Good morning. Welcome to the workshop. Today we're going to dive into a little viewer mail, sort of through Reddit. So, it's sort of viewer mail, but not really. Anyway, we're going to answer a few questions about the markets and about trading among a couple other things that are going on this summer out there in the wild, wild west. So, we're going to get to all this after the battle. Heat. Heat. Interestingly, did you see I heard that Dutton Ranch, the spin-off from Yellowstone, is actually really good. I was out to dinner last night and they said that this group said that they're watching it. It's excellent. It's better than Yellowstone. I would know that I would have to I would have to watch Yellowstone. Oh yeah, Jason. One of the best bunch of characters out there, man. Awesome. All right. Well, whatever. Um, you guys are city folks. That's why I'm a big country guy. Yeah, that's it. I'm a city folk. Yeah, you are a city folk. Um, so what's going on, guys? Uh, earnings today. Tesla. Um, I'm fighting. I gotta be honest. I did my Tesla play. It was good pre-market and it's decided to go not as good once we got open. So, let me get the double diagonal. I'm in fighting mode right now. So, I'm I'm I'm boxing it out. We're gonna see how we end up. So, I'm not giving up yet. Anyway, um so Mark, you said earlier that there's some questions. Was it Reddit that did I get that right or elsewhere? Discord. Yeah, someone reached out to me. Um and uh I thought these were actually some pretty good interesting questions. um a little bit about market making but a little bit about uh some pricing model stuff. Um so I thought they'd be good to take here. Let's do it. Okay. I'm going to paraphrase uh a little bit here. Sure. Um but the first question was from what I understand pricing models used by traders are pretty well known. Uh if these are the models that they're using to quote the bid ask and everyone's using them, what does a quant researcher do? What does someone that's like why are people still studying pricing models? Um and and what is that about? I have an answer. I'm curious Jason's answer too actually. Uh so what do quants do? Like what is the purpose of researching pricing models or ongoing research in pricing models if most of the ones are pretty well known and established? Well, I mean overall I think a lot of the quant so from from what I from what people tell me a lot of what the quants are doing is um either refining cost models looking at you know there's a lot of cost uh option pricing theory out there and they're looking at different ways that uh the the plane can be priced more accurately. Um, I did run into in a in a prominent hedge fund somebody who was doing something similar to what Voland is doing. And um, it was it turned out to be like a a a sharing kind of thing. You know, they're looking for different data sets to improve their models and it's constantly like trying to nail jello to a wall. Um, they're also trying to figure out models on what the other market makers are doing. Um, and the those are kind of like the the people that I'm talking to on the market making side. Um, but I I would love to hear what you guys have to say though, too. So, let me let me chime in here. Um, the end of the question, Mark, is is you know, what what does a quant have to do anymore? Is that is that kind of the gist of it here? Sure. Okay. So, I think relative to pricing options, there's probably not much more to do, right? Because um I think all these big market maker shops have honed this down to a pretty good science. And and and if you're going to price something, I mean, what are you going to discover that's going to make that very much different? It's going to be a penny here, a penny there. You know, not exciting, I don't think. Um I think where the the quant world goes now is you know maybe taking that model but also taking relationships across products and across implied volatilities and when things are relatively cheap and relatively expensive and and and taking advantage of a dispersion book for a retail person. I use that in quotes because that's a tough practice. But maybe there's with AI now and all that's out there, you can compile something that says in an industry group, XYZ stock hasn't performed well and the implied volatility and the tails are cheap. So relative to that industry group, I might want to buy this this stock and I'm going to use calls to do it because of where those those cotic tails exist, right? And they're really cheap relative to the marketplace and I'm going to load up on them. So I think that kind of analysis could be interesting. I don't know. That's my thought. Marky, what do you got? Yep. No, I I agree with that. Um, and I think the I think relationships is a big one. I think, you know, they're always funky things like dividends, corporate actions, like I think in some ways like it's getting better at some of those esoteric situations that you have to price. And the other point I would make too is speed, improving the speed of them that, you know, you want to have like a very good model, but also a very fast model. Y and you know, especially with so many different series out there, you know, being able to repric very quickly across an entire spectrum is, you know, only going to continue to be a demand. Got it. That's that's good. I like it. Um I also think relationships is a big one, too. Like the the what you guys were saying about um because like now SpaceX comes out, how do you how do you you know quote that? So there's like new issuances um relationships but also um you know the it pricing is a moving target too. So I mean it's kind of you know I I've run across quite a few that have you know they end up trying to we're trying to pick each other's brains kind of thing. Um the other thing the other thing that I just thought of too is you know I'm I I kind of like unusual option activity ex with a with a asterisk right? Um, I'm not always sure what it means. If something's oversized relative to normal volume, you know, average daily volume. Um, I think there's got to be a lot of soothing to figure out what it what what actually the trade is. So, especially I want to know when Goldman, JP Morgan, all the big banks are rushing into a name and they're being they're they're bullish or bearish. And it doesn't mean because they're buying calls necessarily that they're bullish. It could be the opposite because they're making it synthetic. We don't know. Um, so if there's a if there is a a lens into that sort of activity, that to me is helpful. I'm never going to put myself in front of billion-dollar firms who have researchers who just are good at picking direction. And, you know, ultimately, I want to I want to I want to join the crowd. I want to jump on with them. But I I understand I do have I do have kind of a vested interest in that because we are um providing data to uh a new a new unusual options kind of thing. It's more like a time in sales than it is unusual options because I find that somebody has to determine what the threshold is for unusual options and that's kind of you know that throws a whole monkey wrench into the whole thing, right? Um so like I but we do um Samantha Leuke is coming out with something called option teller which you know gives you like the full list um with like some assumptions and uh and premium like you know it gives you the total premium that was purchased um some assumptions like you know basically using delta and a couple other things. Is it bullish? Is it bearish? Is it hedging? Is it not? Um stuff like that. So it's it's pretty cool tool. That's good. Um, but I always the the thing that always got me with options uh unusual option activity that's out there is they cherrypick, you know, like and then when they throw their ads up, they're like, "Oh, look at this big trade that happened, right?" Uh, you know, that predicted this merger and then you're like, "Well, yeah, but there was this other big trade that wasn't." Yeah. That's why I think it's a little bit imperfect. So, you know, Okay. All right. I got number two. That's good. and and maybe it's a little bit of kind of what you guys are talking about here. Um so there obviously in addition to market making strategies there are market taking strategies uh forecasting what volatility is what some of these relationships are balls cheap after earnings whatever this taker side you know edge would be if market makers are just there to take advantage of the bid ask and these other strategies are you know objectively true and positive edge or whatnot why aren't these inefficiencies part of their pricing models or how does a market maker take advantage of some of the, you know, potentially legitimate edges that exist on the taker side? Uh, I don't know the answer to this one. Uh, because I don't think there's edge on the taker side except for the fact that you can choose when you want to be in. Well, I take that back. There is there is some edge, but it's not a it's not necessarily a pricing inefficiency edge. So, you're not going to do a conversion or reversal in today's marketplace as a retail person. A, you can't buy the bid and sell the offer. And anything anything south of that is giving up the all the edge in these things, right? Um, so their edge is that you can pick and choose when you want to be in a trade, right? And you don't have to be on every trade. and your timing is is is probably one of the the better edges. And and if you have a system of discipline where you get in and out of things, your exit strategy is very good and you stick to it, you know, that can be edgeful, too. I I I don't know. I'm not sure. I think, you know, um notice Okay. Well, I mostly agree with you. I think another asterk might be that like retail can sometimes take more or different risk. That can be an edge that they can do. Yep. Do you believe that you think V is cheap or expensive at sometimes then? Um, I do believe it's cheap or expensive relative to a historical plane. Um, what you do with it necessarily, I'm not sure because when volatility is high, it doesn't automatically mean you just sell it because you have to buy something in terms of being, you know, hedged. So you have to pick and choose the best possible things to sell in high volatility versus the best possible things to buy in low volatility. Um and that could be a whole plane of strike selection too. That could be a certainly a good edge for you as well. Um so I think that's I think that's really well said and that like I think that kind of is the answer there. like it's you manually adjusting and seeing those opportunities like is there an absolute like you know incorporation of that idea that you know ball is generally cheap it's generally expensive I I'd rather be a buyer than a seller like you just it's more manually tilting things rather than explicitly incorporating that as a strategy say right yeah think about think about the retail person slower to sell on one side faster to buy what whatever it might be yeah and you may have you may have the personality where you like selling premium him more and you or vice versa you like buying it more well what does the this premium seller do in low volatility environments does he just keep selling it you know I I I think there's certain strategies where you can actually be collecting theta but being long ball right it's a it's a it's a calendar it's a diagonal those kind of things where if you have this this love of selling premium and collecting theta that's one way to do it in low volatility environments isn't it's not the greatest thing in the world but it's it's a way to kind of stay in the Right. So yeah. So um I agree. So all those questions like if there's all this edge on the liquidity taking side, you know, or is there edge on the liquidity taking side versus the liquidity buying side. Um I agree with Lex that um you know adverse selection is your is the the takers edge, right? They go in and come out how they see fit. it. I think you have to define edge because the dealer's edge is mechanical and the taker edge is speculative. Even if you have like the greatest technical setup in the world, it's speculative, right? Um I think that you can say that V is cheap or expensive because it's never perfectly priced. Like there's, you know, if you do a 30-day historical volatility compared to what IV was back then, like sometimes it'll be close, but they never like match exactly, right? So, um, you could say that looking back that IV was cheap or expensive, right? Mhm. Um and but you know determining that going forward from this thing is really what you know like like platforms like mine and stuff like that are all about like what made V cheap then and expensive then and you know like looking back at how V was priced and then the reaction function to what um to what that V was when going you know when going forward when that you could almost say like realized implied V kind of thing like where you know what happened there right um and that is kind of really you know if you're trading V that's what you're trying to figure out is what happened there like why why was it priced lower than the result um and there's all these like you know metrics and stuff like that and it can you call that edge not really because that's you know it's speculative it's you're trying to predict something but the dealer's edge is concrete it is bid ask. I get this little I get these little things and get paid to manage the risk. Right. Yep. What do you were saying Mark too? Um you already said I think on this one, right? Yep. Um I think uh the last question is also a good one. Um and it kind of goes, you know, both modes for market making and moes in general in trading, right? um for options market making a lot of the edge is passively you know collecting you know what Jason's calling structural edge um like with access to markets the ability for anyone to code up anything like seems like that barrier to entry is getting lower like what are the and that goes for market making as well as really any kind of professional trading like what are what are those barrier to entries and um you know like what does that mean for the markets. Um I'm not sure I understand the question in barrier to entry. Are you talking about for a retail person barrier to entry or a market maker? Sorry. Maybe the fact that these barrier to entries are getting significantly lower. What does that mean for markets? Yeah. Okay. Um so yeah, sorry. Think about what where this this option market was. I'm gonna say 10 years ago pre-COVID. Okay. Um, and even pre, you know, discount broker, even pre- Robin Hood, right? Um, you paid a dollar contract to get in and out of here, markets were wide. There's no real, you know, super incentive for a retail person to be active in the marketplace, right? And option volume reflected that. Um, then all of a sudden, Robin Hood comes into the scene. I'm not necessarily saying they they were the cause of all this, but they were a big help. Um, and they start offering free trading, you know, free trading. um all of a sudden that starts to democratize access for the retail person. Now all of a sudden you need a good computer. They give you a platform and the markets start looking a little tighter. And as we know now time went on and and other entrance came to the market, you know, we came in the market, Weeble, all these other players, Tasty. Um and now you have everyone competing for that that same order. the liquid option volume's done as a result. A markets have gotten super tight and B um they've become super liquid and C it's it's it's almost it's so cheap for a retail trader to open up his computer and trade right with free commissions. So it's it's insanely um easy to get in there. There's virtually no barrier to entry to get into the market. The barrier to entry that I always find with with retail folks is why in the world would I ever make a trade? What's my reason? And you know, I I struggle with myself. I mean, I've got good ideas in in earnings plays, you know, because it's non-directional. I don't care which direction it goes. And for me, you know, and Mark, I don't know how you are from the market making days, but we have no I have no training in understanding direction. Zero. I don't know if a stock's going up, going sideways, or going down. I I can't read a chart, you know? I I know what they mean. I think it's bologoney. I don't believe it. Um, but people swear by it, you know, and if you can be successful, great. I need an idea generator. And if AI is going to help me get there, that's where I think it becomes, you know, even more democratized. And can everyone win? Yeah. You know, I I don't I'm not sure how zero sum it becomes. If if my strategy is to be short and I'm right at it a lot, well, Mark is still gonna make money even if he's got the other side, right? So, I'm not sure. Sure. I think it's I think I think option volume is going to it could potentially double option daily option volume with the whole AI craze and in the access to this marketplace. I really do. What was the question again? Because I I thought I had like an answer to the question and then Lex I think answered it differently than I was thinking. So yeah, that's all right. Go ahead. Uh Mark to just kind of paraphrase the question one more time. uh broadly low barrier to entry in markets for all different types of participants. What does this mean? Increased liquidity. That's what I was going to say. Yeah. Well, that's true. That's we've noticed that, right? Yeah. And Mark, you wrote a great piece on this a while back when we were dealing with PDT. Um and it has to do with those those little cuts of information that every retail person gives to a marketmaking community. Every one of those trades, one lots, two lots, three lots, is helpful for defining the market price. It gives it gives the market making community information and it and th those people are vital to their community because it's a it's an ongoing revenue stream for the market making community, right? So they can keep providing liquidity because it keeps the lights on for them. And I think I think that's really important. You know, it's it's symbiotic the retail community and marketing community. They live together and they can both do well. They really both can do well in that world, right? Yeah. More liquidity is better for everyone, right? Like the more information that comes to the market just allows everything to get, you know, better and better priced and that's, you know, good for the entire stack of participants. Yep. I agree. I agree. Yeah. I mean, like even it's even better for like everyone, not just participants, but I mean, if you're starting a business, you know, don't you, you know, liquidity is in venture capital markets. You know, there's also a certain level of trust that goes into the liquidity that's out there. I mean, you know, there's still people for some reason, you know, there's these like bare mongering like Twitter feeds that are telling you that tomorrow we're going to go into a uh double, you know, double depression kind of thing. Um, if if you have trust in markets and you know markets are are stable, those people are screaming into the ether. You know what I mean? Um, but for some reason there's always this this mistrust of financial markets and you know really education and and liquidity helps that. So I think liquidity is like is ultimately what the markets want, right? I agree. I agree. All right, that was kind of fun, Mark. I like that little It's kind of like a the viewer mail, you know, uh getting We love viewer mail. More viewer mail. More viewer mail. I mean, I have three more viewer mails, but we can't get to them today. Okay, we'll do it another time. Um, all right. What's go what's on tap for the weekend, you guys? Anything fun before we leave? Head out of here. Let's talk fun. Um, so I'm I'm going to be gone. So, this is good. This good uh uh uh broadcast thing. I'm going to be gone uh for the first like two, three weeks in August. I'll be in Europe. Really? Where are you going to Europe? I mean, what's what's We're doing um theis conference? No, no conference. We're going actually we're doing a cruise. We're we're flying into Madrid, then going to Barcelona, and then taking a cruise. Uh, you know, we're hitting Cartahia and Gibralar, but in the middle of the cruise is a total solar eclipse that we'll see while we're in the Mediterranean. How cool is that? You didn't plan that. Isn't that cool? No. Yeah, we did. You knew the solar eclipse was coming? I guess you could. Yeah, that's I mean, you had to book it fast. You had to book it in advance, but then we're finishing in Italy. Well, we're gonna get you on the show when you're in uh Gibralar or whatever and and give us the backdrop. I'll have to look. I I have to look at the itinerary. I'll tell you I'll tell you where I am. Awesome. Awesome. All right. Good. Mark, what do you got going? You got a You got your tennis garb on, I see. Yep. Uh nothing anywhere near as exciting as a as a cruise around the Med. Um having a pool party for my daughter's birthday. Half birthday. Hey, I'm doing that on Thursday. Next Thursday. That's good. All right. But it's a full birthday and a son. Yeah. I can't even compete with either one of those. Oh, you know, I'm uh enjoying the beautiful sun here in Drinking wine. Oh, yeah. You know, I don't drink as much anymore. You know, Mark's got me beat here on this one, but I will have some uh maybe not tonight, but tomorrow definitely good wine. Uh really light vac, a little golf, a little pool, you know, nothing big. Just chilling. Cool. And thinking about my option strategies. Speaking of which, Speaking of which, it's in it's in I have to go give it CPR right now. Yeah, I was gonna say I heard a little trading activity over there. Uh yeah, I've got uh I've got a patient that's uh almost KO'ed here. I might have to go tend to him and give him some CPR. I hope we're TPS, not SLS. That's right. I think some of those some of those trading activities was mine because I put in like limit limit orders like for rolling and uh they started all hitting during the show. Oh jeez. Ding ding. Yeah, that I didn't know you guys could hear that. That's funny. All right, guys. Have a great weekend. That's a wrap. We'll see you next week. Have Have a good um fun time, Jason and Mark. What else? Happy trading. Happy trading. You know how the financial world goes. Here comes the buzzkill. Please make sure to take some time to read this boring disclaimer. We will owe you one.
