• 00:00:38 How Imran found his way from Wall Street to teaching option strategies at Options Insight.
• 00:09:42 What retail traders should learn before trading options. Why meme stocks options are such a ‘rational choice’ right now?
• 00:14:42 Where are the best opportunities for trading options to still have an edge?
• 00:24:45 What is Imran’s view on the delation/inflation scenario? Are commodities a good hedge?
• 00:29:35 Why does a ‘rational investor’ buy negative yielding bonds (or very low yielding bonds) at all considering the inflation risk?
• 00:36:35 Did Softbank successfully manipulate the stock market for mid-tier tech stocks in 2020?
• 00:43:19 Is there a ‘low risk’ strategy to buy/sell volatility?
• 00:48:56 What are excellent, low risk hedging strategies for a portfolio? Can a option based ‘hedge’ actually make money?
• 01:03:15 What is the strong relationship between low interest rates and money losing tech companies?
• 01:08:10 Is there are place for ‘value investors’ left? Why does the investment world basically just ‘bet on more free money’ instead?
• 01:13:14 What is Imran’s strategy to use options trading Bitcoin upside/ downside?

You may watch this episode on Youtube – #95 Imran Lakha (How to use option strategies to improve your market edge).

Imran Lakha has been working with Citibank, Bank of America and Credit Suisse trading options. He now teaches options strategies at Options Insight.

 

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Torsten Jacobi: Yeah, we love to have you on and we know your specialty is option trading. And do we also know you’ve been all old, all street, different banks, credit, Swiss, city bank over the years, and you’ve been doing this for a long time. And I was curious, what attracted you to the financial industry in the first place? And then why did you leave Wall Street at some point?

Imran Lakha: Okay, so in terms of what attracted me to Wall Street, I guess, you know, I did mathematics and economics at university. I was the son of an accountant. So my dad was in finance, both my brothers were kind of in finance as well. And so because I was always pretty decent at maps and had those quantitative skills, it was like, what career can I go into and utilize the skills that I have? And, you know, going to London School of Economics set me up to be able to, you know, be attracted by those big banks on Wall Street where, you know, as a 20, 30 year old, you can you can make good money and, you know, you can get some decent security and live a good life, right? That was the kind of goal when I originally started. I was brought up to be very motivated to get myself secure and comfortable in life, right? So, you know, my dad struggled, you know, he moved here. When he was 20 years old, he struggled through various jobs that he would, he was quite skilled, like in terms of knowledge and stuff, but he had to do jobs that were kind of, you know, maybe a little bit basic for him. And he didn’t want us to go through the same strife, right? So he, he kind of taught us that, you know, work hard at school, get the skills, get a good job and make set yourself up, basically, right? So it’s very Asian, very Asian mentality. But it kind of worked, right? It was, it was certainly worked on a materialistic level, like allowing me to earn enough money to get myself comfortable, you know?

Torsten Jacobi: Yeah. Why did you end up, and I know you changed positions for different banks over the years, but I know you took a break a couple of years ago, and then you left Wall Street once out.

Imran Lakha: So actually, you know, a lot of that initially was driven by my wife. Yeah. So she, she was really keen on traveling before we had kids. So we were married for about, you know, seven years. We weren’t in a rush to have kids, but we were like, you know, if we’re going to have kids, she really, really wanted to see the world a bit and travel. And because my career was going pretty well, you know, I hadn’t really taken the plunge until then. And, and it just came to a nice point in my career where I was feeling pretty burnt out. I’ve been doing it for about 10 years. And she really wanted to travel before we had kids. So I was like, you know what, I’m going to put my hand up, take voluntary redundancy, and let’s use the money I get to travel the world. So that’s what we did before we had kids. It’s amazing.

Torsten Jacobi: Yeah, it sounds a bit like Jim Rogers, right? He, he took his money, he went on this two year long trip, you know, I think he did two trips around the world, both of them were around two years old. And then he ran his own shop after that, right? So he, he joined the ranks of the legendary investors who run their own shop, the company, the publisher, publishing newsletter, we know this is something that is as a business model, really, really popular right now, the stack exchange. Is that something that you, where you felt like, well, I can either make more money, or this is just fits my lifestyle better? How did you, how did you transition this way out of Wall Street at that point?

Imran Lakha: Well, my, my actual transition out of Wall Street happened later. So when I came back from traveling, I wasn’t desperate to go back to banking. I was, I was kind of fishing around to see if there were any hedge fund opportunities, didn’t manage to find any, and then ended up joining an old boss of mine at Citibank, and actually got back to banking, which was slightly annoying, because I was kind of enjoying not being in it. But it was only later after I had kind of, you know, had my little go on the buy side, you know, satisfied that sort of itch, scratch that itch as it were. And then it was only then that I was okay, now it’s time to maybe try something else. And that was the teaching, because I’d always quite enjoyed the idea of teaching and I’d always in, you know, throughout my career at banks, I’d always trained people that came through, and, and that was something that I really liked to do. And I found that I was quite effective at it. So then I was like, okay, so I’ve got a bunch of knowledge on a subject that’s quite niche, and I’ve got a lot, I’ve got a big network of contacts that I could probably, you know, turn into clients, you know, ex colleagues or whatever that I might have. So why not give it a go? So that was the night when I created Options Insight.

Torsten Jacobi: And Options Insight help us to understand that a little better. It’s really about trading options in the market, what’s available to the retail investor, or does it go in a different direction?

Imran Lakha: No, well, when I first started Options Insight, it was about how, how do I leverage my network, right? So I’ve got a bunch of old colleagues at banks, some of them are asset managers who are old clients of mine. I’ve got some brokers who I used to be their clients, all these people who have, I’ve probably have staff, junior staff who need proper training, and probably don’t get proper training, right? So it was actually at the start, it was more of an institutional product and an institutional offering that I was giving, because that was the contacts that I already had, right? And no one, no one in the public sphere, no one in retail knew me, right? So, so it was very much the first couple of years, just leveraging those contacts, building up my content, building up my sort of product suite. And it was only post COVID, really, that I realized that, you know, the people who really need the education and are still out there looking for it, and are more consistently always going to be there, are the retail traders, right? And as the growth in retail trading exploded in the last couple of years, particularly in options, and I was seeing some really basic sort of errors or mistakes that I think, you know, novice option traders kind of make, I was like, these are the people that I need to try and educate, right? So then it was a case of try to build that sort of profile that I’m not just for institutions, even though I’ve been on Wall Street for 20 years, and those are the people who I know and know me, I’m happy to teach the retail people, because, you know, it doesn’t have to be only professionals, you can, you can teach this knowledge to anyone, right? So that was the goal and that was the idea.

Torsten Jacobi: Yeah, I feel like they should make your initial course mandatory on Robinhood. I was really surprised, you know, I had a portfolio for, I don’t know, 25 years, first eTrade, you know, that was the first online broker a long time ago. Anyway, from the minute I started, but Robinhood, about two years ago, 18 months ago, I was really surprised that the approval to, for option trading used to be a pain, like it was possible, but you needed to file some documents and you need to text something, you needed to validate your ID. I think that’s all true with Robinhood too. But I feel like I was instantly approved for options trading, and I couldn’t believe it, I could suddenly, I could, I could sell calls, I could buy points, it was amazing. But from, and I think I know what I’m doing, well, we all think that, right? But I do have 20 years of experience with the subject, not in detail. But I was really surprised that Robinhood really opened up options trading to the masses. And I had this suspicion, that might be just me, that most people have no idea what these options actually do, right? Why are they so different, why are they different than the equity that I’m investing in? What is all this game about, why would they decay? That seems to be not really open to the retail investor, at least from what I see in the Robinhood app.

Imran Lakha: Yeah, I mean, that’s a no brainer. I mean, I actually, the regulators should make it compulsory for platforms that offer the use of leveraged products, like options, to make sure that those, those people using that platform have got a minimum level of education, because you’re totally right, you know, people can lose all their money in a week with some of the crazy things that they’re doing by buying one week call options on a, on a crazy hot meme stock. I mean, it’s insane. Yeah, so yeah, I totally agree. I mean, I think that’s the problem. Like, people just, you know, get into fads and trends, right? And the fad and the trend was, okay, what’s the next hot stock like Tesla or whatever, that’s going to explode? And how can I turn a small amount of money into a large amount of money? And, you know, on these, on these Reddit forums, they all got excited and they all started doing the same trades and it became self fulfilling, I guess to an extent. But yeah, I would love to be able to, and it’s not, it’s not because I want to necessarily, you know, capitalise on this, right? But I just don’t like the idea that these, a large part of a large percentage of these people at some point are going to lose all their cash, right? And if there was a way of preventing that, that would be a good thing, right? Because the idea of all these retail traders losing the 10 or 20 grand that they have to play with is not a nice thought really, right? You know, banks can afford to take it on the chin and lose a few billion here and there, because they’ll always get bailed out by the government, right? But the retail guy won’t.

Torsten Jacobi: Yeah, I found it quite mesmerising when they, when the data that I’ve seen about raw trade is extremely young, it’s most likely male. And they bet a relatively small amount of money, between $500 and $1000. Yeah, I think it’s a little bit, you know, we, I’ve been talking on the podcast a lot about the dearth of opportunities. This generation probably has the highest overhang from the previous generation in that, in, in, in mainstream thinking that is hard for them to, to break out and use new opportunities. Yes, you can drive for Uber, but it’s not going to, not going to change your life, right? Do you know there’s a level, there’s like a glass ceiling, so to speak, as an Uber driver, and it makes cash. And I think from that point of view, I actually feel it’s kind of smart what they do. They take this bet that most likely won’t go anywhere. But if it pays off, you’re going to have a few hundred thousand in your portfolio, just two days later. But worst case scenario, and most likely scenario, your money is gone. And this, this virtual casino, what the odds are certainly probably better than going to Vegas to get, if you’re thinking about $200,000 or a million dollars that you want to, want to, want to bring back. I think this is actually a pretty, I almost want to say it’s a smart way to make money. I know how crazy it is, right? But if, if you don’t have enough opportunities to get to these levels, because most people, you know, under 30, they can never buy a house in San Francisco. I don’t, I don’t know if it’s ever going to change.

Imran Lakha: I guess, you know, another way to think about it is they’re all buying a lottery ticket, but you can have multiple winners and they can share, share the payout basically, right? And the more, the more people they get to buy the lottery ticket, the more likely they are to get paid out, right? So that’s kind of the game that they’re playing, which, like I say, it’s fine. And it’s great when it works. And, you know, I wrote an article, one of, one of the things that I do occasionally is, is write articles about the market and just, just to sort of put my thoughts down on paper and they go on my blog on my website. And I wrote an article about the retail army, because I was loving what was going on with the retail army and how they were, you know, sticking it to the, to the hedge funds and stuff and creating short squeezes and stuff like that. And it’s great, but it’s great while it works. But then when you, when you get these problems, like, oh, you know, your account just got, your account got frozen because we’ve got margin issues on our side. And now you can’t do anything. You know, had they had the foresight or the knowledge to be able to maybe do some smarter trade implementation, right? Then maybe they could protect themselves against that tail risk. I don’t know, right? I don’t know for sure. I mean, trade, even if you know how to trade options well, it doesn’t mean you’re always going to call the market correctly. But it’s just, you know, the trade, for example, the trade that I was doing when the GameStop stuff was happening was quite funny. It was in one of the other stocks, BlackBerry. And BlackBerry was kind of following the AMC and the GameStop price action. It was one of the meme stocks as well. And it was, I think it was at like $26, $27, something like that. And I was like, you know, this thing might just keep going. It might do a GameStop, right? So, but the bowl is absolutely on the moon, like the bowl was in the hundreds. Okay. So I sold, I think the stock was at $26, $27. I sold the $15, $10 put spread, the $15, $10 put spread. And I collected $2.5 for that thing. And it was expiring in like two or three weeks. Okay. So it was miles out of the money. And I was collecting half the premium of the most it could ever be worth. Okay. And that was happening in two weeks, it was going to expire. Right. So I was like, rather than trying to buy this stock and take the risk that it drops in my face, that’s the best expression of being long this stock. Right. And as it happened, I was completely wrong. The stock dumped 40% over the next week. And I lost no money. Right. So if I just bought the stock, I would have lost 40%. But because of the pricing of that put spread and understanding how the optionality works and where the opportunity lies, I was able to sell that put spread and take a zero hit on a 40% drop in the stock. And then I just cut my position. And it was fine. Right. So, so that’s what I want to learn. That’s what I like to be able to empower people to learn how to kind of swing the odds in their favor a little bit.

Torsten Jacobi: Right. Yeah, I love that. You know, what I am, what I was my experience with options, it’s the market is incredibly illiquid. It’s very difficult often to get a good price for that option. Depending even on relatively well known stocks, I think I had some Uber calls. And I felt like, I don’t know what the strike price was, but there were like five of them traded the whole day. I’m like, holy smokes. I mean, this is not exactly a small stock. Right. And there’s always something going on where I feel like the market maker, someone on the other side is way more inside than I have. That’s probably true in all of Wall Street. But I feel with options, I feel like, especially that’s, I don’t know actually what’s going on behind this. So maybe you can help us a little bit, but when you just eliminated one of those strategies, what are the strategies where you feel like you still have an edge out there, even do Wall Street is basically against you. And these computers are super smart.

Imran Lakha: Yeah. I mean, when you’re talking about liquidity, I mean, I think that’s a bit of a special case on the Uber side. Like, you know, big large, relatively large cap names, options markets are quite liquid if you know what the expires are that trade, right? So the problem I think you had there was most likely you were picking some obscure expiry that was like a weekly expiry rather than one of the monthly expires, where that’s where most of the trading volume is. So you’ll get better pricing on that. So you kind of need to know what is the stuff that trades liquidly, like even on something like the VIX, for example, right, the VIX index, you can trade options on the VIX, but the monthly expires are super liquid, whereas the weekly expires are horrible. And that’s on something as deep and as liquid as the VIX, right? So you kind of need to know what you should be, which instruments provide you the liquidity, right? In terms of where the edge is, the edge is in understanding how to implement a trade, right? So you’re right, on trade execution, you are probably going to give some edge away, right? But so if you’re like trying to trade it on a super short term horizon and day trade it, then the odds are not in your favor, right? But the odds, the way to swing the odds in your favor are to have slightly longer time horizons, right? And know that the structure or the strategy that you’re using is optimal for the market conditions and for your view, basically, right? And you should also be careful to not constantly buy options all the time across everything, right? Because systematically paying premium is generally a losing game. So you want to try and be a bit more selective about how much premium you burn and when you burn it, basically, right? That’s kind of how I, that’s my general sort of feeling.

Torsten Jacobi: Yeah, I read the original post of the GameStop saga and I think it appeared in early November, second week of November. And basically the idea that was given in that original post was why don’t we buy really long dated call options? And the same thing happened for Tesla. So this was, this was like the go to strategy for people on Reddit by long dated three months, as long as they could find it on Robinhood, basically, and I think they don’t go so far out. That’s a big problem. You can’t buy a two year option. Even if that exists for professional traders, it doesn’t really show up on Robinhood. And what I found interesting, they bought this three month or two and a half month option, it was a long user was available. And the stock barely moved during that time. And the second it expired two days later, it started to explode when like 5,000% higher. So it was a little bit from the original post this year, if you don’t roll over your options, you would have given up all the upside through your health and position basically till the end, it only moved 20% until then. When you look into two options strategies, what does it kind of do? You just said that short term, it’s a problem. What is a typical investment horizon? Is it two months? Is it one week?

Imran Lakha: Yeah, that’s a good question. I mean, generally, I prefer to err on the side of buying a bit of extra time. So I might have a view on an underlying, but I’m not arrogant enough to think that my timing is going to be perfect. Maybe it’s just because I’ve been doing it for 20 years, so I know how often I’m wrong. So the idea then is say, okay, well, how much does it really cost me to give myself an extra month for this view to play out? So rather than buying a July option right now, maybe I should go to August or September. Yeah, so always err on the side of buying a bit of extra time for your view to play out is kind of my default. And then it’s like, how much am I having to really pay extra in terms of volatility premium to push myself further out the curve basically, right? So that’s kind of, and then that’s one thing, that’s my general sort of default in terms of if I’m expressing directional views using options. And then like you said, rolling is very important, right? So if if it turns out that my thesis isn’t playing out as quick as I thought, or so I can change my mind, right? And then just say, okay, can I salvage back some premium? Because my views changed. If my view hasn’t changed, and I still like the scenario that that stock or that underlying is going to go in the direction I think, but it’s not playing out, and I’m getting within a month of expiry of my trade, then I think, how can I make that premium that’s left? How can I make that live for longer? So where could I roll that premium to what strike and what maturity to just keep that premium alive for a bit longer, right? Because you just don’t want it to get to the point where it’s very digital, where it’s very binary, whereas you get one bad week in the stock, and now your options definitely dead, basically, right? And that tends to happen when you let the option get too close to expiry. So the people who play it from the professional side and the more statistical side will always want their long premium to be sitting in maybe a one to three month expiry. And when it gets too short dated, and it starts to get too binary, and the theta, and the theta bleed basically gets too heavy, then you push it out to a longer expiry to make it live for longer. Well, that’s kind of how I think about it.

You would have to sell that option and just buy a new one, right? Correct. Yeah, exactly. When you look at the markets right now, there seems to be a lot of trend following going on, right? So it seems there is, and that’s kind of my green topic a little bit, there’s too few people who buy on value, who buy on their conviction, right? So we always have those, those contrarians, right? So they buy things and they’re ready to hold it forever, some worn buffets, you know, as long as it’s my return on equity is the same as what I projected. I’m good. It doesn’t matter what the stock prices ever, because it will eventually be realized. But there seems to be what when you look at the markets right now, there seems to be a ton of trend following, right? Nobody actually is able to go out there anymore and say, well, this is the mania, crypto is crazy. But crypto, I mean, it just came down a little, but usually it would just double the next day, just because we’re because someone said, oh, we’re gonna be in in a bubble. When you, is that for you an investment criteria? You feel like, well, this is too, too big. I’m looking at more specific trading opportunities. So I would say trend following is definitely a valid strategy. You know, think about CTAs and why they exist, right? But go back to the turtle traders, right? And the birth of the CTAs, you know, that was trend following. And that worked, right? And they managed to teach people who knew nothing about trading and make them profitable traders by following a very simple trend following strategy. So clearly, it used to work and there was value in it. Now, whether or not there’s as much value in it now, or it’s as consistently profitable, it is debatable. I would argue there is still value in it just because why, you know, when you’re a momentum or a trend follower, what I think you’re basically getting rewarded for is patience. So you will, you will, you will basically find a trend, right? You will establish a trend that is established and you will say, you know, this is why I think that trend is, is going to continue. And I’m willing to just be in that trend and stay with it basically, right? And if you have the ability to size your risk and be patient enough with that position, that’s kind of your edge, right? That you’re not getting puffed out of the position on the first sign of a drawdown basically, right? So I think momentum seeking does get rewarded because it’s some, but it depends on the time horizon, right? You need to probably look for, so the way I think about momentum is find longer term trends that you, that you expect can persist for years maybe, right? And have some sort of way to size into those trends and follow those trends and some indicators maybe that you use to identify those trends, right? But then around that, what a nice overlay strategy on top of that is to look for mean reversion in the shorter term time horizons, right? Because that’s a valid strategy as well, right? You know, things can get frothy and things can get overstretched away from their mean. Simple things like Bollinger Bands allow you to sort of see that in terms of charting. So, you know, but then you look at daily time frequencies or even, you know, four hourlies or whatever, and they will give you a different sort of outlook about your short term tactical positioning that will sometimes kind of neutralize your longer term trend holdings. But then once those things mean revert back to their averages, then you’re happy to unwind your tactical mean reversion bets and get back to the trend following position, right? So I think they work hand in hand as complementary strategies basically, but just across different time horizons. If that makes sense. Yeah, I’m trying to parse it. I’m obviously not from the industry. One thing that I think a lot, which is a big struggle right now, is basically all the trades are heavily impacted by either deflationary or inflationary scenario. Whatever you do right now, you have to have a position more or less. You can basically, this is very difficult, I feel to find anything right now that’s completely neutral and not affected if either of the scenario comes true. So you’ve got to have a view of the future. Will it be inflationary and strongly inflationary? It seems to be this very bifurcated right now. Or will this continuous technology deflation keep going? China is very deflationary. It’s just the bigger trend, which isn’t this little trend that basically is a blip over the years. And we’ve seen deflation or deflationary scenario for a long time. Where do you stand on this? Yeah, I sympathize with both sides of the argument. And I’ve been talking about this on my YouTube channel recently. So I did one video a couple of weeks back, which was talking about how inflation looks like it might overshoot in the short term. And these are the reasons. And then literally the week after I was spelling out the case for the case against inflation. And I think David Rosenberg in his latest piece, and he was on podcasts recently, and he was spelling out why he doesn’t believe in inflation longer term and he thinks it will be transitory and he actually agrees with the Fed. It’s hard to argue against what he’s saying. The structural forces are strong. And these inflationary dynamics are because of factors that clearly are temporary. So you’ve got to assume these stimulus checks are not just going to keep coming forever. I mean, maybe they will, but your default base case needs to be at some point, they’re going to expire because you’re seeing the disincentives for people to work in the non farms numbers. And we’ve got another one coming this Friday. And if that’s a bad number, it’s going to be not because there’s not demand for jobs, not because we don’t want people to work. The job vacancies are sky high, but no one wants to go and work because they’re getting paid free money from the government. So you are starting to see states in the US, you know, stop the unemployment benefits in an attempt to force people back to work. And hopefully you’ll see that come through the jobs numbers over the summer. So June, July, August. So that I think that needs to happen. And that will address some of the kind of potential wage inflation that maybe we might start to see. And then, you know, people talking about Europe is not affected by this, right? So Europe seems to be because we have this scenario for the US, but beyond Europe, I’m currently too. It seems Europe has always had great generous benefits, right? If you if unemployment benefits, I remember that when I left in Germany, where large stretches of the population were all unemployment benefits, nobody had worked in 20 years. And that was not that was pretty normal. It was still in the decent neighborhood, right? It wasn’t a neighborhood where you get shot at night. And it’s somehow, I mean, Europe doesn’t have any inflation, right? So it keeps giving people checks for 20 years. But inflation hasn’t really shown up in the longest time in Europe, if anything, it’s negative not rates. Yeah, that’s true. And I mean, the structural I suppose the structural deflationary forces, you know, that spring to mind, right, are obviously technology, the big one, right? Demographics is another one. So what what is the demographic profile of Europe look like versus maybe places where we are seeing more inflation? That’s probably a factor. And those and those structural demographic forces aren’t going away, right? So, yeah, I think longer term, I kind of agree that we’re not going to get some massive runaway inflation that’s going to that’s going to force yields higher. And it’s the end of it, right? Is the end of bomb markets, basically. But I think in the short term, we might get an overshoot, right? In short term, we could get an overshoot. I don’t think it will be enough to force the Fed to act. And so I think the interesting thing is what what a commodity market is going to do, right? So the way I’ve been playing and using, I’ve been using commodity markets as a bit of an inflation hedge, right? I think everybody’s onto this trade. That’s what commodities have done so well, you know, energy stocks and commodities obviously are kind of somewhat in sync. And they’ve been doing pretty decently. There’s a whole electric car thing going on in the background with precious metals. But I sometimes I’m not sure it’s just because all the traders think this is a good hedge or maybe because it is a good hedge. Yeah, no, that’s, I mean, it’s valid point, right? Because at some point, it’s fully priced or, you know, too much money’s in it. And it requires an unwinder, you know, that these are the whole trading game theory and psychology aspects you need to be aware of, right? Is the money in commodities, is it fast money? Is it fickle weak hands that are going to dump it at first side of trouble? Or is it a structural mega trend that’s going to keep going for a long, long time? Now, arguably, because of the governmental sort of agenda towards clean energy and electrification and all that stuff, you’d have to think, or it’s certainly easy to construct the argument that the demand for copper is going nowhere, right? And then not only have you got a strong demand story, because we need to have a shitload of copper to, you know, to do what we need to do for the electrification of the world, right? So demand side’s there, and then you look at the supply side and you see there hasn’t been enough capex, there’s a supply shortage, it’s going to take a while for that supply shortage to be addressed. So you can see copper, the copper mega trend being there, but then maybe some other commodities are getting a bit, you know, far ahead of themselves, like the agricultural commodities, like corn and wheat and things that have started correcting a little bit recently. You know, what if there is some bumper harvest in the US, right? This time round, all of a sudden, that supply shortage goes away and those things get sold another 30% quickly, right? Who knows, right? So I think you’ve got to be careful about what you own in commodities and make sure that you’re comfortable with the underlying fundamental trends that are there, but then they also offer you a general kind of inflation hedge and a real asset type thing in your portfolio, right? Because having too many bonds in your portfolio right now against your equity exposure doesn’t feel that sensible and that that goes back to your recent podcast with Harley, right? Talking about the correlation between bonds and equities going higher, if rates go higher, you know, then bonds aren’t offering you any diversification. So how do I get that diversification in my portfolio? And I think some move towards real assets and commodities that have got a real demand, a real supply demand story going on that isn’t about to disappear. Maybe that’s the pivot that people are making in their portfolios away from bonds and into real assets, right? Yeah, sometimes I feel like the demand from bond is kind of came in by default because remember for the last 40, 50 years, people had been pitched, the simple investment approach put 60% on equities, 40% on bonds and more people got on the train to invest, right? So either that’s demographic or this is just because we’re richer, whatever it is that seems to be surplus of savings and we haven’t put them in government savings as you would have to do in China, right? So what we did, we followed the 6040 model. I did it quite some time ago and I felt really confident with this because it gives you some stability, like think back to 2008, the bonds were doing well, relatively well compared to the equity portfolio that didn’t do so well at least initially. Yeah, there is a lot of science to it, but I feel like that’s what I’m trying to say, people are buying these bonds not because they want to buy bonds, no, just because it’s basically inherent into this strategy. It’s kind of what Mike Green is saying with the passive investors, they don’t want to actually buy this stock, they just buy it because it’s in that index and because it’s in this index and you buy into that mutual fund or this index tracking fund that they’re being bought. So it’s in the fall of the investment because I cannot come up with any scenario where rational investor buys 0.2% bond with a perceived inflation of 2% that we always had, right? You can argue it’s more like a point five or it’s a 3.5, but it’s somewhere we always had 2% more or less the pet target over a long time, right? Why on earth would you buy such a bond if you want to hold it, right? I couldn’t agree more, like negative real yielding bonds, why are you putting them in your pension fund? You’re basically saying I want a guaranteed loss, right? That’s what I want, right? Maybe they know something they don’t know, right? Maybe they’re ahead of us, that’s what I sometimes say, but there’s something going on there. Yeah, I think it’s more related just to the mandates of some of these funds where they just have to hold X amount of bonds, right? They have to hold some paper that doesn’t look like equities because of the riskiness of equities and the volatility of equities. So they’ve got nothing else to own, right, other than these ridiculous negative real yielding bonds, but and then the truth is the price appreciation of those bonds hasn’t been that bad until maybe recently as yields have backed up. So even though the yield on it is negative, I’m getting price appreciation out of it. So as long as I don’t hold it to maturity, I’m getting a total return off it, right? Sounds like Bitcoin to me. You know, I don’t want to hold it down, right? I just want to write it up all the way. Well, there you go. The definition of a bubble, right? Then, you know, if people look at Bitcoin and say it’s a bubble that they should look at what bonds have done for the last 50 years, right? 40 years. I mean, that’s clearly a bubble too, right? So one thing I want to pick your brain on is they call it the gamma meltup. So something that happened last year and we know a little bit about that story what SoftBank did. We don’t know all the insights, but there’s a rumor that they had the trader with lots of experience and options from Deutsche. And the idea was that SoftBank said on this portfolio with very strongly depreciating assets, all of these were underwater. They’re real investments, right? And they put a billion each usually into those investments. So yeah, they raised 100 billion and two funds are 200 billion and they usually put a billion or more in. And the trouble was the valuations were falling because the real tech market was was dropping, especially because everything was dropping, right? In March and April last year. And the strategy came up with was why don’t we try to manipulate the global market for tech stocks? And they weren’t really focused on game stock and the meme stocks, but they were focused on why don’t we push up the valuation in the public markets of the main trading stocks. And that includes Amazon, includes Apple, but mostly the mid tier, I’d say not necessarily the banks, because they of course were on a strong high valuation already. And I’m curious if that’s even possible. So the conspiracy theory goes like this, they put a few billion, maybe five to 10 billion into call options. And what these call options did, of course, they wanted to drive up and did lots of leverage in it, they wanted to drive up the valuations, but it created this this effect that prices for these options went higher than the options or the equities went higher, the options dealers had to buy it because they had to hatch, they had to buy more than it went higher and higher. So would we saw this massive appreciation of tech stocks that kind of hit a lot of us by surprise, maybe you foresaw them, but it seemed a bit like market manipulation from South Bank conspiracy theory. Would you think that’s even possible? If I give you 10 billion, can you create a government? Well, I mean, yeah, I think it’s very dependent on the stocks that you choose and how deep those stocks are. So literally how much volume do I need to buy in a stock to have market impact, right? So that, you know, it’s hard to move a stock like Apple or Amazon, right? They are very, very deep. I don’t know exactly the numbers, but you need to buy a lot of stock to move those names, right? A GameStop is not hard to move, right? If you’ve got a decent amount of capital behind you, creating gamma squeezing GameStop and AMC, like which happened last week, even right, that’s not that difficult, I don’t think. But Tesla, Tesla, like 12 months ago, and now it’s a huge number, but 12 months ago, it wasn’t a huge company. Well, not by the standards of ESP. Yeah, but you know, I don’t think you can really call it market manipulation because the guy who’s buying those calls is putting his money where his mouth is, right? He’s, it’s not like it’s some official body that’s like going in there and spooking the market and telling them that they have to buy and forcing other people to act, right? They are asking a bank or a dealer for a price and they are saying, mine, I’ll buy that for you at that premium, right? And that dealer then has to go and recycle that risk. And if that dealer can’t find other offsetting proxies for that risk, whether in the NASDAQ options, because that’s the index that that stock resides in or other tech names that are highly correlated to that stock, and they have to just go straight back into that market and buy the stock. And they realize that they’re having to force the stock up by 10% in a day because they’ve sold too many options. That’s not market manipulation. That’s just really bad pricing on the part of the dealer that hasn’t priced the liquidity of the stock properly, right? In the, in the optionality that they just sold, right? So really, it’s about how efficient the option market prices things and realizes the impact that it’s going to have for the volumes that it’s offering clients. Now, there’s definitely a tendency over the last sort of 10 years for banks to offer the wrong price liquidity to good clients. So that’s one of the reasons why I left banking, right? So a lot of my day job was making prices to clients in ridiculous size and volume at prices that made no economic sense to me, because, and that was the only way I was going to maintain market share and win those trades from those clients, right? So maybe there’s some of that going on where dealers are just forced to give soft bank an amazing price, knowing that they’re just going to have to go into the market and lift the stock. And we’re going to lose money on it, but they don’t care because they need to keep their clients happy, basically, right? So then, so you see what I mean? Whereas if everyone was pricing it efficiently and saying, right, this guy wants to buy a billion dollars worth of premium in call options, what is the realistic market impact is going to have? And I’m going to show him the right price for that option. Then maybe it wouldn’t have as much market impact, and you’ll be at a recycle that risk over time and you’d be able to go softly, softly with it. But I think maybe there’s an element to the dealers who offer that liquidity, the kind of got a gun to their head forced to offer the wrong price liquidity. And then they go and they make they have the market impact that we all get to see, basically, right? So yeah, that’s good. That’s called the Goldman Sachs trade, right? So if you have your margin of the Goldman Sachs monster trade with you, you you’re definitely having an edge in the market. But I also feel it’s a bit like it’s a common BC strategy. So say you, you, Sequoia, right? So what you would do, you have a few companies in your portfolio, they all are worth 100 million in valuation, say 200 million, like a random number and they raise their recent rather than that. And you know that the threshold for a unicorn is a billion dollar valuation. So you do the next round, you only put in whatever 50 million, don’t put in a lot of money. But you do this not on 500 million, which the starter would accept easily, what 600 million or 700, no, no, you say that the valuation is going to be a billion, right? You’re only, you’re still only putting 50 million in, you don’t really care, right? So you’re not negotiating hard for the best price, because you know that if you put it in a one billion bracket, you can move the market. Someone else will come in and say, oh, I’m going to buy this for two billion and then you just double your money, which wouldn’t happen if you do the same thing with the 200 million dollar, 300 million dollar valuation. So what I’m trying to say is there is obviously because something is so big, they leverage their position in a way, obviously behind scenes, maybe more than in public markets. But what they did, they kind of moved the whole portfolio because we think, okay, well, they had 10 billion or whatever they put in, 5 billion at risk. And that’s true, right? These things could have sucked. But it’s a hedge against their portfolio, even if it wouldn’t have done anything, it would maybe have stabilized at least the the bloodletting and the rest of their portfolio, which is 200 billion. So I think it’s very well played. It’s kind of like a PR standard. From their point of view, if it’s a hedge to the rest of their portfolio, then yeah, it could make sense for them. And like I say, by putting that size up, you know, you’re kind of cornering the market almost, right? You’re creating a size that the market is not really comfortable digesting. So it’s probably going to move that trade in your favor. So maybe there’s some truth there, right? But like I said, I don’t think that’s, I still wouldn’t call that market manipulation because the market should be efficient enough to price that accordingly, right? If your size is so big that it corners the entire market, the market should charge you for that, right? And the market should find the level where it’s statistically the right price to sell that amount of risk to you, right? Do you see what I mean? Right, but you know, the efficient market theory has been debunked so many times in the warm up. Yeah, I agree. I don’t believe we’re in that. Yeah, we can just speculate how they pulled it off. I don’t want to wish anything bad on SoftBank. What I’m trying to say is they facilitated a really big strategy and it worked beautifully well. What I’m trying to find out, is it even possible? And it’s, I have a gut feeling it is, but I’ve never ran the numbers because I really don’t know enough about it. I think it is possible, but I think it’s more possible in smaller cap names, right? I just think the big deep liquid names, it’s much, much harder, right? Whereas for the, and we’re seeing it, right? We’re seeing it live and up close like last week with AMC. There was a load of weekly call options that got bought and the stock was up obscene amounts in a very short amount of time, right? So it’s still happening, right? They’re just so small, you know, even if they go to a building, I don’t know what their market cap is, they’re really, really small. So in the options volume is really small. It’s very easy to move those around. Exactly. Literally just a thousand people on red and you’re good to go. Exactly. Executed trade. I want to ask you about another strategy that seems to be going on that’s selling or buying volatility, right? And for me, it seems, it’s extremely easy. Once we have one of those events like COVID when volatility explodes and we’ve seen public markets 50, 60, 70, the VIX is printed really high. You definitely want to, you want to bet on a job in the VIX because it always happens because of the pattern. If it doesn’t happen, the world is ending, right? If it goes to 200, I think the public markets end because there’s no price that you can really find. So I would always take that back. And on the other hand, if it’s extremely low and we saw this, I think 2017, there is times when volatility is extremely low and it’s 10 or below that even at single digits. And that seems to me, if you can hold it, if you can, and we talked about that earlier, very shortly, if you can make it work that you can express this investment over long enough time frame, say six months, 12 months, 18 months without paying too much, you always win. I mean, looking back at historic data only, you always win with your strategies. Yeah. So I mean, volatility is a mean reverting asset, right? That by nature of it, right? It is mean reverting. And you know, something I often talk about is the kind of gravity of the VIX, right? So whenever the VIX pops and goes up 30, 40, 50, whatever it is, it’s like throwing a stone up in the air. And you know that stone’s coming back down to earth. It’s inevitable. Okay. And I guess what you’re saying is, well, it’s also the lower it goes, it’s inevitable that it’s going to spike at some point. Now, I would say your confidence about it dropping back down after it’s spiked is much higher than your confidence about when you buy it, having any idea on the timing of when it’s going to go up, basically, right? So I would say as a kind of expected value or proposition, I think selling it after a spike is going to have a higher probability of success than just buying it when it’s low. Okay. Now, when you sell it, you obviously are taking a risk, right? I mean, the reason why the vol’s just gone to 40 or 50 is because the market’s crazy in going, you know, very volatile. And so it could well go to 80 or 100. And that’s exactly what happened in March last year. So there are ways to kind of cap your risk, right? There are ways to sort of limit the risk that you’re going to take, even though you’re still selling vol, you can cap it. So an example, a way that I sold vol in March, April, 2020, was I sold cool spreads on the VIX, right? So the VIX was at 80. I think the front month futures were about 80 or something like that. And I was selling the 100, 110 cool spread for about two vol puts, right? And that doesn’t sound like an amazing trade, right? Because you’re selling something for two, that if it maxes out, it’s going to be worth 10, right? So risk reward, is that amazing? Doesn’t sound it, right? But the reality is, for it to actually lose you 10, and actually doesn’t lose you 10, it loses you eight, because it’s 10 minus what you took in for it, which was two. For you to lose that money, it needs to go to 110 and stay there, right? And it’s already at a place where it’s probably not going to stay there, it’s already at 80, right? So the probability is massively skewed in your favor, that the vol is just going to collapse and you’re going to collect those two vol points, right? But the beauty is, is because you’ve capped the amount that you can lose, you’re never going to actually blow up on that trade, right? And also, even if vol went to 100 or 110, at some point in the life of that trade, I’d probably still be able to cut that position and only lose maybe two or three. I wouldn’t lose the full eight until it got to expiring, right? So really, if I think about it that way, I’m selling something for two, which might lose me two or three, which I’ll cut it if it does maybe, let’s say because vol might go to 200 or whatever. But the chances that it goes to zero and makes me that full two points is very, very high, right? So that’s a smart way to kind of sell vol when vols are crazy high, basically, right? You know, other people, other ways to sell vol when vols are high are maybe buying put structures on the VIX as well, maybe selling iron condors. That was another way that I did it. I think I did May expiry iron condors on the S&P, where the S&P was down at 23, 24, 2300. I was selling iron condors, which are basically cool spreads and put spreads, selling both of them to collect premium, but again, knowing the max that I can lose. And having confidence. This is a bit like a strangle. It’s a strangle. It’s not a strangle, it’s a strangle, but you buy a strangle behind it. So it’s like sell a strangle, but buy a strangle further out so you cap how much you can lose again. You always limit, when you sell volatility, it makes sense to try and find ways to limit your damage if you get it wrong, basically, right? So that’s the kind of, that’s what the professionals should be doing, basically. There’s probably a lot of professionals who don’t do that still, but that’s how I like to approach it when I sell vol, basically. Well, often people sit on a lot of big investments, right? And the, the, just selling or buying volatility is just an expression of the hedge. So they don’t want to hedge the hedge, right? They just want to have the full risk. Sure. Yeah, yeah. That’s true. So call overwriting is a good example, right? When you, when you own the stock and you’re happy to sell a 110% call against it, and you don’t need to buy anything against that, because if you get called out of that stock position, you don’t mind 10% above where we are, right? So totally right. That’s a natural, that’s a natural supply of volatility that the, you know, clients are happy to sell, right? And then on the buying vol side of things, this is where it becomes a bit more tricky because the cost of carry is, is like, you know, your enemy, basically, right? The theta and the premium bleed, that’s your enemy. And you’ve got to find ways to mitigate or minimize that, I guess, right? And people have various ways they do that. And some people just write, some people just say, you know, I’m going to pay that cost of carry, I’m going to write it off. And it’s just something that, you know, a good example is Nassim Taleb and Mark Spitznagle, right? The guy’s, the universal, universal, I think, is the name of the fund. And they just always buy ridiculously out of the money puts with a very small fraction of their capital, so that they, they’ve always got the crash risk, basically, right? And, and one day that crash risk will make 50x or 100x. And that’s fine. That’s when they’ll, they’ll look like heroes when the market’s down 30%, everyone else is dying. And they’re, they’re in a position of strength where they can buy up cheap risk assets, basically, right? So they did that. I think they made some ridiculous returns last year in the thousands of percents in those funds. So that’s not a bad way to go as well, right? Just buying. But they’ve lost money, they lost money every single year, right? They lost 10% every year. Well, no, no, they lose, they tear up, they tear up that premium that they lose every year. So let’s say they spend 3% a year that they tear up, but they’re fully allocated to the market, right? So with the other, with the other 97% of their portfolio, they’re not like, they’re not messing around with a bit of bonds and a bit of equity and a bit of this and a bit of that, they’re just fully along the market. So in a year when the market’s up, they’ve participated to whatever the upside in the market is by a factor of 97%, which more than compensates them for what they’ve been tearing up on premium, basically, right? So that would be really cheap, right? So at least 3% of like a really cheap price for that kind of insurance that gives you an upside that the market actually goes up. Yeah, I mean, it’s a barbell strategy though, right? So it’s, it will work in a rallying market, you’re going to make money, you might slightly underperform the benchmark because you’re 97% invested as opposed to 100. But who cares, right? Like that’s still probably a half decent return on an average up here. But then in the down years, you need a big down year, right? You need, you need a 20, 30% type correction for those deep out of the money puts to ever be worth anything, right? If you get a 5% correction, that doesn’t do you any favors because you actually take the entire 5% drawdown on your equity loans and your puts never perform, right? So, so it’s a barbell strategy that works in, in both extremes, but it doesn’t really work in that middle ground where we’re kind of drifting a little bit lower and having small corrections, but they, they don’t care because they look at the market and they say these small drawdowns just get bought, basically, right? The buy the dip mentality, if the drawdowns 5 or 10% within a few months, it gets bought and we’re rallying again, right? So they’re kind of saying it’s only worth having protection when it turns into a 20, 30% drawdown, which I can kind of sympathize with, right? But the question is, do other fund managers need you for going long? I mean, they can do this themselves, right? So when, when you have an investor say you have an institutional investor, why would you go to a hedge fund? They can put their money into long positions anyway. Sometimes they are very, very different, certain instruments for generally long positions and equities, everybody can buy, but they really need you for this magic optionality that pays off very nicely in down heroes, right? So why not just focus on that aspect? It seems to be for other institutional investors the most interesting part because for some other reason, they cannot invest into more exotic material. Yeah, I mean, I think that, you know, I, I’ve spent some time training asset managers, right? And the reason why I get that business is because one of the biggest mistakes institutional fund managers make when they use options is they, they get the approval that they need a hedging strategy because it, because it improves their risk profile, right? But what happens is every time the market dips, they never monetize any of their protection, okay? And then the market just rallies back again. And all that ends up happening is that their hedging program is just a drag on performance. It’s never actually monetized. Never monetized. And that’s because no one’s really trained unless you’re a practitioner who’s used options that for 20 years and has seen it all before and has thought about all the different ways to monetize and capture these moves in, in volatility and in, in spot, you know, you kind of don’t have a game plan for monetization. All you know is that I need the disaster hedge because if we get 50% drawdown, I don’t want to lose my shirt and I want to, I don’t lose my job, right? Yes. But, but it seems like these hands just make you, make you sleep better, but they don’t actually make you money. And whenever I ran, I ran a lot of, you know, backtesting and automated trading strategies, I never could find a single one. And this might be the percargery I use where I felt like the hedge made me money even long term, right? So this is also born Buffett’s philosophy is like, well, if you have to hedge, then something is wrong with your strategy. You’ve got to find something you’re so convinced and you can sleep with, sleep, do the night, despite not having a hedge, or just don’t do it, just put it in cash or put it into something under your mattress. Yeah. I mean, I don’t necessarily agree with that just because, you know, and this is part of the course that I give, right? So at the start of it, when we’re talking about hedging portfolios, it’s like, why am I hedging? Why don’t I just liquidate my exposure? Right? What is the, what’s the point in holding a position and having a hedge against it? And there are reasons, right? Like you may well think that there’s a load more upside in the asset and you want to have that upside participation, but there’s something on the horizon that is making you nervous. And there’s a tail risk that you want to hedge. And you don’t mind giving up some performance to just be covered for that tail risk, right? So that is, that is a valid argument. And so I don’t think the, what that, I don’t think that thing about. So it’s very short term. When you think of it, say, maybe we’ve just went through a pandemic, but markets are basically back where we started more or less depends kind of on the market, but more or less. So it’s a time horizon that the hedge works out for say, six months, 12 months, whatever that moment in time is. But then after that, you’re basically back to normal sooner or later. I mean, you know, the markets go anywhere, but that seems to be from the last 30 years, our experience. Now, this might be skewed, right? The next 30 years might be completely different. But yeah, but the problem is like people are measured by drawdowns and sharp ratios, right? So yeah, if you can, if you can close your eyes for a year and say, don’t worry, the market’s going to recover because the Fed’s got my back and it’s my own capital and I’ve got no one banging down my door saying, what the hell are you doing with my money? Yeah, you’re right. You don’t need a hedge, right? Really. But given that you’re competing for capital against a bunch of other funds and the thing that people measure you on is your drawdowns, your sharp ratios and all these things, that’s why you need that structural hedge in your book to help prevent those drawdowns when they come to show, look, I’m outperforming, I lost less than the benchmark did in that drawdown, which is why you want to give me your money rather than passive, rather than just passively invest in the spider ETF, right? So I think that’s the reason why you want it. But you just need to have protocols in place to understand how to monetize that, right? So which, you know, it’s not like there’s a magic formula where, and this is again, you know, you just need to teach people what are the go to ways to monetize and then they’ve got to use their own kind of discretion and skills to pick those ways, right? So really a really easy example, right, is let’s say you do a risk reversal. So let’s say you’ve got exposure to the market, but you don’t mind giving up some of that exposure up 10% and you’re going to sell a 10% out of the money call option, right? Get that premium and buy whatever put you can with that premium basically, okay? So that allows you to have some crash protection, yeah, and you receive a little bit of premium from those calls, okay? Now let’s say the market dumps, right? Let’s say you do that risk reversal and the market dumps, okay? That call option that you sold for 2% or whatever the hell the premium on that call option was, right? That call option is now worth nothing most likely, okay? But you’re still short that call option, right? So a really easy way for you to monetize some of the hedge that you just did is to buy back that call option for next to nothing, yeah? So all you’ve ended up doing is selling that call and buying it back for and you’ve captured that money. That money is locked in, okay? So that’s your one way of monetizing your hedge. So then if the market was to recover over the next month, you’ve got ammunition to resell a new call option, right? And you’ve managed to trade around that position and trading around that position is what is going to help you over the long term fund some of that bleed that you have systematically in your portfolio that you that you can’t at the moment do anything about and is annoying you and making you think twice about doing hedging basically, right? And then on the put side, your options would be things like rolling those puts down to lower strikes, maybe rolling them to future maturities, if the curve, if the volatility curve has moved in an extreme manner, all sorts of other options. But you get my point, right? Like you don’t have to just take the position off and now not have a hedge on your book anymore. You just need to know what are the kind of smart ways that I can monetize this protection and kind of effectively stop myself just bleeding money all the time when the market just mean reverts back after these shallow dips. When that mean reversion happens, I’ve managed to capture some of it, right? That’s the general sort of idea. That’s why I tried to teach in my options versus management course. Well, you got to know the market timing, which is obviously quite an art. I just feel the Holy Grail and all this is and I hope you’re going to get there is the edges also make money, right? We put an edge in to protect something, but it also should consist of the well, consistent the obviously is a question of definition, but it should make money over the long term. That would be ideal. That’s the Holy Grail. Yeah, I mean, that is the Holy Grail. I would say a better starting point is to say, if I can manage to just have a hedge that doesn’t really cost me much money, then I’m happy, right? For you to make money off your position and make money off your hedge, you’re kind of asking for a lot, I would say, right? It’s not impossible, but that really is like pretty much superior to sell to structural investors and to a lot of investors if you can pull it off, right? Obviously, maybe it’s impossible. It can never be done. But if you can get close to that the ideal scenario, because I feel like the hedge fund industry is definitely consolidating, right? So what’s, it was had a big boom in the late 90s, 2000s, and then it’s consolidating because it seems there isn’t enough innovation coming out of it. But pretty much anyone can do what a hedge fund can do with a Robinhood app. It’s on the slightly lower price level, certainly, and there’s structural benefits to it. But if it’s not insider trading, what is actually a hedge fund good for? Right? So what’s left? What’s left? What do they do with these guys that nobody else can do? Obviously, and they have to disclose a lot of their strategy. I mean, not in detail, but there is a certain level they have to disclose. So you feel like, no, I can do this myself. And I think this is what structural investors or a lot of these large investors, pension funds have been doing. They say, oh, well, we don’t put a lot of money in hedge funds. There is a lot of demand for this. It seems compared to the size of the hedge fund industry. Yeah, I mean, I definitely agree that these more sophisticated strategies are becoming much more accessible and much easier to implement for everyday investors, whether it’s real money funds or whether it’s even retail guys, 100% agree. I mean, the thing that the hedge fund guys bring to the table is they’ve got the experience. Usually, they’ve got decades of experience, probably maybe some of them from the sell side have moved over to the buy side, maybe some of them have been there for a long time. So and if they’ve managed to stay on the buy side for a long amount of time, it means their track records are pretty good. And so they’re doing something right, basically, right? They’ve kind of mastered their art, as it were. But you’re right. What a lot of them do is probably quite replicable with some basic education. I would say. Yeah, it seems like I don’t know who coined that. But if you have a paradigm shift, you want 20 year olds trading your money. And if you just have an extension of the current trading scenario, you want someone who’s in his 50s or 40s, right? And maybe that’s what we see with Robinhood, all these 20 year olds making money. Or maybe not, I don’t know. Yeah, I mean, take enough numbers. Back to your point, what you made about bonds earlier, right? I mean, have we gone into this new paradigm where rather than owning a bond, I should just own like some low, some low earnings, high duration tech stocks instead. Because in the scenario where bonds do well, those stocks are going to do much better. Right? You see what I mean? So like the arc, the arc innovation ETF is kind of the poster child for duration right now. Why am I going to hold actual duration in treasuries or European even worse, like even lower yielding bonds, long duration assets, when I can own the arc ETF, which is also a long duration asset, but is going to have staggering upside because it captures all the growth potential, right, of all these innovations that are happening in the world, right? So maybe that’s the paradigm shift where the young guys are coming in, and they get excited about those growth opportunities and those ideas. But it’s the same conditions that will make both those investments profitable. But the high growth stocks are going to make a lot more money than the bonds are, right? But Imran, I’m not sure if I really understand that correlation, because I know it’s there, but I don’t understand, to be honest, why? Because say most tech companies, they’re plenty of money, like money for them is not a problem. There’s often the like for Google, for the longest time, it was a problem to spend all that money in something that would earn a future return. I think it’s still the case of cash flows and llamas. So they have bonds and they do raise money in financial markets, but actually, once they have a certain size, they really don’t have to, they’re almost like a government, right? So they’re really all talk in that sense. Why are they so addicted and related to low interest rates? It’s not the mega caps. It’s the guys like Palantir and, you know, you just look through the ARK Innovation ETF, right? It’s the guys that don’t have any earnings and therefore don’t really have any cash flow. They’ve got no free cash flow, but in 10 years, 20 years, they’re expected to have loads of earnings, right? And those future earning streams are what are being discounted at incredibly low yields, which are creating value to those stocks, basically. That’s all it is. But it also assumes a venture capital, which usually goes along with public markets or public markets, IPOs and valuations are being transported into seed funds right away, right? That’s always a problem. So you say you have an IPO, it takes about three to four years for most companies or more, and you say, but in that moment that someone goes IPO, these valuations are being applied to seed funds retroactively, but you’re projecting the next three years are going to be just like the market valuations right now, which is never true, right? So in two years, this is a very short time frame typically, it’s like a year or two, and then they drop, and then it goes, it’s like the cycle. So I always feel like Palantir, they are more related to what is the actual IPO valuation, which yes, you can say it’s discounted cash flow, but I mean, it’s basically just creative thinking, what the next IPO price is for Palantir, right? Well, Airbnb, that is 100 billion, but the fire financing one was what, five billion, that’s massive difference. It cannot be, I mean, you can always come up with the cash flow scenario, but it doesn’t really random, that’s right, the randomness of those things are really massive. Yeah, and there’s cycles, right? I mean, clearly the SPAC bubble that kind of seemed to pop early this year, I mean, we saw it, right? So there will be kind of manias and cycles of manias in these type of things, and we see it, right? So the savvy investors who are getting into this space need to be aware of where they think they are in this cycle mania, and not try and pile into these names at the top of the mania, right? But like kind of allocating into some of these names that you’ve done a bit of due diligence on, that you think have got the kind of business model and some edge, some competitive edge that means they will survive and they will be in that space in 10, 20 years, then I think it can make sense when that space looks like it’s having an unwind of some of that speculative prof, because there’s going to be a lot of people who just get into it without doing any homework, right? So I would say you do your homework, you find out which names you like and why you like them, and then you wait for unwinds of the speculative prof in them to enter your positions, and you hold those positions for a long, you have a 5 to 10 year, maybe longer horizon on those positions, but you’re using the unwind and the pain of those unwinds to get into those positions basically, right? And you had some opportunity recently when ARC was doing particularly badly, went sub 100, and you were able to dip your toes into some of those names, and maybe you don’t do your full size, you know, leave yourself some powder, dry powder to do more if there’s more unwinding to be done, but that’s kind of how I would approach accumulating some of those names that you believe in basically for the long term growth story. Yeah, I feel it’s very hard to, you know, if you have a value perspective to find anything that is of good value, because by the time it is very low value, in one of those super crazy crises where I think the world is going to end, like the financial crisis could have brought down the financial system, right? It didn’t, but it could, and the pandemic could have made life, you know, if it was as bad as we all thought, could have ended financial trading, and any kind of trading for a long long time, it didn’t turn out to be that bad, usually it doesn’t, but so for value investors it is almost never a way to get into these markets, and what I’m trying to say with this is in value investing, I’d say is a directional person who buys on a PE ratio that’s 12, whatever, you know, that there’s more to this, but let’s say this is our filter, and the return of capital is good, and the return on equity is good, and whatever. So these numbers seem to be extremely long term positive, but you can’t use them anymore because stuff never gets that low unless, you know, big crisis is coming around. Well, what I’m trying to say is for all the other investments, you can just bet basically someone buying more of this for a higher valuation in 10 years from now because there’s more free money going around, or more money being printed. I think this has been the investment strategy for the last 30 years that seems to work. Anything else is, if you go from really macro view, it’s this doesn’t really work anymore, because it’s too unpredictable. I totally agree that value investing has become impossible in the negative yielding world, basically, right? Because, you know, like, there used to be a point to doing, to bad to kind of analyzing the valuation of the company, because there was some mean reversion there, right? It was like, if value, if your PE is above 50, you want to sell it, if your PE is sub 10, you want to buy it, and there’s a mean reversion around PEs, right? And in terms of in companies that are within the same industry or whatever. But now PEs don’t matter, right? The Amazons never had a PE. I don’t know what it is now, but for most of its life, Amazon’s never had a PE probably below 100, right? But it’s been one of the best investments you could ever could have had, right? So, you know, it goes down to this kind of exponential theory that Real Vision have been talking about a lot recently, right? So, you know, these long term investments are more not about valuation, they’re about picking what are the exponential trends, right? What are the trends that are going to become the networks of the future, right? What are the things that are just going to span across the entire planet? And every single person with an iPhone is going to be using that application or that product, basically, right? And whatever the PE is, whatever the PE is of those things is actually completely irrelevant, right? Because PE only matters, and valuation only matters. If the money that we use to buy it has got any value, yeah? But when you can pull however many trillion out of thin air to bail out an economy that just shut down for a year, right? How can you really attach value to anything, basically, right? I think it’s quite difficult, I would say. And that’s kind of what I’m coming to terms with, right? Yeah. But that’s, isn’t that, isn’t that what investment is about? Well, don’t you, you know, isn’t investment bound to an idea of value being represented in numbers, in money, right, in dollars or whatever currency you use? I think this is the core of investment. If, and I agree with you, if we follow down that road, then what is investment, what’s left of it, right? Besides a mania building, that’s kind of, kind of, that’s our current, right? So we go into these crazy manias, which are rational at some point, they are, but they pop and then they drop and then the next meme start, it seems to be continuation of this with the future. Yeah, I agree, right? But that’s, we’ve got a mania in central bank balance sheets, right? Yeah, yeah, I agree. I mean, look at the rate of growth of central bank balance sheets, right? I mean, it’s parabolic. So that’s the problem, like, so it shouldn’t be a major surprise that asset prices are exhibiting similar characteristics, right? Now, I’m not saying you should go and jump on every mania that’s out there, right? But what I’m saying is you should, you should be aware that these manias can persist for much, much longer than you think is rational. But the beauty is, is once you know how to use optionality to participate in these manias, then you can contain your risk, right? You can contain your downside. And that’s kind of how I got into Bitcoin, basically, right? Because I wasn’t really a massive believer in Bitcoin. I didn’t think it’s going to become the new central bank. I don’t think it’s going to become the new reserve currency. But last summer, I came to terms with the idea that in a world where FBX currency gets printed for fun, yeah, and just created it out of thin air, and we, as entrepreneurs, I’m sure you noticed, you have to work pretty damn hard to make $100,000, right? Yeah, they can print trillions at the drop of a hat. So like, when you see that happening, you start to lose faith and lose trust in your institutions and your governance, basically, right? And whether Bitcoin is, whether it’s true or not, Bitcoin is selling itself as a way of getting away from that system and buying into a system that is peer to peer, that is not controlled by a central planner, that is, you know, controlled by the people, basically, right? But all around the world has no jurisdiction, no central jurisdiction. And, you know, it’s something, it’s like building a trust, it’s building something that we think we can trust and we can believe in, right? Now, whether it’s going to happen or not, who knows, which is why you would never put 20% of your portfolio into it, right? As a starting point, that would be a bit insane. Wait, I sold my house and put it on Bitcoin. And I know people who have, and they’re crazy, and I would never, and I think that’s mental, and they might get lucky, but they might get very unlucky, right? But, but I feel like me, I put probably maybe 3% of my kind of investment assets into it last summer. And that’s grown quite a decent way, right? So maybe 30%. And I’m sitting there thinking, wow, now, do I want to de risk and take some off or do I just want to let this thing run? Now, because I put only 3% in at the start, it makes sense. The whole reason for putting 3% in is because it had potentially 100x upside over the next decade, right? So there’s no point now taking it off. But what I can do is I can put option strategies over the top of it, which mean when it goes, if it goes back to zero, because something crazy happens, like the Mike Greens of the world think might happen, right? Let’s let’s, you know, he’s a hater of it. And I was hilarious listening to him and him and pump like kind of sparring on the whole Bitcoin thing, right? But but basically, if it goes to zero, I’m not going to lose all my money that I made, I’m going to lose some of it, but I’m going to get to keep at least half of it basically, right? And so that’s what that’s what I like. I like that fact that the options markets there allows me to do things that will help me retain some of those gains I’ve made in this highly speculative asset, but also allows me to maintain further upside participation if that thing continues, right? And that’s how I look at it. What kind of options are available for Bitcoin? I wouldn’t know what to do with Bitcoin. The first place is that options on the ETF that has Bitcoin as an underlying instrument. No, so that probably will come about at some point, but the ETFs aren’t really very sort of, I don’t think they’re necessarily all over the place and easily accessible for everyone yet. So once they become, then they’ll probably be an option on ETF. But at the moment, like, there’s really only one go to place for retail, which is Derabit, which is the exchange for crypto, the options exchange of crypto. Now, Derabit, I believe is not available to US investors. So if you’re outside of the US, then you can participate and you can have an account on Derabit and you can trade. The CME did list options on Bitcoin about a year or two ago, but because it’s the CME, I think there’s some size issues there. So you need to be very large institutional size to be able to participate in that. So I think for the retail, it’s very much Derabit is the place to be. That’s where I trade my stuff, Derabit. I like that name. I like that name. Yeah. One thing I was immediately thinking of, I don’t actually know if this is even the strategy, but then you get a ton of leverage and so you can go at 5x long and 2x short at the same time. I don’t even know if that makes sense, but this is the only thing I think you can play around with the current Bitcoin exchanges. You can change the leverage you want, but I don’t know of any direction. Is that kind of leverage long or leverage short exposure you’re talking about? Yes, that’s kind of the only thing you can play with. Yeah, but the problem with that is that I think those are daily rebalance structures. I hate those structures. They’re not nice. Yeah, they immediately sell your stuff. The margin calls come in quickly. Yeah, I would stay away from those types of products personally, because what they don’t like, those products, is the chop. When there’s a choppy price action, you get buried in those products basically. Those products will only work if you get a trend that just goes in the same direction every single day for a week or two weeks, and you happen to be the right side of it, then yes, you’ll make a load of money. But if there’s choppiness, which there always is inevitably with things like Bitcoin, that choppiness is eating up your performance and is actually costing you money. I would stay away from those, but I would learn how do I get that leverage and how do I get that exposure via optionality? Are there any smart strategies that I can do like call spreads or call ratio type structures that give me that participation? That’s kind of how I like to play it on the upside. But in general, do you believe in this? And we talked about, you sound like a believer. I find that we have to use religious terms for monetary instruments. But do you feel like it is a useful store value? I can’t wrap my mind around this. So I get the full libertarian streak, but the store value, and it’s just the broken currency for the internet, it just doesn’t work. It should be abandoned, everybody should know about that. And it also is a shitty store value from my point of view, but obviously the world disagrees. Where do you stand? Yeah, that’s a good question. I mean, I think as a store of value, generally, something that can drop 50% over the weekend, for me calling it a store of value is insanity. So I don’t call it a store of value. I call it a kind of fiat currency debasement hedge, a long term fiat currency debasement hedge that doesn’t cost me any carry, and is a call option on the adoption of this thing, basically. And that’s what got me excited about it, because I was like, I can effectively be long a call option here, that’s something that could go up 10, 20, even 100x, right? That’s what call options can do. But most call options cost me time decay. Most options, I have to put premium down, and that premium is decaying through time. It felt like this was a call option, which was actually making a crewing value through time, as more people learn about it, and as the network kind of spread, and your adoption cycle grew, basically, right? And you don’t often get to own optionality that doesn’t decay on you, basically. So for me, that’s what was attractive about it, not that it’s a store of value, because store of value needs to have some stability in my mind. But it’s like, if you are losing trust in fiat money, which is not a difficult thing to get your head around, what the hell is fiat money when they can pull 20 trillion out of nowhere? Then it’s like, yeah, maybe it makes sense to have something in this thing, because this is an alternative, right? This is doing something different, right? Now, that doesn’t mean that I think it is necessarily the solution. But who am I to know whether it’s the solution? All I know is it offers me an alternative. It has some slightly different characteristics to being in the normal monetary system that is governed by central banks, right? And it’s got this, it’s got this cool sort of adoption kicker, where the more people who understand it and see it and throw a bit of money into it, that that is going to help you, basically, right? So that’s what it is. I don’t see it, I’m not part of the religion by any stretch, right? But I’m, I’m just open minded to it, basically, right? And I don’t feel like I have to be a lover or a hater of it. I think I can be relatively agnostic. And I think I can benefit from it going up and maybe even going back down. At some point, I might skew my positioning to be short this thing, right? So right now, using optionality, of course, I’ve never been naked short it. But I’m happy to go, go both ways on that if I think there’s a good reason to, right? So yeah, I like how you put it, that’s like basically a free option. Do that’s a bit true with any volatile stock, right? So if you find any instrument that you go along, that’s not a volatile, it’s gives you a free call option, right? And whatever positive story it is, whatever, like a startup, right? Really interesting that the positive convexity for the startup founder is such a beautiful thing, because it always is a huge call option, even doing just on the stock, you don’t need to buy any call options, right? Because you notice it could be a billion dollars tomorrow, or it most likely will never be more than anything. Yeah, I mean, that’s totally right. That’s the great thing about equity. I mean, I guess with companies, though, you’ve got to know if they’re burning money or not, right? Like some of these startups might just be burning money that they will run out of time. I’d say that’s one benefit that Bitcoin has. Those are the ones you want, the ones that go up all the time. Higher burn rate is usually an indicator of growth and growth is what people want. Yeah, you’re right. You don’t want to have any money. That’s a bad idea. You know, Uber had so much money on their balance, she could try to get rid of it. That’s quite interesting, isn’t it? That tells you a lot about the world that we live in right now, but yeah. It’s a funny story, but if there’s no growth anymore and people go into 0.5% long term bonds, something strange is going on. So maybe one day we know what’s going on, 10 years from now, we’re like, look back. So that’s so easy. You know, as a wise man once said, I think our goal isn’t to predict it’s just to be less wrong than everyone else, right? We know we’re going to be wrong on a lot of stuff. We’re trying to be less wrong, you know? I like that. I like that. I got to think about that, but that’s, I really like that. Emron, with that message, thank you for coming on the podcast. Thanks for doing something very insightful. I learned so much. No, it was really nice to chat. Thanks for having me on. Great. Absolutely the same here. Until next time. Take care. Emron, talk soon. Bye bye. See you. Bye.