Ex-Trader Warns: The Great Rotation Out of US Stocks Is On | Jared Dillian
Summary
Market Volatility: Discussion highlights a smooth 10% drawdown with relatively muted VIX, raising concern about complacency and lack of capitulation.
Risk-Off Rotation: The classic rotation from high-risk tech to staples is underway, exacerbated by the Magnificent Seven’s heavy index weight.
Style Shift: Potential secular move from large-cap growth to Small Cap Value is flagged as a compelling, longer-term style-box trend.
Dollar Weakness: A weaker dollar could drive large flows from US assets to International Stocks, with European Equities already outperforming on modest USD declines.
Portfolio Hedging: Emphasis on long-dated, out-of-the-money puts as insurance due to their Vega sensitivity, versus risky zero-day options.
Tactical Structures: Risk reversals are presented as a bottom-fishing tool, selling rich puts to fund calls when skew spikes in selloffs.
Key Mentions: Magnificent Seven leaders like Tesla (TSLA) and Nvidia (NVDA) are cited in the drawdown; anecdotes include Eastman Kodak (KODK) and volatility extremes like GameStop (GME).
Outlook: Elevated policy uncertainty implies higher and more erratic volatility, making options education and prudent hedging timely.
Transcript
Hi, I'm Ed D'Agostino from Mauldin Economics, and today we are talking about stock market volatility. If the market has you concerned, you're not alone. A lot of people are asking is now a good time to buy or to sell? And how do I protect my portfolio? That's what we're going to be discussing today with my good friend Jared Dillian. He's had a long career as a trader at one of the biggest banks on Wall Street, and today he's the founder of Jared Dillian Money. Thanks for joining us today. Here at Global Macro Update. Jared, thanks for coming back. Always good to see you, my friend. Appreciate you joining us again. Let's talk. It's been a while. It has been a while. It's been a while and it's been an interesting while, right? I mean, what a start contrast this year in the markets, uh, versus last year, uh, speaking stock markets, right? You've got s and p 500 last year up over 23% this year. So far, year to date, down around 4%. Not, not a huge loss, but still, I think people aren't, people have forgotten that the market sometimes goes down NASDAQ's even worse from peak. The trough, the s and p was down about 10% at the worst point. Um, and that was about the smoothest 10% loss I have ever seen in stocks like. If you go back to August 5th of last year, during that yen carry, blow up market was down 8% and the VIX went to 80. Okay, so here the market was down 10% and the VIX went to like 25. Like really not a lot of panic, you know, uh, which is worrisome. Like you like to see that panic, you'd like to see that capitulation, which is what we saw, you know, last August. Um. I was at a, a party over the weekend and I was talking to a guy and he basically, he's got a sizable 401k, it's seven figures, and it's all in index funds, s and p, and he says, when do you think's a good time to buy? It's not usually the questions that you get with the market down 10%. I'm like, look man, I can tell you like it might be a lot lower than here. Um, but um, the question was not, you know, like, do you think we're gonna get a rally so I can sell? He is like, no, tell me a good time to buy. And this is a guy who is 62 and is pretty close to retirement. You know, he is gonna retire in three years. So that's the mentality. How do you feel about sort of the underlying aspect of the market where the Mag seven right, the, the, the magnificent seven stocks were, were responsible for a huge amount of the last two years run up. Uh, and now, now you could argue Tesla and Nvidia are, are pulling the entire s and p 500 down some. I was on a podcast a few months ago, like kind of right when the decline started. I. And the, the host asked me, she's like, do you think there'll be a rotation? And I'm like, look, like. Anytime the market goes down, you always have a rotation and it's usually pretty predictable. You know, you're usually getting out of high risk stuff into low risk stuff, so tech into staples and stuff like that. Um, and that's exactly what's happened. Like, so you've had that sort of, that classic risk off rotation that's happened. The difference is this time, you know, with the magnificent seven being like 35 or 40% of the market, like. That rotation by definition means that the market is going down, you know? Um, so the question is, is this, uh, is this a three month phenomenon or is this the beginning of like a really big secular shift, like a style box trade from, you know, large cap growth into small cap value or something like that? Um, you know, I saw a chart of that recently that looked pretty compelling. Like you started to get an uptick in small cap value. So I, you know, the thing with these style box trades is they can just trend forever, you know, and it's just, it's just kind of, it's kind of tough to tell if, look, I mean, maybe today. Um, you know, Trump speaks and the market's up 4% and then it makes new highs and the mags haven't come back. I mean, it wouldn't surprise me if that happened because that's happened like 10 times over the last three years, you know, so you have to be careful around these kind of things. I hear you that there's still a lot of greed in the market among individual investors, though, it, it seems like maybe the professional investors are taking the opportunity to sell rallies. What do you think? The risks are to the market right now. You know, is it, is it earnings? Is it valuation? Is it strictly political? I really think it's, um, macro, and I think you're talking about like big, big flows outta the US and into international stocks or bonds. Um, like the risk is the dollar. If the dollar goes down 10%, 12%, 15%. There's there, there are going to be trillions of dollars coming outta the US and going overseas, right? Like that's what's gonna happen. In the first quarter of this year, European stocks were up 10% and the s and p was down 6%, 16% outperformance, right? And that's with the dollar going down about three or 4%. So imagine. If the dollar continues to weaken for, you know, years, like it's, I, I don't know if you remember what like the mid two thousands were like, but that, you know, valuations in Europe actually were really high. I think the PE of like the Euro stocks got to like 30 or something like that. Like, so, you know, this can, this can go for a while. What's interesting is your friend at the party asking you, when is a good time to buy? Like, like. I not asking you what should I be doing? Right? Like, like just like, tell me when to buy. Like, I've already decided what I want to do. Tell me when instead of, Hey, what should I be doing right now? Uh, which you're not, you're not, you're not a financial advisor. You're, you've got a, had a long career on Wall Street and you're, you're, you're a trader and an investor. It's just interesting. Like, no, nobody seems to yet be saying. With all this volatility coming back, you know, how do I maybe protect all the gains that I've had over the last few years of how do I protect my portfolio stacked with index funds? Um, how do you, how do you protect your, uh, your, your gains? There's really two ways to do it. Number one is you can just sell it and go to cash. And most people don't like that answer because they're like, well, what if it keeps going up? So they have FOMO and they don't like that answer. Um, the other thing you can do is you can do it with options. Now, kind of hard to do in a 401k, um, you know, kind of hard. It's, I mean, look, it's not, it's not trivial. You can, if you have, let's say you have a portfolio of index funds, s and p nasdaq, stuff like that, um, that was worth a million dollars. You could buy 35 s and p puts like on spy down, like 10%, like 90% strike, and you could have a pretty good hedge on that portfolio. The problem is, is that nobody knows how to do that, right? Like nobody, nobody knows how to do the calculations. Nobody knows the right amount to buy. Nobody knows which strike to pick. Nobody knows which month to pick, like. So, and the funny thing about all this is that we have insurance on everything. We have insurance on our houses, we have insurance on cars, we have insurance on boats. We have insurance on our lives. Nobody has insurance on their portfolios. You know, there's a lot of people like liquid assets make up most of their net worth. And they don't have any insurance on it. Now, that's not to say that you should have insurance because insurance in the stock market is very expensive, right? Like you could pay several hundred basis points a year insuring a portfolio, right? So it doesn't necessarily mean you want to do it all the time, but you know when the market goes up 20 or 30% a year for three years and you're sitting on all these gains, like it's, you know, it's time to buy some insurance. So that's interesting you say that's. What you should use options for, because what, you know, a lot of what you hear about with options, I don't, I haven't heard about it too much lately, but over the past couple of years, you know, the, the options were always sort of coupled with like zero day to expiration option or essentially get rich quick schemes or, or gambling. Right. That's not what you're talking about. No, it's not what I'm talking about. So. What I do pretty much all the time, or like half the time, is I have some hedge on my portfolio and I do it with very long dated options, like as far out as you can go, like two years, two and a half years, something like that. And I will buy a put option. That is like say 70%, strike, like 30% down. Okay. What I'm, I am not betting that the market is going to go down 30% market is probably not going to go down 30%. And even if it did, I wouldn't really be happy right? Like that, like, 'cause that would mean that I'm losing money on my portfolio. So I don't want that to happen. But the reason I do this is because long-term options. Have a lot of Vega, which means they have a lot of sensitivity to implied volatility, right? So if we get some dislocation in the market where you get a 10 or 20% crash, right, those options will explode in value and then you can sell them, right? So I actually did this before the pandemic. It was one of my greatest trades of all time. Um, so November of 2019, vol volatility was crushed. The VIX was like at 11 or 12 or something like that. And 2019, the market had been going up for a couple years and I was very uncomfortable and I said, I'm gonna buy some protection. So I bought some, I think one year s and p puts down like 20 or 25%. March of 2020. The pandemic happens. The market goes down 35%. Right. Just to put in per this, this in perspective, I don't remember the prices I paid for the options, but I remember the dollar amounts, the price, the dollar amount I paid for the protection was $2,500. I sold those options for $70,000. Wow. Right. Wow. So that's, that's why you do it. Now. I actually lost more than 70,000 on the portfolio. Right. But I made $70,000 like the hedge worked. Yeah. You know? Yeah. That's just a hedging technique that I do pretty much all the time. You know, uh, buy some long dated options. They have a lot of Vega. You get a big vol spike. If the market crashes, then you sell them and. It works out. That big gain percentage wise that you made, did that kind of take the edge off and let you stay invested in the rest of your portfolio? Yes. Yes. Okay. Yeah. Okay. What if you have the opposite view? What if, you know, what if your friend from the party asked a slightly different question and said, look, I think, I think the market is at a bottom. Um, but I don't, but I don't, you know, I don't want to go all in. Instead of saying, tell me when to buy. Like, could, could, could, could there have been a different strategy that he would've employed? I think the s and p's gonna go down another six or 7%. I think ultimately it's gonna go down like 16 or 17%. I, I, and then we're gonna have a bottom, right? So what you would do, what I would do in a situation like that is, uh, I would do a risk reversal. Okay, so let's say the s and p goes down to 5,300, right? I would sell the 5,100 puts and I would buy the 5,500 calls. So the reason risk reversals are really good, like at bottoms, like in a market crash or something like that, is that ball goes up, but that's not really what you care about. What you care about is skew. Like SKU goes up and SKU is the price of downside options relative to upside options. So the puts will get very expensive. So you sell the puts, which are expensive relative to the calls that you're buying. Right? That's a great trade to put on if you're trying to pick a bottom at something. Now the danger is, is that. You sold the put, so you have unlimited downside. Um, so if you're wrong, it could be, it could be catastrophic. But if you are, if you're right, it's, it's really the ideal trade to do. If somebody is listening to this and they're intrigued, I. Right, but they're lost because they're not familiar with options or, or more importantly, the right way to use options. You, you have a solution. Right. The, the reason I even started thinking about what we were gonna talk about for this interview is you sent me your, your new options masterclass, which is. Phenomenal. I learned so much reading this. I've always been curious about options. I've played around a little bit on my own, but it's not something I've always felt comfortable with. I knew enough to know that I could get myself in real trouble, you know, using them. So te, tell me a little bit about your approach to. Options in general, how you think about them and, and this masterclass that you did, there's generally two types of people who trade options. There's people who buy options all the time, and there's people who sell options all the time. Okay. Um, I. So I have a, I have a friend from Lehman Brothers. Um, I, I, we, we were pretty good friends. I knew him pretty well and, um, I, I'm friends with him on Facebook and he moved to Miami Beach and grew his hair out. He's got long hair and I'm like, what is going on here? So, one time I was in Miami and I had drinks with him and he's like, yeah, I'm just, I just left Wall Street and I just trade my own money. So I'm like, well, what do you do? Like, what's your strategy? He's like, I just sell options. So, so he, um, not only does he sell options, he sells like teeny options. He sells stuff that just will never go in the money, like sells stuff at like a nickel, a dime, a quarter, whatever. He just sells teeny options, like all over the place. He, he, with the money that he made from doing this, he bought a condo. In Miami Beach, 2 million bucks, bought a condo with the money, made selling options during the pandemic. He almost got carried out. He literally almost went bankrupt, but the market came back and he was fine. So, um, but probably gray or his, his long hair is gray now. Yeah. But I do not recommend doing that. I do not recommend doing that. Uh, then you have people who buy options all the time. Uh, they buy coats. They, they buy calls, they buy puts, um, and. There's a saying, I don't know if it's true, but that 90% of options finish out of the money. So if you go around buying calls and puts, then you're just gonna bleed to death over time. Really, the idea is to, and I talked about this in the beginning of the options of masterclass. I talked about, I talked about this, uh, interview question that I got at my trading firm, and, um, you know, about rolling the dice and expected value and stuff like that. Like, like basically the idea is. Over the long term, if you buy options that are cheap and you sell the ones that are expensive, you, it will work out in your favor over time. Right? So one of the things that I kind of can't teach I try is how to tell when an option is cheap or rich. Right? Which takes a lot of experience. You know, some options are obviously expensive, like GameStop when stuff was trading at 500 ball, like. Obviously expensive options and you have obviously cheap options, but there's a lot of stuff in between. You don't really know, like Nvidia at like 50 or 60 vol. Is that cheaper, expensive, you know? Uh, that's probably about fair. Like it seems high, but it's probably about fair given the volatility of the stock. So that just takes a lot of experience. When should you use these? Zero day to expiration options? Never. Never, never. They're not, I don't even really consider them options. Right? Because if an option has zero days to export, basically hours to expiration, like it's an instrument that has, and I talk about this in the course, but it has infinite gamma, right? So let's say the s and p is at 5,500. Now, let's say it's at 54 90 and you buy the 5,500 calls, right? Well, an hour before expiration, those options are worthless. And then the s and p goes from 54 90 to 55, 10, and those options are worth 10 bucks, right? So it's all gamma. They're like, so I like really what makes an option? An option is the optionality, which is. The vol, right, the implied vol. And it, it, like short term options are almost like binary options. You know? Like it's, I, they, they, I, they're only good for. Pure speculation. They don't really serve any economic purpose whatsoever. So who's using them? Is it is, uh, is it institutional investors that are hedging for the day or is it just people on Robinhood that don't fully appreciate the risk that they're taking? I would say it's a mixture of Robinhood people and hedge funds. Hedge funds do use them. Um, you know, hedge funds that trade aggressively, you know, intraday will, they do use. Um, and you know, the funny thing is, is that you can kind of see the effect of it in the market. Like if a hedge fund buys 10 or 20,000 zero DTE options, like that is a huge amount of short gamma. The market. So whoever sold those options has to hedge very quickly when the market goes through that strike. So then you have this really high velocity move through the strike. It's usually because of something like that. Still sounds risky to me. All sounds risky. You talked about a couple of. Concepts that are, that are native to options. Right? You talked about, uh, Vega and, and Gamma, um, the Greeks, right? When I got to that section years ago, when I tried to teach myself about options and I got to the Greeks, I just put the book back on the shelf. I. So, so, so tell, tell me a little bit about like, what do you learn with this options class? And I don't, I don't mean to turn this into an ad, but this, this options masterclass is, is really, really good. And it really explained things in a, uh, in a, in a layman's way, so, so anyone can understand it, which I appreciated. Anybody can use options, right? Like, so the thing about the options masterclass is. Um, it assumes sort of a higher IQ than the person who's gonna buy options for Dummies, right? If you buy Options for Dummies, you're gonna get the hockey stick diagrams, calls go this way, puts go this way. Whatever. You're gonna get what you deserve. Yeah. I mean, and you can trade options that way, but I think most people would benefit from a little bit of an understanding of the math behind it. So, um, with, you know, with options, there's an options pricing model called Black Shoals, which was developed in 1973. Um, and it's a closed form equation. That, uh, it basically, you plug in five variables and it gives you the value of an option. And the five variables are the price of the stock, the strike price of the option, the time to expiration, the volatility and interest rates. So if you, if you know those five things, you know the price of the option, um, but usually. We already know the price of the option because you see it on the screen and we know the price of the stock and we know the strike price of the option. And we know interest rates and we know time expiration. But what we don't know is volatility. So usually what you're doing is solving for volatility, right? Options trading is volatility. Trading. Your trading volatility on Wall Street. They don't even call these guys options traders. They call them volatility traders. Right. So you have to have an understanding about volatility, which, you know, you have to, you, you have to be able to understand some math, right? So if you've, you know, I, I was a math major at major in college, so I took calculus. I could, took differential equations. I took two semesters of probability and statistics. I, that's really all the math you need to know to understand options in the course. We don't have black Shoals, we don't have the formula. We don't do any math equations. But what we show you is the mathematical relationships between things. So when you're talking about Greeks, when you're talking about like theta, which is the time decay of options, we show you how the value of an option declines over time, right? And really what theta is, it's a partial derivative of the price of the option with respect to time. Okay. Anyway, I'd, I don't know if that makes any sense. Yeah, it does. And it's, and it's helpful. It was explained in a way that, that seemed Greek, uh, in, in, in prior textbooks. Um, it's funny, you, you bring up a vol traders, like a volatility trader. Um, I remember. Meeting a guy who was a, uh, he was one of the main principles and one of the co-founders of, uh, a volatility firm called Trotti. And I, I met him right after the financial crisis. He had become a, you know, seemingly overnight become a, a billionaire. Um, just, just made a fantastic killing, uh, during the financial crisis. Um, but then three years later. Closed his firm, uh, because volatility disappeared. So, and, and it seems like all the reers are pretty much gone now. Emmanuel Derman wrote a piece about this in 2000 when he was working for Goldman Sachs, when he was a strategist. He wrote this very famous paper called Regimes and Volatility, right? And basically in the markets you do have regimes and volatility. You'll have. Five years where volatility is very low and then like three years where volatility is very high. Right? And generally among volatility traders. You're generally only good at one or the other. You're either a long vol guy or you're a short vol guy. So what happens is, is that the option sellers, the short Vol Vol guys, they'll make money for like five years and then vol will spike and they'll, they'll all get wiped out and the long vol guys will make money. So your friend. I'm sure it was a long ball trader because during the financial crisis, like the VIX went to 90 and it stayed there. There were, I gotta tell you, during the financial crisis, the equity derivatives desks were the only desks on Wall Street that were making money and they were killing it. I talked to one of the traders back then, he said during the financial crisis, everybody was broke. You could walk into any restaurant, it was empty. Any store was empty. He said he walked into Best Buy and he basically bought everything in the store for like 80,000 bucks. Like he, he had made millions during the financial crisis and everybody else got killed. Wow. And so it, it was such a weird time. The derivatives traders just killed it. Would you say that now is a good time to get familiar with options based on what you've seen so far? Year to date? So vol is up a bit. Um. I didn't look at the VIX before I came in here, in here, but I think it's probably around 16 or 17. But it, like I said, it did get up to about 25, um, you know, with Trump as president I. We are getting a lot of tape bombs. Uh, policy is much more unpredictable. Um, the whole world is much more unpredictable, which kind of argues for a higher level of volatility and not just a higher level of volatility, but the volatility of volatility is going to be high. Volatility itself will be volatile. So yes, this is, this is a perfect time. To be learning about options. It's a great environment. So if you don't think about options as a, as a, a tool to get rich quick, but instead you think about them as insurance, this is a good time to have some insurance. Yeah. Yeah. Okay. Well, three months ago would've been a better time. Right? It's never too late. It's never too late. Where can people get, um, more information on this JaredDillianMoney.com. Okay. Yeah, just go to your website. Yeah. Let's end on a, a fun note here. Do you have any other options, stories from your days on Wall Street? Two weeks ago I was in DC and I met up with one of my old floor trader friends and he was telling me a story. So, um, kind of like the New York Stock Exchange, you have specialist posts, but they call him something different. They call it an LMMA lead market maker. But he's essentially the specialist and he was making markets in 50 options on 52 different stocks, and one of them was Eastman Kodak. Right. So this is 2003 and, um, you know, Eastman Kodak is still making film cameras, right? And everybody's expecting them to go digital. Okay? So, first of all, there's a lot of internet stocks. Like, nobody ever trades Eastman. No. Nobody cares about Eastman Kodak, right? So my friend has to go to the bathroom, he's gotta go pee. And he gets one of the other traders to come over to, uh, to just watch the specialist post for like five minutes while he goes to the bathroom. Well, this guy leaves and a broker comes over with an order to buy a thousand puts in Eastman Kodak like. Teeny puts, not teeny, but they were like an eighth. They cost like an eighth. They were down like 40%. So my friend comes back from the bathroom. He is like, what happened? He's like, oh, bear Stearns bought a thousand, puts for an eighth. He's like, you sold them. He's like, you did what? So. He immediately, like he, he raises his bids on the screen. He's trying to buy them back for a quarter three, eight to half. He's calling other exchanges. He's trying to buy as many as he can, and he gets like 200 of them. And at the close, Eastman Kodak announced that they were staying with film cameras. They weren't going with digital, and the stock was down 40%. Somebody had insider information. Either that or they were very lucky. Yeah. Yeah. Interesting. What else should we cover? Anything that I missed that we should ask, that I should ask you? No, I think that's it. Always fun. Thank you, Jared. I.
Ex-Trader Warns: The Great Rotation Out of US Stocks Is On | Jared Dillian
Summary
Transcript
Hi, I'm Ed D'Agostino from Mauldin Economics, and today we are talking about stock market volatility. If the market has you concerned, you're not alone. A lot of people are asking is now a good time to buy or to sell? And how do I protect my portfolio? That's what we're going to be discussing today with my good friend Jared Dillian. He's had a long career as a trader at one of the biggest banks on Wall Street, and today he's the founder of Jared Dillian Money. Thanks for joining us today. Here at Global Macro Update. Jared, thanks for coming back. Always good to see you, my friend. Appreciate you joining us again. Let's talk. It's been a while. It has been a while. It's been a while and it's been an interesting while, right? I mean, what a start contrast this year in the markets, uh, versus last year, uh, speaking stock markets, right? You've got s and p 500 last year up over 23% this year. So far, year to date, down around 4%. Not, not a huge loss, but still, I think people aren't, people have forgotten that the market sometimes goes down NASDAQ's even worse from peak. The trough, the s and p was down about 10% at the worst point. Um, and that was about the smoothest 10% loss I have ever seen in stocks like. If you go back to August 5th of last year, during that yen carry, blow up market was down 8% and the VIX went to 80. Okay, so here the market was down 10% and the VIX went to like 25. Like really not a lot of panic, you know, uh, which is worrisome. Like you like to see that panic, you'd like to see that capitulation, which is what we saw, you know, last August. Um. I was at a, a party over the weekend and I was talking to a guy and he basically, he's got a sizable 401k, it's seven figures, and it's all in index funds, s and p, and he says, when do you think's a good time to buy? It's not usually the questions that you get with the market down 10%. I'm like, look man, I can tell you like it might be a lot lower than here. Um, but um, the question was not, you know, like, do you think we're gonna get a rally so I can sell? He is like, no, tell me a good time to buy. And this is a guy who is 62 and is pretty close to retirement. You know, he is gonna retire in three years. So that's the mentality. How do you feel about sort of the underlying aspect of the market where the Mag seven right, the, the, the magnificent seven stocks were, were responsible for a huge amount of the last two years run up. Uh, and now, now you could argue Tesla and Nvidia are, are pulling the entire s and p 500 down some. I was on a podcast a few months ago, like kind of right when the decline started. I. And the, the host asked me, she's like, do you think there'll be a rotation? And I'm like, look, like. Anytime the market goes down, you always have a rotation and it's usually pretty predictable. You know, you're usually getting out of high risk stuff into low risk stuff, so tech into staples and stuff like that. Um, and that's exactly what's happened. Like, so you've had that sort of, that classic risk off rotation that's happened. The difference is this time, you know, with the magnificent seven being like 35 or 40% of the market, like. That rotation by definition means that the market is going down, you know? Um, so the question is, is this, uh, is this a three month phenomenon or is this the beginning of like a really big secular shift, like a style box trade from, you know, large cap growth into small cap value or something like that? Um, you know, I saw a chart of that recently that looked pretty compelling. Like you started to get an uptick in small cap value. So I, you know, the thing with these style box trades is they can just trend forever, you know, and it's just, it's just kind of, it's kind of tough to tell if, look, I mean, maybe today. Um, you know, Trump speaks and the market's up 4% and then it makes new highs and the mags haven't come back. I mean, it wouldn't surprise me if that happened because that's happened like 10 times over the last three years, you know, so you have to be careful around these kind of things. I hear you that there's still a lot of greed in the market among individual investors, though, it, it seems like maybe the professional investors are taking the opportunity to sell rallies. What do you think? The risks are to the market right now. You know, is it, is it earnings? Is it valuation? Is it strictly political? I really think it's, um, macro, and I think you're talking about like big, big flows outta the US and into international stocks or bonds. Um, like the risk is the dollar. If the dollar goes down 10%, 12%, 15%. There's there, there are going to be trillions of dollars coming outta the US and going overseas, right? Like that's what's gonna happen. In the first quarter of this year, European stocks were up 10% and the s and p was down 6%, 16% outperformance, right? And that's with the dollar going down about three or 4%. So imagine. If the dollar continues to weaken for, you know, years, like it's, I, I don't know if you remember what like the mid two thousands were like, but that, you know, valuations in Europe actually were really high. I think the PE of like the Euro stocks got to like 30 or something like that. Like, so, you know, this can, this can go for a while. What's interesting is your friend at the party asking you, when is a good time to buy? Like, like. I not asking you what should I be doing? Right? Like, like just like, tell me when to buy. Like, I've already decided what I want to do. Tell me when instead of, Hey, what should I be doing right now? Uh, which you're not, you're not, you're not a financial advisor. You're, you've got a, had a long career on Wall Street and you're, you're, you're a trader and an investor. It's just interesting. Like, no, nobody seems to yet be saying. With all this volatility coming back, you know, how do I maybe protect all the gains that I've had over the last few years of how do I protect my portfolio stacked with index funds? Um, how do you, how do you protect your, uh, your, your gains? There's really two ways to do it. Number one is you can just sell it and go to cash. And most people don't like that answer because they're like, well, what if it keeps going up? So they have FOMO and they don't like that answer. Um, the other thing you can do is you can do it with options. Now, kind of hard to do in a 401k, um, you know, kind of hard. It's, I mean, look, it's not, it's not trivial. You can, if you have, let's say you have a portfolio of index funds, s and p nasdaq, stuff like that, um, that was worth a million dollars. You could buy 35 s and p puts like on spy down, like 10%, like 90% strike, and you could have a pretty good hedge on that portfolio. The problem is, is that nobody knows how to do that, right? Like nobody, nobody knows how to do the calculations. Nobody knows the right amount to buy. Nobody knows which strike to pick. Nobody knows which month to pick, like. So, and the funny thing about all this is that we have insurance on everything. We have insurance on our houses, we have insurance on cars, we have insurance on boats. We have insurance on our lives. Nobody has insurance on their portfolios. You know, there's a lot of people like liquid assets make up most of their net worth. And they don't have any insurance on it. Now, that's not to say that you should have insurance because insurance in the stock market is very expensive, right? Like you could pay several hundred basis points a year insuring a portfolio, right? So it doesn't necessarily mean you want to do it all the time, but you know when the market goes up 20 or 30% a year for three years and you're sitting on all these gains, like it's, you know, it's time to buy some insurance. So that's interesting you say that's. What you should use options for, because what, you know, a lot of what you hear about with options, I don't, I haven't heard about it too much lately, but over the past couple of years, you know, the, the options were always sort of coupled with like zero day to expiration option or essentially get rich quick schemes or, or gambling. Right. That's not what you're talking about. No, it's not what I'm talking about. So. What I do pretty much all the time, or like half the time, is I have some hedge on my portfolio and I do it with very long dated options, like as far out as you can go, like two years, two and a half years, something like that. And I will buy a put option. That is like say 70%, strike, like 30% down. Okay. What I'm, I am not betting that the market is going to go down 30% market is probably not going to go down 30%. And even if it did, I wouldn't really be happy right? Like that, like, 'cause that would mean that I'm losing money on my portfolio. So I don't want that to happen. But the reason I do this is because long-term options. Have a lot of Vega, which means they have a lot of sensitivity to implied volatility, right? So if we get some dislocation in the market where you get a 10 or 20% crash, right, those options will explode in value and then you can sell them, right? So I actually did this before the pandemic. It was one of my greatest trades of all time. Um, so November of 2019, vol volatility was crushed. The VIX was like at 11 or 12 or something like that. And 2019, the market had been going up for a couple years and I was very uncomfortable and I said, I'm gonna buy some protection. So I bought some, I think one year s and p puts down like 20 or 25%. March of 2020. The pandemic happens. The market goes down 35%. Right. Just to put in per this, this in perspective, I don't remember the prices I paid for the options, but I remember the dollar amounts, the price, the dollar amount I paid for the protection was $2,500. I sold those options for $70,000. Wow. Right. Wow. So that's, that's why you do it. Now. I actually lost more than 70,000 on the portfolio. Right. But I made $70,000 like the hedge worked. Yeah. You know? Yeah. That's just a hedging technique that I do pretty much all the time. You know, uh, buy some long dated options. They have a lot of Vega. You get a big vol spike. If the market crashes, then you sell them and. It works out. That big gain percentage wise that you made, did that kind of take the edge off and let you stay invested in the rest of your portfolio? Yes. Yes. Okay. Yeah. Okay. What if you have the opposite view? What if, you know, what if your friend from the party asked a slightly different question and said, look, I think, I think the market is at a bottom. Um, but I don't, but I don't, you know, I don't want to go all in. Instead of saying, tell me when to buy. Like, could, could, could, could there have been a different strategy that he would've employed? I think the s and p's gonna go down another six or 7%. I think ultimately it's gonna go down like 16 or 17%. I, I, and then we're gonna have a bottom, right? So what you would do, what I would do in a situation like that is, uh, I would do a risk reversal. Okay, so let's say the s and p goes down to 5,300, right? I would sell the 5,100 puts and I would buy the 5,500 calls. So the reason risk reversals are really good, like at bottoms, like in a market crash or something like that, is that ball goes up, but that's not really what you care about. What you care about is skew. Like SKU goes up and SKU is the price of downside options relative to upside options. So the puts will get very expensive. So you sell the puts, which are expensive relative to the calls that you're buying. Right? That's a great trade to put on if you're trying to pick a bottom at something. Now the danger is, is that. You sold the put, so you have unlimited downside. Um, so if you're wrong, it could be, it could be catastrophic. But if you are, if you're right, it's, it's really the ideal trade to do. If somebody is listening to this and they're intrigued, I. Right, but they're lost because they're not familiar with options or, or more importantly, the right way to use options. You, you have a solution. Right. The, the reason I even started thinking about what we were gonna talk about for this interview is you sent me your, your new options masterclass, which is. Phenomenal. I learned so much reading this. I've always been curious about options. I've played around a little bit on my own, but it's not something I've always felt comfortable with. I knew enough to know that I could get myself in real trouble, you know, using them. So te, tell me a little bit about your approach to. Options in general, how you think about them and, and this masterclass that you did, there's generally two types of people who trade options. There's people who buy options all the time, and there's people who sell options all the time. Okay. Um, I. So I have a, I have a friend from Lehman Brothers. Um, I, I, we, we were pretty good friends. I knew him pretty well and, um, I, I'm friends with him on Facebook and he moved to Miami Beach and grew his hair out. He's got long hair and I'm like, what is going on here? So, one time I was in Miami and I had drinks with him and he's like, yeah, I'm just, I just left Wall Street and I just trade my own money. So I'm like, well, what do you do? Like, what's your strategy? He's like, I just sell options. So, so he, um, not only does he sell options, he sells like teeny options. He sells stuff that just will never go in the money, like sells stuff at like a nickel, a dime, a quarter, whatever. He just sells teeny options, like all over the place. He, he, with the money that he made from doing this, he bought a condo. In Miami Beach, 2 million bucks, bought a condo with the money, made selling options during the pandemic. He almost got carried out. He literally almost went bankrupt, but the market came back and he was fine. So, um, but probably gray or his, his long hair is gray now. Yeah. But I do not recommend doing that. I do not recommend doing that. Uh, then you have people who buy options all the time. Uh, they buy coats. They, they buy calls, they buy puts, um, and. There's a saying, I don't know if it's true, but that 90% of options finish out of the money. So if you go around buying calls and puts, then you're just gonna bleed to death over time. Really, the idea is to, and I talked about this in the beginning of the options of masterclass. I talked about, I talked about this, uh, interview question that I got at my trading firm, and, um, you know, about rolling the dice and expected value and stuff like that. Like, like basically the idea is. Over the long term, if you buy options that are cheap and you sell the ones that are expensive, you, it will work out in your favor over time. Right? So one of the things that I kind of can't teach I try is how to tell when an option is cheap or rich. Right? Which takes a lot of experience. You know, some options are obviously expensive, like GameStop when stuff was trading at 500 ball, like. Obviously expensive options and you have obviously cheap options, but there's a lot of stuff in between. You don't really know, like Nvidia at like 50 or 60 vol. Is that cheaper, expensive, you know? Uh, that's probably about fair. Like it seems high, but it's probably about fair given the volatility of the stock. So that just takes a lot of experience. When should you use these? Zero day to expiration options? Never. Never, never. They're not, I don't even really consider them options. Right? Because if an option has zero days to export, basically hours to expiration, like it's an instrument that has, and I talk about this in the course, but it has infinite gamma, right? So let's say the s and p is at 5,500. Now, let's say it's at 54 90 and you buy the 5,500 calls, right? Well, an hour before expiration, those options are worthless. And then the s and p goes from 54 90 to 55, 10, and those options are worth 10 bucks, right? So it's all gamma. They're like, so I like really what makes an option? An option is the optionality, which is. The vol, right, the implied vol. And it, it, like short term options are almost like binary options. You know? Like it's, I, they, they, I, they're only good for. Pure speculation. They don't really serve any economic purpose whatsoever. So who's using them? Is it is, uh, is it institutional investors that are hedging for the day or is it just people on Robinhood that don't fully appreciate the risk that they're taking? I would say it's a mixture of Robinhood people and hedge funds. Hedge funds do use them. Um, you know, hedge funds that trade aggressively, you know, intraday will, they do use. Um, and you know, the funny thing is, is that you can kind of see the effect of it in the market. Like if a hedge fund buys 10 or 20,000 zero DTE options, like that is a huge amount of short gamma. The market. So whoever sold those options has to hedge very quickly when the market goes through that strike. So then you have this really high velocity move through the strike. It's usually because of something like that. Still sounds risky to me. All sounds risky. You talked about a couple of. Concepts that are, that are native to options. Right? You talked about, uh, Vega and, and Gamma, um, the Greeks, right? When I got to that section years ago, when I tried to teach myself about options and I got to the Greeks, I just put the book back on the shelf. I. So, so, so tell, tell me a little bit about like, what do you learn with this options class? And I don't, I don't mean to turn this into an ad, but this, this options masterclass is, is really, really good. And it really explained things in a, uh, in a, in a layman's way, so, so anyone can understand it, which I appreciated. Anybody can use options, right? Like, so the thing about the options masterclass is. Um, it assumes sort of a higher IQ than the person who's gonna buy options for Dummies, right? If you buy Options for Dummies, you're gonna get the hockey stick diagrams, calls go this way, puts go this way. Whatever. You're gonna get what you deserve. Yeah. I mean, and you can trade options that way, but I think most people would benefit from a little bit of an understanding of the math behind it. So, um, with, you know, with options, there's an options pricing model called Black Shoals, which was developed in 1973. Um, and it's a closed form equation. That, uh, it basically, you plug in five variables and it gives you the value of an option. And the five variables are the price of the stock, the strike price of the option, the time to expiration, the volatility and interest rates. So if you, if you know those five things, you know the price of the option, um, but usually. We already know the price of the option because you see it on the screen and we know the price of the stock and we know the strike price of the option. And we know interest rates and we know time expiration. But what we don't know is volatility. So usually what you're doing is solving for volatility, right? Options trading is volatility. Trading. Your trading volatility on Wall Street. They don't even call these guys options traders. They call them volatility traders. Right. So you have to have an understanding about volatility, which, you know, you have to, you, you have to be able to understand some math, right? So if you've, you know, I, I was a math major at major in college, so I took calculus. I could, took differential equations. I took two semesters of probability and statistics. I, that's really all the math you need to know to understand options in the course. We don't have black Shoals, we don't have the formula. We don't do any math equations. But what we show you is the mathematical relationships between things. So when you're talking about Greeks, when you're talking about like theta, which is the time decay of options, we show you how the value of an option declines over time, right? And really what theta is, it's a partial derivative of the price of the option with respect to time. Okay. Anyway, I'd, I don't know if that makes any sense. Yeah, it does. And it's, and it's helpful. It was explained in a way that, that seemed Greek, uh, in, in, in prior textbooks. Um, it's funny, you, you bring up a vol traders, like a volatility trader. Um, I remember. Meeting a guy who was a, uh, he was one of the main principles and one of the co-founders of, uh, a volatility firm called Trotti. And I, I met him right after the financial crisis. He had become a, you know, seemingly overnight become a, a billionaire. Um, just, just made a fantastic killing, uh, during the financial crisis. Um, but then three years later. Closed his firm, uh, because volatility disappeared. So, and, and it seems like all the reers are pretty much gone now. Emmanuel Derman wrote a piece about this in 2000 when he was working for Goldman Sachs, when he was a strategist. He wrote this very famous paper called Regimes and Volatility, right? And basically in the markets you do have regimes and volatility. You'll have. Five years where volatility is very low and then like three years where volatility is very high. Right? And generally among volatility traders. You're generally only good at one or the other. You're either a long vol guy or you're a short vol guy. So what happens is, is that the option sellers, the short Vol Vol guys, they'll make money for like five years and then vol will spike and they'll, they'll all get wiped out and the long vol guys will make money. So your friend. I'm sure it was a long ball trader because during the financial crisis, like the VIX went to 90 and it stayed there. There were, I gotta tell you, during the financial crisis, the equity derivatives desks were the only desks on Wall Street that were making money and they were killing it. I talked to one of the traders back then, he said during the financial crisis, everybody was broke. You could walk into any restaurant, it was empty. Any store was empty. He said he walked into Best Buy and he basically bought everything in the store for like 80,000 bucks. Like he, he had made millions during the financial crisis and everybody else got killed. Wow. And so it, it was such a weird time. The derivatives traders just killed it. Would you say that now is a good time to get familiar with options based on what you've seen so far? Year to date? So vol is up a bit. Um. I didn't look at the VIX before I came in here, in here, but I think it's probably around 16 or 17. But it, like I said, it did get up to about 25, um, you know, with Trump as president I. We are getting a lot of tape bombs. Uh, policy is much more unpredictable. Um, the whole world is much more unpredictable, which kind of argues for a higher level of volatility and not just a higher level of volatility, but the volatility of volatility is going to be high. Volatility itself will be volatile. So yes, this is, this is a perfect time. To be learning about options. It's a great environment. So if you don't think about options as a, as a, a tool to get rich quick, but instead you think about them as insurance, this is a good time to have some insurance. Yeah. Yeah. Okay. Well, three months ago would've been a better time. Right? It's never too late. It's never too late. Where can people get, um, more information on this JaredDillianMoney.com. Okay. Yeah, just go to your website. Yeah. Let's end on a, a fun note here. Do you have any other options, stories from your days on Wall Street? Two weeks ago I was in DC and I met up with one of my old floor trader friends and he was telling me a story. So, um, kind of like the New York Stock Exchange, you have specialist posts, but they call him something different. They call it an LMMA lead market maker. But he's essentially the specialist and he was making markets in 50 options on 52 different stocks, and one of them was Eastman Kodak. Right. So this is 2003 and, um, you know, Eastman Kodak is still making film cameras, right? And everybody's expecting them to go digital. Okay? So, first of all, there's a lot of internet stocks. Like, nobody ever trades Eastman. No. Nobody cares about Eastman Kodak, right? So my friend has to go to the bathroom, he's gotta go pee. And he gets one of the other traders to come over to, uh, to just watch the specialist post for like five minutes while he goes to the bathroom. Well, this guy leaves and a broker comes over with an order to buy a thousand puts in Eastman Kodak like. Teeny puts, not teeny, but they were like an eighth. They cost like an eighth. They were down like 40%. So my friend comes back from the bathroom. He is like, what happened? He's like, oh, bear Stearns bought a thousand, puts for an eighth. He's like, you sold them. He's like, you did what? So. He immediately, like he, he raises his bids on the screen. He's trying to buy them back for a quarter three, eight to half. He's calling other exchanges. He's trying to buy as many as he can, and he gets like 200 of them. And at the close, Eastman Kodak announced that they were staying with film cameras. They weren't going with digital, and the stock was down 40%. Somebody had insider information. Either that or they were very lucky. Yeah. Yeah. Interesting. What else should we cover? Anything that I missed that we should ask, that I should ask you? No, I think that's it. Always fun. Thank you, Jared. I.