Episode 191

full
Published on:

9th Feb 2024

Explained! Systematic Options Strategies with David Sun - David Sun

In this discussion, the ReSolve team is joined by David Sun, a retail investor

turned hedge fund manager with a background in engineering. David shares his

journey from options trading during grad school to launching two private

options-based hedge funds. He discusses the intricacies of options trading, the

importance of risk management, and the evolution of his investment strategies.

Topics Discussed

•David Sun's background in engineering and his transition into options trading

and hedge fund management

•The launch of David's two private options-based hedge funds and the rationale

behind having two separate funds

•The importance of risk management in options trading and how David's strategies

have evolved to minimize volatility drag

•The concept of return stacking portfolios and how it has been applied in

David's funds

•The role of diversification in enhancing portfolio performance and reducing

risk

•The potential of long volatility strategies as a diversifier and how they can

be applied in retail investing

•The impact of market changes on strategy backtesting and the importance of

continuously updating strategies to reflect current market conditions

•David's views on the future of his funds and the potential for launching a

third fund

•David's public presence and his efforts to educate retail investors through his

podcast, The Trade Busters

David Sun provides a unique perspective on options trading and hedge fund management,

drawing from his background in engineering and his experiences as a retail

investor. His insights into risk management, portfolio diversification, and

strategy development offer valuable lessons for anyone interested in the

intricacies of options trading and hedge fund management. This episode is a

must-listen for those looking to deepen their understanding of these complex

financial landscapes.

This is “ReSolve Riffs” – published on Friday afternoons to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association ("NFA"). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
David Sun:

If we see call premiums at a certain part of the surface

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contracting at a certain rate, that will

be our signal that it's a downtrend.

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And so when we deploy the

premium, we'll lean short, we'll

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sell calls instead of puts.

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Conversely, if put premiums are

expanding, that's another way to

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indicate market's probably going down.

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And yes, they're mirror images

of each other, but they're not

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gonna react exactly the same.

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So looking at call contraction and

looking at put expansion can give you

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the same type of signal, but the timing

and flavor will be a little different.

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Adam Butler: All right.

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Welcome David Sun, David,

um, private fund manager.

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I know you've been on Corey Hoffstein's

Flirting with Models podcast, and, uh,

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that's how you showed up on our radar.

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So welcome to Resolve Riffs.

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David Sun: Hey Adam.

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thank you.

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And, uh, it's a really privilege

to be here and I wanted to first

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mention, I don't know if you remember,

but, uh, you've actually been quite

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an inspiration to our strategies,

how we approach the markets.

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And it actually started with

your first episode on, Flirting

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with Models, the Ultimate Gift

and a very aptly named episode.

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It's honestly, that's been the, the

gift that I keeps on giving because the

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kind of ideas that, you talked about,

especially towards the end with regards

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to ensemble methodologies and just.

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Not having to focus too much on one

particular, you know, way of doing

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a strategy and just being able to

diversify and have a robust portfolio.

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that, that's been kind of the

fundamental premise from which all

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of our ideas, you know, move from.

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And again, you may not remember, but I, I

sent you a DM on Twitter maybe a year and

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a half, couple years ago, just letting you

know that I had really lashed onto that.

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So again, uh, it's

really come full circle.

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So like I'm

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Adam Butler: Oh, that's brilliant.

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Wow.

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Yeah, no, thanks for letting me know that.

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I think that's the one that

Cory and I recorded, in Banff.

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I think we were both at a

conference in Alberta and, uh.

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We sat at the bar and had a couple

of pints and, recorded that episode.

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And, uh, I remember that one

was a, that was a lot of fun.

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So I'm glad it had an impact.

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David Sun: Yeah, definitely.

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And I always share that cliff with a

lot of people who follow me on my own

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own podcast, and so on and so forth.

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So I think it's, uh, you've had

a, a lot of, uh, impact on, on me

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and the people who listen to me.

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Adam Butler: Oh, that's brilliant.

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Well, that's great.

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So, how have you translated some of

that into what you are currently doing?

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Maybe, so what are you currently

doing, and then how did you

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come to become a private

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David Sun: Okay.

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So I guess a little bit about my

background first, is that kind of Yeah.

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So I started off as, um, my

background's in engineering, so

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electrical engineering, and actually

I started off as a retail investor.

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I don't have any formal

finance background pedigree.

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Uh, I actually just got,

incidentally into options trading

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during grad school at Princeton.

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Right around 2008, 2009, there was a

friend there who, you know, that was a

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time where the market was gonna be on your

mind regardless if you intended it or not.

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And uh, I had a buddy there that traded

options, you know, really nothing too

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sophisticated, but he got me into that.

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So, interestingly enough, I started with

my foray into the markets by trading

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options, but not only that, but from

selling options and selling premium,

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which is usually kind of backwards 'cause

I think most retail get into it as way

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of speculative leverage and having big

payouts and lotto, so on and so forth.

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So I got my start with that.

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Again, nothing really sophisticated.

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I was just selling, you know, randomly

selling, put options on various

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symbols, whatever it was, you know,

on mad money, whatever Jim Cramer said

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that would come, come to my attention.

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So again, nothing really

sophisticated, uh, was just

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doing that for a number of years.

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It was really around 20 17, 18 that I

found more, I don't know if it's books,

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but it was like online communities,

online kind of options, education,

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where I started to try and be a little

more systematic again with that kind of

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engineering and math background and trying

to do something that's more repeatable.

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And probably a couple years later,

and, and this was the time where I was

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kind of accelerating my own learning

curve, but, around:

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you know, things were going well and,

and I got the confidence to launch my

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first, private options based hedge fund.

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Nothing really big, no small shop.

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Uh, that went well.

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a couple years later, 2021

launched the second one.

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We can talk about why two and the

differences, so on and so forth.

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But, um, along the way I've,

I've always been kind of.

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Still found myself associated with

toward the retail community because

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that's kind of where I got my legs.

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And I still collaborate and communicate

with a lot of people in the retail

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community through online groups.

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I have my own podcast, which is

sort of a focus on retail education,

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but with a focus on options.

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But lately has also grown

into not just like options and

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strategies, but more about portfolio

building, ensemble methodologies.

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I had people like Cory on the podcast.

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I had Andrew Beer talking about

trend following and ETFs and how

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to utilize that to build your book.

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I think that's some topics

we may touch on as well.

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so that's all kind of been going on

and that's been the last few years.

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Uh, and that kind of catches you

up to where I am today, I guess.

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Adam Butler: Yeah, that's great.

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So why don't we get into

why the two different funds?

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David Sun: So originally,

my first fund had.

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Kind of a simple mandate.

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And it was the idea of, and actually

it's funny, it was return stacking.

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I know that's a term,

kinda a buzzword lately.

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And it was a simple concept of if I

can take, you know, buy and hold the

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market right, get my pure beta exposure,

well, options are an instrument which

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you can trade a margin so you're, you

don't have to have cash in the account

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If you have equities, those equities

are marginable and you can basically

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overlay an option strategy on top of that.

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So the idea was just to get a pure

beta exposure and trade varying

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option strategies to generate,

you know, some marginal, couple

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percent alpha for instance.

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And if you can, consistently outperform

the market, 'cause you're stacking that

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little bit of alpha on any given year,

you're not gonna beat it by very much.

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But over time you let

that compound, right?

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A 10% keger versus a 12% keger after

10 years, it's pretty meaningful.

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So that was kind of the original idea.

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And then throughout the, the few

years after that fund was launched,

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we were always like investigating

and developing new strategies,

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looking at different tenors.

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You know, in the beginning was treating

a lot of weekly options out seven days,

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we explored forty-five days, 90 days.

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And we start going the other way,

going shorter duration, two to

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three days overnight basically.

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And of course now zero DTE is kind of the,

the buzzword in the last couple years.

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So we, we did a lot of intra - basically

intraday, zero DTE options trading.

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And the interesting about zero DTE is

the fact that it's intraday, right?

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So there is no, there,

there's no overnight exposure.

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You go flat, by the end of the day.

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And so, there was, some demand

from existing investors and also

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new prospects for a focus on

trading just zero DTE strategies.

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So.

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My now partner who then wasn't partner,

but my business partner who I launched

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the second fund with, he basically,

he's sort of the, the tech guy.

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so he built the, the backend automation

for us to scale up trading pure zero DTE.

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And we spun that out and just made

a separate product, separate fund.

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So it was, the focus was zero DTE.

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And so that was the reason.

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So you kind of get a

little different flavor.

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with the zero DTE, no overnight

exposure, you can kind of keep the, the

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volatility of your portfolio very low.

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There's no equity holdings,

there's no holdings.

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It's just we're in t-builds

basically overnight.

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So that was kind of the reason and

fundamentally the difference in

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why that second fund came about.

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Adam Butler: So the Zero DTE, you know,

other than following the flows of the Zero

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DTE phenomenon, you know, I haven't really

done much digging into exactly what kind

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of strategies you employ at that tenor.

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So is that something

you can go into at all?

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Like just in general, what kind

of, or maybe just what kind of

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strategies do people in general

deploy at that short timeframe?

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David Sun: So I don't know

how you qualify in general.

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'cause we're not a large, you know,

institution and I know now there's

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institutional level ETFs and I, I guess

they're doing cover calls or whatever.

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We're kind of, uh, put underwriting.

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but what we're doing, and the funny

thing you asked about that is it's

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actually the similar kind of strategies

that we've run at Higher Tenors.

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It's just at zero DTE.

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Not to be too reductive about

that, but the idea is you're just

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trading a shorter duration, right?

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So a simple strategy we might have

is just, you know, a naive one, and I

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mentioned this on Corey's podcast, we're

just naively selling puts and calls.

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When you say put and call and we spread

'em off, let's call it an iron condor.

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But the idea is, I think sometimes

these kind of strategies get a bad

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rap because people think you just sell

iron condors, leave it like it is,

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and you're quote unquote, harvest the

VRP and you don't have to manage them.

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Well, we know that that's not the

case because if, and especially

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recently realized volatility has

been quite a bit above the implied,

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so you can get easily blown out.

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So we're gonna manage the risk, you know,

take the positions off, you know, stop

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out at a certain percent loss or whatever.

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But the main difference is when

you're trading zero DTE, you can get

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a lot of occurrences because number

one, there's expirations every day.

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So that gives you, you

know, 250 trading days.

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But number two, you know, we can kind

of deploy positions throughout the day.

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So we're t tranching into, and I

guess on the surface it almost just

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looks like deploying iron condor,

re-centered every, . You know, let's

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call it 30 minutes for instance.

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And because the market's moving around

now, it's a little bit more than that.

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But the idea is when you have so many

occurrences, you know, people that deal

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with options and probabilities, you know,

there's a concept of law of large numbers.

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And when you can trade this many

occurrences, you can really get that

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law of large numbers to play out.

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So if you can trade, you know, a

dozen times a day, then you multiply

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by 2 52, how many samples is that?

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And so it's really about being

able to trade very small positions

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and having a lot of occurrences so

that you can kind of really control

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the volatility in the drawdowns.

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Adam Butler: Yeah, I mean it's um,

fundamental law of active management.

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You've got an edge and you've got

breadth, and one of the ways that

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you increase the breadth is by

trading more frequently, right?

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So just having a much larger sample size

can really smooth out the return profile.

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When you're observing it on a daily

timescale and you're, you know, you're

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trading eight to 15 times a day, then

that adds up to a lot of extra breadth

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Are.

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David Sun: I think that's one of the

reason I was gonna say, I think that's

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one of the reasons some of the, uh,

institutions got into, you know, 'cause

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they used to do cover calls but now

they can trade on a much shorter basis.

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And that also kind of gets rid of

some of the path dependency associated

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with trading longer duration

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options.

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Adam Butler: Yeah, and

it's, it's nice there.

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There are benefits to

not holding overnight.

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There's some downside too,

but, but there's some benefits.

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Are you just primarily

trading index options

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David Sun: training, we, we are

training exclusively SPX and X options.

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Um, I, I think they've introduced, I think

QQQ just came out with zero DTE and of

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course technically any option has zero

DTE, but just on the day of expiration,

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so the frequency may not be as much.

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So I know, you know, especially with

like all, all the stuff with the

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meme stock hysteria, I'm sure there's

people kind of training the zero

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DTE lotto on, on Tesla or whatever.

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But yes, for us we we're focusing

primarily or exclusively on index options.

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S&P,

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Adam Butler: And there's

plenty of liquidity.

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Like could a large player employ the same

strategies that you're, that you're using,

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or would they have to do different things?

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David Sun: think it depends

on what you mean by large.

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So for us, part of the reason we like to

tranche into entries is actually because

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it makes it so each trade is smaller.

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Fundamentally we're not

trading in large blocks.

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and even.

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The way we manage the strategies

and we kind of do little tricks

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to, to kind of plan and do that.

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For instance, when we manage risk, right?

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Normally you might think of a position,

okay, if I got in for a let's say I sold

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this option for a dollar credit, right?

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And I'm trying to exit at $3, which is

a $2 loss, 200%, well, we might kind

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of adjust that a bit and split that up.

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Part of it gets out 150%, part of it gets

out at 200%, part of it gets out at 250%.

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The analogy I use is you're building

three fire exits instead of one, right?

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So anything we can do to

kind of push that liquidity.

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But to kind of answer your question

more directly, we might be per trade,

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you know, a couple dozen contracts.

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Now that sounds small, but we're doing

lots of trades, so I, I don't think

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we've ever really pushed, like you can

watch the tape and sometimes you'll

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see these trades, 500 contracts, a

thousand contracts go through, which

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maybe at a one-time basis, that's fine.

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There's a lot, there's a lot of

liquidity now, I think with the

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market makers, you know, coming

to, to provide that liquidity.

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But if we suddenly had to, you

know, pull thousand lots in rapid

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succession, I don't, I don't know.

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I don't know, nor do I necessarily

wanna find out because once you find

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out, you know, usually something,

not, something bad is happening.

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Adam Butler: Yeah, right.

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I mean, when I think of large, I think of

sort of a, an institutional investor with

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a few hundred million in their management.

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I'm just wondering what proportion

of their book they could trade

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at that, at that timeframe.

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I mean, obviously you, you know, you're

trading SPX options, so I'm, you know,

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I'm sure there's plenty of liquidity,

but, it comes and goes, as you say, right?

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Like the conditions will

dictate the amount of liquidity

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that's, that's provided.

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And, um, so I guess is.

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David Sun: Makes sense because, not

necessarily, but what I wanna point out is

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when you say conditions, that, that makes

sense because it's always getting into

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the trade is not, not a problem, right?

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It's getting out.

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And if somehow there's, you know, and

everyone's kind of waiting for the

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next shoe to drop when the next kind

of, they call it Gamma-geddon, right?

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Because of all, all of

the, the amount of volume.

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Now, if, if there's a sudden move

and it's one sided and we gotta

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close out all the positions on

one side, that's a lot different.

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Yes.

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It's nice to be able to tranche in

over time, but then if you had to pull

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everything out, you know, and we've

traded through Covid for instance, and

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even then the market was fairly orderly.

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there were some times when the spreads

got kind of wide, but I don't, I

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haven't lived through like, or I've

lived through, I didn't trade through,

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like for instance, the flash crash

situations where market makers pull all

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the liquidity and you know, that's, We

have some contingencies for that as well.

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But you know, that that's not

something I necessarily look

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forward to, uh, to witnessing again.

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Adam Butler: And you know, one of the

things that's the Zero DTE's have gotten

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a lot of press for is the reflexive

nature of, the leverage at that time

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scale and how there's potential for

the options players to push around

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the, the cash deltas, the Delta ones.

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So do you

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track that at all?

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Like, are you tracking the,

directly, the participation of,

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of other traders and is that.

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Impacting the way that you take

positions throughout the day

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David Sun: We've started to

look a little bit at that.

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Um, there's even some off-the-Shelf

products available to retail that

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they don't provide the actual direct

dealer positioning, but they could

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give some signals that, Are based on

how they track the dealer positioning.

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And we've done some simple modeling.

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We bought some data, but it's hard to

really find some conclusive signal.

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generally what we do, beyond.

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So in the beginning I mentioned there's

some kind of just naive strategies

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where there's no signal, you're just

selling premium and you have kind

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of basic risk management, but you're

generally just trying to harvest

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that, that VRP again, it's sometimes

it's there, sometimes it's not.

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Especially, you know, lately

market's been moving a lot intraday.

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Adam Butler: and you're, you're

obviously not, you're not trying to

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harvest the premium when the, when

the premium is not there or when the.

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vol relationship is inverted,

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David Sun: so

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Adam Butler: or you just selling

the condors instead of buying

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David Sun: I, so I don't think we can, I

don't think we can necessarily predict.

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When we, we've looked into it, we haven't,

we don't have any live strategies based

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on sort of predictions of IV over RV.

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What we've done recently, a lot of our

strategies that we've introduced signals

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is more about trends and directionality.

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And this actually plays into some

of the stuff I learned from the

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episode of yours on Corey's podcast,

which is, when you look at a

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trend, well what is a trend, right?

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To some definition, yes, if

it's going up, I wanna buy, if

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it go down, I wanna sell it.

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But how is that measured?

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How is it defined?

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And some people can look at moving

averages, you know, this moving

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average cross over that moving average.

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Okay?

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That means it's, it's a plus sell

puts 'cause it's going long or

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sell calls because it's going down.

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But what we do is we look at different

ways to kind of perceive or try to

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predict where a market might be going.

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So there's there a couple ways.

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One is we can look at the rate

of volatility contraction.

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So if the market's going down.

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The call premiums are decreasing.

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If we see call premiums at a certain

part of the surface contracting

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at a certain rate, that will be

our signal that it's a downtrend.

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And so when we deploy the

premium, we'll lean short we'll

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sell calls instead of puts.

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Conversely, if put premiums are

expanding, that's another way to

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indicate market's probably going down.

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And yes, they're mirror images

of each other, but they're not

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gonna react exactly the same.

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So looking at call contraction and

looking at put expansion can give you

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the same type of signal, but the timing

and flavor will be a little different.

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And so what we've done is we have

multiple strategies that are sort of trend

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following and they'll kind of lean our

exposure long or short, but they all kind

337

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of end up at slightly different timing.

338

:

So if we look at the plot to

equity curves or kind of the

339

:

the return or the time series.

340

:

It isn't a perfect correlation between

the various strategies, even though

341

:

they're all quote unquote trend following.

342

:

And so that's kind of one

way we've used that concept.

343

:

And we tend to, whenever we're researching

and developing new strategies, rather

344

:

than trying to overfit one and trying

to be like, okay, well this, this

345

:

month we did bad 'cause of this,

so what do we do to address that?

346

:

Right.

347

:

And we all know that's kind of a,

futile, um, it, it's not gonna end

348

:

well because it never matches exactly.

349

:

So usually whenever we find a new signal

or something that shows good expectancy,

350

:

we'll just add it to the ensemble

and size everything down accordingly.

351

:

And I say size down because for us, one

way to vol target, if you will, is just

352

:

to control how much premium we're selling.

353

:

It's interesting because.

354

:

If I sell X amount of premium and

I've determined I'm only gonna take a

355

:

loss, equal to a certain multiple of

the credit I've sold, Then the credit

356

:

I sell is a proxy for how much risk

and practice I'm willing to take.

357

:

And so we call it the way we view a

risk budget, we call it a credit target.

358

:

And so we will basically allocate

how much premium we're willing to

359

:

sell to the various strategies, and

then we kind of weight them that way.

360

:

And so this idea of adding different,

you know, expanding the ensemble

361

:

and adding as many low correlated

strategies as possible, and using

362

:

that as a way to increase the, the

sharp ratio of the overall book.

363

:

Adam Butler: Yeah, yeah, I got it.

364

:

You're not, you're not trading

each of the new strategies that you

365

:

add with just adding new, new risk

to, to your risk budget, right.

366

:

You're, you're averaging 'em all together

and trading the fixed premiums that

367

:

you, that you want to trade, right.

368

:

David Sun: Yeah, that's, that's right.

369

:

And, and I guess I kind of

conflated two different issues.

370

:

One was the fact that how we add

strategies, but the other one was the fact

371

:

that we add, as in we add to the book, but

kind of bring everything else down because

372

:

we're trying to kind of have a, a set

fixed risk budget across the entire book.

373

:

Adam Butler: right.

374

:

Got it.

375

:

And I'm curious, does the, do the

signals that you're using, for

376

:

example, the premium contraction or

premium expansion inputs or calls,

377

:

does that translate to other tenors?

378

:

Like is that a useful signal

at 30 days or 90 days?

379

:

Have you, looked whether that's a useful

signal for delta ones to identify trends,

380

:

or is are they very specific to, you

know, zero DTEs or very short-term tenors.

381

:

David Sun: So the specific ones that

I mentioned that we use, we haven't

382

:

explored that for other tenors.

383

:

So the answer is, I'm not sure,

just honestly, like there's so many

384

:

places to look for signals and, and

it just like never-ending research.

385

:

A lot of time our, our research

is more just incidental.

386

:

Like, oh, this happened

and this caused a loss.

387

:

I wonder what happens um, if

we did this, you know, X, Y, Z.

388

:

And whereas most people are just,

can only speculate, you know, we

389

:

fortunately have the, the testing

infrastructure to basically, if you

390

:

can think of it, we can test it.

391

:

Right?

392

:

but there's, the answer is, I, we

haven't really looked into that.

393

:

But the other point about the Delta One,

we have explored and some of our signals

394

:

have been applicable to Delta One.

395

:

Now, one issue though is to make

the P&L kind of meaningful, you

396

:

have to trade in fairly large size.

397

:

And when I say size, I don't

even mean a lot of leverage.

398

:

Like if, if you trade at one x, you know,

notional exposure to your NAV Market

399

:

goes up 10 bips, you're up 10 bips.

400

:

I mean, it doesn't sound like a lot,

but we try to keep our daily, you

401

:

know, P&L pretty tight as it is.

402

:

And so it just hasn't, we haven't

found a way to do it in a way where

403

:

we're comfortable with the set.

404

:

Delta one is Delta one, right?

405

:

It it's very impactful.

406

:

So if you're wrong, you

have to fix it right away.

407

:

And then the execution really

matters because it's that, well,

408

:

like I said, Delta one, so it's,

it's gonna be that much faster

409

:

when it moves against you.

410

:

Adam Butler: Yeah.

411

:

I mean, trading Delta ones is just a

very different, it's funny talking to,

412

:

to options guys, because, the Headspace

is just completely different, right?

413

:

Like you're, you put a bet on, typically,

if you're running institutional style

414

:

or systematic style options strategies,

then you have relatively fixed risk

415

:

when you enter, enter the trade.

416

:

Right?

417

:

Whereas, you know, trading Delta ones,

even if you've got stops, you still, you

418

:

know, you on average may have relatively

fixed risk, but every now and then

419

:

you're gonna get, you're just gonna

get hit with, with something getting

420

:

blown through your stops, or market's

gonna get halted or something like that.

421

:

Right?

422

:

Like it's, very different.

423

:

Maybe just a take a minute

to explain that, right?

424

:

Because I think for people who don't trade

options, the idea of being able to very

425

:

precisely shape the risk you're taking,

may be foreign and also interesting.

426

:

David Sun: So.

427

:

As you said with, with Delta One,

basically market goes up, you make

428

:

money, market goes down, you lose

money as assuming you're long.

429

:

Right?

430

:

And with, with options, there's a

lot of ways to, the way we kind of

431

:

looked at, and I mentioned the term

kind of constructing the risk profile.

432

:

So we really focus on just that

kind of risk reward, that ratio.

433

:

So if we take a simple example, if I'm

willing to, you know, risk two to make

434

:

one, and cause if you sell an option for

a dollar, your max upside is a dollar.

435

:

and we know you can lose many multiples

of that, but let's say I choose to

436

:

cap it off at a two-dollar loss.

437

:

So this is a plan risk two to make one.

438

:

So if you fix that, then your breakeven

win rate, we're not counting for

439

:

commission slippage, et cetera, et cetera.

440

:

It's, it's two-thirds, right?

441

:

So if you win two out of

three, you're gonna breakeven.

442

:

And so.

443

:

Again, simply stated, if you win more

than two-thirds, you'll make money.

444

:

If you lose less than two thirds,

sorry, if you win less than two

445

:

thirds, you're gonna lose money.

446

:

And the rest is just depending

on where that win rate is.

447

:

And the idea is with like, if I were to

use the same again, a lot of people focus

448

:

on the hit rate or the win rate, but they

kind of lose sight of that risk profile.

449

:

If I were to sell, I don't

know, an at-the-money put

450

:

option, We know at-the-money is

50, deltas about fifty-fifty.

451

:

Whether or not you win or lose, and I can

set my stop at, two x or whatever, your

452

:

win rate's not gonna be super high, right?

453

:

It's probably gonna be

a little bit above 50%.

454

:

And so that's gonna be below

that break-even win rate.

455

:

But if I take that same idea, I could

sell a 40 delta out of the money, sell

456

:

a 30 delta or 20 delta or 10 delta at

some point consistently at that Delta,

457

:

your win rate effectively over enough

samples will be above, whatever you

458

:

need to be at a positive expectancy.

459

:

Right?

460

:

Again, assuming risk two, to make one,

you can do different kind of profiles.

461

:

Now there's a trade off because if I start

selling really wingy stuff or sell nickels

462

:

and dimes, it's it's not very, number

one, it's not very margin efficient.

463

:

Because if I'm selling nickels and dimes,

sure I have a ninety-nine percent win

464

:

rate, but then the commissions and fixed

costs is gonna eat up a lot of that.

465

:

And not to mention if you get hit

with a real black swan, right?

466

:

Those things explode and you're gonna

lose many dozens, hundreds of times.

467

:

Right.

468

:

So there's kind of that, like the

469

:

Adam Butler: So just to, just

to decipher for people, right?

470

:

So you're trading the tails,

you're trading very low deltas, and

471

:

you're getting lots of leverage.

472

:

and your win rate's extremely high because

you're, you're in the tails, which means

473

:

that typically the returns, if you're,

if you're in the, first percentile

474

:

tail, then you expect the returns are

not gonna be in that tail 90 days.

475

:

Ninety-nine days out of a hundred

kind of on average, right?

476

:

So you're gonna collect, you're gonna

win Ninety-nine days out of a hundred.

477

:

But at the same time, you've got

a lot less liquidity when you're

478

:

trading out in the wings, right?

479

:

Like it's just, so you've gotta

overcome a lot greater trade slippage.

480

:

You may not be able to put the same

position size on, or if you, if you

481

:

do want to put the same position size

on, you're gonna pay more from it or

482

:

for it in terms of liquidity, right?

483

:

Sourcing that liquidity.

484

:

And at the same time, when those,

when you're in that one percentile

485

:

or ninety-nine percentile tail,

typically you're no longer in a normal

486

:

distribution that you understand.

487

:

And that's when that leverage

can really work against you.

488

:

Is, did, did I kind of cover all

the, Dimensions that you were trying

489

:

David Sun: You, you

covered all the gotchas.

490

:

The reason why we don't sell the

super, the tails or the wings and the

491

:

exact reason why people who say, Hey,

I sell options sometimes, get the eye

492

:

roll because, I, I think the people,

there's stories of the people, the

493

:

funds that blow up or of a leverage.

494

:

And a lot of times it's because

they're just selling the tails.

495

:

Not just selling the tails,

but having no risk management.

496

:

But uh, going back to the earlier

example, we found, you know, in some

497

:

strategy it depends, but somewhere in

the kind of the 10 fifteen-ish delta

498

:

range, you get a nice balance between

being able to, you sell the premium

499

:

and you have, you know, your stop loss

or your profit take or whatever it is.

500

:

And over enough occurrences,

and again, you've defined

501

:

your risk and practice risk.

502

:

Two, the make one, for example, that

win rate, it's gonna fall, you know.

503

:

Somewhere in the

eighty-five percent range.

504

:

And one other kind of metric that

we kind of look at is, I, I call

505

:

it premium capture rate or PCR.

506

:

And it's just a proxy for expectancy.

507

:

It just means, because I don't expect

to collect and keep every dollar or

508

:

premium myself, Sometimes I collect

a hundred percent, if it expires, I

509

:

collect 60% of my profit take, or I

lose 200% if I had to stop after all

510

:

of that, whatever you net on average,

you know, 10%, 20%, you if your PCR is

511

:

25%, it's basically you're averaging

25 cents on a dollar that you sell.

512

:

And for certain tenors, you can get

a, fairly predictable long-term.

513

:

That's the stress long-term.

514

:

PCR, right?

515

:

There's gonna be sequence risk and in

certain times where just everything gets

516

:

stopped down and you lose it in clusters.

517

:

But having that kind of probabilistic

approach and idea, again, the focus being

518

:

on architecturing, that risk profile.

519

:

Not so much necessarily trying to

maximize win rate, but really trying

520

:

to maximize expectancy by keeping in

mind where your kind of guardrails

521

:

are for your, your, trade structure.

522

:

Adam Butler: Gotcha.

523

:

And are, are you engaging in any, um, of

the other kind of more traditional, option

524

:

strategies, like dispersion trading or

correlation trading, anything like that?

525

:

David Sun: We, we aren't explicitly,

but we may be kind of inadvertently in

526

:

the sense of we have one strategy where,

and this, this kind of interesting

527

:

segue into how to hedge these things.

528

:

because normally another reason why

selling premium gets a bad rep because

529

:

the jump or gap risk because you can,

yes, it's nice to say I want to get at

530

:

two, two x or whatever, but whatever does

a black swan, whatever's the gap, right?

531

:

So those are the things that kind of

blow people up and something that we've

532

:

explored, which is kinda interesting.

533

:

It's selling shorter data options

that's so on each day, right?

534

:

I can sell on Monday, sell

the Tuesday option Tuesday.

535

:

So one DTE, right?

536

:

Overnight or Friday you sell the

weekend, you sell for Monday.

537

:

So you're selling a shorter data option.

538

:

But we've had to explore hedging them

with kind of longer dated, structures.

539

:

So if I'm selling like a one DTE, I

might be hedging with like a seven DTE,

540

:

a longer data straddle, uh, for instance.

541

:

And that's just kind of one example.

542

:

And we're trying to uh, I wanna try

to answer that question correctly.

543

:

'cause when you're, when typically

we talk about dispersion is

544

:

that, that's kind of more like.

545

:

Selling index.

546

:

Uh, I dunno if I get it backwards

selling index and buying like, individual

547

:

symbol vol or the other way around.

548

:

That's, so we, we don't do that kind

of dispersion, but I think what we're

549

:

talking about is more like trying to

sell in one tenor and taking advantage

550

:

of the overpricing in another tenor.

551

:

Um, so quick example of the

hedging that I mentioned.

552

:

You would think that, for instance, if I'm

selling an out-of-the-money option, right?

553

:

And I'm trying to harvest

the VRP in that structure.

554

:

If I now tell you I'm gonna hedge it,

but then at-the-money structure, you

555

:

know, just to buy an at-the-money long

straddle, it kind of sounds kind of

556

:

impossible because I'm, I'm buying

something that's at the face value

557

:

gonna be a lot more expensive, right?

558

:

But what we found is in certain cases,

if you buy at-the-money straddles.

559

:

And just seven DTE for instance, over

a long, you know, long enough period.

560

:

You know, we looked over, you know, 10,

11 years that straddle is gonna have

561

:

a really kind of wild return profile.

562

:

It's gonna lose money most of the

time 'cause we're not in these kind of

563

:

high realized volatility environments.

564

:

But then you hit pockets like Covid or

:

565

:

And you get really paid.

566

:

Now that's really lumpy of a return

curve, because it's gonna be losing money.

567

:

It's gonna be gaining money.

568

:

But interestingly enough, over the last

11 years, it's about a net scratch.

569

:

Now that's kind of coincidental.

570

:

I, I understand there's a lot of path

ency, but over the, from like:

571

:

to end of 2023, buying the straddles

kind of happens just to be zero.

572

:

'cause you lost a bunch

and then you made a bunch.

573

:

Now it's a wild curve,

but it ends up to be zero.

574

:

But if you think about it again.

575

:

I've just said that buying the straddles

ended up being about a zero expectancy,

576

:

but if the straddles, those weren't my P&L

generating structure, those were my hedge.

577

:

So if they're zero expectancy,

close to zero, that's not that bad.

578

:

Right?

579

:

Because now I've, I have a

structure that can kind of fully

580

:

protect these short outta the money

options, whereas it actually doesn't

581

:

cost me as much as you think.

582

:

So there's kind of ideas

like that that sort of were

583

:

Adam Butler: Well, buying straddles

is highly margin efficient too, right?

584

:

David Sun: Yes.

585

:

So, So there's, there's like

586

:

Adam Butler: It doesn't cost you much.

587

:

David Sun: numerous benefits to

doing this versus the traditional.

588

:

Yes.

589

:

Okay.

590

:

I sell my option.

591

:

I go buy a wing or I buy, a ratio.

592

:

I buy two more to try.

593

:

Those are more of like a Vega hedge.

594

:

If, if something really there's

a shock, those can expand.

595

:

But this idea of applying an at-the-money

structure that's kind of longer dated, I.

596

:

It's, it's sort of turned our

thinking of hedging and how to

597

:

protect these structures around.

598

:

So that was kind of a, a kind of

exciting avenue of, of exploration.

599

:

Adam Butler: Okay.

600

:

So the idea is, I mean, you're, you're

selling, you're selling vol as the

601

:

core strategy and you're buying vol

at a different tenor in a different

602

:

way as your, as your hedge over time.

603

:

On average, how far back do you think

it's relevant to run your, your kind of

604

:

back testing of your, of your approach?

605

:

David Sun: So we have data, we, we,

cally use data back to around:

606

:

Before that, it's a little dirtier,

the data and it's just less samples.

607

:

but also with the advent of daily

tions, you know, since May of:

608

:

It seems like there's been a bit of a

structural change just because of the

609

:

market participants and their behaviors.

610

:

So I think it's a good time for

us to kind of, we're, we're always

611

:

updating the back test, you know, as

we, we have like a data subscription

612

:

so we can keep updating the test to

see if our live trading matches it.

613

:

But I would say at some point I would

to give more credence to post-:

614

:

or post-2022, just because Covid really

kind of reset expectations and just the

615

:

way the volatility surface reacts and

it'll probably take another decade before

616

:

it goes back to kind of pre-COVID levels.

617

:

It.

618

:

I think it was like from 2008 we had

this big reset and then complacency kind

619

:

of came in and compressed everything

up until like twenty-twenty, and then

620

:

again everything kind of blew up.

621

:

so I don't know if that's like.

622

:

The perfect answer, but for us, 2020,

no,:

623

:

But I do also separately look at kind

of post:

624

:

there's kind of meaningful change.

625

:

And sometimes there isn't.

626

:

I would honestly think the, the

bigger change, which isn't surprising

627

:

is that because we're showing short

data options, there's just been more

628

:

opportunities as in literally more trades

in the recent years, which, you know,

629

:

I think makes the data more reliable.

630

:

Adam Butler: Yeah.

631

:

Right.

632

:

It's, it is a tricky thing in, finance,

this idea of non-stationarity, right?

633

:

Where you've got, you've got a

regime, you've, you've run all

634

:

your testing against this regime.

635

:

90% of your data comes within

a certain regime, and then, you

636

:

know, you're always wondering,

has something structural changed?

637

:

Right.

638

:

And I, you know, I think it's fair

in your space, and I'm sure to a, to

639

:

some degree in markets in general.

640

:

I.

641

:

to say that there is a change in,

in character over time, and they're

642

:

gonna affect those changes are

gonna affect different types of

643

:

strategies, more or less than other

different types of strategies.

644

:

And, you know, sort of continues to

lean in the direction of trying to

645

:

diversify the strategies that you

run and the sources of risk that

646

:

you're harvesting returns from,

to the greatest extent possible.

647

:

So, I mean, is that something

you guys have considered?

648

:

I mean you, I understand you

sort of started with this kind

649

:

of return stacking approach.

650

:

have you continued to look for more

sources of risk to harvest or, have

651

:

you been sort of content to continue to

play within your, vol selling sandbox?

652

:

David Sun: So we have, I, I think we're

still primarily, predominantly kind of

653

:

in that vault, selling sandbox, but, on

the zero DT side, sometimes, depending

654

:

on the signal, we, we, we have a few that

are long vault, so we will occasionally

655

:

deploy just a small allocation to just

buying, you know, outright buy a putter

656

:

call and that can pay off because.

657

:

Again, there's been days where it's

moved multiple standard deviations

658

:

beyond the expected move and you get,

you know, I dunno if you remember top

659

:

of your head, but in late December

in:

660

:

where the market sold off like 60

handles in the last, uh, couple hours.

661

:

So, that was a nice payday there.

662

:

beyond that, the idea of, um, even that,

the idea that I just mentioned about

663

:

kinda hedging with the straddle versus

the typical buying wings or a ratio,

664

:

whatever, it's just more thinking about,

ways to, but yes, thinking of not just

665

:

short ball, but different ways to apply

long volatility strategies, as a way to

666

:

kind of provide another return stream.

667

:

But beyond that, one thing that we

have added, and part of the reason

668

:

I, you know, kind of follow you

and Corey and kind of the work you

669

:

guys did is the idea of adding.

670

:

trend following as kind of another.

671

:

It, it's uncorrelated.

672

:

We, we know that, so like typically people

talk about, you know, stocks, bonds,

673

:

and correct me if I'm wrong, but trend

following itself sometimes considered

674

:

like a, like a third asset class.

675

:

And so, we've looked at not, we

looked at, we have like, we allocate

676

:

to kind of a basket of these trend

following ETFs, you know, including

677

:

you guys, the one you guys have.

678

:

And, uh, it's been interesting

to follow that space and being

679

:

able to get that exposure.

680

:

and one thing I had mentioned, I

want to email you some topics to

681

:

talk about today, is the idea of how

something like that can even apply

682

:

at the retail level and specifically

why I think that's interesting.

683

:

And for nowadays, which is the

kind of the proliferation of like.

684

:

Products and exposures accessible at

the retail level because before, you

685

:

know, you could only get access to

trend following via like a mutual fund

686

:

or some kind of private hedge fund.

687

:

But having that liquid wrapper, and one

thing that's interesting is the ability to

688

:

get capital efficiency and kind of build

return stacking portfolios in your own

689

:

account, because you can hold these ETFs.

690

:

And whereas before I mentioned our

old model was buying that pure,

691

:

pure beta and stacking alpha, we,

we changed up the model for that

692

:

one front now is focusing more on

non-correlated as low beta as possible.

693

:

So actually the model transition to

where we, we got rid of the the market,

694

:

the traditional S&P index funds.

695

:

Now we have a basket of trend following

ETFs and we kind of stack these other

696

:

options, strategies, and really what the

drive to have as little beta as possible.

697

:

and what I found interesting is, the whole

premise of your return stack products,

698

:

right, is the capital efficiency.

699

:

And when you talk to, you know, I guess

as an advisor who was talking to a client

700

:

and why they should, you know, typically

the friction was they don't wanna sell

701

:

off their stocks or bonds or whatever it

is to make room for the trend following.

702

:

And that, and that's why you got

these capital vision building blocks.

703

:

Now as someone who's a self-directed

investor, haha the fact that you

704

:

can buy, for example, RSBT, which

is return stacked and is inherently

705

:

leveraged, but your brokerage can allow

that in and of itself is marginable.

706

:

And you can layer an option

strategy on top of that.

707

:

You, you're basically

triple dipping the capital.

708

:

So I kind of find that.

709

:

Pretty interesting and, and we

should caveat, you know, you

710

:

gotta do your own homework.

711

:

This is not kind of a recommendation

to leverage on top of leverage, but

712

:

the idea to, you know, now even as a

retail person, if you have portfolio

713

:

margin, you can buy T-bills, you can

allocate to trend following ETFs, then

714

:

you can layer these options strategies

on top of that and it can really create

715

:

something unique that institutional

grade leverage capital efficiency

716

:

that wasn't possible, a few years ago.

717

:

Adam Butler: Yeah, it's, it's funny

how once you begin to think in risk

718

:

space or you employ derivatives, then.

719

:

This whole idea of an expanded

canvas, just, I mean, it

720

:

becomes second nature, right?

721

:

Like the idea of you've got

a fixed amount of capital.

722

:

How can I put this capital to work

in as many ways as possible that

723

:

are, you know, mutually diversifying.

724

:

So I'm harvesting risk from

as many different sources as

725

:

possible that are hopefully not

correlated to the same risk factors.

726

:

In other words, you don't expect

them to react negatively to the

727

:

same financial or economic events.

728

:

It's, you know, how can I stack

as many of these different premia

729

:

into my portfolio as as possible?

730

:

Right?

731

:

And the whole idea of leverage is, it

doesn't even make any sense, right?

732

:

I mean, even once you go to where

you're mixing stocks and bonds

733

:

in a portfolio and you want to.

734

:

Have them effectively

diversify one another.

735

:

And you realize that stocks are so

vastly more volatile than, than bonds

736

:

for the most part, that, if I want to

have equal risk or if I want to have

737

:

them well diversified, I either have

to accept a really low volatility

738

:

portfolio that's mostly bonds, or I

can use all of the array of different

739

:

derivatives or products that underlying

them contained derivatives to expand my

740

:

canvas and, gain all of this, you know,

diversified access to all of these premia.

741

:

And the leverages kind of

washes its own face, right?

742

:

It, it becomes a trivial aspect

of that, of the whole approach.

743

:

The leverage is, is this, you know, four

letter word for for many retail investors.

744

:

Once you realize that you get, you really

want leverage to expand your opportunity

745

:

for diversification, not so that you

can take on more concentrated risk.

746

:

The leverage kind of fades away, right?

747

:

And then this return

stocking becomes so obvious.

748

:

David Sun: Yeah, I, I think, you

know, if the definition of leverage

749

:

is just your exposure on a notional

basis is above your NLV, then yes,

750

:

we're, we're all taking leverage.

751

:

But I guess it's sort of like a, kind

of loses again, like you said, the

752

:

opportunity set that's available if

you're simply just trying to expand

753

:

or avoid having that larger exposure.

754

:

But knowing that the exposure you're

looking for is non-correlated, right?

755

:

You're not looking to buy a bunch

of, you know, different stocks on

756

:

margin and having a concentrated

beta exposure, for instance.

757

:

Is that the point is you're trying to have

as many uncorrelated sources as possible.

758

:

Adam Butler: Yeah, yeah.

759

:

You're trying to generate

wealth over the long term.

760

:

You're not trying to get

lucky over the short term.

761

:

Right.

762

:

With this kind of, with, the leverage

that we're, we're endorsing for, you

763

:

know, this return stacking concept.

764

:

David Sun: And along the lines of

the return stacking, one thing I I, I

765

:

found kind of interesting, the way to

approach things is because when you're

766

:

investing, you know, there's this kind

of dichotomy between fully passive

767

:

investing, which is just buy in the next

fund, close your eyes, and on the other

768

:

side is, you know, staring at the screen.

769

:

Typical kind of day trader looking at

setups and, and fully active, but sort

770

:

of in the middle, like one step above.

771

:

Just allocating to S&P is a

permanent portfolio, right?

772

:

60 40 or Harry Brown, or Golden Butterfly,

whatever it is, you're, you're allocating

773

:

different assets, and you're gonna

rebalance them, but that's gonna provide

774

:

you some better risk adjusted return

than just having that one asset class.

775

:

Fully allocated.

776

:

And then above that is the idea.

777

:

So these are, you know,

what is an asset, right?

778

:

It could be stocks, bond,

gold, real estate, whatever.

779

:

But the idea is for us, when we talk

about a systematic option strategy, like

780

:

a put selling, you know, like I mentioned

earlier with the profit tag and the stop

781

:

loss, I see that as something that's

gonna be the same repeated occurrence,

782

:

the same mechanics over and over.

783

:

And when you repeat that the set

of mechanics over and over that

784

:

strategy is gonna have a sort

of a expected return profile.

785

:

We, we can kind of know what the return

over long term, what the volatility, what

786

:

the, you know, what the risk profile is.

787

:

Well, if you're gonna say that, I

mean the, the whole point of building

788

:

portfolios is, you know, gold is

gonna have a certain risk profile,

789

:

certain behavior, you know, stocks

are gonna have certain behavior.

790

:

And so this concept of

strategies as assets, right?

791

:

The fact that we're doing all of

these different strategies, it's

792

:

not like we're, you know, what,

what does active really even mean?

793

:

Right?

794

:

It's, I, I have this term I call like

actively passive investing, right?

795

:

What's to say?

796

:

I have a permanent portfolio of these

five assets, and one asset isn't just

797

:

this one systematic strategy that I run.

798

:

And so it, it doesn't necessarily have

to be like some super exotic concept.

799

:

The fact that we're trading options

trading derivatives, It's just another

800

:

way to build a portfolio basically.

801

:

Adam Butler: Well, yeah, I mean, in the

end you're harvesting your harvesting

802

:

an explicit risk premium, right?

803

:

I mean, and, you're, it's designed

strategy is designed to do that.

804

:

Some of the, alternatives.

805

:

It's a little harder to tease out

what the underlying risk premium is.

806

:

You know, trend following is one of these

strange ones where, really is a, has a

807

:

history of being phenomenal diversifier.

808

:

there's no clear risk that investors

who are investing in trend following

809

:

are accepting in return for their, um,

the long-term profile of, their returns.

810

:

but it has been so reliable over

time and there's such a reasonable

811

:

explanation for why the phenomenon

exists and persists that many still

812

:

sort of choose to, to have it.

813

:

But I think at the highest level of

abstraction, really, your, you've got

814

:

a bunch of strategies that are gonna

try to triangulate on harvesting vol..

815

:

You've got a bunch of, you know, in a way.

816

:

Straight up long only equities is

a way to harvest of all premium.

817

:

Right?

818

:

Does sort of prompt the question, why

not try to harvest of all premium in

819

:

a variety of other markets too, right?

820

:

Like, why aren't we, selling

vol on, on gold or on treasuries

821

:

or on oil or what have you?

822

:

And there are funds that do that, right?

823

:

And you've got this sort of

diversified vol selling, approach.

824

:

And then you've got other strategies

like global carry trend following.

825

:

Then you've got the stock

specific strategies.

826

:

So you wanna be sort of market

neutral but biased towards, you know,

827

:

cheap companies, over expensive,

biased towards lower volatility

828

:

companies, over higher volatility,

higher quality, over lower quality.

829

:

You can sort of, you see

how this canvas expands.

830

:

And you just want to have exposure

to as many of these different premia

831

:

or styles or factors as possible.

832

:

And then there's a layer above that

as you sort of say, which is kinda

833

:

the strategy that you're gonna

use to gain that exposure, right?

834

:

And for those who are a little more

sophisticated, you want to, you

835

:

want to do some due diligence there.

836

:

But the general concept is just expand

your canvas, gain as much, gain access

837

:

to as many different, style premia or

risk premia as possible, and be maximally

838

:

diversified at a risk tolerance that you

can accept over the long term, you know,

839

:

that allows you to hit your, uh, return

targets and your financial objectives.

840

:

And it really kind of

is as simple as that.

841

:

David Sun: And the interesting thing

about is being maximally diversified,

842

:

we found it doesn't necessarily have

to be maximally diversified into assets

843

:

that make the most return per se.

844

:

What you want really is assets or

strategies that lower volatility, right?

845

:

And can kind of, really minimize

the volatility drag that you

846

:

might incur from a large drawdown.

847

:

And one specific example is, that,

that concept I mentioned earlier about.

848

:

Hedging with a long straddle,

like who would've thought of that?

849

:

Right.

850

:

But, we have this term we call a a

zero EV or zero expectancy strategy.

851

:

And back in the day, like when we were

testing different things, we might reject

852

:

an idea just for having a low return.

853

:

But nowadays huh we'll be like,

Hey, let's, let's put that into,

854

:

and we have some spreadsheets.

855

:

We can kind of blend in strategies

and look at the overall book.

856

:

Like, let's see how that strategy

plays off the other ones we have.

857

:

Does it do well when the

ones we do don't do well?

858

:

Like we don't care if it makes money

long term, as long as it kind of makes

859

:

the bad days a little less bad, right?

860

:

Because every single time you can reduce

a drawdown, you're, you're incrementally

861

:

reducing that volatility drag.

862

:

Volatility drag is always

working against you.

863

:

So if you can inject something that

isn't necessarily P&L generating

864

:

and, and that's the idea of that the

shaman's demon, that there's sort of

865

:

this convergent property where you can

actually squeeze out more return if you're

866

:

rebalancing over time by the fact that

you're able to minimize that volatility.

867

:

I.

868

:

Adam Butler: Yeah, exactly.

869

:

I mean, the more bets you add to

the portfolio that are independent

870

:

and they're, exposure to different

risks, then the more you're able to

871

:

generate returns with lower volatility.

872

:

And that is just generally the

secret to long-term wealth creation.

873

:

But it's also very hard for many to stick

with because, you know, for example,

874

:

the last decade, any effort to diversify

away from cap-weighted US equities

875

:

has kind of made you look foolish.

876

:

Right?

877

:

Because, every diversifier for the most

part have underperformed, cap-weighted

878

:

equities as we've had this massive.

879

:

Concentrated, tech equity rally, right?

880

:

So, you know, it's just, you've

got these different kinds of risks

881

:

that people are willing to take.

882

:

And one of them is your

willingness to be meaningfully

883

:

different than your peer group.

884

:

If you see your peer group getting

very wealthy, very wealthy over a

885

:

short time horizon, that can be very

painful because nobody wants to be

886

:

sort of left behind or left out.

887

:

And so, you know, one thing I know

I've learned in my 20 odd years

888

:

in this business is that most

people just cannot stand to be

889

:

anywhere near mean variance optimal.

890

:

Like the whole idea of trying to maximize

diversification scale your portfolio

891

:

to generate, enough returns while

preserving that diversification and just.

892

:

Not really caring whether you're

gonna deviate from that one narrow

893

:

risk factor, which is U.S equities,

that is very very small percentage

894

:

of people can, can tolerate that.

895

:

So, you know, a, a dimension of

this equation is always, you wanna

896

:

have the most diversified portfolio

that the investor is gonna be

897

:

able to stick with long term.

898

:

Because the worst thing that

can happen is them bailing on a

899

:

strategy because it deviates too

far from their emotional benchmark.

900

:

and that almost always happens at

precisely at the wrong time, which

901

:

means that you capture all of that,

all of the risk from being different

902

:

without then harvesting those

extra returns from being different.

903

:

So there's always a balance there.

904

:

David Sun: Yeah, interestingly, what

you just mentioned was exactly why.

905

:

Our original model for the first fund

was the way it was, it was, okay,

906

:

let's get the beta, we'll just track

the market and we'll just make it

907

:

sort of a relative return kind of

product where if we can just kind of

908

:

incrementally get a little bit more yield.

909

:

although, uh, I, we changed that up at

the end of:

910

:

the best time, but because fundamentally

my, my kind of views of market risk

911

:

in general, not just us, but just like

the world and it's stocks gonna go up

912

:

forever and now end up going up another

year and then we'll see how this year,

913

:

you know, it's, it's only February now

and we're up like another four or 5%.

914

:

So it's, it's hard to say.

915

:

Obviously no one can predict,

uh, what, what's gonna change.

916

:

But, that that was the thesis behind

kind of breaking from that old model.

917

:

Just the trying to not, you

know, basically be concentrated

918

:

in, in just stock beta.

919

:

Adam Butler: Yeah, so are you

guys thinking about starting fund

920

:

number three or is there plenty

to do in funds one and two?

921

:

No need to branch out into strategies

that are sufficiently different to

922

:

justify the launch of a third fund.

923

:

David Sun: Um, I, I think right now it's

just gonna be funds one and two because

924

:

it was, originally the spin out to get

the zero DTE concept that that made sense.

925

:

But now between the two, there's so

much like places, avenues to explore

926

:

and, and really just kind of adding

more strategies to, uh, to the book.

927

:

Whenever we, like I said,

something new, we just kind of

928

:

scare everything down, add it in.

929

:

not to say there isn't a reason

for a third one, I, I guess it's

930

:

just some reason to kind of compel

us or, or some fundamentally new

931

:

mandate that we wanna pursue.

932

:

But, but at the moment, I, I

think that the two that we're

933

:

doing, have a sufficient, kind

of uniqueness between the two.

934

:

That, that, you know, people can kind

of choose which, which one they like.

935

:

Adam Butler: Yeah.

936

:

No, it's a, it's a very

interesting profile.

937

:

It is, it's amazing the number of

ways that people have come up with

938

:

to, harvest that volatility premium.

939

:

And it's enormously powerful.

940

:

I.

941

:

So David, um, where can people find you?

942

:

Do you have a public presence at

all that people can interact with

943

:

you or do you remain mostly private?

944

:

David Sun: Um, the funds

themselves are mostly private.

945

:

Like I don't typically name them,

you know, on air, on the podcast,

946

:

although if people wanna reach

out in, in private, certainly I'm

947

:

happy to kind of talk about that.

948

:

My, my public presence, as I kind of

alluded to earlier, was more on my

949

:

outreach and my podcast, uh, as far

as the retail education so that people

950

:

are curious and to learn about some

of the concepts and, and strategies.

951

:

Uh, the, the podcast is

called The Trade Busters.

952

:

So, and then my Twitter handle,

I think the one I reached out

953

:

to you is at the trade Buster,

although I guess that should be.

954

:

X now not, not Twitter.

955

:

but there, there's plenty on there.

956

:

And, and people like, again, uh, IE

even as sort of a, having gone to

957

:

the other, quote unquote other side,

I, I still sort of associate myself

958

:

with the, the, the retail crowd.

959

:

'cause that's kind of

where, where I got my start.

960

:

so I do the podcast and stuff

kind of as a way to reach out and

961

:

try to make my difference in, in

the retail education landscape.

962

:

Adam Butler: That's great.

963

:

I mean, I find that

podcasting also kind of, uh.

964

:

Keeps you honest, right?

965

:

Like, you're you're explaining

things to people means that you

966

:

need to make sure that you've got a

deep, fundamental understanding of

967

:

the things that you are explaining.

968

:

And, uh, as you search for things to

educate people about or to, to talk

969

:

about on the podcast, or for me,

it was always writing, papers and

970

:

blog articles, that sort of thing.

971

:

Then you're constantly learning,

you're climbing the learning curve

972

:

and exploring new dimensions of this

almost infinitely, curious domain

973

:

that we, that we occupy, right?

974

:

Um, no one's really solved the market yet,

so there's always new things to learn.

975

:

David Sun: Yeah, definitely,

976

:

Adam Butler: Well, it's been fantastic.

977

:

Really glad you reached out and, uh,

we had a chance to connect and do this.

978

:

Thank you very much for your

time and for sharing all of these

979

:

valuable insights and, um, I'm sure

there'll be an occasion for us to

980

:

do this again in the next few years.

981

:

David Sun: definitely.

982

:

And again, thanks, thanks for all

you've, all the impact you've had

983

:

on, on us and our, our own methods.

984

:

So, uh, can't say enough about that.

985

:

Adam Butler: gratifying.

986

:

Thank you.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.