Lots More With Charlie McElligott on the Sharp, Strange Selloff

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Charlie McElligott (0:08)

It's good, it's good. Markets are fun, and as we said, spring is here.

Tracy Alloway (0:13)

Yeah, markets finally got interesting.

Charlie McElligott (0:16)

Oh man, I mean, I have so many thoughts.

Joe Weisenthal (0:18)

Oh good, all right.

Charlie McElligott (0:19)

If you can't tell from my normal stream of consciousness operation.

Tracy Alloway (0:23)

You know how I know it was bad, Joe?

Joe Weisenthal (0:26)

Go on.

Tracy Alloway (0:27)

It was one of those weeks where we talked about negative gamma quite a lot.

Joe Weisenthal (0:32)

What's gamma again?

Tracy Alloway (0:33)

Interestingly, we didn't talk that much about standard deviations, which is kind of funny. Normally those two kind of go hand in hand, but not last week. It was weird.

Joe Weisenthal (0:42)

What's gamma again? I feel so dumb because I know we've talked about gamma, and it's just one of those things like, what is it again?

Tracy Alloway (0:48)

Should we get you a refresher?

Joe Weisenthal (0:49)

Yeah, I need one of those Guide to the Greeks books or something. Or like a little laminated card that I can like.

Tracy Alloway (0:56)

Someone should do a coffee table book. Yeah.

Joe Weisenthal (0:59)

Guide to the Greeks. I like Greek stuff these days, because I'm into like ancient history and everything like that. I know what alpha is. I know what beta is. After that, I started to get a little dicey.

I did a deadlift.

Tracy Alloway (1:11)

I am both the most popular trader and most successful trader at Citadel.

Joe Weisenthal (1:16)

Feta is going viral.

Tracy Alloway (1:18)

Barges.

Joe Weisenthal (1:18)

This is an after school special, except.

Tracy Alloway (1:20)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (1:26)

Black gold.

Tracy Alloway (1:27)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (1:30)

No, I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day, that person will have the mandate of heaven.

Tracy Alloway (1:39)

How do I get more popular and successful?

Joe Weisenthal (1:42)

We do have the perfect guest.

Tracy Alloway (1:45)

You're listening to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:50)

Because even when the Odd Lots is over, there's always Lots More.

Tracy Alloway (1:53)

And we really do have the perfect guest.

Oh, the definition. I feel like I've done this before. But Gamma is the option sensitivity to the change in Delta. And Delta is the option sensitivity to the underlying price. So Gamma is like the change of the change. It's a function of the underlying price, but it's second order. And I guess negative Gamma, that's when Delta is at the opposite direction to the stock price movement. So Delta goes down if the underlying asset price is going up, and then it becomes less negative if the underlying asset price is falling. And we usually see people talk about this during market sell-offs because all the options traders have to basically sell or buy stuff to hedge all that changing exposure. And the suspicion is always that that hedging activity are pushing the market in one way or the other. I think that's it. Okay, I did it. Charlie, you should write a book, a coffee table book on the Greek letters.

Charlie McElligott (3:06)

I'm liking this Spartans versus Romans history vibe we're going through.

Joe Weisenthal (3:11)

That's very you. I feel that's very you.

Charlie McElligott (3:14)

It resonates. It resonates. Could have something to do with the beard. Well, if you just think about it with regards to who is long and who is short, an option at a certain level, and that's so much of what we're asked to do in our job is to get a sense for where these potential acceleration points or potential gravity points are. And you're looking at the whole spectrum of strikes across the S&P index options, and you're then doing your kind of risk calculations and your Greeks calculations, and you net out all of those strikes. You have to identify calls sold, calls bought, puts sold, puts bought, multi-leg tregs. It's quite complex. I think in the past, there was a lot of narrative because people made kind of two core assumptions on dealer positioning before you had the actual exchange tagged data, which now gives you the actuals. Those two prior assumptions are that dealers are short puts to hedgers and long calls from overriders, these VRP vol sellers that you hear so much about these days that create dynamics where the market is trapped in long gamma, right? Because we're constantly, dealers are constantly getting stuffed from these premium collectors.