Hey Traders,

I have always enjoyed going to CBOE’s Risk Managment Conference because it is the only event that brings together people that look and think about markets in similar fashion to people like myself,  Andrew, and Licia.

Half the people there are ex market makers,  the rest are traders or managers that actively use options.

It is a deep dive into what is taking place in the option world right now… I go to these not only for myself but for you guys too. One important thing that you should know is that the markets always change and so do strategies, vehicles to trade, and opportunities. Trading – much like health and exercise evolves. And my job is to stay on the cutting edge do you don’t have to… If you’re not updating your trading styles and opportunities you’re going to find yourself lagging.

Every year there is something new and I pick up several ideas on what I can add to my trading.

Today at 2 PM I will be live with Cem Karsan and we will break down in further detail our big take aways from the conference.

Ahead of that though I want to share with you my 5 biggest take aways from the conference.

1.  There are way more option buyers than I thought there were in the institutional space: On 4 separate occasions in 4 unrelated presentations I heard the manager or trader discuss how they were buyers or longer dated out of the money calls.  Why? I’ll share my thoughts along with Cem today at 2.
   
   
2. Trend following is not working and has not worked in about 15 years. Trend following had it worst decade in 2010-2019, right now the 2020s are looking better, but, the old saying that the trend is your friend…it has proven to be a fallacy through 2020, and the 2020s are still up in the air.
   
   
3. Investment managers have been allocating to protection more and more but it is not nearly enough. Currently the average pension fund or sovereign wealth fund is long about 95% beta (exposure to the market) in their portfolios and they do not realize it. Long real estate,  private equity,  etc. is often pitched as diversification but correlates to the S&P 500 at a much higher rate than most managers realize.
   
   
4. This was maybe the most interesting…we are leaving the most unique set of economic circumstances in history. I have to apologize for the image because I took a picture of a screen, but it is so important I wanted to share it with you.
   
   
   
   This is a plot chart of CPI relative to inflation in england going back to the 1300’s (yes that is how old the Bank of England is).  The last 20 years have been THE outlier….not the normal.  Where we are now is much more normal than where we were.
   
   
5.  My view on the gamma bomb has changed.  Yes it is going to come,  but what is going to set it off has shifted.  I will share this in much more detail today.  But long story short,  if retail paper disappearsin 0 DTE  liquidity dries up….Gamma bomb.
   
   

Lastly I want to share with you my favorite new ACRONYM.

C.R.A.P.

Credit Rates Are Puts.

If you sell puts on the S&P 500 you essentially create the same risk profile and return profile as the Bloomberg long credit index. I did not know that, but the numbers are hard to argue. Selling a put consistently is essentially the same return profile as long LQD.

I miss seeing you guys and am looking forward to being back this afternoon.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian