Host: Joining me here at CEO Chicago is David O'Donoghue, senior vice president, co-head of alternative strategies, and senior core portfolio manager at Kalamos Investments. Welcome back to CEO. I know you were here a couple of weeks ago doing the closing bell. Always a good time, a lot of energy, so it's great to have you back and also learn about some of the expertise and what you bring to the table.
David O'Donoghue: Thanks. Good to be here. Good to be back.
Host: Yeah, one of the things I want to start out with is the VIX. You know, here we are, it's home of the VIX. Volatility is taking front. Center page, everybody's talking about it. So what are you seeing from it right now?
David O'Donoghue: Yeah, dipping down below 15 to a 14 handle on the VIX, um, you know, I think what it really is telling you though is that realized volatility is really low. You know, it feels like there's a lot going on, but we've really been stuck in a pretty tight trading range for an extended period of time. The 30-day implied volatility in the S&P, I realized volatility in the S&P dipped into single digits last week, and 100 day is like 12. And so when you think about 15 and 14, that seems low. Not necessarily given that low realized wall, and I think that that's going to continue to put downward pressure on the VICs until we break out of that range.
Host: You know, one of the things that we always hear is like 20 is that magic number. Like when we hit 20 or go above, that's when I guess for lack of a better term, like panic starts to set in or there's more fear going on. But really what's happening and even with all these like headlines with geopolitical conflicts, stuff like that, it's just still suddenly kind of coming down. It was up in the 17 2 weeks ago, and every day it's just kind of going down a little bit.
David O'Donoghue: Yeah, it's just really a function of that that uh realized ball not not being there to support it. You know, I think it, VIX being low doesn't tell the entire story though. I think one of the things that we think is unique and really interesting about this market is that um there's starting to be a big divergence between single name volatility and index level volatility. Um, you know, that index volatility level volatility is really low, but single name isn't necessarily. We're starting to see um pockets of higher volatility in single name, especially You think about longer dated upside call options, you know, volatility is just a measure of price movement, right? And people always tend to focus on the downside, but it really does measure the upside as well. And when you think about tech, big tech, and AI, there's been such explosive growth and really big movements and big price movements up. And so that, that upside fat tail gets priced into volatility, and that doesn't necessarily show up in the VIX, which is more of a shortdated measure, but it does show up in the S&P vault surface and It affects SKU and affects a lot of the things we look at when we come up with our hedges and design our hedging strategies.
Host: You know, that makes a lot of sense because like a lot of earnings reports came out, you know, in the last week or so, and everybody was expecting for these companies to beat expectations, but by how much, you know, like to go above and beyond what people were expecting. So that makes a lot of sense.
David O'Donoghue: Yeah, you really have seen some of that shift from the bid for protection to the bid for participation. You know, people don't want to get left behind. They're worried about, you know, how big that distribution is, how high those stocks can go, and so there's a big bid to upside calls, especially long dated. You know, we have Jan 29 options listed now, and some of those are in 70s, 80s, 90% implied volatility, and that's, that's a really high number for a long period.
Host: Yeah, now one of the things I wanna talk about too is equity risk and environment. So what do you see on that end?
David O'Donoghue: You know, obviously when you're talking about single digit volatility and you're talking about a VIX at 14, it feels like we're in a low ball world. Um, and, um, but there are a lot of risks out there, right? Like we talked about. And so, when you have that, and you have a lot of potential catalysts, a lot of potential risks, you combine that with really low volatility, uh, markets near highs, you know, this feels like a good time. To be adding hedging, you know, one of the things that sets us apart from a lot of our systematic competitors and hedge equity is we can adjust that hedge. We have that active dynamic approach, and so we've all been through periods of higher vol when the VIX is rising and markets are falling, and guess what, hedging is really challenging during those periods. And so when you have periods like this with more complacency, these are the, these are the times when you need to get ahead of that, and you can add in extra layers of hedge, roll up, strikes, um. More calls if you want to fund that, move some of that out in time so that when we get that downside move and we get the spark to ignite some of that, you can trade out of a position of strength.
Host: Yeah, that makes a lot of sense and really it leads me to my next question here talking about CHDG. So tell me about this and really how you could utilize that in this environment that we're in.
David O'Donoghue: Yeah, so it's, it's an ETF version of the hedged equity mutual fund. Been running for a while and um we really think that that dynamic approach and being able to adjust and shift your trade to match the current environment and then also be able to take advantage of those periods of complacency and those periods of higher volatility, um, that's really the right approach for hedged equity. Uh, there's also a really unique opportunity in hedged equity right now. The combination of higher short-term rates with lower vol gives you the ability to create a Portfolio that has really interesting asymmetry. You can create a portfolio that can, that has a goal of getting 65% or so of the upside with only 35% or so of the downside. And so for equity investors that want to stay invested but are worried about all those things you mentioned, we're worried about valuations and slowing AI growth or whatever it may be, being able to still get equity upside, but be able to do it with a lot lower volatility, that makes a ton of sense. And then also, uh, in the uh ETF space we've seen so much growth, right? And people keep asking for us to bring products, traditional strategies in the ETF wrapper. So being able to combine those three and get that, that dynamic approach we like with the unique opportunity set in that ETF wrapper is really exciting.
Host: Yeah, it seems like the, the perfect like placement for where we are right now as we navigate really what's happening. Happening in front of us and with that being said, here we are, we're approaching the 4th quarter. Any outlook that you have right now, anything to look out for?
David O'Donoghue: Yeah, you know, once again, I think the market with that 14 VX is telling you there's not a lot of short-term catalysts. You know, we have midterms coming up, but that hasn't really historically been a big mover. So, you know, we're looking for possible catalysts to break us out of this range and Make sure, most importantly, we're set up for it and we're prepared for it if we get that. But you know, short term, I don't know that we have anything that's going to really move us.
Host: Yeah, no, it's really interesting. Well, you know, David, thanks again for all your time and your insight, especially as we navigate these interesting times. There's a lot happening right now. Oil is starting to go down, you know, we're looking at bond yields, all the geopolitical tension. So again, there's a lot of headlines. It's making things move in the market, but expertise like you kind of helps us to really navigate what's going on. So we appreciate your time. If people want to learn more about Kalamos, what's the best route? How can they do that?
David O'Donoghue: You can go to Kalamos.com. You can find all of our products listed there, and you know, there's, we have a lot of thought leadership on convertibles and options and, and, uh, ETFs.
Host: All right, well, thanks again. We appreciate it.
David O'Donoghue: No problem. Thanks for having me.
