Podcast Transcript: Thorsten Wegener On the Simplest Way to Understand Option Markets

This is an edited transcript of our podcast episode with Thorsten Wegener, published 3 June 2022. Thorsten spent twenty years trading equity derivatives and was a partner at Bear Stearns. He was also head of equity derivatives at Panmure Gordan and Head of Trading Warrants and Structured Products at WestLB. Currently, he educates and lectures on derivative markets. In the podcast, what VIX is and how to trade it, understanding the greeks – delta, gamma, theta, the different players in the options market, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:00:01):

Welcome to Macro Hive conversations with Bilal Hafeez. Macro Hive helps educate investors and provide investment insights for all markets from crypto to equities to bonds. For our latest views, visit macrohive.com.

There seems to be a lot of public holidays this week with the U.S.’s Memorial Day holiday this past Monday and the two-day Jubilee holiday in the UK. This has compressed the trading week, so I’d be cautious in reading too much into market price action. Nevertheless, it does seem like bond yields are moving back up thanks to high inflation prints in Europe. I discussed this on a Bloomberg Television interview, which you can see on the Macro Hive website. Elsewhere, oil markets are also on the move, and we feature a guest post looking into whether there is any investment in the energy sector to help boost oil supply. The picture looks grim.

On the crypto front, we look at correlations between Ethereum and equities, and it finally looks like the correlation is moderating. Finally, we have a fun piece on the Queen’s Jubilee. So as usual, great analysis that should help investors of all levels of experience. And if you’re not already in the Macro Hive universe, you can sign up for our new free weekly newsletter. It’s super popular and it contains charts, explainers, and unlock content on anything and everything that you need on markets. It’ll be your weekly dose of sanity in an uncertain world. To get the newsletter, just go to macrohive.com/free and sign up for the letter there.

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Now, onto this episode’s guest, Thorsten Wegener. Thorsten has spent over 20 years trading equity derivatives and was a partner at Bear Sterns. Before that, he was also Head of Equity Derivatives at Panmure Gordon and Head of Trading Warrants and Structured products at WestLB. Currently, he educates and lectures on derivative markets. Onto our conversation. So greetings Thorsten, it’s great to have you on the podcast.

Thorsten Wegener (00:02:23):

Thank you very much, Bilal. Thank you very much for inviting me.

Bilal Hafeez (00:02:25):

Well, first of all, as you know, Thorsten, I always like to ask my guests something about their origin story. Where did you go to university? What did you study? Was it inevitable you would end up in finance and then something about your career up until now?

Thorsten Wegener (00:02:36):

Well, I can give you the true story or fake-up story. So I give you the true story. I studied in Berlin, West Berlin at the time, I’m a little bit older, economics and law, and I actually never intended to go into banking until I saw a little movie, which was called Wall Street by Oliver Stone, which was originally produced to critique the Reaganomics and the rough area of the 80s in investment banking. It was the biggest advertising billboard for my generation that was ever out there.

So from that day on, I thought, oh, that is a very interesting part of the industry I’d like to work in. And when I finished university, I applied at several German banks and got a couple of invitations. At this time, I don’t know whether they still do this, they had three day assessment centre everywhere with all sorts of, you had to write essays, present it to people, do post-core exercises, how good you are in memorising things and making different connections.

I got an offer from Deutsche Bank and from WestLB in Dusseldorf. And WestLB paid the enormous amount of 4,000 Deutsche Marks more annually than Deutsche Bank was offering. And Deutsche Bank didn’t explain it properly. They said, “Yeah, we need somebody to eventually run one of our branches.” And I thought, I don’t want to be at a branch in Cologne or somewhere. They were talking about something like Tokyo, but they didn’t explain that after the trainee programme. So I said, “No, WestLB, it’s fine.” They offered me a trainee programme. And that gave me the opportunity to see all interesting parts of the business.

That was bond sales, where I started, where on the first day actually I met my wife. I didn’t know it then, but when I entered the trading floor for the first time, there was a bond trader with two phones on her ears, talking and shouting and doing deals. I was quite impressed and didn’t think about it. Years later, we met again after she had left to Merrill Lynch and then eventually came back and so the rest is history. So that’s how I met Susan.

Then obviously, I saw bond sales, equity sales, international sales. They realised that I could speak reasonably well English for a German guy so I was in there, and derivatives trading. And derivatives trading was obviously the thing that really caught me. I thought it was interesting, I had studied at university. I always like gambling and playing with the odds and that is what we do in derivatives. We play with odds.

Bilal Hafeez (00:04:50):

It’s funny, you mentioned gambling and playing the odds because when you work in a bank, I worked on sell side research for the bank for a long, long time. The one thing we’re not allowed to do is to use any gambling language when we write, in our research reports, it’s forbidden. So we can’t talk about the odds of this event are high because the bank doesn’t want any perception that investing is linked to gambling or is associated with gambling, or is gambling in any form.

Thorsten Wegener (00:05:14):

Well, let’s put it that way. Gambling in its worst form is actually just that, gambling. If you do it professionally, you play the odds and odds is probabilities and probabilities can be calculated. And that’s actually an educated guess. So I would assume that, well, I never had that experience, but my approach was a bit different. I was from the trading floor. So our language, you know that, used to be a little bit rougher than in the elaborated presentations or sales pitches you do out there.

But necessarily I like the ideas of working with odds, using the mathematics behind it all and make educated investment trades or speculations out of it. And when it came to the point where they, after the trainee programme, tell you what you’re going to do, I thought, great, I’m going to be a derivative trader. And they put me in international equity sales. Because they needed somebody there, which I didn’t know. And corporate politics, they had put their hands on me first. And the derivatives boys who also liked me said, okay, fine, you have him, we get the next one.

And I was three month in equity sales. And then I resigned and I met my boss and my 10 year longer boss then on the way out. I was about to leave the building. I went to the restroom and we were standing next to each other in the stalls and said, so what are you doing? I said, “I just resigned.” He said, “Really?” “Yeah, I have a better job offer in Frankfurt. They pay me roughly twice as much as I can get here.” And he said, “Oh, now you can actually join our department.” I said, “Great, what are you going to pay?” He said, “The same you have now.” And so I actually forfeited the pay rise I would’ve got in Frankfurt and stayed there. And I worked for 11 years for WestLB.

Bilal Hafeez (00:06:49):

And that was in trading then, that was the job you wanted, not sales. Yeah.

Thorsten Wegener (00:06:53):

I started as a humble market maker at Eurex and I was responsible for 15 of the 30 Dax stocks. There were industrial companies and the car manufacturers BMW, Volkswagen, Daimler. That was my market, which I had to make for institutional clients. We had the big pension funds. WestLB at the time was the fifth largest bank in Germany. So all the big names, all the pension funds, all the public funds used us as one of the counterparties they used. There were Deutsche Bank, Goldman Sachs, WestLB, Dresdner Bank, Commerzbank. These were the players in the market for the time.

And that seemed to work quite well. And I managed to, how do you call, eat my humble pie in my first year. My budget as a young market maker was a million Deutsche Marks I had to earn for the firm. So that was all right. I was up five million by half a year. I thought, I know everything, nobody can tell me everything. And then I think in three weeks, when Daimler made a takeover bid for Chrysler, I lost five million of those five millions I earned. So all the money was gone. But that was a time when you weren’t fired by your boss. I was called in by our senior boss. He really rubbed me hard and they said, don’t do it again, go back to work. So I went back to work and that was the point.

Bilal Hafeez (00:08:07):

And how did you lose that amount of money in the space of a few weeks?

Thorsten Wegener (00:08:10):

Oh, one of the worst trades out there actually, you can have low volatility and you’re Gamma short at the pin. Now you’re perfectly hedged in a position. If you have high volatility, it doesn’t matter. The stock goes through the upside, through the downside and you hedge there. You lose money once. If you only flick ever though slightly through the pin, where you are pinned, then at the one moment you are one million Deltas short and the next you’re flat. And then you’re one million Delta short, and then you’re flat. And you always show when the mark goes up and then you’re flat again. So when you very slowly, with low volatility, painfully work through these spots, it costs you a bloody fortune. But I had to learn that the hard way.

Bilal Hafeez (00:08:50):

And maybe we’ll talk a little later about some of these concepts as well so the listeners can understand this.

Thorsten Wegener (00:08:54):

Yes, I didn’t have these stellar performances anymore, but my earnings were stable. My profitability was all right. I had my risks under control and that made me grow. I ended up then becoming chief trader for the warrant and structured products desk because by this time the German retail market was huge. And I was always interested, how can I buy volatility? We didn’t invent it, we saw from an institutional client base, they had a product which was called reverse convertibles. Which is basically the client shorts a put, you have legal implications. You can’t make them owe you money. So we all wrapped that up into securitized product. They paid us up front, but for the first time I was able to buy volatility in big size. That coincided with an oil mark with TMT bubble around the 2000s.

So we were volatility short on the upside. So I always sold the offer and was able to buy it below the bid, through these products back. So we had nice margins, nice spreads, good market making all over the place. That worked very well. And it worked so well that I was called to the board to report. And I thought I get the biggest promotion of my career. And they kicked my butt from here till kingdom come, because we issued more of these products than the house fund of the loan and saving banks. In half a year, they collected something like 500 million Deutsche Marks at the time. And I collected 750 million. So they saw me as a natural competitor in their main bank doing this.

But at the end of the day, everybody was happy that we were making money out of that. And that progressed my career. So I eventually became head of trading for the structured products and the warrants books, with all the securitized products of WestLB. And then came the time when everybody went business card long. What does that mean? You remember the names of Dredsner, Wasser, Stein Clydeworth, Deutsche Morgan Grenfell and Bankers Trust. So everybody went bad shape crazy and WestLB, always a bit slow, was the last bank who picked up the last available investment bank, Panmure Gordon in London. So WestLB bought Panmure Gordon and became an expert in growth, was the slogan. And at the time it was absolutely appropriate.

Everybody wanted growth stocks and they bought in a great team and they did lots of stuff and it worked out. And then I’d realised we have a convertible desk in London, but we don’t have a derivatives desk in London. Thorsten, would you like to go over and set that up? And I thought, well, cool. Well, let’s go to London. My wife’s British anyway. So fantastic opportunity. So I went to London, started building this whole thing up, then the market collapsed and then they reduced costs. In my case, there also reduced risks, which means all the risk books were suddenly reallocated to Germany. So there was I, head of trading, building up a department without risk books anymore under my control. So I thought, hmm, that’s not good.

Bilal Hafeez (00:11:34):

Okay. So it’s after the dot com crash and it was kind of, as markets were bouncing back and then all these mergers had happened.

Thorsten Wegener (00:11:41):

Yeah, exactly. So all the risk books went back to Dusseldorf where the HQ was and I suddenly traded without a trading book. So I focus on issuing more of the securitized structured, the really nasty stuff, heavy structuring with all bells and whistles attached, which we could sell into the institutional client base. Problem is, if you are not in control of the product you’ve created, about the market making and the price, I didn’t like that. So cut long story short. Eventually Bear Sterns had approached me a while back already. And I turned them down. They wanted to set up their retail product, the structured derivatives product in German speaking countries. They had retreated from Germany in the ’80s and said, “Okay, we need somebody who has the experience. Who can do that? Would you like to come?” And I said, “Yeah, fine. I’m on board.” So we set up an office in Frankfurt again.

We were covering Switzerland, Austria, had a perfect market making team sitting in London. I had my boys shuttling between London and Frankfurt. And I was well, occasionally in Frankfurt, but I liked London more at the time. And then the unspeakable happened, Bear Sterns people say, we ran against the wall. We didn’t, we actually ran out of fuel. That was the only problem. People remembered LTCM when Bear Sterns was the main broker who said, “No, we’re not going to chip in.” And when Bear Sterns needed some liquidity, I think it was especially Goldman Sachs. And then later JP who said, “No, we’re not really chipping in.”

And I remember I came into the office and already the JP boys on the trading floor. And I saw my counterparty at JP Morgan on the Bear Sterns trading floor. I went into my boss’s office and said, “You know what, I’m going to take my annual holiday right now. And don’t expect me to come back. I guess I’m getting fired anyway.” And then they didn’t fire me Bilal, because obviously the earnings were right. And they didn’t have a justification, obviously the question, oh, would he sue us or not? So I actually had to make a case that yes, I would earn some money on my way out and I would not sue anybody and I would leave the firm.

Bilal Hafeez (00:13:32):

So this was Bear Sterns got taken over, was it…

Thorsten Wegener (00:13:35):

JP Morgan in 2008.

Bilal Hafeez (00:13:36):

2008. Yeah. That’s when subprime was all kind of kicking off and Bear Sterns was vulnerable.

Thorsten Wegener (00:13:42):

So I was, I was actually ending my employment as a good employee in good standing at JP Morgan. That was already JP when I left. And that was the time then when I realised, you know what, you’ve hardly seen your kids over the last years they were growing up. They were six and seven at the time. And my wife wanted to go back to work. And I thought, you know what? We’re moving to Germany. I am being Mr. House Husband. You go back to work. You’re better at it than I am anyway. And I do the whole thing. I clean, I cook, I look after the kids, I drive them back and forth.

And that’s what I did for quite a long time until one of my old friends asked me, he’s a teacher, he’s educating people in forex trading and economics. And he said, occasionally, I have a batch, Thorsten, who want to know about the derivatives, about options. Would you be happy to give classes? Not very often, but once in a while, I’ll call you in. I said, yeah, fine. Let’s try that. Bring eight people to me. I want somebody who will barely tie their shoelaces and a mathematician. So, I prepared this presentation, it took me three or four months for a three day seminar. And because I wanted to find out, first of all, can I educate? And secondly, do I make mistakes? Can somebody shoot me down? And Susan then always asked me because I had a fantastic title, strategic investments with equity derivatives. And she said, what are you working on? I said, my stuff, oh yes, straddles and stuff. That became then the name of the seminar. And that worked quite well.

So, most of my students are people who already have made their money, sold their main business, are out of more a technical persuasion and say, why would I give my money to a 25-year-old bank advisor? Everything I’ve done in my life I’ve done well. So, I learn how to manage my money. And that’s fantastic. So, the next step was the evolution out of that. Some of the best students actually, I grouped around myself, and we started building up, how would you call it? It’s more than website. All the tools I teach with, all the Excel sheets. Students are lazy. They never use them. So I said, “Why don’t we programme that into an application where everything we use for trading, for investing, for speculating is there at the press of a button.” So I had the advantage. These students paid me to teach them. And then they came on board and now they programmed, we’re in the progress of finishing it, one of the best applications to make trading easier for somebody who’s generally a bit lazy.

Bilal Hafeez (00:16:02):

So you’ve transitioned from being a trader running book, trading books at some of the big banks to becoming a teacher and educator now, in derivatives?

Thorsten Wegener (00:16:11):

Yes, absolutely. I love it. Bilal, if you’re used to talking to people in very expensive suits and it’s all about money and suddenly your main audience is six and seven, and doesn’t care about that, eventually you have this urge to come back into the industry. When they turned teenagers, it was really the question, what am I going to do with my whole day? And then this offer came in to teach and I really loved it. It was fantastic. Made a lot of fun.

Then obviously I wrote a couple of articles for you. Then more people keep on calling, universities ask me, would you like to hold a speech? And I’m almost inclined to get back to one of these lines from John Wick, people keep asking me, are you back, and I really don’t know what to say. Because the moment I say, now I’m back at work then it feels like work again. At the moment I say, I’m retired. Everything I do, I do just for fun.

Bilal Hafeez (00:16:59):

So you are like the John Wick, the Keanu John Wick of the derivatives world. You don’t want to get you out of retirement or else there’ll be some trouble.

Thorsten Wegener (00:17:06):

I think I’m back at least in getting serious about, and what I’m doing at, in my spare time, I run the most expensive hedge fund in the world. I have a 100% performance fee, it’s good. I’m the only investor. So I can charge myself whatever I like, it makes life much easier. And when I wasn’t in the market for a while, when I was looking after the kids and doing the whole mundane things, it’s actually quite nice to come back on the sidelines and you’re not as fast anymore as you used to be when you were 25, but a little bit of wisdom comes in. Yeah, you can lay back more and think, okay, I’ve seen something like this before, the odd rodeo I have experienced already, especially what we’re seeing now. And then it starts making a lot of fun when you bring all these bits together.

You have very good students you work with; you give education, you write an article and you do your own investments, your own speculation, and you still have a lot of time to do what I love most, reading a lot of books, watching a lot of television, seeing movies and thinking about things. What a lot of people don’t tend to do anymore. I’ve spoken to so many of students and fellow peers and said, “When’s the last time you actually sat down in a chair without audiobook or music and were just thinking about a topic?”

How to understand volatility, and what VIX is and how to trade it

Bilal Hafeez (00:18:18):

No, that’s fair. I mean, absolutely I think that’s one of the challenges of our time, that all of our time gets taken away by gadgets or other things. Now, Thorsten, I wanted to ask one thing, obviously you are a great educator. One basic question is, derivatives as an outsider, looks quite scary, especially options. People talk about volatility, all these funny Greek names, Gamma, Delta, and all sorts of things. And people hear scary stories about derivatives and leverage, that famous quote from Warren Buffet about weapons of mass destruction. Do you think it is complicated or not?

Thorsten Wegener (00:18:54):

Well as far that way, I’m doing it now for almost 30 years, I’ve counted 27 it’s now. It’s not really complicated. First of all, I’m not Mr. Super Smart. I learned it at university, the basics, Black-Scholes, and we even had to find out how to develop an option pricing model for bonds. That was part of the exam, because you have the finite expiration date in bonds. It’s not that difficult. If you break it down, what it really is, it is a way of measuring the value of something. And you try doing that by guessing the volatility, the future volatility.

Now’s the question, what is volatility actually. When I’m being asked by somebody who hasn’t got a clue, I always say volatility, the technical term could be, it’s how much stuff moves in one or the other direction. And volatility in these terms is nothing more or less than the forecast. How all market participants, who are always human, always the same people for the last, I don’t know, 10,000 years, we tend to do the same things, mostly rational. And then we are irrational. And volatility is one way of measuring this.

The beautiful thing is, if somebody calls you and say, Mr Hafeez, what do you think, who will win the next election? Will it be Tory government, or will it be Labour? Yeah, fine, you give your opinion. And that’s it. We have these surveys in the option market, but people put their money on the table for this survey. So whatever you see in price action can be translated into volatility because when you trade options, there’s only one variable in it. That’s the volatility. People bid a price for it. Everything else you need, strike, expiration, price of the underlying interest rates is there, you can observe that.

So you pay a price for something and the volatility, the implied volatility is derived out of that. And this implied volatility actually gives you a good guess how the market thinks the marketplace or the asset they’re focusing on will trade in certain boundaries over the next one day, two days, two years. And you can actually see that out of the market pricing and hardly anybody out there knows that. That you can say fine, you can attach probabilities to something. I’ll give you an example for that. When we have a VIX of 20, just to make math easy. And the S&P would be trading at 6,000, a VIX of 20 just means that the market thinks in one year time, the S&P will not trade higher than 20% from now, 7,200 or 4,800 with 70% roughly probability, we will be inside this corridor. Which then means the market only attached the 15% probability that we might be above the top corridor were just defined.

And that is what volatility shows you. It changes obviously every day, how the market, the market participants are bidding for whatever they have, but you can attach a probability to that. If everybody is panicking, volatility will be higher. So, this corridor will widen. And the market attributes wider price ranges for it. When something is more likely that everything could happen, it gets more expensive. When this corridor shrinks again, volatility falls, then the expensive stuff becomes cheaper because now we’re going in circles. The odds have come down. You’re the bookie. The idea is I sell very, very favourable odds, and when the odds come down and they’re not so favourable anymore, then I can go and buy them back. It will be cheaper, or the other way around. When nobody wants to do something, what we usually have before a crash happens, volatility is usually trading in 12 or 13 levels.

And I always say to my trainees in the past and my students, it’s like a functional insurance company. You’ve built the nicest house in the world. It’s worth millions. And the insurance company gives you the cheapest insurance contract available. If this thing just burned down and you want to insure the ruins, they’ll ask you four or five times the premium. And that’s how the equity markets at least work. And I think your bond markets as well, you always see that just before the shit hits the fan, we have extreme low volatilities. And when we have 60, 70, 80 volatility points on the equity market, that’s usually the time where you can at least sell volatility and make a fucking fortune out of it.

Bilal Hafeez (00:23:12):

And so, as an investor, if we just look at equities, S&P 500, say, you can just buy the index S&P 500. So you’re long. So the way you make money there is if the S&P 500 goes up, then obviously you make money. You could be short, so you could short sell the index, and you’d only make money if it goes down. The alternative is, if you go long volatility, so you’re not taking a directional view on the market. Instead you’re basically saying that you expect that the range or the day to day changes in the market to be higher than what the market is pricing right now. So, you expect the market to go from low day to day changes to higher day to day changes. And you’re not taking a directional view per se.

Thorsten Wegener (00:23:54):

We just made an interesting study. It’s hot on my desk. Last week, two of our boys crunched the numbers, and we found out something which obviously everybody besides me probably already knew, because when we’re talking about volatility, what the VIX tells us is how the realised volatility, what the market will have done in 30 days, is guessed now. So, what we did, we said, okay, let’s check, how’s the correlation between what the VIX tells you, what might have happened in 30 days, and what really happened. And we have a correlation of roughly 72%. All right, fine. That’s the mark. The volatility you see in the options market is a very good predictor of how much stuff will move.

Bilal Hafeez (00:24:31):

So just to be clear, just in terms of terminology here, implied volatility is what the market is pricing is the expectation of future volatility, and then realised volatility is what actually happened. So yesterday’s volatility, the day’s before volatility. And so what you’re saying is what you tested was to see what the market’s forecast was and what actually happened, was the market correct or not.

Thorsten Wegener (00:24:52):

Exactly. And then we have a 72% correlation, which is in our terms very, very high. So then we looked at what actually happens at different volatility regimes. And that’s very interesting. We have a negative correlation with volatility below 20, a positive correlation, volatility between 20 and 50 and a negative correlation between volatility at 60. In easy speak, if volatility is below 20, it always almost makes sense to sell volatility because it will get lower. If we are between 20 and 50, then we are in a country where you want to be volatility long, you more likely make money on the upside. You have a positive correlation between what really then happens.

But if you are in panic territory, it always, not almost, it always makes sense to sell volatility because markets will eventually come back to a mean reverting point, at least in volatility. That’s always the discussion. I wrote a little article on your website about that as well. We can’t stay dysfunctional for too long. We’re all market participants. We can’t slap our faces for hours and hours or years. Eventually volatility will come down and that’s what it always does.

Skew and volatility smile

Bilal Hafeez (00:26:03):

And actually, on that, that’s a very interesting point that you make, which is that when volatility sort of shoots higher, so your unusually high levels, almost invariably volatility ends up falling, because as you said, people can’t stay in panic mode forever. But how do you define too high? So, say VIX, let’s say it’s 30% or 40% or 50% or 60%. At what point do you say, okay, that’s the point where it can’t really go much higher.

Thorsten Wegener (00:26:29):

You can always approach the extreme points. The extreme point volatility on the downside is zero. Then markets don’t move anymore. Nothing happens. Where’s the top side. Just think about, you have a stock trading at 100 and you want to perfectly hatch that because the world is ending tomorrow. So you can buy a put option with a strike price at 100. So you get your 100 back. How much would you at max pay for that? $100 or $99,99 because then you would at least make 1 cent on the way down. Plug this price into the Black-Scholes formula. So for the implied volatility, then you have the maximum levels in there. And then you look into the history. We had in 1987, we’ve done the analysis, intra day we had a VIX, or didn’t exist at the time, but would’ve been the equivalent of 180 volatility points.

In the recent Corona panic we had a volatility of around 80 in the market. Then you look at the oil markets when oil was trading negative, we had volatilities beyond 300, 400 in there. So volatility as a concept, the best example is there are always different market players in different assets. The trader who is mostly interested in buying Coca-Cola and Walmart, not the recent move, but in general, is a different crowd than the guys who trade cryptocurrencies or pump around in Tesla shares.

So each volatility has different characteristics when you think, yes, it’s just people behind it. And people will always tend to react in the same way. But as we are not equal, there are equal crowds in there. And volatility in the marketplace, how we use words like skew and term structure and kurtosis, they all give you a bit of information, how the market is actually really positioned at the moment. And that works quite well.

One of the examples where I really put my foot in it was one of the first seminars. And I was explaining how the volatility skew usually cooks. You have an investment skew, which means people are spending more money on puts because they want to protect themselves against falling equity markets. And it’s flattening to the top side because they usually sell calls against that. And you have the opposite in the oil market. Obviously, the crash happens to the upside. People need calls to get their oil cheaper. And I’ve asked my assistant, I said, “Okay, let’s have a look at the commodity skew now.” And that was in 2018, I think. And she put it on the screen, and it looked like an investment skew. And I didn’t make any information out of that. I thought, oh, that is strange.

What happened? We had a complete crash in oil because the skew already showed you. No, it’s not the producers anymore in the market who want to hedge themselves against rising oil prices. It’s the speculators who are in there and speculators get really fast disappointed if the asset they bought doesn’t double, triple or fivefold anymore. The same phenomenon we have seen in the crypto market. Why are these people in there? They want to get rich. They don’t buy this whole thing of, oh, it’s eventually a different currency because if it would be a currency, the volatility would be at three. Nobody could get rich with it anymore.

So all these guys who say, that’s why they buy it, wouldn’t be in there anymore. So it’s a self defeating process, but the volatility gives you the indication when you know how to read it. And that’s where we bring our quantitative research in to say, how was it in the past? Is there any development we can see? It’s more likely we come back to…

Bilal Hafeez (00:29:51):

And just on that skew, just so that it’s clear. So what we’re saying is that, there’s different volatility, prices or levels at different strikes of an option. So for example, you can have at the money option. So that’s where the option is at the current price. Or you could have a put which is an option that benefits when the market goes down, if it’s out the money. So it’s far away from the current market. That has a volatility price. And you could say the same for a call on the upside as well. So what you can create is, you can see if there’s a skew, is the volatility for the downside, for weakness in the market, higher than options for the upside in the market?

Thorsten Wegener (00:30:34):

It’s actually defeating the whole object of what Black-Scholes and Kelly and Simmons, without being public about it, came out of it because there can be only one volatility in the future. Stock can only move like this stock. However, there are guys on the market on the puts and call sides and different strikes who are bidding different prices, which implies then it is skew. And the interesting thing is before 87, the big crash, this volatility skew was a very gentle smile. At the edges, it went up a little bit. People were willing to pay relatively more for far out of the money puts and far out of the money calls, but it was a decent smile. Now it looks like a stroke victim. Left side up, this down. And the market has facilitated for that, that this bell curve, which is plucked into the models, everybody who’s working in this market knows it’s at best an approximation. And it might not even be a bell curve. It might not be what we think it is, but it works. At least up to three standard deviations.

And that’s always my mantra when I say fine, I know it’s not working perfectly. And the assumptions are generally wrong. Otherwise, we would have one volatility surface, one flat surface because there can only be one volatility for the stock, but the market shows us it’s different. Risks are being priced differently. So, we plug this all into our models and try to arbitrage these conditions out against the historical performance they had. And that is the beauty of mean reversion on the volatility side. You look at a stock, and if it has peak volatility, it’s 50. And then everybody calms down again, and it goes to 10 again.

Now I had this experience in, it was 98. LTCM when they blew up, I had the head trader of Citi Group on my phone, said, here Thorsten I need volatility. And I said, “Where?” And he said, “Everything.” He said what maturities, whatever you have, because he had to reduce their vol risk, their vega risk, the risk they had in their books. He knew that he was doing the wrong thing. And I looked at the stocks he was asking for, they were usually trading at volatilities of 15. They were trading at 50. So yes, everybody thinks the spread is going to be huge in the future. And when the odds come down, it gets cheaper and cheaper and cheaper again. And you can measure this volatility against itself in our market, which is a big advantage because if you buy just some share in some equity, I don’t know, it can tenfold. It can make a 1000% or can go to zero.

Prices are not mean reverting, returns are. And that’s what we are working with. And that is the advantage we have on the option side. What I always say to all my students, even if you never in your life want to trade an option, you should see the information option markets make available for you. And it’s become well, more urgent and pressing over the last two years where the option market was actually telling the other market participants whether we see a bull market or a bear market, whether there’s a panic or not. We’ve seen it in these meme stocks many, many times.

Bilal Hafeez (00:33:31):

So the information you’re saying we can get from volatility is, one is the market implied volatility level. So if it’s high volatility, low volatility, it tells you that investors think that the regime is going to be very volatile or not. Then there’s the skew, which is the price, in effect price in volatility terms that people are demanding for downside versus upside. So if there’s a negative skew, then the price in volatility terms for downside is more than the upsides. That means that whoever’s driving the market at the time is more worried about the downside than they are about the upside. So that’s additional information. And all of this is something you can get from the options market and you can’t get from just the spot market where it’s just the current spot price.

Thorsten Wegener (00:34:14):

Exactly. That’s what I always call, in my investment framework, that is the sentiment part. Usually, when you talk about sentiment, everybody says, “Oh, is it the put call ratio?” No, it’s not the put call ratio. Yes. It’s interesting to see that. But what we were talking about now for 10, 15 minutes, volatility gives you very good information. But for me, it’s just the icing on the cake, because first of all, you look at macro, you don’t want to be long. I don’t know, retailers, or Coca-Cola in a market where the economy is booming and interest rates are zero and there’s no inflation on the horizon. You want to have growth there. The markets we have at the moment, yes, you want to be in commodities. You want to have oil stocks and these things. So the overriding factor is macro.

Then I usually go into the fundamentals to say, okay, in this sector, I’m actually interested in, what is the company I most likely would like to place a bet on, either long or short. Then we go into the quantitative approach, I want to have my priors. How did the past look. Put that in my computational model to say, okay, when the scenario was what I expect coming for the future, how was the outcome then? And in case I’m getting it completely wrong, then I have option theory because what it’s all based on, then you see how bizarre banks is. Banks are selling alpha. You have very clever guys who do analysis and tell you, we can predict markets. If markets can be predicted, then you can generate alpha. So you’re with Robert Shiller and then you have Carnamal and Zwersky, Eugene Fama, who said, markets are a random walk.

Funnily enough, both got the Nobel Prize at the same time, because they both did prove mathematically that they’re right, for opposing theories. So if I’m getting it completely wrong with my macro analysis, with my fundamentals and with my market sentiment, just by using options as a tool, I still can stack the odds in my favour and say, fine. I have a 70% probability that I’ll make 30 cent on a dollar. I have a 70% downside. And then what hardly anybody knows options, trading options. You can change your bet after the little ball on the roulette has already been placed. Yeah, you get it completely wrong, then you can tinker around with your position and you thought, okay, I’m probably going to lose 70, if I lose, you can reduce that to 50. And then you have positive expectation values coming down the chain if you know how to do it.

You will make mistakes. You will lose money. That’s why we have probabilities. If I have 70% successful trades, I’ll have 30 losers in there, but I’m not affected by them because I’m not doing these transactions once, I’m doing it over and over and over again. And that’s why we have derivatives desk at banks. Yes, you will have the odd trade which might screw you. But that’s why I always come and say, okay, the bell curve is not reliable. But up to three standard deviations, I cut my risk off at the edges. Yes, that will cost me a little bit of return, but I can sleep. If we see a 20% dive next day, I’ll probably even make money on that.

How to manage your options position

Bilal Hafeez (00:37:14):

So if we have an example now, in terms of how you would kind of manage your position. So let’s say you have just a call position. So you have a choice. So you’re bullish on equities. You can either buy the cash market, so you can just buy the S&P 500 or you can buy a call. What would go into your decision making on that first decision? Why use an option, a call, over cash, just buying the market directly.

Thorsten Wegener (00:37:42):

I wouldn’t. That is one of the points. I haven’t bought or shorted stocks in I don’t know how many years. In a position like that, I’m bullish on something. My process usually works, I might still be wrong. First I start selling put options. When I sell a put option, that simply means if the market tanks, I will get the stock, and I have to buy it at that level anyway. But I got a little premium for that. That is reducing my costs already, if it is reducing my costs…

Bilal Hafeez (00:38:10):

But do you have an underlying cash position when you sell the puts or are you just selling the puts?

Thorsten Wegener (00:38:14):

Yeah. Well obviously I have liquidity. I have liquidity to be able to get these shares assigned, if it works against me. So let’s assume our scenario. I’m bullish on something and that works. So the put will expire worthless. I’ve taken the premium in, has already reduced my overall portfolio volatility. At the same time, I could have taken this premium and bought a call, but now let’s assume the stock is trading at 100, I don’t buy a call option at 100. I take the premium I sold from the put option, which is in my pocket now and I go further out. I buy two options at a level of, let’s say a 105 or 107. If I’m right, I’ll make far more on the way to the upside because I have the progressive profile from the call option in there.

Thorsten Wegener (00:39:02):

I have the same structure. I want to be bullish. I want to invest, but I haven’t used, so far a single investment in equities. I even have reduced the volatility of my overall portfolio by using weapons of financial mass destruction. So you see that Mr. Buffet actually doesn’t really know how you could employ these tools. Of course you can be stupid. You can take all your money and instead of buying shares, you buy a hundred times as many options and it doesn’t work out and you’ve lost everything. Yes. But then you haven’t used them intelligently. And the whole point about options is that you want to have a steady, manageable position where you have returns and you can calculate the odds for, and where you actually have your stop loss built in.

Bilal Hafeez (00:39:49):

Let’s say, for example that you sold a put, doesn’t that mean you have unlimited downside potentially?

Thorsten Wegener (00:39:55):

Yeah. But if you buy a stock, what do you have? Unlimited downside. You have exactly the same downside position. But in one case, I bought a stock at 100 and it goes to zero. I’ve lost 100. I sold a put with a strike at 100 and somebody paid me five bucks for that. The stock goes to zero, I’ve lost 95. So my profile on the downside is already less volatile than me just buying the stock in there. I have the same down… I can’t participate to the upside in this position. And if I own the stock and it doubles, fine, I double my money.

If I’ve only sold the put, I only have this premium. However, I put this premium to use if I have this scenario you just described, I want to be bullish. I take it then and buy something, maybe on a shorter timeframe, a little bit higher, far out of the money, if I think, okay, there’s a probability that there’s a huge move to the upside. My other research indicated that to me. And then I have an asymmetric payout profile. On the downside I lose less and on the upside I can make an absolute killing. And if it doesn’t develop in that direction, well, I have at least the premium. And I do that over and over again.

Bilal Hafeez (00:41:02):

Yeah, no, that’s a very fair point, when you’re long cash, you are also exposed to the downside and it’s unlimited, at least down to zero in the same way as selling the put would be as well.

Thorsten Wegener (00:41:12):

It’s actually fairly simple because if you’re a pure equity investor, you can buy something, you can sell something, you can do nothing, right? That’s the three options you have. On the derivative side there are not so many more options. I can buy a put, I can sell a, put, I can buy a call, I can sell a call or I can do nothing of these. And I can combine them in all weird and wonderful ways, which are possible to do that. You have to understand that obviously a little bit, how these things behave when markets move, that’s where you come to your Greeks, Delta, Gamma, Theta, Vega Rho, Charm, Vanna, Vega, Vomma, where you have to understand how these things have to move. It’s a mathematical relationship. If they wouldn’t move that way, then somebody could arbitrage the market. That’s the concept which Black and Scholes developed to say, yes, we can replicate a portfolio in cash and underlying, which would have these options, if I allow for permanent continuous trading and no friction in the system. So therefore these things have to move in a certain direction.

Understanding the greeks – delta, gamma, and theta

Bilal Hafeez (00:42:10):

Actually, perhaps we should go onto the Greeks then. So what, what is Delta? And then how does that relate to your option?

Thorsten Wegener (00:42:16):

Well, Delta, there are different ways. You could say Delta is the hedge ratio which is confusing people. Mostly you say, okay, if I’m long a call as a Delta or 50, I ave to sell half the underlying and then I’m Delta neutral. Best explanation is it gives you roughly the probability that when the option expires, let’s say you have an option for one year and it has a Delta of 50, a Delta of 50, 0.5 tells you it’s a 50% probability that after one year you will be above that level of the strike level you had.

In our example, the stock is 100. You have a strike at 100, the Delta is 50 for this option. That is part of the game. Let’s not take dividends and interest rates in here just to make it simple. It tells you in a year’s time, it’s a 50/50 chance that you will trade above 100 or below 100. If you have a Delta of 15, that would say, okay, the strike must be higher. In our example, let’s say the strike would be at 115, call option strike. But the equity is trading at 100. Then it’s only a 15% probability that by the end of the year, you will trade above 115.

Bilal Hafeez (00:43:24):

Okay. Yeah. And so, the strike is the price at which your option gets into the money. And so, if you buy an option, which has a 50 Delta, it’s 50% chance it’ll be at that price or in the money in a year’s time. So, you buy the option and then the price of the market S&P starts to go up, or that stock goes up. Then the Delta starts to increase on your option. So suddenly you go from 50 Delta to 70 Delta because the price is higher. So, the 70% chance. And so, when you have that position, so you now have 70 Delta, do you do anything, as somebody who’s managing the position?

Thorsten Wegener (00:43:57):

Yes, what I usually do, I write options on top of it. So let’s say I own the 100 call. My idea went according to plan, we are now trading at 120. I think I’ve seen enough. I start selling 130 calls against it. I collect additional premium. What’s the worst that could happen. Nothing. I already have a winning trade there. It’s already in the money. So I start selling against it. So the market goes then to 150. I lose the shares at 130 of the call I’ve just sold, but I get them at 100. I have $30 spread P&L plus the premium I’ve taken in and what I’ve minused the one, the premium I’ve paid at the 100 level. So you play this stuff over the time period. You don’t have to trade only three month option against three month options. You can go long five month options and sell two month options against it or vice versa.

Bilal Hafeez (00:44:49):

And in that case, why would you buy? Or why would you sell highest strike calls? Why not double up on everything and just buy a call?

Thorsten Wegener (00:44:58):

Absolute valid strategy. You roll up the ladder.

Bilal Hafeez (00:45:00):

Okay. So, this is just your different investment style. So, your first example was one where you’re kind of managing the upside. You don’t mind giving up some upside to earn some premium and someone else might say, no, hang on, I’m going to basically go with the move and start to buy options.

Thorsten Wegener (00:45:15):

You see, I’m a bit of a conservative and you’re a bit of a gamble, Bilal, because you want to double up and double up, which you could easily do in that position. Yes. You have already made money. Fine. Then you roll the strikes up. You own the 100, the market has gone to 120, which means your Gamma, your rate of change goes down. You want to get additional juice out of your position. So you roll the strikes up. You go again to 120. Now you’ve already made money. Maybe you can buy two of those. Now you put the money in, the market moves more in your direction. It’s a pyramid scheme on the positive side. If you are right, if you’re correct with your assumptions, you will make money. That’s an absolute, valid, appropriate strategy if you have still the investment case for something like that.

Bilal Hafeez (00:45:55):

And you mentioned Gamma there, what do you mean by Gamma?

Thorsten Wegener (00:45:59):

Gamma is the rate of change of your Delta. It simply tells you how much the probability changes when things happen. And there’s a different distribution. Gamma doesn’t behave like Delta. It’s different. It moves very, very fast at the outer edges and the relative change in there. And it’s the biggest right in the middle. So your probability from 50% to 55 changes the most, that is the Gamma. The rate of change of the probability in this case. Now, the further you are away, something has to move first a little bit before you start noticing that the price went up. However, in relative terms, the price of these far out of options you have there, which might be two cents, suddenly four cent, not really, but it’s actually a 100% increased. That’s what you have with these Gamma distributions in there. So the Gamma gives you this information, what is going to happen with your position.

And when we’re going back to the hedge ratio, it tells me as a market maker, how much stuff I have to buy or sell to be neutral in these positions. That was the big talk over the last two years. Oh yeah, Gamma and market makers. And when you’ve been in the screens and I’ve done it for your whole life, you know exactly what that means. That’s how we started our example. When I got screwed out of my first million, when a negative Gamma does horrible things to you. So this Gamma gives you the information, how your hedges should be put on if they happen.

Bilal Hafeez (00:47:23):

Okay. So, let’s say you have that example of the call earlier. You have the 50 Delta call. So, the strike is the same as the current price. Say it’s a one-year option. Delta’s 50. What would the Gamma be?

Thorsten Wegener (00:47:35):

Gamma doesn’t have a ratio between zero and 100. It’s actually the term. Easiest example is the Delta is at 50 and you have a Gamma, because Gamma is also dependent on the volatility you price into the model. Volatility is high or low. When we’re at the money, the Delta will always be 50. Your Gamma is different. Huh? Which means, let’s say you have 50 and you have a Gamma of two. Your pricing watch shows you two. And then the market moves $1 up. That simply means your new Delta will be 52. The two Gamma’s get added onto the Delta you have there. Then the Gamma is not continuous. Two, two, two, it changes over time as well. So the market moves further up. Now, your Gammas only one and a half. So now you are at 53 and a half in Deltas when the market moves one further up.

So you could actually see the information that Gamma gives you is how much additional shares you would generate if it goes in your direction or against you. In one case, it goes into your direction. You get longer with your positive Gamma. It’s as if somebody out of outfield gives you additional shares for free in your portfolio. And if the market falls, it’s as if somebody’s taking little chairs away from you. So you’re less long when the market works against you, that is if you own the option. As a market maker, I was always short the options because clients want to buy options. Now, for me, it worked in the other direction. Market goes up, my hedge position suddenly became shorter markets go down. My hedge position suddenly became longer. So I always had to do the opposite of what you actually should do in these scenarios.

The different players in the options market

Bilal Hafeez (00:49:07):

Okay. And so we often hear this in markets, when people start talking about the microstructure of markets, the bank trading desk, they’re long Gamma right now, which means that the option desks as the market price goes up, their Delta’s increased. And so if they want to maintain their Delta at 50, not 52, they have to sell the underlying to bring their Delta back down and equally when the price starts to fall, the underlying markets price starts to fall, then their Delta goes down. Then they have to buy some of the underlying to bring their Delta back up.

Thorsten Wegener (00:49:37):

It gives you very good indications, whether markets are slippery or sticky. Now, if the market is Gamma long, which means fantastic. If I’m Gamma long, you can’t do anything wrong. Let’s assume volatility stays the same. So that’s no impact on the price of your options, but market moves a lot. So market goes up, suddenly I have more shares than I had before, theoretically, at a lower price. And now the market is higher. I can sell them. I will do that. I will use my Gamma. So I give additional material into the market. I stabilise the market if I’m Gamma long. If I’m Gamma short, that’s what usually happens on the downside. I have to do the opposite, the market falls, and I have to take liquidity out of the market because I’m also selling into it. If the market is on the upside, everything is smooth running.

Yeah, everybody’s bullish, I’m Gamma long. I can say fine, you have more shares. So that’s why we see the direction of the market. On the upside we always have this slowly grinding up because there’s always new material coming out. Why is that? 90% of everybody who’s invested in equities is long, right? That’s what mutual funds do. And what do they do to make some additional money? They own a share at 100 and they think it can do 10% this year. Okay, I sell a call at 115. I get premium from the market maker. And if it goes for weird expectations beyond that level, fine, I’ve made 15% plus the premium. So I’m as a market maker, I sit on these calls and I’m now Gamma long. The market works in my direction, fine, I have additional shares generated by my Gamma. I can filter into the market, makes it very, very slow.

That’s why you have this grind to the upside. And when the market does the opposite, it goes down very fast. What are these clients doing on the upside? Yes, they already own the shares. They sell the calls on top, make additional money, but they want protection on the downside. So they call me at the same time and say, “Can you tell me some puts Thorsten?” Yeah, fine. Yeah. Here are your puts. So they’re protected. But I now am Gamma short on the downside, which means market falls. Oh dam, I’ve become long. Yeah. Market falls a little bit more. I have to get Delta neutral again, which means I have to sell into a falling market all the time. I take the liquidity out of this market and the market takes this massive, fast dive to the downside. That’s why we always have this relationship grinding up and going down.

And again, what you can see, I actually spotted that in March. Quite nice. It’s a temporary, it’s a technical situation. The market was trading. Everybody said, oh, the big crash is coming. And I think I even published that on your platform. And I made the call to the day, I have to brag a little bit about it. Because the market traded and I’ve seen that as an ex market maker, the market traded as if it was Gamma long, it was really sticky. And at this level, I thought, no, we’re not going down to the downside. The market is Gamma long here. There is absolutely liquidity coming in. If somebody wants to sell something, somebody sucks it up. It’s over. And then we have this nice relief really. And then obviously you have to readjust the opinion because markets move.

And what we are looking at is usually then the open interest, the volume, how much is in there and the Gamma distribution of the whole market. You can build beautiful charts. And there are fantastic providers out there who do that. Spot Gamma is one of these guys out there who look into the different Gamma distributions, which is nice, but I don’t need an email four times a day telling me how the Gamma at a specific level now is. I want to have the general market condition. I’m not a day trader, was never good at that. I want to see a direction. A medium to short term direction, but you can put on some nice trades and don’t make any mistakes in there. At least it will happen that you’re completely wrong. But I have this additional layer that I say, I’ve done my research. I work in the right sector. I’ve done the macro, I’ve done the fundamentals. The sentiment tells me this. And now I have the options on top of it.

So I’ve shifted my probabilities Bayesian style in the direction that I say, I’m feeling comfortable with it. And options give me the opportunity obviously to say, fine, I know how much it will cost. If I lose that’s it. And I think Paul Tudor Jones was just recently quoted. He said, “It’s not about being smart or clever. It’s about having your risk under control and don’t lose your shirt.”

Bilal Hafeez (00:53:41):

Yeah, absolutely. And so on the Gamma side, just in case we’ve lost some of our audience here, just one of the important messages from what you’ve just said is that when market makers are long Gamma, that tends to be a stabilising force for markets, these are grindy markets. Markets just gradually go up. Whereas when market makers, when the bank desk comes short Gamma, then suddenly it’s a destabilising force that the market making desk will be selling when the market’s going down. So it would be a slippy market.

Thorsten Wegener (00:54:08):

But it’s obviously it’s a zero-sum game. If you say, well, one guy has Gamma long, the other guy has to be Gamma short, but there’s a distribution in the market. Retail clients, or non-sophisticated funds never used their Gamma. They’re buying option and then just look at it and sit on it. Market makers use it, have to, because if I’m Gamma long means I’ve paid somebody else a premium. And then you have your last-born Theta coming in, which sucks away the value of my long position every day just by time decay, it’s getting out of there. I can earn that, but I have to use my Gamma to do that.

So if the market is Gamma long, you say, yeah, fine. The retail has sold everything to the market makers. The market makers are actually using that stuff and make it a grindy sticky procedure. If it’s the other way around, fine, the market makers are short. The retailers are sitting on it. The retailers are not using their Gamma so there will be no scenario where they suddenly provide liquidity to the market. They’re just sitting on it and are happy. So the market maker will be forced to sell into a selling market or buy into a rising market.

Bilal Hafeez (00:55:12):

There’s a bit of a thunderstorm going on. So you might hear some thunder behind me, but you know, I thought let’s round off this discussion. We could spend even more time on the Greeks, but let’s put that on hold for now. And just the final question before we go into some personal questions for you, are the principles of options and derivatives the same across different asset classes? So if you know, derivatives like in equities, can you apply those principles to FX or bonds or to commodities? Is it transferable?

Thorsten Wegener (00:55:38):

Commodities and FX is actually very, very simple because they’re also, you have products which they don’t expire. The dollar doesn’t expire eventually. And it’s just the question, what’s the maturity of the options you are trading. The mechanics, the Delta Gamma, Theta, Vegas, what volatility does to it is everywhere the same. Bonds are a little bit different because you have to think inverted, interest rates go up, prices go down, and then you have a finite product behind it. And I’m not teaching that because, sorry, the bond boys are much smarter than I am. So I leave it to them.

I dab in the part where I think, okay, equities is a fantastic field, bonds and on FX, obviously you can use the same. However, as I understand it, you guys only have eight currency pairs where you can trade futures and then options on futures, which is a bit boring. In my universe, the world is my oyster. If I want to trade Thailand today, I trade Thailand. And if I want to go buy Coca-Cola in the United States and sell some puts, I can do that as well. So I can actually also bring the whole macro spiel into it. I read actually a recent statistic, the S&P was down 15%, hedge funds were down 16%, global macro was up by 12 in a survey. Very, very interesting.

Bilal Hafeez (00:56:47):

So, yeah, it’s been a good year for macro, at least for some people in macro, at least. Now I did want to ask some personal questions as well. One was, what’s the best investment advice you’ve ever received from someone?

Thorsten Wegener (00:56:57):

Don’t do anything. That was after my disaster, which actually put me on the right path. Before that I, well, I was smart. I knew what I was doing I thought, and I leveraged positions up and I used every ounce of risk I could use to do that. And did trades I actually shouldn’t do, because I wasn’t looking for conviction trades. I was a market maker, but sometimes you don’t have to do anything. Yeah, it’s fine. If you don’t do anything, you don’t make stupid mistakes. When you have the conviction and the math behind it, the odds, the nasty word, in your favour, then you do the trade. But before you have this scenario materialised, sit back, drink a coffee, have a nice chat with your neighbour. It doesn’t hurt you. It’s all about preserving money.

I like crocodiles because that is actually the epitome of what it is. They know where the watering hole is. They’re in the watering hole. And then they lie in the sun the whole day till a stupid gazelle comes around. And then they jump in, do the death roll, digest and then they lie in the sun again. Perfect scenario, perfect allocation of resources. And that was the best tip, especially. And I see that with all the young guys, cause they come in, they want to trade, they want to press the button and it’s good. Fine, yeah, you need to be motivated to do this job and you don’t have to be afraid of pressing the buttons. But sometimes less is more. And especially in trading, wait till you have good idea till you see the indication the market gives you. Don’t try to be active all the time. You’ll lose money with that.

Bilal Hafeez (00:58:24):

Great advice. And you mentioned youngsters, so what advice would you give to youngsters? Say somebody who’s just leaving university now, they’re about to enter the job market. Any advice for them?

Thorsten Wegener (00:58:33):

Be humble. And if you are not humble, get humble. Why I’m saying that. When I started, I came out of university, I had a fancy degree and I thought, I know already a bit about options. And when I started at the derivatives desk, Vitel, my boss and mentor took me out and said, there are the four coffee machines. Always keep them full up, and when my boys need coffee, it’s your job to do that now, because before you, somebody else did it. And I had the photocopying jobs and then I had to crunch huge Excel sheets, where we had to list all the OTC jobs nobody wanted to do. So I made them better. I programmed a little sheet, which could flash. That’s how it got me the job. Because these guys who are telling you to get a coffee or ignoring you, they’re working hard. And they’re not doing that just to be nasty. It’s probably in the fewest cases.

If you already start working with, I have a work life balance and I haven’t studied to go to the photocopy machine, sorry. Then you most likely are not going to the really good departments where the guys who have fun, what they’re doing, and you will not become a team member of them because they’re very, I was very sensitive. If you have good guys around you, I’m still friends with most of my guys I trained, whom I worked with and whom I worked for because we had the same mindset. If you want to get into this industry and in the exciting bits, yes, you’ll have to work out and get humbled. And the other thing is, maybe that’s the last bit, all of these guys they’re coming from universities. Never forget. You are getting a lot of money for doing something where far brighter people do more important jobs than you do for far less money. So it helps to be a bit humble.

And for speculating, I’ve learned that because I’m a trader, if I go to the supermarket and a house husband, I knew inflation was coming six months before the Fed because these guys don’t go to the supermarket anymore. And I look at prices, I saw butter’s going up, eggs are getting more expensive, Ben and Jerrys is suddenly only 400 millilitres, not 500 millilitres anymore. Then you see the official data. Why is that? Because I know what prices are. I know how normal people out there do their shopping because I’m one of them. If you stick all these bits together, I think you have a fairly good chance with the fantastic education you got when you come out of university to make a career.

Bilal Hafeez (01:00:45):

That was great advice there. And just on more personal note, do you have any system to manage information or productivity? I mean, how do you deal with information overload?

Thorsten Wegener (01:00:56):

I have one daily newspaper in Germany. It’s the Handelsblatt, which I read and hate, but you have to do it. You have to see what’s going on. Then I occasionally check the Bursung Zeitung, which is another one of these sheets for specific, just to be on the… I have CNBC running in the background all the time, because I’m a big Jim Cramer fan. It’s just funny. You have to see it. Obviously, Bloomberg too to flick back and forth. And then my network sends me the really good research pieces. which is brilliant. And then there are obviously, I love podcasts. There are a couple of really good guys out there.

I think to get through the information overload, what helps me, I love actually the guys I don’t agree with. I don’t want bias confirmation because I’m arrogant enough to think yeah, I’m probably right. So I want to have the guys who shoot me down and Peter Schiff, perma-bear for the last, I don’t know how many years, I love to listen to him. And I’m waiting for the day when he gets bullish, that’s probably when you have to sell everything and short your mortgage money.

But the network you can surround yourself with. People tend to send you only the good stuff because all companies produce so much research. Do you know what is really interesting or not? It’s more all filtering down again. I’m a mainstream man, which is positive because I know if I like that, probably everybody else will like it too. I made a killing in Tesla when Elon came out with a cyber truck and I said, I want one, I’ve ordered one. And I thought, if I do that, probably everybody else will do that. And the stock shot up after this thing, I made a 100% and then it made another 600, but I was already out again, however mainstream. See what the people are doing out there. Where we start with, we have this mean reversion for 10,000 years. We do trading. It’s always the same guys doing the same, good things and bad things in there.

Books that influenced Thorsten

Reminiscences of a Stock Operator (Lefvre), and Atlas Shrugged (Rand)

Bilal Hafeez (01:02:37):

And you mentioned books at the top of our interview. And you said you like to read a lot. What are some of the books that have really influenced you?

Thorsten Wegener (01:02:45):

Obviously, I knew this question would become, you always ask that. So, I prepared to make it totally cliche. Can you see that?

Bilal Hafeez (01:02:51):

Oh, Reminiscences of a Stock Operator. Yeah. Great book. Yeah.

Thorsten Wegener (01:02:55):

Jessie Livermore. I got my first copy into my hands quite early and I was just fascinated. I liked the idea of him going with the flow, going against the flow, reading the tape, analysing situations, and then also the tragic backstory and the other one has actually more to do with railways. But that was one of the most influential books in my life. Atlas Shrugged by Ayn Rand. Well, she’s she founded a philosophy called objectivism, which is massively based on Aristotle. And one of the main lines is, a is a. Don’t pretend the world how you would like to see it. Look how it is. Great comedian. It’s the Canadian guy, Russell Howard, I think. He said, “I don’t make the stereotypes. I just observe them.” Observe, yeah. Observe the reality. A is a. Don’t wish it would be a bull market or a bear market because you want to put on a long or short position and never mind, Atlas Shrugged of Ayn Rand. One of her first disciples was a certain Mr. Alan Greenspan.

Bilal Hafeez (01:03:54):

That’s right. Yeah. She’s very influential in financial sector. That’s great. Okay, good. Good. And in terms of, if people wanted to follow you in any way on social media or learn more about you in some way, what’s the best way for them to do that?

Thorsten Wegener (01:04:09):

That is the sad bit Bilal. I have nothing to sell at the moment. I don’t even have a Twitter. I’m not selling any courses at the moment. We are working on our little FinTech, which will eventually turn into something. They can follow me if they check on Macro Hive, because occasionally I write an article there, which I try to make bit lighthearted, bring some math and some option stuff in there. So that would be, and leave a comment under the article

Bilal Hafeez (01:04:34):

I have to say Thorsten, your articles are very popular. Your article on what is gamma and all these sorts of things, it seems like there’s real hunger out there. Even from people who are in banks and are very experienced. They also want to learn some of these concepts. Cause it’s one of those things where many people kind of know what it is, but they don’t really know. And so, it’s good to have this type of education.

Thorsten Wegener (01:04:55):

Bilal, I always say there’s no shame in that. You can’t know everything. If I want to know something, if I don’t understand something, how economy works, I’ll ask a specialist for that and they’ll explain it to me because I’m not stupid, I’ll understand it. But a lot of people make the mistake, they don’t ask because they assume you should already know. And I don’t want to look stupid doing it. I think maybe another advice for the youngster’s leaving university, don’t be afraid to look stupid. If you don’t understand something, ask. That’s what I did, and people explain it to me. And if you ask nicely, they explain it nicely to you. It works.

Bilal Hafeez (01:05:25):

Okay. Well with that, thanks a lot for taking the time to have this conversation with me.

Thorsten Wegener (01:05:29):

It was entirely my pleasure.

Bilal Hafeez (01:05:31):

Yeah. And good luck with everything that you’re doing.

Thorsten Wegener (01:05:33):

Thank you very much. See you soon Bilal.

Bilal Hafeez (01:05:41):

Thanks for listening to the episode. Please subscribe to the podcast show on Apple Spotify or wherever you listen to podcasts. Leave a five-star rating, a nice comment and let other people know about the show. We’ll be super grateful. Finally, sign up for our free newsletter and Macrohive.com/free. That’s Macrohive.com/free. We’ll be back soon, so tune in then.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)