Options Trading

David Rosenblum: 

Hi. 

Elana Margulies-Snyderman: 

To kick off the conversation, tell us a little about yourself, your firm, and how you got to where you are today. 

David Rosenblum: 

Yeah. My background ever since I graduated college has been as an options trader. I was on the floor of the American Stock Exchange and then had several different roles all over Wall Street, but all doing options trading. My now partner who I met 10 years before we started the fund, completely different background and skill set, and we had an opportunity to utilize what we both bring to the table, my options background, his macro background, and started our first fund, RS Low Beta Opportunity Fund. 

Elana Margulies-Snyderman: 

Great. Given your focus on options trading, I would love to hear your high-level outlook for the space. 

David Rosenblum: 

Options volume has exploded over the last 20 years, and I think that'll continue. You saw even during COVID-19 when people just wanted to gamble, and they would use options to try to hit home runs. That was actually the main thesis that we have when we started our first fund, that options are used incorrectly a lot of times because people want to buy them. You can absolutely hit grand slams when you buy them, but 90-some percent of the time those options expire worthless. For us, we actually use options correctly, and I put that in air quotes because not everyone will agree, but that's how we pitch it and think that it's true to sell them. We systematically sell them. In our first fund, which is RS Low Beta Opportunity Fund, we sell options on the S&P 500, we never use leverage, and we just try to consistently hit singles. I'm sure as we go on with this back and forth, we'll talk about the second fund. I'll get into that a little bit after. 

Elana Margulies-Snyderman: 

David, as a follow-up, what are some of the greatest opportunities you see in your space, and why? 

David Rosenblum: 

As more people are trading electronically, have access to all markets, realize that markets don't only go straight up, I think a lot of opportunities lie in getting people comfortable with selling options. You watch CNBC or you watch somewhere on the news about selling puts and everyone talks about how risky it is. If you just sporadically sell options, they're very risky. But what we do in both our funds is we never take leverage, so we actually have a lot less risk than the underlying asset. In our first fund, RS Low Beta Opportunity Fund, we sell puts on the S&P, but only to the same notion of what the fund has. In our second fund that we launched a little less than a year ago, we sell options on ETFs that track Bitcoin, so we have access to that space. We're never actually buying Bitcoin directly. We're always trading options in a cash-settled ETF or cash-like settled ETF, but never overselling them that if there's a real big pullback that all of a sudden, we're going to lose more than what someone just buying the stock outright is. For us, educating people that even though we're selling options, we're taking less risk than outright buying the underlying is I think where large opportunities arise for us. 

Elana Margulies-Snyderman: 

David, on the other hand, what are some of the greatest challenges you face in your space, and why? 

David Rosenblum: 

Convincing people that selling options aren't as risky as them directly buying the underlying and also underestimating how greedy people can be. It's just the Greed & Fear Index, right? We run a lower strategy in RS Low Beta Opportunity Fund, and everyone felt we weren't making enough money prior to 2022 when we launched in 2019. All of a sudden 2022 comes and they're like, "Ah, okay. This makes sense to have a low-risk strategy," because up until maybe two weeks before the end of the year, we were actually up money in 2022. Then, in January '23, we made back everything we lost in 2022, and that's when a lot more money started flowing in as people understood what we explained to them about the strategy. 

Elana Margulies-Snyderman: 

David, I know you recently launched a Crypto Income Fund, and I would love for you to take a deeper dive into that. Obviously, crypto's been a growing area as of late. 

David Rosenblum: 

Sure. It was around this time last year when the first ETF BITO listed options. We looked at it and just saw a great opportunity. Where our first fund is super low risk, we saw one where it actually, relative to the underlying asset class of Bitcoin, still was super low risk, but because of how high volatility was in the space, we could use the same strategy instead of hitting singles, using the baseball metaphor, hit triples. We launched RS Crypto Income Fund last Summer, didn't start raising outside money until the fourth quarter. Whether it's from the election or it would've happened anyway, but crypto almost went from a feared-upon world to people wanting to be involved. For us, selling volatility at extreme levels implied volatility. For people that don't understand options, one of the measures of how you price an option is implied volatility, where we're selling options in our first fund at an implied volatility tied to the VIX anywhere between, let's say, 15 and 30 in a given year. Here, that level in Bitcoin, the ETFs that track it are in the 50s and 60s. So, investors that never got involved in Bitcoin but saw the strategy in our first fund, and they're like, "Okay. We can be involved here, we could generate income, but what's the downside?" And look, we could lose money. Bitcoin can have a terrible week, month, quarter, year, but it's an ongoing strategy where we're constantly rolling options. Over a 12-month period, we would need Bitcoin to decline more than 35% for us to start feeling that pain. If it doesn't, if Bitcoin's flat or up and volatility where it is now, we've been making about 3% a month net of fees for our investors. It's another opportunity for us to just, we have a low-risk fund and even though it's called Crypto Income, it's a higher risk fund or higher return profile than our first one. 

Elana Margulies-Snyderman: 

David, we've covered a lot of ground today, and wanted to see if you have any final thoughts you would like to share with us. 

David Rosenblum: 

I think, just understanding that there's many ways to trade options, and I'm sure there's plenty of people that would disagree with me about using them correctly, and they want to buy options, and I'm sure some people make money there. But that's really the final thing, is just that options typically are too expensive. We sell them, we extract income from in the first fund, the S&P, in the second fund, from options that track Bitcoin, and take a lot less risk than the underlying and have had solid returns since we launched each fund. 

Elana Margulies-Snyderman: 

David, I want to thank you so much for sharing your perspective with our listeners. 

David Rosenblum: 

Thank you. 

Elana Margulies-Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business. 

_{Transcribed by Rev.com}