Feb 26, 2018 · 55m · capital-allocators
Rick Selvala - Harvesting Volatility (Capital Allocators, EP.41)
0:00 / 0:00
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Host Ted Seides interviews Rick Selvala, co-founder and CEO of Harvest Volatility Management, exploring how institutional investors can intelligently harness options and volatility for yield generation, risk mitigation, and capital efficiency. Selvala details practical implementation strategies, manager due diligence, market crash mechanics, and robust risk guardrails across varying market regimes.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 30.1% of the talking time here. How this is scored →
Ted as informed peer 3.9 Guest teaching 5.1 Guest disagreement 0.2 Ted pushing back 0.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 44:46 Pushing back on quant conspiracy theories
Rick dismisses sensationalist narratives regarding algorithmic manipulation of volatility, arguing financial reporting focuses on clicks rather than balanced analysis.
Hardest push from Ted ▶ 26:10 Clarifying actionable access for non-professional allocatorsTed interrupts Rick's suggestion of trading straddles to redirect the focus toward actionable methods available to standard asset allocators.
Biggest teaching moment ▶ 23:30 Reframing naked put risk vs stock ownershipRick overturns the conventional taboo around naked puts by demonstrating mathematically that selling out-of-the-money puts possesses a larger safety buffer than outright stock ownership.
Ted holds their own ▶ 22:02 Highlighting Berkshire Hathaway's derivatives paradoxTed demonstrates sharp industry knowledge by juxtaposing Warren Buffett's public criticism of derivatives with Berkshire's massive 10-year index put sales.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Fundraiser Appeal: Cycle for Survival | 1 | 0 | 0 | 0 | Ted opens with housekeeping and a charity appeal for Cycle for Survival, followed by asking Rick about his career trajectory from GM to Credit Suisse and Harvest. The dynamic is purely biographical and introductory. | |
| The Three Core Functions of Volatility in Portfolios | 3 | 6 | 0 | 0 | Ted asks a foundational question on volatility as an asset class. Rick structures the entire framework around three functions: adding yield, reducing risk, and adding leverage, using an educational tone. | |
| Implementing Covered Call Strategies and Managing Decay | 5 | 6 | 0 | 1 | Ted probes on how to price covered calls in muted volatility environments and asks about the optimal term structure rule of thumb. Rick breaks down the mechanics of delta, strike selection, and the optimal 1-to-3-month expiration window for time decay. | |
| Volatility as Insurance and Understanding Skew | 4 | 7 | 0 | 0 | Ted explores whether equity derivatives function like structural insurance. Rick confirms the risk-transference dynamic, explaining the historical spread between implied and realized volatility and defining option skew. | |
| The Mechanics of Leverage and Essential Guardrails | 4 | 6 | 1 | 0 | Ted asks where investors trip themselves up with leverage in derivatives. Rick explains the asymmetry of buying versus selling options, emphasizing the necessity of defined guardrails such as spreads or holding underlying cash. | |
| Deconstructing Headline Risk and Warren Buffett's Put Sales | 6 | 6 | 1 | 0 | Ted raises the paradox of Warren Buffett calling derivatives financial weapons of mass destruction while selling 10-year puts on the S&P 500. Rick reframes short naked put selling, demonstrating that it is mathematically less risky than outright stock ownership due to out-of-the-money buffers. | |
| Exploiting Cheap Volatility with Stock Replacement | 5 | 5 | 0 | 1 | Ted cites a conversation with Bill Spitz regarding volatility appearing cheap and asks how non-professionals should deploy capital. Rick outlines stock replacement strategies using cheap call options to retain upside while capping downside risk. | |
| Sponsor Message: Ridgeline Investment Management Tech | 0 | 0 | 0 | 0 | This segment consists of a mid-roll advertisement for Ridgeline Investment Management Tech, scored low across conversational metrics. | |
| Due Diligence and Red Flags in Derivative Managers | 4 | 5 | 0 | 0 | Ted asks how allocators can evaluate derivative managers and detect red flags or reckless cowboy behavior. Rick details due diligence markers, warning against strategies picking up nickels in front of freight trains without clear stop-loss discipline. | |
| Benchmarking and Measuring Alpha in Volatility Strategies | 5 | 6 | 0 | 1 | Ted asks how alpha and outperformance are measured across derivative strategies. Rick lists CBOE benchmark indices like BXM, PUT, and CNDR, prompting Ted to clarify their non-tradable, systematic nature. | |
| Systematic Volatility Selling & The Iron Condor Strategy | 5 | 6 | 0 | 0 | Ted introduces the Iron Condor strategy as the archetype of disciplined insurance selling. Rick elaborates on how post-spike volatility expansion allows managers to write wider bands for richer premiums, enabling rapid recovery after drawdowns. | |
| The February 2018 VIX Spike and Market Mechanics | 4 | 7 | 0 | 0 | Ted shifts the dialogue to the contemporary February 2018 market turbulence. Rick explains the unprecedented compression of volatility in 2017, the unsustainable January rally, and the systemic feedback loop caused by inverse VIX products blowing up. | |
| Inverse VIX ETN Risks and Media Sensationalism | 4 | 5 | 1 | 0 | Ted asks about quant conspiracy theories and product landmines like XIV. Rick clarifies that Harvest avoids VIX exchange-traded products, dismissing excessive media sensationalism while acknowledging structural design flaws in daily-rebalanced ETNs. | |
| Next Frontier: Volatility Regime Rebalancing and Smarter Beta | 5 | 7 | 0 | 0 | Ted asks about the future frontier of volatility strategies. Rick delivers a comprehensive masterclass on volatility regime rebalancing, synthesizing delta management, skew monetization, and synthetic stock replacement to generate superior beta. |
Statements from this episode (23)
Selvala: Volatility serves three basic functions: yield, risk reduction, and leverage
“We sort of think about volatility as a way to do three basic things.
One is to add yield, and two would be to reduce risk, and three would be to add leverage.”
Selvala: Selling covered calls provides income, not portfolio downside protection
“Obviously, you sell a covered call.
It's not a hedge.
It's not protection, but it is additional income, which can, you know, help dampen things a little bit.”
Selvala: Selling 25-delta covered calls realistically adds 2-3% in portfolio yield
“Generally speaking, you know, I think you can adding two to three percent, sort of doubling the yield is, is a reasonable expectation. If you're trying to do more than that, either you're selling calls on a really volatile stock, which in effect is giving you …”
Selvala: One-to-three-month expiries are optimal for covered call decay
“The time decay doesn't really kick in until three months and in, and so that doesn't make a lot of sense. You know, and markets can move and change so much in a year. So I personally think sort of that one to three month window, you know, is really the optimal”
Selvala: Options act like insurance where buyers systematically overpay
“Options provide a risk transference mechanism, like insurance. And buyers of insurance, over time, typically overbuy, but they sleep well at night. And sellers of insurance make a lot of money, but they better know how to manage their risk.”
Selvala: Implied volatility spread over realized has averaged 3-4% since 1987
“And you can see it, you know, numerically by looking at the spread of implied volatility over realized volatility. And since the 87 crash, it's been pretty persistent in that, you know, three to four percent range.”
Selvala: Option buyers risk gradual capital bleed rather than sudden ruin
“You're less likely to be hurt buying an option. You might bleed to death over a long period of time, but you're not going to be, you know, taken out tomorrow on a stretcher if you're, you know, buying options.”
Selvala: Catastrophic losses happen when shorting volatility without guardrails
“So, I think where people really get hurt is when A, they're short, Val and B they don't have guardrails in place. And the simplest way to think about a guardrail is, is, is if you sell options to sell spreads or if you sell an option to own the underlying.”
Selvala: Selling OTM naked puts is less risky than owning stock
“Anybody who buys a stock, it's the same as being long a call and short a put, you know, at current level. And so if you decouple those things you can be a naked put seller and that's less risky than owning, owning the stock because the puts are out of the mone…”
Selvala: Buying volatility when VIX is at 9 to 11 is historically attractive
“Well, what I would say is if your view is that volatility is cheap and arguably when the VIX is around 11, 10, nine, it is cheap. You look at any, You know, it's a mean reverting asset and you look at over time that tends to be pretty, pretty attractive level …”
Selvala: Covered calls generate yield when valuations are high and upside is muted
“One is a manager that uses covered calls, and even though, sort of to our earlier point, even if volatility isn't high, stock prices are high, and so adding some yield on top when the risk of a continued run is more muted and the potential of more of a decline…”
Selvala: Combine bottom-up stock picking with S&P index options as macro hedges
“Generally how I would want that to work would be, Finding someone who's really good at stock picking, you know, bottom up research, et cetera, and then use S&P index options as more of the macro bet around, you know, macro hedge around.”
Selvala: Derivative blow-ups stem from leverage, shorting, and absent guardrails
“Spectacular blow-ups that we've heard over time are usually on that side. They've been short, they've been levered, they don't have guardrails, and probably a little arrogant, and not being able to You know, put in a stop loss and manage risk and thinking, you…”
Selvala: CBOE provides benchmark indexes across core options strategies
“The CBOE has certain, come up with many new indexes, which are helpful benchmarks. So if you're looking at covered call strategies, for example along the market with short calls against it, you know, you can look at BXM or BXY, for example. If you're managing …”
Selvala: VIX spikes let systematic volatility sellers collect higher premiums
“When there is a storm, it's not good for the policies you've already written, but it's very good for the policies you you're about to write. And if you are sort of a systematic volatility seller with guardrails, like the iron condor strategy, then those VIX sp…”
Selvala: S&P 500 saw its longest streak without 5% pullback since 1950s
“We've had a market, the S&P, which, you know, hadn't had a five percent pullback in 400 trading that, you know, call it two years, which is the longest streak in since the fifties.”
Selvala: In 2017, the VIX averaged around 11, lowest since 1990
“The VIX averaged about 11, which was its lowest level, I think, since 1990.”
Selvala: The VIX spikes to 30 or higher roughly every 24 months
“When you look at a graph of the VIX over the last, you know, 20 plus years, It's about every 24 months or so that you see one of these spikes where the, you know, the VIX will get up to, you know, certainly 30 plus, if not, not touch 40.”
Selvala: Inverse VIX ETNs exacerbated the February 2018 volatility spike
“In this case, the VIX spike that we saw on the, you know, towards the close of the fifth and the opening on February six was exacerbated by these inverse VIX ETNs that a lot of people were sort of getting into because they looked really good for a long period …”
Selvala: Complex instruments attracting capital without understanding lead to heartache
“When you see, you know, an instrument that most people who are in it don't understand, and you see it attracting capital, and it's usually a recipe for heartache at some point.”
Selvala: Sell shorter-dated options for theta decay, buy longer-dated options
“When we do sell options, let's stay shorter dated to take advantage of time decay, and when we buy options, let's buy a little longer dated so that we're not hurt by that fate of lead.”
Selvala: Shift delta from put spreads to call options when volatility drops
“As vol gets richer, you want to sell more and get more of your delta from the short put spread side. By the way, the market's collapsed, and we're okay selling some more put spreads lower strikes, and selling more vol when vol's really high. And we'll buy less…”