Darrin Johnson is the first independent trader I’ve interviewed for this show and with that distinction he brings an entirely new perspective.
After learning about how Darrin began his career as an independent trader, we get into the bulk of the conversation that circles around his process of shorting volatility in the S&P 500 complex, including options on futures, index options, VIX futures, and VIX ETPs. Darrin provides insights into how he plays certain tenors over others, why knowing when not to be short is the most important key to risk management, why the upside can be riskier than the downside, and thinking through managing a trade over its lifetime.
Towards the end of the interview, Darrin paints a realistic picture of what it means to be an independent trader, in both the opportunities and constraints unique to his position. We finish with the advice Darrin would give to anyone serious about starting a career in independent trading.
I hope you enjoy my conversation with Darrin Johnson.
Transcript
Corey Hoffstein 00:00
All right 321 Let’s do it. Hello and welcome everyone. I’m Corey Hoffstein. And this is flirting with models, the podcast that pulls back the curtain to discover the human factor behind the quantitative strategy.
Narrator 00:20
Corey Hoffstein Is the co founder and chief investment officer of new found research due to industry regulations he will not discuss any of new found researches funds on this podcast all opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of new found research. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of newfound research may maintain positions and securities discussed in this podcast for more information is it think newfound.com.
Corey Hoffstein 00:51
This season is sponsored by simplify ETFs simplify seeks to help you modernize your portfolio with its innovative set of options based strategies. Full disclosure prior to simplify sponsoring the season, we had incorporated some of simplifies ETFs into our ETF model mandates here at New Found. If you’re interested in reading a brief case study about why and how visit simplified.us/flirting with models and stick around after the episode for an ongoing conversation about markets and convexity with the convexity Maven himself simplifies own Harley Bassman. Darren Johnson is the first independent trader I’ve interviewed for this show. And with that distinction, he brings an entirely new perspective. After learning about how Darren began his career as an independent trader, we get into the bulk of the conversation that circles around his process of shorting volatility in the s&p 500 complex, including options on futures index options, vix futures, and vix etps. Darren provides insights into how he plays certain tenors over others. Why knowing when not to short is the most important key to risk management. Why the upside can be riskier than the downside and thinking through managing a trade over its lifetime. Towards the end of the interview, Darren paints a realistic picture of what it means to be an independent trader. And both the opportunities and constraints unique to his position. We finished with the advice Darren would give to anyone serious about starting a career in independent trading. I hope you enjoy my conversation with Darren Johnson. Darren, welcome to the show. You are the first I think truly independent trader, I’ve had come on the podcast. So I’m excited to get a brand new perspective for what is normally an overwhelmingly institutionally driven podcast. And given that you’ve chosen sort of a bit of different career trajectory here, I was hoping you could just start off with your background and get us to how you got to where you are today.
Darrin Johnson 02:58
Well, first off, Cory is honored to be on your podcast. And thank you for inviting me. My story definitely involves taking the scenic route. I’m from Detroit originally, I went to a Jesuit High School, which was actually inside the city of Detroit. And then from there, I went to HBCU. I majored in general business had several corporate internships. And I worked part time briefly for a financial advisor while in college. And that’s where I’d developed. I mean, I always had an interest in markets. But it was at that point that I knew what I wanted to do, versus what I didn’t want to do, because I had a lot of exposure to government contracting and government accounting. And then corporate finance was really just glorified accounting, so a lot of financial statement analysis and stuff like that. And then like I said, I worked for an advisor. And it’s not to disparage all advisors. But my experience wasn’t the best. Because what you get to see behind the scenes is that they don’t really understand how the products are structured, a lot of times, it’s more of just a push towards sales and together assets. And that left a really bad taste in my mouth, just to be quite honest. But there were several investment banks that were coming down to my college. And they were at least attempting to sort of go through the process of recruiting kids for different trading positions, specifically like credit derivatives and bond positions. And unfortunately, I didn’t get paid, I made it to like the third round, but for my year, they actually didn’t take anybody at Chase. This was for JP Morgan. But that didn’t discourage me. I mean, I knew I was interested in it, and I was still but I just knew that, you know, it was gonna be harder. And I knew that because both my parents are postgraduate, educated, but at the same time, they’re not. There’s no one in my family that has any history or any legacy in the investment industry. It’s just not something that was talked about it wasn’t even considered a viable option, at least at that time. And so from there, graduate, like I said, my school didn’t have a finance major. So it was just general business administration. But from there, it’s like, okay, and you got to think this is a year before the Great Recession. So things were, you know, it was on the tail end of things being okay. Like there was a lot of that time, there were sales positions to be a mortgage broker, there was easier access for small business loans and stuff like that, so that things were still good. But again, you know, I’m an elder millennial, so my timing wasn’t great. So briefly, I accepted the position as an analyst. And this was actually in downtown Detroit. So I went school in Tallahassee, and I came back home briefly actually got an apartment, never went back home, my parents. And so I was living in a suburb outside of Detroit and working as an analyst. Because a friend of mine, his older brother, had kind of like, you know, everybody in the banks has like a VP position. So. So, but he had influence and he was able to get me in and stuff like that. And then I had, I had a couple other job offers, one was in the DC Maryland area. And it was with a government contractor, but I just wasn’t interested in doing that long term. Yeah, so I got exposed to the corporate finance side, and the thing was about it, you don’t get the hard quantitative skill, the technical skills that you would like if you were to get a position, even as an entry level analyst or assistant to a trader at a bank or a hedge fund, so you don’t get the really the valuable coveted quant skills. And then at the same time, you’re not really an accountant, either. So for me, it just was so redundant, and it became so political, and I just knew with my personality, I mean, I knew this back in college, like with my personality, I have a lot of questions. And I’m kind of like a self starter, so an autodidact. And so I know that in those type of environments, I’ll push people the wrong way. And, and even unknown, even unintentionally, because people are playing sort of a different game. And it’s not necessarily about anything substantial or substantive. It’s just about looking like you’re doing what you’re supposed to be doing. And for me, I just didn’t see the upside. But at the time, I wasn’t aware of any other options. So fast forward, a friend of mine who grew up on my street, who was one of my good friends, he had just graduated from MBA JD program, and he was in Dallas. And he mentioned to me that because around this time, so you have to think that there were a lot of hurricanes and tropical storms. In fact, like when I was in Tallahassee, we saw like the tail end of Ivan and Katrina, we saw all of that. So there was a lot of government contract work being handed out for like Storm cleanups and stuff like that. And so my buddy hit me up, and he says, Hey, man, if you come down here to Dallas, number one, the economy is good. We can stay with me. And in addition to that, I think we can start a business and I think it’ll be good. Basically, we would just be brokering and doing the logistics for like, local contracts and storm cleanup and stuff like that. By the way, I
Corey Hoffstein 07:53
hate to interject, I feel like we could do a whole podcast just on that a little bit. And either way, that’s that’s got to be one of the most interesting tangential career paths. I’ve heard anyone come on the podcast and even mentioned,
Darrin Johnson 08:06
and you know what, I learned so many life lessons, because you got to think like, so many of the folks that hit me up on Twitter now, there’s so much more clear eyed and so much more advanced than I was at that age, I was aware that I wasn’t necessarily like a rocket scientist, or on path to be like an Ivy Lee Kuan or anything like that. And so I did have the self awareness to realize that entrepreneurship probably was going to be my only way, or only way out to get to the successful path that I wanted to be. I just, I feel like I don’t want to say it’s innate, and you’re born with it. But you’ve realized early on, like I knew early on in college, and in high school that, like I was different. The idea that we’re in this environment, and we’re competing against each other in a business school, when no one really has any real wealth or power access to it. It just didn’t make sense to me. It’s like, you know, what we should be collaborating and trying to figure it out on our own. And so like, I’ve always had that personality, and to be honest, like, it doesn’t necessarily serve you well, in those environments, because you’re the odd person out. And it’s funny, I’ve listened to other entrepreneurs talk and it’s like, you hear the same thing. It’s like, they had that feeling and you recognize it early. So anyway, so makerdao, so I go to visit him for two weeks. He was living in Lewisville at that time, which is just a suburb in the Metroplex. And so I would sit on the floor. And then so we went to several banks. One was a local bank, and we went to Bank of America with all these different banks. And he had already had the proposal written up and it was just a matter of, okay, can we get enough capital to get at least one piece of equipment even though I was opposed to like going all in on like a whole lot of equipment, but we knew we needed at least one dump truck. And so then we had to go through the process to find the driver. But anyways, I love Dallas. We went to bars. He took me to Uptown. He just I fell in love with it. I’m like, Dude, I’m gonna tell my boss that I’m quitting. I’m gonna pack my stuff up. I’m gonna Have my car shipped. And I’m going to move down there. In See, this is another thing about my story that I tried to emphasize on Twitter, but you know, limited characters. But Cory, I cannot stress to you how the social shaming, it was not cool in 2008 2009, to be an entrepreneur, for my whole life, like I’ve been sort of the outcast, per se in my family. And like, of course, my parents still love me stuff like that. But it’s like, it wasn’t cool to do this back then. It took me a long time and a lot of self help, and a lot of reading and a lot of thinking to really, except that I was different, except that I was taking a risk. Because at this time you got I remember, all my friends are starting in like entry level accounting jobs, or some were going on to law school or medical school or whatever. And here I am, like, No, I’m going to do this. And I’m going to essentially, do brokering and logistics for like a blue collar old industry. So I moved down, my car gets shipped, it took about a week and a half to get there. I immediately was like, Dude, I can’t just live with you permanently. So I had to find an apartment, I had some savings, just money from graduation, and just money I had saved up. It wasn’t that much. But it was enough. And so I immediately got an apartment. And then I had a loft, and I converted the whole space into what was like a little office. And I just would spend eight to 10 hours a day learning everything I could about the trends, the seasonal trends, the different materials and which ones pay the highest. And again, a lot of these lessons helped me when I wanted to make the transition to be a charter. And so I had the experience with like, filling out proposals and different government contracting. And so I took to it. And then I just studied the industry, I would call different companies, different logistic companies, I called the Urban League, I got us a contract with that. So like I really tried to I immerse myself, mainly because I’m an extreme personality. Fast forward six months to a year after that, it was doing really well. And all of a sudden, everybody from our parents, all these other people were like, wow, like you figured this out like this is really cool. But this is where the most important lesson came in, that I learned thus far about business and about being on your own. Because I came in with sort of the business school mindset that you learn, which is prepare for failure, because two thirds to 80% of small businesses fail within the first four years or whatever that statistic is right. And so I’ve worked my butt off, live below my means, just to ensure that that didn’t happen. Well, the thing that they don’t tell you, and this is applicable to trading as well, is you need to prepare for when things go right. And you need to make sure that when you select a business partner, whether you’re starting a fund, or whatever the business endeavor is, you need to make sure that this person has the emotional traits, to be able to handle at that time for a 2425 26 year old would be considered a lot of money. In my eyes, it was like this can be grown to a legitimate eight figure business, this can be a really good thing. But my partner was interested in Not to disparage him, but he was you learn more about a person’s character, I think, in successful times. And so needless to say, after a year, and we, we had a joint business checking account, I woke up one morning, and a third of the money is gone. And so it’s not like he didn’t steal the money, right? It was just like, I have roughly one out of this, because I want to take this money and I want to flex and you know, we didn’t say lit at that time. But that was the thing. And so that left me crippled, although we had the cash reserves that left me in a tough spot, because it’s like, Dang man, like, I’m gonna have to do this on my own. And he just abruptly did this. And then we had receivables. I mean, it was a giant mess. However, I kept that going for another year on my own will. And at this time, I met a young lady who eventually became my wife who just happened to be a CPA think. And she saw this and she was like, it is amazing that you’re doing this. But long term. I don’t know how sustainable This is, with just you alone. So needless to say, at that time, when this is where trading comes in, I still had that itch to be a trader. I just I’ve loved it. And I had been reading books on the side in my spare time but hadn’t taken it seriously. But luckily, in Dallas, there is a huge network of financial professionals. And so what I would do is, as I’m winding this down and figuring out savings and selling off equipment and enduring relationships that I had built with all these different other brokers across the country, I mean, it was you know, shut down the contract with the Urban League. That was a lucrative thing for us at the time. But I started going to these networking events with investment professionals around Dallas. I mean, there’s a real stuffy bar in Highland Park called Harvey, here’s a cigar bar. And I would go there and I hated it. I didn’t like, you know, those weren’t my type of people, but you did it just to try to network and try to meet people. And so I think I’m personable enough that I was actually able to meet some really cool people that are going to all these different events. I mean, if the Dallas Federal Reserve put on like a mixer or someone was giving a speech, I would go, I just wanted to meet people wanted to talk about stuff. So at the same time, as I’m networking with people, I’m reading these books, and I found this book, I remember I was at the bookstore. And it was by a guy named Yuan Sinclair. And it was called options trading. And I’ve read this book, and I said to myself, Oh, this is really cool. This is what I would want to do. And so this gets into the part where I really decided like, oh, man, I was like, I’m really into this. This is really cool. And like, you know, I wasn’t like a super shy student. But ironically, I did well in like physics one and physics two. And so like, the derivative part didn’t really bother me. And so I made it a point, I told my girlfriend at the time, I said, I think I want to do this, but I don’t have the bankroll, to be able to sustain a lifestyle to do this. So I’m going to need somebody to back me. And she was like, Well, you have the personality, got to put on the business casual, and you have to go out and try to find somebody. And I said, well, in the meantime, can you help me put together like a brochure or like a prospectus, even though I knew I didn’t want to have to register. So it would have to be under like an investment club type of situation. But I told her that first I need to come with like a whole back test and a whole sales deck or a pitch deck to explain, like, what exactly I would do and how I would do this. This is where stuff gets fun. So I use all the skills that I had learned my whole life, in terms of kind of just being somewhat introverted and self taught. And so I set up a whole system to analyze and learn all the concepts in all of humans books, so I bought options trading about the first edition of volatility charting later on about the second edition. And then I additionally I went to a site, I was a freelancer.com. And I found a quant, a real quant to actually walk me through the Black Scholes formula, line by line. And all the other sort of second order derivatives, I made a flashcards I would record stuff from like, I had a screenshare app. And then I would, of course, up on Thinkorswim. And so I literally would come up with scenarios and story problems that would say, if I’m short, an iron condor, at the 20, Delta, and skew flattens or skew shifts in implied volatility does XYZ on the strike. So I’m short. Tell me my position. And I did this over and over and over again, again, while basically living off savings. My goal was to be as comprehensive as a person would be on a prop desk or in a hedge fund. And so along the way, found Twitter and started following people that I felt like were professionals. And I would try to interact with people I was trying to learn from them. But in the meantime, dude, I’m just grinding away, and I had so many different hacks, and so many different ways to learn. I would I taught myself Python, just basic coding, nothing spectacular. But the purpose of it for me was to get an idea because eventually I was going to settle on leaning short volatility. First of all, I knew that honestly, just being honest, like, if you’re trying to raise money, or you’re trying to get someone to back you, it’s easier on the sort of off side, I knew that there were ways to buy options to make money and let that be your main investment strategy. But at the same time, I was aware of how difficult it would be to get, you know, you lose 65 to 70% of the time, and you’re sitting in drawdowns for months at a time potentially. So I knew that that would be difficult. So I was aware that I wouldn’t be short of all, but the thing that was so important to me was that I had the confidence to go out and sell this because I needed some but I really didn’t need to back. And so what I use Python for, and this is what I tell any of the young people who come to me who want to learn ball trading options trading, I use random data first, because option data at that time was expensive. And we’re talking like, oh 910, and there weren’t that many vendors, there was I volatility.com, and then a couple other sources, but it was expensive. But I use random data, what I would do was I would create a distribution like a Monte Carlo. So it would have a certain drift factor, and then you have a certain volatility, but then I would just want to see okay, so if I did this, if I ran this, let’s say 1000 times or whatever, I wanted to see what was the median outcome, most common outcome. And then what were like the worst case, given these volatility parameters, and if I changed it, how would that affect these positions? These are all if I wanted to really understand it inside out. And in addition to that, and this is really important for me, was understanding that the goal, if I’m going to run this program, I’m going to trade like this professionally, is going to be understanding when not to put this trade off, when not to have the strategy on, because the whole entire game, especially when you’re leaning short ball, but I would say this goes for training in general, is to keep what you make. So a lot of people get it twisted, right? They think that, oh my god, it’s so hard to make money, it’s actually not, it’s keeping the money once the regime changes. And that’s one of the things that I noticed when that’s why I tell people random data in simulations is like, you can learn so much from that you don’t necessarily need the backtest. Because when you back test with actual data, definitely one path, like you can become very myopic. And forget that there’s a whole lot of you want to see a range of possibilities. So that when you have 70,000 100,000 500,000, of Vega exposure, you don’t want to be surprised by what can happen. And so then another thing that I learned was that holy cow, depending on how you measure realized volatility, that can make a huge impact on your profitability in the long term. So one of the things I decided to do, and I included this in this sort of pitch deck was, I’m going to have a composite sort of dashboard of various different measures with different lag times different forecasts, horizons, all of that have realized volatility. Because what I’m really trying to get is not necessarily to, I don’t want to oversimplify and say like, Oh, it’s just IV minus HV, because it’s not that. But at the same time, I want to get as accurate a picture as possible of how much this underlying is moving, I want to really, really understand, okay, this is how much this moves on a typical day, on a weekly basis on a monthly basis, on an annualized basis. And that’s something that has stuck with me from the beginning. And it’s something that I really, really, really believed in. So long story short, I put all this together with the help of my girlfriend, the time came my wife, and I follow this stuff together. And I found it was really one person, but it ended up being a couple of people, friends and family, who were willing to back me. But the funny thing about it is that that same sort of lesson reared its head again, where I was prepared for like, Okay, this is a long term thing. But the way we have this structure set up, and the way the distributions are set up, that this will be a long term thing, but I’ll be able to live a nice life with this amount of capital, with very modest return expectations, very tight drawdown risk, etc, etc, etc. Well, as luck would have it, you jump out the gate and you do very well, you exceed your own expectations, because quite honestly, if you are a decent trader, and you stare at this stuff all the time, you probably will do better than what an academic would expect you to do. Problem is, though, is that investors, or people who are sort of managed partners, and LLC, all of a sudden their eyes get big, and they’re like, whoa, like, Hey, this is good. What can I expect this quarter? And the text messages started in the middle of the night? And I’m just like, oh, no, this is not I’m like, you know, this is a long term thing. Like this isn’t some sort of just ATM machine. So it was another situation where I was confronted with, how do you handle when you do well, when you exceed initial expectations. And so we reworked the terms. And I continue to do that, until like 2015, I had saved up enough money, and I talked to my wife, and we just discussed like, you know what, I want to be completely independent of any of this, I want to get to a point where I don’t have to be dealing with text messages. And because you end up being a therapist, all kinds of other stuff gets projected onto something that should just be like, sort of investment, set aside money. And so return the money, had my savings, like I always stressed live well below my means for a long time. My car was paid off. And so I just I separated at that time and gave the money back. And then I’ve been on my own ever since then. That’s a long winded answer to your question.
Corey Hoffstein 24:18
So as it sits today, maybe before we dive into all the details of your process, and all the little nuggets you’re gonna give us maybe we can just start with what is sort of the underlying philosophy of the way you’re approaching the markets in your investment process
Darrin Johnson 24:32
for my active trading account, not talking about long term requirements, sort of quasi passive stuff. For active trading. My philosophy is that you want to be short volatility most of the time. So 80% of my book at any given time will probably be short volatility. When I first started out I would hang out around the 40 to 60 day window Because classically, when you read all the sort of classic options, tech, they talk about that being sort of the sweet spot for that sort of shedding of the extrinsic premium or like the day to decay, like you’ll see that curve. And it’s right around that time. I’ve migrated since to 20 days and under much shorter tenders, one because the volume is there on the index is now because everybody is in the Super front end of the curve, the term structure. And secondly, because I found that most of the research that you’ll find that you’re doing your own, the highest variance risk premium is in the short date. So because of that, I want exposure to the VRP as often as possible to take advantage of compounding. And I want to get feedback sort of very quickly. And then the other 20%, which has gone up is used to be 90 thing. I’ve fallen in love with small caps and micro caps. The reason being one is there’s so many occurrences on a daily basis. And then too, it’s like trading of vix at 60 or 70 Almost every day. And so with my exposure with the SPX products, and with the etps and stuff like that, it’s given me an insight into how to manage risk on volatile stuff. And so when a friend of mine who’s a prop trader in Austin, when he introduced me, he said, Dude, you got to check out these markers, this mock ups, when I actually looked at it, I said, Man, this is the gutter like this is this is where I really want to trade. But then I looked into it. And I’m not super coder. So like I couldn’t really back test this in Python, I had to kind of do it by hand. But as you would go through, you would see wow, there’s a drift here and is downward 99 to 98% of these things do come down. So I added that slowly to my portfolio. And I love it. So those are the two main things. So it’s primarily sorting. However, after collecting a lot of data and looking at it, there are times there are special situations where I will get long the small caps and use micro caps to like I said, it’s only with right now it’s only with 20% of the portfolio. But who knows, I mean, I may increase that to 30% next year, because it’s amazing how strong the edges in that space.
Corey Hoffstein 27:05
Let’s start with the bulk of the book. First, your volatility trades, which I know are mostly on the SPX universe. You alluded to this a little bit in the intro. And in a prior conversation, you said to me that the best defense for a short vol portfolio is knowing when not to sell. And I was hoping you could expand on that a little bit for me, how do you think about identifying those times when it really doesn’t make sense to sell vol.
Darrin Johnson 27:29
So because of the popularity of two leaves books, a lot of people have this idea in their mind that steep corrections in the equity indexes, particularly SPX. But in all equity indices, people have this idea that it just comes out of nowhere, like so we’re going along, compounding at 789 percent per year or whatever it is, and then all of a sudden, just the world ends. And then we’re down 50%. And everything that I have looked at. And then also in live trading, there are usually tremors before the earthquake. The problem is, is that most people do not pay attention to them. And this goes back to what I was saying in in my earlier point was, this is why I’m so obsessive about measuring realized, because there’s been this thing that has become popularized in the office space that essentially realized doesn’t matter. You just tried the implied the spread between the two is sort of like a futile metric with low efficacy in actually trading this stuff. I think that couldn’t be further from the truth. I think you really need to have you know, whether it’s German class or traditional standard deviation of returns, I think you need different sampling periods. All of that will start to tell you in some of the worst situations like let’s go back to 2011, right with the eurozone crisis and stuff like that, the intraday ranges if you were tracking them, were spiking back in May around flash crash time, you started to see expanding ranges, all of a sudden, five day 10 Day realized started spiking and it was causing like a backwardation or like a Realized term structure. And so when those things start to happen, those are your warning signs. Now, a lot of times, especially with zero interest rates, and sped coming markets, there’ll be short lived, and you can go back to running your program. But I always take them really seriously. And because I don’t have a narrow mandate, like an investment manager would, if during those times usually Korede that I’ll actually buy the straddle because I’ll start noticing it. And then you have to get an organized system to try to track all these things. But you’ll see where, in these short dated tenors, you’ll see that the price of the straddle really gets super cheap, relative to how much we’re moving because again, everybody’s kind of just complacently in this sort of comatose state where we’re just going along, and I’m looking at this and I’m glued at my desk, and I’m like yo, like we’re moving at IES points a day. And the straddle is only pricing in like a 2325 point move, why wouldn’t you buy it? And you damn sure wouldn’t sell it. Although most people just blindly do it. I don’t. And so to answer your question, it’s just you have to really pay attention to this stuff and really get granular on the volatility. Because what you’ll find is, there will be a couple of times every single year on a softball program that can wipe out all use profits. If you can just remove one of those, or lessen the impact. When you do get caught in that situation that regime shifts, then you have great risk adjusted performance. And that’s all that matters at the end of the year.
Corey Hoffstein 30:39
So over the last decade, more and more products have become available for expressing a long or a short vol forecast. For example, you could do options on Yes, options on SPX trade vix futures, you can trade vix etps, how do you think about sort of choosing an instrument for expressing your views?
Darrin Johnson 30:59
What I tried to do is, I tried to derive a specific forecast for realized volatility. And for imply, like, it does not have to be perfect. But I want to have, to me, it’s always better to have an opinion and having a forecast then to not have one and just systematically do something. And so what I’ll do is, if my forecast is, let’s say, for implied volatility to hold steady, and or spike, then what I’ll do is I’ll take that forecast, and I’ll say, Okay, what is the most efficient way to express this forecast? What product and what trade structure will give me the biggest bang for my buck? Because I’m all about getting paid when you’re right. That’s one of the things that over the years, I’ve managed to make a good acquaintance with a lot of sort of professional institutional ball traders. And that’s one of the things you always talk about, get paid when you’re right. Don’t mess around and accept pennies on the dollar when you actually forecasting something correctly. And so that’s what I’ll do. So for example, in the volatility space, if I think that implied may hold steady, or spike, then I’ll go to the etps. And then I’ll look at okay, is there a VRP inside of the ETP. So like right now, it’s March 15 2021. In at least the way I measured, there’s a pretty strong risk premium in the options on the etps. So you see a lot of people coming in, because I think a lot of institutional people want to express the VRP in a risk defined way. So they’re buying puts like crazy across the ETP space and in the VIX space. And so someone like me looks at that. And I say, Well, you know, this is potentially a time where I can maybe sell a put heads, the delta with the calls. And I think that those puts are inflated, and I’ll be able to make that margin. But it’s all about the forecast. And in finding the most efficient structure to give me the best bang for my buck.
Corey Hoffstein 32:52
Can you spend a little time comparing and contrasting for me trading vol, sort of at the index level, SPX, Vol, maybe in particular, versus thinking about it from a single stock perspective? How are the opportunities different? What are those differences really mean for how you have to think about constructing and expressing your trades.
Darrin Johnson 33:12
So this is an area that, first of all, is not really well documented in the academic space, you can go on Google Scholar, you can look on the SSRN. And there isn’t a whole lot of quantitative research on single stocks and sort of the their implied volatility cycles. One of the things that I think traders need to pay attention to with respect to single stocks is to understand that single stocks are not the index. And what I mean by that is, the VRP, that you find in single stocks is spotty at best. So you have to be very careful with the assumptions that you make when you go to trade an individual stock, because historically, the VRP could be negligible or close to zero or even inverted. And so when I go to trade single stock positions, be if it’s an earnings trade, or if it’s just on a non earning cycle. I tend to use those as opportunities to probably get long gamma, because generally speaking, what I found is especially on growth stocks, particularly, and this is something that I really would love for some quants to really dive into formally, but in my experience trading those stocks, the implied volatility does not catch up to the momentum until it does it until the party is almost over. So you can have quarter after quarter of blowout revenue growth, sales, growth, whatever it is, stock is trending. Implied stay in the toilet is still cheap. So you can be long this stuff through a whole series of product cycles and growth cycles. And for whatever reason, the implied volatility lags it. Now eventually the market smartens up. At the minimum, you’re talking about three to four months of where you can get really exponential returns on your tray. It’s where if not priced into the implied volatility, why this is a thing? I have no idea. I’ve tried to come up with my own explanations, I think its primary behavioral. But that is the big difference with single stocks is that you do not go in with the assumption that there is sort of this four to five ballpoint meeting variance risk premium, because in my experience, especially the stuff that you want to trade is not there. So you got to be really careful because you can get run over. And we’ve seen some of the various horror stories of people trying to do this.
Corey Hoffstein 35:33
One of the quotes that I’ve heard you say in the past is that quote, The upside is the real pain. When it comes to short volatility trades. What do you mean by that?
Darrin Johnson 35:43
What I mean is, now this is assuming that we are not using a vix future or volatility ETP to express our trade forecast and volatility. So we all know that, yeah, we wish that as retail anyway, that we could try a variant swap or OTC product and give us a more direct exposure to what we’re trying to predict. But we can’t. And so we have to use options and options are messy. Options are path dependent. And so when you are trading, let’s say a straddle with five days to go on the SPX, you need to understand that that upside is most likely, in most cases, going to be what hurts you, as opposed to what everybody gets told through media and through pundants. And through macro economic podcasts and personalities. The whole is the end of the world. The downside downside, in my experience is the upside, so much. So over the past 10 years, that I’ve gotten to the point where I almost need a full smile on the SPX, in order to sell the upside. And there are times where that happens, right. So this time last year, we saw the SPX smirk or skew turn into a smile, that’s when you want to sell like an iron condor, for me a tight iron condor, but like a condor or string or something like that, where you’re actually getting compensated on the upside. But on most times, even if you’re into technical analysis, or something like that, in situations where you’re like, oh, this may look bearish, somehow, some way that call is going to be threatened upside is going to be threatened. So you really have to pay close attention to the price that you’re selling something for. Because otherwise the upside is what will take you out. I’ve seen that happens. In fact, two weeks ago, I tweeted that up because I could tell that, you know, it was one of those days where we went down and we went down and we ended up down like close to 2% or something like that. And I’m like, these are the exact times where people get caught selling a condor or selling a strangle or something. And then all of a sudden, the SPX will just rip your head off. And those calls will be deep in the money and you’ll lose. And that happens so many times, Cory, like, you’d be amazed at the sort of predictability of it. Like it happens a lot like all the time, to the point where, like I said, I would like for the smart to turn to a smile before I actually sell upside.
Corey Hoffstein 38:05
So I’m gonna flip for a minute and talk about not what can go wrong, but actually the risk of being right in a certain sense. I’d love to get a sense from you, when you’re short vol how you think about when to close out a position, or more broadly, like how you think about managing the risk of the trade over its lifetime, as that premium is getting squeezed out.
Darrin Johnson 38:27
Going back to when I first started, and I was obsessively thinking about this stuff and thinking about risk. I’ve always been of the mindset that I want to get paid when I’m correct. And that’s really, really important. Because that will lead you into sort of what I would say, shaky strategies like selling SKU like selling tail risk, because that’s what you’ll see a lot of people, that’s the route you’ll see them go is, well, okay, I’ll sell this five Delta option in the SPX, I can still get a nominally decent amount of premium. I’ll sell that. I don’t do that. And to answer your question, the reason why is it goes back to all the random data and all the back testing and all the research, what you find is, so I’m a proponent, I’m a subscriber to the Kelly criterion in terms of whether it’s at the portfolio level or is at the individual trade level, I just think that it’s so useful. And if it’s already been done, the stuff has already been figured out for you, then you might as well use it. And so one of the things that I found, I built a very simple spreadsheet, but what you see is that the smaller the credit that you know, obviously there are some assumptions in here about probability of a trade being profitable, etc, etc, stuff that I don’t necessarily like to rely on, but you need it in order to run the simulation. But what you find is, is the smaller the credit that you take in under a Kelly framework for managing options spreads is you essentially have to stay in that trade and you have to hold that trade through expiration, it has to be a terminal position. And whereas the closer you get to the money, you get several Better properties, one, you can manage at 60%. Once you’ve taken in 60% of the premium, then you can take the trade off, and over 1000 or 10,000 trades, you’ll still have a positive expected value with the tail stuff that people love to sell, they don’t understand, let’s say you sell that option for $1, you have to take all of that dollar, or 95 cents of it, like there is no oh, I’m looking at the markets today. And it’s looking shaky, but I’ve gotten 60 cents of this dollar. No, you have to sit in it the whole time. Because in the short term, you may be relieved and then maybe psychologically appealing. But there’s going to be a time when you lose multiples of that. And so you have to account for that. And the cool thing about Kelly is, we don’t have to go through the pain of experiencing these different trials, the equation can give us the wisdom ahead of time, so you don’t have to make those mistakes. And so for me, I want to be closer to the money. So you’ll never see me go on a short option sort of structure, I won’t go less than like a 30 or 35 Delta, because I want feedback. The other thing about going that far out, taking small credits, is I don’t really know, if I have an edge in forecasting or not, I can just be fooled by the fact that I’m so far away that I never really am close to the action, I may not have an edge in forecasting. So I want quick feedback on whether I was right or wrong. Because therefore I can go back and if I’m using garbage, if I’m using like in my case is just to glorify exponentially weighted moving average. But like, I can go back and I can iterate on this. And I say, okay, what are inputs do I need to see to try to get better forecasts. So there’s that. And then there’s the fact that the closer you get to the money you can potentially get, there may be times where you really nail and you can get point A on your risk or point nine on your risk. And that’s great. And then lastly, it turns the stock a lot quicker. So yeah, there’s a ton of gamma near the money. But because you’re so close, it goes linear really quickly. So if there’s a time where I need to scramble, and I usually hedge es futures, right, so I’ll flatten that can do it and not worry about this sort of convex profile, this extreme convexity, where even your implied volatility exposure has like a gamma light component to it. And so for those reasons, that’s why I want to get a decent meaty credit, and then manage from there. I want
Corey Hoffstein 42:18
to talk a little bit about the small and micro cap space that you’ve started making into a larger and larger portion of your book. And I know this is something that’s a little newer for you. How is this piece different than what you’re doing in the large cap space? And why do you think it’s a growing opportunity.
Darrin Johnson 42:35
So for one, like it does not play well, at cocktail parties, it does not play well. Even on financial Twitter, people immediately label you a degenerate for even dealing in these crappy stocks. And I think that that really is a part of why the edge just persist. And then there’s the other side of it, and that big managers can trade this stuff. And a lot of analysts don’t cover these companies. And so it makes for a space that has a moat around it. And I’ve really liked that. But and this is something that I really wanted to include in here is as retail people, and even for investment managers, we have to get out of this approval seeking mindset. And this ability to be shamed, to a place where we’re leaving money on the table. And I’m not sort of preaching. I’m saying that I struggle with this, like this is something that I personally struggle with, where it’s like, do I really want to say that, like, I’m shorting XYZ crappy energy drink company. And that’s what contributed, patted my bottom line at the year do I really want to say that, but the fact of the matter is, we are in this to make money. And whether you are retail, or whether you’re an investment manager with fiduciary responsibilities, your job ultimately is to make absolute returns for your clients. And so I have to always constantly have a dialogue with myself because it is very straightforward. It’s not nearly as intellectually like caveman like. There’s some stuff that I’ve borrowed from like quant stuff that I’ve learned in terms of. So one of the things is typically the participants in these markets. I like to call them tables like at a casino, right where the bells and whistles and everybody’s drinking and stuff is hot and moving around. The participant in this market, just to be honest with you aren’t nearly as sophisticated as you would get in vix products or in the SPX landscape. They just aren’t. There’s limited bankrolls in this. So the way that they approach it is not from a portfolio perspective at all. It’s very much a lot of technical analysis voodoo, and very myopic and very just like Oh, I’m in this trade or if you just apply basic quant stuff that you learn on portfolio management and position management, like you can really outperform in that space. Now, the reason that I think it exists is because like I said, Number One capacity constrained, I mean, the most that I think based on my calculations on bid ask spread and how you can impact prices. You probably can only run like $10 million in this max now have individual, that’s a nice life, but to an investment manager that does not move the needle, but the fact that it’s there, and that you have these players who aren’t nearly as sophisticated as you get in these other large cap spaces, it’s really attracted me to it. But again, like just full disclosure, like I have to fight with my own battles, because I like talking to second order Greeks and talking about variance swaps, and OTC stuff and trade management. But again, I always have to stick to like, what works. And for my space and my size, like that works, and it works well. And so that’s what I’ve committed to. And then there’s another thing too, and this is something that’s super important, as a trader, not as a long term investor, not as a large manager. But as a trader, you need volatility to make money. And these things are volatile. So always remember that like, if something doesn’t move, it’s going to be a lot harder to make money. And so the thing that I liked is like, there’s always at least movement. And the way I look at it is volatility is synonymous or interchangeable with leverage. So you can trade a basket of these things. You can size to a cash level, right? No margin, or very little margin. But because they move so much, you can still make decent returns, and you get the occurrences. So when you combine all that together, that’s why I’m a huge fan of it for a retail trader.
Corey Hoffstein 46:20
So speaking about the differences between maybe retail and institutional constraints and opportunities, can you compare and contrast for me what your personal view of being independent versus an institutional trader really is? And where do you see your constraints versus the edges you have,
Darrin Johnson 46:38
in an ideal world, the differences wouldn’t be that vast, because, in theory, both sides of the coin should be trying to make absolute returns. But in practice, it can be a lot different. Because I will tell you that the psychological pain that comes from being an individual, and is just on you, it can be extremely stressful. I’ve gotten used to it. So it doesn’t bother me as much as it used to. But it can be extremely stressful, because like, Look, if the market simply isn’t accommodating your edge at that time, then you don’t make any money. But that’s also why I’ve learned from people on the institutional side in terms of how they structured their hedge funds or their funds or whatever. So I tried to set it up to where, on a quarterly basis, I would do it just as if I had a fund. But the key difference is, is that I have to perform. The advantage of that, though, is that I don’t have a narrow mandate. And so because of that, there are opportunities that are available and accessible to me that for some of our mutual friend, Chris, you know, he can’t access those. That’s why whenever we have these performance discussions, it always drives me nuts when you have academic types or large fund managers talking about performance numbers. And I’m like, Yeah, well, there’s a sliding scale in there. So if a guy has a million dollar account, his performance expectations should be way different than someone who’s managing $500 million or a billion dollars. And it seems like nobody wants to have that nuanced conversation. So the opportunity to outperform and to consistently outperform, is there for the retail trader, but that doesn’t remove the psychological text that you pay. And then a lot of times to court, the stuff that is accessible to a retail trader is there for a reason is not that guys, like you aren’t smart enough to notice it. It’s that, quite frankly, we talk about use of time and stress management. You don’t want to be sitting at a desk staring at this stuff for 12 hours a day. Like at the end of the training days, man, I’m dog tired. Like I’m exhausted. Because you have to sit there you have to be patient you have to observe, take notes, I have binders and binders full of notes and just observations from just staring at the stuff all day. And then you have to be willing to put the trade on and take it. So it’s not that I think a lot of retail people get this it’s not that smart people this people are smart. On the institutional side, it’s just that quite frankly, they view it as almost manual labor. They view it as almost like a blue collar gig. I’ve heard Michael Martin call it blue collar despair. He would rather be golfing, raising money, fully automated. So because people on the institutional side have that mindset that leaves pennies and dimes and nickels lying on the sidewalk. But again, you have to be in decent shape physically. And you have to have the mental dexterity and the mental endurance to be able to sit there and wait for these opportunities to arrive. So I think that’s the main difference.
Corey Hoffstein 49:39
Well working as an individual. I mean, you’re talking about all the things you’ve got going on. You’re building research systems, you’re constantly trying to learn you’ve got new products coming at you. You might be exploring a new area of the market. You’re watching the tape me How are you scaling your man hours working alone?
Darrin Johnson 49:58
It’s inefficient and It can be chaotic at times, just to be 100% truthful with you, the bottom line sort of absolute dollars, relative to what you would make if you were trying to just work your way up the corporate ladder, make it so that you kind of accept a lot of slack in your process. That’s just the honest truth, like a lot of Prop traders and a lot of retail at the high end of retail, they won’t say it like that. But that’s just the honest truth is, like, I’m way under optimized, I’m sure there are plenty of ways, there’s a whole lot of slack in my process. But at the same time, I feel like at the end of the year, the amount of money that you can make as an individual relative to what you would be doing like a white collar corporate job makes it worth it, you kind of just deal with the disorganization and the chaos. And, to reiterate, it is hard to like you are your own risk manager in the risk management part isn’t necessarily the hard part. The hard part is you’re your own researcher, I don’t have like our friend Chris, like, you know, he has guys from Citadel and these super smart PhDs and like Maska, like, it’s just me. And because it’s just me, I’m partially learning. And I’m partially trying to conduct research. So there’s really no way to streamline this into like, sort of, from one to two, I do this, or from eight to 9am I do this, I can’t do because I’m still I’m learning to, I’m learning different ways to get better at coding and more efficient at coding, but I still have to learn. And so because of that, it’s very difficult to be as efficient as possible, you just have to accept that things are gonna take longer, they’re gonna take you longer, you’re gonna have to go the scenic route, you’re gonna have to do a lot of stuff manually. But hopefully, you have your trading situation, your trading program set up to where you’re getting compensated for that. Like, it may not be what it would be if you decide to go to the institutional side and just go golfing and raise money. So you’re getting two and 20 on 300 million. Now, it may not be sort of that efficient. But you can still provide a nice life for yourself. And you do have a lot of autonomy in your personal life.
Corey Hoffstein 52:09
I want to pull on that thread of learning a little bit. Because as I get older in this industry, one of the things I feel like I’ve come to appreciate more is how much of the trading wisdom is really passed down through what has historically been sort of an apprenticeship structure that people came into this industry. And they’ve learned through experience they learned through someone who had been doing the job teaching them as someone who’s come at it on their own, what were some of the hardest learn lessons that have sort of stuck out for you.
Darrin Johnson 52:41
So because the way that I learned was actually through more of an academic sort of institutional framework, it was the actual, it was the actual notation in the jargon in the symbology. That was the hardest for me. I mean, I had to hire a math, like these white papers in the formulas, and then stochastic calculus, and then really sort of wrapping my mind around. Okay, what exactly am I doing here? And what are sort of the nonlinear risks that I’m trying to not only exploit, but that can potentially hurt me. So like, for me, it was really like the formality of trying to grok all this stuff in illiquidity cascades, right or, or instinct, like, I tell people this all the time, and I sound like a broken record. But us and Claire’s books, were literally my Bible, man, I was looking for it. The other day, there’s a picture of me like, sound asleep on the bed when my oldest son was a newborn with Sinclair’s book right next to it, because I would go through it over and over and over again. And then the stuff that I didn’t understand, I would try to find people. And the cool part is there’s a lot of grad students and quants that do a lot of freelance work that will tutor you on the side, you just have to look for it. So I would reach out to those people. And I would say, Look, man, explain this to me, like I’m a freshman in college, explain this to me, like, I don’t know any of this stuff, and just walk me through it. And so after doing that over and over again, eventually, you do figure out how to do it efficiently. And you do learn. But that was the hardest thing was like, because I always wanted to be taken seriously as if I was on the institutional side. There’s a small minority of retail that can make money, but not really articulate why or how in sort of a formalized way. And I never wanted to be that because this is really my craft. And this is really what I love doing. So I wanted to be as professional as possible. But in doing that, that meant that I had to sort of train myself as if I was on the professional side. And that was really hard. I mean, I’ve read physics, academic papers that had less fanciful math and less obtuse equations than the stuff you’ll receive from econ departments or from finance departments. And so for me, that was the most difficult part and then the The other additional challenge was more just, you have the benefit of knowing all the ins and outs of back office stuff. And my retail peers like they don’t, and that hurts you. So I wanted to learn like, Okay, how was margin calculated? How is span margin calculated? How is portfolio margin calculated. So like another exercise I did in Python, and I didn’t any so it was just, I wanted to recreate VX X and UV x, y. And so I went through their perspectives, this was years ago, went through their perspectives, got all the equations, wrote them out on the spreadsheet and did it in Python. And then I just wanted to replicate VX X and UV X Y to see exactly how this thing is composed. But again, this is the way I view it, back office sort of nuts and bolts stuff, that that was a hurdle for me, because nobody’s gonna give you that stuff. But I realized, like, it’s super important to recognize that. And so for me, those are the biggest challenges just trying to formalize and professionalize my training.
Corey Hoffstein 56:00
So it’s absolutely not my place as the host to add my two cents to a guest answer. But that last point you made around replicating other products is something I have done so many times. And I could not stress enough how helpful it has been to my intuition. It is probably the most useful exercise I could recommend anyone do, particularly on like the quant side quant equity or something like that, if you can get your hands on some bank notes, some bank research notes and go back to their back tests from 2012 2013, try to replicate what they’re doing and see what it looks like out of sample, you learn a lot, you can learn a whole lot doing that.
Darrin Johnson 56:37
And this edge has become so noisy but back in 2012 2013, it used to be if you were one of the people that went to their perspectives on VX X or UV x y. So what I did was I just it’s like a table in Excel and in Python, where you just see the holdings in the certain times of the month. And so it used to be it’s not it’s way noisier now and more difficult to harvest now, but you could just time it based on the weighted basket of vix futures in the ETF. So in other words, you could sit out for a majority of the month in cash. And then at the sweet spot when the portfolio is closer to 5050 than that row yield is really grinding away at the product, then just sort them. So what eventually happened is people got hit to that. And so then it became okay, not just the sweet spot of the month, but we need to quantify a way to track the basis. So when the basis gets stretched, but not too stretched. Plus, we have this 5050 or even 5545 basket of vix futures. So you have those two things going, then you sorted, then people got aware of that, then it became to the point where it’s like, Okay, now we’re just going to play for this product to decay. And so then can we at least buy the downside, the puts for a reasonable price that if this thing continues to drift downward, I can still get some sort of return on my money. And now it’s the market has gotten so smart that you can’t even do that. People think they’re clever buying these puts in the VIX complex in the etps the markets ahead of that, and that trade has not done well. You’d be better off just shorting the underlying or certainly vix future. But that’s an example of how that trade more from when it was super easy to get a little bit harder. You had checked out basis when it was stretched, but not to stretch to get that last, because you’re trying to do is you’re trying to get that last piece of decay, right? Then people got on to that. And then all of a sudden, now there’s not nearly as much as in those products as there used to be.
Corey Hoffstein 58:34
Can you spend a moment or two talking about sort of identifying when you think the edges gone? How do you sort of decide personally, okay, I think this trade is over.
Darrin Johnson 58:44
It’s funny, you bring up trading axioms and trading wisdom. There’s so much bad stuff and stuff that doesn’t pass like sort of the basic back test and research that gets passed down. And I really believe one of the ones that’s really pernicious is this idea of like, focusing on win loss ratios and at the trade level, and like streaks of trades and what’s not possible, what people have to realize is, and this is really important to timing, the trade, or figuring out when it’s not working. When you are calibrated with a regime in a market, you can literally have 20 winning trades in a row. Now over the long haul, those numbers will average out to whatever sort of the historical average is. But when you’re synchronized perfectly with the current regime, then you will win win win win win win win. For me, the tail has always been is is this starting to be hard money. I noticed this going into the end of 2017 2018. I noticed that it was all of a sudden, VA wasn’t going down. Like these products weren’t going to I might have like you can almost so weekly posts or bi weekly posts on VX X and come up with the product. So in other words, the cost from a big picture perspective all of a sudden Got a positive carry on insurance, right? And so when that starts to happen, then you’re like, Okay, this is crowded. That’s my take on, it’s just crowded. It’s just too many people know about it. The pejoratively coined target manager made $50 million, waking up and starting to fix every day. And so once that got out there, I mean, there are a whole YouTube, so it’s quite dedicated to I just sort of blindly, I just do it, I’m just the short ball. So like I all I do is sell bought. So that’s one thing, but then it starts to manifest itself in the actual volatility on these products, and just the price performance. And so at that point, it’s like, okay, you know, it’s time to pack up and go home onto something else onto the next table.
Corey Hoffstein 1:00:42
It’s no secret that trading amongst retail investors really exploded in popularity in 2020. What advice would you give to anyone who is new to trading, but he’s really serious about taking it to becoming a full time career?
Darrin Johnson 1:00:59
Well, first off, I’d have to sort of interact with that person to know how serious they really are. Because one of the things that’s become popular now, even amongst retail is I’m seeing a lot of really technically smart kids who are either in grad school or just graduated from undergrad, and they want to sort of do what I do. But what’s missing is when I interface with a lot of these kids is they don’t have the hustler piece. This is sort of a top down thing, right? Like it started on the institutional side, presumably in the late 80s. Were all of a sudden quant just was like, not a pejorative term. But it was like the new thing that everybody wanted. And so you have all these super duper, numerous super smart, scientific and mathematical kids, but they don’t have the hustle. And again, this is where I think I’m eyeball. When I read Market Wizards. When I read the Market Wizards books, the first thing I thought was these guys are hustlers, even all the way up to George Soros. I thought, like, he’s just the money. He’s like, this guy’s to escape the Holocaust. Like, he’s just a survivor, right? He’s a fighter. He’s a hustler, even with the turtles, right? Like that was what I thought was like, these guys are just earners, and then who just happened to be traders. Now I see a lot of people that love the intellectual stimulation of options trading. And because everything’s open source, I mean, it’s amazing, sort of the things you can program on your own with all the open source resources out there. But they don’t get the best, not where your money is going to be made, especially on the retail side. Like you have to really have, first of all, you have to have a risk seeking temperament. Are you the type of person that would pack up and move cross country have a little bit of savings and sleep on the floor and try to figure it out? Because had I been a baby boomer, maybe I would have been the one crazy black guy that packed up and went to Chicago and said, You know, I want to be on the CBOE floor. It started off as a clerk. But do you have is that in you, because if it’s not, there’s nothing, there’s absolutely nothing wrong with that. There’s nothing wrong with being just a researcher. But be self aware. Don’t delude yourself into thinking that this is for you. Because like if your palms are sweaty, and you get uncomfortable when you put risk on, because that’s the thing. It’s not just a partial differential equation, right? There’s actually risk involved. The other day, we were talking with Australia, like I told you, there are a whole lot of really smart people that just won’t put this trade on. There are certain things that they’ve learned from their financial engineering program, or certain things they’ve learned from other academics. And so all of that baggage will prevent them from actually putting on the risk. And putting on the risk is how you are going to get paid. It’s how you want to pay your mortgage, how you’re going to pay for kids. Like, that’s where it’s going to come from. And if that’s not in, you, then find another support role in the ecosystem of finance. Just don’t say that I want to be a traitor. And so that’s what our response to you in the sense of like, do you really want to do this? And the other thing is Cory, like, it’s cool now. Like, it’s cool now to say, Yo, man, I got a Robin Hood account, or I’m on em one finance or whatever, dude, like that is so new. One of my closest friends, he worked at credit derivatives at Goldman, and his wife manages a large endowment for Vanderbilt. And I can remember when I told her what I chose to do, and like the look that I got, and I had to develop a level of thick skin and a level of mental toughness and independent mindedness to shake that off and still say, You know what? No, like, this still makes me money. And this is what I want to do, and I’m going to do it. But people under like, you have to put up with that. Can you tell your parents? No, I’m not going to go to go get a Wharton MBA or wherever have you. I’m going to actually do this. And I’m going to stick to it. I’m going to stick to my guns. Because when I read the Market Wizards books, I see those guys have that trait. That’s the part that stands out to me, or even like a crazy story like in reminiscences of a stock operator, like dude was a punter. He bought For the wall, like you wanted to make money, and it’s like, if you don’t have that, then this isn’t for you. And so that would be my advice is to self assess first. And you know, a lot of people talk about get adequately capitalized. That’s important. But if this is really in you, you’ll find a way to find somebody or figure out what you got to do to get to an adequate capital base, you need to deal with the inner work of is this something I really want to do? And can I deal with being socially ostracized? Can I deal with being isolated? Can I deal with the fact that when I talk to professionals, investment professionals, that they’ll laugh at me that they’ll mock me on Twitter to all their audience, or financial media types? Who incorrectly or erroneously labeled me as a degenerate or whatever? Can you deal with that? Do you have the psycho emotional makeup to deal with that and keep doing what you’re doing? So self assessment would be my first thing and then we can talk about the technical stuff and what you need to do and how much capital you need to have to actually do this and have reasonable expectations return expectations year over year.
Corey Hoffstein 1:06:07
Darrin, last question for you. Vaccine rollouts seem like they’re accelerating seems like return in a corner on COVID When the world gets back to normal, what are you looking forward to most
Darrin Johnson 1:06:17
probably just going out to like coffee shops, and being able to actually go on the day in like, have a babysitter, and I love coffee, like and I love coffee shops and like, when I was first starting out, and I was putting together you know, our initial brochure like I would live in coffee shops. So yeah, just being able to go you know, maybe to have a drink or have a cup of coffee and be around people and kind of just take in like the whole ambiance, but that’s definitely it. Yeah, and then hopefully, hopefully the reflation trade works out, right. That’s the other thing that would be great.
Corey Hoffstein 1:06:54
Well, Darren, I can’t thank you enough for coming on. I know I learned a lot, which means I hope our audience learned a lot. This has been terrific. Thank you.
Darrin Johnson 1:07:01
Oh, thank you for having me, man. It’s been a pleasure.
Corey Hoffstein 1:07:08
If you’re enjoying the season, please consider heading over to your favorite podcast platform and leaving us a rating or review and sharing us with friends or on social media. It helps new people find us and helps us grow. Finally, if you’d like to learn more about newfound research, our investment mandates mutual funds or associated ETFs please visit think newfound.com. And now welcome back to my ongoing conversation with Harley Bassman. So Harley, by any measure, you’ve had an incredible career you worked at Merrill Lynch, Credit Suisse. Pimco, you had retired, written off into the sunset. I’m curious, what drew you out of retirement and inspired you to join, simplify?
Harley Bassman 1:07:54
I wouldn’t say I was retired, I’d say more like I was running a W two. But yeah, I’d kind of stepped back and was writing. And by happenstance, I was introduced to the gentleman at simplify, they were starting to ETF business, and you know, moving on chat, and I really had no particular interest in in one or the other. And then towards the end, they started to describe the strategy and what they’re going to do, and I’m going to buy an asset, I’m gonna buy an index, I’m gonna buy a put, we’ll look, everyone does that. And then oh, by the end, we’re gonna buy the call is like, you’re gonna do what like, that’s incredible, because that’s actually the value part of the trade. And that’s sort of looking at what they were doing in terms of buying various instruments, and buying optionality and bind the convexity. I thought that was genius. I thought that was really second generation stuff. And I wanted to be involved with that, because I thought, it can go a lot further in terms of what you can do with terms of taking these various asset classes, and adding optionality positive convexity to them where you can increase your return for a limited amount of risk. And I also thought the call option was the cheap part. And the other thing was that there the ability to go and take some of my longer dated is the ideas and offer them to civilians, civilians being non professionals, is the International swap Dealers Association, is the contract that all Wall Street uses is the template so we could trade options between each other that aren’t listed. People are basically limited to trading exchange options that are three to six months, maybe you go a year or two, not very liquid. But when you start to put on longer dated five 710 year options available, all of a sudden, you solve the problem of path dependency, and simplify what they offer. What we offer is genius in many ways, one is offering the optionality but the second is offering the management of the risk managing the path dependency of these options. And that’s frankly, the biggest challenge you have is dealing with that the issue of managing these options is bothersome to most people, simplify, we’ll manage them for you in the structure. And so you get the combination of picking the assets, and then managing that profile. And if you get long dated options, well, then it’s really off to the races because then you actually own a convexity you own optionality as an asset that doesn’t require any management at all. And when you own that kind of profile, where you can have multiple unlimited returns for limited loss with a stable profile, that’s amazing. And so the combination of those two, I was eager to join the firm and it’s been a great experience so far.