May the Odds Be in Your Favor

Published on
July 29th, 2020
Duration
46 minutes

May the Odds Be in Your Favor

The Big Picture ·
Featuring Jason Buck and Jerry Haworth

Published on: July 29th, 2020 • Duration: 46 minutes

In Part 1 of this three-part, The Big Picture, volatility extravaganza, Jason Buck of The Mutiny Fund embarks on a journey of discovery with some of the world’s top leaders in the fine art of volatility investing. To start, Buck sits down with legendary trader and investor Jerry Haworth, chief investment officer of 36 South. A noted veteran of volatility investing, Haworth reveals his ideas on everything from hunting for bargains and ergodic economics to how he masterfully played the wild swings of 2020. His tremendous success this year is something he attributes to his core framework, which is centered around mean reversion and cyclicality. Additionally, Haworth goes into detail on why he rejects monogamous investment strategies and opts for a pan-asset approach that allows for true diversification on both tails. He also discusses his philosophy on long-dated options, or LEAPS (Long-Term Equity Anticipation Securities), and why he thinks they can become gold mines under the right circumstances. Buck and Haworth provide specific insights on commodity currencies and how options can be instrumental in riding the volatility to profits (depending, of course, on whether the futures curve is in contango or backwardation). Taking things one step further, they navigate into the murky waters of financing negative carry positions associated with protecting against tail risks. Filmed on July 23, 2020. Coming up in Part II and Part III, Jason continues his journey with Bastian Bolesta of Deep Field Capital and Chris Cole of Artemis Capital Management.

Comments

Transcript

  • MC
    Melvin C.
    17 August 2020 @ 22:03
    The whole vol series is one of the best on RV. Enjoyed it throughly. Great work Jason. I also enjoyed Hari K's pieces and read his book in february before the crash which proved invaluable! So as a retail investor I have had a great experience with my own vol trades: but I must admit that I was going blind. My trades still did 5x, 10x, 30x, 50x ... but I was pretty much guessing as to how and when to monetise them. Unfortunately that means that I monetised much more at 5x and very little at 50x! and then I made the mistake of laying new left-tail hedges rather than picking up cheap right-tail options for the rebound. I've been kicking myself since. All that to say, that I think a professionally traded vol strategy can be much much more profitable as obviously you have far smarter people with far more experience taking these decisions. When to roll. when to monetise. where to take the basis risk... each of these decisions can mean so much. I see the Mutiny fund is open to retail investors.. are some of the others from strategies discussed in the series, or Hari's? for say 100k investment? Thanks!
  • WA
    Wissam A.
    30 July 2020 @ 11:11
    I have a suggestion to Real Vision and I hope they take this seriously and look at it from my point of view. My comment may seem to you that I am a frustrated person but bear with me please. Since the release of the super excellent paper by Chris Cole "The Allegory of the Hawk and the Serpent" demonstrating how important it is to have long volatility in a portfolio, I have been fascinated by asset class as a non correlated diversification strategy to the portfolio, and done extensive research on it. Ray Dalio said that the best portfolio is to have as many as possible non correlated assets to one's portfolio. Nassim Taleb clearly shows in his Incerto books that your job, most of the things you do in your life, and most of your portfolio is short volatility long concavity, so adding this asset class is a must in my opinion. However, for the retail person like myself engaging in long volatility is extremely difficult for the following reasons: 1) Since most of us are busy with work and family etc it is difficult from time perspective to learn this. It requires a lot of studying. Reading books is not enough because you need a mentor who can teach you this type of investing. I would love to study options, but the reality is that I am super busy person with work, life's responsibilities, and just managing my own portfolio doing is time consuming because reading research,10-K's and 10-Q's, and macro publications I subscribe to. 2) All long volatility funds require sh*t loads of "Benjamin Franklins"! When I contacted Logica they required 1 million at a minimum. Spitznagel wants 150 million USD! You also need to be an accredited investor as per SEC definitions which are either you make over 200K USD per year in income, or you are worth more than 1 million USD in net worth. In another words you have to be rich. 3) I have contacted the mutiny fund since it designed for the retail investor. I thought that I can outsource this part of my portfolio to the professionals due to the constraints mentioned above. Unfortunately I do not qualify as per SEC regulations. Taylor Pearson was a lovely gentlemen to talk to. 4) This video series are great but I do not benefit from them. They are more suited towards the experienced investors in this space. So here is my suggestion. RV should create a special video series that teaches investors like me how to do it the way Mike, Jason, Hari etc do it. Bring on the specialist and slowly build up the material from beginners to advanced by explaining the basics and add difficulty and complexity through out the series with real life practical trading examples, not the academic stuff you see in books. I am thinking more of the format like they have in Coursera or Udemy . For example you can have 4 series from level one to level four increasing in complexity . I am MORE THAN HAPPY TO PAY FOR THIS. Otherwise if you guys can convince the SEC to remove that silly accreditation stuff that would be even better! Cheers.
    • JB
      Jason B. | Contributor
      30 July 2020 @ 13:18
      Wissam. Your frustrations resonate with me, as we built Mutiny Fund out of similar frustrations. As we can do nothing about the SEC, they are at least allegedly going to allow certification by education. I do truly wish we could walk thru how to DIY these trades, but these firms have teams of PHD quants working 24/7 due to the difficulty of these trades. I believe you will like part 2 where I speak in depth with Bastian about VIX trading, it should hopefully give you several trading epiphanies to explore.
    • ea
      edwin a.
      30 July 2020 @ 21:12
      It might be worth looking into Meb Faber / Cambria's TAIL ETF. It's a tail risk fund, available to retail investors, which provides some protection in volatile markets, and performed pretty well during March 2020. He explains it here: https://mebfaber.libsyn.com/fund-profile-series-tail
    • DT
      David T.
      30 July 2020 @ 23:26
      So true
    • JB
      Jason B. | Contributor
      31 July 2020 @ 11:19
      We suggest people look at the TAIL ETF, with the caveat that it’s a long bond play with an options overlay and understandably can have a lot of bleed buying close to the money options
    • PC
      Peter C.
      2 August 2020 @ 07:24
      You can buy IVOL. A long interest rate volatility using OTC options. Nancy Davis is the manager and excellent.
    • AG
      Alan G.
      4 August 2020 @ 19:26
      Be ware of some of the funds fee structure. Mutiny Fund May be a great product but not there fee structure including the underlying managers is 2.5% management fee and 28% of profits. I think trading costs are about 3% per year. The numbers may still work.
  • MT
    Mark T.
    4 August 2020 @ 10:48
    Fantastic interview. Probably would not have understood half of this at the start of my career, certainly need some option knowledge prior to watching this.
  • SS
    Shanthi S.
    1 August 2020 @ 07:49
    Wow! Just brilliant content. Thank you so much Jerry and Jason. I disagree with the comments along the lines of this content not being useful to retail traders. I’m hardly more than a beginner and find it unquestionably the most useful content, as it really stretches my thought processes and forces me to assess my own risk in ways I might not have thought to previously. Mike Green and now Jason are my favourite RV interviewers. This stuff is food for a ravenous mind. Thank you both so much!
    • JB
      Jason B. | Contributor
      1 August 2020 @ 14:12
      Thanks Shanthi! I think all levels can take something away from Jerry’s experience and knowledge
  • AP
    Alex P.
    30 July 2020 @ 14:23
    Jason Buck and Mike Green are amazing interviewers. Please have them on as much as possible.
    • JB
      Jason B. | Contributor
      30 July 2020 @ 15:11
      Thanks Alexander, Mike is trying to teach me how to do it, but I am nowhere close to him
    • HK
      Hari K. | Contributor
      31 July 2020 @ 00:20
      I am glad someone mentioned the TAIL ETF. It certainly has done well but based on what I know, I would argue that it isn't a real tail hedge. Please correct me if I'm wrong on the details. TAIL is a mix of a series of S&P puts and 10 YEAR NOTES. Not T Bills, but longish yielding bonds. These have been in a long term bull market ... The low bleed isn't a function of clever put design, but positive 10 year note performance. It is vulnerable to a stocks down, yields up scenario. If you don't think that's likely, fine, but duration risk is baked in there. BTW I am in no way criticising Meb Faber.
  • DT
    David T.
    30 July 2020 @ 23:27
    Interesting but, not much for retail investor.
  • MS
    Moritz S.
    29 July 2020 @ 19:16
    I backtested a tail hedging strategy on the S&P that sells 4W 1x3 put ratios and rolls them weekly (as presented in Hari's book). The strategy had a constant risk budget of 0.05% in the portfolio. The performance was quite good, however once volatility has spiked the put ratio became prohibitively expansive. With sharp sell offs and subsequent quick recoveries this isn't that much of an issue but if after the initial big vol spike the market continues to gradually fall without another spike in vol, the structure fails to provide much protection. What would you say is in such an environment a good hedge? I was thinking about sth gamma/delta sensitive like short dated puts with one week left to maturity. Thoughts?
    • MS
      Moritz S.
      29 July 2020 @ 19:19
      * risk budget of 0.5% - not 0.05%
    • HK
      Hari K. | Contributor
      29 July 2020 @ 20:11
      Please contact me directly if you would like to discuss. The editors will have my details. Thanks Moritz!
    • MS
      Moritz S.
      29 July 2020 @ 20:39
      Thanks Hari, I'd love to discuss! @one of the editors: Whom of you guys should I contact to get Hari's details?
    • JF
      Jack F. | Real Vision
      30 July 2020 @ 00:03
      Hi Moritz, I'm more than happy to connect you with Hari. Please email me at jack@realvision.com or DM me (Jack Farley) in the RV Fan Slack channel and I'll put you in touch
    • MS
      Moritz S.
      30 July 2020 @ 08:42
      Great! Sent you a DM on slack
    • JB
      Jason B. | Contributor
      30 July 2020 @ 13:49
      Moritz, I think this also speaks to what Jerry and I were referencing, after the sell off in S&P it may be prudent to take some basis risk and search for cheap convexity in proxy assets
  • MD
    Matt D.
    30 July 2020 @ 05:56
    Great interview Jason, and Jerry. To me the essential point is the counter intuitive strategy (buying when cheap as no one is panicking then having liquidity to sell) - yet sort of obvious now you point it out - in a cross asset class. I spent some time (doing the opposite of long dated options) seriously trading binary options. No special maths, just using their structure to my advantage. Yet I know the risk of being right but it not expiring at the strike - straight to zero. So I can see there is still some skill in the timing of this strategy Interesting too about the positive expectancy with puts v contango. Never thought about that. Looking forward to parts 2 and 3. Thanks!
    • JB
      Jason B. | Contributor
      30 July 2020 @ 10:57
      Thanks Matt!
  • VG
    Viktor G.
    30 July 2020 @ 06:49
    So interesting! Many thanks for sharing your experience!
  • IC
    Ibrahim C.
    29 July 2020 @ 10:37
    This looks like very sophisticated interview to me, however I like the options. So, would it be possible to put this into simple plain English for a normal retail person to get these ideas invested? Thanks!
    • JB
      Jason B. | Contributor
      29 July 2020 @ 12:11
      A retail version would be buying many long dated options (2 year LEAPS) on different asset classes. With the caveat emptor that buying options is easy but managing options positions has a ton of nuance
    • MT
      Mike T.
      29 July 2020 @ 15:18
      Jason, are you suggesting that's possible to 'manage' and adjust options that have been purchased i.e long option positions without adding more capital? If so that's simply wrong? It's only the short premium i.e. option seller that has the flexibility to manage and each time of adjusting collecting additional USD credits along the way. The short premium positions that have the most flexibility to manage are undefined risk naked options. As soon as a short premium option trader decides to define risk using protective wings he limits the possible flexibility to manage
    • HK
      Hari K. | Contributor
      29 July 2020 @ 15:29
      Interesting points here, I can't resist weighing in. Mike T is correct that long-dated options do not require much, if any delta hedging, i.e. vega/gamma is large. They also do not require much rolling. However, identifying value opportunities, set ups where roll yield offsets bleed and profit taking after an event all require skill. Great interview BTW
    • JB
      Jason B. | Contributor
      29 July 2020 @ 15:32
      Hari said it better that I could, thanks. Mike, I was only trying to point out that options trading is trickier than it looks for new traders, without discouraging someone from taking that educational journey
    • IC
      Ibrahim C.
      30 July 2020 @ 01:38
      Thank you Jason!
    • MM
      Michael M.
      30 July 2020 @ 05:34
      This was a fantastic interview! To attempt an example of how a retail trader could trade this. If you’re bullish on an equity, instead of spending your available capital on buying shares outright, instead look at deep in-the-money LEAP calls for that stock, 1-2 years out. Aim for a delta of around .9, compare nearby strikes and minimize extrinsic value while weighing against the total capital you want to allocate to the position. As you move closer to at-the-money strikes, calls will get “cheaper” but extrinsic value will increase for each option. You can then sell short dated, out of the money calls to offset the extrinsic value you paid on your purchase. Roll these OTM calls as they get closer to expiration to collect additional premium while maintaining your original long ITM call. Don’t sell calls if you expect a move or are willing to accept the loss of the extrinsic value if the position goes against you. This will give you greater delta exposure than just purchasing shares outright for the same capital. Max loss will be the cost of the ITM LEAP calls you buy, minus the premium you collect on the OTM calls over time. Upside is capped by your OTM call but you can always roll those call up and out if they go ITM.
  • BT
    Billy T.
    29 July 2020 @ 23:45
    Where do we get long dated 5 yr options? Tda does not offer those long dated ones
    • JB
      Jason B. | Contributor
      29 July 2020 @ 23:52
      You need as ISDA with an Investment Bank, they are OTC products
    • JF
      Jack F. | Real Vision
      30 July 2020 @ 00:02
      https://www.youtube.com/watch?v=XBzhk5eANTU
  • GM
    Gary M.
    29 July 2020 @ 11:21
    I wish I had a deeper understanding of options markets. In a world where 'Black Swans' seem more common and are likely to become even more so due to the yet unknown consequences of financial repression, strategies like this make intuitive sense.
    • JR
      Jorge R.
      29 July 2020 @ 20:44
      There is an earlier interview in RV, I think it was filmed in 2018 of Jerry Haworth. he speaks in more general terms about the strategy. check that one out. it is a great piece as well. Excellent interview Jason!
    • JB
      Jason B. | Contributor
      29 July 2020 @ 22:30
      Thanks Jorge, hopefully this interview was at least a little different from prior interviews
  • DS
    David S.
    29 July 2020 @ 21:17
    Great interview. I enjoyed Mr. Haworth's prior two presentations also. I am looking forward to the next two presentations in Mr. Buck's series. I know I cannot put in the time to understand and trade volatility, but these presentations help me understand what is going on. As for the discussion on one life’s journey, a Swiss friend and I have a bet on making it to 100. He is a little worried in COVID Times at 97. I think his probabilities are better than mine at 74. DLS
  • MT
    Mike T.
    29 July 2020 @ 15:56
    I'm disappointed not so much with the speakers for this piece, but with RV itself. Not once in nearly five years of RV existence has there been any attempt to explain the benefits of short volatility trading ( I'm not talking about volatility instruments themselves) but rather the overwheming mathmatical advantage of selling premium, selling options in the most highly liquid equities. I will accept to attain a real understanding of how to trade, make money selling options is an intellectual challenge that typically takes two years of study to attain an 'average' level of competance. However for RV to never even attempt an introduction is most disappointing. It leaves the whole collective Options Votality Pieces/Videos on this platform, put simply totally one sided in favour of Options are for buying, never any talk of Option selling. I wonder why? Is it down to their own regulatory/ compliance issues?
    • JB
      Jason B. | Contributor
      29 July 2020 @ 16:28
      Mike that is a great point...Aaron Brown could potentially be a good guest...I will ask. Anyone else you would recommend?
    • JF
      Jack F. | Real Vision
      29 July 2020 @ 16:44
      Hi Mike, thanks for sharing your view, that's an interesting critique that we will keep in mind going forward. For this three-part series, I think Jason and his interviewees (Jerry Haworth, Chris Cole, and Bastian Bolesta) give short vol their due... curious to see if you will agree with me once you've watched all the pieces.
    • MT
      Mike T.
      29 July 2020 @ 18:08
      @ Jack F, thanks I'll await parts 2 & 3.
    • EH
      Edward H. | Real Vision
      29 July 2020 @ 19:18
      I think RV has talked about selling vol in the past. Leo Kolivakis went into this for one, because he's a pension fund specialist and I asked him about it. I think some of the Canadian pension execs we spoke to also mentioned it as well. I don't remember specifics now. But the gist is that they sell as return enhancement strategies. And regarding the risk, I also do not remember the answers.
  • SS
    S S.
    29 July 2020 @ 15:49
    At some angles. Jason looks like David Beckham. Great interview by the way.
    • JB
      Jason B. | Contributor
      29 July 2020 @ 15:53
      Thanks Steve, I’m telling my girlfriend now! Maybe in my soccer playing days of yore, now I’m the poor mans, fat version of Becks...but I will definitely take it, made my day!