the podcast

[00:02:25] today.

[00:02:26] Thanks Dean, yeah it's definitely my pleasure to be here today.

[00:02:29] Well I just love your title, head of derivatives market intelligence and as someone who's

[00:02:34] been in the derivative side of things for quite some time now I think that there

[00:02:39] is a lot of intelligence to be derived from evaluating this just broad array of market

[00:02:46] prices that the derivatives markets provide us as food for thought.

[00:02:50] So we'll have a lot to chat about in your role.

[00:02:53] Let's get our conversation going and just briefly tell us a little bit about your career

[00:02:58] history.

[00:02:59] Obviously you spent a lot of time at CSFB before moving to the SIBO but just give

[00:03:04] us a little bit of flavor for your background how you got started in the industry and

[00:03:08] then we'll talk about your role at the CBOE.

[00:03:10] Yeah sure, so I joined SIBO last summer after a 13 year career at Credit Swiss where I started

[00:03:18] out as a first year analyst on the derivatives desk post global financial crisis.

[00:03:23] I've always been on the equity derivatives desk as a strategist and my role kind of

[00:03:29] evolved from being a first year analyst running a lot of the analysis to running

[00:03:33] the group and really carving a niche for myself in terms of becoming an expert in terms

[00:03:39] of index volatility ETF and macro volatility.

[00:03:43] So that's a lot of what I did at Credit Swiss running market commentary for the desk and coming

[00:03:49] up with trade ideas for the major institutional clients of the bank.

[00:03:53] And then early last year I was kind of looking for career change and SIBO was actually

[00:03:57] a really smooth and easy and almost obvious in hindsight next step for me in the sense

[00:04:03] that it allowed me to build on a lot of the experience expertise that I had already garnered

[00:04:09] on the sell side in terms of derivatives experience and obviously SIBO being exchanged

[00:04:13] for all SPX and VIX options was like the perfect kind of next step for equity derivative

[00:04:19] strategist but in my current role and what actually really exciting is not only just

[00:04:23] getting to do a lot of what I used to do which is market commentary and analysis but

[00:04:27] also playing a role in helping develop new products bringing new products to the exchange

[00:04:33] to the market speaking to clients about what are some of the gaps in their portfolio and

[00:04:38] how SIBO can play a role in filling that gap.

[00:04:41] So that's been really exciting and as I said I've been in this role for almost

[00:04:45] a year now and it's been going great.

[00:04:48] We're going to talk a lot about the product side of things and of course the SIBO

[00:04:53] last year celebrated its 50th anniversary so the first listed options were traded in 1973

[00:05:01] and along the way there's been lots and lots of financial innovation and the VIX is a centerpiece

[00:05:08] of that.

[00:05:09] During your time at CSFB there was the T-VIX which for a period of time got really dislocated

[00:05:16] from its net asset value.

[00:05:18] And of course we had some pretty spectacular blowups of ETNs that were based in some way,

[00:05:25] shape or form on the VIX.

[00:05:27] Just give us a little bit of perspective as you think back on your career at CSFB and

[00:05:33] the development of some of these products that are centered around the VIX.

[00:05:37] I'd love to just hear you talk out loud as you sort of think back on these low

[00:05:41] vol events or low vol periods, these spectacular right tail events on vol.

[00:05:48] What's on your mind with respect to the VIX and just the history of the VIX?

[00:05:52] Yeah, sure.

[00:05:53] I mean it's a great point when you brought up the 50th year anniversary of listed options

[00:05:59] last year SIBO and actually this past week coincidentally was the 20th anniversary

[00:06:05] of VIX futures being launched right so that was exactly 20 years ago so I think the

[00:06:09] space has certainly come a very long way and I think what's great about the VIX

[00:06:15] and what's great about a lot of the products we launched around the VIX is it has made

[00:06:19] volatility very accessible to a lot of investors.

[00:06:23] I think 20 years ago for someone to trade volatility, it was a much more complex trade.

[00:06:30] It was maybe not so accessible whereas now you want to take a view on where the VIX

[00:06:34] is going to go.

[00:06:35] There's VIX futures, there's VIX options.

[00:06:36] Obviously you can still trade SPX options to also get a view around VIX and along

[00:06:41] the way in these 20 years you pointed out a lot of product innovations that have happened

[00:06:45] on the back of the volume that we've seen in VIX futures and VIX options.

[00:06:49] Here, where I sit, I'm really excited to see where the next stage of this iteration

[00:06:54] goes.

[00:06:55] What other products or what other risks can we make more accessible and transparent

[00:06:58] for investors to take a view on to be able to trade?

[00:07:02] I know we'll get into it a little bit later in the call but dispersion to me

[00:07:06] is kind of the natural next step where almost parallel to the VIX in the sense that VIX

[00:07:11] index made volatility, the benchmark for a lot of investors.

[00:07:15] People want to know it every day what does the SPX do?

[00:07:17] What did VIX do?

[00:07:19] Our goal hopefully with dispersion and the SPX index is to make that also a center

[00:07:24] point in a lot of conversations to really help understand what's going on in the market

[00:07:28] not just at the index level but also underneath the index surface with single stock.

[00:07:33] That's kind of the next iteration but here at SIBO, we have a whole labs team that is

[00:07:37] dedicated to product innovation speaking to customers to figure out what are

[00:07:42] like I mentioned gaps in the portfolio, what are some risks that maybe they're

[00:07:45] trading over the counter that's become a liquid that we could bring to the listed

[00:07:49] exchange and make it more liquid, make it more transparent and really increase

[00:07:53] the pool of investors who are interested and active in that space.

[00:07:58] Yeah, you mentioned the SIBO's work on dispersion indices and definitely something I

[00:08:03] want to cover in this conversation. We live in this time of just extraordinary low

[00:08:09] realized correlation and of course implied correlation as well so that's definitely

[00:08:13] something I'm going to circle back to. I wanted to just read something that is from a New

[00:08:18] York Times article from April 26th of 1973. This was the announcement of the idea of

[00:08:26] trading listed options so they were just call options and the article says trading in 16

[00:08:31] issues began this morning AT&T, Xerox, Kodak, McDonald's and a dozen others. Trading does

[00:08:38] not involve dealings and actual securities but rather in the rights to buy them in blocks of

[00:08:42] 100 shares. Then it says the first trade to cross the CBOE tape was an option for July Xerox

[00:08:49] and so it goes through some of the actual prices that cleared so I looked at it on a

[00:08:54] backward basis and I calculated that it was about 32 vol, the first trade. Anyway, quite a ways ago

[00:09:01] and of course over those ensuing 50 years, volumes have grown, products have been created,

[00:09:10] the exchange is so vastly electronified we now deal in these micro-expirations which is just

[00:09:17] a fascinating development and something that we're going to cover. I would love for you to

[00:09:22] just tell us a little bit more about this transition from CS to CBOE because the role of a

[00:09:28] derivative strategist at a large bank is to be thoughtful on ideas, field requests from clients,

[00:09:36] engage clients on trade construction, your meeting with hedge funds and insurance companies

[00:09:43] and the like. I can imagine there's at least some notable differences in your role now just

[00:09:48] given that the CBOE is not a big bank, it's an exchange. Tell us a little bit about the transition

[00:09:53] and how some of the duties are the same and how some are different. Yeah, sure. You mentioned it

[00:10:00] in terms of helping clients come up with trades and portfolio construction, I would say that is

[00:10:04] a big difference in that being an exchange obviously we're not an investment advisor,

[00:10:08] we do not give investment advice so whereas you still give up a lot of trade ideas that

[00:10:13] is something that I'm less focused on in my current role so that's one big difference but

[00:10:17] I would say some other big differences is that this is something I didn't really fully appreciate

[00:10:21] until I moved over is that when you're on the sell side where your clients are the buy side

[00:10:25] institutional investors whether they be hedge funds, pensions, asset managers, insurance or in

[00:10:30] the case of CS a very large private bank client and that's great. That's a very broad ecosystem

[00:10:36] of buy side investors but when you move over to the exchange you realize that's still only

[00:10:40] one part of the ecosystem. The exchange really touches everyone so in my current role I talk

[00:10:46] not only to the same buy side clients that I used to talk to when I was at Credit Suits but I talk

[00:10:51] to the rest of the sell side banks, I talk to the market makers, I talk to retail customers and

[00:10:57] retail brokerage firms, I talk to index providers so S&P, FTSE Russell, MSCI you really I think

[00:11:04] get an appreciation of just how big the ecosystem really is and the different investor

[00:11:09] types and the different parts of the ecosystem so that I would say has been really the

[00:11:14] biggest change and the most pleasant surprise to me because in some ways I knew that but really

[00:11:19] it was kind of moving to the SIBO and especially I think coming at this particular in time with

[00:11:24] the rise of the eluded to the zero day options trading and a lot of it being electronic and

[00:11:30] the increase in retail participation in the options market that we've seen particularly

[00:11:35] index options over the past two years it's really come at kind of the right time or the

[00:11:39] perfect time for me at least. When you mentioned technology I was on a long flight a couple of

[00:11:46] days ago and one of the movie choices was Dumb Money so it's the GME story and I think the movie

[00:11:53] was actually reasonably well done and what a fantastic learning experience just around

[00:11:59] the behavior of markets on crowding and I think a lesson on just the dangers of volatility

[00:12:07] from the short side I mean vol can be dangerous owning it too at the wrong price at least reflect

[00:12:13] on that period. I assume you were still at Credit Swiss during the meme stock episode right? Jan 2021?

[00:12:21] Yeah I think the pain for a lot of the investors I spoke to was really concentrated on the hedge

[00:12:27] fund side particularly the equity long short hedge funds that were maybe on the other side

[00:12:32] of a lot of the let's say retail squeezes that we saw in those names but it's interesting because

[00:12:38] we saw some very extreme dislocations in the volatility market back then at the single stock

[00:12:43] level right and it was obviously most concentrated in the super small cap stocks like GameStop AMC

[00:12:49] etc. Hertz I remember with another big name but really it spilled over that euphoria the

[00:12:55] thinking that the stocks only go up right? That spilled over into the options market for

[00:13:00] wide swath of stocks so one metric that I used to track was what percent of the stocks in the S&P

[00:13:06] Top 100 had inverted skew or inverted call skew where your out-of-the-money call option

[00:13:13] were trading at a premium to be at the money which again is historically very atypical you

[00:13:19] may see it sometimes for certain names going to earnings or an advance of a catalyst like a

[00:13:24] biotech name ahead of FDA announcement but generally speaking it's very atypical I think

[00:13:29] the 10-year average prior to that period was like 6% of stocks that any given time in the S&P

[00:13:35] Top 100 had that characteristic in 2021 that percentage hit 50% so that was a pretty incredible

[00:13:44] period in the derivatives market but if I want to tie it back to what we're seeing in the

[00:13:48] market right now because every time I talk about retail adoption or retail usage of options

[00:13:53] of index options a lot of people automatically I think assume that this is just an extension

[00:13:59] of that same kind of mean stock FOMO era that we saw back in 2021 that's just migrated from single

[00:14:06] stocks now to index options with the zero DTE but really it could not be more different right and

[00:14:12] you can see it for example in the put call ratio back then you know the put call ratio got

[00:14:16] extremely distorted for single stocks it was like I think two and a half three times

[00:14:21] the number of calls traded for every put it got to the most dislocated or most extreme level since

[00:14:27] the tech bubble so like a 20 year extreme if you look at SPX zero day option zero put call ratio

[00:14:34] it's been pretty balanced at one to one this entire time for the past two years during the rise of

[00:14:39] zero DTE trading so that's something I want to emphasize that at least the retail activity

[00:14:44] that we see on the index option side with zero DTE is very different from kind of that FOMO driven

[00:14:51] frothy market that we saw in 2021 at least for option in terms of the volume that we see in

[00:14:56] terms of the impact on the wall surface that we see. This is such a fascinating period that was

[00:15:02] and so now things are I would say more normal than not but I'd love for you to frame out

[00:15:08] what you see just in the broad landscape of prices options centric prices whether it's

[00:15:14] a cross asset you did mention term structure perhaps skew give us the broad mosaic that you're

[00:15:21] looking at and then we can kind of drill down into some of the specifics. Sure I mean in terms of

[00:15:26] themes and equity of all and really volatility in general I mean what's on everyone's mind is just

[00:15:31] how low it is right that's been consistently the number one in down question I've gotten over

[00:15:36] the past couple months is why is it so low is it low because potentially being distorted by

[00:15:41] other factors I think a lot of people have cited the growth in option income funds as a potential

[00:15:47] driver personally I'm not so convinced and I'm happy to dig into why that is but I would say

[00:15:52] low ball as a theme has been very prominent a lot of people's mind and it's been very

[00:15:57] surprising because I think coming into the year last year everyone thought we're expected

[00:16:02] volatility to remain elevated in a similar range that we saw in 2022 let's say in the

[00:16:07] low to mid 20s was kind of the consensus expectation and instead we got you know Vix in the mid-teens and

[00:16:13] this year to start year I think Vix in the low teens right so that's been very surprising

[00:16:18] underlying that has been the continued flatness in skew so in layman's term just the lack of

[00:16:24] demand for protection that we're seeing in fpx and index options in general this has been a

[00:16:29] trend gone on for almost two years at this point different drivers I would say that this

[00:16:34] past year versus what we saw in 2022 but certainly the low levels of index skew has been very prominent

[00:16:41] for a lot of people a lot of questions around when if ever it will normalize and it will normalize at

[00:16:47] some point but what are some of the catalysts that could potentially drive a normalization in skew

[00:16:51] and then the other one that which we touched upon already which is dispersion and correlation

[00:16:56] and how extreme both have gotten over the past years so people talk about low Vix and

[00:17:01] low index vol but correlation even more extreme right like fmp implied correlation at least for

[00:17:08] longer dated tenors is lower today than it was in 2017 when Vix was at nine so we talked about

[00:17:14] why that is the continued high sector rotation that we continue to see stock selection being

[00:17:19] very important in this market but those I would say some of the broad themes that's been very

[00:17:24] top of mind for a lot of investors then you've also talked about depressed levels of

[00:17:29] other asset class vols I think you've mentioned fx and maybe rates is a little bit different but

[00:17:36] even that one's coming down as well right so that's mostly to make the point again like when

[00:17:41] something unexpected or surprising happens in the market I think people's first instinctal oftentimes

[00:17:47] people start blaming on technical factors right I remember used to be market sells off because

[00:17:51] of risk parity rebalancing market sells off because of low control funds rebalancing or

[00:17:56] cta momentum funds last year anytime the market sold off with zero dte options driving it and

[00:18:02] recently it's been vixas low because of option income funds and the point about low vol across

[00:18:08] asset classes is really to say that in my view the main driver of low volatility has to be

[00:18:14] macro fundamental because of the fact that we see it across all asset classes right so yeah

[00:18:19] rates of all is still relatively elevated we can talk about why that is but even there

[00:18:23] it's coming significantly over the past year rate fall currently is round to the lowest of this

[00:18:28] hiking cycle this with this recent cycle and then every other asset class fx vol credit vol

[00:18:34] commodity volatility for all below average credit vol in fact if you look at vixig which tracks the

[00:18:40] implied volatility of cdx investment grade index that's at a 10-year low currently so to me it's

[00:18:47] really a reflection of the fact that the macro economic outlook has changed so materially has

[00:18:53] changed so drastically over the past year you know we've gone from everyone expecting a recession

[00:18:59] talking about how there's no way that that could land the plane could really bring down inflation

[00:19:04] without causing a recession to now south landing is a consensus and we're talking about even

[00:19:08] potentially no landing when the economy just picks right back up so i think that to me is

[00:19:14] the number one drive the main driver of low volatility and of course you can then layer

[00:19:19] on like additional reasons why equity volatility so low we talked about few in correlation and things

[00:19:24] like that but those are just marginal i think drivers of a low volatility at the core i

[00:19:30] think it's really reflection of the improvement in the macro outlook one of the things i personally

[00:19:35] think the cibo does quite well is develop these indices and whether they're tradable or not like

[00:19:41] the vixx has become incredibly tradable they are a source of rich information around trading

[00:19:49] strategies around the price of risk around the different alternatives in terms of what you're

[00:19:54] trying to accomplish i've seen put hedging indices you've got an iron condor index the vixx right the

[00:20:02] vol of vol so you referenced the vixx hy and then there's the vixx ig it'd be great if you could just

[00:20:11] maybe frame out the concept behind let's just say vixx hy i just looked at it and

[00:20:16] at least on a recent basis it's actually even lower relative to the vixx than it normally is

[00:20:22] and so it's just interesting as you say that credit vol is super low as well so what are you

[00:20:28] measuring there in vixx hy yeah sure so vixx ig and vixx hy are two indices we launched last year

[00:20:37] and it's actually two of a broader suite of credit vol indices so there's also the equivalent

[00:20:42] for the european credit but vixx ig essentially measures one month in plie volatility for the cdx

[00:20:50] investment grade index and vixx hy yield measures the one month in plie volatility for the cdx hy yield

[00:20:57] index and it's using the same methodology as the vixx index which everyone kind of is familiar

[00:21:03] with or knows and trust and we're bringing it to the credit market and we're working closely

[00:21:07] with x and p dal jones which owns eye track or market that aggregates all of the cdx prices

[00:21:14] from the various different dealers so we take an end of the day snapshot of the traded prices

[00:21:20] across a wide range of strikes for the various credit index options and using the same methodology

[00:21:27] as the vixx we derive a number that's really meant to give you expectation a forward-looking

[00:21:32] expectation of how much the underlying index is expected to move so a couple of kind of basic

[00:21:37] things to know is that the indices are quoted in bits vol so normal vol so if you look at for

[00:21:43] example vixx hy right now i'm pulling it up on my screens it's currently around 118 so that's

[00:21:50] basically an expectation that the underlying index cdx hy yield is going to move 118 basis

[00:21:55] point up or down an annualized term in the next 30 days so that's very similar to how vixx

[00:22:02] measures how much of the f and p is expected to move on an annualized basis for the next 30 days

[00:22:06] it's the same methodology applied to the credit space and to your point yes credit volatility is

[00:22:11] extremely low and i think again i bring it to the point that the change in the economic outlook

[00:22:16] and how consensus soft landing has become you really see it in the credit market in terms of

[00:22:21] vixx ig and the tie yield being at in the case of ig at a 10-year low and in the case of vixx hy yield

[00:22:28] it's at a multi-year low so just running with this concept of data and indices created around complex

[00:22:37] data and the window that you now have to look at these types of innovations in creating these

[00:22:43] indices share with us anything else that you've seen that has been especially interesting to

[00:22:48] you in your new role with respect to data sets that the cbo is generating oh sure so i did not

[00:22:55] appreciate and really moved to the cbo just how much data as an exchange and you really have

[00:23:02] and i think it's becoming more and more in demand or sought after by customers by clients

[00:23:07] because of the rise in electronic trading the rise in zero-day trading where a lot of the

[00:23:13] volume is not going through high touch desks but rather through the pipes and therefore third party

[00:23:18] observers have very little visibility into the flow so to really truly understand zero dke flow

[00:23:24] you have to basically use our data sets right so our data set the open close data set which has been

[00:23:30] by far the most popular one over the past few years looks at all the volume on our c1 exchange

[00:23:36] which is the exchange where all spx and all next options are traded so there's been a lot

[00:23:42] of interest from customers in terms of purchasing the data set looking at the data set and

[00:23:46] devising trading strategies or just to getting better understanding of zero gte trends and zero

[00:23:52] dpe flow because of fact that a it's now 40 to 50 percent of all spx option volume and the fact

[00:23:58] that again outside observers have very little visibility in that so on every client meeting

[00:24:04] that i've been to in the past year or eight months that's been a topic that people bring up

[00:24:09] over and over again it's just the appetite for data and more data better data more frequent

[00:24:14] data in order to better divide strategies and then to better understand what's going on in the market

[00:24:21] but we'll talk a lot about zero dte and maybe as a preview to that we can talk about vix one day

[00:24:28] the vi x1d i think it's an interesting index i've certainly gotten some value out of it

[00:24:34] noted just how much premium there was in the one-day vix ahead of three big data releases

[00:24:41] especially in 2022 was nfp cpi and fomc days there was just a huge premium going into those days on

[00:24:49] one day vol as reflected in the vix and you'd get your move it was almost like an earnings day you'd

[00:24:54] get your move and then the index premium would get sucked out of it because the move was over

[00:25:00] so the market kind of had to learn its lesson on overpaying for these ultra short dated options

[00:25:06] as the fed cycle matured and there was just less oomph i suppose i should say in terms of the markets

[00:25:13] move in response to the data yeah no that's a trend if you look at 2022 versus 2023 certainly i would say

[00:25:19] the event risk premium in 2022 was a lot larger than it was in 2023 right and in terms of those

[00:25:26] subsequent realized moves that gap there's just a lot more of that premium to be harvested

[00:25:32] in 2022 when there was just a lot more uncertainty around inflation and what just exactly how high it

[00:25:37] was going to go whereas last year by and large the narrative had shifted to inflation it's falling

[00:25:43] the question is just how quickly so i think that kind of helps to explain some of that

[00:25:47] their friends in the event risk premium but bringing it back to vix one-day index yeah i think

[00:25:52] you're absolutely right there's definitely value to be had from the index i think a lot of people

[00:25:56] look at the intraday action of the index and say well it doesn't make sense that it would

[00:26:01] continually go up during the day and that's really because of the fact that we were trying to

[00:26:06] give a constant if you will 24 hour measure of volatility so as the day goes on it starts to use

[00:26:12] both options that expire the same day as well as the next day and i kind of interpolating between

[00:26:17] the two to give you that constant 24 hour measure of volatility so that kind of explains

[00:26:22] some of the intraday quirks for the way that i use them most often is if you look at the opening

[00:26:27] print of vix one day that is entirely comprised of options that expire that same day right so that's

[00:26:33] a really good way to kind of get a sense of how much implied volatility is in the zero day options

[00:26:39] and then you can obviously then compare it to the subsequent realized moves and try to figure

[00:26:43] out that zero dpe you know walrus premium that is currently in the market well i mentioned the

[00:26:49] first trades ever and call options from 1973 on xerox and back then it would be pretty hard

[00:26:55] to argue that the overlay of things like gamma and vega exposure in the market was impacting the

[00:27:03] market but today it's probably a different story and it gets a lot of debate there's of course very

[00:27:09] good logic for trying to understand mechanical flows whether they're hedging flows that are forced

[00:27:16] by the existence of gamma profiles in the market or mark to market risk those sorts of things

[00:27:23] you get a lot of attention as they should they can be also very difficult to truly pinpoint but

[00:27:29] look you've been at this a long time you've seen these super low vol periods you experience the

[00:27:34] xiv blow up of course as a strategist so maybe as we get this part of the conversation on zero

[00:27:41] dte underway tell us just about your framework for thinking about the existence of trades in

[00:27:48] the market how much attention do we have to pay to the flows and the hedging behavior frame that out

[00:27:55] for us yeah sure i mean you bring up a good point that like the interesting gamma profile and vega

[00:28:00] profile all of that i think before coming to see though at least on the sell side i was always a

[00:28:04] little skeptical of any kind of analysis around that only because again what determines true

[00:28:10] gamma positioning or the risk you really have to get a good sense of the actual breakdown

[00:28:16] of the flow right and a lot of times when people talk about sell side like dealers are short or long

[00:28:21] x amount of gamma it's based on estimates because all the data that we see right the open interest

[00:28:27] data and you don't really know where the volume data but you don't know how much of it is buy

[00:28:30] versus sell so i was always a little skeptical to be honest of any kind of those gamma analysis

[00:28:36] around option expiration not to say that can't be an impactful it's just that it's hard to

[00:28:41] know because at any given sell side bank you know we only see part of the flows i remember

[00:28:46] i used to run this analysis looking at the flows that the credit suites would see and then say you

[00:28:51] know if we extrapolate that for the broader market this is kind of maybe what we would estimate

[00:28:56] other people you know i've seen take very extreme estimates and i think wildly unrealistic where

[00:29:01] they assume a hundred percent of the puts are bought a hundred percent of the calls are sold

[00:29:05] and therefore you get these large gamma numbers and obviously make headlines but clearly not

[00:29:10] reflective of the flow that we see in the market now the difference i would say coming to the cibo

[00:29:15] as i mentioned is now actually to the cibo i do see the positioning right because all spx options

[00:29:21] trade through the cibo so i can see for every trade whether something is opening closing

[00:29:26] buy versus sell whether it's market maker or customer and this is part of that open closed

[00:29:31] data set that i mentioned that that is being so highly sought after because once you have that

[00:29:35] data you can really actually build a pretty accurate sense of the positioning in the broader spx

[00:29:41] market but particularly in zero day which is i think what a lot of the focus around gamma positioning

[00:29:45] that centered around it's the ultra short data to space so once you have a clear understanding

[00:29:51] of the positioning it's not making assumptions like i assume this contract was bought i assumed

[00:29:56] this was sold i can actually see whether it's bought or sold and by who so then you can

[00:30:01] actually build i think a realistic accurate picture of the gamma positioning and that's

[00:30:06] what i think it's useful it's when the gamma positioning is based on a lot of assumptions

[00:30:11] and estimates when you don't see the flow or you don't see the entirety of the flow then you can

[00:30:16] really start to question it but for spx then at least at cibo because all spx options again

[00:30:21] trade on cibo we see 100 percent of the flow we don't need to make assumptions about what

[00:30:26] a portion of the flow looks like as we see it all that's where the value of talking to the

[00:30:30] exchange and the value of being that exchange really comes in is the information that you can

[00:30:34] provide to customers well give us a mapping of those flows you've got speculators taking a shot

[00:30:41] who look at one-day options and say gosh that premium is real low perhaps not appreciating the

[00:30:47] severity of the time decay that they'll undergo you've got the income funds which i

[00:30:52] definitely want to talk about this proliferation of mutual funds selling all options sometimes

[00:30:57] is selling put options and sometimes they're extremely extremely short dated there's been

[00:31:01] a lot of growth there you might have hedgers and then of course you've got the vol community at

[00:31:06] large who's responsible for making prices and risk managing these exposures how should we think

[00:31:12] about the landscape of participants in the short dated market yeah sure i think you've given us

[00:31:17] a really good preview so what stands out to me is that it's really a balanced mix of all of

[00:31:23] the various use cases you mentioned and also investors so we see a pretty good mix of both

[00:31:28] retail and institutional and in terms of your use cases why people are trading it a lot of

[00:31:33] people do it for hedging purposes whether it's intraday hedging then risk hedging overnight

[00:31:37] risk hedging we see people use it for income that's been very popular and a lot of people

[00:31:42] looking at using these options for intraday momentum and reversal right a really easy way

[00:31:48] to play intraday moves with incredible leverage in the market so when you break it all down what we

[00:31:54] see is about half of the flow is in complex orders and that's largely again people selling the spreads

[00:32:02] for income so selling put spreads call spreads iron condors various iterations of those so

[00:32:08] that's a good big part of the market and then other half is in single leg orders

[00:32:12] that i would say are mostly for directional leverage or for hedging or sometimes the single leg orders

[00:32:18] i would say tied to the complex in the sense that people who sell these complex spreads often will

[00:32:23] manage position manage that spread throughout the day as the market moves so a lot of single leg

[00:32:27] orders i would say is also tied to the complex order volume but what we see is a pretty good

[00:32:33] mix of all the different various use cases i already mentioned in terms of put call ratio it's

[00:32:38] extremely balanced at one to one and has been that way this entire time and that's very unusual for

[00:32:45] index options right if you look at non zero day option flow it's much more tilted towards put

[00:32:51] because primarily people typically historically use index options for hedging purposes so for non zero

[00:32:57] dte flow it's i would say much more tilted towards hedging but for zero dte flow it's very

[00:33:03] balanced between puts versus calls and it's very balanced across strikes between buys versus

[00:33:08] sells and this is really i think the crux of it because a lot of times when people talk about

[00:33:14] the risk with zero dte trading the gamma risk the market impact risk they focus on the

[00:33:20] notional volume and the point that i've been trying to hammer home for the past year

[00:33:24] is that high volume doesn't equal high risk just because 100 000 contracts trade on a particular

[00:33:30] line doesn't mean that market makers are on the other side of that 100 000 and have to buy or sell

[00:33:36] if for example that 100 000 contract is 50 k customers buying 50 k customer selling then

[00:33:42] actually there's nothing at the end of the day for market makers to hedge on the other side of

[00:33:47] the flow because it's perfectly balanced so really what matters for market impact is a breakdown

[00:33:52] of that flow between buys versus sells and that's something that feebo we can see we can

[00:33:56] observe and when we run the analysis we find it on average again it's extremely balanced throughout

[00:34:03] the day on average we're talking about gamma and balances like hundreds of millions which in the

[00:34:08] context of overall s and p liquidity and s and p many futures liquidity we're talking about like

[00:34:13] 0.1 percent of the adb right so in terms of the net risk it's de minimis because of how

[00:34:20] balanced it is now could that change going forward perhaps but so far at least we track this

[00:34:26] constantly it hasn't really shown signs of changing in terms of the trading profile

[00:34:30] yeah it's a really interesting point you make one is the idea behind volume not necessarily

[00:34:38] being the same as risk if you had a put option just traded back and forth ferociously

[00:34:44] and then just closed out it's almost like day trading but you also point to the reality that

[00:34:50] there is just a lot of leverage in being able to control so much notional that could exist should

[00:34:57] the delta go your way with such a low amount of premium it's really interesting i mean look a lot

[00:35:02] of this debate goes back to the sort of idea that volmageddon 2.0 was coming or at least

[00:35:10] was a potential based on the take up of this very short dated option and i suppose the argument

[00:35:18] but forth was these options were being sold and so typically a vol event is on the horizon

[00:35:26] in people's minds when the vol community is short vol and here the argument was the vol

[00:35:32] community's long vol and it's the seller the opening kind of unhedged outright seller that's

[00:35:39] got the potential to blow up yeah so here maybe i'll throw out a couple of stats in terms of the

[00:35:45] trading volume and also kind of the characteristics that we see right so when we look at customer

[00:35:52] opening trades in terms of who's selling these spreads or who's selling options very little

[00:35:58] of it is actually in naked short puts or short calls the vast majority over 90 percent i think

[00:36:03] 95 percent blast that that i saw of it was in capped format meaning customers who are selling options

[00:36:10] we're doing it as i mentioned before primarily through spreads call spread put spread right so

[00:36:15] your risk is capped so that even if we got a very large intraday move it would move past your

[00:36:21] spread and you would be out the width of the spread but there's not forced unwinds that

[00:36:25] happen on the back of it so that's one thing that i think is worth noting that 95 percent

[00:36:31] of the opening short volume that we see from customers is in capped format and the second thing

[00:36:36] is one of the distinguishing or main features of the vix etp blow up that what we saw in 2018

[00:36:43] was the fact that inherently designed as part of the etp is the fact that the leverage

[00:36:48] built up over time as volatility stayed low right the aum's grew just by the fact that

[00:36:53] volatility continued to be low to the point that it got to be too big for the overall market

[00:36:59] whereas here the risk really reset at the end of the day there is that not the same build up of

[00:37:03] leverage over time that's contingent upon kind of the market's volatility being low so i think those

[00:37:09] are kind of two very different scenarios of never say never but like at least from what we've

[00:37:14] seen so far in terms of the flow in in zero day options it's a very balanced between buys

[00:37:20] versus sells the people who do sell options are doing it in capped format and by the feature

[00:37:25] that cash settled index options the risk resets at the end of the day it's zero day option you don't

[00:37:31] get that same build up of leverage what we saw in 2017 in the lead up to 2018 so to me i think a

[00:37:37] lot of the fear mongering around volmageddon is really overblown at least in this particular case

[00:37:42] i have to imagine that the price maker on this product is not a big bank there's just

[00:37:48] not enough time to price this thing up it's going to be against some vol algorithm that's pricing out

[00:37:56] and basically making the market in electronic fashion what about the initiator is that typically a

[00:38:03] machine that's doing it kind of on a systematic basis i mean i know there are individuals and

[00:38:09] institutions with a capacity to trade electronically initiated by an individual with the screen

[00:38:15] so what's the breakdown of assuming it's screen based but an individual sitting there and deciding

[00:38:21] versus some systematic process that's engaging the market yeah you're absolutely right in terms of

[00:38:28] the liquidity providers it generally it's the market makers not the sell side banks so the flow is

[00:38:33] almost split completely evenly between customers on one side and market makers on the other side

[00:38:38] there's very little sell side bank participation in the zero dte space at least for spx in terms of

[00:38:45] the customer side right so the question we always get is like who's buying or who's trading these options

[00:38:50] as a retail as an institutional how much of it is algorithmic that actually is one area that i

[00:38:56] would have to caveat that we had our estimate but really it's still an estimate at the end

[00:39:01] of the day and the reason being is that while we can see where the trade comes from

[00:39:05] and we see about 90 of the customer flow in zero dte comes from a retail brokerage firm

[00:39:12] we would very strongly caveat that as being not reflective of the troop breakdown because we know

[00:39:18] for a fact a lot of the large retail brokerage firms are also used by very sophisticated

[00:39:23] institutional investors for example the interactive brokers the fidelity of the world

[00:39:29] they are not just pure mom and pop retail shops right so what we've done on our end to i think

[00:39:35] maybe get a better sense of the breakdown between institutional versus retail is look at

[00:39:40] not just whether it comes from a retail brokerage firm but also the size of the trade the

[00:39:46] frequency of trading of someone's trading more than 10 000 contracts a year or a month i figure

[00:39:51] with exact threshold is over like 20 contracts per day that's less likely to be retail and more

[00:39:57] likely to be institutional if the sizes are large there are also other markers that we can see

[00:40:02] as on the exchange side to better differentiate between retail versus institutional so we run our

[00:40:08] analysis through the flow our estimate is about 60 of the flow in zero dte on the customer side

[00:40:15] is coming from what we would call an institutional or professional customer and about 40 of it is

[00:40:21] what we think is more reflective of true retail mom and pop that type of end customer but that said

[00:40:28] there is very much a blurring of the line between institutional professional versus retail because

[00:40:33] even for a lot of the retail investors they're now a more and more third party platform that are

[00:40:39] spring up where you can algorithmically trade spreads through the day like you can target

[00:40:44] what spreads you want to trade for how much leverage how much income and they would actually

[00:40:48] execute it for you throughout the day you know it's linked to your brokerage platform so

[00:40:53] actually that's like a very interesting trend that i've seen is that even on the retail side

[00:40:57] like the rise of the third party algorithm to help retail investors trade zero dte that's

[00:41:03] been fascinating to watch i'm talking my own book and yours as well but i think the capacity

[00:41:10] to trade electronically in the u.s equity derivatives market is and has been fantastic

[00:41:15] and it should be kind of a model for other asset classes to try to get to that level of

[00:41:21] transparency that degree of trading technology it just makes it so easy and it's a real blessing

[00:41:27] for the end user and maybe that's why there's been this huge growth in derivative centric

[00:41:34] mutual funds you've got a great chart in one of your decks about the twin growth both on the

[00:41:40] mutual fund basis for option overriding funds and then also in the etf landscape tell us a little

[00:41:47] bit about your work there and what you see yeah sure so this has been something that's come up a lot

[00:41:51] of client conversations over let's say the past 16 months which has been the incredible growth

[00:41:57] and option income funds for those not familiar that's primarily ets and mutual funds that

[00:42:03] sell options for yield for income purposes and in terms of aum growth i think the space

[00:42:08] went from 20 billion in total in 2019 to now over 130 billion so grown over six times in the past

[00:42:17] couple of years and if you focus especially in the last two years two to three years the bulk

[00:42:22] of that growth has come almost entirely from the etf space so this has been a big theme in the

[00:42:27] derivatives market these funds are certainly huge now the question is going to have they become

[00:42:32] too huge or too big of a driver such that they're the reason why volatility is low and to me i

[00:42:38] think the couple of reasons why don't believe so i already mentioned one which is the fact that low

[00:42:42] wall we see across asset classes you know it's not just an equi phenomenon but if you look at these

[00:42:47] funds they are not all employing the same strategy there is a diversity in terms of underliers yes

[00:42:53] the bulk of it is on the fmp 500 but a lot of these funds over underwrite on nasaq on russell

[00:43:00] 2000 and actually there's been a growth in a lot of these single underlier income funds as

[00:43:05] well so people writing on like say nividia or some of the mega cap tech names there's also a

[00:43:10] diversity in terms of tenors right so ranging all the way from zero day options out to one month

[00:43:16] three months six months or even further out and similarly with strikes some funds override

[00:43:21] closer to say at the money while others look at 20 delta 30 delta options for overwriting or

[00:43:27] underwriting so because of that the impact of life would be more spread out versus say if

[00:43:33] they were all overwriting one month options on the fmp which is kind of what would really impact the

[00:43:39] vix and then the second thing is if you really look at the impact on the wall surface the things

[00:43:44] that you would expect to see if these overwriting strategies or underwriting strategies have

[00:43:48] become too big you actually don't see it's been the opposite so things you would expect to see

[00:43:53] is one the volatility risk premium in the market to really just start to shrink so that's a

[00:43:59] spread between implied to realize that's what options sellers try to monetize is the fact that

[00:44:03] implied trades above realized and as more sellers come to the market you would expect that spread to

[00:44:09] shrink which we haven't in fact you know over the past year the volatility risk premiums actually

[00:44:14] doubled it has reached it the second thing is given at both of these assets are in call

[00:44:19] overwriting funds they've gotten too big you would expect calls to you to become

[00:44:24] very low or to start to fall meaning the out of the money call options to become cheaper relative

[00:44:29] to the at the money we see the opposite right now we see out of the money call options actually being

[00:44:35] bid and actually historically did relative to the at the money and actually I think the main

[00:44:39] story right now in the derivatives market is really the upside call buyer because the people

[00:44:43] hedging their right tail risk rather than the overwriters so all of these things combined

[00:44:48] with the fact that it's really across asset phenomenon the low volatility kind of

[00:44:53] really makes me a little skeptical of the claim that these funds are what is driving

[00:44:58] volatility lower but certainly the rise in AUM and the popularity in these strategies I think

[00:45:03] it's pretty great to see well you mentioned some of the products built around single stocks and

[00:45:09] we've got this really unique configuration in the S&P it's extremely top heavy and the

[00:45:15] top portion of the index has got these names in it that have a considerable amount of vol at

[00:45:21] least at different points in time I mean Nvidia that 16% move it's got more often than not an

[00:45:29] inverted call skew and probably for good reason and so what I wanted to do is get your read on

[00:45:35] dispersion and correlation so far in 2024 the correlation of apple to Nvidia is 12%

[00:45:42] that's just I would say shockingly and probably unsustainably low but the realized correlation

[00:45:49] at the index level super damp or super muted what do you make of it all and then maybe we can pivot

[00:45:55] to some of the work you're doing on dispersion futures yeah so absolutely as a low correlation

[00:46:01] high dispersion has been a very distinguishing feature of the market over the past year and a

[00:46:06] half so if you want to track dispersion we launched our dspx index which is a measure

[00:46:12] of S&P one month forward looking so imply dispersion of the stocks within the S&P 500 that

[00:46:19] launched last year if you want to track correlation we have an existing suite of correlation indices

[00:46:25] depending on tenors would be sample one month implied correlation would be core one end six

[00:46:31] months of course six and etc. So to give you a sense of how extreme things have gotten

[00:46:35] it's not just one month a lot of people focus on one month and earnings and you know these

[00:46:39] outsize moves on earnings and tech you know obviously Nvidia all of that yes but if you look at

[00:46:45] like six months one year implied correlation they're actually all lower today than they were in 2017

[00:46:52] right when vixx was at nine that was a record low volatility year so at least the Walmart

[00:46:58] kid is kind of pricing the low correlation to be persistent and I think that's interesting I think

[00:47:03] it's interesting and it's partly a reflection of just the very low realized correlation

[00:47:08] environment that we've been in for the past year like the rotations we've seen between sectors between

[00:47:13] factors obviously the dominance of AI and then the mega cap techniques for longer data implied

[00:47:19] correlation part of it I do think is supply demand driven with just a lot less selling pressure

[00:47:24] on longer data you know single stock wall but then in dispersion what we've been highlighting

[00:47:30] very recently is the fact that so if you look at the dspx index right there's typically a

[00:47:34] very strong and very pronounced seasonality dispersion or implied dispersion goes up go

[00:47:39] heading into earnings obviously earnings is big driver of single stock volatility and then it

[00:47:45] comes back in but what's been interesting recently is that dispersion post earnings didn't really fall

[00:47:51] and actually picked right back up at one point the spx was higher post earnings than it was before

[00:47:57] earnings which is fairly unprecedented and we kind of look underneath the index surface to see

[00:48:02] what was driving it but a half the move came from one stock it was from nvidia and it was big to

[00:48:07] nvidia wall and the lead up to their ai conference so that was post earnings I thought that was just

[00:48:13] incredible it kind of goes to show as you talked about earlier the dominance of some of these names

[00:48:18] on the s&p well let's talk a little bit about the pronounced hump in the vix futures curve

[00:48:25] in and around the us election what do you make of that yeah that's interesting so

[00:48:30] it's happening earlier than I recall at least I haven't done an exact analysis but I remember in

[00:48:36] 2016 the conversation was all around why is an equity vol market pricing in an election risk when

[00:48:42] you look at like say fx markets and other classic classes that were pricing in the very significant

[00:48:47] risk premium to the election and then 2020 we started really seeing if I recall correctly a

[00:48:53] pronounced vix term structure premium really in the summer heading into the election and this

[00:48:59] year we started that very pronounced premium I think a three-point premium in the October vix

[00:49:05] futures as early as agli wasn't late January when the future we started to see that so it's

[00:49:10] happening earlier and it's happening at the same time where we're not actually seeing a similar

[00:49:15] risk premium being priced into the other asset classes so I thought that was really interesting

[00:49:19] the switch where you know equity markets used to be the last mover and now we're really the

[00:49:24] first mover in terms of pricing in the election risk I think partly maybe because of the fact that

[00:49:30] this year at least we already know who the general election candidates are going to be

[00:49:34] this early on in the year used to be we had to go through a primary cycle there was a lot of

[00:49:39] uncertainty around who's going to be the candidate but this year pretty much from the beginning

[00:49:43] we all knew right it was going to be a rematch so I thought that was interesting and the

[00:49:47] second is if you look at the realized moves in the fmp if you look at the realized like how vix

[00:49:52] actually performed in elections around elections the past two election cycles we would seem very

[00:49:58] pronounced vix jumps so in 2020 it was double digits and of course in 2016 we also saw a very

[00:50:05] sizable vix increase in the immediate weeks preceding the election so I think it's just

[00:50:10] recency bias that past two elections have been particularly volatile in terms of kind

[00:50:15] of how the vix has moved that we're starting to see this very very hefty premium already

[00:50:20] being priced into the market this far in advance of the election well you stare at that curve and you

[00:50:25] see the hump and your first inclination might be well I don't want to buy that hump that's

[00:50:31] more expensive than everything else but there is some logic to the idea that that price is just

[00:50:37] going to hold that until the event comes and goes that futures price is going to stick

[00:50:42] because the market just is bracing itself for sadly uncertainty in the good old USA on its

[00:50:49] own election yeah I mean you think about like so I'm just pulling up the analysis I ran for the

[00:50:54] previous couple elections right so in 2020 the vix in the month leading up the election

[00:50:59] shot out 13 points in 2016 it was almost 10 points so a three point premium for the

[00:51:05] election right now it doesn't seem that high given how you know vix has performed in the

[00:51:10] last two elections right well one of the closeout this conversation which I really enjoyed thank you

[00:51:15] very much for taking the time and sharing your insights and your work we talked about this a

[00:51:21] little bit before we jumped on you were kind enough to participate in an event I hosted

[00:51:26] I want to say it was back in 2021 that featured women in finance in prominent positions

[00:51:33] and I just wanted to get your take on the kind of state of progress for initiatives designed to

[00:51:40] empower careers for females in finance you're obviously at a large firm and a unique firm in terms

[00:51:47] of it being the leading exchange in terms of equity derivatives tell us about what you see out

[00:51:54] there in terms of initiatives and progress yeah sure I mean I would say the industry is making

[00:52:00] progress for sure but it's undeniable in terms of the focus and the number of initiatives both

[00:52:06] when I was at credit swiss and also now fivo senior management puts on in terms of helping

[00:52:11] advance the careers of women the industry is making progress but there's still a long long

[00:52:17] way to go that said here at fivo right my manager is female the woman who she reports into who runs

[00:52:22] global derivatives kathy clay is female our cfo is as a woman so there's definitely I would say

[00:52:28] at fivo a lot of senior women at the executive level as well as the next level down but to me

[00:52:35] my personal career things that really helped me the most is mentorship programs and also sponsorship

[00:52:41] I think I might have mentioned that on the call that you hosted for the difference between mentorship

[00:52:46] and sponsorship being very important when advancing your career a mentor somebody go for advice someone

[00:52:53] who maybe you can get closer to you in terms of level but then finding a sponsor someone who

[00:52:58] is very senior in the organization who would actually go out of their way to help you right

[00:53:03] like that's I think critical and finding a sponsor in your organization who is willing to help you

[00:53:11] put their reputation at stake for you this is the one of the biggest takeaways for me in terms of

[00:53:16] my personal career growth it's finding a sponsor to really help advance your career in addition to

[00:53:21] obviously the value that come from having a good mentor but those two are not the same I think

[00:53:25] we're just starting out the career you think those two have the same but it's not there's

[00:53:28] actually a very big difference between the two well I appreciate you sharing that and thank you very

[00:53:34] much for your time Andy it was great to have this conversation yeah so it's been a pleasure thank you

[00:53:38] for having me on you've been listening to the alpha exchange if you've enjoyed the show please

[00:53:44] do tell a friend and before we leave I wanted to invite you to drop us some feedback as we

[00:53:50] aim to utilize these conversations to contribute to the investment community's understanding

[00:53:54] of risk your input is valuable and provides direction on where we should focus please email us

[00:54:00] at feedback at alpha exchange podcast dot com thanks again and catch you next time