Check out the complete Transcript from this weeks podcast below:

VIX in the 30s, talking market shocks and VIX spikes with Brian Stutland of Equity Armor

Jeff Malec  00:07

Hello dark days here with our vol spike topic for this episode caused by news that Russia was in fact invading Ukraine. We talked financial markets and strategies on here, but should remember that there’s real people in real danger out there. So our hearts go out to all those in the path of war and the human tragedy that will unfold over the next several weeks or months. It’s not going to be easy. For today’s pod with vix shooting up to its highest levels in a year we found a vix friend, so to speak, getting Brian Scotland’s CIO of equity arm investments to join us on short notice. Brian used to be a market maker in the VIX option pits, and now runs equity armour strategies, which use their EA vol index to essentially replicate the VIX. We cover what this morning was like in comparison to 2020 in 2008. Why is the VIX an imperfect benchmark for vol and what the rest of the year may have in store for the VIX, send it. This episode is brought to you by RCM professional team of advisors that help investors research and access hundreds of professional managers in this space. Check out everything RCM does at WWW dot RCM Make sure to check out our newly updated vix and volatility white paper as well as a trend following white paper we put out last week, just click the Education tab and then white papers. Okay, back to the show. All right. Hello, everyone. What a day to have a big specialist on recording this around 11am. Thursday, February 24. US markets were down about 2% European markets down four to 5%. The neat guy was at a 15 month low. And our old friend the VIX was up in the 30 handle. All this morning, Brian and I were gonna record actually at 9am. And the market was so crazy. We pushed back to 11am here so we’ve rallied back a bit. I think NASDAQ went positive. Now it seems to be turning over again. So quite a day, Brian, thanks for coming out of the foxhole for a bit to chat with us.


Brian Stutland  02:20

Yeah, it’s been what? Quite a day quite a night for the last few days for sure. For markets here.


Jeff Malec  02:26

The I was playing Paddle Tennis, which listeners outside Chicago might not know. But in the northern part of Chicago here. That’s a big deal. But last night, that guy actually left the paddock because he’s checking his phone he’s on he’s like, said something about margin call and ran out the door. Mike.


Brian Stutland  02:44

This is happy. Yeah.


Jeff Malec  02:47

So yeah. So tell us we got NASDAQ entering a bear market downward 20%, s&p in a correction down more than 10%. So let’s just start. Explain what you’re seeing in the vol space generally and option prices locally and anything you got.


Brian Stutland  03:04

Yeah, well, certainly, you know, it all really started when the Fed started talking about pulling back liquidity essentially, right, that they were going to stop buying bond purchases, the market, basically anticipating rate hikes. And then obviously, the news on Russia and whatnot, you know, invading Ukraine is, you know, glorified the level of volatility in the marketplace. And so I think what we saw is once the liquidity started to realize maybe it’s got to pull back a little bit, all this volatility crept in. And you talked about the NASDAQ entering a bear market down 20%. Well, when interest rates start moving higher, at least on the back end of the curve, historically, that’s not been great for the NASDAQ because those top names, what I like to call if you’re a right wing, political person, Maga, Microsoft, Apple, Google, Amazon, if you’re left wing, you can add a Tesla in there and make it maggot. But those stocks really lead the NASDAQ. And they do very well when they can borrow for cheap, right. So when when they can borrow cheap and either buy back stock or or acquire other companies that have been falling in value. It’s great for them. So a rising interest rate environment is not that’s led to a lot of volatility. They make up a big component, not just at the NASDAQ, but the s&p 500. So certainly that has been the reason for all the volatility in this marketplace is really coming from those large cap value names and the growth sector in general, having a very tough


Jeff Malec  04:22

time. And what were you saying this morning, in particular, in terms of where option spreads blown out? Where vix was what hit 34 So it wasn’t like March 2020. We weren’t going into the 60s 70s 80s. But give us just a little behind the scenes look of what the actual plumbing was looking like.


Brian Stutland  04:42

Yeah, well, I mean, I think when we looked at March 2020, you know, we were seeing four or 5% moves in the stock market, Close to close, you know, then all the level of intraday volatility to go with it. Now, we’re not quite seeing that level. Definitely high levels of volatility, but not quite those moves and that probably warrants a pretty little But we’re VIX, not the 60 or 70 vix or at vix we saw in March 2020, the market moving 2% or so, it is very volatile. It’s tough to be an investor in this market, but it is also warranting IVIG, somewhere in the 30s not not the 60s or 70s.


Jeff Malec  05:17

And compare contrast one more time with like Lehman crash 2008 lows compare and contrast that one as well.


Brian Stutland  05:27

Sure, I mean, I actually would say that this is somewhat comparable to the 2008. You know, 2008, we saw high levels of volatility, but it was a consistent market down, down down with a couple of gaps in place, right when leaving collapse. I remember that day very clearly, the VIX popped extremely hard on that day, you know, there was panic, but then once the sort of panic settled in, you got into this normalized volatility level, not were normal in terms of like, it’s fun to be in the market, but normal in the sense that, you know, you’ve got that range of two or 3%, daily moves up or down. And that sort of became the norm. And that’s where the VIX sort of settled in back then as well. Obviously, once we sort of got through the clearance of October of 2008, that brought high levels of volatility, but December, and then January, oh, nine, February Oh, nine, it was more of that normalized move of two or 3% that we’re kind of seeing today. And I think that’s, you know, fairly comparison, which hopefully means the tail end of a bear market, as it did in 2008. Heading into 2009.




Jeff Malec  06:32

It seems a little similar, right? At that point, they let Lehman fail at this point. They’re kind of letting Ukraine be taken. So it seems like a similar thing, like people like hold on this, you’re actually going to let one of these go. Yeah, a little wake up call for people. That I


Brian Stutland  06:49

think it’s why you’re seeing the pop in the VIX today that you weren’t maybe seeing like a week or two ago, because now people are waking up realizing are you actually you’re really just going to let Ukraine go, this is like your pension. Are you really going to let Lehman go under? So that’s what I think we’re going to see today, we’re going to probably see some higher levels of volatility due to that the same way we saw Lehman, you know, September, October, we’re probably kind of in that time frame, comparatively versus the December, January, February timeframe of oh nine, where we then saw the bottom we’re not I don’t think we’re quite there yet.


Jeff Malec  07:20

And then you were saying you think it’s a little bullish? Actually, what was that comment of like, the await comparison?


Brian Stutland  07:26

Well, I think when you said the OA comparison, basically, you saw the VIX actually start going down, and the market was going down the VIX going down because the levels of moves in the market were not as great we kind of settled into 2% daily range for the market, although that was elevated in terms it was not increasing in volatility. And so whether you’re increasing or decreasing in volatility is more of the key to be looking at. Right now. We’re seeing the ball pop, we may get a little bit more shakeout in this market. It may not be over yet. So until we start to see the volatility levels come down the VIX come down to daily moves come down. Um, you know, you may see a bear market kind of continue.


Jeff Malec  08:07

And what does that look for you like, into the 20s or into the back into the teens all the way or you’re saying just into the 20s and the VIX would be fun. Well, I


Brian Stutland  08:15

think the s&p has got to get over some key levels here 4200 intraday, on a Close to close basis. I’d like to see it close above 4320. I think if we do that, then you may see the big start to come off and get into the low 20s. But with the Fed sort of in play, decreasing liquidity in the market, the normal vix could be back to where it should be, which is around 20. So the days of low teen VIX, I think are gone for a little while until the Fed indicates that they’re going to stop raising rates until that happens, you know, the upper teens to 20 is probably an area where now the VIX, you know, market participants say risk is now you know, back on again, you can get into the market. So that’s probably where the VIX goes if we break some of these higher levels in the s&p, but until then this this feels like a bear market right now.





Jeff Malec  09:03

And give us the nut to put you on the spot with the math but give us the earth on a VIX, right? A vix of 32 Yeah, like what does that mean in terms of daily moves and turn of weekly moves versus vix at 20 to say or 30 and 20?


Brian Stutland  09:18

Sure, yeah. The way I like to look at it is for every 16 annual move in the VIX that represents 1% daily moves in the market most of the time. So 32 You know, double that. So that’s 2% daily moves. So when you’re looking at is the VIX cheaper? Now you have to say to yourself, well, is the market moving 2% a day? If it is then the VIX is not cheap, right? Because 32 is representing that 2% move most of the time.


Jeff Malec  09:43

Got it. That’s an easy, easy one to use. And then halfway would be one and a half percent and so on and so


Brian Stutland  09:50

forth. Exactly. Yeah, it’s symmetrical all the way up. 48 vix would, you know, be a 3%


Jeff Malec  09:56

which is crazy to think of when it’s in like the 80s and it’s rare. Anyway, like a 6% daily move or something? Yeah,


Brian Stutland  10:03

that’s what we saw in March 2020. Right. I mean, that was, that was just levels of insanity.


Jeff Malec  10:14

Want to backtrack a bit and dive into your personal background? Give us a little bit how you got into the biz where you’ve been touch on that. Michael Jordan last shot that Jordan last shot first Utah behind you.


Brian Stutland  10:26

That certainly is it’s one of one of my favorites. Oh, that’s a guy, you know.


Jeff Malec  10:31

Like he can’t follow through. Right? Yeah, right. Have you ever read about that? He said, like he knew he was tired. He could feel his legs were tired. So we wanted to really exaggerate the follow through to make sure you got it to the best.


Brian Stutland  10:44

Yeah. That was I mean, that the reason I love that shot was just representative, when you know, it came to crunch time for Jordan. He was willing to step it up. And he knocked down the shot when you had that. I mean, that’s what made him degrade. Right? It’s just when you needed it. You got it from him. I heard a great basically,


Jeff Malec  11:05

in a great argument to end the Lebron verse Jordan debate. It was like there’s one NBA Defensive Player of the Year, two NBA titles. It had basically the difference between them. And they said if that was a player, right, if if the difference between the records was just a single player, it’d be a first ballot lock Hall of Famer. And that’s yeah, between the two. So yeah, yeah. We’ll move on to our Jordan Phantom. So yeah, give us a little background. You were down in the pits at one point, right.


Brian Stutland  11:37

Yeah, um, you know, grew up in Chicago, went to this Chicago Board Options Exchange pits right after college in 97. After finishing a degree in chemical engineering and a master’s in Biomedical Engineering from Michigan, and went down in the pits traded for some pretty big specialist units down on the floor, eventually, for my own broker dealer went off in my own pay, and went into the VIX options that when right when they listed options, there was maybe like five of us trading in there. It was quite quiet. Goldman Sachs, Barclays stock Gen were the very big institutional players in there, whether they wanted to protect themselves against the housing crisis, when you think about the movie, The Big Short, and Goldman being so involved in that, you know, I look back and say, you know, I there was a reason why they’re vix by Goldman was buying upside calls in the VIX, right? Anyway, so it traded around that and just learned a lot about how vix moves, how vix futures move, and how volatility moves relative to the market. And eventually, we formed a registered investment advisor, he sorted it to, you know, turn our market, you know, making strategies that we developed into market taking strategies and offer that to clients. So left the trading floor in 2015 ish or so closed up the broker dealer and really focused on just the advisory business and sub advisory business and capacity that we’re you know, we’re portfolio managers on a couple of funds now, and offering all that vix trading and knowledge to the marketplace in the public.


Jeff Malec  13:12

And so take me back to something. So what was that 2010 through 2015 and the VIX bit,


Brian Stutland  13:19

I know 2002 2006 Right when they listed options, the future came on in 2005. And they listed vix options in 2006. And I was there from the start.


Jeff Malec  13:31

Okay, so you were there? What?


Brian Stutland  13:34

Nine years? Oh, we’re here the moment right.


Jeff Malec  13:37

What was that like in the pit days? Insane? Crazy?




Brian Stutland  13:41

yeah. I mean, wild swings for sure. I you know, it definitely helped to do 1007 2008 You know, the bid ask spreads were a little lighter. If you’re a market maker, you kind of enjoy that being able to get you’re basically making a little bit of edge in the market trying to get in and out and manage your book and risk. So the wider the spreads are, if you can find the bid of the spread zone, they ask, you know, it definitely helps. So, I mean, we, we had some great, great moments back then. And actually our firm became one of the higher level volume traders in the CBOE electronically we were one of the top volume trading firms there so so yeah, so certainly that was you know, exciting times for us obviously 2000 2008 hit you know, we’re able to manage it have a ton of success. I don’t even post returns from those two years because they were insane for us so but yeah, last crash, Flash Crash 2010 was probably the most craziest moment when the market out of nowhere dropped five or 6% and mix you know, move from like 30 to 40 and matter of like seconds. But, but certainly a lot a lot of times we see a lot of volatility, it seems like you know, even though the standard deviation moves are called three standard deviation moves seemed to be happening, you know, once or, you know, once every other year or once a year almost right? So it just seems like all the high frequency and everything that else that goes on in this marketplace is making and driving this level of volatility.


Jeff Malec  15:14

And when you were down there doing the victim, you can you feel that steady increase in the volume and the interest and the institutional participation. Like oh, yeah, certainly feel like in real time.


Brian Stutland  15:25

Yeah, I mean, we went from like five guys trading and the bit, you know, a lot of orders coming in, how does the VIX future move. And, I mean, I remember one order a guy bought a call spread, you know, customer bought a call spread, and like literally five minutes later, he sold it back out for like two and a half cent loser because he didn’t really know what he was doing. But But basically, the pit grew from like five over six of us standing in there to, you know, a pretty sizable pit. Now, when you go to the Chicago Board Options Exchange, the only two open outcry pits left really are the s&p 500 options and the VIX options. So volume really grew the number of guys trading and women trading it grew. So, you know, it became more liquid, and more actively used for market participants to use a better way of hedging themselves, rather than just using a put option contract.


Jeff Malec  16:19

And could you feel two things one, who was that guy? 50 cent? Yeah, that would just keep coming in and buying one. What was that? Like? Was that you guys knew who he was. I think it’s come out since right? It was like a London.


Brian Stutland  16:33

Yeah. Yeah. Yeah, you know what I mean, you know, it just wasn’t him doing that. Obviously, he had his 50 cent program or whatever, but other market participants, you know, similarly, you know, what they wanted to do was own the upside call in the VIX, because on days like today, you get this asymmetric pop, you know, out of nowhere that surprises people. And then all of a sudden, all those call options that you bought in the VIX, you know, playing the VIX to the upside explode in value. So lots of traders played played that. And as a market maker, my job was obviously to sell them that call, but then also trade around that and manage my book. So that, you know, I wasn’t caught offsides, by that that ball pop.


Jeff Malec  17:17

And so you would you’d sell the option. And you’re kind of like all these gamma flows now. So then you would Delta hedge that you were trying to be, what was your strategy in terms of market making you were always neutral?


Brian Stutland  17:27

Yeah, I was pretty neutral as a market maker, the way I would sort of play it was trying to leg into butterflies all over the place. Because that’s usually the most neutral option strategy if you’re somebody that is more knowledgeable about options. And I talk about this in the higher level parts of the book that I wrote on option trading, but the butterfly is usually the most market neutral kind of play. And so as a market maker, you would try and sort of leg in and out into those flies. So if you sold one strike, you were buying something around it if it’s whether it was the same month or later month, and try and stay neutral. We did for actually a little bit of time have a couple guys market making in the s&p and sort of trading s&p versus vix for a little while as well, to sort of to play those two option areas since the s&p 500 options are built to calculate the VIX.


Jeff Malec  18:19

Yeah. And then the second one, just what was it? Like? Could you feel the institutional interest the retail interest in being short, Vol. Right? And kind of did you feel that playing out with the ETFs coming online and all that?


Brian Stutland  18:31

Yeah, I mean, you could see that when the short volume or short interest increase to try and play vix to the short side, whether it was selling a call on the upside, or or shorting VX X, for example, the ETF tracking the front two month futures contracts, when the vol pop came, you could feel those guys just you know, have to rip out of their positions. I know, you know, a handful of firms that literally blew out on having those positions on and not managing that risk. So I mean, people say being short, vix futures is the greatest trade till it’s not and then, you know, they go up 100%, and you’re done. So, it’s a difficult trade to manage, but you could see the players come in and the level of panic it created when we got the fall box.


Jeff Malec  19:16

Love it. And then so like you said, left the floor started equity armor. So you guys run to manage accounts, you run some programs and some advice on some mutual funds. And the main takeaway that I have from it is right equity armor you’re trying to protect the equity portion of the portfolio. So talk a little bit about the the main idea there of what what you’re trying to accomplish.


Brian Stutland  19:42

Yeah, I mean, our handful of strategies, the core, the core issue there in play is, is using the VIX using vix futures to provide a hedge for any long equity exposure or long beta I like to say to the market, so if somebody is dialed in in some way or form with correlation to the s&p 500. And being invested in stocks. What we like to do is we’d like to use vix with that. And, you know, there’s a there’s a handful of reasons we do that. One, we know that over time, we believe stocks go higher. And if you looked all the way back to, you know, the Great Depression 1929, the market is higher, right? At the same time, the VIX kind of acts as like a heartbeat. Yeah, it spikes, but it kind of comes back down. You can’t exercise forever, that heartbeat comes back to normal. So vix sort of returns to this mean, right? So if I own something that is mean, and not going to generate any returns, and I own something that’s, you know, moving higher? Well, now I have two pretty good things. The thing is, is is this mean reversion going to give me protection when the market goes down? And the answer on a daily basis typically is yes, the VIX pops when the market goes down. And so if I get this daily hedge embedded, where I have two, two sort of securities that are balancing each other, but then over a long period of time, I have one that I’m owning that’s going higher, and the other one that I’m owning, that’s going to return back to its mean, I can play that seesaw action and benefit from that.


Jeff Malec  21:13

And so embedded in that is the whole concept of base. I’m using the VIX as a cash machine, when it pops, I can take that put it back into the equities that are going to generally trend higher.


Brian Stutland  21:25

Yeah, exactly. It’s like it’s like, you know, a farmer, you know, you’re gonna, you’re gonna sort of plant your crop, plant your seeds, when it become when it comes due when the corn you know, is right, you’re gonna pick the corn, right? And eventually, the corn is going to go away, you’re gonna have to replant again next year. So we do the same thing with the ballparks. We’re selling out of that volatility pop and buying equities at a lower price.


Jeff Malec  21:48

And talk a little bit right that structurally, that makes sense. The devils in the details, right? Because the VIX futures have a constant bleed. They’re always reverting to the cash fixed price, you can’t trade the cash picks. So talk a little bit about that dynamic of like, how, how can you trade the VIX profitably, when it seems very hard to actually hold it as a long holding?


Brian Stutland  22:11

Yeah, it is tough to hold as a long holding. I mean, we see the VIX drift lower here and whether how you hold that held those futures, or how you traded the VIX really depends on how well you did. You know, the key is, is we developed a methodology in order to start to limit some of the decay of a contango market and by the word contango, I mean example, the oil markets when the oil let’s say spot prices at 100 Oil Futures traders, whether it’s storage costs or whatever the future outmanned is trading at a higher price than the spot price. So that happens a lot of the time in vix where the VIX future outlines are trading at a higher price than the VIX. So what happens is if the VIX does nothing, the VIX futures have to come down and settle down into that cash price. And so that’s called decay. And so managing that decay aspect of the VIX futures is the key part and the actively traded part that where we use some methodology and tricks so hard to be able to hold long vix futures or hold that long fun month vix futures synthetically, to play all this mean reversion back and forth in volatility.




Jeff Malec  23:20

But that’s right in a lot of people thought, oh, I’ll just buy VX X I’ll buy one of these ETFs to have that. Yeah, that long exposure. They’re rebalancing right, they’re down 98% or whatever it is. So Right. How do you that’s the kind of the trick of like, okay, if I just bought and hold VIX, I lose all my money. Yeah. So I think


Brian Stutland  23:40

I think I think the problem that you have there is, is Vx X is based on the calendar every day, it’s gonna roll from the front month, and it’s gonna buy a little bit of a second month, vix future, that’s what the V xx is tracking, okay, it’s only the front two month futures contracts. It has no idea where the spot price is, or where other future contracts are trading. So it’s like this systematic program based on a calendar that’s owning vix futures, whereas we are looking at the shape of the Futures Curve on how to own it, how to hold it. It’s very similar to a treasury trader, you want to own two year notes or 10 year notes or 30 year notes, or the Euro dollar traders that trade you know, the shorter term, you know, yield curve, so to speak, there’s a yield curve to be traded in the VIX. And that’s how we manage


Jeff Malec  24:30

and you’re gaming for the cheapest part of that curve, essentially. Right, so Exactly, exactly. Yeah. Yeah. Which it seemed by definition would always be further out. No, but sometime, right, if it sank, and I think it’s always closer by but then you always having to do the continuous roll.


Brian Stutland  24:49

Right? So it’s not it’s not just measuring, you know, owning the further out. It’s, it’s how much how many contracts Do you own to replicate the front month contract, right. So Our our methodology, our EA vol index, which is disseminated by the Chicago Board Options Exchange. Actually, they have our calculation, right. And so they take our calculation on hold on how we hold these vix futures. And they publish, you know, the returns of holding these futures and, and so it’s an actively managed position on how many contracts to hold and where to move along the curve. It takes a little bit of sophistication to do.


Jeff Malec  25:34

Let’s dive in a little bit to all the problems with the VIX as a measure of volatility, right, like I did a thread, we’ll put it in the show notes back in January of like a lot of long ball programs struggled in January, even though vix was a quote unquote 40%. Because fixed strike Vol. was actually came in a little bit. So yeah. Talk to us a little bit about those dynamics of like, why the VIX isn’t always a great measure of what’s actually happening underneath the hood in terms of the ball surface.


Brian Stutland  26:03

Yeah, I mean, so I think what’s interesting about the VIX calculation is you know, it measures SMP option contracts out of the money puts in calls, okay. And so it’s just an index calculation. What’s really embedded in there are two components, one, realize movement, the actual movement in the market. And two, what do traders expect 30 days from now, what the VIX should look like or what volatility should look like 30 days from now. So it gets a little tricky to some of the ball traders that like to be long ball. When you’re buying SMP options to do that, you’re having to really manage those two issues, right? Did I get the realize movement? Correct? And our future expectations of volatility, can I get that one correct, as well. And so that makes it a little bit more difficult. And like you said, a lot of the long ball, you know, firms had maybe some trouble with where the straddle was priced. The reason being was options on the downside were accurately pricing the level of volatility that the market would be at when we got down there. So when we when the market would move down, those option prices were priced right for the level of movement you would then see in the market. And so it’s these two dynamic components realized actual movement and what people expect. Whereas when you’re trading vix futures, and we’re doing it in our model, we’re just trading expectations of where the VIX goes. And the VIX has, like we talked about negative correlation to the market, meaning when the market goes down, the VIX will travel along that s&p 500 option curve and go up in value. So it’s very difficult for times to see the VIX go down and market go down. It happens a handful of times per year, but not very often. And so now we’re sort of removing these two components, and we’re only trading one thing volatility, and we can just manage that better. And we can rebalance harvest the crop when we need to, and rebalance with stocks accurately, versus some other ball trading groups.


Jeff Malec  28:08

And, and so what would you say right, people say vix isn’t tradable. Would you agree with it or not?


Brian Stutland  28:15

Like I yeah, I don’t think it is really tradable. Right? It’s the calculation and measurement of what these premiums are in the s&p. And because it doesn’t factor in time decay, or future implied volatility, what’s going to happen in the future. It’s just that snapshot moment in time. It’s not tradable in that sense. So so, you know, it makes it difficult for traders to play it. And, you know, sometimes trading straddles or strangles to get long volatility doesn’t always work out the way you want it to happen, for those reasons,


Jeff Malec  28:50

and that and it’s a floating band on the market, right? So if it if we go down 5% The VIX kind of resets to those options, and it’s ignoring options that were bought at that previous level. And talk to us a little bit I’ve got into it on Twitter here too, of like, what are your thoughts on quoting vix in percent gain? Don’t do it.


Brian Stutland  29:13

What well, you know, it is important actually. And it’s really a key measure we look for when our trading our strategies, when we’re trading vix versus a long equities, we actually are looking at what’s the percent change of vix relative to the percent change of the s&p 500. I think that’s something to keep an eye on. When that ratio drops, you know, to two or three to one, it usually indicates a level of comfort that we’re at a level where option traders are willing to sell puts in the market and get long the market is what I find. When we see the VIX move, let’s say up 8% For a 1% down move in the market, that eight to one ratio is very high. So those things I do like to watch and totally ignore the price of both the s&p and the price of the VIX and just look Look at the percent change of relative to each other.




Jeff Malec  30:02

Hmm. I was some of the people are saying you can’t if, right a vix of 20 means there’s 20% volatility. vix of 40 means there’s 40% volatility, it didn’t increase 100% even though technically, right? The Yeah, it’s only 20% more volatility not 100 I can see both sides. But it’s an interesting debate. So where do you stand? We’ll go to another Twitter commentary, where do you stand on gamma flows? And that that’s all that really matters. And if you can model where the market makers are, and you were a market maker, and where you know, where they have to do their delta hedging, you can glean some information on, on where, where the market is going to make a stand or break through.


Brian Stutland  30:43

Yeah, I mean, you know, through through time, you know, traders have looked at open interest, they’ve looked at volume, they look just at that, you know, where are people short, short, gamma and long gamma. Because obviously, as a market maker, if you’re short gamma, you’re having to sell the market as it’s going down, right, which is then forcing the market lower. If you’re a long gamma trader, it means that when the markets down, you’re actually buying the market and trying to push it back up. So getting that sense of feel of flow of that actually is important that a lot of times, you can kind of sense that as we get towards like these big strikes in the market in let’s say, for example, SMP, let’s say, get down to 4000. That seems to be like a key, big strike level for a trader there. So certainly, I do like to watch that it takes a little bit higher level of sophistication, if you’re just, if you’re a trader, you’re going to go through those levels of iteration to try and figure that out. If you’re a general investor, it’s probably a little bit too more too detailed to try and determine where the gamma is, and all that kind of stuff.


Jeff Malec  31:46

And you mentioned before the 4200 level, what does that have any Signet? Why does that have a significance? If at all, just it’s been a, it’s, it’s had significant, so it remains significant?


Brian Stutland  31:57

Yeah, I mean, I think 4200 on the s&p was a low kind of where we saw at the end of January, we saw that market kind of touched down near there, actually, just before Russia attack last night. And if you go back even further, in 2021, that was sort of a level that it bounced off of, as well. So that seemed to be a support in the market where market participants were willing to buy the market. And I think last night, when we saw crack that level, there was a real indication that maybe the buyers are getting a little bit weaker in hand here. And so that level now becomes a very key important level, whether the market is can rally through that, and probably push the market significantly higher, or it’s going to trade back up to there. And all those buyers are like, Hey, I got to get out of this thing now. And then it’s going to flush lower. So it’s an important level. On the Close to close, I like to look at that, too, was 4320 was a level on a closing basis in the s&p is something to watch, as well as a sort of support resistance line.


Jeff Malec  32:58

And then I want to circle back on the NASDAQ that we touched on briefly, there’s been tons of carnage sort of under the hood there. I think the index finally caught up a little bit being down 20%. But right, a lot of those art names are down 6070 80%. Yeah, a lot of those IPOs down more than 50%. So just two things. One, have you seen a lot of demand of investors of like, hey, help me hedge this other part of the portfolio, these single names, or these higher tech names, not just the index? And to what we’ll start there?


Brian Stutland  33:33

Yeah. Well, I mean, I think that the single names the some of these growth names that are, you know, seeing wild swings, the thing is, is raising the interest rate environment, some of those names become more difficult to own, the level of volatility increases there. And so they tend to lose a little bit of a correlation to VIX, meaning they perform a lot worse. I mean, there’s nothing worse than owning an asset class that you’re trying to own. And like I talked about, we expect stocks to go up over a long period of time, you’re owning something that actually is departing from the broader base stock market and performing worse. Those are names if you want to use levels of hedging and volatility against some of those names. We encourage people to try and you know, look for the best of breed in the market and right now, you know, we’ve been buying stuff where, you know, think of it as things you need, not what you want, and all those want stocks are just getting hit because they’re getting hit without any sort of correlation to volatility and it becomes a little bit difficult to hedge those kinds of names


Jeff Malec  34:33

and doesn’t seem you we have a NASDAQ VIX, but it doesn’t trade at all. Just the index.


Brian Stutland  34:42

There’s two out there. They have a NASDAQ VIX. Also the NASDAQ publishes a vol Q, which is their version of NASDAQ volatility levels as well. But again, those aren’t really tradable. They tried to you know, little success to get bought Going in those contracts. And so now people just kind of use it as a measurement and indication of where, what the NASDAQ is doing where it’s at. And actually, actually, we, we own the VIX and one of our in one of our strategies, and we trade. We own the NASDAQ, I should say, as stocks. And we trade that against the VIX. And we just kind of measure up the beta of the NASDAQ versus the s&p to sort of be able to manage that and hedge it.


Jeff Malec  35:26

Right. So I guess you’re saying, I can still just use the VIX. And I can use twice as much because the NASDAQ’s to do X the beta of the s&p or something like that.


Brian Stutland  35:36

Yeah, exactly. Exactly. There’s there’s a rough correlation to that. Now, obviously, the last couple of months, you know, he talked about some of these growth names, that’s obviously pushing the NASDAQ down a little bit further than you’d want to see it, which makes it a little bit more difficult to hedge even if you’re at that 2x level or whatever. But yeah, just measuring up the beta exposure, if you can get something highly correlated to the s&p, even though it might have a different beta, then you can use vix to hedge.


Jeff Malec  36:02

Right? And I guess these days, it’s even more highly correlated than normal with a lot of those big names becoming part of the s&p, right. Yeah, for sure. Um, and then come back to that interest rate thoughts on doesn’t make sense to me of tech stocks have a lot of interest rate exposure, right? They don’t need a lot of capital, they don’t have rights, not a airline that has to buy and lease planes and whatnot. So like, what, go back to that theory on why tech stocks have that interest rate exposure?


Brian Stutland  36:32

Well, you know, they do but they don’t, right. So the thing is, is that when you look at some of the big names that I talked about Microsoft, Apple, Google Amazon, not only are they in a great position to buy back stock of their own, and and certainly when interest rates are lower, they’re able to do that cheaper, right? If the markets down and interest rates go down, they can borrow cheaper, they can buy back stock, they can push the market back higher doing that. The other key component here is when it gets cheaper for them to borrow out longer term, then a lot of these other high flyer names, you know, Microsoft, Apple, Google, Amazon, they’re almost private equity firms, right? Like they can get get in and acquire, they almost want to see a sell off, right, they want to see interest rates go lower and a sell off because now they can acquire companies at a cheaper rate and build up their portfolio of growth returns through acquisition. And so in a sentence, everybody that is tied to valuations off of that, and there’s where that interest rate trickle down effect. You know, we have a newsletter on on, you know, calling it sort of the butterfly effect or the ripple effect. When when you drop a bowling ball in a pool in the deep end, and the wave moves, it eventually makes its way to the shallow end. It might not be as big but it’ll make it there. So there is a domino ripple effect that occurs even with interest rates to big cap tech and then down to the more growth smaller cap names.


Jeff Malec  38:03

So you would try it you did first traded options at CBOE and then moved into the VIX, right? That’s right. Yep. Just do you ever feel like there’s a better like, how do you manage that dichotomy between the options and the VIX, like in theory, sometimes you could go into the option market and get better right to SPX options, and yet better value, so to speak, then during the VIX futures, so do you play that game and look for the relative value there? Or you’re just focused on the big speech? No, we


Brian Stutland  38:31

do do that, you know, under unusual circumstances, as we’re seeing in the markets over the last few days, there is opportunity that presents itself to do that to make that switch. You know, when I talked about, oh, you know, owning straddles or puts or strangles is sometimes difficult. Well, sometimes it’s not. And it’s just a matter of finding the right balance of seeing realized volatility occur when you get a pick up and realize volatility. Sometimes the s&p can present itself as a nice place to sort of hedge yourself out and play volatility in that sense. But if volatility becomes muted, then it becomes more difficult to use that and the VIX becomes a better place to trade.


Jeff Malec  39:11

And then how do you view in the blended product, right, that has the beta plus the VIX exposure? Does that have a is it 50 Delta or 80? Delta? What do you have a delta target on that?


Brian Stutland  39:25

Yeah, I mean, so in that sense that you know, our beta strategy we trade, NASDAQ and s&p futures, mostly a lean towards s&p 500 futures to be long the market and we trade our EA ball methodology, the index that you see on the CBOE we’re buying vix futures against that. And we’re trying to keep the notional value of the two balanced out at the ratios that we talked about percent changes moves in the VIX versus a percent change in the s&p looking to balance that accurately, so that it provides a hedge should the market move lower


Jeff Malec  40:00

but it doesn’t have a set like that. So I was going from the VIX futures back into the options, right? So if you’re buying those straddles and when you’re going to have some delta component, but you’re saying no, it’s just to try and even out the, if I’d lose 10%, here, I want to be gaining 10% Here.


Brian Stutland  40:16

No, I mean, in that type of strategy, we actually have a long market bias, we actually offer that strategy as a more efficient way to be long, the s&p, right I mean, you could buy the spy and pay that five or 10 basis points management fee and just be long in the market, we think is there’s a more efficient way to do that. So we want to be long the market, we want to provide market like returns at, you know, 20%, less risk. And the reason we’re able to do that is we actually, we actually dial up, you know, instead of 100% long the market, we’re actually longer the market more like 130% long the market, but then we’re holding vix component, right? To hedge out the 130. And what we find is, is that we actually participate almost in line with the market going up maybe a little bit better. And we reduce drawdowns by 20% or so. So, now we’ve created a dynamic, that’s a more interesting way to belong to the s&p 500 than just blindly buying it and riding the roller coaster.


Jeff Malec  41:17

Love it. And then so does that aim is to reduce volatility, as well as drawdown or just trying to


Brian Stutland  41:23

the aim is really to reduce drawdown right. So we can create this asymmetric return, where my beta to the downside is a point eight beta to the downside, but a one beta to the upside. I mean, that’s that’s the home run, right? That’s where you get, you know, all the all the geeks out there, you know, the Sharpe ratio, that column, I raise you all those ratios, whatever, start looking really good, when you can change the beta profile, whereas if you’re owning the s&p, you’re one beta to the downside, you’re one beta to the upside. That’s it, you’re right in the market, but we can give you the one same one beta, the upside, but only a point eight beta on the downside, you know, that’s a more efficient way to be on the market.


Jeff Malec  42:00

And in theory, you’re risking the one beta in order to remove it on the downside, right. So you might have, you might have a point nine to a point eight or something. Exactly. That’s the trade off of the risking to the upside being.


Brian Stutland  42:12

Exactly. And so what we want to do is give people, you know, if I’m someone that normally was in a portfolio, and I like, you know, I’m a little bit more conservative, let’s say, and I, and I want to be 80% loan in the market and 20% bonds, okay? Because I only want 80% of the risk of the downside, right, and I want the bonds to protect me. Well, basically, our beta strategy gives you that level of, of risk to the downside, but now I’m actually giving you 100% of the upside. If you look at what we’ve done over the last couple of years in that strategy, right, so I’m risking the same to make more is really what it comes down to, in terms of, you know, how to, you know, devise a plan to invest in that kind of strategy.


Jeff Malec  42:56

So, that’s important, because, right, if you’re talking to investor, hey, I’m trying to get equity like returns with less risk, or here, we’re saying we’re gonna get equity, like risk with more return.


Brian Stutland  43:06

Right. So that, you know, that really depends, you know, that’s just a matter of going from like, 1x to 2x, or beta strategy, right? Yeah, you know, the 1x strategy is, is give somebody you know, at 20 risk profile that normally is in that lifestyle category, but give them 100% of the upside, right? Is where you kind of start with, so we’re always giving you a higher level of upside versus the same amount of risk, you’re willing to take on the downside. And


Jeff Malec  43:34

talk through a little bit, right, like we’re making it sound pretty simple, right? Like, oh, I’ll just go do this. Yeah, my own Oh, by spy I open a futures Can I trade the VIX against it? Yeah. Like talk through why it’s harder than it than it seems? Well, I


Brian Stutland  43:47

want one main thing is the rebalancing act that occurs, right? Because when the VIX goes from 20 to 35, and back to 20, did you on a daily basis, take advantage of that to harvest the crop? Right, so that I can put it back into the market? That’s a very key component, especially when we’re seeing wild swings, like we see, you know, on days like today, or last couple of weeks, right? So the harvesting of the crop component is very key. Because the VIX that you’re owning, remember, it’s it’s a mean reverting product, it’s going to go back to not return anything for you. So you got to take advantage of these daily moves, versus the long term outlook. And that would that’s the main thing that makes it difficult. The second thing is just how do you buy vix and not become a VX X and see a decay away 98% to the downside over a long period of time. That’s the other part that you know, needs a little bit of, of massaging as well.


Jeff Malec  44:39

And did so you open up a little nugget there. So every day you’re harvesting that are not necessarily right. That worries me because now if it went from 25, it goes to 80 and I got out of 25 Did I leave a lot on the table or how do you do that?


Brian Stutland  44:55

Yeah, I mean, the thing with VIX is it’s really tricky. I always say you never know when the Marionville Gotta stop when it’s gonna stop spinning. So at some point, you have to do some harvesting. The key component in the harvesting, though, is that as it’s going up in your price averaging out of the VIX and buying the market, yes, maybe it starts to go against you. But we’re keeping that percent relative to each other. So in other words, let’s just say I have $100 on long $90 at the market and $10 worth of VIX, right? That ratio, we kind of maintain so that the market keeps going. We’re not We’re not blasting out of all our books. I don’t think anybody ever wants to do that. Because like I said, you don’t know where the merry go round, you’re gonna stop and volatility, right, whether it’s March 2020, and you go to 80? Or is it you know, 2018, February, that goes to 45 ish 48 and comes back down. But it’s, it’s maintaining that, you know, nine to one ratio of the two, let’s call it with each other. That is the key component in the daily rebalance.


Jeff Malec  45:58

And so then, by definition, you’ll never perfectly rebalance, right on every move to 25 and back to 15. You’re going to miss some and then you’re never going to have everything on all the way up to 80 either.


Brian Stutland  46:10

Right? Yeah. So I mean, there is a little bit of science to that, whether you let some of that run a little bit or not. The key thing is if you can sort of maintain the relationship, like I said, that nine to one eight to one relationship or so with the two, then you’re going to have the daily hedge on and then doing some of the rebalancing of the weights back to that norm allows you to sort of take advantage of the Pops and drops of volatility. And by time, the VIX is sort of made that round trip up and down. As long as you’ve averaged out of the VIX and average back in, typically what you find is after that time, you’re actually up like a great example was 2020. Right? We’re selling out of the VIX a little bit as it’s going up. RDA, Vol. If you looked at it was about unchanged on the entire year of 2020. Right. The markets were up, SMP, were up like 13%. But we were actually our strategy was actually more, right. So the only reason we were up more was because we captured and harvested all that volatility back up and down. And you know, capture three to 5% or whatever a year on rebalancing, the mean trading, you know, you’re adding you’re adding alpha,


Jeff Malec  47:24

what is have you done those that research, I’m sure, what does that look like in terms of daily rebalancing versus monthly versus quarterly versus annually? Right, annual would make no sense at all for the pick, right? Because they could totally revert you missed the whole thing. But at the same time, if it reverts to the market came back maybe? No, right?


Brian Stutland  47:43

Yeah, we I mean, we, you know, we looked at daily, we looked at monthly, we looked at annual and sometimes it works, sometimes it doesn’t, what we found really is somewhere in between a daily and a monthly is really where you want to be at. And if you really want to be tight, the daily is probably the best way to go. But you could leave some level of room to rebalance, you know, on trader feel I kind of feel like in some degree, I mean, we kind of stick to that daily rebalance. But there are, you know, moments in time where, as a trader, I’ve found that I have a pretty good feel of the VIX and you know, I can maybe let it go or not go. Sometimes I’ve rebalanced it three or four times in the middle of the day in 2020. I couldn’t stop trading over this last month or whatever. I haven’t been able to stop. I’ve rebalanced a couple times intraday, because of the wild swings in the market. So it really depends on market conditions, how you’re going to play that that rebound.


Jeff Malec  48:39

Got it. And so that makes it less systematic and more just, hey, it’s the goal is to capture that and redeploy it versus the goal is, like you said with the ETFs or with the it’s just time based and I’m doing this and that leads to problems.


Brian Stutland  48:53

Exactly, exactly. There has to be somewhat of a dynamic feel to it. I mean, we have a systematic methodology to hold VIX, but the rebalancing part is something where you know you need to rebalance it appropriately act in times when you need to pull back a little bit if you you know, if you want to as well and manage that structure and not be on this. set it forget it kind of thing.


Jeff Malec  49:21

So where do we go from here? Talk a little bit about rate hikes. We talked about looking to feeling a little bit like 2008 You know, say this week hadn’t happened in the whole Russia thing hadn’t happened. And just talking about the Fed. What do you think for the rest of the year?


Brian Stutland  49:38

Well, it’s kind of interesting because I think we’ve been in such a dynamic over time where you know, we wanted the Fed to rescue us and lower interest rates to save the market. The thing is, throughout that period of time we were in a flat to deflationary, let’s call it kind of world where inflation wasn’t a factor. Now we’re it’s quite the opposite. Right? We have this in inflation pressure, I actually think the market wants the Fed to hike rates 50 basis points. I think if the Fed came out today and said, We’re hiking rates, 50 Bits, I think the market would actually go up, the opposite would almost happen. When we were trading in the floor, we’d always say, you know, don’t fight the Fed. And we would say that because if they lowered interest rates you wanted to get along in the market, but that was in a non inflationary environment. You know, we had a whole boom of technology, keeping inflation lower. Now, we’re not environment. And so I think if the Fed actually raises rates, the market might actually like that.


Jeff Malec  50:36

And what about with volatility? So if they keep rising, the market likes it. Does that dampen vol, where do you see you mentioned before you kind of see it settling in the 20s? For the rest of you?


Brian Stutland  50:47

Um, I do think it dampens vibe. I mean, I don’t want to see the yield curve, invert, you know, so if the yield curves kind of meaning that the interest rates of the two year versus a 10 year, debt can sort of kind of stay maintain? I’m okay with that. But as you’ve noticed, the more that the Fed does nothing, the flatter that yield curve has been going right. And so typically, when that has inverted, that’s been an indication of a recession coming. And so I actually think when they hiked the rates, the yield curve, I think, was maintain itself, the back end actually might go higher, which is not great if you’re a bond investor. But sorry, if you’re a commodity investor, sorry about that. But I think I think commodities will get hit hard. They’ll write hate right, you know, high grades. And I think the market will rally off of that, because it’s asking for it. I think that’s what the level of volatility in this market is all about. And I think you might see the VIX come off, back down to that 20 level.


Jeff Malec  51:42

Yeah, it’s super weird this morning to see right stocks, bright red, and energies, everything else risk on was bright green. Yeah, was quite a quite a difference from usual of like, stocks are down oils down, grains are down, everything’s down. You know, it’s a React. But


Brian Stutland  51:58

yeah, although it was it was actually kind of interesting this morning, when looked at big names out there. The Big Oil names, energy was actually down when the market was down, not as much as the market, but it was down, which was to me kind of strange that, you know, maybe people are kind of sensing that oil. $100. Okay, it’s maybe gone far enough. Yeah,


Jeff Malec  52:20

I think we’re starting to see real world, real world effects with that. I think I probably lost a bet somewhere in the last five years that we’ll never see $100 oil again.


Brian Stutland  52:32

Well, I can tell you this when I was in the bids, when you know, during the Obama era in 2008, when he was coming in, what was it 2008, just before he won the election, over the summer of 2008, oil was at like $140 or whatever, we had a bet in a bit, you know, call it trading places a bit of $1 that I’m like, my word oil going back below 80. And going to stay down there for a long time. And a few months later and happen.


Jeff Malec  52:56

Nice. The Well, it’s hard to believe, right? Two years ago, we were at negative 4040 to 100. Well, let you go here. But last bit, give us your hottest take if you have on something nobody else is talking about something everyone’s talking about the Euro 180 degrees on the other side of


Brian Stutland  53:20

  1. Yeah, I mean, I think like I just mentioned before, I think when we need the Fed to take some action here, we can’t let the inflation continue. It’s opened up the door to places like Russia, who profits greatly off of owning gold, which they have off of owning reigns, you know, they’re the breadbasket of the world off of owning oil, places like that, when they see inflation, they smell, they smell, you know, their chance to go in for the kill, right? We need some of this inflation to back off. And like I said, I think if the Fed comes in and raises rates, I think the stock market is going to love it. And I think that sort of stops the volatility bleed to some degree, as long as it’s those rate hikes are somewhat systematic, and people see them continually coming to get some of this inflation out, get some of this commodity pressure that’s being created in the market, because it’s becoming more and more difficult for companies to pass that buck on to the consumer. And so, you know, if it gets more difficult to do that, what does that mean profit margins get squeezed? Versus if rates are higher, and we can sort of, you know, crap out the commodity markets, that might be a positive for the overall stock market.


Jeff Malec  54:29

I was like, yes, you can raise rates, yes. Historically, that’s lowered those commodity prices, but the same time if the, the industries, the people if everyone still needs those goods, right. So to me, I don’t know how much you dampen that demand, unless we’re saying the the rising of rates just eliminates a lot of speculative demand.


Brian Stutland  54:50

Yeah, I think it takes I think it takes a speculative flavor out of it. Um, you know, maybe it’s not raised the Fed funds rate maybe is just stopped bond purchasing what they’re doing, but actually pulling back some of the money supply as well. But there’s there’s all this speculation bubble that’s occurring in those markets, you’ve got to pop that market and I think if you do that, then you’re going to see profit margins and companies go up


Jeff Malec  55:16

financial speculation like futures traders like us, or are we saying like, because the money is so cheap, and they’re buying building new condo buildings in Miami and so right there, that whole knock on effect of


Brian Stutland  55:29

Yeah, I mean, it’s it’s made everything cheap to do all of that. Right. And so, um, you know, what, what people then have clamored towards is things that they need, right? Because because there’s this bubble that occurs and people pile into the trade. And there’s a lot of speculation, I believe in it right now on top of I mean, yes, we increase the money supply dramatically in 2020. Right. Some of that’s got to come out of this market. The markets can be at all time highs, and you maintain that money supply in the marketplace. And so you know, what was real and what was not, you know, there might be some levels of a little bit more volatility to go. But I think you’ll get a big carpet shakeout and the markets will move higher after we take those rates and take some of this supplier.


Jeff Malec  56:14

Love it. I let everyone know where they can find you and find all the good equity armor stuff. You guys read it your site, like was that a year ago now? So there’s some cool content on there? I know.


Brian Stutland  56:24

Yeah. Yeah. We were always keeping it up to date. You know, our guys myself, publishing media all the time. I’m on NASDAQ talk on CBOE TV. And some of the other channels out there some of my colleagues as well. So lots of contact content that we we produce for people to just kind of see our insight on how we’re trading the VIX and volatility and it’s important for people to follow along so we’re excited to


Jeff Malec  56:52

have you got it. And what’s the website again?


Brian Stutland  56:55

Equity armor and armor is a our MLR and when you go on there, by the way, you know, we launched a book that I wrote about option trading it actually goes over some of our times on the floor and compares how we use those times with you know, teaching a lesson about option trading very basic kind of stuff. But you know, if you want to learn about option trading, some of the stories of the war stories on the trading floor are in there and you can pick up a free electronic copy of that our website and sign up so feel free to stop in there.


Jeff Malec  57:27

Give us a teaser. What was one of the one of those stories? Well,


Brian Stutland  57:33

we talked one of the funny ones is just I traded a buyout dryers ice cream, if you remember was bought out by Nestle’s. And there was a whole big hubbub about ice cream. Right. And, and one of the funny things was, you know, was the bio going to happen and and you know, was our government going to approve being taken over by a European company for ice cream supplies? Whereas fun was a US company. Yeah, dryers are the US company and Nestle being the European company. And so a lot of activity on the call option side to the upside, whether the buyout was going to happen or not. And there were some lessons to be learned just about binary situations that that occur whether it’s going to happen it’s either yes or no there’s no gray area value is going to slowly go up. And so that was kind of a fun one to try to trade under the other funny thing that made it even funnier, we’re trading ice cream and the pit was literally so the s&p 500 Pit real quick story is built up on stairs right and it’s a massive pit hundreds of guys in the pit trading it really loud. The dryers ice cream option trading pit was literally underneath the staircase on the s&p. So you’re like in this little like you know, under the staircases if you’re like under the bleachers at your high school trading this like buyout thing that was quite active with all this noise going on that where dryer didn’t it didn’t matter what the s&p was doing, you know, dryers had its own deal.


Jeff Malec  59:00

So probably like, a couple 100 million dollar market cap, right. Was it relatively small? Yeah, it was the s&p,


Brian Stutland  59:08

I guess, you know, I want to say it was not part of the s&p at the time, so


Jeff Malec  59:14

I don’t think dryers buyers, or what’s that one briars?


Brian Stutland  59:19

Briar? Yeah, no dryers was like, it was a hard ice cream, you know, so that stores so it was it was it was a fun one to be at, you know, there was maybe five to 10 guys in the pit. It was very active and big, big, you know, broker dealer players that came in, came in there, which made it kind of fun to trade. But it was kind of a funny situation.


Jeff Malec  59:40

Love it. Alright, go pick up the book. I’ll read your copy, and we’ll talk to you soon. All right, great. Thanks, Brian.