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Why options are easier than you think - Thalex founder Hendrik Ghys on volatility and delta hedging
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Hendrik Ghys, Co-Founder & CEO of Thalex, joins the Insilico Terminal Podcast to talk about crypto options, volatility trading, market makers, delta hedging, and why options are easier than most traders think. We cover how Thalex is building a crypto options exchange, why options are harder to bring on-chain than perps, how MOVE-style contracts work, what market makers actually do when they hedge, and how traders can think about perps vs options. The episode also covers selling volatility, delta hedging straddles, OPEX, gamma, call spreads, longer-dated options, and why many retail traders might be making trading harder than it needs to be.
00:00 Intro: Hendrik Ghys from Thalex
01:47 Building a Crypto Options Exchange
06:15 Why Thalex Focused on Better Options Products
13:26 Why DeFi Options Are So Hard
16:53 Perps vs Options for Traders
30:13 How Options Market Makers Hedge
40:18 Selling Vol and Delta Hedging
49:34 Simple Options Rules for Retail Traders
55:16 Day Trading Options vs Perps
01:01:56 Learning Options by Doing
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Transcript
Introduction to Henrik Gies and Talax
00:00:11
Speaker
Welcome to a new episode of the InSilico Terminal podcast. And ah while we were just preparing, i was i was thinking um how I exactly to do this because oftentimes when we read something online,
00:00:28
Speaker
especially as a non-native speaker, you don't know exactly the way to like pronounce things. So like now where I'm going to introduce I'm just going to pronounce it the way that I think it's correct and then you can correct me if it's if it's wrong. So my guest today is Henrik Gies, something like that, from Talax.
00:00:44
Speaker
Is that how you say it? Yeah, yes. Okay. Ah, okay, okay, okay. But is Talax correct? do you say Talax? Yeah, Talax is correct, yeah.
00:00:55
Speaker
Okay. And you are the founder and CEO, I guess? Or yeah what exactly is your role? One of the co-founders and and CEO, unfortunately, yeah. Unfortunately.
00:01:07
Speaker
Why unfortunately? I think if you join a startup, you know, being a CTO or being like BD or something like that is honestly better upside versus downside. Like as a CEO, you're going to have to deal with all the problems that um nobody else wants to deal with.
Origin and Model of Talax
00:01:24
Speaker
um So yeah, that's a lot. you You're the person that's like being a pinpointed down and if if something goes wrong. Yeah, I'm the fall guy. yeah I see. i see some some Someone's got to do it. like For Talax, the C4 and Silica Terminal, it's me. i'm i'm I'm not the CEO, but I'm more a fall guy. So if anything ever goes wrong, I ah ah would go to prison for for the company. Hopefully not.
00:01:50
Speaker
ah Nothing's ever going to happen. Everything is legitimate. But yeah, why don't you tell us a bit about what Talax is and and what you do? Yeah, Zatalix is a crypto options exchange. um It really started, the idea started sort of early 2020. It was not my idea originally, it was actually a group of people that all worked together at like Optiver, which is one of the largest options market making firms.
00:02:14
Speaker
and And they become active trading crypto and sort of had these near-death experiences with their market-making firms around the yeah the March 2020 COVID crash, right? And so so all throughout COVID, they started the brainstorming around how do you basically build DairyBetter. That was the initial code name. How do you build...
00:02:35
Speaker
essentially like um an options exchange that has everything on the wish list executed that them they were lacking at that point with Aribit and at the same time it was just this idea of like you need more also of this institution grade technology ah to trade on. I mean a lot of exchanges at that point were ruralre retail first and then they sort of got monkey patched for for institutional flow um but that sometimes really complicates ah market makers job and um and so the idea was like okay we got the talent to and the experience from Tratify to build um essentially better options exchange.
00:03:11
Speaker
um I joined in early 2021. I was the last co-founder to complete the roster.
Challenges and Partnerships in Building Talax
00:03:21
Speaker
And then my job was more to to think about like, how do you build a business around this this product idea?
00:03:26
Speaker
um And so my background actually comes more from like investing. I worked at a large family office that was an early investor in crypto. And we didn't just have a liquid portfolio. We also invested in the changes.
00:03:39
Speaker
ah The best known one was Bitstamp. um And so from that side, I sort of had this idea of like, okay, there's a lot of these spot exchanges, perp exchanges, they're not going to build options. So what if we actually ah build a partnership model, sort of a B2B2C model where they get effectively an options or an options exchange, they can sort of plug into our tech, our liquidity, and then we do a revenue share. So that was on that on that idea, we sort of built built a business, um raised money in 2022,
00:04:09
Speaker
uh then got little bit unlucky with the the launch timing which was like right after fdx um isn't it good launch timing actually like looking back wasn't that the no because because the because what we had was a lot of market makers who sort of promised their their commitment to like provide liquidity and they were all making a ton of money um uh before then and then the problem is like market makers are really kind of like high fixed cost, high operating leveraged businesses, right? So downturn, right? Like A lot of those guys, they they started like really looking at at cost and and and sort of these long venture bets of like market making on a platform that maybe in like two, three years is is as big as there, but it seemed a lot less attractive.
00:04:54
Speaker
But in hindsight, it wasn't the worst thing, to be honest, though, because we yeah you cannot underestimate the complexity of building a good options exchange because you also really need good perps, you need futures, um you need really good portfolio margining.
00:05:07
Speaker
And then once you build a business, you also need to learn how to operate it. um And so, you know, once we started like ah like launching, it was also just very clear that like operating the exchange is a whole other challenge, right? Just how to guarantee the uptime. um How do you just get all of the bugs, all of the edge cases out of your margin requirement systems, et cetera. At the end of the day, 2023 wasn't bad to to sort of take time to to to build everything more properly. By 2024, then we were sort of ready to um to launch like the first exchange partner, which was which was Bitfinex.
00:05:40
Speaker
And then after that, we started bootstrapping volume, liquidity. um And we got to a certain extent, like to 25 million a day average ah spikes to like 50 million plus.
00:05:53
Speaker
um But it was sort of like very hard to get like all the gears turning at the same time. and And the reality is because at that point we're sort of just kind of a smaller version of Darybit, right? So you have the options order books, you have the perps.
00:06:06
Speaker
um But if if you have a lot of flows where people are just trading options, single leg options, like people start buying, for instance, calls, you know, because of the convexity of the options, you very quickly have hedging positions um that are fairly large relative to the value that the Perboo could provide.
00:06:24
Speaker
And so so so basically after that, we decided we really need to invest more in in better microstructure at the same time, like better differentiate the exchange. Like how do we really build something that's not just a small version of Darybit that would say can be executed, but provide like product differentiation. And so the two main things there um that we added was ah really good options combinations.
00:06:49
Speaker
Because if you trade options from a discretionary discretionary perspective, Marty talked about that a little bit in in his episode. Yeah. Really when you when you when you're interested in like buying a call, very often you're actually more interested in buying call spread.
00:07:04
Speaker
Right. Because that allows you to, you know, you buy a lower strike, you sell a higher strike in part to like out fund the the the premium. Right. Because usually you don't need unlimited upside. Right. You have a defined upside. And so you specify the payoff better. You pay less than theta. And then the market makers that take the other side, they actually have less delta to hedge. um So the hedging flow starts to work better.
00:07:27
Speaker
um Plus you do obviously more volume. um and then um And then the other thing that we we added recently that i'm that I'm very excited about this is that we have these built-in Delta hedging bots.
00:07:39
Speaker
ah And that kind of unlocks more the systematic options trading um use case um where you're trading volatility. But if you want to isolate the volatility component of options, you need to need Delta hedge them. And that's something you could build yourself. I mean, you could Vibe code it in arguably, but it's it's still, these are hard systems to build. um and so we just offer it within the exchange just via the ui um and um and then we also adjust the fees so that you're not overspending there on on transaction cost um but then really what you're able to do is you can you can for instance buy straddle uh delta hedge it and then you sort of really play more of a volatility spread between
00:08:18
Speaker
your expectation of realized vol and then what was implied by the auctions and so at this stage of i think the product vision is is is is complete and so you can you can essentially trade any exposure you can think of in in bitcoin or eth you can you can trade them on phallix you can trade um You can isolate the volatility.
Talax's Market Focus and Partnership Models
00:08:39
Speaker
um And then the next logical step for us will be to to add other assets. We're we're working on XAUT and obviously hype. um But that's that's that's where also we need to figure out like how to provide good liquidity good books i think i mean what i'm seeing in the rye for instance it's it's nice that they that they offer it but the spreads are still very wide yeah and so um so that's what we're really trying to solve for now is just getting also liquid alcohol and options books
00:09:11
Speaker
How exactly do the exchange partnerships work? Like how your partnership with Bitfinex work for example? So you have basically like KYC sharing so that um you basically consent to your data being shared and then the onboarding process essentially is um is a fraction of the time.
00:09:30
Speaker
And then also like the transfers between ah both exchanges are optimized. So it's like very so like it feels like a sub-account transfer right du to go from Bitfinex to us. ah Commercially, we have a revenue share.
00:09:43
Speaker
um and then And then also more recently, we we added for some of the institutional customers some cross-exchange margin efficiency. there's There's more demand now that Bitfinex lowered their trading fees to zero, and then we offer fairly competitive fees as well. There's a bit of arbitrage demand between the perbps So it's basically like a shared account or is it like if if i if I, for example, have and a Bitfinex account and then I see the the exchange and then they have like an options section and I click there and then I get to Talix or? Exactly.
00:10:16
Speaker
Okay, okay, okay. I see. Yeah, I was kind of curious because I don't really know what what's going on on Bitfinex that much nowadays, to be honest. But the yeah, it sounds like a good good model instead of just like having their own ah options part of the exchange to like be able to plug into yours.
00:10:34
Speaker
Yeah, i do I do have to say that um there was initially like a lot of interest from different centralized exchanges to ah essentially join on the same model.
00:10:46
Speaker
But after Bybit and Binance essentially launched options and couldn't really convert their retail um and DeFi started happening, I think a lot of the exchanges basically sort of gave up on on options and started focusing more on Perp or on on yield products.
Options in DeFi: Opportunities and Challenges
00:11:01
Speaker
Yeah, definitely seems like it. but um But now I'm actually ah talking to some some DeFi exchanges where um we want to do the partnership model, but not actually bring the whole options chain onto DeFi.
00:11:16
Speaker
yeah i'm on I've looked into that. It's it's extraordinarily hard. um So what you could do is is you could do the trick of having the matching engine and the portfolio margin engine kind of off chain and then use essentially um the crypto wallet as the entry point to like check the balance and then use essentially sort of like ah the same smart contract for clearing you could potentially do that but the big problem is um with also the regulation that's in the pipeline where you really have to make the case that you're decentralized actor and not intervening too much on the platform the hard part is foundations um if you if you want to um
00:11:54
Speaker
ultimate liquidations like you cannot just do adl for instance um you know what's what's crucial for options is you need that portfolio margining yeah so now imagine that like you know a market maker um um is like long long perps and now we're gonna go adl them right then the only thing that happens is a liquidity liquidation cascade into the options and it's terrible um And the other thing that's really hard is it's when you want to liquidate options. um It's very multidimensional. Like, let's say that you sold a call and now like Bitcoin flies up and and you need to get liquidated. Like now that all is in the money. And so it might not be the best thing to just cross like a really widespread. Like it might be the best thing to then
00:12:35
Speaker
buy the put of the same strike which is then out of the money now i have like essentially a future exposure a short future exposure in the options and now i may be delta hedge that with the perp or with the future in function of the quilly so all of these different decision steps if you want to actually encode that into a smart contract. It's it's incredibly complex.
00:12:54
Speaker
And at the same time, um you would also expose yourself to the risk of like all these liquidation rules being clear. yeah um But now people could adversely trade against that.
00:13:05
Speaker
um So that's really hard. I think what Derive is doing, they're doing liquidation auctions. But then the problem is that very easily leads to centralization because there's only a few people that can um like realistically respond to those liquidation or use.
00:13:19
Speaker
um The game theory of that is extremely complex. um so So it's actually really hard to get like our model of options onto DeFi. And then the question at the end of the day is also, would it be worth it? Because it just feels like people really like the UX, UI of a perp.
00:13:36
Speaker
yeah and modern options chain i think it's still very intimidating to most people um so the thing that we would be working on more is is create volatility based perpetual products um like think of do you remember um like ftx move contracts yeah i feel like they come up on like every other episode like think about like a perpetual version of that right essentially trade something that has a similar exposure like straddle and then it uh it doesn't expire Actually, you you're you're a very good guess, I think, to ask this question because I just talked about this in the last episode. um
00:14:10
Speaker
So many people say that the move contracts were really good and they kind of miss them and they would like to have them back. But no one has done them since FTX. And I was curious, like what the challenges are with implementing them, because I guess ah since FTX and Alameda did it, the the hedging part and market making part of that was a bit grimed up. And maybe if you do it in a legit way, it's more difficult to to execute properly.
00:14:36
Speaker
No, it's actually an extremely simple contract, especially if you structure it like a future. right Because the only thing they did is... If you think about the straddle payoff, right it's kind of just the absolute difference between ah the price and the strike.
00:14:52
Speaker
And betting on both directions at the same time. So just like the absolute um difference with of price and strike. And what FTX move contracts and the difference for daily move contractors, that they would just like take a TWAP at the start of the day to define what the strike of that contract was. And at the end of the day, they do a TWAP to establish the final price. And then the contract just settles for the difference. um It's actually a really elegant design. I just think that like these days what people want is something that just rolls it automatically forward.
00:15:25
Speaker
Yeah. um But it's it's actually a great product. And the the nice thing about it is that, I mean, we we would have a version that that does that doesn't do the TWOP exactly, um but actually in a clever way sort of like links to a basket of straddles.
00:15:41
Speaker
And then it's actually really easy for market makers to just replicate that product. It's really easy for us to price it. um I just think that like people have gotten so bearish on the idea that that crypto traders are interested in volatility products. I really think that's it.
00:15:59
Speaker
I mean, yeah, I talk a bunch with people and they're always kind of like, it's always kind of the same point of perps are just easier, perps are like easier to to understand. And options, there's just so much ah optionality, ironically, where you can do so many different things. And um I think for me, for example, like i kind of get options like I kind of understand what they do and like the Greeks a little bit and all of that stuff. But like when when you look at the options chain, like
Options vs Perps: Differences and Payoffs
00:16:23
Speaker
the the interface to buy an option, it's so much more difficult than if you just like go along or short on the perp because you have these spreads and then like you basically
00:16:33
Speaker
I'm not really I think you're not supposed to like market order into anything because the spread is so high that you're just like kind of fucked on that already. So you have to like place limits and then it's like it's just way more like effort to to create a position. And you also need to understand properly, probably i need to to have this calculator next to you where you're like, this is a payoff structure. this is how it's going to work. And the purpose is just like it goes up and then you make money and if it goes on, you can liquidate it. And it's like way way simpler to to just grasp.
00:17:02
Speaker
Yeah, so I think i think the most people, like when they trade, they sort of think in these binary terms, right? Like stop loss or take profit, whatever gets hit first. And for the same reason, they they probably would say binary options are more intuitive than then then then regular options. um And yeah, I just think that intuitive doesn't mean um simple to trade. I think um the problem with...
00:17:31
Speaker
If you think about like doing the same trade with purps and options, for instance, like a purp is a symmetrical exposure, right? Bitcoin goes up by a dollar, the contract goes up roughly by a dollar. It's not exactly a dollar because of the basis and the funding rate component, but um but it's roughly a dollar, and the same thing if it goes down. and and so that in itself is is not a exciting payoff right same risk in return so obviously people want leverage and what people don't want is to create sort of the the hockey stick payment or the hockey stick payoff um where um
00:18:07
Speaker
they feel like they're they're getting um they're getting asymmetry. right so So you have like this this fixed return, for example, with liquidation or a stop loss of this, yeah like your your max loss, and then the payoff function is like... Exactly. but But really what you're doing is you're sort of at that point saying, um I'm going to take the distance between my entry point and my stop loss, and that's a smaller distance than and where I think the market is going.
00:18:29
Speaker
And then the problem with that, by introducing a stop loss, right you make it actually a trade that's analytically... quite hard because you have this variable stoppage time and what you're really then doing is you're expressing that you want trends and that you're actually short volatility yeah imagine that like my price moves in two components right there's the trend and then there's a volatility around the trend if i have no trend then it's very easy to predict what will happen to this payoff structure is that like most likely the stop loss gets hit first and i just lose my money right so what want is that you want the trend
00:19:05
Speaker
yeah ideally the trend goes let's say if you're long the trend goes up sharply so you get this sort of let's call it escape velocity away from from the stop loss um or what you want is that if it goes to the stop loss that it at least has the decency of just going all the way to the bottom where you're like thanking yourself like oh my god i could have lost so much more money yeah exactly yeah In reality, what happens more often is that like your stop gets hit, that's like the that feeds the the absorbing limit orders and then price ultimately recovers. um And so so what a purpose of stop loss is, is the the issue is that the asymmetry right is sort of artificially created. There's no convexity there. It's it's a symmetrical contract. You try to create asymmetry through leverage, but that means your short volatility and your long trend.
00:19:53
Speaker
And so if you then look at a call option, you can get the same hockey stick, pay off exactly the same, right? If you think about the strike, ah replace the stop loss by the strike, you get the same exact looking payoff. um But then the key difference is that with the option, um you get that's um that liquidation protection.
00:20:14
Speaker
um And you can actually, the what I find the easiest way to think about like what an option does is to actually think about like a replicating strategy. as if you were trading the perp um but where you would basically say at the strike i have this stop by order let's say we're doing a call option at like 70k bitcoin right now we're all at like 65 or something so yeah 65. so it's absorb a little bit out of the money And so now I have this, let's say, the stop buy order at 70. So if the price actually comes from below and hits it.
00:20:44
Speaker
Now this thing buys me in into per position. I'm just now one per plan. And I immediately replaced um the stop order by a stop loss. And so if price then dips down again, it makes sure that I'm back to zero. If price goes back up, it buys me back in.
00:20:59
Speaker
And so actually it's sort of this rechargeable stop loss, stop buy strategy. and And so intuitively, like, what is the value of that strategy? Well, the more choppy you have around that strike, the more valuable the fact is that I've chosen an option and paid a premium rather than have all this stop-loss drama with the perp.
00:21:21
Speaker
um And so clearly, like, the distance to to the strike matters for the probability of of crossings. The volatility matters a lot. and the And the time to maturity, right? Because volatility and time together basically define the potential for for movement.
Perpetual Options: Theory and Practicality
00:21:37
Speaker
yeah and so so the big advantage of of just doing options is that i can now be long volatility i basically get my downside protection with full upside protection so from that perspective it's it's sort of the premium product right it's it's the luxury edition of of having having downside protection um but then yeah indeed you um you have the uh the cost of the premium um but then there's there's multiple ways to to basically optimize that. And I think the most most important way, number one, is just buy options with a longer, much longer maturity than than your time horizon.
00:22:17
Speaker
like there's no There's absolutely no reason to have a trade-on where you sort of give it a time horizon of a week. and then use a weekly option for that. Because that weekly option has really fast time decayed.
00:22:28
Speaker
And by the end of that week, it's it's basically lost all of its time value. um But nothing prevents you from- What is really the the point of this weekly option then, if there if it's like not a smarter user? Why why is it still? I mean, I guess it kind of makes sense because the option has to like end at some point. but But maybe, I don't know if this is a stupid question, but it kind of like occurred to me while we were talking about this. Why is there like no like perpetual option?
00:22:51
Speaker
and know like Why why is it why does it would it have to end I mean, look, the the the basic case is just that options are basically, they're kind of like futures, right? And and and they actually grew out of futures where people started basically saying, I don't like the fact that I'm sort of locked into the trade. What if I pay the seller that owns the goods, supposedly,
00:23:16
Speaker
what if I pay a premium so that I have the right, not the obligation to take the delivery? And that's where basically options were born. They were really like a way to sort of like buy a future, but then not have to take the delivery. And it became so popular, especially when people realize that that's then also a way to actually get more leverage and get asymmetrical leverage, that it became an instrument on its on its own right.
00:23:37
Speaker
um But like the the the reality is that like, what is what is a perpetual it's kind of like a future where instead of having the basis that defines like what is the the cost to hold that future until expired you take the basis and you swap it right and you create like a fixed into like a floating um uh into a floating cost effectively and you can create a ah product that that rolls that rolls forward um If you want to create a perpetual option, um there's this paper um made by Paradigm together with SPF back in 2021. So you could think about actually then mathematically creating sort of theoretically like all these different maturities of different options and creating a basket that sort of auto rolls forward and then creates ultimately sort of a funding rate that reflects theta.
00:24:33
Speaker
um And that is based on the difference not between mark and index, but between mark and payoff. And so you can theoretically do that and and price it and um and and create a perpetual option at a fixed strike with like an infinite maturity.
00:24:46
Speaker
But the real problem with with that approach is just that um at the end of the day, a good derivative product has good replication cost, right? Like at the end of the day, every...
00:24:59
Speaker
derivative is priced based on what is the replicating portfolio. And the problem is then with these kind of things is that you're creating all these maturities that don't exist. It becomes this mathematical abstract thing that becomes kind of hard to price price and hard to hedge.
00:25:13
Speaker
What is replication cost? What does that mean? I mean, the simplest example is like, how do I buy, how do I price a future on Bitcoin? um it's It's actually basically thinking about just the borrow cost of Bitcoin, right? Or borrow cost of USD. And then we will just buy a Bitcoin spot. And then I can essentially have an arbitrage profit if like the future, that the carry cost embedded in the future is higher than the cost of like basically replicating the same exposure. But then if you had different means by just like borrowing
00:25:45
Speaker
uh, borrowing Bitcoin in margin, then I have like this basically, this, this future that's priced, priced at the basis of let's say 6% annualized and I can borrow four, um, then, then there's an arbitrage profit, right? And so what you do when you theoretically price these things is you, you assume that the arbitrage profit is zero.
00:26:03
Speaker
Um, and so then the way you can, you can think about like an option, like Black and Scholes does effectively that, but then it says like, I can, I can sell a call option and then I can take the first derivative of the call with respect to the underlying price. Basically linear approximation of the option is the Delta.
00:26:22
Speaker
And if I then hedge a short call by just always making sure that I have delta units of spot or perp for that matter um as as a counter hedge and I can keep like the exposure delta neutral.
00:26:35
Speaker
And then actually it turns out that the um the the the cost of that strategy is a function of volatility. And that's how you basically ah get the um um get the Black and Scholes formula. Black and Scholes formula basically says that the price of the option, the theta,
00:26:51
Speaker
should reflect the the Gamma P&L of basically dynamically ah hedging the the option underlying. So every every derivative ultimately, from a pricing perspective, you need to look at replication, but then replication is a very real thing, right? For all these ah derivative prices to stay in sync, you have market makers actually you know buying one explosion, converting it into into another, and trying to create like delta neutral ah um arbitrage profits.
00:27:17
Speaker
um And so going back to the to the um to the to the to the option perpetual, so that's the hard problem with like these academic sort of theoretical ah frameworks for for for designing that product. It's like, hey, but how do I hedge it?
00:27:33
Speaker
Um, which is why I'm, I'm, I'm much more bullish on, on having like and a liquid options market.
Market Making and Hedging Strategies
00:27:41
Speaker
Maybe that's more the go-to for the institution, but then creating professional products that actually hedge as baskets of like fixed expiry options and and then you get the best of both worlds.
00:27:55
Speaker
But like ah a perpetual option by itself is just really hard to to model to price. And then the other thing about it is like the UX is kind of not good. Like if you have...
00:28:05
Speaker
all of the theta costs in the funding rate, that funding rate constantly goes crazy. So what what do people do then? They start like putting all these dampeners on it and smootheners and okay, you can do that, but then it becomes even harder to hedge properly, right? Because all of these things create like non-linear mathematical functions of like the inputs. and And so by trying to make it easier, you actually make it harder for the market maker who then ultimately resorts to basically just giving white quotes, bad liquidity.
00:28:35
Speaker
Whereas if you have like really liquid fixed state options markets and you can you can replicate perps into that, I think you can make a much better volatility per product. Yeah. That actually makes a lot of sense the way you explain it. Interesting. I didn't know there was say extra papers and stuff on that, but that's that's a very good explanation.
00:28:53
Speaker
I kind of want to ask, um I have another question where it's like, um'm I'm not sure if it's like stupid or if it's going to benefit. Maybe like I won't understand it even if you answer it, but maybe it's going to benefit someone or whatever whatever. Because what I always find interesting about options that um that they have like this this complicated or it it it appears to be like a complicated hedging flow. Like if you with perps and stuff, they're just like kind of more simple to, as we discussed, like intuitive intuitively grasp. You know, for example, if you want up the funding rate, you just buy spot and then you short the perp. It's like very, very easy to understand. But if I'm going to to go on Talix, for example, and then I'm going to
00:29:36
Speaker
and this becomes a kind of complicated fast i feel like because there's so many variations of stuff that you can do with options if you buy like multiple different strikes or whatever and then you sell buy this or whatever yeah um but maybe if you just buy a call then that means the the market maker sold directly sold the call to you like it's kind of a bit more of a one-to-one relationship not like per so just like buy into the book because it's like this RFQ thingy, right? And then it's um they basically go short perp in ah in an equal and I don't know which which Greek it is now, but like an equal Greek something way. And then that that's that's I still kind of understand that. But how does it work with like more ah the more complicated ah options constructs, I guess?
00:30:22
Speaker
um I mean, for multi-leg options, um like i like I explained a little bit earlier, it actually makes things easier if the net delta is lower and some of the Greek exposure of different legs offset.
00:30:35
Speaker
um But if you take like a really simple example, right, and I'll sort of go more into what happens in the real world, like you Come to Alex, you buy a call, the market maker sells it to you.
00:30:46
Speaker
um Well, before we compared the difference between the perp and an option, it's like, okay, one is this symmetrical payoff, the other thing asymmetric payoff.
00:30:58
Speaker
um So the way that translates into into into Greek terms is that like the the delta of of a call option is is dynamic. um And the easiest way to remember this is like delta is just the degree to which a call option behaves like the future.
00:31:18
Speaker
right Because lots is this thing that has a, let's call it, it has this almost identity crisis, right? By the end of its life, it will either be in the money or out of the money.
00:31:30
Speaker
It will have a delta of zero or a delta of one. And before, trades sort of at um the superposition of both. It probabilistically is like half in the money, half out of the money, let's say. Mm-hmm.
00:31:44
Speaker
So if you think about like a market maker um who sells you a call, um the the difference between like a perp and an option is that like a perp has this static delta of one.
00:31:57
Speaker
and um The call option actually has a delta that that changes dynamic. And so the delta is... You can think of it as the degree to which um the option behaves like a future.
00:32:10
Speaker
um So if if an option goes deep into the money, basically trades the same like a future. um If it goes out of the money, right it loses its sensitivity to the underlying price and its delta goes essentially to zero. um but So whenever the the Bitcoin price moves, that delta of that option changes changed a little bit.
00:32:29
Speaker
And so where you could hedge a perp statically, right, by, for instance, just holding Bitcoin spot, selling a perp against that, and now those those two things are delta neutral and they stay delta neutral, you just can't do that with with an option.
00:32:45
Speaker
um And so what what you need to do is you need to dynamically hedge that, dynamically rebalance that. um And as you do that, you actually convert the the the directional exposure of the option into a pure volatility bet.
00:33:00
Speaker
and And the way market makers then make money is that they, effectively the option price does not reflect any type of expected return on Bitcoin. That's irrelevant because that gets basically Delta hedged.
00:33:13
Speaker
um But they're overcharging you for for the volatility. um And the hedging P&L, that like buying and selling, that rebalancing, ah that hedging P&L is a function of realized volatility.
00:33:26
Speaker
And so what market makers are basically in the business of is selling you options, but converting that into a delta neutral volatility exposure where they make money on the difference between kind of slightly overpriced implied volatility, i that the option prices, and then having exposure to realized volatility um which on average it should be slightly lower than the implied.
00:33:49
Speaker
Otherwise, market makers have a really tough time staying in business. um And so that's what they call the the variance risk screening. um And then hedging P&L depends on whether you're long or short volatility.
00:34:04
Speaker
um So actually in the case where we're short a call, it's actually an uncomfortable position to to to be in even as a market maker because the problem is like, okay, let's say i sold you now this call at 65k Bitcoin and now the market starts rallying to seventy k the delta of that call starts increasing. And so then what I have to do as a market maker is have to keep like selling. I have to keep um um to keep basically, you have to keep selling. ah If I'm short a call, sorry, I have to keep buying on the way on the way up right So that's like the gamma squeeze thing, right? Yeah, that's actually buying. I'm buying on the way up. And so I'm actually...
00:34:47
Speaker
entering it at increasingly high prices. If then them bitcoin Bitcoin drops again, I need to sell. And so I'm basically buying on the way up, ah buying high, selling low. If you're a long gamma, that actually flips around. If you're long gamma, you can actually sort of add liquidity to the underlying.
00:35:03
Speaker
um and if if if um if you're long gametes basically becomes a little bit similar to like think about it like range trading where you sort of start selling um the top of the range and you're buying back lower um and that makes sense right because if i'm if i'm if i'm short the option i'm getting the I'm getting the premium paid and then my hedging normally goes money.
00:35:26
Speaker
And vice versa, if I'm paying the premium, then I can make money back by it by hedging. um So that's sort of the the ah the use case when you're just like thinking about the market maker, just Delta hedging and in perp.
00:35:40
Speaker
What they actually in reality do is they also hedge options with options. um So they like actually spreading options. So they might actually sell you the 65K strike and then actually buy 65K strike in the week after that or in an adjacent strike. It all depends on how they see the relative the value of different options.
00:36:00
Speaker
And so then um their hedging job of what they need to hedge in the perp, that risk becomes smaller. But also that's a way for them to like offset Greeks risks. um And then really sort of the...
00:36:13
Speaker
the the magic of of of of option market making is that um what these are guys are very good at is sort of like selling options in the in in the part of the distribution that's sort of the center and then making making a vol spread on that. And then they will often reinvest that in in wing options so that they're actually long volatility across the book.
00:36:33
Speaker
um and then And then usually they make a lot of ah money when volatility they explodes. Yeah. Because then they're actually net long optionality. And so their margin requirement is not getting ah getting hit. They can continue to make markets when it speeds up, when there's more volume, when the spreads are bigger.
00:36:53
Speaker
So then they they can they basically buy optionality to be able to market make when it's the best time to do it and at the same time make sure that they can never blow up. Um, and so really, um, yeah, that's, that's the best way to explain it is that it's ultimately these, these market makers kind of taking all the direction we risk out and creating yeah the ball PML.
00:37:15
Speaker
Um, and yeah, I can understand that it's, that it's like intimidating and and complex when you're first learning about these things, but at the end of the day, it's, it's sort of mechanically, it's sort of a simple, a simple business. And I think, um,
00:37:32
Speaker
the The opportunity also for for retail investors is that, like well, if you can if you can sell straddles and and and and delta hedge them, you can actually start manufacturing a very similar P&L for yourself.
Retail Opportunities in Options Trading
00:37:48
Speaker
okay um And so I think um i think once you like understand the the mechanics of that trade, actually becomes a a relatively easier trade to do.
00:37:59
Speaker
because the problem is if you're just trading discretionary, you just trading direction, um I mean, it's a really hard game, right? Like yeah already we discussed with burps and stop losses that you sort of like short volatility, you're betting on trend.
00:38:11
Speaker
um I think in the in the, when did you start trading crypto? Like which which year? I guess probably maybe like two, three years ago or something. Yeah. 2022, 2023.
00:38:22
Speaker
Maybe even 2024, yeah. yeah maybe even twenty twenty four yeah but i would say Yeah, that's also already where it started to get a little bit harder. But when I was trading more actively, let's say the era of 2018 to 2021, like um i think i feel like you could have a lot more just more of a read on the market. It was just a lot more expressive in terms of like open interest changes. Yeah.
00:38:48
Speaker
in terms of like, you know, funding rate on Binance being 100% annualized for like a week when we're like mid 60s, future contango of like 30% annualized premium. Like there was a lot of telltale sigh but science sign when the market was sort of overheated or not. So I feel like you could have a lot more discretionary trading edge.
00:39:07
Speaker
i think I think these days um it's a lot more narrative driven. It's a lot more. ah Also, the the performance is now a lot more concentrated than ever. um and then And then you're sort of in this business where you rely on your discretionary ability to always like read into the new narratives.
00:39:25
Speaker
and And that to me seems like this this extremely hard way to trade or to Because at the end of the day also, you don't know necessarily how much edge you have. It's hard to measure.
00:39:36
Speaker
And even if you know that you've had edge because you've had good performance, how are you sure that you're sort of keeping up with the narratives, right? Yeah. The investment case now of ah of the vbas of of like investing in Bitcoin like a few years ago, like the themes are like very, very different than, for instance, now where you need to understand the Saylor's balance sheet. um And throughout all of this, then look at like this very complex thing where everybody assumes it's extremely hard to like sell a straddle and Delta edge it.
00:40:06
Speaker
But then my counterpoint would be like, yeah, it's it's it's kind of hard to to learn about that trade and and and and especially unless you use Stylex to get the tooling.
00:40:17
Speaker
But once you do that, you can sort of like just systematically sell vol, for instance, every week and have this very measurable result where you know that you're starting from an edge.
00:40:28
Speaker
Like the variance risk premium is there in every options market. Otherwise, the option market cannot survive. It's not always there. Right? Like there's definitely times where, um you know, the the realized volatility turns out to be a lot higher than the implied volatility and market makers definitely don't make money each day, um which is also why there's long opportunities.
00:40:46
Speaker
But that you know that if you're going to sell systematically like a straddle each week and delta hedge it, you kind of know what your return expectation can be. yeah Know that it's roughly 1.5 sharp.
00:40:59
Speaker
um You should have a win rate of of around two thirds. And so as as sort of intimidating as it might seem, the nice thing about it is you have like essentially every market before that is as kind of like your ability to like take notes.
00:41:15
Speaker
um You have these really defined metrics of of how it should perform.
Options Trading Strategies for Investors
00:41:20
Speaker
um And so from that perspective, like I find these kind of things easier personally to then figure out a system to trade and And then just observe how unreasonably effective it is. I mean, um you know, all throughout, like, the escalating conflict in Iran, you could just just basically sold straddles and make money.
00:41:40
Speaker
um Last week, right, you have all the the the the discussion on on um on crypto Twitter exploding around the health of... MSG's balance sheet, but look, you sold the straddle. It ended up at it the exact same spot like last Friday as the Friday before. So again, yeah we saw in fall. And so um I call this like um um the the the girlfriend um thought experiment. So what if you So they say, explain to your girlfriend, like, just do your Friday morning routine, which is like every week, log into that, like, sell a straddle, and then click on the bot thing to just hedge it. And I always say, like, hedge it because you could also sell straddles naked, but then the drawdowns are going to be pretty severe. Yeah, then you have to Christmas turkey, that Thanksgiving turkey. You'll make money over the time, but it's like, if you backtest, for instance, just selling straddles naked over the last year, you you would have made 30% on your notional capital.
00:42:36
Speaker
um but you you have made it twice in in four months and then given everything back and then some and then like having a miraculous recovery so like that's not necessarily what you want from systematic strategy um because obviously you could you could start being unlucky and and like you know start investing draw immediately lead's sort of more if you if you delta hedge it you can get like actually very similar total return but like uh the drawdowns become much more acceptable um they'll become like ah an order of three or four times smaller.
00:43:06
Speaker
um So let's say you you can explain this to your girlfriend and she doesn't know anything about like what's going on in the world. She just does it systematically every day. And then the question is, do you outperform?
00:43:16
Speaker
Because it's actually ah fairly high benchmark to beat. right And so um I'm not saying then like drop everything you're doing and start only doing that. so how how much How much is said the average yield on that? Let's get into the numbers if it's like interesting and enough for an average crypto degen.
00:43:34
Speaker
If you commit 100k notional, then you should make 30k in profit. And notional is like conservative, like your actual margin requirement on that thing will be, let's say or something, 40, 50k on Alex.
00:43:47
Speaker
um Portfolio margin is important there, by the way, if you're delta hedging so that the margin requirement actually goes down. um but So like depending on how you you measure the the return on capital, I think Notional is the most conservative, then it's 30%. But if you if you basically um run a tighter margin balance, you could argue it's even 50%.
00:44:10
Speaker
This is the Insignia Terminal Podcast Alpha that you're looking for. I think you you explained the market maker stuff also really well. like i kind of It kind of made me understand things a little bit more.
00:44:21
Speaker
um I want to ask, is there like, because I always read about like OPEX and this is like, expiry stuff you know because you have these uh these days like every every like every week an option expires basically and then you have some times where it kind of like collides where like more things expire like at the end of quarters and stuff like that and then some people kind of use that for their trading and i'm curious how that works because i guess since all the options stuff is kind of like public like you can see all ah the
00:44:52
Speaker
positions that people trade because the options chains are public so you can like infer from that what the market makers kind of would need to do in that situation does it kind of work like that yes but it's it's something that um has a lot more um like market impact in in traditional finance and equities options where yeah the option market is is is huge relative to the spot market um and so what what happens there is as i explained like market makers are sort of kind of like they will have different vol exposures depending on the strike right they like sort of selling the middle part and then being long in the in the tails um and then depending on like how the stock approaches the expiration uh they might get like
00:45:38
Speaker
collectively, right they might get short gamma. And that means that they have that issue that I explained earlier where they sort of have to buy high and sell low and where they sort of amplify the volatility. Whereas if they're long gamma, their hedging will actually cushion the market and sort of add liquidity to the market. right So short gamma heuristic is that the market makers start taking liquidity and forcing the trend.
00:45:58
Speaker
And long gamma, then they're actually adding liquidity and they start um sort of dampening the trend. um And so so a lot of people, they love sort of you know, speculating on like, oh my god, the market makers are short gamma, so we're going have this explosion of volatility. around expiration, which is when, yeah, as an option approaches expiration, the gamma increases um and because of that binary effect, right? Sort of the closer here, if you're far away from expiration, your delta is sort of this probabilistic, like it could still go either way.
00:46:32
Speaker
um But if you get very close to to expiration, the Delta basically becomes almost binary. right that's so um And so people love to then infer that like, oh my God, Mark makes a short gamma. We're going to see you like massive volatility.
00:46:48
Speaker
um In crypto, the options market is just categorically way too small for that to happen. And you might see a funding rate on there, but being a little bit weird.
00:47:00
Speaker
Or sometimes also the futures being like a little bit off, but that's about it. ah ah So it might make more sense to like look at, ah actually look at traditional markets, OPEX, and because there's like this tight correlation, so maybe you can infer something from that.
00:47:13
Speaker
Yes, that makes sense. But I would say the the more interesting thing for me is to to think about like the reverse of the, market maker position. It's like, okay, you know, in crypto, options trading is a niche, but like the people who trade it, they're they're pretty smart guys, right? And they're taking these directional bets.
00:47:31
Speaker
So if, for instance, the the market makers are short gamma around 70K, that means that like the positional traders went long gamma, right? So now I'm actually interested in like, okay, well, why are they all buying calls here, right? Or I'd look like in last week, I'd look at sort of the exposure of like, are people now buying all the puts?
00:47:51
Speaker
um because of Sailor or not, and and actually the the the options flows on that was very muted. um So you can sort of actually flip it around and instead of using it as this sort of volatility proxy or volatility prediction proxy,
00:48:07
Speaker
um I like to look at more as like, okay, can I copy trade um the smart money in in crypto, like the taker side of the equation? And then you have this fun thing that you can do is which you can just look at like the big option trades that happened. And then um on the long side, because of Theta, right, you can often sort of in the weekend sort of think about like, okay, there's a lot of people that bought like calls on Friday, I can actually now even a slightly better entry point to this trade than that they got, right? Yeah, that makes sense. But they like they're in their office shop. They got to do the trade on Friday, not Saturday. And so you can do think of it back running options trades, right? You can sort of have the advantage. Thanks to Theta. Isn't it a great thing? You can sort of like get better entries of the smart flow.
00:48:52
Speaker
I feel like I'm getting ah progressively less scared of options like s s as we go along. Even even like the the Greek stuff kind of seems a bit more intuitive. um Maybe I'm still scared of like the the exotic. like I feel like there's this wall or whatever maybe. like The basics is like delta, gamma, theta.
00:49:12
Speaker
What else is there? That's just pretty much it. Or one more, I think. But then there's also like this this stuff like Vanna and and and I think Charm and Row and stuff like that. That that seems kind of scary, but I guess it's also a bit too did the overkill. lord It's really not. that Yeah, I mean, Vanna is is relevant for sort of spot-volk relation, but like it really depends on what you're doing with the option. If you're like structuring a directional view with options, then Delta is king.
00:49:37
Speaker
Delta is the most important thing. Theta versus gamma, you'll find out is usually the third most important thing, unless you buy like really short-dated options. And let let me actually go circle back to that, um because the when we talked about that, we started them ah venturing into like why are there not like options perpetuals?
00:49:55
Speaker
um but my my advice would be if you're if you're looking to to structure a long trade like yeah trade a longer maturity uh than than the time horizon of your trade because then the theta versus gamma pnl is a lot less significant and most of it will just be delta exposure And then secondarily, it will be Vega exposure. So think of Gamma as more of your exposure to realizable and ah implied volatility being more forward looking like what's the the volatility price that's the future volatility that sort of priced into the option.
00:50:30
Speaker
um and and when options like when vol reprises that can actually be quite an important component of your pnl because you don't hold an option until maturity so it's say delta is vega is second and then gamma and theta sort of their shares and um i mean the easiest way to think about i mean you're you're you're german think about it like i'm buying a porsche right at like fifty k but it holds its resale value really well. So maybe in three years, I can still sell for like 120.
00:51:00
Speaker
okay right versus like I buy a shit car that after three years is fully written off. And so that's a little bit like the dynamic between like longer dated and shorter dated options. So the shorter dated options are from that perspective a little bit more junky.
00:51:16
Speaker
um And the Theta and Gamma do make it like hard. And that's where all the people that are like complaining about options are so hard. It's in part because they're focused way too much on like these very short dated options. And it's just it's increasing the difficulty level exponentially.
00:51:30
Speaker
yeah An option decays, at the money, an option decay like accelerates exponentially towards expiration. And then the issue, if you're out of the money, then the decay starts low or it's even a little bit faster.
00:51:42
Speaker
um so you actually want to, if you just want to like get like that directional exposure, with ah where you don't have that liquidation stop loss issue, um usually just better to look for longer data options, and then you'll see that your net theta cost is lot lower.
00:51:56
Speaker
Or you can do, if you do want to have shorter data views, then you get that alternative mechanism of being more specific, right? I don't want to call, I want to call spread. And then the fact that you're also selling vol at the same time as you're buying vol then reduces your theta that way.
00:52:13
Speaker
um So i think I think the key point is that indeed, like the options chain is very intimidating, right? It's, I mean, Thalix, I think we have seven, eight maturities. Then you have like up to 20 strikes and you have calls and puts. So the possibility space of that thing is like,
00:52:31
Speaker
300 right yeah but if you use a couple of these heuristics that i just explained um then it starts to become a lot easier um and and the last thing i'll say on that is that you usually like especially when you have a directional view you just do a call spread or a put spread like there's rarely really a need to complicate further do see some people that love to like make christmas trees and four-legged options straight yeah The problem with all of that stuff, though, is that it becomes much harder to actually analyze what your real performance is. um
00:53:03
Speaker
Let's say Iron Conor strategies are very like popular on on on Reddit because they have a really high hit rate. um Can you explain what it does? Yeah, it's basically um your... um um you're sure that i think i think it's actually shorter strangle uh longer straddle but it's basically like these these triangular sort of distribution shapes and might actually be confusing a corner here with the butterfly it's sort of all versions of the same thing um and so you can you can create these trades that have um
00:53:35
Speaker
um and when when you sell them that actually have like only like a narrow band of of of possibility of the price actually are there and then it's a nice way to sort of collect income and like 90 of the time like it works and the problem is like the 10 of the time that it doesn't work it actually you know you can lose as much as you made all those other times like it's still selling asymmetric uh asymmetric convexity And then the problem by like complicating it, you add a lot of transaction costs and you make the trade less measurable.
00:54:06
Speaker
Whereas if I just simply go and sell straddles, um i i have a much more almost trade in terms of feedback. um I just have two legs. ah it's it's It's way easier to see whether like the strategy is like working properly or not.
00:54:23
Speaker
um and And then, yeah, like I said, with discretionary trading, you can go three, four legs, but you're just just adding so much complexity to your trades.
Day Trading and Directional Strategies with Options
00:54:31
Speaker
In general, just like call spreads, put spreads is all you need. Stratals, strangles.
00:54:35
Speaker
um and then more of an important consideration for instance is like when you're doing it systematically is whether whether you're delta hedge or not yeah since there are many many people here that i guess uh do a lot of like intraday degening or like trading scalping whatever yeah i don't actually know if if there's like too much of that done with options apart from like zero dte gambling like do people day trade with options or do like scalping or anything like that because i feel like most of what you talked about were like a bit multiple day or week kind of strategies mean you absolutely can and and people look in the retail side and in in in threadfi absolutely kind of trades options like like perks right like and i think when perps um start to be start to gain scale there i think they'll definitely take some of that that zero dt demand for the reason that you explain like ultimately liquidity is better and It's an easier easier interface. but um But yeah, for sure, like a lot of people, they love speculating on earnings announcements. And um um it's just the problem there is it's just it's it's just the same thing like just trading perps ah intraday. just um
00:55:48
Speaker
it's It's just a lot of churning. It's a lot of transaction costs. It's... it's i don't I don't advocate it because I feel like one of the nice things about options is that you don't have that stop loss, that unexpected part. yeah And i'm much i'm I always just learned that when I was just putting my stops a lot wider,
00:56:07
Speaker
I generally made made more money. Right. And so the the more you go and like walk away a bit more, leave position alone a bit more. It's it's all like I think the most important thing I would say there is like all of the intuition you have by trading perps.
00:56:20
Speaker
It is it is it is deployable on the options like it's it's an edge that you can import. um But it's it's very similar. it's very equivalent in the sense that if I if i take like a higher levered per position with a very tight stop loss, it's equivalent as basically saying I'm trading an option with a very short ah maturity date, right? Like a zero date. If I if i do a 100x lever long,
00:56:45
Speaker
My expected maturity of the trade, it's not preset and maybe everything goes incredibly well. The reality is like probably that trades basically last like, I don't know, five or 10 minutes, right? Yeah. And so I put my stop a little bit wider. Now I basically create the equivalent of maybe like a one day option or like, and if you really want to like swing trade over longer horizons, you just really need to make sure that those stops don't get in the way ah and and that they're put at a place where it's it's very well considered and not just a way to like,
00:57:13
Speaker
just blindly try to get like a higher risk return or like lock it into like a four to one ratio or something like that that wo doesn't make sense right like a stop loss is is a trend instrument together with your entry and so yeah have to think you have to have as much edge on the on the stop loss placement as on the uh as on the entry point yeah um um so ultimately these concepts are very similar i think with with options um Yeah, it it is. You have to be more careful about the spreads.
00:57:45
Speaker
um and And sort of flipping them back and forth will will work less well then than with burps. But then it's more, think about it like, With perps, I will just have to re-enter positions a lot more. And then with with options, it it would be a little bit more like i i I pay the spread once and i and I will have like a lower transaction frequency.
00:58:08
Speaker
um But it absolutely is a way to... um You can actually take the same principles. like For instance, one of the really nice things though is you can you can start to feel a little bit more free. like Because let's say that like let's say Bitcoin like drops to 60k and now we want to buy the bottom of the range.
00:58:27
Speaker
right like with with with With a call option, I can just buy that 60k strike and I expect that it kind of like could like go up and down around it, but like I don't care. I'm long volatility there.
00:58:37
Speaker
and And yes, I'm paying theta, but nothing prevents me from like buying a two, three, four week option, holding that for a day and seeing whether we bounce. yeah um Whereas with the perp, i would you would have to sort of like yeah place your stop lower.
00:58:53
Speaker
And so that's an interesting thing when you start trading options more with that directional view is you can actually start to pick like levels differently because instead of like having this stop loss at a place where you really don't want it to be to be touched or it's a breakout level,
00:59:06
Speaker
you can actually now sort of like start thinking differently about where you actually enter trades. You don't need to time it that well as you would with close. Exactly. It's a little bit like you might actually more like look at it from the perspective of like, okay, we're in a range. I think we're eventually will break out to the upside.
00:59:21
Speaker
um But I could actually even like enter the call and in the middle of the range when live volatility is not that expensive. Yeah. um so yeah you can you can So once you start actually thinking through through the mechanics, I think the the the view space is the same, right?
00:59:37
Speaker
If you trade options directionally, whether it's with perps or it's with options, it's the same foundational edge, right? That you have some kind of view to have like a higher than 50% probability of ultimately being right about the direction of the market.
00:59:51
Speaker
And then in both cases, the the instrument can sort of amplify that edge with with with leverage. um And then it's just like the question of what kind of volatility exposure do I want, right?
Current Market Climate and Trading Tools
01:00:02
Speaker
If i was I'm really, um if I really think the move will happen in a trend, then burps are great. And then honestly, you shouldn't use the option because why pay theta for trend?
01:00:12
Speaker
Yeah. um But in in a lot of cases, and and and especially over the years as the market matured, I feel like there's a lot more shop before there's a breakout. There's a lot more volatility of volatility. Mm-hmm.
01:00:23
Speaker
And I think, yeah, when you just talk to a lot of retail traders, I think know a lot of people have had a really hard time trading perps in the last one two years. I think a lot of them actually just made money um in DeFi because of the air drops giving actually convexity beyond the trading P&L itself. and actually Many such cases. I um i think that saved a lot of people. um But you know these days, if you just want to trade a perp, um especially like doing it the same way like you're used to in the in the previous years when you were maybe making killing, it it definitely doesn't work anymore.
01:00:59
Speaker
I think this has been a very insightful conversation. Is there anything else that want to talk about or want to share? No, I'm just i'm just curious. Do you think you'll ah you'll try and option trades at some point? I kind of should. Yeah, it kind of it's kind of doesn't doesn't seem ah too bad. like Yeah, I kind of like I always think about or like thought a couple of times before that I like want to play around with it a bit more, but then it's just like it's it's a bit intimidating or whatever. I think I tried the the Kian testnet thing before. Yeah, yeah just because it was like easy to to set up. But that yeah is also
01:01:38
Speaker
I don't know. i just never really got into it before. But I think ah like you definitely explained a lot of concepts very well. And I feel like I have a much better grasp on it now. And maybe I'll try it a bit more.
01:01:50
Speaker
No, maybe then I can just like do do like a little shameless plug at the end in the sense that we have... I mean, it's part of like trying to teach people to kind of learn about options, but learning by doing and instead of just reading books.
01:02:04
Speaker
Because I feel like when you're reading books, I have the same issue. It's just that... um you just like read all these books about Greeks and you feel like you get it and then you look at the screen and you you just have no idea what to do. It doesn't translate, it doesn't matter. yeah There's like the difference between the knowledge and the application of the knowledge. um And so for that reason, like, um i mean, in part it's also with the help of of AI, of course,
01:02:28
Speaker
um you know i was just able to um to iterate a lot faster on things like back tests and visualization of options so we've built like on thalic stack dot github.io we build basically what we call second screens and it's it's all these different like mini apps that take um our historical API data, which allows you basically to backtest any option strategy.
01:02:52
Speaker
ah Any mark price, any implied vol of all the instruments that we we have like back to 2024, it's just online there available for free. um And so we use like these different apps to then, for instance, like let you um yeah let you look backwards, like where you basically say, OK, what if I bought a ah call spread last week between these and these strikes and then Delta hedge it or not? like You can just look at the P&L and see how it breaks down between the Delta component and the Gamma, Theta, Vega components. So you have BNL decomposition. So you can just like get a feel of, OK, what is the trade that I might have done, and then and then see how it would have played out.
01:03:29
Speaker
ah We also have a simulator where you can test how a strategy would perform based on like applying trend, applying like different levels of volatility. So you can see sort of like how your expected returns will would change.
01:03:43
Speaker
from max drawdown to max gain to sort of like the the middle of the distribution. um Yeah, we have then like little apps that like simulate the delta hedging so you can play around with those settings. So so there's like a lot of things we we have where you can you can you can start from from thinking about like simple, for instance, directional trades and then like trying to just see what actually would have happened and then i think you should learn the theory from there by sort of asking questions of like real trades or um or these simulated trades and then you go look for the knowledge rather than the other way around i find it very hard personally to like read an options book
01:04:21
Speaker
And then go to the screen and then it's more like you need to use the ah all those like resources, especially with the help of AI. You can just query easily. like Just like do a Q&A driven um learning learning by doing. yeah Sounds good. I would recommend to check that out. And I want to thank you very much for coming on.
01:04:44
Speaker
Happy. Thanks for having me. course so i hope everyone enjoyed this more options focus episode i i definitely did and yeah thank everyone for watching goodbye all right cheers