00:14:55 · Alex Micalizzi
[00:14:55] S2: Yeah, I'd say they've, so historically they've always been there. Like I can't remember a time not having a worst of. It comes down to the yield factor. So what is a worst of? Instead, in the example we just had now, We had S & P and it's down 40%. We take a typical structure in the market that has S & P, NASDAQ and Russell and the worst of, we now observe the worst performer. So you could have two of these indices up 20% and you could have, you know, the main street, wall street sort of trade. And one of these indices really underperform, you could end up with that put. And so it's, going to derive more premium, more premium from just selling a one index, which gives you a high yield. And it's also going to create additional risk factors for us because we have to model how these three things are moving together. And also it means that there are cases where what's the best, what's a great outcome for someone who has this yield and say it was done during a time of turbulence and the yield is very high. The best sort of outcome is two of these stocks rally and one of the stocks is marginally down and just stays there and the volatility on this thing does nothing and it goes sideways. You have now, I wouldn't say locked in, but you now have a relatively higher yield than just doing S & P that's gone up, right? That complexity of trying to monitor the worst one and being able to hedge it, is, I think, a segue to what's trading in the market and why it's creating this market dynamic, or why it's grown, sorry. And so you look at the three assets, the Russell, S & P, and NASDAQ trade, you basically have had all three of these indices and Russell over the last year. Russell was effectively sideways for many years. It's now performed a lot better. And so think about this. What drives volumes in an order call is a knockout. I can have a five-year trade, but if these three indices or three stocks or whatever go up every three months, I can do a five-year trade now has the same notion of every three months. So that volume goes up considerably.
00:17:17 · Tracy Alloway, Alex Micalizzi, Joe Weisenthal, Tracy Alloway
[00:17:17] S3: Just before we get more into the market impact of all of these, talk to us about what's happening, I guess, on your side of the desk when you actually issue one of these products. So you mentioned having to model the correlation between three indices just then. What's the first thing you do when you sell one of these? [00:17:33] S2: Okay. So the first thing we do is we eliminate the delta. So we hedge the delta. That's the simplest thing. We're not taking a directional view. [00:17:41] S1: Is that some Greek letter? [00:17:43] S2: Yes, it is a Greek letter. [00:17:44] S1: What does it mean again? [00:17:45] S0: I said there'd be Greek letters. [00:17:46] S2: I don't know. [00:17:47] S1: What's the delta again? [00:17:48] S2: The delta is the relationship between the price of this product and the spot price of a stock. [00:17:56] S1: Okay. [00:17:57] S3: Right. [00:17:57] S2: Excellent. [00:17:58] S1: Keep going. Right. [00:17:59] S2: So this product is bullish in nature. So as the market goes down, we went through that 6,100 thing. [00:18:06] S1: Yeah.
00:18:06 · Joe Weisenthal, Alex Micalizzi
[00:18:06] S1: Yeah. [00:18:07] S2: I'm on the other side of it. So I have a short delta position. I'm short the market. The first thing we do is we hedge that out. Now we're left with more interesting Greeks. And so at a headline level, what have we got? And let's take the example of the one year single S & P example, and let's take the auto call. The maximum maturity of this thing is one year. And I own some sort of put on that one year trade with the risk of this thing not existing every three, six, nine, 12 months. So I've got Vega on this put, and what's Vega? [00:18:46] S1: Thank you.
00:18:46 · Joe Weisenthal, Alex Micalizzi, Tracy Alloway
[00:18:46] S1: Thank you. [00:18:48] S2: Vega is the put sensitivity to the implied volatility. I've got Vega there, and I've got these quarterly knockout features. So what are they? What is a knockout? A knockout is a fancy way of saying a digital and a less fancy way of saying it's a call spread. I've got three call spreads there. that I look at. And so that, that is a lot of options in that phase. And so what do we do? What, what do we have headline Greeks? So we look at our Vega and a lot of my exotic brethren will probably go, well, that's not technically correct, but the way we generally look at it is when do we expect, how long do we expect this thing to last? And it's probably gonna, we can model that sort of, and just say in this example, we say it's going to last six months. We will assign the vega of this put at the six month level, and we'll go to the listed market and we'll sell some sort of downside because it's related to that 60% strike and sell that out there. That's not really what's in this product. [00:20:03] S3: Can I ask really quickly, who do you actually sell that vega to?
00:20:03 · Tracy Alloway, Alex Micalizzi, Joe Weisenthal
[00:20:03] S3: Can I ask really quickly, who do you actually sell that vega to? [00:20:07] S2: Yeah. We generally use the broker or listed market. So we will go to the S & P market makers in this case, and we will go there. We'll either do it on screens or via the broker market. It's generally what we do in this case. With the trend, we'll go to the trend a little bit later because I think it's important to understand why it's an imperfect hedge and what disruption that causes and how dealers, my colleagues have changed some of the trading methodologies as well. [00:20:44] S1: Let's talk a little bit about the action that we're seeing these days. And I guess to understand maybe the action, these days markets have gotten a little bit, like I said, it feels like the plane is like rumbling a little bit or something at high speeds. But before maybe we understand right now, let's maybe start and go back to the start of the year. Let's start, okay, we're talking about We're talking to you at the beginning of 2026, or maybe March 2026, three months ago or whatever. What are popular things that you're selling and what are the popular thing to clients? And then what are the popular trades you're putting on to hedge those trades?
00:21:20 · Alex Micalizzi
[00:21:20] S2: Yeah. So I would say it's bifurcated. There's an index side. So US registered stuff, we talked about the 300 billion run rate. And then there's the single stocks stuff, which is a very similar concept, but It's the, when we talk about maturities and we talk about these knockout dates, it's basically shrunk to a level that's creating a different dynamic. Let's start at the beginning of the year. So markets are going up. This product is effectively on the single stock side, on the index side is knocking out the single stock side is a lot faster because we observe it instead of every three months. Some of this stuff we observe every day. And so this stuff is churning a lot and In terms of hedges, there's less hedges because there's less vega because the product isn't extending because markets are going up. So this is a pretty virtuous cycle because it trades out, one comes in, and your day one hedges are working and you don't have to think too much about it. And then it's all hunky dory, as we say, until we hit some turbulence and certain stocks go down. And indices go down and that hedge, which isn't static and needs to be dynamic, changes. And the participant, the value of where I can hedge in terms of that implied volatility has also changed because a lot of people need to hedge at the same time. And some of the counterparties that were used outside of the listed market and IDB are pulling back because of turbulence. And so you have this concurrent effect of a lot of dealers have to now sell more optionality as markets are coming off. And a lot of the, I guess the demand for it is also fading come August.