00:42:20 · Tracy Alloway, Alex Micalizzi, Tracy Alloway
[00:42:20] S3: Which is more painful, the slow decline or the big overnight fall? [00:42:26] S2: That depends. I would say the virtuous cycle is that the product markets go up and we get new trades and everybody's happy because there's a coupon. Both of your scenarios, there's many ways to die and that slow grind down. And again, it depends on your hedging and what you've done. can be painful because we've got this dynamic of hedging with two, left with five, wrong hedge, volatility is going lower, the skew is flattening. That can be painful. And what can also be painful is, hey, I've hedged and I described a put spread or call spread and I've just done an outright position. So locally I'm hedged, but on a large move, I'm not because my call spread or put spread only gives me X amount of value, whereas the thing I've sold has value beyond that. So there's a scenario where that's horrible too. And it really depends on, again, how these things have been hedged. [00:43:32] S0: I have one more question. [00:43:33] S3: Some of these products are very creative in both their design and their hedging. Do you have a favorite that you like to point to and go, hey, this was extra creative?
00:43:44 · Alex Micalizzi
[00:43:44] S2: Yeah, I'd say a popular product now, so we talked about the worst of, we talked about daily observations, and we talked about what an auto callable is that we observe it, and the worst performer has to be above that level to knock out. So one of the more creative auto calls we've seen is one with a knockout auto call feature. So say you've got three stocks, and you've got observation dates that are daily. You can have one of these stocks... that rallies 20% on day one, say the other two are down 10%, it's now considered knocked out regardless of what happens next. So then you've got two names left and the first stock is down 30%, kind of irrelevant, but the other two, or just let's say another one goes up, it's gone. You're now got a position where the original stock, which was up 20%, is now down 40% and the stock A, If it just rallies a little bit, the whole product disappears. And this thing is way down, like the stock that was up 20 is now down, you know, 50%. It's going to be like, it's going to have real put value, but that put value is all destroyed if this last guy gets knocked out. So I now have this, this way in the money put, which can disappear very, very quickly. And so I've got this massive vol of vol position where If everything just rallies now, it's done. I need everything to fall. And it creates a really interesting dynamic. And I think it's what we're seeing in the very front in single stockings.
00:45:24 · Joe Weisenthal, Alex Micalizzi, Tracy Alloway
[00:45:24] S1: As the clients get richer and richer, the last question for me, as clients get richer and richer, does the creativity with which they can purchase an instrument multiply as in, all right, you know what? Here's this guy's worth $ 100 million. Here's a few items you can pick from the shelf. Here's a billion dollars. You know what? We're going to bring out the best chef for him. And we're going to chop the mushrooms and everything. And we're going to come up with something really creative for him. Just in the nature of the business, there's other sort of more and more exotic versions that you can get depending on how much money you bring to the table. [00:46:01] S2: You can get more and more exotic. I would say that liquidity is a factor. And generally, what provokes or what creates these sort of structures is what created pain. So we had examples in 2018 of dealers getting into trouble and what created pain was that drift down. So a whole new product was created, not knock in, knock out, where if we drift down, but we haven't drifted too far and we stay in a certain area, we knock out as well. So I would say it's, and that the level of all of all that creates and, oh, this is a simple way to solve it. creates secondary issues. But to your point, I would say as it gets more sophisticated or you get large institutional clients, the amount of structuring that can happen, it's possible, but it's more about size and handling liquidity. Got it. [00:46:49] S0: All right.
00:46:49 · Tracy Alloway, Tracy Alloway, Alex Micalizzi, Joe Weisenthal
[00:46:49] S0: All right. [00:46:49] S3: Alex, truly the perfect guest to talk about structured products. Really appreciate you coming on Odd Lots. [00:46:54] S2: Thank you for having me, guys. [00:47:02] S3: Thank you. Joe, I thought that was fascinating. There are indeed a lot of Greek letters involved, but I got to say, I feel kind of bad for, for the market makers who are basically like the buyers of last resort or a lot of that Vega. And like, as the market does what it's been doing recently, they basically just have more and more that they have to absorb and then they have to hedge more and more and more. [00:47:28] S0: It seems hard. [00:47:30] S1: I guess I don't feel sorry for them. [00:47:32] S0: I mean, I guess they're paid to do it, but still it's hard. [00:47:35] S1: But that's what the money is for. You know, it's like, that's why they get paid well, because it's actually, it's very complicated to figure out where all these different like balancing prices are and how exactly, what exactly is the value of some of these things. But I don't feel bad for them at all because it seems like a job where not many people would have that skill. And if you do have that skill, you're probably getting paid very well. I really enjoyed that conversation overall. Helped me sort of understand what these products are there, what problems they solve for the clients. why the client is getting compensated for them, why the banks like to sell them. It clarified a number of things.
00:47:35 · Joe Weisenthal, Tracy Alloway, Tracy Alloway
[00:47:35] S1: But that's what the money is for. You know, it's like, that's why they get paid well, because it's actually, it's very complicated to figure out where all these different like balancing prices are and how exactly, what exactly is the value of some of these things. But I don't feel bad for them at all because it seems like a job where not many people would have that skill. And if you do have that skill, you're probably getting paid very well. I really enjoyed that conversation overall. Helped me sort of understand what these products are there, what problems they solve for the clients. why the client is getting compensated for them, why the banks like to sell them. It clarified a number of things. [00:48:11] S3: Yeah, and I do also think it definitely underscored that sometimes the most painful environment isn't the big sharp move down or the sharp move up. [00:48:19] S0: It's that slow grind. [00:48:21] S3: Which kind of is what we've been seeing recently.
00:48:21 · Tracy Alloway, Joe Weisenthal
[00:48:21] S3: Which kind of is what we've been seeing recently. [00:48:25] S1: It's interesting. U.S. stocks have just done so well for so long. I mean, that is the big story. And I think about this all the time in many cases. flavors of this conversation where we talk about hedge funds and options and trading and stuff like that. It's like, man, you got paid in retrospect, sitting here in 2026 for basically the last 45 years, you got paid a lot of money to just invest in the market and do nothing, right? To buy the index or whatever. And with very rare exceptions, that's all you had to do to make a ton of money is buy the index and go swimming. But it's interesting to think about how, for example, in other countries, Problems are a little trickier. It's like, how does someone in Japan get yield during all those Zerp years and stuff? So you have to get a little bit exotic and stuff like that. Now I can understand why, you know, people sitting on some huge gains, they don't want to miss out on future gains, but maybe they want to like take off some risk. Now there's yield again in the United States. over the last few years. That could be interesting and stuff like that. So I understand a little bit more about like inherently why these products have gotten more lucrative or Desirable for high net worth American investors in recent years. Sure.