Portfolio Construction During The Ultimate Volatility Regime Change

Published on
September 23rd, 2020
102 minutes

Portfolio Construction During The Ultimate Volatility Regime Change

Live ·
Featuring Diego Parrilla and Jason Buck

Published on: September 23rd, 2020 • Duration: 102 minutes

In this special live-to-tape edition, Jason Buck, CIO of Mutiny Fund, and Diego Parrilla, portfolio manager at Quadriga Asset Managers, return to Real Vision to give an advanced masterclass on portfolio construction during these turbulent times. Covering everything from gold to options to calendar spread, Parrilla shares his framework for investing and risk management. He and Buck then explore if the markets have officially entered a new volatility regime. Filmed on September 18, 2020.



  • MS
    Mark S.
    23 September 2020 @ 23:27
    Has anyone written anything in book or paper form on optionality outside of investments, like talking about optionality of lettuce on salad but on wider topics. FYI I have read Chris Cole but looking for something more
    • JB
      Jason B. | Contributor
      24 September 2020 @ 03:01
      Thinking In Bets, An Economist Walks Into a Brothel, AntiFragile
    • MG
      Michael G. | Contributor
      21 October 2020 @ 14:52
      Research anything on Real Options https://www.researchgate.net/profile/Manfred_Perlitz/publication/229745571_Real_options_valuation_The_new_frontier_in_RD_project_evaluation/links/5b4dc554a6fdcc8dae24cff1/Real-options-valuation-The-new-frontier-in-R-D-project-evaluation.pdf
  • BO
    Bistrin O.
    28 September 2020 @ 16:12
    Diego mentioned several times that the premium he is paying for his long-dated options is around 1%, and later he mentioned he likes to work with SPY for example. Currently, 3-month SPY PUT options (at the money strike) are 5.5% of underlying, and 12-month at the money option premium is 10% ($33/$333 Strike). Can you please clarify if Diego is buying deep out of the money options, or if I have somehow misunderstood something? I bought some at the money SPY puts in January 2020, and made a lot on them, but at that time 3-month puts were still 2.6% of underlying, and VIX was only 12 back then. Today you would have to go to a 160 strike price to get to the 1% premium range. By the way, I absolutely loved his video, and make a point of watching any videos with Diego, fantastic. Mike also did a great job of moderating. Bistrin, Canada
    • sp
      spencer p.
      17 October 2020 @ 17:12
      what sites do you use to evaluate options? started trading options recently and doing just fine but so much more to dive into with them.
  • CR
    Christopher R.
    24 September 2020 @ 04:28
    Awesome awesome interview! Learning from the very best. As a retail trader with limited capital, I'm looking to this interview for the learning and practicing options with sim accounts for when I do have that larger capital base to play long options. Or is there something I'm missing where one can create a portfolio of long options and like in his example long gold with a small account? I guess my question is how can I learn to trade and build my portfolio in depth this way with a small account as a retail trader? It feels like most of the online information on options trading lean selling options (iron condors, credit spreads?) and "options income trading". Though I have no personal experience, I've built some bias against after reading/listening all of the ways one can blow up with selling options from Taleb's books or RVTV.
    • SN
      Stefan N.
      26 September 2020 @ 07:16
      Piranha Profits has a course. You can email them and ask. If they can’t provide you a clear answer to your question just move on.
    • jw
      jarkko w.
      29 September 2020 @ 10:46
      Hey ! You might want to take alook at: https://bigpicturetrading.com/ I have been subscriber over year and very happy, they go from macro view to technical and all trades are excuted with options. 14 day free trial. Im not affiliated with them, just like the value of service and great learning experience if You are not familiar with options trading. Good luck !
  • SB
    Simon B.
    24 September 2020 @ 19:07
    Thank you Jason & Diego for one of the absolutely best and most informative videos i have ever seen! Much appreciated and i very much like how RV and you makes room for advanced topics and not only whether to buy or sell stonks. Some of the arguments made may on face value seem rather implausible. Such as the market saying that there is "no way that this and this happens at the same time" but i think it is important to note a stark feature in the world of derivatives. Derivatives are not the underlying. They are a contract between two parties, usually one of which is a market maker. The market maker operates in a BS-world, and the speculator probably operate under a MC world view. Because they differ in views on how to approach optionality and path-dependency they manage their exposure and risks in different ways. As mentioned in several other RV videos (and RVDV) there is no balance between supply and demand in the options market as there is in most other markets. Demand for options is not necessarily matched by supply but through creation of a contract between a market maker (dealer) and a buyer. When you buy a stock, someone is selling you that stock and taking the other side of the trade, but in the case of an option, the market maker is not necessarily betting against you. He might share your beliefs about the underlying asset, but he is playing a different game. He is, under his BS-beliefs, trying to sell you an option priced at an IV that is high enough that he will be able to cope with the delta hedging until it expires. You are not playing the same game, which means that "inefficiencies" can, and do, arise in the options markets. He might not even have a view on the directionality or probability of certain outcomes, just on the volatility of the asset.. (One of the many reasons derivatives are just way more interesting than spot markets, in my very biased opinion)
    • MT
      Mike T.
      26 September 2020 @ 06:15
      I think I sort of agree but maybe not. You state inefficiencies can and do arise in the options markets??? I don't think so, otherwise there would be arbitrage opportunities, there isn't if so the whole business model of market making would be totally unviable, when the reality the MM's e.g. Citidel, Jump etc are absolutely up to their eyes in profits pure money making machines. Also MM's such as aforementioned there is nothing personal against the other side, they don't have viewpoints, there is no belief in the world of MM they simply have this book of millions upon millions of positions I think of this as a living organism so to speak where new positions simply end up in the bucket with all the rest, there is no hesitation by a HFT Market Maker to weigh up pros and cons of any one position. The MM simply plays the game of volume, volume and more volume which in the end they win, big time and they like nothing more than lots of customer debit trades people buying options to which they take the other side where given the laws of large numbers the buyer of options loses so frequently and the MM profits all the way to the Bank.
    • SB
      Simon B.
      26 September 2020 @ 09:37
      Mike, i agree with you. But I chose a poor phrasing. Vol markets misjudge volatility all the time, that's why IV and subsequent RV are rarely the same and why there is an IV premium. I did not mean arbitrage inefficiences but more in terms of how e.g. a Vol-arb fund would look to use mispricings of risk. The MM/Dealers also seem to be blamed for the recent run-up and subsequent trip of the markets to an extent. That does not seem very efficient to me, but in my experience MMs tend to have a view but probably express it in another way, such as hedging using their own input on vol as opposed to what the market is pricing the option but Volume is the driver of their pnl for sure.
    • MT
      Mike T.
      26 September 2020 @ 20:35
      Simon, thanks for taking the time to respond, seriously much appreciated. ".. so Vol markets misjudge volatility all the time.." ".. that's why there is IV premium.." Well in a friendly and polite way, I would argue is not the 'misjudgement' entirely deliberate i.e. options are over priced deliberately?
    • SB
      Simon B.
      27 September 2020 @ 11:37
      Thank you aswell, interaction is why we're here :) IV is overpriced but i think the market making business is competetive enough to pressure it. The problem for MMs is that they must allow for real-world distributions not being as convenient as a bell curve. Once realized vol rises it tends to stay elevated but the premia intake is a one-time event. A sold option is only sold once so the IV premia as to allow for being very wrong for a pretty long and tumultous time in case of a regime shift.
    • MT
      Mike T.
      27 September 2020 @ 14:23
      OK last thing. If you haven't already guessed it, I'm a Short Premium (sell), Short Vol Option trader. Including adjustments, I literally do many thousands of trades per year. On RV at least I think I'm in a minority of one.
    • SB
      Simon B.
      27 September 2020 @ 19:01
      I think there are many RV users who sell vol one way or another but they're typically not as vocal as long vol actors.. I think i average as many short as long vol trades so i try to stay both humble and nimble
  • rc
    ritesh c.
    27 September 2020 @ 18:37
    This is the best video so far for me in RV. It went from macro view to strategy to actual mechanics of portfolio construction, and finally the section on options was mind altering for me. Having sold puts and calls, I have personally gone through several of my positions blow up (of course hubris was the root cause). This was a masterclass. Salute Diego and Jason!
  • sg
    scott g.
    27 September 2020 @ 13:09
    There is so much in this interview. Ive never really thought about "their take" before so very helpful...(maybe it was the soccer analogies that helped) ty
  • FR
    27 September 2020 @ 01:15
    Proper Diego Proper!
  • GD
    Gabriel D.
    26 September 2020 @ 15:28
    did he just say the price of weed is going to go up???
  • AP
    Alex P.
    25 September 2020 @ 15:53
    Love both of hem. Always amazing interviews with tons to learn every time.
  • AH
    Ali H.
    25 September 2020 @ 13:00
    Thank you both very informative discussion
  • PG
    Philippe G.
    24 September 2020 @ 18:21
    Excellent - always appreciate Diego Parilla's approach to explaining his framework and views. Jason Buck also adds plenty of value, great interviewer!
    • JB
      Jason B. | Contributor
      25 September 2020 @ 02:46
      Thanks Philippe, you’re too kind
  • CM
    Cory M.
    24 September 2020 @ 22:53
    Fantastico! I must begin Diego’s book soon!
  • GS
    George S.
    24 September 2020 @ 16:43
    One word - phenomenal...
  • MR
    Madhur R.
    24 September 2020 @ 09:45
    One of the best interviews on RV, kudos to both Diego & Jason.
    • JB
      Jason B. | Contributor
      24 September 2020 @ 14:23
      Thanks 🙏
  • sp
    spencer p.
    23 September 2020 @ 23:04
    jeezus. enough with the sports analogies. I prefer straight talk. to understand it on a technical level.
    • SM
      Sam M.
      24 September 2020 @ 10:06
      What about the lettuce being an option on a salad? You have to pay that.
    • SM
      Sam M.
      24 September 2020 @ 10:29
      Risk free interest = World with sufficient supply of capital = death of rentier. Sorry ... I mean it's like a "golfer" with "10 million golf balls" and the hole is 1 metre away and the rate of interest will be zero if he holes the putt. And then there is a lettuce ... which is an option on a salad.
    • SM
      Sam M.
      24 September 2020 @ 10:35
      We need a new RV drinking game. 1 shot for every analogy. Non sports analogies count for 2.
  • JK
    Jason K.
    23 September 2020 @ 20:46
    Jason and Diego, thank you for highly informative, easily approachable, discussion about volatility. One quick question - Diego mentioned Monte Carlo analysis. In a non-ergodic world, how should allocators use MC analysis?
    • DS
      David S.
      24 September 2020 @ 08:29
      • "The basis of a Monte Carlo simulation involves assigning multiple values to an uncertain variable to achieve multiple results and then to average the results to obtain an estimate. • Monte Carlo simulations assume perfectly efficient markets. • The Monte Carlo method tests a large number (several hundreds or thousands) of scenarios in which the inputs are drawn as random numbers." IMO the need to know that the world is non-ergodic is not important in a simulation. DLS
    • CD
      Christopher D.
      24 September 2020 @ 10:34
      Since looking at time series analysis, I always understood that we're bound to calculate monte carlo averages making an implicit assumption of ergodicity. Broadly speaking ergodicity is the assumption that time averages & vols can be mapped to set averages & vols (for stationary processes at least). So to cut the noise out of measuring a trend, you just do an average of daily returns and that gives you the daily trend. The better alternative would be to use many samples of the same day (set average) rather than 1 sample of each of many consecutive days (time average). But you'd have to be able to go back in time and replay the same day many times. So you assume things are ergodic, or perhaps use a quantum computer?
  • CD
    Christopher D.
    24 September 2020 @ 10:06
    As engineer in applied maths and derivs trader, I loved the way Diego covered in laymen terms probabilistic concepts and related them to markets. A lot of substance in this live video, brilliant duo. I'd be interested to hear Diego's take on the 'Softbank/Robinhood strategy' of going long OTM calls on FAANGS. It is crazy and not sophisticated. But then doesn't it match Diego's framework for a good scorer? In a flat forward and zero vol world, OTM short calls exhibit massive leverage. Start with a small allocation, and it can grow exponentially month on month. I actually did this last year after the Sep repocalypse because of the ensuing Fed liquidity injections, it worked marvellously well. The only issue was: if you had reinvest everything on each roll you're guaranteed to have the strategy going to zero at some point (Feb 2020). So, one had to set some profits aside, say 150% of premium invested each month. Doesn't work in the current environment. A math point for the curious: the magic of (risk neutral) Monte Carlo and Option Hedging yielding the same price lies in the Feynman-Kac formula.
  • mw
    michael w.
    24 September 2020 @ 00:20
    Probably the best live one yet!
  • DA
    David A.
    23 September 2020 @ 22:02
    I was getting a bit disillusioned with Real Vision (too many guests telling the markets what to do; too may macro debates that seem to go round in circles). This was fantastic. A really persuasive and clear headed overview of portfolio construction and risk. Thank you.
  • PT
    Peter T.
    23 September 2020 @ 16:35
    funny everyone thinks that people will actually have enough income to pay for all this inflation
    • MD
      Mario D.
      23 September 2020 @ 18:21
      I second your view. Inflation has to be the mechanism that re-converges the standard of living with productivity. Effectively this means less surplus / saving / discretionary spending.
    • DS
      David S.
      23 September 2020 @ 22:01
      Peter T. - I agree, but IMO we are already seeing inflation. You just need to look in the correct place. Inflation follows the money. Look at the price of a stock. If the P/E of the MSFT is 15 and it goes to 30 in one year, I can only buy half the number of MSFT stock with the same amount of money. As Mr. Parrilla in Mr. Pal’s interview said, “What we need to understand is that inflation is 100% a monetary phenomenon.” The CPI is not rising rapidly partly because the regular consumer did not getting the benefit of all the recent money printing. When they print a lot of money and give it to the average consumer, the CPI will inflate. DLS
  • DS
    David S.
    23 September 2020 @ 21:42
    It was generally accepted long ago in a market far away that stock splits do not change the value of a stock – NPV will be the same. Now, with so many investors using options this may have changed. Apple may have made a smart move by splitting it stock as the price of an option contract is much less. If you are a small investor you really cannot afford to buy a call option on Amazon with a stock price of $3000. I do not know if the price of an option contract benefits the value of a stock. It might be an interesting analysis. Are there fractional option contracts? That would be another way to skin the cat. DLS
  • DS
    David S.
    23 September 2020 @ 20:27
    Thank you! With each one of Mr. Parrilla’s presentation I understand and follow his solid advice better. Well explained in metaphors to bring it home. Mr. Buck did at great job on the interview. He added essential ideas and explanations without disrupting the flow of ideas. Looking forward to seeing both on RVTV soon. DLS
    • JB
      Jason B. | Contributor
      23 September 2020 @ 21:19
      Thanks DLS, glad you liked it
    • DS
      David S.
      23 September 2020 @ 21:21
      If you have not listened to Mr. Parrilla's previous presentation, the repetition and additional points of view helps. Like Mr. Buck, I would start with Mr. Pal's interview and then move on if you have time. DLS
  • JH
    Jesse H.
    23 September 2020 @ 19:16
    Very instructive and great stuff from Diego, as usual. Only constructive criticism is that the concepts could have been communicated more succinctly. But always learn from him. A lot of merit to his simplified examples of options trades. Thank you both & RV!
  • JS
    Jon S.
    23 September 2020 @ 18:19
    Saludos Diego! Muy buena entrevista. Great interview! Splendid.
  • IW
    Ian W.
    23 September 2020 @ 17:08
    Absolutely *fantastic* with two of my favorites. I really like how Diego's contrarian and anti-bubble bets interleave with Jason's focus on path dependency and ensemble approaches.
    • JB
      Jason B. | Contributor
      23 September 2020 @ 18:11
      Thank Ian!
  • FL
    Fabrizio L.
    23 September 2020 @ 11:21
    hy Diego, simple question: in Igneo portfolio do you just do the capital preservation, or do you also do the loading up at the bottom of the "event"...?
  • RY
    Roy Y.
    23 September 2020 @ 10:20
    Superb ...
  • SC
    Sebastian C.
    23 September 2020 @ 08:02
    GREAT Masterclass! I think the analogies if you know football is really helpful and give life to the conversation. I am typing so many notes. For young investors like me, it really is like sitting next to the guy at the desk. Thank you Realvision & co.