0:00

Today's Animal Spirits Talk, your book, is brought

0:02

to you by STF Management. Go

0:04

to stfm.com to learn more

0:06

about their two tactical

0:08

growth strategies, the TUG, TUG, STF

0:11

technical growth strategy, and the TUG

0:13

and STF technical growth and income

0:15

strategy, both ETFs. And we'll

0:17

check out stfm.com to learn more. Welcome

0:22

to Animal Spirits, a show about markets,

0:24

life, and investing. Join Michael Batnick and

0:26

Ben Carlson as they talk about what

0:29

they're reading, writing, and watching. All

0:31

opinions expressed by Michael and Ben are

0:33

solely their own opinion and do not

0:35

reflect the opinion of Red Bull's wealth

0:37

management. This podcast is for informational purposes

0:39

only and should not be relied upon

0:41

for any investment decisions. Clients of

0:43

Red Bull's wealth management may maintain positions in

0:46

the securities discussed in this podcast. On

0:52

today's show, we're joined by Jonathan Mulchan.

0:54

He is a managing partner at STF

0:56

Management, and we got into trend

0:58

following and option overlay strategies of the

1:00

Massac 100, which has been a

1:04

very popular corner of the market. I think

1:06

what's interesting about what Jonathan is doing is

1:09

he's taking a different approach to generating income

1:11

on top of the trend following model. That

1:13

we haven't seen. No. It's also interesting to

1:15

see people from the hedge fund world get

1:17

into the ETF space. Yeah. Because this is

1:19

the kind of strategy you would never have

1:21

seen in ETF in the past. No. No.

1:24

We didn't get into this on the show, but he spent

1:26

time at SSE Capital and Millennium at to Ben's point. A

1:28

theme that we've been talking about on

1:31

other shows is the ETF milestone of

1:33

$10 trillion in assets. It's

1:35

not just index funds. In fact, a lot of the growth

1:37

in the market is coming from active strategies like this. The

1:40

ability to do it in a wrapper like this, that's liquid

1:43

and tax efficient, and you're able to put

1:45

all sorts of different interesting strategies, is something

1:47

that's unique and new and interesting.

1:49

Yeah. So these strategies are starting with the

1:51

index as the baseline, but

1:54

then it's also adding a tactical overlay and

1:56

trend following. Then it's also on the other

1:59

strategy and tugging. it's adding

2:01

an income options overlay

2:03

as well. One thing that we got into on

2:05

the show at the end of it was what

2:08

might happen to the income

2:11

being generated on a lot of the

2:13

popular strategies in a falling rate environment,

2:16

which is something that I

2:18

think is not being appreciated by

2:20

investors in the market and an

2:22

interesting consideration for those that

2:25

do. So with no

2:27

further ado, here is our conversation with

2:29

Jonathan Mulchan. Jonathan,

2:34

welcome to the show. Thanks for having

2:36

me. For the audience, just if you don't mind, give

2:38

us a quick 30 second background. How did you get

2:40

here? Who is STF? What are you trying to accomplish

2:42

in the market? Sure.

2:45

So STF management is

2:47

an ETF issuer based out of Texas. We

2:50

are focused on active ETFs that

2:52

complement traditional asset classes, but with

2:55

an innovative twist that help investors

2:57

remain invested to different market cycles,

3:00

as well as solving for

3:02

the challenges associated with

3:04

generating consistent current income.

3:08

We do that through two ETFs, TUG

3:10

TUG and TUGN TUGN.

3:13

These are what I call the third

3:15

generation of options income ETFs that

3:18

have moved from a passive

3:20

underlying asset income to

3:23

a passive underlying active income

3:25

to now fully active in

3:28

touching all asset classes while solving for

3:30

that income need. What does STF

3:32

stand for? Simple transparent and

3:34

focused. Okay. Not

3:37

bad. Okay. So like you

3:39

said, the first two option based

3:41

income strategies are I guess are pretty well

3:43

known. So how does yours differ from those?

3:45

What are you trying to expand on? Sure. About

3:48

10 years ago, I became involved in the

3:50

ETF industry after starting my career on the

3:52

hedge fund side. There was

3:55

a collective curiosity to see if

3:57

options based strategies could gain track.

3:59

action within the retail

4:02

investment community. And

4:04

what Tug and Tugend do differently.

4:07

So Tug is basically

4:09

the underlying benchmark. So if we

4:11

were to think about passive, say,

4:14

buy-write or covered call products, they're

4:17

tracking the S&P, the NASDAQ, or

4:20

the Russell 2000, to name the

4:22

three big ones. So what

4:24

Tug does is it can toggle between

4:26

an allocation to the NASDAQ 100 and

4:29

a full replication. But

4:31

in times of downtrends

4:33

or heightened market volatility, it

4:36

can toggle into US Treasuries to

4:39

provide a risk-off component without

4:42

incurring the cost of a hedge like

4:44

many hedge equity products. So

4:47

the key difference is that unlike

4:49

a passive index product, it has

4:51

the ability to de-risk in times

4:54

when maybe you don't want to be 100% long stock.

4:57

In regards to Tug, again, the underlying is the

5:00

same. The difference there is

5:02

that it has an active option

5:04

overlay. And unlike a typical

5:07

covered call product, it's selling a

5:09

monthly call spread. The

5:11

benefit of that is it can still support

5:14

the high current monthly income and

5:16

the distribution. And right now,

5:18

it has a 12-month trailing yield of 12%. But

5:21

it can help in reducing

5:24

capping that upside participation unlike

5:26

a passive product can. So

5:28

one, you're solving for income.

5:30

Two, you have the ability

5:32

to remove the option prior

5:34

to expiration if the market's moving higher. So

5:37

you can increase that participation.

5:41

And it also allows you in changing market environments

5:43

to be able to lock in those gains and

5:45

close that option out. All right. So let's stick

5:47

with Tug. And then we'll get to Tug again

5:49

because you just said a lot that I want

5:51

to dive into. So a

5:53

lot of the hedged products were

5:56

really built for bear markets. And

5:59

the reality is, is bear markets

6:01

are fortunately few and

6:03

far between. They exist for sure, obviously,

6:06

but the challenges for some of these products that

6:08

have come to the market, certainly after all wait

6:10

and even through, pick

6:12

a year, they weren't able to

6:14

survive a bull market. And if

6:16

you can't survive the upside, then you're no

6:18

good to anyone during the downside. So how

6:21

is your product accomplishing both surviving

6:23

the upside and be able

6:25

to potentially survive the downside as well? Right,

6:28

so in regards

6:30

to TUG, it's looking

6:32

at moving averages, rates

6:34

of change, market volatility,

6:38

and as a trend

6:40

turns south, it has

6:42

the ability to, in

6:44

general, regardless of market environment, there are

6:47

three scenarios that you'll see the portfolio

6:49

composition. So you'll be 100% stock, and

6:53

let's say the market starts to slow down and then

6:55

roll. We can go 50 stock,

6:57

50 bond. If the

6:59

market continues to roll, we can maintain a

7:01

position of 10% stock, 90% treasury. So

7:06

if we wanna look back in time, and

7:09

this is just looking at the market, this has nothing to

7:11

do with the ETF, in

7:14

01 with the dot com, it would have

7:16

taken you almost 15 years to

7:19

recoup that same level of principle balance. That's

7:22

a long time. So our

7:24

ability to de-risk is

7:26

the key difference.

7:30

What I will say is that the

7:33

biggest risk, let's

7:35

just say with the passive covered

7:38

call strategy, it's not

7:40

necessarily that your downside is

7:43

essentially unlimited, less the premium

7:45

received. It's that

7:47

it could potentially take you

7:49

forever to recoup the

7:52

principle loss and the sell off. So

7:54

we'll use an example here. So let's

7:56

say the VIX is at 20, and

7:59

you... sell and at the money

8:01

call. Typically, VIX divided by 10 is

8:03

the premium you'll receive for a one

8:05

month out expert. You brought in 2%,

8:07

the market's down 20. You're

8:10

down 18, the market's down 20. Alpha.

8:14

Now, the

8:16

VIX is at 40, four

8:18

weeks later. You bring in

8:20

4% and

8:23

the market has a V-shaped recovery and now

8:25

the market's flat. So

8:27

you're down 14 and the

8:30

market's flat. That's the

8:32

biggest risk to these strategies

8:35

is how do you recover the losses?

8:39

Fast forward to 2022, which

8:41

was probably the most unique year that I've ever seen.

8:44

In that year, you saw the

8:46

S&P down 18, you saw

8:48

the NASDAQ down about 32. On

8:51

the back end of that, long bonds were

8:53

down about 32 as well. So risk off

8:56

was still risk on. If

8:59

you then look at, say, the

9:01

passive SIBO indices, so BXM, BXN

9:03

indexes, BXM was still

9:05

down 11 and the BXN, which is the passive

9:08

out the money on the NASDAQ, was down about

9:10

19. So you participated

9:12

in 50 to 2 thirds of

9:16

that downside. But

9:18

if you look at what happened 23 to now,

9:21

they've only participated in 50% of their

9:23

recovery. And what

9:26

I find interesting about this is that

9:29

even if you were to use TUG

9:31

as an asset allocation

9:33

benchmark, the

9:36

way in which TUGN with that

9:38

options program operates is

9:40

participated in 90% of that total return

9:42

over that same timeframe. So

9:45

that's what I like to highlight

9:47

is yield at what

9:49

cost? How much total return

9:52

are you potentially sacrificing while chasing

9:54

that double digit yield? I'm curious,

9:56

a couple things on the strategy.

9:59

First, I guess how How often do you look

10:01

at your trend signals to determine whether to have

10:03

risk on or take risk off? That's

10:06

monitored daily and throughout the day. That

10:09

being said, there are

10:11

guardrails in place to not overtrade

10:15

and for turnover to not be You're

10:19

looking at probably four to

10:21

five rebalances annually. In

10:24

a quiet, sleepy market, you could see

10:26

maybe one or maybe none. The

10:30

option overlay is something that you're obviously very intimately familiar

10:32

with. What do you think are some of the differences

10:34

between the spreads

10:36

that you put on versus some of the

10:38

traditional strategies that have gotten really popular in

10:40

the marketplace? Sure. The

10:43

idea behind the spread is

10:45

married to the underlying structure

10:48

of the TUG model. Meaning

10:52

that it has the ability to de-risk

10:56

and has the ability to also

10:58

source income from Treasuries

11:00

if in that scenario,

11:03

the spread can still support a 1% distribution.

11:08

The benefit of the spread versus, say, just a

11:10

straight at the money call is at the money

11:12

call, it's going to be short 50 Deltas. Basically,

11:16

what that means is for every 1% move

11:18

higher or lower in the market, you're participating

11:20

in 50% of that. We're

11:23

short 20 to 30 Deltas. We're

11:27

increasing the upside capture when the market

11:29

moves higher. When

11:32

the market moves lower, we

11:34

don't necessarily depend on that

11:36

short call to buffer the

11:38

downside to the same extent

11:40

because we can then go out of 100% stock into

11:43

50 stock, 50 bond. I'm

11:46

curious how much of this is rules based

11:48

and how much of this is just you

11:51

understanding the options market? I

11:54

would say the majority is rules based. There

11:56

is a bit of an arc within options. and

12:00

understanding when certain

12:03

moves and changes in market structure don't

12:05

add up. There's been no shortage

12:07

of events in the last two, three years since

12:09

the funds launched. They hit

12:11

their two-year track record in May of this year.

12:16

The idea here is to support

12:18

the distribution, reduce the

12:20

upside cap, and

12:22

seek to track your

12:26

underlying benchmark more closely than a

12:28

passive strategy cap. We've

12:31

set it and forget it. People

12:33

talk about buying hold. We talked about

12:36

the advantages of TUG versus buy and

12:38

hold and its

12:40

ability to de-risk, not

12:42

participate all the way down, and then hopefully

12:45

recover on the way back up. The

12:47

idea of the option is to be

12:49

complementary and to reduce

12:51

that negative contribution to the total return.

12:54

For the underlying holdings, are you using ETFs

12:56

or individual stocks? On

12:58

the stock component, we fully replicate the

13:01

NASDAQ 100. The

13:03

trend following, was that at the index level or the

13:05

stock level? How does that work? It's

13:07

at the index level. TUG was

13:09

created as a way

13:13

to combine two

13:15

uncorrelated assets. That

13:17

over time, you could smooth the return

13:20

profile of a risk-on asset and a

13:22

risk-off asset basket. In

13:25

these two funds, the risk

13:27

assets and NASDAQ 100, the

13:30

risk-off asset is the least

13:32

correlated US Treasury, regardless

13:35

of duration. The twist

13:37

that- Sorry, to interrupt, the bond piece

13:39

can change then depending on the environment.

13:41

You don't use the same bond piece

13:43

for every sell-off or every downturn.

13:46

That's correct. It's the least correlated to the

13:49

equity complex. And the

13:51

reason for that was visible in 2022 where

13:53

a long duration Treasury ETF participated

13:55

in the same

13:59

down-side- as now is to Apple 100. Caused the

14:01

downside. Yes. And,

14:04

you know, especially with inflation being front

14:06

and center over the past couple of

14:08

years, you know, historical

14:10

research shows that,

14:13

you know, anything 10 years

14:15

and farther out, that

14:18

correlation actually comes in materially

14:21

to the point where it's

14:24

a detriment to the portfolio. I

14:26

think, you know, this is the advantage of, you

14:29

know, Tog and its purest

14:31

form being an innovative

14:33

solution to the traditional 60-40

14:36

portfolio. Because not

14:38

only is it helping investors

14:40

remain invested and

14:42

not capitulate with market volatility, but

14:44

it's also solving for the risk

14:47

off piece. So maybe right now

14:49

you want to be a 90-day paper. If

14:51

that changes, maybe you're in, you

14:53

know, seven-year duration. Maybe at

14:56

some point in two years, you're in 20 to 30-year duration. But

14:59

so it's solving for those two

15:01

pieces. And then Tog and takes it

15:03

a step farther and gives you income

15:05

without, you know, while seeking to not

15:08

sacrifice that total return. I'm curious

15:10

on the Tog and piece. Do the

15:12

tactical rules supersede the income strategy? So

15:14

like, if you're totally risk off and

15:16

you're 10% in stocks and 90% in

15:19

bonds, obviously, that income piece is

15:21

a lot smaller, I would imagine? No.

15:23

So with Tog, again, it actually is

15:25

able to collateralize all of the underlying

15:27

securities, both equity and fixed

15:30

income. So if we

15:32

are in a sideways

15:35

to down market, we

15:37

are risk off, we

15:39

can still support that distribution to

15:42

the selling of the monthly call spread. So

15:45

then, in theory, the investor is benefiting

15:47

because they're still supporting the income need

15:50

on a monthly basis, and

15:52

they're getting paid to wait for the market to rebound.

15:55

And that's the big advantage

15:57

of Tog is that it's removing.

16:00

the emotional bias from

16:02

investing the market. It's

16:05

saying the model

16:07

is taking care of when do I sell,

16:09

when do I get back in? Because those

16:11

are two very difficult decisions

16:13

for any investor to try and make. Just

16:17

getting back to the trend following, I'm

16:19

not exactly clear how it works. The trend

16:21

is being measured at the index level, but

16:23

then you've got the replication of the individual

16:25

securities. Is there an in

16:29

out or is it

16:31

gradual with only certain holdings?

16:35

How does that happen? From

16:37

the holdings perspective, the idea was

16:39

to give investors the

16:42

same core exposure that most

16:44

of them already possess. Exposure

16:47

to NASDAQ 100 and exposure

16:49

to US Treasuries. At

16:51

a single stock level, there is

16:53

no consideration. Now,

16:55

the shift between

16:58

how the portfolio is

17:00

allocated is gradual in

17:02

many cases. You could

17:05

be 100% stock, you see a move and

17:07

the market moves lower, you'd probably get a

17:09

50 stock, 50 bond. If

17:11

it continues lower, that's when you would go to 10

17:13

stock, 90 bond. It

17:16

would take a catastrophic event to

17:18

see something where you would shift from 100

17:20

to 10 90 or inverse. The

17:24

movie averages, you said you're measuring them as zoomed

17:27

in as even daily? They're

17:30

monitored daily, but they

17:32

go anywhere from three days to 200 days. What

17:37

about an environment like 2022 where there's just a lot of

17:40

sloppy sideways, where the longer term trend

17:42

is sideways, but the intermediate term trend,

17:44

there's just a lot of bear market

17:46

rallies and you're in, you're

17:48

out, you're up, you're down. What about

17:50

an environment like that? When

17:54

stocks and bonds become more

17:56

positively correlated, that's obviously a serious problem.

17:59

serious challenge for a trend following model

18:01

that's toggling between risk on risk off.

18:05

And operating within the constraints of

18:07

an ETF, unlike a personal

18:09

account, you can't go 90% cash.

18:13

So there still is that risk

18:15

aspect within the fixed income complex.

18:18

What I would highlight though is

18:20

that since inception, Tug

18:22

has outperformed despite 2022, the traditional

18:27

6040 of S&P and Bloomberg AG.

18:29

So I was going to ask that, is that

18:31

your benchmark that you think investors should look at

18:33

is this is more like a 6040 portfolio in

18:36

terms of, I

18:38

guess, return expectations and risk expectations?

18:41

That's correct. So this is looking

18:43

to give you a smoother return

18:46

profile so that we can avoid

18:49

the most volatile days

18:52

and that desire

18:54

to continue to remain fully invested throughout

18:56

different changing markets. If you were to

18:58

look at the lifetime of the backtest

19:00

or even since inception, do you

19:03

think that 6040 is the right benchmark? Are you

19:05

close to, on average, 60% fully

19:07

invested? Where did that benchmark come from? So

19:11

based on if

19:13

we were to go back over time, a

19:16

6040 is probably the

19:18

most widely understood or followed benchmark.

19:21

We also use that because of

19:23

the recent rule change from where

19:25

Bloomberg brought our benchmark as a

19:28

comp for all ETFs. Since

19:31

inception, you're looking at probably a 70% to

19:33

75% on average allocation to stocks. That

19:39

makes sense. I'm curious why

19:41

you chose the NASDAQ here. Is

19:43

there a certain... Does it

19:45

trend more? Is it better for trend following rules? Why the

19:47

NASDAQ 100 as opposed to the S&P 500 or Russell 3000

19:49

or something like that? Sure.

19:52

The two ETFs were actually

19:54

born out of a SMA conversion. Oh,

19:56

interesting. Tell us about that. and

20:00

it's at the TUG level

20:02

has been widely followed and used for a

20:05

little more, out a decade at

20:08

this point, in other SMA

20:11

type models, signal research, et

20:13

cetera. And it grew to

20:16

a point where the idea

20:19

was to open

20:21

it up to the broader retail community

20:23

through two ETFs. TUGN is brand new.

20:26

It took TUG and then added the

20:28

income component. What's great

20:30

about the TUG approach is that it's basically

20:32

a widget maker. That

20:34

risk on component can be switched

20:36

out in other strategies

20:38

or products. So the

20:41

legacy SMA was the

20:43

NASDAQ 100 and then long duration bonds.

20:47

Obviously, as we came into launch

20:49

and correlations and bonds and

20:52

stocks went to near one. That's

20:55

when the legacy bond

20:58

allocation was brought

21:00

into a more adaptive allocation

21:03

and being able to toggle across the

21:05

curve. I'm not surprised to hear

21:07

you say that it was an SMA conversion because

21:09

I was surprised to see that you've

21:11

got almost $200 million in the strategy

21:14

in what has it been, two

21:16

years? Yeah, you said that your anniversary. That's

21:18

pretty impressive for a tactical ETF.

21:21

So are part of the flows

21:23

due from legacy holdings converting? That

21:26

is true. But we have also seen for

21:28

a new product that is

21:31

active, which many

21:33

ways extends the

21:35

period of time that investors want

21:38

to see the ETFs perform. Net

21:41

creations and both bonds has been

21:43

impressive even in this

21:46

market environment of tremendous uncertainty.

21:48

What do you think is a fair

21:51

period for people to judge the

21:54

performance of the product? Because trends

21:57

don't change on a dime, especially

21:59

the type of upward trend that we have,

22:01

there's a very much a buy the dip

22:04

mentality. And so you can

22:06

go through a sideways to corrective action and still

22:08

be in a longer term uptrend. So what do

22:10

you think is a fair like, do

22:12

you need a year? What do you think is a reasonable time,

22:15

time period for you to judge? I guess it'd be market dependent.

22:17

So maybe it's not a fair question. But when

22:19

people ask you, how do I judge your performance? What do you say

22:21

to them? So, you know,

22:23

back to 22 being incredibly

22:26

unique, if we were to just look

22:28

over the last year and a half, I

22:30

think that's a pretty decent timeframe to look

22:32

at. And why I

22:34

say that, you know, COVID

22:37

is a tough timeframe to

22:39

show. But the last year

22:41

and a half is interesting, because we

22:44

see rates go from effectively zero

22:46

to five trend sideways. And now

22:48

we're in this, you

22:50

know, rate cutting environment

22:52

where there's no shortage of, you

22:55

know, declining interest rates. If

22:57

we were to look at any timeframe

22:59

before COVID, I mean, it was four

23:01

decades of lower rates. That's

23:04

not a fair way of looking at how

23:06

a trend falling model would look. You've

23:09

got lower rates, rising

23:11

market, and you're just

23:13

long the market. So you

23:16

got increasing rates, flat rates, lowering rates

23:18

the last year and a half. You

23:21

had a vol event that hadn't been seen

23:24

since COVID. So

23:26

there's a healthy mix. And that's

23:28

all alongside inflation. Now, inflation has

23:30

come down, but it's still relatively

23:33

high. And,

23:36

you know, if you look at the

23:38

performance there relative to, you know,

23:41

the S&P, you know, over this

23:43

timeframe, the S&P is up about 53%, TUG's

23:46

up about 55%. It's outperformed,

23:49

you know, the 60-40, which

23:52

is up around 36%. And

23:55

what I think is even more interesting is that

23:57

TUG N is up about 50% over the last year

23:59

and a half. That's a lot Jonathan credit credit to

24:01

you for not saying full market cycle because that's

24:04

a phrase that I think people use and I Still don't know what

24:06

it means I'm curious how you

24:08

would if so if an

24:10

advisor an individual investor came to you and said

24:13

hey listen We're interested in these in these strategies.

24:15

We like the tactical approach like the rules based

24:17

nature We like to have a equity-based approach. It's

24:19

a little more Cognizant

24:21

of volatility. How do you help people decide

24:23

between the two? Strategies in terms

24:25

of the pros and the cons and in which one is

24:28

better for which type of investors so

24:30

there are still some investors

24:32

that Options

24:35

are be you know, not the right solution for

24:37

them And eventually we're

24:39

going to come to a point where with

24:41

the plethora of products that have come to

24:43

market in the last few years That

24:46

at spotlight is most likely going to come

24:48

out and how Options

24:51

based products are actually achieving what

24:53

they are selling For

24:55

someone that is a you know, let's

24:57

go back to 6040. This

25:00

is a product that can sit kind of on that 50

25:03

yard line so it's taking care

25:05

of that incremental rebalance for you the

25:08

income With tug and can

25:11

you know for every 10% allocation

25:13

in a portfolio that's allocated to

25:15

it You're increasing your portfolios yield

25:17

by you know greater than a

25:19

hundred basis points So

25:21

there are different ways of looking at it. Sorry

25:24

So that so you're you're talking a double-digit yield

25:26

on that then based on the

25:28

option income, right? What you said that there's

25:30

to be a spotlight to come on some of the strategies. What do

25:32

you miss? What do you mean exactly? So

25:34

as as rates come in the

25:37

pricing of call options is going to

25:39

change materially mm-hmm and

25:42

You know, let's let's use any of it

25:44

could be products

25:46

that provide upside with protection it

25:48

could be Let's

25:51

just start there so as

25:53

rates come in and the pricing

25:55

of call options begins to normalize

25:57

to traditional levels the

26:00

The call at

26:02

the current level is going to bring

26:04

in less premium than it has been

26:07

during this higher rate environment. Does

26:09

that mean less upside protection or less downside protection

26:11

or both? To maintain similar

26:14

downside protection, that means that the call that

26:16

is sold needs to come closer to at

26:18

the money or closer to

26:20

where the market currently sits when

26:22

it's put on. So 22, 23

26:27

were very interesting

26:29

because in many instances,

26:32

you could sell somewhere between 4%

26:35

to 6% out of the money

26:38

and fully finance an at the money put. It

26:42

didn't matter if you were looking

26:44

at homebuilders, utilities, real estate, or

26:46

an index. The historical

26:48

norm is that

26:51

in order to satisfy 2% downside

26:53

fully protected would be an at

26:55

the money call. So

26:58

as this interest rate dynamic

27:01

starts to change and rates come

27:03

in, it's going to be more

27:06

difficult to provide that same upside

27:08

over the last few years with

27:10

that same downside protection being so

27:13

tight. Those options are based

27:15

on interest rates and volatility. So in a lower

27:17

rate environment and maybe a lower volatility environment, those

27:19

options are either going to be more expensive or

27:21

there's not going to be as much range. Like

27:23

you said, it's going to be harder to cap

27:26

the downside while also giving you more room to

27:28

run on the upside. That's

27:30

correct. So two things to point out. From

27:34

03 to 06 and

27:36

a Fed hiking in the world, right? By

27:40

rights, even passive by right indices

27:43

outperformed the historical annual return

27:45

of the S&P every year.

27:49

They were double digit returns so they

27:51

could satisfy that yield. Now

27:54

in declining rates like what we just

27:56

saw coming out of COVID, they

27:59

could not. So, as

28:01

a rising rate

28:03

environment actually benefits the

28:06

over-right, declining rate

28:08

environment is more difficult, one,

28:10

because markets, equity markets, tend

28:13

to appreciate considerably when rates

28:15

are lower declining and

28:18

the price of a call option declines, relatively

28:21

speaking. So that

28:24

means for that same protection

28:26

in a hedged product, your

28:28

upside is reduced. So

28:31

in other words, if you were able to get 100%

28:33

downside protection with 80% of the upside in the previous

28:35

regime, now you're saying if you're still trying to get

28:37

that downside protection, maybe you can get, we're making up

28:39

numbers, 65%, 70% of the upside, whatever it

28:42

is, not as much as you can get when interest rates were

28:44

higher. That's true.

28:46

Okay. All right. Calls

28:48

remain to be seen, but as the price

28:50

of calls comes down and skewed

28:53

normalizes, the

28:55

price of a call relative to a put

28:57

at the same level is going

28:59

to be vastly different than if interest rates are at

29:01

2, 2.5 versus 5. So

29:04

how does that impact the income on your tug end

29:06

strategy then? What does that

29:09

do to your options? So the

29:11

benefit of the spread is that

29:13

it can change

29:15

based on rates of change and

29:17

market volatility. So

29:21

as let's just say the

29:23

market moves higher and yield

29:26

or volatility comes in, that

29:29

spread will widen. So

29:31

that outer wing that you're buying to

29:34

kind of cap your liability in a

29:36

running market higher will

29:39

be cheaper and will still allow

29:41

you to seek that

29:43

full 1% or greater premium received

29:49

of the NAV of the fund.

29:53

And if we see

29:55

the inverse happen and

29:57

volatility goes up, then it's natural.

29:59

being supported because of the spike

30:01

in volatility that directly impacts the

30:03

price to the options. Okay,

30:06

very good. Jonathan, really appreciate

30:08

you coming on today. If people want to learn more about

30:11

your strategy, how do they find you? They

30:13

can find us at stfm.com.

30:16

They can also Google TEG or

30:18

T-U-G-N. We are always around and

30:21

love talking to investors and

30:23

really focused on the education

30:25

component of the benefits

30:27

of tactical and this active approach,

30:29

as well as what we think

30:31

is the next generation of sourcing

30:33

income from options. Awesome. Thanks,

30:36

Jonathan. Thank you. Okay,

30:40

thanks again to Jonathan. Remember, check out

30:42

stfm.com to learn more about both of

30:44

these strategies. Email us, animalspiritsathecompoundnews.com, and we'll

30:46

see you next time.