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
If we see call premiums at a certain part of the surface
2
:contracting at a certain rate, that will
be our signal that it's a downtrend.
3
:And so when we deploy the
premium, we'll lean short, we'll
4
:sell calls instead of puts.
5
:Conversely, if put premiums are
expanding, that's another way to
6
:indicate market's probably going down.
7
:And yes, they're mirror images
of each other, but they're not
8
:gonna react exactly the same.
9
:So looking at call contraction and
looking at put expansion can give you
10
:the same type of signal, but the timing
and flavor will be a little different.
11
:Adam Butler: All right.
12
:Welcome David Sun, David,
um, private fund manager.
13
:I know you've been on Corey Hoffstein's
Flirting with Models podcast, and, uh,
14
:that's how you showed up on our radar.
15
:So welcome to Resolve Riffs.
16
:David Sun: Hey Adam.
17
:thank you.
18
:And, uh, it's a really privilege
to be here and I wanted to first
19
:mention, I don't know if you remember,
but, uh, you've actually been quite
20
:an inspiration to our strategies,
how we approach the markets.
21
:And it actually started with
your first episode on, Flirting
22
:with Models, the Ultimate Gift
and a very aptly named episode.
23
:It's honestly, that's been the, the
gift that I keeps on giving because the
24
:kind of ideas that, you talked about,
especially towards the end with regards
25
:to ensemble methodologies and just.
26
:Not having to focus too much on one
particular, you know, way of doing
27
:a strategy and just being able to
diversify and have a robust portfolio.
28
:that, that's been kind of the
fundamental premise from which all
29
:of our ideas, you know, move from.
30
:And again, you may not remember, but I, I
sent you a DM on Twitter maybe a year and
31
:a half, couple years ago, just letting you
know that I had really lashed onto that.
32
:So again, uh, it's
really come full circle.
33
:So like I'm
34
:Adam Butler: Oh, that's brilliant.
35
:Wow.
36
:Yeah, no, thanks for letting me know that.
37
:I think that's the one that
Cory and I recorded, in Banff.
38
:I think we were both at a
conference in Alberta and, uh.
39
:We sat at the bar and had a couple
of pints and, recorded that episode.
40
:And, uh, I remember that one
was a, that was a lot of fun.
41
:So I'm glad it had an impact.
42
:David Sun: Yeah, definitely.
43
:And I always share that cliff with a
lot of people who follow me on my own
44
:own podcast, and so on and so forth.
45
:So I think it's, uh, you've had
a, a lot of, uh, impact on, on me
46
:and the people who listen to me.
47
:Adam Butler: Oh, that's brilliant.
48
:Well, that's great.
49
:So, how have you translated some of
that into what you are currently doing?
50
:Maybe, so what are you currently
doing, and then how did you
51
:come to become a private
52
:David Sun: Okay.
53
:So I guess a little bit about my
background first, is that kind of Yeah.
54
:So I started off as, um, my
background's in engineering, so
55
:electrical engineering, and actually
I started off as a retail investor.
56
:I don't have any formal
finance background pedigree.
57
:Uh, I actually just got,
incidentally into options trading
58
:during grad school at Princeton.
59
:Right around 2008, 2009, there was a
friend there who, you know, that was a
60
:time where the market was gonna be on your
mind regardless if you intended it or not.
61
:And uh, I had a buddy there that traded
options, you know, really nothing too
62
:sophisticated, but he got me into that.
63
:So, interestingly enough, I started with
my foray into the markets by trading
64
:options, but not only that, but from
selling options and selling premium,
65
:which is usually kind of backwards 'cause
I think most retail get into it as way
66
:of speculative leverage and having big
payouts and lotto, so on and so forth.
67
:So I got my start with that.
68
:Again, nothing really sophisticated.
69
:I was just selling, you know, randomly
selling, put options on various
70
:symbols, whatever it was, you know,
on mad money, whatever Jim Cramer said
71
:that would come, come to my attention.
72
:So again, nothing really
sophisticated, uh, was just
73
: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,
75
:but it was like online communities,
online kind of options, education,
76
: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.
78
: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:
80
:you know, things were going well and,
and I got the confidence to launch my
81
:first, private options based hedge fund.
82
:Nothing really big, no small shop.
83
:Uh, that went well.
84
:a couple years later, 2021
launched the second one.
85
:We can talk about why two and the
differences, so on and so forth.
86
:But, um, along the way I've,
I've always been kind of.
87
:Still found myself associated with
toward the retail community because
88
:that's kind of where I got my legs.
89
:And I still collaborate and communicate
with a lot of people in the retail
90
:community through online groups.
91
:I have my own podcast, which is
sort of a focus on retail education,
92
:but with a focus on options.
93
:But lately has also grown
into not just like options and
94
:strategies, but more about portfolio
building, ensemble methodologies.
95
:I had people like Cory on the podcast.
96
:I had Andrew Beer talking about
trend following and ETFs and how
97
:to utilize that to build your book.
98
:I think that's some topics
we may touch on as well.
99
:so that's all kind of been going on
and that's been the last few years.
100
: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.
102
:So why don't we get into
why the two different funds?
103
:David Sun: So originally,
my first fund had.
104
:Kind of a simple mandate.
105
:And it was the idea of, and actually
it's funny, it was return stacking.
106
:I know that's a term,
kinda a buzzword lately.
107
:And it was a simple concept of if I
can take, you know, buy and hold the
108
:market right, get my pure beta exposure,
well, options are an instrument which
109
:you can trade a margin so you're, you
don't have to have cash in the account
110
:If you have equities, those equities
are marginable and you can basically
111
: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
113
:option strategies to generate,
you know, some marginal, couple
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:percent alpha for instance.
115
:And if you can, consistently outperform
the market, 'cause you're stacking that
116
:little bit of alpha on any given year,
you're not gonna beat it by very much.
117
:But over time you let
that compound, right?
118
:A 10% keger versus a 12% keger after
10 years, it's pretty meaningful.
119
:So that was kind of the original idea.
120
:And then throughout the, the few
years after that fund was launched,
121
:we were always like investigating
and developing new strategies,
122
:looking at different tenors.
123
:You know, in the beginning was treating
a lot of weekly options out seven days,
124
:we explored forty-five days, 90 days.
125
:And we start going the other way,
going shorter duration, two to
126
:three days overnight basically.
127
:And of course now zero DTE is kind of the,
the buzzword in the last couple years.
128
:So we, we did a lot of intra - basically
intraday, zero DTE options trading.
129
:And the interesting about zero DTE is
the fact that it's intraday, right?
130
:So there is no, there,
there's no overnight exposure.
131
:You go flat, by the end of the day.
132
:And so, there was, some demand
from existing investors and also
133
:new prospects for a focus on
trading just zero DTE strategies.
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:So.
135
:My now partner who then wasn't partner,
but my business partner who I launched
136
:the second fund with, he basically,
he's sort of the, the tech guy.
137
:so he built the, the backend automation
for us to scale up trading pure zero DTE.
138
:And we spun that out and just made
a separate product, separate fund.
139
:So it was, the focus was zero DTE.
140
:And so that was the reason.
141
:So you kind of get a
little different flavor.
142
:with the zero DTE, no overnight
exposure, you can kind of keep the, the
143
:volatility of your portfolio very low.
144
:There's no equity holdings,
there's no holdings.
145
:It's just we're in t-builds
basically overnight.
146
:So that was kind of the reason and
fundamentally the difference in
147
:why that second fund came about.
148
:Adam Butler: So the Zero DTE, you know,
other than following the flows of the Zero
149
:DTE phenomenon, you know, I haven't really
done much digging into exactly what kind
150
:of strategies you employ at that tenor.
151
:So is that something
you can go into at all?
152
:Like just in general, what kind
of, or maybe just what kind of
153
:strategies do people in general
deploy at that short timeframe?
154
:David Sun: So I don't know
how you qualify in general.
155
:'cause we're not a large, you know,
institution and I know now there's
156
:institutional level ETFs and I, I guess
they're doing cover calls or whatever.
157
:We're kind of, uh, put underwriting.
158
:but what we're doing, and the funny
thing you asked about that is it's
159
:actually the similar kind of strategies
that we've run at Higher Tenors.
160
:It's just at zero DTE.
161
:Not to be too reductive about
that, but the idea is you're just
162
:trading a shorter duration, right?
163
:So a simple strategy we might have
is just, you know, a naive one, and I
164
:mentioned this on Corey's podcast, we're
just naively selling puts and calls.
165
:When you say put and call and we spread
'em off, let's call it an iron condor.
166
:But the idea is, I think sometimes
these kind of strategies get a bad
167
:rap because people think you just sell
iron condors, leave it like it is,
168
:and you're quote unquote, harvest the
VRP and you don't have to manage them.
169
:Well, we know that that's not the
case because if, and especially
170
:recently realized volatility has
been quite a bit above the implied,
171
:so you can get easily blown out.
172
:So we're gonna manage the risk, you know,
take the positions off, you know, stop
173
:out at a certain percent loss or whatever.
174
:But the main difference is when
you're trading zero DTE, you can get
175
:a lot of occurrences because number
one, there's expirations every day.
176
:So that gives you, you
know, 250 trading days.
177
:But number two, you know, we can kind
of deploy positions throughout the day.
178
:So we're t tranching into, and I
guess on the surface it almost just
179
:looks like deploying iron condor,
re-centered every, . You know, let's
180
:call it 30 minutes for instance.
181
:And because the market's moving around
now, it's a little bit more than that.
182
:But the idea is when you have so many
occurrences, you know, people that deal
183
:with options and probabilities, you know,
there's a concept of law of large numbers.
184
:And when you can trade this many
occurrences, you can really get that
185
:law of large numbers to play out.
186
:So if you can trade, you know, a
dozen times a day, then you multiply
187
:by 2 52, how many samples is that?
188
:And so it's really about being
able to trade very small positions
189
:and having a lot of occurrences so
that you can kind of really control
190
:the volatility in the drawdowns.
191
:Adam Butler: Yeah, I mean it's um,
fundamental law of active management.
192
:You've got an edge and you've got
breadth, and one of the ways that
193
:you increase the breadth is by
trading more frequently, right?
194
:So just having a much larger sample size
can really smooth out the return profile.
195
:When you're observing it on a daily
timescale and you're, you know, you're
196
:trading eight to 15 times a day, then
that adds up to a lot of extra breadth
197
:Are.
198
:David Sun: I think that's one of the
reason I was gonna say, I think that's
199
:one of the reasons some of the, uh,
institutions got into, you know, 'cause
200
:they used to do cover calls but now
they can trade on a much shorter basis.
201
:And that also kind of gets rid of
some of the path dependency associated
202
:with trading longer duration
203
:options.
204
:Adam Butler: Yeah, and
it's, it's nice there.
205
:There are benefits to
not holding overnight.
206
:There's some downside too,
but, but there's some benefits.
207
:Are you just primarily
trading index options
208
:David Sun: training, we, we are
training exclusively SPX and X options.
209
:Um, I, I think they've introduced, I think
QQQ just came out with zero DTE and of
210
:course technically any option has zero
DTE, but just on the day of expiration,
211
:so the frequency may not be as much.
212
:So I know, you know, especially with
like all, all the stuff with the
213
:meme stock hysteria, I'm sure there's
people kind of training the zero
214
:DTE lotto on, on Tesla or whatever.
215
:But yes, for us we we're focusing
primarily or exclusively on index options.
216
:S&P,
217
:Adam Butler: And there's
plenty of liquidity.
218
:Like could a large player employ the same
strategies that you're, that you're using,
219
:or would they have to do different things?
220
:David Sun: think it depends
on what you mean by large.
221
:So for us, part of the reason we like to
tranche into entries is actually because
222
:it makes it so each trade is smaller.
223
:Fundamentally we're not
trading in large blocks.
224
:and even.
225
:The way we manage the strategies
and we kind of do little tricks
226
:to, to kind of plan and do that.
227
:For instance, when we manage risk, right?
228
:Normally you might think of a position,
okay, if I got in for a let's say I sold
229
:this option for a dollar credit, right?
230
:And I'm trying to exit at $3, which is
a $2 loss, 200%, well, we might kind
231
:of adjust that a bit and split that up.
232
:Part of it gets out 150%, part of it gets
out at 200%, part of it gets out at 250%.
233
:The analogy I use is you're building
three fire exits instead of one, right?
234
:So anything we can do to
kind of push that liquidity.
235
:But to kind of answer your question
more directly, we might be per trade,
236
:you know, a couple dozen contracts.
237
:Now that sounds small, but we're doing
lots of trades, so I, I don't think
238
:we've ever really pushed, like you can
watch the tape and sometimes you'll
239
:see these trades, 500 contracts, a
thousand contracts go through, which
240
:maybe at a one-time basis, that's fine.
241
:There's a lot, there's a lot of
liquidity now, I think with the
242
:market makers, you know, coming
to, to provide that liquidity.
243
:But if we suddenly had to, you
know, pull thousand lots in rapid
244
:succession, I don't, I don't know.
245
:I don't know, nor do I necessarily
wanna find out because once you find
246
:out, you know, usually something,
not, something bad is happening.
247
:Adam Butler: Yeah, right.
248
:I mean, when I think of large, I think of
sort of a, an institutional investor with
249
:a few hundred million in their management.
250
:I'm just wondering what proportion
of their book they could trade
251
:at that, at that timeframe.
252
:I mean, obviously you, you know, you're
trading SPX options, so I'm, you know,
253
:I'm sure there's plenty of liquidity,
but, it comes and goes, as you say, right?
254
:Like the conditions will
dictate the amount of liquidity
255
:that's, that's provided.
256
:And, um, so I guess is.
257
:David Sun: Makes sense because, not
necessarily, but what I wanna point out is
258
:when you say conditions, that, that makes
sense because it's always getting into
259
:the trade is not, not a problem, right?
260
:It's getting out.
261
:And if somehow there's, you know, and
everyone's kind of waiting for the
262
:next shoe to drop when the next kind
of, they call it Gamma-geddon, right?
263
:Because of all, all of
the, the amount of volume.
264
:Now, if, if there's a sudden move
and it's one sided and we gotta
265
:close out all the positions on
one side, that's a lot different.
266
:Yes.
267
:It's nice to be able to tranche in
over time, but then if you had to pull
268
:everything out, you know, and we've
traded through Covid for instance, and
269
:even then the market was fairly orderly.
270
:there were some times when the spreads
got kind of wide, but I don't, I
271
:haven't lived through like, or I've
lived through, I didn't trade through,
272
:like for instance, the flash crash
situations where market makers pull all
273
:the liquidity and you know, that's, We
have some contingencies for that as well.
274
:But you know, that that's not
something I necessarily look
275
:forward to, uh, to witnessing again.
276
:Adam Butler: And you know, one of the
things that's the Zero DTE's have gotten
277
:a lot of press for is the reflexive
nature of, the leverage at that time
278
:scale and how there's potential for
the options players to push around
279
:the, the cash deltas, the Delta ones.
280
:So do you
281
:track that at all?
282
:Like, are you tracking the,
directly, the participation of,
283
:of other traders and is that.
284
:Impacting the way that you take
positions throughout the day
285
:David Sun: We've started to
look a little bit at that.
286
:Um, there's even some off-the-Shelf
products available to retail that
287
:they don't provide the actual direct
dealer positioning, but they could
288
:give some signals that, Are based on
how they track the dealer positioning.
289
:And we've done some simple modeling.
290
:We bought some data, but it's hard to
really find some conclusive signal.
291
:generally what we do, beyond.
292
:So in the beginning I mentioned there's
some kind of just naive strategies
293
:where there's no signal, you're just
selling premium and you have kind
294
:of basic risk management, but you're
generally just trying to harvest
295
:that, that VRP again, it's sometimes
it's there, sometimes it's not.
296
:Especially, you know, lately
market's been moving a lot intraday.
297
:Adam Butler: and you're, you're
obviously not, you're not trying to
298
:harvest the premium when the, when
the premium is not there or when the.
299
:vol relationship is inverted,
300
:David Sun: so
301
:Adam Butler: or you just selling
the condors instead of buying
302
:David Sun: I, so I don't think we can, I
don't think we can necessarily predict.
303
:When we, we've looked into it, we haven't,
we don't have any live strategies based
304
:on sort of predictions of IV over RV.
305
:What we've done recently, a lot of our
strategies that we've introduced signals
306
:is more about trends and directionality.
307
:And this actually plays into some
of the stuff I learned from the
308
:episode of yours on Corey's podcast,
which is, when you look at a
309
:trend, well what is a trend, right?
310
:To some definition, yes, if
it's going up, I wanna buy, if
311
:it go down, I wanna sell it.
312
:But how is that measured?
313
:How is it defined?
314
:And some people can look at moving
averages, you know, this moving
315
:average cross over that moving average.
316
:Okay?
317
:That means it's, it's a plus sell
puts 'cause it's going long or
318
:sell calls because it's going down.
319
:But what we do is we look at different
ways to kind of perceive or try to
320
:predict where a market might be going.
321
:So there's there a couple ways.
322
:One is we can look at the rate
of volatility contraction.
323
:So if the market's going down.
324
:The call premiums are decreasing.
325
:If we see call premiums at a certain
part of the surface contracting
326
:at a certain rate, that will be
our signal that it's a downtrend.
327
:And so when we deploy the
premium, we'll lean short we'll
328
:sell calls instead of puts.
329
:Conversely, if put premiums are
expanding, that's another way to
330
:indicate market's probably going down.
331
:And yes, they're mirror images
of each other, but they're not
332
:gonna react exactly the same.
333
:So looking at call contraction and
looking at put expansion can give you
334
:the same type of signal, but the timing
and flavor will be a little different.
335
:And so what we've done is we have
multiple strategies that are sort of trend
336
:following and they'll kind of lean our
exposure long or short, but they all kind
337
: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.