In This Episode
On this week's Stansberry Investor Hour, Dan and Corey are joined by Jim Carroll. Jim runs the Vixology Substack, where he analyzes stock market volatility. He also serves as senior wealth adviser and portfolio manager for investment adviser Ballast Rock Private Wealth.
Jim kicks off the show by describing how he got his start in finance and how he found his way to volatility trading with CBOE Volatility Index ("VIX") futures. He breaks down what caused "Volmageddon" in February 2018, what he learned from the experience, and which specific factors drive the VIX. As Jim explains, many investors don't realize that the VIX can soar higher when everyone is piling into buying call options...
Let's go back to the meme stocks. Everybody's buying call options on all kinds of stuff. That can also push the VIX up because volatility really doesn't care whether it's volatile to the downside or to the upside. So the VIX really reflects people's enthusiasm for buying options on the S&P [500 Index].
Next, Jim talks about his "VIX Mix" composite of 17 different indicators that he uses as a warning signal for what's about to happen in the markets. This applies to both the downside and the upside, with the VIX Mix predicting crashes and rebounds alike. Though primarily for trading, Jim explains that long-term investors can use this tool to their advantage too, since they can prepare for bottoms and buy more stock when those drawdowns hit. He then warns listeners of several things they should keep in mind about volatility data, including small sample sizes, the fact that volatility clusters, and the outsized influence of institutional investors...
In the volatility world, there's a lot of institutional volatility selling these days... And I think [it's] one of the reasons that we see these spikes out of nowhere. Go back to the Fed meeting in December, which we've all forgotten. But there was a couple of days' spike in volatility that was very significant... We've got institutional volatility selling that dwarfs anything retail might be doing.
Finally, Jim gives his opinions on VIX futures products, such as the popular Simplify Volatility Premium Fund (SVOL). He reminds listeners to beware of embedded leverage and to size their positions carefully – especially because the stock market has become like a giant casino. Jim also analyzes why the VIX is tilted more toward the bearish side, how "market makers" profit from investor fear, and how to more accurately gauge market sentiment...
One of the things you can do to sort of gauge underlying sentiment is to compare the action in the VIX with the action in the VIX futures. And if the VIX futures are not moving as much as the VIX, I would trust the VIX futures as a better gauge of what's really happening.
Click here or on the image below to watch the video interview with Jim right now. For the full audio episode, click here.
Additional past episodes are located here.)
This Week's Guest
Jim Carroll is a senior wealth adviser and portfolio manager for investment adviser Ballast Rock Private Wealth. Before this, he had worked at multibillion-dollar investment adviser Tidal Financial Group, founded wealth adviser LongRun Capital Management, spent four years as chief financial officer of a Nasdaq-listed company, and worked 16 years as an investment banker with Smith Barney, Kidder Peabody, and Bear Stearns. Jim's Substack, titled Vixology, analyzes stock market volatility to craft systematic long or short exposure designed to produce uncorrelated returns.
Jim earned his bachelor's degree in psychology from Claremont McKenna College and his Master of Business Administration from Harvard Business School. He also served four years of active duty as an officer in the U.S. Army.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today, we talk with the "vixologist," Jim Carroll.
Dan Ferris: Jim is a fantastic follow on Twitter. If you're interested in volatility and the VIX, you have to follow him, @vixologist on Twitter. I highly recommend it. I look at his feed every day, and I get his e-mails. It's really interesting stuff if you're into the VIX, but let's not hear me talk about it.
Let's talk about it with Jim. So, let's do it. Let's talk with Jim Carroll. Let's do it right now. Jim, welcome to the show. Thanks for being here.
Jim Carroll: Hi. Great to be with you, Dan. Good to meet you, Corey.
Corey McLaughlin: You, too.
Dan Ferris: I just want our listeners to know that Jim Carroll is the one and only vixologist, and that among other things, besides describing his calling in life, it also is his handle on Twitter, which is now called X.com, but I'd rather call it Twitter because it's easier to figure out what you're talking about. And I highly recommend following him if you're on Twitter, because it's a real education, and that's what I'm hoping that he can help give you today. Vixology 101 maybe we can do today. First of all, Jim, you're a new guest, so maybe just tell our listeners a little bit about your background, like how does one become a vixologist? What happens in the years before that?
Jim Carroll: Yeah. As it is with many callings in life, a big part of it is an accident, and it goes all the way back. I have to take it all the way back to college, but I'll make it short. I was the son of an Army guy, so we moved every four years. What am I going to do? I don't know.
I had a couple of part-time jobs, and I said, "Well, maybe I better study economics, because that must have something to do with business," and I vividly remember one of the early classes, the professor standing up in front and saying, "Let's talk about some of the basic assumptions. First of all, we assume rational behavior," and I thought to myself, "Oh, my god. I'm in trouble, because –"
Dan Ferris: Yeah.
Jim Carroll: "I'm just a kid, but that don't make any sense to me. I don't know who this guy hangs out with," and I was taking an elective course in the psychology department on organizational behavior, and I said, "Maybe there's a different angle here. Maybe I can study irrational behavior how we herd cats and make organizations run," so I switched from econ to psychology. I paid my way through school with an Army [Reserve Officer Training Corps ("ROTC")] scholarship, so I had a job.
That was the good news. I didn't have to compete for a job coming out of school. I spent four years on active duty. Fortunately, we weren't shooting anybody at the time, and so then, there I am, and my cousin is the smart one in the family, and I heard she was going back to business school. So, she had been accepted at all the top 10 schools. She was deciding between Harvard and Stanford.
I said, "OK. Well, that's – I'll just save the trouble and only apply to those two." You know, how naïve was I, but what I discovered when I arrived at Harvard Business School, because they did accept me, was that they loved ex-military people, because Harvard is all about training leaders, and their heuristic is that if you were a military officer, you were already a good leader, so bring them on and let's go.
Wound up on Wall Street, because that was the craziest thing I could think of doing coming out of business school. Met a lot of people who had spent some time on the street. Ended up in investment banking at the start of my career, and when the dot-com bubble burst, I had some friends say, "Hey, Jim. You're a Wall Street guy. What do you do with your money? Do you manage money? Our accounts have been cut in half or worse. Help." So, naïve again.
You know that there's a naïve thread that runs through all of this. I took the Series 65 and started a registered investment adviser called LongRun Capital, and so I've been on this side of the business since 2004, '05. So, 20 years now, and the whole VIX thing really started in 2015, so literally 10 years ago. We're celebrating the 10th anniversary of my foray into this crazy world because – so flashback to 2015, right?
Dan Ferris: Yeah.
Jim Carroll: Interest rates are really low coming out of the global financial crisis. Stocks seem to be expensive. If you looked at the Vanguard, Capital Markets' assumptions, or you look at, GMO, what they were saying about where you're going to make money in the next 10 years –
Dan Ferris: Right.
Jim Carroll: It looked pretty bleak.
Dan Ferris: Yeah.
Jim Carroll: So, I'm thinking, "Holy crap. I need to find something else," and I looked at all the research that had been done on the commodity markets, because you want commodities in your portfolio because they are a good diversifier. They lack correlation, and my conclusion was in large part, they lack correlation because when stocks are working, they lose money.
Dan Ferris: Yeah.
Jim Carroll: And that didn't particularly sit well with me, and I stumbled across some research about this. I knew what the VIX was, but I didn't know that you did anything with it, this whole volatility complex, as I sometimes refer to it. And coming out of the GFC, the VIX futures had started trading in 2004, and so during the GFC, there were some people who said, "Hey, we need to buy these VIX futures things because they're going to go crazy high as the market goes crazy down."
So, there were some people who made a ton of money trading VIX futures in the GFC. And Wall Street, in its infinite wisdom, said, "Hey, we need to productize this thing." In, I think it was 2009, were the first exchange-traded products that sat on top of the VIX futures. VXX and TVIX were in that 2009 to 2010 timeframe.
Dan Ferris: Right. It's ETF.
Jim Carroll: And then 2011 –
Dan Ferris: Right, you're talking about ETFs, yeah, ETMs.
Jim Carroll: ETFs that basically reference the VIX futures –
Dan Ferris: Right.
Jim Carroll: – either long position or a short position, and by the time I had stumbled across this stuff, there were half a handful. VIXY had come out, which was an inverse VIX futures. VIXY had come out as a competitor of VIXX. We still had the TVIX, which was two times the long, so you had some toys to play with, and I just went down this rabbit hole of reading a bunch of academic research. There were a couple of websites that were launched by people trading this stuff.
And I said, "Maybe there's some systematic way that I can sort this out and figure out how to use these things." And what was obvious was that if you could get on the right side of the trade, the returns were crazy, if you did the short-vol trade. And short volatility is akin to being long equities. So, S&P going lower left to upper right, you want to be the short the VIX futures, and with – back in that day, the hot product was XIV.
We'll come back to XIV, but it was 1x inverse in VIX futures, and – but referencing the returns on the S&P, the returns on XIV would be something like 2x what you'd get out of the long position in SPY, for example. So obviously that attracted a lot of attention, but I did a bunch of work, borrowed a bunch of analysis that other people had done and came up with a framework based on the term structure to say, "This is a good time to short it," and, "Maybe this is a good time to be long," but mostly the initial foray that I came up with was identifying periods of time when it was OK to be short VIX futures. And so, started trading that in 2016, just after Brexit actually, and had a great run, 2016, 2017.
Dan Ferris: You sure did.
Jim Carroll: And then, you don't know what you don't know, but –
Dan Ferris: Then 2018 happened.
Jim Carroll: Well, in January of 2018, it's etched in my mind forever, it was on January 16, my systems said, "Close out your short volatility position."
Dan Ferris: OK.
Jim Carroll: So, I closed out my short volatility position. It wasn't very good at going the other direction, so the good news was we took our profits and avoided being obliterated in Volmageddon on February 5.
Dan Ferris: Wow.
Jim Carroll: I knew a lot of people who didn't avoid being obliterated on February 5.
Dan Ferris: Yeah.
Jim Carroll: But –
Dan Ferris: What really happened, Jim? What really happened on February 5?
Jim Carroll: What really happened was a combination of things, and I try to stay away from the inevitable conspiracy theories, but the short version is there was literally just too much money betting short on VIX futures, such that even a relatively small change in VIX, relatively small drop in the S&P triggered a cascade, triggered a bunch of people heading for the exits at the same time on the same day, and they just couldn't get out the door at the same time.
Dan Ferris: I see.
Jim Carroll: There was over $2 billion in these short volatility instruments going into that couple-of-day period, and I was just way more that – the VIX futures liquidity was not there, and let's just say that there may have been some actors who saw what was going on, and if I was standing in the window, looking to jump, they pushed me.
Dan Ferris: Yep. Yep.
Jim Carroll: There are people out there who look to take advantage of a lack of liquidity, and that may have contributed to it. So, two things really hit me there. One was, wow, this stuff is tricky and dangerous, but it appears that I've got some systematic approach that kept us safe, but how do I catch that long one was one question I had to ask myself. And the other thing we had was we had rubble. XIV was gone.
VIXY, which was the other 1x inverse, ended up being cut in half, so you no longer had the same exposure that you had before, and so I had to essentially pull back, and reconsider how I was going to do this. And at the same time, I had gotten to know some people who were deep in the weeds in the volatility world, and the exchange trade, the product world, and got involved helping them essentially relaunch a couple of products. Volatility shares is the business, and then products now are VIX and UVIX, the 1x inverse and the 2x long, so essentially replacements for XIV and TVIX, because TVIX disappeared during the pandemic. That's another story.
Dan Ferris: OK, maybe –
Jim Carroll: So, that's how I got started. It continues. I've made some adjustments to how I do what I do, but that's kind of the origin story.
Dan Ferris: OK, good. That's a good history there of Vixology. A little bit – intro to it. Let's just tell our listeners what the VIX is, just to make sure we all know what we're talking about.
Corey McLaughlin: Yeah, ground everybody in what – we talk about it within our newsletters and whatnot, but I'm sure –
Dan Ferris: Yeah.
Corey McLaughlin: – we have the Vixologist here. We need his simple definition.
Dan Ferris: Right, yeah. Yeah, presumably you're going to be better at this than we are.
Jim Carroll: Well, yeah. So, let's start with the VIX, which is kind of the sort of ground zero of all this stuff, and essentially what VIX is designed to do is to give a composite measure of the premium reflected in a strip of both put and call options on the S&P 500 Index. So, think of – and this is SPX. We probably don't have time to get into some nuances that we could get into, so VIX is referred to as the fear index, right? VIX reflects the activity in the call and put options for the S&P.
It tends to go up when people are buying puts. They're concerned about the market or the market's already rolled over and they're buying puts to protect themselves, and the premium paid for those puts goes up. Well, that means that the VIX is going to go up. Now, what some people don't recognize is that there's another circumstance where the VIX might get pushed higher, which is when everybody's going crazy trying to buy call options.
Let's go back to the meme stocks, and everybody's buying call options on all kinds of stuff, and that can also push the VIX up because volatility really doesn't care whether it's volatile to the downside or to the upside, right? So, the VIX really reflects people's enthusiasm for buying options on the S&P. Typically, the VIX really goes crazy in conditions where investors are fearful. August of last year, this latest tariff tantrum, and that put buying activity will drive the VIX higher. The VIX can't be traded, OK?
The VIX is literally just a quotation from the CBOE based on a 15-second reading of option prices on the S&P 500, so that's what it is. So, in 2004, they decided, "Well, let's create some tradable instruments around this," and mixed futures were launched, and so we now have VIX futures contracts. Right now, we just dropped May and added January to our term structure, so we've got a string of VIX futures contracts that people can buy and sell. We've got options on those VIX futures.
People get confused sometimes when they hear, "VIX options." The options do not translate to the VIX itself. They translate to the VIX futures. There's –
Dan Ferris: Right. Their futures options, right.
Jim Carroll: They are futures options, so people sometimes get confused about that, but – so now you have a bunch of tradable instruments around this VIX thing in the futures, in the options, and then we have the exchange-traded products that were created to make it easier for people to take a position, again, in the underlying VIX futures, like any futures contract, whether it's oil, gold, whatever it is, those contracts every day are one day closer to expiration, so if you own a futures contract, every day your exposure is slightly different than it was the day before.
So, what these exchange-traded products do is they make that daily adjustment so that you have a constant exposure to the underlying futures contracts, which has some benefit to it from the standpoint of being a little more predictable, but again, people can do what they want to do in different ways. Some people want to play volatility using options. Some people want to play volatility using futures. I made the decision to play volatility using the exchange-traded products.
Dan Ferris: OK. Now, I wonder if this is a good moment to talk about the VIX Mix, which is something I look at every day, like I'm addicted to it now. I have to look at it every day or every time you send me an e-mail. That seems like it's daily, right? I don't think you've missed a day.
Jim Carroll: It is pretty much daily.
Dan Ferris: Yeah, so what the heck is the VIX Mix? How did you come up with this, and is this – like, is the VIX Mix part of your system that told you to get out before the February Volmageddon in 2018, or when did you do this?
Jim Carroll: The VIX Mix is more recent than that, but what I came to realize was that every day I was keeping track of a whole bunch of different things, and I thought, "Well, what if I put all these things together?" and created a composite indicator that pulled measures of volatility from different aspects, different perspectives. And I had actually been approached by the people at Substack because they had been following me on Twitter, and they said, "You're putting up a lot of interesting content. Have you ever thought about doing a blog, bringing it over to Substack?"
And I said, "Well, not necessarily," but I thought about it and decided that that's what I would do. I had to have a home for all this work that I'm doing on a regular basis anyway, and then the idea of this composite indicator came to mind, and I spent some time developing it. And so, what the VIX Mix is, it's a combination of, right now, 17 different perspectives, if you will, 17 component indicators, each one of which takes a different perspective on some aspect of volatility. It could be the VIX futures term structure.
It could be the CBOE volatility term structure. The CBOE is the home of VIX, but it's also the home of – and VIX is a 30-day measure. It's also the home of VIX 9-Day, VIX 3-Month, 6-Month, 1-Year. Don't get me started about 0DTE, because it's out there, but I don't pay attention to it.
Dan Ferris: OK.
Jim Carroll: I let the smart kids play with that, but again, you have this term structure out of those CBOE indices, and watching how that shifts, and what the dynamics are there can give you some insights. Medium-term VIX futures versus short-term VIX futures, again, how is all of this stuff responding to day-to-day changes in the market, and when you add it all up, is it telling you something? And so essentially, I have 17 things that are all percent ranked based on their history. Where are we relative to the history of this thing?
Add them all up, and then I sort of arbitrarily said, "OK, over here, these are bearish readings, and in the middle, these are neutral readings, and over here, we've got bullish readings," and one of the things that you see occasionally, because nothing works 100% of the time, is you'll see the equity market's behaving one way, and this VIX Mix thing behaving a different way. If we go back to July of last year, before the August sort of flash crash, if you will –
Dan Ferris: Yep.
Jim Carroll: – the S&P was making new highs, and the VIX Mix was saying, "Yeah, we're kind of feeling neutral. We're not feeling that bullish sentiment," and the S&P decided that the VIX Mix was right and came down, and so it provided a little warning signal, and sometimes that warning signal is kind of a yawn, and sometimes that warning signal is pretty useful in terms of protecting capital.
Dan Ferris: OK.
Jim Carroll: And the other one is obviously – there are times when the market has cratered, and you're thinking, "Geez. Wow. This is bad," and maybe the VIX Mix starts to perk up.
Maybe people are taking hedges off. They're beginning to adjust their positions, and so under the surface, sentiment has changed. Volatility has receded a little bit, even in advance of the market turning around, so you can see divergences in both directions. Again, it's not always the case, but it can be useful.
Dan Ferris: OK, yeah. You sort of answered the question I had, which is, what happens at tops and bottoms, because presumably you'd be deep in bear mode at the bottom, right when you'd want to be turning around, but you're saying that some of the components that you have in there help you, can be useful. I think that's a good way to put it, in determining when it's time to kind of turn your bets around and take off your shorts and think about going long.
Jim Carroll: Right.
Dan Ferris: OK, and right now –
Jim Carroll: But again, that's a very tactical use of it.
Dan Ferris: Yeah.
Jim Carroll: And not everybody's a tactical investor. I think the –
Dan Ferris: Right.
Jim Carroll: The other thing that I suggest to people is let's say you're just a – hey, Dan, Corey, I don't have time for all this. I'm a buy-and-hold investor. I'm long term.
Dan Ferris: Yep.
Jim Carroll: I'm making some money. I'm relatively young. I want to just keep putting money into the account and watch it grow. Well, let's work on your psychology then. Let's make sure that your risk tolerance is what you think it is.
And so something like the VIX Mix, you could say, "OK, well, we're going through a bad time, but I'm prepared for that," and maybe I'm even going to say, "OK, if everybody else is freaking out, maybe I want to put some more money to work, but I'm not going to allow myself to be shocked by what's going on." And so, even for longer-term investors, I think just having something that says you might want to prepare yourself for an increase in volatility. It doesn't mean you have to do anything about it, but psychologically, you might want to brace yourself.
Dan Ferris: I'm glad you said that, Jim. I'm really glad you said that, because that's been a big message of mine in one of my newsletters and like, almost every week in the Daily Digest that Corey writes the other four days – I just do it on Friday – is to be, by all means, a fundamental-based, bottom-up, long-term investor in great businesses. That's where you're going to get your best compounding, but we know how people behave, don't we? They sell when they should be buying, and they buy when they should be selling, and I feel like you're right. The VIX Mix can sort of help prepare you, and I'm constantly telling people, "Prepare, don't predict," right? Just prepare for what's out there, right?
Jim Carroll: Right.
Dan Ferris: Which I believe is the mentality of a great trader. They don't say, "I know I'm right." They manage their risk and say, "This looks like a good bet." It's a totally different mindset.
Jim Carroll: Yes.
Dan Ferris: This kind of helps with that, but I think I cut Corey off. I thought he was going to ask you a question. Nope?
Corey McLaughlin: No, but I was just going to say, we've written recently, after these VIX spikes, the long-term returns, you go one year, two years out, it's pretty good. Pretty great, actually, so –
Jim Carroll: Yeah, and you're absolutely right, and there have been a few of these little data points. The only time I object is when somebody says, "Hey, when the VIX goes to 50 and then goes back under 20 1000% of the time you make a trillion dollars." Well, the end, the end on that set – on that set of occurrences is four, going back to 1990. It's happened four times.
Dan Ferris: Oh, yeah.
Corey McLaughlin: Right.
Jim Carroll: And oh, by the way, how many 10-year periods has the S&P lost money? Not very many. So, yes, I think if you can be brave in the middle of a market meltdown, and you do have an extended holding period and an ability to hang on for an extended period of time, you're going to do great. I sometimes kind of shake my head at these tables that are produced that say, when this thing happens, whether it's bad things or good things, I just – statistically, half the time we're talking about small data sets. So, I just say, "Yeah, but take it with a grain of salt." And by the way the other –
Dan Ferris: That's a great point.
Corey McLaughlin: [crosstalk]
Jim Carroll: There are two other things that are important to understand with this whole volatility thing. You get a spike in volatility, and that reflects the market going down. So, OK, we should buy that, and again, I think that usually works out, and I would just say two things. One is that sometimes that initial shock has aftershocks, so again, fine.
Dan Ferris: Yeah.
Jim Carroll: You want to buy? Go buy, but prepare yourself for some additional volatility. The –
Dan Ferris: Right. Mandelbrot. That's Mandelbrot 101, volatility clusters. Be careful.
Jim Carroll: Volatility clusters. The other thing that I occasionally remind the audience on Twitter is that – and again, this is – this stuff only goes back. VIX only goes back to early 1990s, so again, we're dealing with relatively small data samples here, but the other thing I look at is, just taking a simple, one-year moving average of VIX and saying, "Is that one-year moving average above 20 or below 20?" Twenty is roughly the historical average for VIX, because if you can look back, when that one-year moving average of VIX gets above 20, again, you may be looking at a cluster. You may be looking at a period. If you go back to the Russian debt crisis, long-term capital management, the Asian Contagion.
Dan Ferris: Right.
Jim Carroll: You had a series of events during a period where that one-year moving average of VIX was above 20. The global financial crisis, we got above 20 and hung out there for a while. I look at the serious VIX spikes that include 2011, which was coincident with the U.S. government debt downgrade, but more coincident with the whole euro debt crisis that was kind of isolated, actually. And we were not in what I refer to as a high-vol regime. 2015, again, August of 2015, when we had a big spike in volatility, that was relatively isolated, and as we got into 2016 and 2017, it was a great time to actually be short volatility and long stocks.
Dan Ferris: Yeah.
Jim Carroll: So, I look at these things both in isolation and in context to give myself a sense of what I think the probabilities of things calming down or things staying volatile might be.
Dan Ferris: Yeah. You can see, like, if you'd just take a VIX chart back to whatever, 1990, there's these – you can see clusters, and you can see periods from – I'm just going to eyeball it here on a Bloomberg chart that I'm looking at. From just, say, 1998 to say, 2002 or so, the bottoms are all higher, right? And the tops aren't as big as, 2008, or 2020, or whatever, but there's – it's spiky, and the bottoms are all higher. You can see the whole bottom, and then you get this nice downdraft down to about, '07 or so, right? The top of that, and then whoosh, we're off to the races.
Jim Carroll: Right.
Dan Ferris: And the bottoms are actually higher all across from '07 to, I don't know, call it '11 or something, and then, so you can see that something's going on in the world. People are scared, and they stay, let's say somewhat more scared than normal for an extended period of time.
Jim Carroll: Right.
Dan Ferris: And I feel like when you look at what's happening now starting maybe with a bottom in, like, May of last year, that we're – that bottom, those bottoms are steeper. We're getting higher, and we could be – I think we're headed into a period of higher volatility because I think that's what happens when all of these forces converge on a market that is extremely expensive compared to history by several different measures.
Jim Carroll: Right.
Dan Ferris: I think I've written, literally, about something like, 20 or 21 different measures, and the market's like, epically, historically expensive based on nearly every single one of them, and above average on the other one or two, so that's what I'm expecting. I've been telling people, "It's going to be more. There's going to be more of this," like, people act like April 8 was, "Woo, Trump relented," and there was a little bit of a hint of bond market, vigilantism because he mentioned it the next day.
He was like, "Oh, people are freaking out in the bond market." It isn't over, I don't think. I don't think it's about tariffs either. It's about those fundamental imbalances that can't go on forever. Tariffs are just one way to handle that, so –
Jim Carroll: Yeah, and I'm a terrible macro guy.
Dan Ferris: Your [crosstalk] – Go ahead.
Jim Carroll: I'm a terrible macro guy, but what I say is, "Look, you're entitled to your own views of the world, your own opinions, but you can't be surprised if these volatility episodes continue."
Dan Ferris: Correct. Yeah.
Jim Carroll: If we see several more of them, you just can't be surprised.
Dan Ferris: Yeah, but hang on a minute. The vixologist says he's a terrible macro guy?
Jim Carroll: Oh, yeah.
Dan Ferris: Equities generally are not a great macro asset. Like, you want to watch bonds, right? That's the macro asset, but if there is a macro view though that seems like, just intuitively, I would think it would be through volatility, but no. You're a terrible macro guy.
Jim Carroll: Well, if you want to say that looking at the world through this lens is a macro perspective, God bless. I'll take it.
Dan Ferris: OK, right, because – especially the instruments that you're doing. It's like, a derivative of a derivative of something. So, that tends to be like, macro goes into those places and just blows them up, or melts them down, or whatever. Inflates them like [crosstalk]
Jim Carroll: Well, which is fine, which is fine.
Dan Ferris: Yeah.
Jim Carroll: And I guess where I draw the distinction is, you take sort of legendary macro guys, whether it's Tudor Jones, or Soros, or some of these –
Dan Ferris: Yeah, yeah, yeah.
Jim Carroll: Some of these folks who come up with these theories and this piece is going to move, and that's going to cause this thing to happen, and this other thing to happen, and this other thing to happen.
Dan Ferris: Right.
Jim Carroll: And it might unfold over the next 20 years.
Dan Ferris: Yeah, and therefore, let's short Malaysian palm oil futures, and then they make 1,800% in a week. Yeah, I know what you're talking about. Yeah.
Jim Carroll: Well, but so, my perspective on this is, I just kind of let the numbers do the talking. I don't come up with a grand theory of what I think is going to happen. I just let price tell me what I want to do and when I want to do it. I sometimes refer to it as just humble swing trading of exchange-traded volatility products.
Corey McLaughlin: Yeah, do you –
Jim Carroll: And sometimes those swing trades can extend themselves to weeks or months, and sometimes they're over really quick.
Corey McLaughlin: There may not be an answer to this, but – or an easy one, but the – just as far as what the VIX or what the VIX Mix, like, who is it measuring, right? Like, is it mostly institutional? Is it more retail nowadays than you've seen in the past? Do you have, like, an inkling of what it's actually representing, a little bit more generally?
Jim Carroll: Yeah. I think, yeah. So –
Corey McLaughlin: Or is just like everything else, it's just a combination? It's like, the market?
Jim Carroll: Well, I think one of the things that I try to pay attention to are smart people who have an insight into what is commonly referred to these days as the flows. Who's doing what to who and what size? Is retail driving the bus? Is institutional driving the bus? In the volatility world, there's a lot of institutional volatility selling these days.
Dan Ferris: Oh, yeah. Yeah.
Jim Carroll: And some of it has been in place for quite a while, right? Whether it's income-enhancement, right, you've got this portfolio of equities. We should be selling calls against that. You've got all kinds of strategies that use derivatives to try to squeeze some premium out of the volatility market, typically by selling options.
That volatility selling tends to be a suppressant until it isn't, and I think one of the reasons that we see kind of these spikes out of nowhere, August of last year, go back to the Fed meeting in December, which we've all forgotten, but there was a couple of days' spike in volatility that was very significant, and then we've got the temper tantrum, etc., etc. We've got institutional volatility selling that dwarfs anything retail might be doing. Retail's really not a factor in the markets that I follow.
Corey McLaughlin: OK.
Jim Carroll: Historically, you had – when we got to February of 2018, that was sort of the peak of retail participation in the volatility markets.
Corey McLaughlin: Right.
Jim Carroll: And those people were carried out, that the few survivors have probably not come back.
Dan Ferris: Yeah.
Jim Carroll: It's interesting though. We have seen some products, and we're seeing some newer products come into my world. JPMorgan came out with an exchange-created note, "VYLD."
Dan Ferris: Oh, VYLD?
Jim Carroll: Which is, again, sort of tethered to the VIX futures, but they've done it with a different construct that is meant to be less volatile. Frankly, I have no idea what the real use case is for the product, because to me, it looks like an S&P kind of return in an exchange-traded note that JPMorgan has. I don't get it.
Dan Ferris: Yeah.
Jim Carroll: A couple of other people have recently filed at the SEC for volatility products that look a little bit like Frankenstein's monster to me. We'll see what happens. There's one very popular product that the – and I have great respect for the team at Simplify.
Dan Ferris: I'm just looking at that, yeah.
Jim Carroll: And they have a product –
Dan Ferris: Yeah.
Jim Carroll: Yeah, they have a product called SVOL, which is an actively managed short volatility product that also incorporates some hedging and really is designed to capture the roll down in VIX futures, so they'll short on VIX futures contract. They'll cover that short position, and they distribute income from that operation, so they view it as kind of an alternative income product. So, there's some different takes on it. I tend to be a little more of a purist in terms of the VIX futures and products that directly tie to the VIX futures, because if I'm giving money to an active manager I may or may not know what they're doing on a day-to-day basis, and that kind of unnerves me.
Dan Ferris: Yeah, I'll say. Especially when it's – it's one thing to not know the secret sauce of a stock-picking strategy, but it's quite another to not know the secret sauce of a derivative strategy, just from my way of thinking. I always took –
Jim Carroll: Yeah, look, if –
Dan Ferris: When I hear, "Derivative," I think of embedded leverage. Just –
Jim Carroll: Yeah, well, and there is embedded leverage, OK? We're talking about products that have embedded leverage, and because that's what futures are, and if somebody has a strategy to use these things, and they're consistently applying that strategy, then I can say, "OK. I can get with that if I understand the strategy, if it's not a black box, right, where there's no transparency," and that's being applied consistently. That's what I get with the exchange-traded products that I use, which are primarily SVIX and UVIX. I know what they're going to do every day, and so there's no mystery to me, and so I feel comfortable using those to implement the strategy that I have.
Dan Ferris: Right. Jim, this sounds like something that it's really interesting to hear about it, but I almost feel like telling our listeners don't try this at home unless you really know exactly what you're doing, and it sounds like – you've spent a career, or a good part of one, as you told your origin story, a good part of your career just focused on this. That tells me something.
Jim Carroll: I sometimes refer to what I do as juggling nitroglycerin.
Dan Ferris: That's great. [laughs] Yeah.
Corey McLaughlin: Yeah.
Jim Carroll: Now, if you get really good at it, it can be profitable and entertaining, but –
Dan Ferris: Yeah.
Jim Carroll: – one false move, and you could blow yourself up, and so, yeah. This is not something that people should just cavalierly launch off into, because –
Dan Ferris: And the point about – yeah? The point about leverage though is worth amplifying a little bit because, like, let's say you trade gold futures, and let's say –
Jim Carroll: Right.
Dan Ferris: – one gold contract is worth a million bucks. Well, if you've got a million bucks in your futures account, you could probably trade 10 of them or something, but – or 20 or whatever, but you could also trade it unlevered by buying one contract, right, but it kind of almost negates the purpose of [inaudible].
Jim Carroll: Right. Where's the fun in that?
Dan Ferris: Yeah, that's right, so then it becomes this risky, levered thing. So, we wind up here with everybody who trades anything saying, "How do you control risk? Is it position sizing, trailing stops, the sort of typical trader tools?"
Jim Carroll: Yeah, the answer for me is both of those things, and that the one thing I don't do – the way I run my strategy is, I don't hedge explicitly, so if I'm short volatility, I'm short volatility. I don't buy VIX calls as a hedge against that, buy S&P puts as a hedge against that because to me, the way to hedge a strategy is to position size. And so, when I'm working with clients, and if I've got somebody who's interested in having a little bit of spice in their portfolio, we're going to size that such that the volatility of the strategy itself does not cause their portfolio to get wonky.
Dan Ferris: OK, so that –
Corey McLaughlin: Yeah, that's what I was going to bring up.
Dan Ferris: I don't want to –
Corey McLaughlin: Like, what? What?
Dan Ferris: Yeah.
Corey McLaughlin: When you're managing other people's money, obviously you go, has this –
Dan Ferris: Yeah.
Corey McLaughlin: For a lot of people, how does this fit in, like, percentage-wise or not?
Jim Carroll: It's going to be relatively small. Yeah, it's going to be a relatively small percentage, and it's typically going to be in a tax-deferred location, an IRA account, because trading this stuff, there's no such thing as long-term capital gains trading volatility. You're never going to have a trade that lasts 12 months in a day. It's all short-term stuff, and so while the returns can be attractive, they're tax inefficient and need to be located someplace that shields the tax impact.
Dan Ferris: That's a good point.
Jim Carroll: And yes, from a trading perspective, the way I suggest people think about this is if you know how to swing trade, then you are probably going to be comfortable in this environment. If you don't know how to swing trade, then stay away, or just provide liquidity on the other side of my trades. That's OK, too.
Dan Ferris: That's OK with you. Probably not OK with me.
Jim Carroll: Well, this is trading.
Dan Ferris: Yeah.
Jim Carroll: I do not suggest in any way, shape, or form that using these volatility exchange-traded products is investing. It's trading.
Dan Ferris: Yeah, and there's a lot of that. That opens up an even wider discussion we may not wish to have, but there's so many products now that are very obviously structured as pure trading products, hyper-focused on now we have one stock products with leverage. Clearly not meant for investment, clearly, like it's the market, and many people are talking about this, how the market is this casino now to a great degree. You mentioned 0DTE earlier. Huge, huge casino-like behavior there.
Jim Carroll: Look, we have gamified the markets, whether it's Robinhood, or a bunch of other apps – push green for buy, push red for sell, whatever. The long trade options, well, not only will you not pay commissions, but we'll give you rebates for trading options. Woohoo.
Corey McLaughlin: Yeah.
Jim Carroll: I get paid to trade options? No, so we've created a very large casino where some of the people who wander in off the street are soon separated from their cash, and maybe they come back with more, or maybe they are chastened and wander off and do something more productive with their lives.
Dan Ferris: And meanwhile, Jim Carroll's sitting at the table, counting cards in his head, sort of, right? Sort of.
Jim Carroll: I don't want to discourage people from participating because that provides liquidity.
Dan Ferris: And Jim, that is so subtle. That "providing liquidity" is a wonderful way to say that.
Corey McLaughlin: Yeah.
Dan Ferris: A wonderfully polite way to say that.
Corey McLaughlin: I just saw Robinhood, on their app, I had – for the first time, I saw you could bet on, like, the NBA playoffs, like a game. Like, they just all of a sudden – so you want to talk about casino and betting, like, there you go.
Jim Carroll: Oh.
Corey McLaughlin: Like, it's –
Dan Ferris: Yeah. Yeah.
Corey McLaughlin: It's literally sports betting on the app, so – and you can also do Fed, yeah.
Jim Carroll: Well –
Corey McLaughlin: You can also do Fed rate projections and all that stuff, too.
Jim Carroll: Sure. Yeah.
Dan Ferris: All right, let's go back. I want to talk about something, Jim.
Jim Carroll: OK.
Dan Ferris: You mentioned volatility goes both ways, and you were saying sometimes people go crazy and buy call options, and that can affect the VIX, but generally speaking though, the VIX, it's like a bear-tilted product, like it's negatively correlated with the S&P 500.
Jim Carroll: Yes.
Dan Ferris: I think about 80%.
Jim Carroll: Yes.
Dan Ferris: And so –
Jim Carroll: Maybe even more.
Dan Ferris: – why is that? Like, why don't we get – when people go –
Jim Carroll: So –
Dan Ferris: Why doesn't it go both ways?
Jim Carroll: Because fear is a stronger emotion than greed for most investors.
Dan Ferris: Of course. I should've known.
Jim Carroll: And so, it's the activity in the put options that go the other direction and cause VIX to go higher when stocks go lower.
Dan Ferris: Of course.
Jim Carroll: It's that scramble for protection that outweighs people because there are perfectly valid uses for call options by any investor who wants to understand how options work, right? It could be stock substitution,. We've had a good run. A stock may go higher, but I want to reduce my exposure in case it doesn't work out, so instead of owning stocks, I will own some call options.
I have less capital at risk. It's capital efficient. It can be a great way to do it, but that kind of activity, again, is probably not going to cause those call premiums to go through the roof, right? It's sort of –
Dan Ferris: Yeah.
Jim Carroll: – Steady Eddie, thoughtful purchases of call options. It's not chasing call options. It's – [crosstalk]
Dan Ferris: OK, so it's not a technical, structural reason. It's just the way humans behave is the sum –
Jim Carroll: Correct. Yeah.
Dan Ferris: OK.
Jim Carroll: Yeah.
Dan Ferris: I just wanted to make sure I –
Jim Carroll: There tends to be, yeah. The skew, to introduce a term that people may or may not be familiar with, the skew tends to go to put options, that the premium for put options tends to be higher than the premium for call options, and so that's reflected in the VIX moving faster and farther when the market's going the wrong direction than when the market's going the right direction.
Dan Ferris: Right, and just the dynamic of human beings, as you describe. They do get quite bullish and quite frenzied in their buying, that is true, but they're mostly buying most of the time anyway, so they're not mostly rushing for the exits, and mostly trying to not lose everything. So, that dynamic, I feel a little funny that I didn't figure it out, because I'm always writing about that, about fear and risk and the way people behave. They always do the wrong thing at the wrong time.
Jim Carroll: It's like the old movie theater analogy, right? Everybody rushing for the exits.
Dan Ferris: Yeah. Yeah.
Jim Carroll: When the movie finishes, everybody calmly gets up and walks out. It's when somebody yells, "Fire," or smoke starts to fill the room that everybody rushes for the exits and tramples everybody, and then that's when people begin to panic about the market going the wrong direction and try to get some protection in the puts. They're going to chase those puts, and oh, by the way, we also have to remember that the people who they're buying those puts from are almost exclusively very, very, very smart people called market makers who say, "Oh, all of a sudden, everybody's at my door wanting to buy puts."
Dan Ferris: Yeah.
Jim Carroll: "Maybe I'll raise the price."
Dan Ferris: Yep.
Jim Carroll: And so, there's – the chase happens.
Dan Ferris: Right.
Jim Carroll: That's what we saw. If we go back to August 5 and that, the weekend and premarket on August 5, when the VIX got over 60, did it really get over 60? Well, OK, what was happening overnight on Sunday into Monday morning –
Dan Ferris: Yeah.
Jim Carroll: – was a mad scramble for put protection, and so Ken Griffin's computers were saying – they didn't bother waking him up. They just started raising the prices for everything, and it wasn't like there was a lot being transacted, but when the CBOE computer went to calculate what the VIX should be, the prices had gone up. So, it said, "Hey, it looks like the VIX is 60." As soon as the market opened and liquidity returned, that came down significantly, and the VIX futures that were also trading during part of that period, it never got as high as the VIX itself. So again, one of the things you can do to sort of gauge underlying sentiment is to compare the action in the VIX with the action in the VIX futures.
Dan Ferris: Right.
Jim Carroll: And if the VIX futures are not moving as much as the VIX, I would trust the VIX futures as a better gauge of what's really happening.
Dan Ferris: Interesting. So, like, watch the front month when something like that is going on –
Jim Carroll: Yeah.
Dan Ferris: – rather than the VIX itself. OK. That's interesting, yeah. I'm glad you brought that up because there was a... It lasted for a couple of weeks. People were saying, "No, it wasn't really that high." Oh, yes. It really was that high, and it went back and forth.
Corey McLaughlin: Yeah.
Dan Ferris: And I never quite figured it out.
Jim Carroll: Well, and look, the way the CBOE calculates the VIX, it did. It got there.
Dan Ferris: OK.
Jim Carroll: But was that a –
Dan Ferris: Fair enough, yeah.
Jim Carroll: Was that a realistic reflection of what was really going on, and the answer really is not really, that it was a function of that being, and then Sunday night into Monday morning we're having computers talk to computers because everybody's asleep, and the VIX futures did not reflect the same level of movement, and that was kind of the tell –
Dan Ferris: I see.
Jim Carroll: – that – so again, had you been long VIX futures going into that weekend, you did just fine unless you held on to them too long, but that was – it was one of those circumstances where people did kind of freak out, and was it the dispersion trade? Was it the unwind of the Japanese yen carry trade?
Dan Ferris: Yeah.
Jim Carroll: Was it a crypto hedge fund that got a margin call on Friday afternoon? Yes, yes, yes, all of those things.
Dan Ferris: Yeah. Yep. All right.
Jim Carroll: Yeah, and then it settled down pretty quickly.
Dan Ferris: OK, great. Jim, this has been absolutely wonderful talking with you. It's time for our final question, which is the same for every guest, no matter what the topic, even if it's a nonfinancial topic, same identical question. If you've already said it, by all means, feel free to repeat it. So, the question is simple. It's just for our listener's behalf. If you could leave them with a single thought, a single, solid takeaway for today, what would you like that to be?
Jim Carroll: I think that investors generally need to understand enough about the market ecosystem to reduce the element of surprise. I think investors, a lot of investors, especially retail investors, kind of want to set it and forget it. And even in the advisory community, I see investment advisers who want to put clients into a particular portfolio, conservative, aggressive, moderate, whatever, and I'm going back to the golf course now and clients may or may not really understand the vacillations that they could experience in the market. And so, I think, pay enough attention that whatever volatility we experience doesn't come as a complete shock and cause you to do something that in hindsight you'll say, "Why did I do that?"
Dan Ferris: I love what you said. "Reducing the element of surprise." That is an excellent point, and thanks for that, and thanks for being here, man. It was so great to talk to the one and only vixologist.
Jim Carroll: Well, it's a pleasure to be with you and to actually put faces and names together, and I hope it's useful to your audience.
Dan Ferris: All right, Jim. Thanks a lot. You're going to be in a call from us in six or 12 months, and we're going to want to check back in with you.
Jim Carroll: I'll be here.
Dan Ferris: All right. Well, I feel like I got a good Vixology 101 lesson there, and I feel like there's – there's nine more of them. Like, we've got to have him back to get Vixology 102 and etc., etc., etc. It was great.
Corey McLaughlin: Yeah, that was great. I think this would be like a reference episode for a lot of people, just to go back to what he says about the VIX, the inner workings, the mechanics of it, what it actually represents. It was great, yeah. You've got to check out his VIX Mix on his newsletter, and I think I'll add that to one of my routines to check that out, so yeah. It was awesome, and he just told us off-camera, right after we finished too, that quote. You want to mention that, Dan? I think you just posted it, right, to Twitter?
Dan Ferris: Oh, yeah, yeah, yeah. So, the quote is –
Corey McLaughlin: It's like, his personality definitely fits what he's doing, too.
Dan Ferris: The quote came from one of his college professors who was an associate of Timothy Leary apparently, and the quote is, "For every pathology, there is a profession," and then he kind of amplified it. He said, "Whatever you can't prevent your – you can't stop yourself from doing, you can't stop yourself from doing it, well, that's your profession." He found his pathology and made quite a career out of it.
I look at the VIX Mix every day. Like, right now, as we speak, it's at 67%, which goes from – it's from neutral territory into bullish territory, and then it shows whether that's like, plus or minus the previous reading, and that's a minus two, so it may be headed bac into neutral territory, because we've had a couple down days here as we speak, and it's just kind of – it's nice to look at it. A lot of the time, it's not a surprise, but every now and then, you look at it, and I'm like, "Oh, we're more bullish than I thought. We're more bearish than I thought," so it's just a nice reading, like you said, to help not being surprised. What a wonderful, yeah, thing it –
Corey McLaughlin: Yeah.
Dan Ferris: – is to not be surprised.
Corey McLaughlin: Yep.
Dan Ferris: It's just that's the thing about a lot of this, is that people get surprised by events, and quick drawdowns, and quick runups and things, and they think that it requires some action. Overwhelmingly, if you're a long-term investor, it does not, and it's just, to me, if you can have some way of helping you anticipate or helping you know where we are, it could help you be a better long-term investor, I think.
Corey McLaughlin: For sure, totally. If you can have things that can give you confidence indicators or whatever it is –
Dan Ferris: Yeah.
Corey McLaughlin: – to be like, "OK. This is an event that we've seen before, or I've seen before," if you're in it long enough.
Dan Ferris: Yeah.
Corey McLaughlin: I've seen it before. I'm like, "OK." The more you see it, the more confidence you can get, so –
Dan Ferris: Right.
Corey McLaughlin: But if you don't know that, then you get caught up in a lot of emotions, which we all do.
Dan Ferris: Yeah.
Corey McLaughlin: I always hesitate when people are like, "Oh, this will – you've got to take the emotions out of investing." You can't do that unless you want to be like, total inhuman.
Dan Ferris: Yeah, right.
Corey McLaughlin: The algorithms and the robots can do that, but you, as an individual investor, fortunately or unfortunately –
Dan Ferris: Yeah.
Corey McLaughlin: – cannot do that, and so you need to figure out some ways to manage that. Manage it, not avoid it, I think.
Dan Ferris: It's like telling people, "As long as you're not a human being, you'll do great at this." It's a little strange.
Corey McLaughlin: Yeah, as long as you don't get scared and don't get excited, you'll do great.
Dan Ferris: Yeah. Yep.
Corey McLaughlin: Yeah.
Dan Ferris: So, all right. Well, that was a great interview. I really enjoyed it very much. That's another interview. That's another episode of The Stansberry Investor Hour.
I hope you enjoyed it as much as we really, really truly did. We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want. Scroll all the way down. Click on the word, "Transcript," and enjoy.
If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please, and also do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @investorhour.
On Twitter, our handle is @investor_hour. Have a guest you want us to interview? Drop us a note at feedback@investorhour.com, or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my cohost, Corey McLaughlin, till next week, I'm Dan Ferris. Thanks for listening.
Announcer: Thank you for listening to this episode of The Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com, and enter your e-mail. Have a question for Dan? Send him an e-mail, feedback@investorhour.com. This broadcast is for entertainment purposes only and should not be considered personalized investment advice.
Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stansberry Research, its parent company, or affiliates. You should not treat any opinion expressed on this program as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion.
Neither Stansberry Research nor its parent company or affiliates warrant the completeness or accuracy of the information expressed on its program, and it should not be relied upon as such. Stansberry Research, its affiliates and subsidiaries, are not under any obligation to update or correct any information provided on the program. The statements and opinions expressed on this program are subject to change without notice. No part of the contributor's compensation from Stansberry Research is related to the specific opinions they express.
Past performance is not indicative of future results. Stansberry Research does not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this program. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested.
Investments or strategies mentioned on this program may not be suitable for you. This material does not take into account your particular investment objectives, financial situation, or needs, and is not intended as a recommendation that is appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this program. Before acting on information on the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.
[End of Audio]
The Six Levels of Wealth – And How You Can Move Up
Secrets to Diversification and Outperforming Today's Market
Passive-Investing Zombies Have Hijacked the Stock Market
The Alternative Way to Invest in AI and Still Win Big
