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In this episode of the Derivative we chat with Gary Selz @SelzGary, CIO and co-portfolio manager of Zero Delta Funds. Gary shares his background growing up in Chicago and studying electrical engineering at Northwestern University. He discovered options trading through a financial engineering course and was introduced to a Chicago prop trading firm. Gary discusses his experience training as a new trader at the prop firm. He explains how traders are given time and support to learn before getting their own book to trade. Gary reflects on the diverse career paths that can lead traders to prop shops, from poker players to accountants. The conversation covers Gary’s transition from trading to investing his own money in volatility strategies. This led him to co-found Zero Delta Funds and launch a fund seeking talented volatility traders from across the globe and not always where you’d expect.
Gary highlights their process of finding under-the-radar traders internationally and evaluating their sophistication. Gary and Jeff discuss various aspects of options trading, including the evolution of the market landscape. They analyze single stock versus index volatility trading. Gary shares insights on the current opportunity set and speculates on potential future market catalysts. Come join us as we dig deeper into option and vol trading and into the mindset of successful volatility traders.
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Follow along with Gary on Twitter @SelzGary, check him out on LinkedIn and make sure to visit zerodeltafunds.com for more information.
Check out the complete Transcript from this week’s podcast below:
Volatility Vultures: Hunting for Options Talent with Gary Selz of Zero Delta
Jeff Malec 00:06
Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments. Go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Hope your Summer’s going well and you’re enduring the heat wave across the US. We’re back this week talking volatility and options with Gary Selz, co-founder of a unique Fund of Funds focused on getting option trading talent out of nooks and crannies across the prop trading world. We talk about what Gary looks for in a manager. Hear stories about the prop trading and option seen in Chicago. And of course, ask the question, are they always managing the book to zero deltas send it. This episode is brought to you by RCMs YouTube channel, where we post this podcast, but also have some other videos in and around our work in the ball space. So head on over to YouTube, search RCM derivative podcast, and hit the Playlist button, and you can see all our vol pods over the years in the VIX and volatility playlist. And now back to the show. All right, we’re here with Gary. Gary, how are you good? Good.
Gary Selz 01:24
It’s great to be here,
Jeff Malec 01:25
I know. And as has happened a few times on this, you’re here in Chicago, but we’re still doing this on Zoom,
Gary Selz 01:31
yeah, yeah, Chicago. And met you in person for the first time, and now I’m in my hotel room doing this podcast.
Jeff Malec 01:40
We’ll figure that out one day. It’s hard with all the different angles and cameras and sound, but used to live in Chicago for a bit, right? Yeah,
Gary Selz 01:49
I grew up in Chicago. I was here my whole life, until covid hit in 2020 and that year, I moved down to Miami, and I’ve been down there since,
Jeff Malec 01:59
nice. Any any regrets,
Gary Selz 02:03
not really. I do miss the city. I miss a lot of my friends, the trader the trader community here in Chicago is great, so it’s always great to get back here, especially in the summer.
Jeff Malec 02:13
And everyone says, Miami’s becoming a hedge fund town. But you seeing that? Or is it more like East Coast stock hedge fund, type of people. It’s
Gary Selz 02:22
a little bit of both. Citadel has a big presence down in Miami, and I’ve met a number of people from Citadel, from Valley asny, people trading options. So I was pretty surprised, and that’s been increasing over the past year. I think it’s Citadel securities business that’s down there, yeah, so not, I don’t think they’re hedge fund, but, yeah, it’s increasing. A lot of RIAs are moving down there, Palm Beach up that way. So all along the east coast of Florida, up from Palm Beach down to Miami. I’d say it’s transforming, but it’s slowing. I would say the great migration, most of it has happened, but there are still people trickling in.
Jeff Malec 03:08
Yeah, and where were you in Chicago? You grew up in the suburbs downtown.
Gary Selz 03:13
I grew up in Skokie, so I went to high school there, then I went to college at Northwestern in Evanston, and then got a job in the city, had a prop firm,
Jeff Malec 03:24
right? Um, want to dig into that Prop firm a little bit. Yeah. So right out of school, have they found you? Or you found them? No,
Gary Selz 03:33
it was interesting. So I was studying electrical engineering at Northwestern and let me tell you, that was tough.
Jeff Malec 03:41
Dodged a bullet.
Gary Selz 03:43
I dodged a bullet. But in my studies, they had a financial engineering course in the engineering department, so I signed up for that. All the reviews said it was extremely difficult. And when I took the course, it was difficult. It was all about option pricing, swap pricing, with all the calculus, you know, the Brownian motion, the physics, everything involved. And in that class, it was taught by a professor named Vadim linetsky. I go up to him after a class, maybe, maybe it was an exam one day, and I said, you know, this is interesting, but could you make money with it? And he said, Oh yeah, yeah. He said, Oh yeah, you can make money with it. Let me introduce you to a firm. And he sent me an email about a firm in Chicago called Peak six, and they were having an open house. And I thought I’d just go check it out. I didn’t know anything about trading, and I went there, and I saw what they did, and I was blown away. I wanted that job badly. First of all,
Jeff Malec 04:48
right, when you walk into the office, you’re blown away. For anyone, yeah, anyone who’s listening, go Google peak six office and look at that trading floor. It’s the old where the first board. Trading pit was the old comed? Was it or whatever that name of that pit was right there looking down LaSalle Street. Pretty cool.
Gary Selz 05:10
Yeah, it was great. And the people were great too, on top of it. And, you know, we have some mutual friends that. Are there? Some great people, great people. I interviewed with. I shadowed a trader for a little bit on the desk. That was my first foray into Options trading, a real options trading,
Jeff Malec 05:29
really, and you were just total newbie. Said, total down the door, yeah.
Gary Selz 05:33
And since then, you know, the rest is history. I’ve been in the business ever since then, I think
Jeff Malec 05:41
talk a little bit about that. I think the perception would be, at a firm like that, you need to come right in and have the experience and be able to get a P and L going right away. And if not, they’ll cut bait. Right were you given capital to trade right away?
Gary Selz 05:56
Oh, no, they have a, you know, in firms like that, a lot of them, you know, the susquehannas of the world, optivers, IMCs, they all have training programs where people come in that are hungry, that are smart, and they train them so they train them on options theory. They might do some mock trading. They shadow traders. You’re possibly part of a team, learning what they do, and then also as you learn, you know, over six months or a year, you’re providing trading ideas and getting feedback back and forth the whole time. When I started there, I was part of a group trading leap options, and it was a great group, and learned so much about that why it’s different from trading other types of options, listed options in single stocks. But you’re not, definitely not given a book right away. You have to learn, and then eventually you could, gradually, you know you’re part of a trader assistant class you graduate, and maybe you’re given a small book, and they see how you do. You’re kind of on your own. And that’s really the most exciting part. You really feel like at that point you have your own portfolio. You’re almost building your own business, inside of business, in a way, and managing your own risk, putting on trades yourself. Nobody’s approving, nobody’s disapproving. It’s kind of sink or swim, yeah, so it was a great feeling, and you don’t need to make money right away. Just, you know, there’s different times in the market, there’s different opportunities. So might not be a great opportunity set for you. So just depends, like, how are you trading How are you navigating that? How are you protecting capital, how are you managing risk? So there’s all of that involved. It’s not just that seems
Jeff Malec 07:49
like a quick way out of the program, right? If you’re like, Oh, that’s not a good opportunity set, I’m going to force it, or I’m going to go into these things I don’t know how to do. And yeah, and so had you, you got an electrical engineering degree? Yeah,
Gary Selz 08:03
I got electrical engineering engineering degree. It was a focus on wireless communications, actually. So a lot of math, but that did help me, when I was working all of that math, all that those statistics, all the probabilities, thinking like that, because options pricings are based on probabilities, it’s based on Brownian motion. If anybody knows anything about Brownian motion, it’s where you drop it was a physicist, you drop a oil, drop of oil into water, and see how it moves. And you can model that. And that’s kind of how stocks are modeled. You know, how do they move? How volatile are they? How the dispersion of it? So I used that in the option pricing when I was at the firm.
Jeff Malec 08:56
What other either that firm or in your experience with other option traders, right? There’s not a lot of people that just go to school specifically to learn financial engineering and become option traders, right? It’s like this guy was a former poker player and this guy was an electrical engineer, and, like, talk a little bit about that, of like, some of the wide career paths that got them into prop
Gary Selz 09:19
shops like that. I mean, I know people who had philosophy majors, yeah, that that started guilty. There you go, that have become great traders. You know people who studied accounting, but all those diverse views kind of helps build a firm in the way people think, the poker players thought in a different way and and actually, they’re very accurate on how they place their bets, the sizing of the bets and the risk management. Are they getting, you know, hot odds, for example, and how much to bet on that versus, you know, the risk versus the rule the reward. Um. And they’re great, and they’re great. I think it was in the 20 teens when poker was banned in the United States. So I think there was an influx of professional poker players into trading. Yeah, it was
Jeff Malec 10:16
like the Black Monday of poker. I think, yeah, made that ruling, and they called it their own Black Monday, exactly. I don’t know if it was a Monday, but it’s one of those.
Gary Selz 10:25
And some of those people, you know, they went to firms like, you know, Chicago, prop trading firms, firms in New York, and I know a few, they’ve become great traders, and they had no background in trading, no background in options, but they learned, and they were hungry and they succeeded. Some of them became more algorithmic, more automated, but some are still very discretionary and very profitable. So all these diverse view sets, I think, help build a firm that way. You don’t get everybody looking at something the exact same way, yeah,
Jeff Malec 11:02
but that’s confusing. So outside looking in also like, Are you being taught a way to do things? And hey, here’s how we make money. Hit this red button when this clock hits 12 and do this. Or they’re like, hey, you know how to think. Here’s the playground, and see what you can do inside of the playground here, it’s
Gary Selz 11:21
definitely the latter. And I tell people, it’s, there’s a science to it, you know, there’s the math behind it. But then when you’re actually trading it, it’s, it’s an art form, and anybody could learn how to paint. But there are some, you know, master artists out there. And I think it’s the same thing with trading, you know, and especially discretionary options trading. There are some people that are just fantastic. They’re artists, they’re talented. It’s like, I think about basketball a lot when I think about this, you know, what did Michael Jordan have that some of the other basketball players didn’t have and it’s hard to to point to something exactly. Was it grit? Well, a lot of people have grit, the desire to win. A lot of people have the desire to win. Why was he better? And he just was, and it’s the same thing with a lot of traders. Some traders just have it. They’re master artists. They master their craft. Nature
Jeff Malec 12:23
versus Nurture. There you have to have it naturally, and then we can also bring it along with some nurturing. But
Gary Selz 12:30
right, yeah, right. And I still, to this day, I still don’t know what it is. I can’t point to something that says this is why this person’s better than another person. I can’t point to it. And as a trader, I knew some traders were better than me. You know, there was a lot of traders better than me, but I couldn’t really figure out why. Maybe they had a better risk tolerance for holding their winners. Maybe they cut their loser short earlier. I don’t know what it was, but there are traders that are just better than others.
Jeff Malec 13:08
And then one of my favorite stories is the there’s like a market making day where you’re making markets on like, Can Gary throw this ping pong ball 50 feet to the wall on the other side, right, and all the traders and interns and everyone would be trying to make a market on that. So kind of teach you how to think in probabilities. And,
Gary Selz 13:27
oh yeah,
Jeff Malec 13:29
any of those stories you can share. Oh yeah,
Gary Selz 13:34
we had a game. I don’t know who introduced it. I think it was my, my buddy, Clayton, who I traded with called the almanac game. He would just flip through the Almanac and say, All right, make a market on how many miles to the moon. And traders would start trading games, um, sometimes, and we get we get creative, they start trading the options on it. They would start trading this. And it would be like a trading pit. And we would do this probably a couple times a week, and it was a lot of fun. We would also, you know, trade on. There was a basketball hoop.
Jeff Malec 14:14
Now we got, I think it’s about 350,000 I’ll make my market 300,000 miles,
Gary Selz 14:22
you know, we can, let’s
Jeff Malec 14:23
Google it.
Gary Selz 14:24
There’s other, what? Yeah, there’s
Jeff Malec 14:27
the other, um, how many times you have to fold a piece of paper to reach the moon? Which I think is, like, the answer is, like, 64 or something, like, you couldn’t physically do it, actually, but, right? Because, and that teaches you like non linearity, right? It’s doubling, right? Double doubles in the right? You you get halfway there in that last fold, or is the one that gets you all the way to the moon, right?
Gary Selz 14:51
So the answer miles to the moon 238,000 so you’re pretty close, all right? Yeah, but there’d be two way there’d be two way markets, and people will be buying and sell. And tightening it up, and it taught you a lot about trading. That
Jeff Malec 15:03
wasn’t an official thing. This is just you guys bored on a Tuesday, and the markets are very much and like, okay, let’s figure out what we’re doing.
Gary Selz 15:10
Yeah? And they, I think maybe firms started doing it as part of a formal training, yeah, but it was just fun for us.
Jeff Malec 15:26
And so talk a little bit. You have all these diverse people. They’re becoming great traders, and this will feed into what you guys are doing at zero delta. But how do they some will naturally be like, I’m so good, I want to leave and go hang my own shingle, do my own thing, versus some are drinking the Kool Aid or whatever it is, or they get compensated very well. They’re like, Hey, stay here making the firm money. Like, how does that balance work out?
Gary Selz 15:52
Generally, I think it’s not so much that traders think they’re so good that they could leave I think it’s more of a mindset that they want to build something on their own. And I think there’s just two camps. There’s people who want to do that, and then there’s people who just don’t. And some of the best traders that I’ve seen just stay at the prop firm, whatever prop firm it is, forever, and they like it, you know, it’s just a mindset. And some other people just have a mindset, I want to build something on my own. It maybe they have a mindset. They want to build something big. They want to be the next big prop shop, big market making firm, you know, they spin out of optiver. They create a Kuna, you know, they have visions of something large. Some other people just want to spin out, have a small, two to five person firm, and make money for themselves and family and friends. I think it’s just a mindset. Some cases,
Jeff Malec 16:53
they might be like, Hey, I know I’m going to make less money, yeah, but I want to be my own boss. I want to have my name on the door or whatever, absolutely,
Gary Selz 17:00
absolutely. And there’s some people that are more reliant on technology at a lot of these prop firms, and there’s some people that aren’t, so they feel more beholden that they have to stay
Jeff Malec 17:12
right, or it would cost them $2 million a year to have the technology in place or something like that. Yeah, they
Gary Selz 17:19
or they need to build it out, it’d be a large build out, it won’t be as good. It’s actually pretty surprising. The technology at these firms is state of the art. It’s it’s really good at all these firms, whether it’s Wolverine, Susquehanna, peak six, jump trading, whatever it is, it there is all really good. And you don’t really know how good it is until you know you’re in there and you’re like, wow, it’s much better than the big banks that
Jeff Malec 17:50
you think that gives an edge, just in terms of speed, in terms of pricing, all the above,
Gary Selz 17:55
all of the above. It’s an edge. It’s a big edge, but it’s
Jeff Malec 18:00
not the what we were talking about back in the day, like high frequency trading and and satellite dish relays for quotes and all that stuff.
Gary Selz 18:08
Yeah, some firms still have that. And the CO location, the cost of all that is enormous. You know, cost of some of these firms are hundreds of millions of dollars a year for all the servers, all the connections, all the microwave frequencies, whatever it is, yeah.
Jeff Malec 18:25
So yeah, microwave towers, not satellite towers, but maybe they were Yeah, satellites too. Yeah,
Gary Selz 18:30
the satellites were slower, or some thing with weather. But even the microwave towers, you had to measure wind, wind speeds, because the towers would shake. Wow, yeah, yeah, where’s
Jeff Malec 18:44
my quote off a millisecond, but generally peak six and right? I know some about that. They’re not doing high frequency trading. They’re not really doing market making, some shades of it.
Gary Selz 18:55
I don’t know. I haven’t been there in eight years. Maybe they are now, but they’re quite a sophisticated firm that could adapt to any market. There’s very smart people there, yeah, and all
Jeff Malec 19:09
of it, and then it also, then we’ll get right, like there’s smart people at all these places. How come they don’t just cannibalize each other, right? Isn’t it? Zero sum, and they’re like all the Susquehanna traders are battling against the peak six traders or battling against gene straighter man, right? It seems like it’s zero sum. So who’s getting taken advantage of for all these firms to be so successful? Yeah, at
Gary Selz 19:29
some point you think is robot versus robot, professional versus professional. And at times, when it’s slow, when there’s not a lot of volume, I believe that is the case, and you’ll see it in the in the PnL, but at other times it becomes active, and I think it’s been a lot different in the past five years, or four years, the proliferation of retail trading options is. Has exploded the proliferation of these ETFs that are created that trade options, whether it’s on the indices like jeppy, or even single stock ETFs that are overwriting calls. I think there’s a bunch there. I think yield Max has a bunch these. These have quite a lot of AUM, I think over 200 billion of AUM in all these and growing fast. So I think now there’s just a lot more diverse players. There’s also a lot more products. There’s a lot of retail and zero GTE and quite sophisticated retail, I would say, so I would say before, probably like 2011 through 2015 2016 maybe it was a little bit of that professional versus professional. But now, I think there’s just so many more diverse players. There’s big institutions getting into options. I remember when I started back in 2006 somebody from a very large hedge fund in New York was talking to me, and they were long, short equity fund, billion dollar positions, multi billion dollar positions, in names. They never traded a single option ever. Wow. Yeah. So you ask them, you know, what do you think stock’s going to do in the next, you know, three months, he’s like, it’s going to be in this range. And you look at the straddle and like, well, that straddles a sale. And he’s like, Well, what do you mean? You’re like, well, you have a position, you should sell, like, 5000 of these straddles. And so back then, even large hedge funds had no idea about options. But even recently, I think everybody knows, you know, Softbank got into options in a big way in 2020, and 2021, they’re buying a lot of upside options in big cap tech. So that’s just another player. And I think there’s going to be more and more diverse players in the options market. So it’s not going to be professional versus professional. There’s going to be people doing things for different reasons, whether they’re overwriting, whether they’re speculating, and they’re big
Jeff Malec 22:03
and so in my back to our poker talk, like the poker analogy is, you have the six pros. Five pros are at the table on a Tuesday night in Atlantic City. There’s no other guests. They’re just kind of, they’re going to go back and forth and basically be flat now, a couple tourists come in, and maybe a big spender, corporate guy comes in and like, Okay, now we’ve got some, some new money in the game that we can trade around and get around.
Gary Selz 22:30
Yeah, and not everybody’s trading vol, for example, you know, some people are overwriting, so they just want that yield. So they’re not, they’re not very vol sensitive. So that provides opportunity. There’s people that are speculating, just buying options. So they’re more, they’re a little bit more price sensitive, but they’re not vol sensitive, yeah, so they might say an option is $1 but you’re like, wow, that vol is high, but they’re like, it’s $1 it’s, you know, it’s cheap for what I what I think the stock could do. So it’s for different reasons, and then people are hedging it with the stock. So yes, there is a little bit of the zero sum game, but it’s so intertwined with so many players. You know, you’re trading the stock, you’re trading the option, this person’s trading vol, this person’s trading direction, that there could be a lot of winners at all at the same time. It
Jeff Malec 23:19
would a simplistic model, be like jeppy, and what we’re saying, j, e, p, y, I think, is the signal, right? They’re selling calls against the s, p, essentially, yeah, yeah, they’re selling calls. So would it be fair to say, like, that strategy in a vacuum would return more, maybe 1% more a year or something, or 50 bips a year more. And like the prop firms are kind of earning that extra 50 bips by providing the supply to firms like jeppy. Total, simplistic view, but yeah,
Gary Selz 23:52
so jeppy, so let’s say they jeppy sells that call, right? And over time, stock goes up, but that call expires worthless, right? So Jeffy, you know, they made money on the call. They made money on the stock, but if, let’s say you’re the prop firm, you buy that call, you think it’s a cheap vol, maybe it realized the vol over time in your dynamic hedging, you’re doing different things. You can win also on that side, if they sold the vol too cheap. So who’s losing? Well, maybe the people trading the stock are losing because you’re Gamma Scalping back and forth. The other people on the other side are negatively scalping themselves. So it just depends. There’s a lot going on. I don’t think it’s just one person versus another. It’s just it’s just so intertwined.
Jeff Malec 24:42
It’s a podcast we’re trying to simple it to five, five Boogeyman. Let’s get into zero delta. How you started it? Why you started it, what’s going on behind the scenes, wherever you want to start there. Yeah, go far, yeah. I
Gary Selz 25:00
left trading in 2016 and took a year off, and was trying to figure out what I wanted to do. Did I want to continue to trade? But my passion was always investing my own money. I always loved to do that, and I wanted to invest in a strategy that was absolute return in nature, but typically did well during market volatility. And I mean really well. And I didn’t know anything like that except trading volatility, so I was just investing my own money in some vol traders that I knew. A lot of these traders that had these strategies were typically capacity constrained, so a lot of institutional allocators just overlook them. A pension might need to allocate $300 million in a shot, and somebody trading some of these strategies could only handle maybe 50 million or 100 million, so they didn’t bother but also, the strategies were pretty complicated for just high net worth. RIAs so stuck in this weird spot, yeah, stuck in this weird spot where, you know, maybe the trader has some of their own money, or a lot a lot of their own money, and family and friends money, maybe they have 20 million. And for a hedge fund, a lot of people say you can’t run a hedge fund at 20 million. Well, yeah, you can. You could be lean and run hedge funds at that size, because if you have good returns, you’re making a good living. So I would try and seek out hedge funds like that, where people have strong options pedigree, and they’re trading a lot of their own money, and they have the same risk philosophy as I do. When there’s nothing to do, do nothing, preserve the capital, and then when there’s something to do, pounce. And I was doing well. My my partner, Chris joined after he left prop firm, and he was investing his own money as well. He’s been investing in hedge funds since the 90s. So we decided, you know, maybe we should just launch something where we could get an audited track record, and family and friends could come along and anybody else. So we created this entity, zero delta funds, in May of 2021, and we’ve been running it ever since we launched it with just our own money. We weren’t really looking at that point to raise big capital. You know, all the time I’m seeing, you know, trader from Citadel leaves launches new fund with 750 million. That wasn’t our idea. Our idea was to launch our own money. Those are all this great article, yeah, yeah. Produce good risk adjusted returns for for ourselves, and if other people want to come in, great. So that’s what we did. But
Jeff Malec 27:47
the the concept is, like, you’re back, say, you could put all the traders at all the prop firms in one room, and you’re sitting there at that desk and like, I like what this guy’s doing, I like what this guy’s doing. I like what that guy’s doing, and kind of picking them out in that manner, and they’ve already left the prop firm. So you can’t, which maybe we should clear this up. For some people, like you can’t, as an investor, put money into the prop firm. For some, for the prop firm to trade, they’re trading their own money. That’s it. Yeah, outside money,
Gary Selz 28:16
yeah. And we don’t even ask those traders to come up. It’s really we talk to people who have already left, because then they have the mindset that they want to leave already and they want to start something on their own. We don’t want to convince anybody, yeah, you know, that’s part of our due diligence process is, do they have the confidence and the will to do something on their own already? So we won’t even talk to somebody who’s at a at a already at a prompt firm. They have to already have left. Want to start this, want to start this with their own money, and get going. We don’t make any assurances, and that’s part of the due diligence process for us. Is their mindset,
Jeff Malec 28:58
and beyond their mindset, what are you what are you looking at? Okay, you trade these types of options. I know that. Tell me about the strategy.
Gary Selz 29:06
Yeah, definitely tell me about the strategy. What do you trade? We try to assess the risk. We try to assess the risk philosophy also. We also try to pick traders that have a single specialty. There’s a lot of people that say we trade options. So they might trade dispersion, they might trade just single stock, relative value, equity vol. They might trade a tail strategy. But if they try to do all those things at once, they’re not a specialist. So we try to pick people who are specialists. So for example, we might have just a vol dispersion specialist. We might also have just a tail hedge specialist, then we might have just a zero DTE specialist. All they do is zero DTE, and that’s kind of how we look for groups. Specialists, because they focus on one thing, and then they typically don’t have strategy drift, where they try to do something else. And we don’t know about it because we’re LP investors, we’re not managed account investors, yeah, so that’s a big deal for us, and we’ve actually avoided strategy drift by picking specialists,
Jeff Malec 30:21
and then you want them to have skin in the game and have made enough money elsewhere where they don’t feel the pressure to press to do something during a flat period, yeah,
Gary Selz 30:32
but not necessarily. So we’re a little bit different. We tell people that we don’t mind paying management fee because it keeps the traders patient, which I think a lot of traders, if they’re not earning some sort of fees, could get a little impatient. Also, they don’t necessarily have to be very wealthy. So for example, we’ve invested in traders where they’re very young. Maybe they traded for five years, maybe they have, maybe only 500,000 but the point is, they put all that 500,000 in their fund when they start 100% of their net worth. So they’re all in, and that’s very comforting for us as well, where they believe in themselves so much and their family, even you know, who else is putting it? Are your brothers. Are your parents. That gives us a lot of comfort as well.
Jeff Malec 31:32
We kind of as an industry as a group, interchangeably, say, options traders, vol traders, yeah. How do you view the difference? I feel like if we were having this talk 10 years ago, we would have been talking only as option traders. Right now we talk about vol traders. So what’s the difference? In your mind? If there is one, there is
Gary Selz 31:53
an option trader, could be vol traders are options traders, okay, but not all options traders are vol traders. So somebody who’s a vol trader is looking at the actual vol and saying, This vol is too cheap, or this vol is too expensive for whatever reason, and they’re actually trying to isolate that vol and capture that vol. An options trader could be looking at different things. They could be looking at, you know, a pre NEMA capture strategy, a tail strategy. So for example, like zero DTE, you could say I have a premise that there’s a vol risk premium, but also maybe the index tends to trend during the day, or I’m looking at the bid, ask spread expanding or collapsing throughout the day. So they’re not really looking at vol at all. They’re looking at different metrics. They’re looking, you know, how far away is it from spot to hedge out all my risk, and how does that change over time? So they’re not looking at vol, but they’re looking at prices,
Jeff Malec 32:58
or just like a simple bull call spread, or something like, yeah, yeah, looking at that,
Gary Selz 33:02
looking at different structures, broken wing butterflies. And why does that work? You know, time spreads. You know, how do I? How do I increase my Vega, reduce my theta? So if there’s a vol pop, I don’t get killed on the move, but I could benefit from a vol pop, different things like that,
Jeff Malec 33:23
and vol cheap. Let’s use everyone’s favorite stock these days, Nvidia, right? So I don’t even know what it’s probably like. My guess would be, it’s like a 40 vol or something, or 60,
Gary Selz 33:35
yeah, I don’t even know, but I think maybe a 40
Jeff Malec 33:38
ish, let’s call it right? So when you’re saying guys want to trade the ball, or they think ball’s cheap, let’s use Nvidia. It’s got a 40 vol which means, right? You can do the math on that of what that means for annual movement, but probably, what does that mean? 120% annual movement, or something, 16 times 440, 240%
Gary Selz 34:02
it’s a depends on how you hedge it. But in general, 40 vol would mean like a 2% move every day. Yeah.
Jeff Malec 34:08
So they’re saying, Hey, this is two. Yeah, I went. I went the other way. 40 divided by 16. Ish, right. So this vault trader, theoretical vulture, saying that’s this thing is trading like a tech stock in 99 like 2% a day is way too small, which it seems like that would be right. So that’s a vol trader saying, I don’t care, really, where the what the business case is, what anything is. I’m just looking at this versus the probability that it would be more volatile in the future,
Gary Selz 34:38
exactly. And you price a vol based on the past, right, like, that’s how you predict. You know, what did it do in the past? But a smart vol trader would say, well, this environment, you know, for for example, semiconductors, is a different environment than three years ago. Or. Five years ago, something has changed. Now. Does that mean these should be more volatile or less volatile? Well, you can make an easy argument that more volatile right, especially on what these stocks are doing right now. Even when you look at a name like, let me just a few years ago, there was Disney, and Disney didn’t have streaming, and they wanted to get into Disney. Yeah, plus, and you can look at that and like, Disney’s a 20 vol name, but if they want to get into streaming, you know, who are the streamers, Netflix? Well, Netflix is like a 40 vol name. So should Disney be a 20 vol name in the future? Well, maybe it should be like a 23 vol name. But then also you get new catalysts. They’re going to release Disney plus subscriber growth numbers, they’re going to and they’re going to release it on this date. So you get new catalysts. So pricing all of these little things into what you’re doing gives you an edge. And I think a lot of these traders are looking for different kinds of edges, whether it’s a macro edge or an event edge, or they’re trading something called skew. So that’s like the downside options versus the upside options, different things like that.
Jeff Malec 36:11
And then you you’ve uncovered a few guys who you’re, what were we talking about yesterday? Of the you were asking them how they priced the vol, and they’re like, I don’t price the ball or the what was it? Vega versus tell Yeah. I like, yeah, tell me that.
Gary Selz 36:24
I we were with one group, and we asked them, Do you break down your vol, P and L versus your gamma and your theta, P and L? And they said, No, it’s just thinking, Well, it’s kind of hard to figure out if you’re making money on vol if you don’t do that. So then another time, I was in France, and we found a trader. He had, he was just in an office by himself, trading 15 million euros, and I asked him, you know, so do you the same question? Do you break down your vol, P and L versus your gamma and your Stata. And he looked at me almost angry, but kind of confused. He said, Of course, I do. How else do you trade vol? I was like, I love this guy, right, right? So, so we asked them nuanced questions like that, just very simple and just to hear their answer and evaluate whether or not we think they’re the real deal or not right,
Jeff Malec 37:24
if they’re truly sophisticated, or whether they’ve just kind of stumbled upon something right the and so that you’ll travel. You’ll fly to France and meet with a trader. You’ll go wherever the wherever the trader is.
Gary Selz 37:35
Yeah, we’re a little bit of a different kind of fund of funds, in the sense that we typically don’t invest in the large, well known managers. We’re really looking for managers that don’t have marketing material under the radar, don’t go to conferences. So we’re kind of like, I’m sure you’ve seen or read the book Moneyball, yeah, we’re the we’re the ones going to the Dominican Republic, the Venezuela, the Japan, South Korea, those are for baseball players. But we’re going to places that are not typical to find options traders. We’re going to France. Now. France has a very good derivatives background from the French banks. We’re going to Amsterdam. Amsterdam has a lot of option prop traders. We’re going to Asia, different places there to find people trading different things. We’re going all over the place to find traders, and we find them through our Trader Network. We’re also very active on LinkedIn, finding people who have previously traded at a big firm, and just see what they’re doing now, if they’re doing something different, and messaging them. So we’re pretty aggressive in that manner.
Jeff Malec 38:51
Love it and how many are in the portfolio now?
Gary Selz 38:56
Right now, we’re we constructed a eight manager portfolio I’d never see being probably being more than 12. There’s some in the bullpen that trade a little bit differently than what we’re typically used to, so doing diligence on a few, but there’s eight right now.
Jeff Malec 39:15
And do you have preconceived I only right? Would you be like I have 10 vol dispersion traders and two tail risk traders. Are you trying to balance that? No, we try to that exposures out.
Gary Selz 39:28
Yeah, we try to balance it a little bit, just because, if vol dispersion is not good for a period of time, we want to make money in other vol strategies. So we try to spread it out a little bit now, saying that if we find another good fall dispersion manager, we’ll just add it to the portfolio, but it will, we’ll have to determine the sizing of that.
Jeff Malec 39:52
And then, what have you seen from looking inside or getting these guys monthly reports or talking with them, of like, where are we at in terms of. Vault, right? VIX, as a crude measure, has gotten pretty low. The inside dispersion has gotten very high, right? The Nvidias and things we’re talking about are moving like crazy, but the index isn’t really moving. So, yeah, what’s your thought on what you’re hearing from these guys
Gary Selz 40:17
right now? What I’m hearing is that it is still a tricky market. It has been, but there’s becoming a little bit more opportunities. And there’s opportunities when stocks go right, like some stocks are going these semiconductors are are gone. The if you’ve been following any of these pharmaceutical with like ozempic and the diabetes, weight loss drugs, those have been going to so that when, when stocks move a lot, there’s going to be some opportunities. If you take out some of these big, large cap names out of the s, p, and you look at all the rest of the names, you know, all the rest of the names might be more correlated to, like a Russell 2000 index. So like just different looking at different ways to trade these could provide some opportunities. So I would say opportunity set is better than it was six months ago or a year ago. It’s still okay. But I one thing I would say is with with a vol you can never time when it’s going to get good. It gets it gets good in a flash, and you don’t know how long it’s going to stay good. So that’s kind of why I tell people, if you’re a relative value ball, you kind of always have to be in it. You cannot time it. You cannot say I think something’s coming on the horizon. You might wait three years for that,
Jeff Malec 41:38
right? You can say Nvidia’s ball is cheap or expensive. It could keep doing that for years and years,
Gary Selz 41:44
yeah, yeah, Nvidia, and then it could die on you, yeah. Also you could look at, it’s cheap now, but it could the vol could die. And you have to determine, Okay, I’m paying a 40 work, or whatever it is, where could vol go versus, you know, you said VIX is low. A lot of option vols are low as well. But now so in the risk reward, if you’re buying vol, maybe it can’t go much lower. You think so you’re getting good risk reward. If something does happen, you could get a very big pop. And this is exactly what happened in 2019 going into 2020 2019 was a very low vol year. And then at the beginning of 2020, if you had a thesis that this covid might become a thing, you know, in January, some people were thinking that you could say, okay, vols up very slightly. But if you put on this trade, you know, very long vol trade in single stocks, my risk is okay, may I might lose a point or two, but I think I have a lot of upside where it can be generational wealth created. So you all, and I think that was very different from 2022 now, a lot of people said, you know, going into 2022 I think you know, there’s going to be a market correction. But vol was coming from a high place, so even if you thought that you bought vol, you were not rewarded. Yeah,
Jeff Malec 43:15
we talked about that the other day. The 3400 put, I think it was, if you bought it at the beginning of the year, market goes down 20% was that the same price? Yeah. The end of the year, yeah,
Gary Selz 43:25
that’s great for a vol seller, right? Yeah. So, so it just depends on where vol is coming from and your thesis. So pricing dictates a lot. It reminded me a lot of 2011 with the European debt crisis. Vol was still kind of high from the great financial crisis. So when you bought vol, and even though the banks move, you weren’t really rewarded that much. It was very similar. So all it depends on where vol is, where you think it’s going. So right now, vol is in a kind of a low, low place.
Jeff Malec 43:57
I went to a talk once in the guy question the audience is like, if you had a time machine, you went back to the start of the tech bubble. What? What trade would you put on to make the most money? And he’d like, the statistic showed selling puts was actually right. A lot of everyone’s like, buy the out of the money puts, but selling the monthly puts was actually the the highest return over that period, because the ball just got so high,
Gary Selz 44:26
yeah, which was an interest in me. I know a trader that was shortfall all throughout the great financial crisis, and made more money than a lot of the people that were long vol, yeah, that’s a lot of it’s because of the names you pick. If you’re selling SAP, fall, you know, when it’s high or target vol target got to 100 are those companies really affected that much, as much as some of the, you know, five. Financial companies were affected, no, but they’re trading at a higher vol. So it just depends on what names you’re picking,
Jeff Malec 45:05
a lot of some of that structural of like a firm selling the whole basket of stocks, and it’s, yeah,
Gary Selz 45:11
yeah, structural. It could be somebody puking out. It might, it might have been Bill Ackman, who was buying target options, and I guess he wasn’t a very sophisticated ball person, because I think that’s more on price.
Jeff Malec 45:31
Talk a little bit about the difference, right? A lot of the ball guests that come on here are trading S, P futures, SPX options, vix futures, vix options, like, basically all a lot of in just the index box. Yeah. So it we’ve talked a lot about single name ball like, do you view single name as essential to be part of the vault toolbox?
Gary Selz 45:55
Yes, I definitely do. Part of the reason is because if you’re trading just a few indices, if you’re wrong, it’s it’s hard to make it back in single stock options, you could have a very broad portfolio and be wrong on a few and you know, you have a whole book working for you. There’s just a lot more opportunities just,
Jeff Malec 46:17
but does it also get too big, right? If you’re doing a classic, just if you had to have be trading all 500 names the S P versus the index, that can get expensive.
Gary Selz 46:26
Yeah, yeah. So a lot of people don’t. They might trade 50 names in the S P versus the S P or versus the Russell. So I think you just have to get creative. But I like the single stocks. They’re also more capacity constrained. Now, Nvidia trades a lot of options. You can get big in Nvidia. You can get big into Amazon, Tesla, but in general, you can’t get as big as you’re trading the S, P or or vix or different things like that. And I think that’s why a lot of people gravitate towards those products, is they could create a bigger hedge fund with those products with less manpower. Yeah, when you’re trading single stocks, it’s manpower, it’s technology, and it’s capacity constrained. It’s not very conducive to if you want to build a large hedge fund
Jeff Malec 47:14
and talk through that a little bit like that’s why these prop firms don’t become $800 billion behemoths. Exactly,
Gary Selz 47:22
they can only deploy a certain amount of capital in single stock equity options,
Jeff Malec 47:28
which is what, what’s that power curb look like? There’s like, 15 names, 50 names,
Gary Selz 47:32
oh, in single stock or firms,
Jeff Malec 47:36
no in single stock, names that, like, uh, peak six or someone says chronic can actually get their size off in
Gary Selz 47:45
maybe 50 names or 100 is it more now, I think than it was, you could get a little bit bigger. Now, you have to be more sophisticated getting in and out than you used to. The market makers are quite sophisticated. Yeah. So there’s more names, but there’s also a lot of names where there’s a lot of edge, they’re not that are more thinly traded. And if you know how to inventory that risk, you could do quite well in some non liquid names as well.
Jeff Malec 48:16
Um, yeah. I remember a story of one guy that they had. This guy was trading all those illiquid stuff. He went on vacation, and his bids and offers weren’t getting reflected in the pricing anymore. And the pricing, like, blew out huge on the bid ads, and they were pricing it off the offer, I think. And like, the whole book looked terrible, and it’s, like, relaxed, it’s just because I haven’t put my quotes in there. Yeah,
Gary Selz 48:38
yeah. The book could get very marquee on those names. Yeah. So you kind of have to know, this is where I go back to. You have to know where the PnL is coming from all the time. Is it becoming cut because you’re actually losing, like your short vol and the stock is actually moving, or is it just a mark, or are you making on the actual vol? That’s why I get back to breaking down the positions. Is very important.
Jeff Malec 49:01
Love it. What else we got to cover? Where? So you got its website? How do people get in touch with you?
Gary Selz 49:10
Yeah, you know, we have a simple website, zero delta funds.com, we’re an open book. There’s no secrets over here in what we’re doing. You know, people know of all trading, but I think a little bit of the difference in our firm is our approach to finding managers, the groups that are under the radar, the groups that I think are some of these traders are so talented in larger firms like the millenniums and citadels and valley as things of the world want them, but they just have the mindset that they want to compound their money, family and friend money, and run their own small firm on their own, and those are the firms that we find the best talent. So yes, it was. Deltafunds.com you could just email us right on the form there and
Jeff Malec 50:04
then the name. But you’re not actually zero delta all the time. Are you? Yeah?
Gary Selz 50:09
We try to be Yeah. I’d say the managers have some flexibility on how they hedge their deltas. But the name kind of came from there’s two, two things first. It was a joke. We would always first. We would say, you know, what’s the delta of this happening? And we always say, oh, there’s zero delta of that happening. What’s the delta of us getting this business off the ground? Oh, zero delta. Oh, let’s just name it. Zero Delta, yeah. But also our portfolio, we try to have no directional risk in our portfolio. That’s a very it is because you pick up deltas from gamma. But um, we try to have it flat.
Jeff Malec 50:47
That’s a very Chicago trader community thing of just like, What are the odds that doesn’t rain for the cut? Right? People be like, I give it a 10 Delta. We actually get to this Cubs game and right? And it doesn’t rain. Or, like, right? Guys drinking at the bar. I’ll give it a 80 Delta. That guy falls off his stool. Exactly
Gary Selz 51:04
Chicago, Chicago language, definitely Chicago trader language.
Jeff Malec 51:11
And last piece we didn’t hit on a thing, they’re trying to be zero delta, but you’re also trying to be positive skew or long convexity at the end of the day, right?
Gary Selz 51:20
That is definitely what we’re trying to do. We follow the Pareto Principle. I think 80% of the money is made 20% of the time. I actually think it might be more like 9010 those periods are very lucrative, and you have to be in the game. You have to have dry powder to really capitalize on it. I would say we look for managers more with a long vol bias. That doesn’t mean they need to be long vol all the time. So for a good example was that I went back to before was SoftBank. They pushed Amazon vol up into the 60s. Now you can’t be long a book when some of these names are trading on ridiculously high levels, but you’re protected a lot. You know, Amazon needs to move more than 3% a day over a sustained period of time for you to lose on that. So they try to but at times, they might be shortfall, but we’re always protected on the tails, I would say,
Jeff Malec 52:22
Yeah, which is perfect, right? And if that’s if you can carry flat, ish, right, slightly positive, and then have those pops, that’s the ideal, yeah,
Gary Selz 52:33
we try to in single stock equity options. There’s opportunities at different time. So we try to have, you know, the, you know, upper single digits, low double digits, returns, but then really, really have high returns when in quick risk off events, you know, the covid, great financial crisis.com, bubble and bust even, even times like August 2015 when China devalued, or taper tantrum in 2018 or volmageddon, you make a lot of money during those periods. If you know what you’re doing, what
Jeff Malec 53:13
do you think? This is totally out of that field, not what you do, but Right? You don’t really care what is the next scatters. But you have any guesses what the night scatter next catalyst might be?
Gary Selz 53:22
No idea, I guess, yeah, no idea. And I think that’s the best part about ball trading, is it typically comes out of left field, right,
Jeff Malec 53:33
or else it’s already priced in. Like, yeah, no, yeah. So
Gary Selz 53:39
always out of left field, you know, like, India moved 8% last week one day. Yeah, Euro
Jeff Malec 53:44
stocks was down 3% so, yeah, there’s political stuff happening over there.
Gary Selz 53:48
Yeah, there’s a there’s a lot of political things in the world. I don’t know if it’s going to be a war. I don’t, I don’t know what it’s going to be, but I guess it’s
Jeff Malec 53:58
some huge Home Depot, or someone comes out and says, like, well, we’re pulling back on our AI spend. We don’t think it’s all that good. And then another one, and all of a sudden Nvidia is cut in half. Yeah,
Gary Selz 54:09
it could be a big catalyst like that. It could also be something tied to interest rates and inflation in our deficit, that where people haven’t cared, but then they start to care, yeah, and that, I feel like that they’re navigating a cruise ship in a in a small canal. That’s going to be a tough one to turn around. Now, everybody knows it’s there, but nobody knows when people are going to care. So that could be the canary in the coal mine here.
Jeff Malec 54:44
I like it. And again, that’s not what either of us do. So it doesn’t matter what we think, but it’s fun to speculate,
Gary Selz 54:51
right? But you still need to in the back of your mind, always be aware of these things and position your portfolio for what you don’t know. As well, and it also recognize that you don’t know everything. The best traders are the ones that know that. They don’t know they don’t have an ax. And try and fight the market. You try and fight the market. Typically it doesn’t. It won’t end well. End well for you. So at being flexible, going with the flow, trading what’s in front of you, having your thesis, having your risk rewards, that’s the name of the game, and protecting capital.
Jeff Malec 55:26
I love it. Can’t say it any better than that. All right, thanks so much. Gary. Hey, Chef travels back to Miami. It’s like, what’s going on? It’s flooding and raining down there. And,
Gary Selz 55:35
yeah, we had no rain for six months, and now it’s all coming in one week. Yeah. Yeah. 10 Delta. 10 Delta, I get back to the airport tonight, but there you go.
Jeff Malec 55:44
All right, thanks so much. We’ll talk to you soon. Thanks. Take care. Okay, that’s it for the pod. Thanks to Gary and zero delta. Thanks to Jeff Burger for producing. We’ll be off nex
