Options for Extreme Volatility Mispricing

Featuring Nancy Davis

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.

Published on
7 June, 2017
Volatility, Investment Framework, Derivatives
49 minutes
Asset class
Commodities, Currencies, Equities


  • fT

    forecast T.

    30 8 2018 03:08

    0       0

    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 8 2018 22:44

    0       0

    I just came for the Mike Green questions.

  • SH

    Syed H.

    20 5 2018 01:31

    3       0

    This interview is the reason I subscribed. I'm not joking. Nancy Davis is awesome.

  • MM

    Mario M.

    24 3 2018 04:48

    5       0

    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.

  • V!

    Volatimothy !.

    11 1 2018 15:48

    2       0

    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.

  • PD

    Ph D.

    11 11 2017 03:55

    6       4

    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. "...

  • M.

    Milton ..

    22 9 2017 14:31

    5       1

    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.

    21 9 2017 04:23

    1       1

    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.

  • RS

    Rajesh S.

    2 7 2017 23:11

    1       0

    Did not see a link to the cheat sheet of terms like convexity

  • KS

    Kathleen S.

    28 6 2017 02:49

    2       1

    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.

  • AW

    Anak W.

    17 6 2017 03:36

    0       0

    Am i the only one who ended up watching this vid for 3 hrs?

  • AE

    Alex E.

    15 6 2017 04:57

    0       0

    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 6 2017 06:04

    0       3

    Great discussion!! Constant camera movement / focusing is a terrible distraction. Detracts from this amazing content.

  • LP

    Lari P.

    12 6 2017 19:38

    2       0

    A shallow plunge into a very fascinating conundrum. I hoped this had offered more valuable insights into option portfolio construction.

  • JG

    Joe G.

    12 6 2017 05:15

    3       3

    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 6 2017 23:34

    1       0

    interesting and great interview...

  • EC

    Elisabeth C.

    10 6 2017 04:02

    2       0

    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 6 2017 01:37

    8       0

    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."

  • HA

    Hamed A.

    9 6 2017 18:11

    6       0

    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

  • NG

    Nitin G.

    9 6 2017 12:20

    8       0

    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 6 2017 08:45

    2       0

    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 6 2017 02:21

    2       0

    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

  • T~

    Tshort63 ~.

    9 6 2017 02:11

    0       0

    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 6 2017 21:27

    0       0

    Great work, much to think about, thank you very much Michael.

  • JR

    Jon R.

    8 6 2017 20:38

    6       1

    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.

  • EL

    Edward L.

    8 6 2017 16:05

    1       2

    Too much jargon. Deficient discussion of concepts

  • WB

    Wes B.

    8 6 2017 16:03

    31       0

    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 6 2017 14:18

    0       5

    The interviewer is always lecturing the guest on the topic they are supposed to be talking about. He should just let them speak.

  • MS

    Matt S.

    8 6 2017 12:22

    4       0

    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? : \

  • BE

    Baha E.

    8 6 2017 12:06

    1       0

    "Debit card investor" very neat!!

  • DY

    Dmytro Y.

    8 6 2017 06:18

    6       1

    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.

  • SD

    Stephen D.

    8 6 2017 03:46

    11       0

    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.

  • BL

    Bruce L.

    7 6 2017 22:39

    4       0

    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?

  • jg

    james g.

    7 6 2017 21:29

    8       0

    Dovetails nicely with the interview of Chris Cole of Artemis on RV.
    Both outstanding.

  • GZ

    Gabriel Z.

    7 6 2017 21:25

    2       1

    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 6 2017 21:22

    2       0

    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

  • VK

    Vladimir K.

    7 6 2017 20:50

    13       0

    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.

  • MD

    Matt D.

    7 6 2017 20:34

    1       0

    Fantastic interview, really enjoyed it. Look forward to the follow up. Well done RV.

  • JM

    James M.

    7 6 2017 20:03

    3       0

    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 6 2017 18:37

    10       0

    Superstar interview. Massively appreciate RV getting Michael Green to conduct the interview. His is some of the best content here. Bravo.

  • MC

    Minum C.

    7 6 2017 18:04

    2       1

    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.

  • vt

    vadim t.

    7 6 2017 17:56

    0       0

    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.

  • TS

    Tyler S.

    7 6 2017 15:28

    3       3

    she likes you :o)

  • RM

    Richard M.

    7 6 2017 14:42

    6       0

    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!

  • TS

    Taryn S.

    7 6 2017 14:10

    1       0

    Here's Nancy's overview of exotic options:

  • TA

    Thor A.

    7 6 2017 13:57

    1       0

    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.

  • SS

    Steven S.

    7 6 2017 12:15

    4       0

    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?!!

  • JS

    John S.

    7 6 2017 11:38

    16       0

    Excellent. Always enjoy Mike Green's interviews

  • DR

    David R.

    7 6 2017 11:35

    1       0

    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.

  • TJ

    Terry J.

    7 6 2017 11:32

    4       0

    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

  • SJ

    Sophie J.

    7 6 2017 11:11

    2       0

    I don't understand alot of what she's saying, but it's clear Nancy is brilliant.