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Build Your Own Dragon Portfolio – Commodities Trends Following – Part 2

Educational Series

Patrick Ceresna is Host of MacroVoices, Market Huddle, and Founder and Chief Derivative Market Strategist at Big Picture Trading Inc.

In this interview, we explain how you can build your own Dragon Portfolio!

You've probably heard about Chris Cole's portfolio, which consists of five main parts: Equities, bonds, gold, long volatility, and commodities trend following.

Most people understand the first three but have no idea on how to implement the last two.

The good news is during this educational series, we reveal how you can go long.

In this video, we focus on the final difficult component to building your own dragon portfolio, and that is placing the commodities trend-following trade using options.

Click here if you want to jump into part 2.

The Allegory Of The Hawk And The Serpent

George: All right, guys. It gives me a great deal of pleasure to welcome someone back to The Rebel Capitalist Show. One of my favorite people to talk to.

He is the co-host of Macro Voices. His name is Patrick Ceresna. Patrick, welcome to The Rebel Capitalist Show.

Patrick Ceresna: Thank you very much, George. Great to be back.

George: Now, today I'm super, super excited because a couple of months ago, I did some whiteboard videos on Chris Cole's paper that everybody is talking about. It's the dragon portfolio. 

His paper, Allegory of the serpent and the hawk, was just hugely popular all over FinTwit, and it's a relatively straightforward portfolio, except for a couple of key components.

So I said, who can I get on here to explain this a lot better than I can, so the average retail investor can actually put into practice what Chris Cole was talking about in this dragon portfolio?

I said I got to get Patrick on to do this. So Patrick is here today to give us the knowledge bombs that will help us take it to the next level. Patrick, I'll hand it over to you.

Patrick Ceresna: Thank you, George.

We had this conversation about how to take a portfolio and build a dragon portfolio for a retail investor, because it's easy at the institutional level.

You can literally outsource this to people like Chris Cole, who'll actually build it with real money. But the average retail investor doesn't have the ability to access the Chris Cole's of the world.

First of all, let's just quickly go through the concept, then we'll talk about the breakdown and where the issues are with all of it.

I want to start off by talking about this idea that says we’ve have had, over the last 30-40 years,  what's called, the standard market cycle, which is founded on fundamental growth, very normal market conditions, and the economy's expansion.

Then it reaches a point where the cycle ends with huge amounts of leverage and debt expansion in the system. It becomes bloated.

George: This is a cycle, where the typical 60/40 portfolio, the risk parody portfolio that most of my viewers probably have, does very well. But when we go into the next cycle, it doesn't do well at all.

Patrick Ceresna: That's right. What happens is that inevitably, some period of a new secular change occurs to reset the system. This is the key.

A lot of people love to boogeyman the reset of the cycle. Like you have the Peter Schiff's of the world who say the “world is ending”.

But it is a reality of what happens in these cycles, It's happened over and over again through hundreds of years of history.

We go through these expansions, and contractions, and resets, and everything ends up working out in the end.

Volatility Strategies For Your Own Portfolio

Patrick Ceresna: But a portfolio though, doesn't work the same in one of these periods of secular change. 

There are two ways of that cycle resetting, Chris Cole calls it the two wings of the hawk.

It could be a deflationary path or it could be an inflationary path from which this occurs. The idea Chris Cole brought up was, how do you build a portfolio that will do well in both of those conditions?

From all of his research, he basically came to the conclusion that he was going to build this dragon portfolio.

One that had roughly equal weightings into equities, bonds, gold, commodity trend following, and long volatility.

That's pretty amazing because for most investors, to even have 10% allocation to gold would seem actually like a very large weighting.

But in the dragon portfolio, it's almost closer to 20% weighting in there on balanced with equities and bonds. 

Almost every investor knows how to do the first three, which is I'll buy an S&P 500 Index or a basket of equities. He might know how to buy some sort of bond basket or buy gold bullion. 

But then, we get to trend following and volatility strategies, and this is where most people's heads start spinning.

It's like, how do I bring these things into the portfolio?

That's where we had a conversation and said, “Let's find a way for a retail investor to be able to add some of these strategies into their portfolios at a retail level.”

In today's session, what I wanted to do was talk about the volatility component. And when you have me back, we'll talk about trend following and some really neat ways that people can follow trends.

The way that I would look at this for a retail investor is you have to access the traditional options market to be able to go long volatility.

Now, sophisticated money managers that have access to institutional level accounts can have all sorts of special over-the-counter derivatives and other things constructed to be and/or hire a Chris Cole to do these things. 

But I want to talk about what we know, that retail investors can access the exchange-traded options market. 

An average investor would be able to put on a number of these basic strategies in order to be long volatility.

Now, there are all sorts of ways that we can implement long volatility, everything from straddle, strangles to backspreads. 

I want to focus on, first of all, explaining what a traditional payoff profile of a call option is, and then talk about why, something like a backspread, fits the bill to the way Chris Cole described this kind of low carry, long volatility strategy that buys you all this gamma.

George: What is gamma?

Patrick Ceresna: Well, actually I'm going to explain it right now when we get to the slides. We'll go through this whole process.

  • The traditional payoff profile

I want to start off with a traditional payoff profile of a long stock position.

It's called a delta one position, which is a 45-degree angle. It's the very binary relationship where, for every dollar, stock or security, goes down, you lose a dollar. And every dollar it goes up, you make a dollar.

There's no special structure to it. It's very clean. Most investors experience this delta one experience. 

Now, the most traditional way a retail investor enters the options market is with the purchase of a straight out long call option.

  • Straight-out long call option

A long call option gives you the upside to the right, which is that if a stock goes up, you're participating. But it comes at a limited risk, which is whatever premium I paid for the call option, I cannot lose more than the premium I paid.

Now, this is the very traditional long call, but what happens is that there's a negative carry.

In other words, even if the stock stays the same or even goes up just a little, you're still in a position of losing money with a call option. 

Your call option payoff is that you have to beat the capital you outlaid for the call option on the upside of the market. This is where this term of negative carry comes in, and we'll talk more about it.

But this payoff profile we're looking at on a call option, is only the chart at end, at expiration.

What you can see here, the blue line that I put on here, is the shape of the curve or the slope of a call option in the middle of its cycle.

It's not this clean-cut 45-degree angle lines that are very straight. It's the slope. This slope is the delta of the option that slope is steepening or flattening at the rate of gamma.

Now, this is more complex options math and is the next layer of understanding. 

Being Long In Options: A Strategy To Thrive

The most basic understanding that you want to think of is: We pay a premium to buy an option for its optionality, which is the more I am right, the more the option behaves like the stock. The more I'm wrong, the rate of loss is slowing to the point of that, I can't lose more than the premium I paid.

This creates this optionality curve and you're paying for that. That's what it cost a premium for the slope of this line. When buying an option, you profit from the directional moves.

When you pay the premium, you are long gamma. You are basically buying the upside or the downside of the market with put options or the upside with call options.

You're buying gamma when your go long options are buying volatility because as volatility increases, the options become worth more. In the options world, we call that being long vega or volatility. 

It's all amazing things when it comes to being long in options because if there's a big move, it makes you a pile of money, and if volatility explodes while you own it, you also make a big pile money. 

But it comes at a material cost, which is the premium we pay to buy the option, this premium is time decaying and is what we call the negative carry cost.

George: Let me just kind of unpack that real quick here. Tell me if I'm right. I want to buy an insurance policy for the world coming to an end, for Armageddon. 

I'm going to pay $100 a month for this insurance policy, and it's good for let's say 20 years. So I'm paying $100 or $200 a month for an insurance policy.

What happens is if everything is nice and smooth, stock markets are at an all-time high, the birds are chirping, everything's great.

Unemployment's at 3% and headed down, we're all this nirvana, well, I'm going to be able to buy that option or that insurance very cheap for a low monthly premium.

But what happens, let's say we get five years into it, so I have 15 years left on this policy. Then we have riots. We have looting. We have social unrest. We have the coronavirus.

We have unemployment headed to 20%. Who knows what's going on with the deficits and MMT and helicopter money and everything else?

So everyone that doesn't have that policy says, “Listen, I would love to own your policy, George, that you have for the next 15 years. You're paying X for it. I'll give you Y for it.

I'll give you a lot more than you paid for it right now because I don't have any insurance and I want your insurance.”

So you can sell it to them and make a profit that way, or you can hold it for the 20 years and let the entire world crumble around you and then you can exercise the options. 

Those are the two things we're talking about, right?

Patrick Ceresna: They are, but they're mutually beneficial in the sense that you could have a directional move. 

So let's say your long a put option, which is a betting that deflationary asset price impulse, this would cause stock prices to decline, but volatility tends to rise in that environment.

So, you are actually profiting twofold, because you bought the put option in a low volatility regime and it's transitioning to a high volatility period.

You're profiting from, the prices moving in your favor, your long gamma on the left-wing of the curve, which is basically the market declining, and at the same time, volatility is expanding, therefore, the premium of your option is also increasing.

So in fact, sometimes you can get extraordinary payoffs on put options during a market crash if you are benefiting from both inputs at the same time.

We'll talk about this as insurance here right now. The essential issue with buying calls or buying puts in general is, negative carry drags your performance.

If I'm continuously buying stocks and buying options with it as a portfolio component, the options, if they're doing nothing, are just dragging my performance because they're time decaying.

Call Backspreads: A Way To Reduce The Negative Carry

Patrick Ceresna: The question then becomes…

  • How can you create an option strategy that reduces the negative carry?

In other words, it doesn't act as a major burden to your portfolio while you have it there as insurance.

George: Yeah. It offsets that monthly insurance premium.

Patrick Ceresna: Well, offsets, but it's some way of neutralizing its impact. This is one of the strategies, and I emphasize on one because there are a number of ways.

In Chris Cole's paper, he talks about the idea of a rolling straddle and all sorts of different things to do.

So, I want to focus on just one of the ways, and we'll just unbundle this one and try to have all of your listeners understand this one strategy.

We're going to talk about call backspread. I want to talk about different ways of going long volatility in a portfolio. 

Many people perceive, and just like you described in one degree or another, and actually we've been talking about with long calls or long puts just a moment, that hedging tail risk is just essentially buying insurance.

At the same time, when you want to alternatively buy volatility, it's also trying to, therefore, minimize your carry cost when you're actually in this trade. 

So generally, what professionals such as Chris Cole, or other money managers that are buying gamma try to say is, “Well, some years you're going to be up or down, but generally it's a much better carry cost than just outright buying insurance.”

Right? We have to find some way to be long all this gamma and not be taxing the person that is building this into their portfolio, where it's ruining the performance of all of the other things in the portfolio that are working. 

This is where we want to talk about…

  • What are the ways to do this?

  • How do you build one of these portfolios?

There are two ways of buying insurance…

For instance, let's go back to your analogy of insurance, and let's talk about general car insurance.

When you buy car insurance on balance, the vast majority of us are net losers on car insurance, which is we are not the ones that need the payoff. 

Now, if you're unfortunate that you actually needed the payoff, it's because you were in a bad accident or had massive liabilities because of it, and you turn to the insurance policy to cash it in and get the payoff.

But for the majority of us, we're losers on the insurance because we never end up having to crash our cars. Our contribution to the insurance was helping the other person.

George: That's why they sell it to you in the first place, Patrick.

Patrick Ceresna: Yeah, there you go.

On balance, in the same way, always buying insurance on the stock market, perpetually is a losing proposition that drags your performance.

This is where Chris Cole spends so much time asking, “How do we go long volatility without all of this big negative carry in a portfolio construction?” 

I mean, we have to assume that not every one of your listeners is a professional market timer.

Because for people that tend to use options in trading, they tend to be market timers. They tend to have an intuition as to going up or down, and they're using the option as a tool.

What we're talking about here is someone who just indiscriminately buys insurance perpetually in their portfolio as a component of building it out.

Let's talk about the ways that most people perceive buying volatility. The most common thing people tell me is, “Well, when you're going long volatility, that means you're just buying the VIX, right?” 

That's the most common way that most people will say, you're just buying the volatility index. Now, this is actually not the way Chris Cole is going long volatility.

I mean, there might be a component within his portfolio where they are long volatility, like the volatility of volatility or some other component.

But those people that are trading the VIX or volatility index, they are trading a game of trying to forecast where volatility itself will go. 

They're saying, “I think volatility will go from 20 to 40.” 

They're looking at this one big payoff where we go from a low volatility regime to a high volatility regime, and they're trying to profit from forecasting the fact that they believe that this transition is going.

The problem is that volatility itself is not a very good portfolio hedge, because volatility itself is agnostic to the direction of the market. 

Some of those big up days that we had in the stock market off, of the market low, they actually occurred in the period when we had very high volatility.

While the natural tendency is volatility spikes higher during market crashes, it's really a forecast to what is the implied daily range.

Even though implied volatility is annualized, it is based on what is the implied daily volatility of the market.

During market crashes, for instance, what we experienced in February, March, and April on the way down and back up, they were very big days, where we had 2, 3 4, 5% moves in one day. That was a high volatility regime.

So, when you go long the VIX, it's a one-time payoff of you believing that a low volatility period will transition to a high volatility period.

That's great, but that's really not a portfolio hedge. That's just you making a bet that volatility is going to change right now in the period from which you've gone long.

George: It's not something you want to keep in your portfolio for 10 years and just set it and forget it. 

Correct me if I'm wrong, Patrick, but a lot of the people that try to play the VIX, they'll buy an ETF that tries to track the index.

And there's a negative carry to the index just like USO in a sense. Like the contango roll.

Patrick Ceresna Yeah, it's brutal. That's the VIX index itself. But even buying options on volatility, you're dealing with the volatility of volatility.

It's a thing that you want to leave to more sophisticated investors. 

Some of the people that are listening may be more sophisticated and they can be doing that, but let's say the average person, it's usually over their head to be trading the VIX itself and trying to make that forecast.

George: I just want to just hammer on that one point because everyone comes back. I just want to be very clear, guys, to be redundant here. 

If you're buying an ETF that is supposed to “go long volatility” and you hold it for 10 years, you're going to lose money.

It's only going to go up when volatility spikes, and in the interim, there's a negative carry. There's this negative decay. 

I don't know what the correct word is, Patrick, but the bottom line is they're always rolling it over. And every time they roll it over, most often the fund itself is going to lose money.

So it's almost 100% guaranteed to lose money if you hold it over the long-term. I just want to be very clear with those ETFs that say they track the VIX and “go long volatility.”

Patrick Ceresna: Right.

Because there is no real volatility for them to buy, so they're buying VIX futures, and VIX futures have a term structure the way oil and natural gas and all the other futures have. 

Volatility tends to be trading in contango, which means that it's always more expensive to roll it forward, and therefore, often as much as 5% or 10% tax a month is being hit on somebody that's holding a long volatility ETF.

I would highly recommend it and make this very clear. If you want to add and build a dragon portfolio, adding a VIX ETF into a 20% allocation into your mix is a very bad idea. That is not what Chris Cole meant.

It's just not going to be a winning proposition for you to follow that path.

George: That's the point I wanted to make. Just like the USO oil ETF, it doesn't have the underlying asset. It's the same thing. You're going to lose money long-term.

Patrick Ceresna: This is where we want to talk about the second way of being long volatility, which is what Chris Cole was talking about, and that is being long gamma. 

That is being long the trend effect, which is that there are these periods where in a trend move, of inflationary and deflationary impulses, trends persist day after day.

These big moves happen through these huge inflationary impulses.

They often happen in currencies, in bonds, in commodities, and we'll talk about that when we talk commodity trends and commodity trend following. But these big trends develop.

Being a long gamma means that when one of these secular changes comes in, where one of these extraordinary moves is happening, you've built a portfolio that is either hedging your portfolio, if that's a deflationary impulse or, accelerating your returns if it's an inflationary one.

It's supposed to protect you on when one of these wings of the hawk occurs. This is the idea of being long gamma.

Patrick Ceresna: The call backspread we talked about here is one of the ways from which you can do it. There's multiple ways, but this is just one.I think this is a straightforward way to explain how this strategy works.

What this involves is a combination, like a spread trade, of selling a call option and subsequently buying two higher strike priced call options against it with the same expiration on the same underlying security.

The goal is to try to actually open this is at a net-zero cost. Now what happens is, if you recall the payoff profile we described earlier of the hockey stick shape curve, we now create a payoff profile that looks like this.

Where essentially there's only one real kind of dangerous spot where a bigger loss can occur. 

What is the key to a ratio call spread or backspread? Is that when you have a scenario where the stock market is declining, the call backspread just literally expires for no loss.

Patrick Ceresna: It literally had no carry in a period when the market was going down. At the same time, if you had an extraordinarily big move to the upside, it has a huge payoff. 

So a call backspread on the stock market would be an inflationary impulse. But at the same time, if we were talking about bonds, gold, or commodities, the call spread has interest rates or currency like on the U.S. dollar. 

When you're Chris Cole, you're opening these call backspreads on every asset class.

This is not just stocks. So what happens is when one of these extraordinary inflationary/deflationary moves happens, you have this big payoff, at least in the calls, on the right tail. 

So, right tail call backspreads biggest payoffs are on gold and on bonds.

Because usually when the stock markets crash, interest rates tend to decline and bonds rocket higher, so a call backspread on bonds, for instance, paid off extraordinarily.

Patrick Ceresna: We had one open on the TLT, on treasury bonds, during the last crash, and the market just blasted off to the upside in this extraordinary way, at least treasury bonds did in return for the fact that interest rates were declining.

You create this scenario, and that point of risk is where the Underlying security goes up a little, but not a lot.

George: Patrick…

  • Why is there no loss?

  • Why is there no negative carry?

  • Because you're selling the call, so you're getting a premium while at the same time paying a premium?

Patrick Ceresna: So let's take an example of a call spread on a $100 security. You have let's say six months of time on this.

Right now you would sell a $100 call option for let's say a $5 credit.

Therefore, let's say you receive $500 income for selling that call, but you used the proceeds to buy two call options at the $110 strike and each of those are $2.50. 

Obviously, I just use round numbers. In the live market, there rarely will be a perfect zero cost debit. There's usually some form of a debit or a credit in the process of opening them. 

Sometimes in a very low volatility regime, you can even open a three to one or a four to one ratio on these and really buy a huge amount of gamma on those wings. 

The point though is that it's a zero debit. It didn't cost you anything.

So this is why, when the market was declining, both calls, the long and the put ones, expire and it was zero debit cost. Therefore, you lost nothing.

There was no carry cost. So if the security literally stays the same in price or in any way is declining, there is zero loss on a call backspread.

George: Just a quick question, Patrick.

I think what most people will be asking is, say, listen, if I'm selling something for five bucks, why is someone buying two of what I'm selling for $2.50? 

I think that goes back to the timing of when you're doing this transaction relative to volatility. Is that correct?

Patrick Ceresna: Well, you also want to notice that the $110 strike is $10 higher. The option is on a probability adjusted basis. Our right to buy is actually $10 higher.

We're buying something that needs to move greater.

What this does is it allows you to be long volatility and long gamma, but at the same time, it also means that you can generally be able to put on this trade for a very low carry cost.

Because if the stock market is more or less staying the same or remaining unchanged or even going down a little, it doesn't cost you to be long gamma.

Patrick Ceresna: It's not like buying a call option that is just going to be time decaying and expiring at zero cost.

The Goal Is To Be Safe

Patrick Ceresna:

More importantly, what we do want to reflect upon, George, is that Chris Cole was talking about this as a component of a portfolio.

In other words, we're not buying this call backspread because we think that this is going to be an extraordinary performer. We actually are buying it just in case shit hits the fan and some event is occurring and suddenly we're taking big losses on other parts of the portfolio.

This, like an insurance policy, pays off in a big way on the wing. For a balanced portfolio, this is playing a diversifier role, something that will actually do very well when the rest of your portfolio is in turmoil.

George: Yeah. It compliments everything else. This is the cranberry sauce at Thanksgiving dinner. You don't want it for the whole meal, but it's very good to have.

Patrick Ceresna: Right. Exactly. Long equities are the turkey and long bonds are the potatoes.

George: By the way, Patrick's Canadian, so I'm very impressed that he knows this stuff.

Patrick Ceresna: There you go. Nonetheless, it's this idea that you basically have this as a compliment to your portfolio. This is one of the ways to do this.

Now, there are a couple of interesting things that are important to know. Notice that this very deep shaped V at the bottom of the loss, in this case, would be occurring at $110.

So if the stock was exactly at a $110 at expiration, that would be your max pain point on this trade. But there is a couple of really interesting things.

If you really listen to Chris Cole's interviews, he talks about the act of management of a long volatility strategy. 

One of the more interesting things about being a ratio backspread like this or a call backspread, in this case, is that by closing it early, let's say I bought six months and I was rolling it every three months, So every three months I would close and buy another one that's six months out.

You will never actually experience the great loss at that V point because there will always be time value on the long calls against the short call, therefore, you may be down, but you will never be experiencing max loss.

The act of management of rolling one of these call backspreads, which is actively managing your portfolio, allows you to always have gamma and never experience the max loss. This is one of the really fascinating things about owning that option.

Patrick Ceresna: The second thing is that because you structurally have less risk, you can actually size your position even larger.

So, if you turn around and, that max risk point is even a fraction of its size because you never hold until its maturity, you can actually increase your sizing of the spread and have even more gamma.

This is why one of the most exciting times to be going long volatility is in a low volatility regime, like back in January and February when the VIX was down at 10 or 11.

A lot of people perceive that's because you can buy the VIX down there and it jumps to 40 and you make this money, but no. 

In fact, what it is, is that the ratio spreads and all these other ones, cannot only be bought with more narrow spreads, but they can also be bought in larger ratios.

In other words, you might be able to sell an at money call and use the proceeds to buy three or four calls that are out of the money. Now you've bought a shit load of gamma.

George: Instead of $110 spread, it could be $105.

Patrick Ceresna: Exactly. It'd be 100 to 105. Now, when volatility really accelerates, you suddenly have this amazing period.

What happens a lot of times with the professionals like Chris Cole, and there are other great managers that do this as well, but what they're doing is they're saying, “Well, if the volatility is high in equities, there are other assets that are correlated to equities that don't have the same high volatility.

So why don't we put this ratio spread on, in some other asset that is going to move when equities move as well, but we're able to open it at a much lower vol premium and a much easier carry cost.” 

This is what they're doing. They're analyzing the markets all the time and saying, “Where can we put these long volatility trades on, for the best payoffs and the lowest risk and the least carry,” and all these different things. It's why they're professionals. That's what they do, right?

They're perpetually looking for a way to actively manage that.

Another Synthetic Way Of Playing The VIX: Being Long Vega

Patrick Ceresna: The one last thing that I wanted to highlight was that you're also long volatility because you're long vega. This is also a synthetic way of playing the VIX.

Because in the end, you put on more call options than you are short on the market in a low volatility period, and if volatility expands, then you are actually going to see a net profit on your volatility expansion even if the security doesn't move.

That's the cool part, with this particular backspread strategy, you actually can be long volatility itself by having it implemented, and that's the same for straddles and other things. 

In this session, we only covered just the one strategy, but there's a whole array of really cool strategies to do, to have lower carry costs and ways to actually implement them.

George: The next question will be, Patrick, when are you going to teach us that? You've given us this part, but man, there's so much more to grasp.

I want to be very clear, this seems incredibly complex for the average Joe or Jane and we're talking about Chris Cole doing all these complex things. But guys, we don't have to be a Chris Cole.

We don't have to be a professional to leverage the power of this concept within our own portfolio.

We might not be able to maximize like a Chris Cole, but we can definitely use it to our advantage if we understand some simple concepts. 

We've gone over one thing here, but it sounds like Patrick has got a lot more tricks up sleeves. Is that correct, Patrick?

Patrick Ceresna: Of course. That's what I specialize in. Listen, you know what? We had a great time doing that live session.

Anytime you want to invite me to do another live session with you, we can get on there and share that with your listeners anytime. You let me know.

George: Well, I think that'd be great.

Just to remind everyone, Patrick and I did a four-part series a couple months ago where at the end we did this kind of live webinar where we brought people on.

Patrick actually went into the market and made trades. And this was when we were teaching everyone about options themselves.

Patrick Ceresna: It was particularly on gold too, right?

George: Oh yeah, that's right. Yeah, and gold. So now we could maybe just do the exact same thing, but focus on the dragon portfolio. That would be very cool.

Patrick Ceresna: I'm totally cool with that. If you want to do a session on how to actually put on some of these trades, happy to do it. It's a good thing.

You know what? When you do something like putting in, one these call spreads, there isn't a lot risk to doing it. Even if you held to maturity and the absolutely worst scenario happens, it's still an incredibly modest loss in the context of a balanced portfolio.

And, what the objective of the position was all along, which is to be long gamma for one of these big extraordinary moves.

I can't think of a crazier time in the market than now where we had the fed basically have to expand its balance sheet in historic terms in order to fight this economic recession that was induced from the corona.

So, now we have a scenario where one of the wings of the hawk could actually start to materialize. Maybe a major secular change may be afoot.

For an average investor, to just have a few of these long volatility strategies complimenting their existing portfolios, it doesn't actually take a lot of money.

Even if you don't want to sell any of the securities, for instance, something like this backspread that we talked about is a zero debit, so it actually doesn't take any cash to open it.

The margin that it takes to securitize it, which is the spread between the 100 to 110, could be collateralized against the margin of your equities that you own in your portfolio already.

You can just take your existing portfolio and immediately implement a couple backspreads to just complement your portfolio mix. 

It's something that could be done. If you want to do a live session together, we can maybe announce it next week.

George: Let's definitely talk about it.

I think what people really need, and what I would love to see is, okay, I get the concept, but, what button do I push? How do I do this? Step one, step two, step three. 

Just to be clear for everyone, I hear this debate all the time, and Patrick, I know you do too on Macro Voices, where you've got people that are on the deflation camp and people that are in the inflation camp. 

The problem is that the portfolio is widely different. It's basically complete opposites. 

But what's neat about this is you make money, whether we're going into deflation or inflation. It works in both situations.

Patrick Ceresna: More importantly, for instance, let's say an inflationary impulse leads to huge asset price inflation.

In fact, trend following commodities and all the equities start appreciating in a period where the dilution of money is occurring at such a rapid pace.

So the denominator is being hammered on money. In that period, if you were just buying let's say backspreads to ensure a deflationary impulse, well, they're going to expire at no loss to you.

In other words, you had the insurance for a deflationary impulse, but the inflationary one was the one that manifested itself. 

By doing so, you didn't really lose for having that insurance, that low carry cost that Chris Cole was talking about.

You don't want to have burned huge amounts of premium buying insurance and then, watching it time decay. You want to have that tail gamma, that way of being long these big moves. We can do it.

I'm happy to show all of your listeners how to put on a couple of these trades and hedge their existing portfolios by being long volatility. Absolutely, buddy.

George: Okay, cool. So let's talk about that offline. For next week, what people can expect is for us to do kind of the same broad overview of this commodity trend following.

Then, if we come to some sort of idea of how we can make this live webinar, to walk people through this process step by step, then we'll go ahead and announce that next week.

Patrick Ceresna: Sounds good. Thanks for having me, George.

George: All right, buddy. We'll talk to you next week.

Patrick Ceresna: Cheers.