A Career in Volatility Prepared RBC’s Amy Wu Silverman for This Market

After almost two decades in the options market, Amy Wu Silverman of RBC Capital Markets knows a regime change when she sees one. The derivatives strategist—an alumna of Morgan Stanley, Goldman Sachs, and Citadel—has watched as the corona­virus pandemic ushered in a wave of newly minted day traders who were locked down at home with little to do. They descended on the options market, where contracts can cost pennies but have the potential to produce big payouts. The heavy options trading created feedback loops in tech stocks when dealers were forced to hedge the contracts they sold by buying or selling the underlying security. Wu Silverman anticipates that this dynamic will continue in 2021 as more millennials turn to options to make bets on stocks.

(Bloomberg Terminal customers can join a TopLive Q&A with Wu Silverman at 1 p.m. New York time.)

A Career in Volatility Prepared RBC’s Amy Wu Silverman for This Market

How did you get started in derivatives?

I went to Princeton University and ­graduated in 2004, and I had done economics and financial engineering. I came in interested in that—and kind of knew that was what I wanted to pursue—but specifically, derivatives was really interesting. We happened to have a good professor. He made the subject pretty interesting for something that seems like it would be dry, and that sparked a general interest.

Tell me about your career on Wall Street so far.

I started at Morgan Stanley in a general rotational program, but ultimately I ended up on the fixed-income side trading interest­-rate derivatives. In ’07 the world started blowing up. I was trading range accruals and curve swaps backed with issuers like Fannie Mae, Freddie Mac, and Sallie Mae, and literally that whole product went away. I was let go with 400 people one day, and they were just like, “See ya later!” I think I was 25 at the time. It was so crazy, I started having to look for a job again. It was a weird, distressing time.

I landed at Goldman, but in their equity derivatives department. So I was doing rate derivatives, but they were the same kind of thing—this was Goldman’s research department [which had a cross-­asset approach]. I worked for this crazy guy [Krag “Buzz” Gregory] who’s amazing. He ended up being a really important mentor for me. But he was one of the first people who helped build the VIX [the Chicago Board Options Exchange Volatility Index, which tracks the 30-day implied volatility of S&P 500 futures]. He was big-brain, one of the smartest people I ever met and worked for, and we did some white-paper-level work on volatility as an asset class. And obviously this was 2008, so the whole world was continuing to blow up, so it was just a ride. We did some really interesting work on business cycles and volatility, looking at vol in different shock environments, stuff like that.

In 2010 I was approached by Citadel. Ken Griffin at the time was trying to start an investment bank. To be perfectly candid, he was throwing pretty crazy numbers at everyone, and I joined with a bunch of different people across the street. And we spent a year trying to start a flow sales derivatives business. He ultimately went a different direction—he was much more focused on the electronic part of it. So after a year, all of us had to pack up again. One of the really senior people there at the time [Robert Fagen] ended up at RBC. I knew him really well, had known him at Morgan Stanley, and he said, “Why don’t you come try it out, help build a business again?” And I have been there [at RBC] ever since.

Who’s behind the recent pickup in options activity?

I think it’s a sea change. It’s not just people who trade on Robinhood, but people who are part of the millennial and younger generations. They’re more risk-taking in their profile, and they’re also more active and educated in the options market than previous generations were.

People who are millennials have more wealth [than your typical Robinhood user] but came of age in 2008. They’ve seen a financial crisis, but they’ve also seen that after a crisis, you get a 10-year bull run. Their way of investing is heavily influenced by that, and they’re much more comfortable with options and things a financial adviser wouldn’t have talked to them about.

Do you expect those retail-type traders will remain active in options markets this year?

Yes. In 2020 fiscal stimulus checks led to greater retail options activity. A new round of stimulus checks is hitting bank accounts now. In addition, the recent blue [Democratic] sweep drives the possibility of even more stimulus down the road. These are all catalysts for retail to continue to be involved with options. Only a few weeks into 2021, we’re already seeing call ­exuberance and skew inversion. There have been noticeable bullish options trades in the energy sector. In fact, bullish options positioning just hit a decade high. We also noted that, back in November, retail was perfectly willing to rotate from megacap tech—the “work from home” names—into the “vaccine recovery” names like ­consumer discretionary, cyclicals, and general value.

Why are they buying options instead of stocks?

They’re not buying stocks because stocks are expensive, or they feel like they’re not getting the leverage. But they’re buying the calls. How do you get leverage when you don’t have that much to spend? How do you get bang for your buck?

How is this new dynamic affecting the options market?

All the things we hold to be true in options are almost laws. Skew is positive because there’s more demand for downside. Skew is the relative demand of put options vs. call options for a given stock or index. Because investors are typically long and buy insurance, skew is almost always positive, because put-implied volatility minus call-implied volatility is positive.

These are relationships that have held for very long times, but there’s no reason why they have to be this way. If you get a whole class of investors and the way they think about the world is, “The way I’m getting long the market is through calls,” then skew may never go back to positive.

Especially when you’re a dealer, a trader, the way you think about making markets is very influenced by things like what the historical relationship has been. I don’t think it’s going to be overnight, but there are already names that are exceptions. Any dealer making a market in Tesla knows skew is almost always inverted. Normal relationships don’t apply.

What does this surge in options activity mean for the equity markets?

It’s really not something to be concerned with if you’re going to buy Facebook and close your eyes for a couple of years. But if you’re someone who has to be in the market on a short-term basis, it’s going to be more and more relevant to you. The breadth of the market is very narrow and continues to narrow. The fact that seven names drive 50% of the weight of an ETF [exchange-traded fund] is a big deal. As long as breadth is narrow, this is going to be a problem. You could say, “I don’t own Facebook. Why should I care?” But you care because Facebook is part of Fangman, and Fangman is a quarter of the entire S&P 500. [The Fangman stocks: Facebook, Apple, NVIDIA, Alphabet (Google), Microsoft, Amazon.com, and Netflix.]

How can a stock such as Facebook be influenced by heavy call or put buying?

When a dealer—a market maker or trader—receives an order to buy calls from a customer, [the dealer] usually has to sell calls. There are nuances to this: A dealer could offset a portion with an existing position or match to a call-selling client, for example. But let’s say for the sake of simplicity that the dealer has to sell the entire position to the client. When a dealer sells a call option to a client, the dealer has to initiate something called a delta hedge. This delta hedge requires the dealer to buy stock. A good way to think about this is, if a dealer is short a call option, then the dealer doesn’t want the stock to go up, so the dealer buys stock as the hedge.

Now here’s where things go messy and why the “skew inversion” is such a big deal. Typically, when stocks go up, volatility goes down, and vice versa. Intuitively, this makes sense because usually uncertainty should decline if things are good, and uncertainty should rise if things are bad. However, the issue we have encountered is a “spot up/vol up” scenario. Stocks like Apple, Facebook, Tesla, and Amazon go up, and the volatility goes up, too, because of FOMO [fear of missing out] and more people buying calls. So what happens to the dealer in this case? They’re forced to buy more stock as the stock goes up, and remember: The dealer is short volatility, and volatility is rising.

This self-fulfilling cycle is sometimes referred to as a gamma squeeze. The idea is this: On names with strong momentum, heavy options action can result in extreme exacerbating swings in the same direction.

Why are these megacap tech stocks being targeted?

This is just what people know these days. These are the new Covid utilities. They’re trillion-dollar market cap, they’re dominating during the pandemic, and, if you’re of a certain generation, these are your blue-chip companies.

Greifeld reports on cross-asset markets for Bloomberg News in New York.

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