Options for Extreme Volatility Mispricing

Published on
June 7th, 2017
49 minutes

Options for Extreme Volatility Mispricing

The Interview ·
Featuring Nancy Davis

Published on: June 7th, 2017 • Duration: 49 minutes

Nancy Davis of Quadratic Asset Management is a master of option portfolio construction, implementing Quadratic’s entire portfolio with options and swaptions. With volatility at 23 year lows and risk assets at all time highs, Nancy is exploiting some wild mispricings and in conversation with Michael Green, she explains her unique strategies, blending quantitative tools and discretionary judgment, in a market dynamic that is both exciting and incredibly challenging. Filmed on May 25, 2017, in Las Vegas.


  • SP
    Steve P.
    30 August 2018 @ 03:08
    Next crisis isn't funding , it's purchasing power . People will be priced out of their cities slowly , but the exodus of population moving will be quick as society usually behaves in tandem with other people. Yet , the experience of costs increasing will be independently felt and dealt with.
  • my
    markettaker y.
    6 August 2018 @ 22:44
    I just came for the Mike Green questions.
  • SH
    Syed H.
    20 May 2018 @ 01:31
    This interview is the reason I subscribed. I'm not joking. Nancy Davis is awesome.
  • MM
    Mario M.
    24 March 2018 @ 04:48
    Such a great interview. This interview is so rich with information, youll need to watch it more than once to get the most out of it.
  • PD
    Ph D.
    11 November 2017 @ 03:55
    I have a lot of respect for Michael Green: very humble, asks good questions, thoughtful and wise... Yet, I'd like to see more high quality interviewees in the lines of J. Gundlach, B. Melkman, J. Friedman, T. Edgar, (perhaps A. Gurevich)...Nancy Davis doesn't cut it to say the least: her strategy is a jack of all trades, master of none type, her lack of insight is eclipsed by her abundance of marketing her fund, her use of shallow buzz words such as "repeatable process", "heads I win , tails I don't loose much", ''robust tools" or dirty marketing smelling sentences such as "Quadratic strategy is it's really well positioned to help diversify investors’ portfolio because a world, it's kind of crazy town right now." etc. etc. hurt my ear...An ex-exotic options preferring only plain vanilla options independent of their price is alarming...How about some though process, how about some insight, how about walking us through a trade (successful or a failed one), what your thought process was, how it panned out, etc. etc. as opposed to just saying "Where you have assets at all time high valuations, and you have volatility at 20 year lows. That doesn't make sense. "...
    • DM
      David M.
      12 January 2018 @ 22:06
  • V!
    Volatimothy !.
    11 January 2018 @ 15:48
    After watching for a second time I picked up a lot that I didn't understand the first time. I Don't understand the negative comments, maybe they use exotic options or trashy beta.
  • M.
    Milton .. | Founder
    22 September 2017 @ 14:31
    Hey everyone, we've updated the link with a working one and you can grab the extras here: https://we.tl/o3VawKX2Sy
    • LK
      Lyle K.
      4 October 2017 @ 19:56
      Thanks !
  • LK
    Lyle K.
    21 September 2017 @ 04:23
    Nancy was great.... I wish they could of explained a knockout strategy and more selling vol strategies.I would like to understand the selling vol and why it has worked for so long. It does seem like the CDO market where its just synthetic securities being sold to the 3rd power. If you take sell/buy options on a levered etf/etn thats like a nuke if it all starts to unwind.
  • SJ
    Sophie J.
    7 June 2017 @ 11:11
    I don't understand alot of what she's saying, but it's clear Nancy is brilliant.
    • JS
      James S.
      8 June 2017 @ 20:02
      Why is there not an option to play at 0.5x speed? ;)
    • J
      Josh .
      10 June 2017 @ 18:42
      although indeed im sure thlady is smart, to someone who understands the topic, its not a very useful discussion.
    • AW
      Anak W.
      12 June 2017 @ 23:51
      any student or anyone who's new to investing wants to help each other out? leave your reply under this comment.
    • Md
      Mike d.
      8 August 2017 @ 11:16
      This was a good discussion - brilliantly led by the interviewer. I also enjoyed reading all the comments on the fund's performance. Personally I'd really hope they hadn't made +ve returns in recent times - it would rather blow a hole in the integrity of the presentation. The strategy is one that has to be used in conjunction with a broader portfolio / view. For example it would fit very neatly with a portfolio of non 'benchmark' cryptos that whilst security-like have enormous optionality at this point in their evolution.
  • RS
    Rajesh S.
    2 July 2017 @ 23:11
    Did not see a link to the cheat sheet of terms like convexity
  • SS
    Steven S.
    7 June 2017 @ 12:15
    Just to comment. Thanks for saying about the coil of macro-economics. From the title I was hoping for a little insight on future volatility. I bought some vxx last year 1 month before SEC mandate of 3-1 stock split. Is it possible for governments to keep the price of vxx in check? just a question for a double up now that vxx is at $13. I've taken options classes 2 times and have option subscriptions. Loved learning about Best Choice Software from attending Traders Expo's. But with my $100,000 IRA I don't trade options yet. To get people to trade again maybe RV can do some Options Video's like you do with Peter Brandt or Dave Floyd?!!
    • MG
      Michael G. | Contributor
      7 June 2017 @ 13:43
      VXX is not a product that should be "invested" in from the long side in my opinion. There are opportunities to day trade it, but the current contango (upward slope) to the volatility surface driven by many of the dynamics Nancy discusses makes it a remarkably negative returning vehicle. Very "sophisticated" strategies exist in the institutional space that utilize VXX and its inverse XIV for "gamma scalping", which is a consistent high return strategy that effectively makes money by selling deep out of the money S&P "crash" puts. A good gig until it isn't. In general, I would encourage those who have not professionally traded options to stay as simple as possible (but no simpler) in their strategies. Interviews like this are in part to make you aware that there are sharks like Nancy swimming in these waters. While she appears as sweet as can be, I know multiple traders that have confided how she "ripped their faces off" on multiple occasions.
    • KS
      Kathleen S.
      28 June 2017 @ 03:03
      Does she really come off "sweet" ???? She seems like an unapologetic killer to me.
  • DR
    David R.
    7 June 2017 @ 11:35
    Simply, the divergence between low volatility and high pricing is attributable to global QE. As among the big four (fed, ecb, pboc, boj) there has been at least 3 doing QE at any time during the last 9 years.
    • DR
      David R.
      7 June 2017 @ 11:36
      Anyone seriously expect all those CB's to (voluntarily) stop inflating?
    • KS
      Kathleen S.
      28 June 2017 @ 02:57
      The market can spike down before CB's bring out fire hoses
  • KS
    Kathleen S.
    28 June 2017 @ 02:49
    I feel exactly like Nancy - "Am i on crazy pills, can no one else see this" - and guess what I think it is just the human condition they can't see it because they have too much invested and most can't think about what happens if it doesn't work out for them. I am a teacher in NJ and I talk about the coming pension fund crisis and people don't want to hear about it - their willful ignorance is where I see opportunity. Damn right I am happy to buy volatility at these prices.
  • JR
    Jon R.
    8 June 2017 @ 20:38
    Looking at Quadratic Capital's portfolio returns: -11.29% since inception in May, 2015. Not familiar with other portfolios with longer track records. I know vol has fallen off a cliff, but they were down 1Q 2016 as well, when there was plenty of vol. If someone is aware of something I'm missing, please share.
    • MC
      Mario C.
      23 June 2017 @ 06:14
      makes sense with the description of her strategy. Sh e describes the Long Vol idea has being easy winner, reality is totally opposite -> not surprised if her fund perf is negative, would have been surprised by the opposite. Much more clever is Steve Diggle pre GFC fund (Artradis), who used to run a long vol while having positive performance
    • MC
      Mario C.
      23 June 2017 @ 06:16
      I remain a big fan of Michael Green contributions though
  • AW
    Anak W.
    17 June 2017 @ 03:36
    Am i the only one who ended up watching this vid for 3 hrs?
  • AE
    Alex E.
    15 June 2017 @ 04:57
    Really enjoyed this interview. I'm glad to hear that I'm not alone in losing a bit a yearly cash hedging my portfolio. As has been said earlier in this thread, Volatility and markets won't go anywhere fast until the Elephants leave the room. Just got to find that elusive mouse...
  • AP
    A P.
    13 June 2017 @ 06:04
    Great discussion!! Constant camera movement / focusing is a terrible distraction. Detracts from this amazing content.
  • LP
    Lari P.
    12 June 2017 @ 19:38
    A shallow plunge into a very fascinating conundrum. I hoped this had offered more valuable insights into option portfolio construction.
  • JG
    Joe G.
    12 June 2017 @ 05:15
    Appreciate the depth of discussion. The video producer is intruding with the translucent - pan bull shit. Focus on the faces. I'm watching to see the people. I'm listening to hear them speak.
  • PS
    PD S.
    10 June 2017 @ 23:34
    interesting and great interview...
  • SD
    Stephen D. | Contributor
    8 June 2017 @ 03:46
    I would argue that this is NOT the biggest distortion in volatility pricing in history. In 2005-07 prices were just as low but, unlike now, the term structure was flat.. The problem for option buyers now is that the longer dated an option is the higher the implied volatility. Buying time is always expensive but it is worse now as most medium dated options price in some vol spike. The option buyer today needs to be either 1) Right on direction or 2) get a vol spike of a major size. In 2005-06 all the buyer needed was for markets not to get quieter to break even. That's not the case right now and makes Nancy's strategy more problematic than she presents.
    • MC
      Michael C.
      10 June 2017 @ 05:31
      Maybe she sells longer dated vol to buy shorter dated vol. And rolls in attempts to fund the trade whilst waiting for the major vol spike. P.S. Looking fwd to your next RV interview
  • RC
    Robert C.
    10 June 2017 @ 04:02
    Wow really great topic and interview! Vol is the biggest distortion. All the CB's are the bully at the Poker table with the Chips. Only thing that changes the game are the cards and eventually they change.
  • DM
    David M.
    10 June 2017 @ 01:37
    So as an options trader, I automatically create alpha simply by using options? My edge is that nobody else is trying to make money that way? Sorry. But Nancy lost me at "We have a definable edge in the macro space because we implement the portfolio entirely with options and swaptions. That is our alpha. Because nobody else in the market is trying to make money with just the options."
  • VK
    Vladimir K.
    7 June 2017 @ 20:50
    While I did enjoy the interview with Nancy, I would like it more if she did not repeat the commercial slogan: "Quadrant is so well positioned in this environment" over and over again. 2) saying that they have positive Gamma and positive Vega is like saying nothing. of course they have, if they buy options. Sharing how they position size, manage the position going forward - stop loss, take profit, take a look at the whole portfolio would be more appreciated. Though, I did like the trade idea Nancy shared with us.
    • CS
      Chris S.
      7 June 2017 @ 22:16
      I was going to write a very similar comment so I decided to rather reply to yours. So if you're long Gamma and Vega, you're also short Theta. While there is no doubt that being long puts will pay out one day, I wonder how you could have sustained such a position over the last 5 years with paying out theta all the time. I wish Michael had been more persistent in asking about that. Though he tried in his second question. I mean being right on macro is hard enough, but also constantly paying theta? It's hard for me to believe that this pays off over the long run.
    • HA
      Hamed A.
      9 June 2017 @ 18:18
      pitch book / commercial - nothing of value
  • HA
    Hamed A.
    9 June 2017 @ 18:11
    really wish these discussions would be less of a commercial / pitch and more a outline / guidepost for thinking and what to look for. this sounds very similar to my meetings with potential investors and fund of funds. i have used the same analogy - heads i win, tails i dont lose much
  • jg
    james g.
    7 June 2017 @ 21:29
    Dovetails nicely with the interview of Chris Cole of Artemis on RV. Both outstanding.
    • VK
      Vladimir K.
      9 June 2017 @ 13:25
      I liked Chris Cole much more. The guy was expressing a lot of deep insights.
  • NG
    Nitin G.
    9 June 2017 @ 12:20
    Although I enjoyed the interview but personally I think Chris Cole’s interview was much better. Chris interview demonstrated brilliant thinking and how he views the world through a lens of volatility & second order affects whereas in Nancy D’s thinking was more or less offset by repeated fund marketing statements. On the other note, she didn’t provide much color on how are they managing the theta bleed if you are long gamma & Vega. Only way to somehow structure such structure would be to ‘calendarize’ but considering the steep term structure I suspect if vega element remains as effective as it appears on the surface.
  • LH
    Leon H.
    9 June 2017 @ 08:45
    It isn't clear from the discussion whether the fund strategy is a simple "vol is really cheap, so let's buy it" approach, or whether there is a systematic approach to identifying mispriced options on a relative value basis. If it is the latter, why worry about the macro picture at all. If it is the former, as Steve D. pointed out, there is definitely nothing cheap about the term structure of vol in the current environment which is the real practical issue an option buying strategy has to face over time, and what do you do with the fund if and when you ever hit the home run? Close it down?
  • JO
    Joseph O.
    9 June 2017 @ 02:21
    Always look forward to enjoying Mike's thoughts and brilliantly simple articulations... but I did not need the constant marketing speeches for the interviewee's fund as much
  • TS
    Tim S.
    9 June 2017 @ 02:11
    I presume this is a good conversation but after a year of RV Education, this is the first one that had me totally baffled.
  • SV
    Stefan V.
    8 June 2017 @ 21:27
    Great work, much to think about, thank you very much Michael.
  • EL
    Edward L.
    8 June 2017 @ 16:05
    Too much jargon. Deficient discussion of concepts
  • WB
    Wes B.
    8 June 2017 @ 16:03
    Interesting discussion, but I struggle to understand how a position that is constantly long gamma, vega and convexity hasn't been destroyed over this cycle. I was a long time market maker in listed US Index Options and in my experience the best way to maintain long vol exposure without having to pay for it was to buy calendar spreads and simply cover you shortdated options when you felt the storm brewing. The last few years the contango has been so steep and the overnight gaps so severe (Aug2015, Brexit, US Election) that managing such a position has been near impossible. So... how else do you maintain such a position without paying lots of theta for it? Long atm strikes and short wings... there goes your convexity. Put in the other way... won't lay out premium but better hope we don't drift to your longs. The only way to manage long vol and have the time to wait is to sell something against it that won't hurt as bad when the storm comes. Otherwise you're probably just long strangles and thinking you'll be able to leg out of it with perfect timing. There will be a time when long vol crushes it and that time may be just around the corner, but there has been a lot of money lost playing the waiting game. Trust me... I've played that game for longer than I care to remember.
  • RR
    Ronin R.
    8 June 2017 @ 14:18
    The interviewer is always lecturing the guest on the topic they are supposed to be talking about. He should just let them speak.
    • TW
      Thomas W.
      8 June 2017 @ 15:45
      In my opinion that is the best aspect of this format. For example Michael Green pointing out the difference between owning a put and being short is pure gold.
  • MS
    Matt S.
    8 June 2017 @ 12:22
    This reminded me somewhat of The Chain series - what ever happened to that? It was one of the best RV ideas and seems to have fallen flat on its face? : \
  • TS
    Tyler S.
    7 June 2017 @ 15:28
    she likes you :o)
    • MS
      Matt S.
      8 June 2017 @ 12:13
      he likes her!
  • TS
    Taryn S.
    7 June 2017 @ 14:10
    Here's Nancy's overview of exotic options: https://we.tl/Qh4rEJhK2j
    • VK
      Viresh K.
      7 June 2017 @ 14:20
    • MS
      Matt S.
      8 June 2017 @ 12:12
      hi that link is dead already ;)
  • BE
    Baha E.
    8 June 2017 @ 12:06
    "Debit card investor" very neat!!
  • DY
    Dmytro Y.
    8 June 2017 @ 06:18
    What is the ROI on those purchased options for the last 36 months that her fund achieved and how many expired worthless? An inconvenient question.
  • AM
    Alonso M.
    7 June 2017 @ 18:04
    Very insightful interview as it reveals the high level of competition in the options world. I like Mike's comment about sharks in the options market waters. Seeing as how the options market is basically a zero sum game (is it wrong to say this?) where everyone's gain is someone else's loss, it becomes that much more important to acknowledge the sharks in the water. For people like myself, an options strategy amounts to owning index put options with staggered strikes and maturities against existing long positions that have significant taxable unrealized gains. It was instructive to learn the average maturity of Nancy's option portfolio is 14 months. Maybe the RVTV audience is too sophisticated for a discussion on time value decay on short dated options and whether it makes sense to roll over options that are approaching the term to maturity where time value decay becomes crippling. I would find such a discussion useful as it relates to what I'm doing with options.
    • SD
      Stephen D. | Contributor
      8 June 2017 @ 03:07
      Kash. Whilst it is narrowly true that all swaps and options are zero sums, this fact causes more confusion than clarity as they are very rarely 'stand alone bets'. I might lose 100% of my option premium, say a put option, but be delighted with that if the asset I held, but protected the downside on, went up a lot. On option decay I advise anyone holding an option to roll it 30-40 days before expiry unless it is being held for very specific reasons.
  • BL
    Bruce L.
    7 June 2017 @ 22:39
    High asset prices and low vol levels are both reflections of general bullishness dependent on continued central bank liquidity. The popular vol trades have become inverted directional plays on underlying asset price instead of risk management devices. A ticking bomb but who knows how long it can go?
  • GZ
    Gabriel Z.
    7 June 2017 @ 21:25
    What kind of iptions do you choose? Otm atm itm ? And how far otm ? What is your profit target ? Do you hold those options until expirations? How do you trade binary events using options ? (Electoond
  • GZ
    Gabriel Z.
    7 June 2017 @ 21:22
    Great interview, thumns up! However, I would have like a more detailed explanation of her trade structure. For example: When you buy options, do you buy them naked or try to teduce cost basis (buying
  • MD
    Matt D.
    7 June 2017 @ 20:34
    Fantastic interview, really enjoyed it. Look forward to the follow up. Well done RV.
  • JM
    James M.
    7 June 2017 @ 20:03
    Excellent interview thank you. I have been buying vol for over a year now and this was a refreshing and inspiring interview as I was starting to feel I am in a never win pursuit in doing so (unless off course we are in the Japanese CB never never zone globally). After hearing Nancy and Mick talk gave me a bit of relief in self doubt. Not to suggest information bias, off course I may be wrong but if these two highly experienced money mangers feel the same then maybe I aint as crazy as I was beginning to think. Cheers.
  • MM
    Michael M.
    7 June 2017 @ 18:37
    Superstar interview. Massively appreciate RV getting Michael Green to conduct the interview. His is some of the best content here. Bravo.
  • vt
    vadim t.
    7 June 2017 @ 17:56
    Michael, two question if i may (i've got them since your previous interviews): 1) Algoritms which more and more replace humans don't have emotions, right? Isn't it an natural kind of source (and big one) to make vol low? 2) Do you think big CBs allow any meaningful vol spike during their watch? I mean only the crucial markets of cause.
  • RM
    Richard M.
    7 June 2017 @ 14:42
    Wow! Really deep deep dive into the options world. Fantastic discussion and I really learned a lot. Mike did a great job as usual with his interviewing skills and Nancy was able to describe very complex topics in a very understandable way. Thanks to you both for a very enlightening interview!
  • TA
    Thor A.
    7 June 2017 @ 13:57
    Excellent point on how risk parity / smart beta / systematic AA are per design sellers of volatility and rely on assumptions about correlations (particularly between bonds and equities). There's a lot of hidden risk inside these strategies that I suspect many don't realise or don't want to. At some stage the monster within will rear its head and when it does the weaker and less capable providers in the space will be crushed.
  • JS
    John S.
    7 June 2017 @ 11:38
    Excellent. Always enjoy Mike Green's interviews
  • TJ
    Terry J.
    7 June 2017 @ 11:32
    A fascinating and totally absorbing discussion on options strategies. It has provided me with invaluable insights on investment products that until recently I had erroneously dismissed as being at the roulette wheel end of the market. Thank you RV