Benn Eifert | Are We Entering a New Volatility Era? | U Got Options - From the Cboe Floor

Episode Overview

• The speakers dissect the cyclical nature of market volatility, explaining how its performance is driven less by the magnitude of a market decline and more by its speed and pre-existing investor positioning.
• They argue that the 40-year era of the "Fed Put" is over, ushering in a new macroeconomic regime of higher inflation and interest rates that creates structurally higher cross-asset volatility.
• The conversation explores how this new environment breaks traditional portfolio models like the 60/40, increasing dispersion among stocks and creating a need for "true alternatives" beyond leveraged private equity.
• Specific structural opportunities in the options market are analyzed, including the dynamics of long-dated put selling by structured product issuers and the complex flows in the 0DTE market.

Key Concepts

• Path-Dependency of Volatility: The effectiveness of long volatility as a hedge depends on the path of a market sell-off. Fast crashes cause volatility to spike, while slow, grinding declines (like in 2022) can see volatility underperform.
• The Volatility Cycle: Market participants exhibit a cyclical behavior driven by recency bias, or "fighting the last war." A major volatility event leads to an over-hedged market, which then causes long volatility strategies to underperform, eventually making short volatility attractive again and restarting the cycle.
• The New Volatility Regime: The macroeconomic backdrop has fundamentally shifted away from 40 years of declining rates and low inflation. The current era of higher rates and inflation creates structurally higher volatility across all asset classes.
• End of the "Fed Put": With inflation as a primary concern, the Federal Reserve is "in a box," unable to easily cut rates to support markets during downturns. This makes quick, "V-shaped" recoveries less likely.
• Pro-Dispersion Environment: Macroeconomic factors like protectionism and inflation create clear winners and losers among sectors and single stocks, increasing dispersion and making stock-specific volatility more significant than broad index volatility.
• Structural Inefficiencies in Options: The market contains structural flows that create trading opportunities. A key example is the systematic selling of long-dated puts by structured product issuers, which can make downside protection relatively cheap.
• The Failure of Traditional Alternatives: In the new regime where stock-bond correlation is often positive, traditional 60/40 portfolios are less effective. So-called alternatives like private equity are often just leveraged, illiquid forms of market beta, not true diversifiers.

Quotes

• At 3:18 - "You really get that huge vol performance when everybody's over-levered, everybody's bullish, everybody's crazy, people are selling vol like nuts and then they're scrambling to cover, they're getting blown out. Like that's when you get that vol event." - Benn Eifert describes the specific conditions of market positioning that lead to explosive volatility events.
• At 4:15 - "Everybody's always fighting the last war." - Jem summarizes the core behavioral bias that drives the cyclical nature of volatility markets, where participants prepare for a repeat of the most recent crisis.
• At 17:36 - "First of all, in a rising and high interest rates and inflation environment, that drives a lot more kind of cross-asset class vol than we've seen for... the last 20-25 years." - The guest explains that the fundamental macroeconomic shift is leading to a structurally higher baseline of volatility across all markets.
• At 19:59 - "We had this Fed Put that was unbreakable... for 40 years... and the reality is that was because we had structurally low inflation." - The host provides context for why the Federal Reserve's ability to support markets is now constrained compared to previous decades.
• At 20:40 - "Then the Fed gets put in a box. And so if the Fed's in a box, I'm guessing that the bottoms aren't V-bottoms as much." - The host speculates that with the Fed unable to easily intervene, market selloffs will likely be longer and less predictable.
• At 23:51 - "You mean 2x levered equities or credit with 10-year duration with no liquidity... and 2 and 20 fees? I mean it's, it's not an alternative." - The host dismisses the idea that private equity and private credit are true diversifiers, arguing they are just a different form of the same underlying market risk.
• At 32:37 - "You always have the most interest in tail hedging right after a market crash. Come on, guys!" - The guest makes a humorous but critical point about investors' tendency to be reactive and seek protection only after a major loss has already occurred.

Takeaways

• When constructing hedges, evaluate market positioning and the potential speed of a decline, as a slow grind down will have a very different impact on volatility than a sharp crash.
• Re-evaluate traditional portfolio diversification, as the negative stock-bond correlation can no longer be relied upon, and seek out truly non-correlated alternative strategies.
• Shift focus from broad index volatility toward sector and single-stock opportunities, as the current "pro-dispersion" environment is likely to create more distinct winners and losers.
• Recognize and guard against the behavioral tendency to "fight the last war" by avoiding reactive hedging decisions made only after a significant market event has already occurred.