We Asked an Options Expert Why This Melt Up Hasn’t Broken — and Which Signal Could End It

[00:00:00] With the market continuing its big run, despite the war, oil shock, and geopolitical headlines, many investors have been surprised. In times like these, we always find it valuable to talk to our friend Brent Kochuba to get a behind-the-scenes look at the flows that are driving the market. Jack was able to do that yesterday for our monthly podcast, The OPEX Effect. If you are interested in looking at the current market through the lens of the flows driving it, I think you will find this discussion interesting and valuable. We have included this episode in the Excess Returns feed. If you want to keep receiving new episodes, you can subscribe to The OPEX Effect on all major podcast platforms using the links in this episode description. Thank you for listening. We hope you enjoy the show.

[00:00:28] It was the biggest call volume day ever for the SPX, measured in notional value. And so, you know, you look at the convexity of this and it speaks to the growth in options over time. This is about as call heavy as it gets. And that shouldn't be surprising to anybody. If you're not in these names, you have to chase these names, right? And so there's a lot of kind of force buying into the space as those names gain in size, you know, you need that exposure.

[00:00:54] We go from positive on this axis to negative on this axis if you remove today's positions. So what happens now in the S&P is that the positioning in the S&P is very transient. It's here today and it's gone tomorrow. When you go farther on time, they have this negative gamma position. What does that mean? The market is more free to move about. And so this is what we're seeing, right? This is what happens in sort of peak bulls is the way that I would frame this. So we went from incredibly bearish positioning to very bullish positioning.

[00:01:26] So, Brent, can we can we say we're in melt up mode now? I mean, I feel like we almost can. I mean, if you look at the biblical returns over the last month since we last talked, it's been just amazing. So I think full melt up, CapEx, spasms, whatever you want to call this. It's really been it's been something else, right? Yeah. And I like I like your title, CapEx greater than crude, because that is kind of the deal here, right?

[00:01:53] Is is like the market sort of looking through whatever's going on in the short term and saying, like, we've got this huge thing coming in the future. Like, who cares about this? Yeah. And, you know, we always review what we did or what I said because I got it wrong. So I don't want to buck you in this. And I said, look, I'll take accountability for it, Brent. I'll take it along with you.

[00:02:11] Like, this this is a this is a concern, this Iran situation for a bunch of different reasons. And the market literally doesn't care. And it went up, up and up. So we're going to cover that. But it's it's really been wild. Not just the CapEx expansion, obviously, but just the fact that it was sort of looking back this, you know, past this lurking risk. So it's really been, you know, quite an environment here the last month.

[00:02:36] It's funny because, like, if you if you follow a lot of the macro guys right now, they're kind of saying, like, listen, if this street's closed anymore, it's going to be a catastrophe. But like we've been saying that for a while now. And it's it's like and it might be I mean, it might be take a while for it to come. But it's just interesting. Like it keeps staying closed in the markets going up. Yeah. And and, you know, every day is a new alleged peace deal that doesn't seem to come to fruition. And you keep thinking that that stuff will wear thin. But even when oil spiked to 115, the market actually didn't didn't care at all.

[00:03:06] And so I had thought that there would be this point where the market suddenly cares and that vol would really start to expand, meaning like VIX would spike. And it and it just never happened. And we do in that context. We got just these these were biblical again earnings. I mean, Jim Cramer at one point said, I think the Google earnings were the best earnings he's ever seen in his life. I may have missed that, but, you know, say what you will about Jim Cramer. That's quite a statement. That's that doesn't bode well for future Google earnings.

[00:03:33] All right. The inverse indicator there. They're going in the tank now. Yeah. So, you know, I mean, but it was actually interesting. I was at the OCC conference this past couple of days, which is a real options insider. I don't want to call it insider, but, you know, in the weeds. And even on those panels, it was just every conversation is just about AI, AI, AI. And you are probably like me where it's all we talk about. So there is just this major transition.

[00:03:59] And that transition to CapEx and the related AI industries is really changing things. But on that point, a lot of AI needs energy and energy keeps getting more expensive and there's helium shortages or whatever. There's always just tail risks. And again, those continue to be largely ignored. So it is what it is, right? You can't complain about it. You just have to adjust for it. Yeah. It's one of the funny things I've learned over my career is the market has this way of like seeing through things and like looking at the long term future, maybe when you don't see it in the present.

[00:04:27] And I just have to think part of this is the market is just starting to realize and Mythos, I think, was a big turning point for this, like when the semis started rallying and all that stuff. Like the market is continuing to realize like how like world changing AI is. And like to some extent, I guess it's willing to look through a lot of this short term stuff. And I guess the question is how much short term stuff is it really willing to look through? But that to me seems to be because that's a mistake I've made a million times in my career is like looking at this huge thing going on in the short term being like, wow, this is a huge problem.

[00:04:57] And the market's like, forget about that. Like earnings over the next 10 years are going to be massive. Yeah. So, you know, I think that's part of what's going on. Yeah. And it's kind of funny because it was, I guess, two months ago now that we were talking about software stocks. Right. And and Citrini had put out this big piece that made, I mean, global headlines. It was one of those things where your mom calls or my mom was calling like, did you read this thing about it? You're like, oh, yeah, exactly. And software stocks actually have bounced pretty strongly.

[00:05:24] I know team put out some earnings recently and it's like, OK, like the death of software, you know, was at least for the moment seems to be a little premature. So, you know, there there are also these moments that are strange. And we always talk about covid, right, where in February 2020, everyone's like, why doesn't the market care? And then it cared. So I struggle with those things. And then the other thing I would put that in the bucket of is the change here is so rapid that it's it's so hard to forecast what's happening.

[00:05:49] I mean, you know, obviously, Claude releases a new connection or a new model or new this or that every other day. And that seems to change the path of all these industries. Right. So. Yeah. Yeah. And then you get a deep seek model that suddenly is like, oh, we don't need all this, you know, memory anymore or TPUs anymore. It's this other thing that we need. And, you know, so these things can can shift. So it's it's it's such a dynamic industry. And on that point, Jack, we usually start off with some witty banter here.

[00:06:15] Did you see the Department of War just released a bunch of UFO files in the last like 10 minutes here? Oh, I didn't see that. No, that's a conspiracy corner thing, right? Yeah. Can we can we work with that? I may have an alien partner maybe presenting for me, AI or actual. Yeah. I mean, we don't know. So. No, it could be. It could be. Department of War, you know, says there's UFOs now. So we can digest that over the next month as well. Yeah. And I think that I think the people want to hear us analyze that, Brent.

[00:06:41] I think that's I think we were the first people people want to go to for analysis that we could put up a polymarket jack. Actually, it could be an actual signed Iran deal or an alien. Which one comes first? Yeah, I guess the alien is the answer, right? Half the people like I might take aliens. My concern, Brent, is Claude just going to announce that they're launching an options podcast pretty soon. And that's going to be the end of the road for us. So we might as well go out with a bang. Yeah. Well, they've nerfed 4.7.

[00:07:10] So it could be as dumb as we are. And then people watch it. So you actually given us a little by the way, before we get into the real presentation, you've given us a little bonus slide here this time. So I realize that we want to start off with a little bit of data, a little preview of just what's going on. And I just thought this, you know, everybody knows the market has just rallied just viciously since the end of the month. And on March 31st is always this, you know, was this interesting JP Morgan trade. We covered that into April OPEX now or into May.

[00:07:38] But, you know, you just look at this chart here of just how bid the market has been. And it's been a real stock up, vol up environment. And, you know, the rate of returns to that upside to me is what's so interesting. We've had these very, very minor down days. But again, what's so fascinating about this is that we have these situations where more explosions or there's an attack in Iran and they send missiles. But that's below the peace threshold.

[00:08:06] And you're like, I don't know what I'm supposed to do with this. But the market just has not, you know, absolutely not cared. But that's been in the context of these earnings results, which have just gotten amazing responses. You know, so many of these stocks up 20 percent after being up 20 percent, you know, the prior week. Right. So the interesting thing is just how green these returns are in the series, but also the magnitude of these positive returns has just been really pretty, pretty shocking. Yeah, it's funny.

[00:08:35] Like to your point about what's going on with the background stuff like they it seems like we launched a couple of attacks recently. And it's like, well, is the war started? No, the war is actually not started. Those were like non-war attacks or something. So it's like everything is being framed in this, you know, this view where it's just below the ceasefire threshold is what it was called. OK, yeah. What is the ceasefire? I don't even know what that is. I don't know. We've we've earned a bunch of comments, though, Jack. Send your emails to jack at jack dot com. Yeah, exactly.

[00:09:04] It's like two or you could have two up to two attacks below the ceasefire threshold. But once it's past three, then we're resumed or something like that. You said the term liberation day in the past, in our last in the comments related. Just you uttering that phrase was was pretty, pretty interesting. Yes. So anyway, what people want to hear from us is not any of this. What people want to hear from us is the option stuff. And this first slide gets to this idea that more and more people are using options.

[00:09:31] And so they become more and more important to people like me, the average investor, because the flows they create. Yeah. And I need to update this slide here on options volumes because they continue to grow, you know, zero DC driven, et cetera. At this options conference I was just at, you know, they were really excited about the growth in the options market. A lot of new products coming out. I know I've been highlighting these Monday Wednesday or Friday expirations, but, you know, more is the Scuddlebutt. Obviously more names coming out with more expirations. And then the other thing is the pattern day trader reduction, Jack.

[00:10:01] I'm not sure if you're familiar with this, but right now, if you day trade a lot, I know you trade once every 10 years in the value. Yeah, exactly. I'm the opposite of a pattern day trader, but yeah. And I'm the polar opposite where let's trade every five minutes, just whatever it is. I'll sling it out there. But the pattern day trader rule is basically at $25,000 in your account to day trade as much as you want, right? And so that's being removed. And so a lot of the brokers are obviously quite excited about that.

[00:10:26] And that could be another shot in the arm for the options market here as you can come out and start to trade a lot more options. Particularly the intraday zero DTE space, I think it'll be really quite helpful or quite a boon for volumes, I should say. So I think that, and I believe that rolls off on July and the beginning of July. So just another thing that's likely to bring more options volume into the market. So before, if you had less than $25,000, like you had a limit as to how much you could trade? Is that the?

[00:10:54] Yeah, you can only do certain, so many trades intraday. So buy in the morning, sell in the afternoon counts as a day trade. And so you had a limited number. I believe it was only three trades a day, something like that. And so I guess what people were doing, and I never realized this, is if you only have $10,000 to invest, you'll have like $1,000 at Robinhood and $1,000 at E-Trade. And then you'll do your day trades between those accounts. I can't believe people go to that much work and effort, but they would.

[00:11:21] And so just overall, the brokers really like this idea. And the market makers are quite excited about it as well. So take that for what you will. Well, it's just good to know. If I decide to abandon the long-term investing and turn into a pattern day trader, now I know I could do it. Yeah. And there's the other thing that came up, which is a total curveball, but the idea of the IPOs, right? And I think we'll be talking about this, and the amount of liquidity that's needed for these IPOs that are coming up, SpaceX and maybe Anthropic and OpenAI.

[00:11:51] And before it was like, can retail get access to that, to participate in these IPOs, right, as a right? And I think now you have this interesting moment where it's going to be, no, we need retail in order to get these IPOs out, right? Because we need all the liquidity we can get. So I think there's going to be a lot of changes in just the sort of the plumbing of the retail trading environment, I guess I'll say here, over the next couple of months.

[00:12:20] And this is just a tangent to a tangent, because that's what we do on this podcast. But this whole SpaceX IPO is really interesting. Dave Noddy's been writing about it recently. And these indexes are falling over themselves to try to violate every index rule to get this thing in there right away. All of them are like, they have to figure out how to get it when it comes out into the index immediately. Whatever rules have to be thrown out the window are getting thrown out the window.

[00:12:41] Yeah, I, you know, to the point of how fast things are changing, I mean, you're going to have these trillion dollar IPOs, trillion dollar plus IPOs coming out. And then, you know, we're going to talk about Tesla for a second here at the end of this. There's so many changes in terms of acquisitions and things happening behind the scenes and, you know, what companies on what part of what, you know, who to say exactly how this is all going to play out.

[00:13:07] I think the one thing we can count on is we're going to start hearing about the SpaceX roadshow here in the next couple of months. And then we'll be able to sort of concrete anchor to, you know, a date. And I think that date is actually important, even for what we do, because you can imagine. And we've talked about before the energy that that SpaceX thing is just going to drive because there's, you know, the AI component related to it and the space industry and just the size of it and the excitement.

[00:13:30] And, you know, I just think it's going to be a really fascinating moment here with a administration that is very pro stock market, obviously. Right. And so, you know, the the overall idea, the next few months feel very bullish, even though I'm going to lay out, you know, maybe some consolidation coming up here.

[00:13:49] You can sort of just feel the energy, I think, when you go to that, the excitement, when you look at the the options industry, just generally speaking, and then just the attention that this whole thing is going to get both on the size of the IPO, but also what it represents in terms of just like, you know, the growth industries coming coming up. So it's going to be a really interesting couple of months. Yeah. Just one more thing before we get the presentation on that. I would assume we've talked about aliens. Go ahead. We have aliens. Aliens. That's right. We got to we got to make sure that I'll use that the YouTube title. Don't look past aliens.

[00:14:19] But I would assume like, you know, we talk about NVIDIA and Tesla all the time and they seem to like alternate between between being like the king of the options market. Yeah. I would bet there's an argument that SpaceX will become that for a period of time when it comes out. What do you think? I mean, I would think there'd be massive options volume in that. Yeah. And NVIDIA and Tesla just trade in their own ecosphere in terms of option size. So if you ever look at the breakdown of size, it'll be SPX, SPY will trade a couple million a day. Tesla and NVIDIA trade a couple million contracts a day. And then there's this big gap, right, between the other ones.

[00:14:49] I mean, obviously, I include the Qs in there as a big, big complex, right? But if you look between the next single stock between NVIDIA and Tesla, a huge options volume for any other name, even a Google or Microsoft will be a million contracts a day. And they generally can't sustain that, right? It'll be like, OK, Micron is the big name. It'll generate maybe a million contracts a day. So there is this different ecosystem amongst those two names, which I think generate a bunch of really interesting flows.

[00:15:14] But the idea that Tesla and SpaceX are two different entities also seems like doesn't I don't know that that will persist. Right. So the complexion of the volume, I think, will will really change to your point, Jack. And and there's a lot of mechanics, I think, that are going to be adjusted in terms of you think about dispersion or high frequency trading flows and how all that's going to work. A lot of stuff, I think, is just going to shift over the next, you know, three to six months. Yeah.

[00:15:43] And there's a lot of tech insiders, by the way, that agree with you on that, that think eventually this is going to be one entity like Tesla and SpaceX are going to just be combined. Who knows how that works or when it happens? But it seems like that's the inevitable outcome here. Yeah. Yeah. And again, I can't necessarily pine on that, but it makes sense. But I guess just in this age of, you know, expect the unexpected. Right. Or don't plan on anything too concretely with the way that AI changes things and wars don't matter and this and that. You know, who's to say other than I think that we are going to see a lot of change.

[00:16:12] Right. Expect some change, which probably means there won't be change. So at that, we should just shut the podcast off. Yeah. So now that I've gotten us completely off track and we're already 15 minutes in, we should probably talk about why we're here, which is this idea that more and more people are using options. They're generating flows. The dealers behind the scenes are. And this impacts all investors, these flows. Right. And you and I have done a ton of content on this. And so if you want to learn more about this, you can.

[00:16:33] But just very quickly, if all of us go in and buy AMC calls or calls on Tesla, et cetera, the market makers who provide 90% of options liquidity end up short those calls and they need a hedge. So if their hedge ratio is 50 in this example, 50 delta, which is just a metric that says the number of shares that you need to buy to hedge. You can see we rapid fire by 100000 calls. That's five million shares of AMC and they may have to buy those shares very quickly. So that's just the transmission mechanism of how the options flow makes its way into the options market.

[00:17:03] And then those positions have to be constantly adjusted. And so when you look at this, this is the delta, which we just described. Well, if the stock goes up or down, the delta changes. Right. So the hedge ratio changes. What does that mean? They have to adjust their hedge. We actually measure this with a utility called or a metric called gamma. So that's why we focus so much on gamma, because gamma tells us how much shares of stock has to be bought or sold for a given underlying move. But the hedge ratio also changes as implied vol changes. Right.

[00:17:30] So if the VIX goes up or down, that's a metric of implied vol for the S&P. If that goes up or down, that's signaling that dealers have to change their hedge ratio. And then lastly is time. If the stock doesn't move and vol doesn't change. Well, time is always advancing. You can't stop that unless the aliens come. Then then maybe we have to talk about time not moving, Jack. But until then, time passes. Hedge ratios also have to adjust. So just time moving means that the hedge ratios change.

[00:17:57] And that really matters when we look at something like OPEX, even if the market is quiet. And so that's a nice segue into some of the things that we're going to look at here in a few slides. Yeah. For people who want a simple example, I always use GameStop as a simple example of how this whole thing works. Like that huge increase in GameStop options dealers were playing a huge role in that. And they had to keep buying more and more and more as it went up and up and up. That's exactly right. And it becomes reflexive. And so this past inside the past couple of weeks here, we had Avis, right?

[00:18:26] Avis went from being a $80 stock up to a nearly $1,000 stock in the course of just a couple of weeks. I didn't even know that. And there was all this option. Is it bankrupt or anything? Because remember there was like a bankrupt car rental place at one point that went crazy? Yeah. Hertz, I think, was one of those. And what's so funny about this, Jack, though, is what they do now is they squeeze these stocks, right? And Avis actually didn't sell any stock, to my knowledge. But you kind of get this gamma squeeze going.

[00:18:56] AMC did this really of note, and I think GameStop as well, is you get these gamma squeezes going. And people just start buying the stock, and that helps with the options complex. And then the company issues shares. And so had Avis been able to sell a bunch of shares, they could have gotten a couple billion dollars of cash, right, by issuing some new shares, and that really would have helped the business. They couldn't get the stock off, or they didn't for one reason or another.

[00:19:19] But the point is the same, is that you get these squeezes where, yes, it's not at the first start a purely options exercise. But when you get this options flow going, the notional values of the options complex get so big that you really just sort of turbocharge things. It's like you have an engine in a car, well, you slap a turbocharger on it, and then you get a bunch more speed out of the whole thing. Yeah, and to your point, it's important to note that some people say, well, these stocks go up a ton, and they come right back down. It doesn't really matter.

[00:19:47] But it does matter, and one of the reasons it does is because of what you said. These companies are issuing shares when the stock goes up. So a lot of these companies have potentially been saved. Their existence has been saved by these squeezes because they are able to use them to raise cash. Yeah, and as a small company, why not have in your back pocket the right to sort of issue a bunch of shares when you sort of deem fit because of these moments, right? And one of the things that's happening right now is we have Ryan Cohen, who is behind the Bed Bath & Beyond Squeeze, for example.

[00:20:16] He's working on eBay right now, right, and trying to seemingly squeeze that in a takeover play. And that's kind of the interesting thing brewing right now. And so I like to watch those. Ryan Cohen has been involved in some of these dynamics. He's CEO of GameStop right now. So you watch a name like that, and okay, what happens if eBay, he's able to get that momentum and is starting to squeeze? And how do they react with that? How does eBay react as a company? And then also, what does Ryan Cohen do if he gets the price going and says, oh, well, I'm not going to be able to take this company over?

[00:20:46] Does he suddenly sell his contracts or shares? And they have a big options position is why I sort of have been thinking about that, meaning GameStop has some sort of a flex or over-the-counter options position. Yeah, I didn't watch it, but apparently he was like screaming and yelling on CBC the other day. It was one of the most interesting interviews I've ever seen in the finance media, at least, or industry. So you can go and check that out. It's all over X.

[00:21:13] So anyway, the reason we're talking now is because we're a week ahead of the options expiration, and options expiration can sometimes be turning points for the market. So here you've got the whole option cycle spelled out. Yeah, and the positions build up into the third Friday of the month typically. And so you see positions build up, the hedges with those positions build up, and then all of a sudden on expiration, he goes, boom, these positions expire. And the flows associated with those positions, the hedging flows goes away. And we have some stats that sort of suggest that this is a clear impact to the market.

[00:21:43] In this case, this shows you that two-thirds of the time, the market will switch its direction. So what does that mean? If we're trending up and we have VIX expiration actually occurring after OPEX, so we call this the window, right? VIX expiration is generally within a few days of OPEX. So what tends to happen is if the market is rallying, we have expiration, the market will sell off. And these are generally short-term movements, right? You know, a couple days to a couple weeks.

[00:22:11] And you'll see market will rally, and then we'll see a sell-off, for example. Or market will decline, and then we'll rally after OPEX. And in fact, this also works in terms of volatility. And I think this is key for what we're talking about here, Jack. If we have a quiet period into expiration, we call this RV or realized vol, that if you have a quiet vol period, that vol will get really contracted. It'll get super squeezed, let's call it, into expiration. And then after expiration, which is the green bars, the volatility will expand.

[00:22:41] So it's sort of like, Jack, if they try to put you in a straight jacket, and then you just go on Incredible Hulk, and you break out at expiration, right? So that jacket gets tighter and tighter and tighter until you sort of break out. And that's the general idea. And I think that matters here because I really think that implied vol is going to contract pretty sharply now over the next week. And then we have just a really interesting lineup of timeframes into 519 and 520, which is VIX expiration and NVIDIA expiration, where I think that finally we may get some consolidation here. That's kind of what I'm looking at.

[00:23:09] That's another 10 days from now. So on this next slide, we're looking at predicted volatility versus using gamma. Yeah. And the idea with this is we measure the dealer gamma position in the SPX options, and that tells us how much volatility we should expect in the next day. And there's also evidence of this about five days out in time. And so the big thing with this is that we get these really quiet periods. We're in something of a quiet period right now. And when can you expect or when can you think about that stability ending?

[00:23:38] And oftentimes it's with expirations that we see that stability ending, because what happens, the positions that are supporting or suppressing volatility, I should say, expire, and that allows the market to start to move around. So as we get into the current expiration here, my first takeaway on this is this is definitely more call heavy than we've been seeing recently. It's extremely call heavy. This is about as call heavy as it gets. And that shouldn't be surprising to anybody, because why is this? Well, we're measuring with Delta. What does Delta really mean?

[00:24:07] Delta is another way of just saying, what is the stock equivalent of these options positions? A lot of times what you see is Goldman in particular put out these notes, and let's say it's $10 trillion of options expiration. And what they're doing is every contract they assume is worth 100 shares. Well, that's not right, because you may have a call that is, you know, 300% above where the stock is trading, and that's about to expire. That call has zero value, right? But Goldman will mark that as fully valued. So what I do here is I say, what is the stock equivalent? And that's about almost a trillion dollars here, which is pretty big, actually.

[00:24:38] But what this is, is so very call heavy. So the S&P being 91% call values is a function of the fact that we've rallied to all-time highs. There's a lot of calls that are deep in the money that are essentially worth shares of stock, right? And these are very extended. So when you think about those slides before, if the market tends to rally into options expirations, and when we're really loaded up on the call side, and those positions expire, we'll oftentimes get a correction, right?

[00:25:06] Not a full-blown collapse, right? But okay, we've made 30% gains in the last month. Let's give a few percent back, and then we'll see what happens. So that's interesting, though, that point you made before, because it doesn't necessarily, just because we see 91% here, doesn't necessarily mean people are going crazy, like buying, like reaching for calls. Because the market's gone up a lot, that's made the calls more valuable. So they could be reaching for calls, but just these 91% doesn't tell us that, right?

[00:25:34] Because a lot of this is the market just going up and the calls gaining value. There's definitely, it's definitely part of both. I would say typically in the S&P, what you're seeing in that top line is mainly the growth of the value of the calls from the fact that the market's rallied up, as opposed to necessarily like this chasey momentum thing where micron earnings are amazing, I need to buy Sandisk. And Sandisk was amazing, I buy AMD, right? So I think in the single stock side, you'll see more of that chase behavior,

[00:26:02] as opposed to purely the growth of, you know, value of these stocks. But a lot of it is simply the fact that market rallies, which amps these call values up, right? Because delta is a measure of, again, stock equivalents. So the deeper in the money an option is, the higher the delta is. What does that mean? Well, if you have a call at 200 in micron, a micron goes to 600, the delta of that option grows massively, right? And that will then reflect in these stats that you see here. So a lot of it is, Jack, to your point, you know,

[00:26:30] function of the fact that the market is rallying or stocks are rallying so much. Is there anything to take from the idea that ETFs are more balanced than the other ones here? Or is that just kind of a random thing? No, I think that's actually interesting. Something that caught my eye. I think one of the things that is, is a note where here is, is there's a lot of ETFs that fall in that bucket now, right? And those ETFs have all sorts of different designs. So you could have triple long ETFs, triple shorts. You could have overriding ETFs. You can have all this stuff in that bucket.

[00:26:58] And that bucket is very small on a relative basis, you know? So you see it's only about $6.4 billion of value. That's less than 1% of the value of the overall complex, the overall U.S. options complex. So I don't want to read too much into that, but generally that's the way that I look at that is there's just a lot going on there. A lot of ETFs that people also don't care about, right? Like do people even care about XLP, for example, right now? Whereas EWY, which is going to be included in this, is the Korean market.

[00:27:27] But it has gone insane. You know, it's up 30% or something like it. It's literally trading like a micron, which is just really pretty shocking. So on this next slide, we're getting at the size of the expiration. And this is not a quarterly expiration, so we wouldn't expect this to be a huge one, right? Yeah. And so you can see that here in the top left. I can use my fancy pen tool, actually, Jack. You can see here, right, for the SPX, this is the S&P 500, it's pretty average for a monthly expiration. Maybe even a little bit big for a regular monthly expiration.

[00:27:56] But these are the quarterly expirations that are huge, right? And those quarterly expirations are more the ones that could be significant turning points for a market, generally speaking. You know, if we're crashing into a March OPEX, for example, can that be a low, as we just saw? Whereas in this case, more of a, I don't want to call it idiosyncratic, but shorter-term market, localized market correction, so to speak. The thing that catches my eye here is the single stock side. That's a pretty good-sized single stock. And that shouldn't be surprising because we've had these earnings,

[00:28:25] we've had these massive market rallies. That's really built up the value of a lot of these single stock calls. And so on the single stock side, this is actually a pretty significant expiration. So on the next chart, we're looking at the performance here. And as you note in the chart, it's been kind of nothing but up there. Yes. And we talked about the quarterly expiration just a minute ago. And you can see, here's the March OPEX. The March quarterly OPEX is where that JP Morgan position expires, right? And so we saw, we traded down through that and then back up there.

[00:28:53] So this was this major turning point for the market. It was the low. And then I was looking for a correction or a pause in the market movement with the April OPEX. And we're going to talk about this in a second. What you see here is there is this very big rally. And then right at April OPEX, we did plane out. Now, what happened during that planning? Huge earnings results, right? Just the CapEx explosion. Pardon me. And on one side, you go, well, oil made new highs after that.

[00:29:23] I would have bet strongly. And I did bet strongly. Hey, if oil keeps going up, this market's going to go down. Oil went up. Market didn't necessarily care, right? But then we get these really big earnings. Just the best earnings ever out of Google, I guess, and et cetera. And so super positive earnings. And that's really helped the market to go up. And so now when you look at this window, Jack, this is super interesting to me because next Friday, a week from today, we have May OPEX. And that's followed by VIX expiration and NVIDIA earnings. Today, Rubio said he's expecting the peace deal to come in.

[00:29:53] So it's the alleged peace deal. We've been hearing a lot about peace deals for the last, I don't know, month. Maybe that's true. Maybe that's not. But oil's back down around 90, right? So the idea that oil matters as much right now, I think we could all agree it doesn't. Maybe if it goes back over 100 people care, I don't know. But the idea here is that I would expect us to sort of just trend sideways now into that May OPEX. And we could see a real contraction of volatility into that moment. We'll flesh this out a little bit here in the coming slides.

[00:30:22] But I'm really looking at this moment of, OK, finally, we'll get a little trend change here, a little bit of consolidation in some of these top names. And again, I'm not thinking a 5% to 10% correction. I'm thinking like, OK, a pause here, a mild correction. I think if you're a bull, you want that. You want a little bit of tightening. Build a new foundation for another leg higher into some of these major IPOs. Yeah, that point you made about earnings is so important because that's Warren Piesman,

[00:30:49] who I know you talked to in a recent video as well, has been making this point. But like earnings have been really, really good. And not only that, like expectations of earnings in the future have been rising. Yeah. And so we talked earlier about like people are seeing through with AI for the long term, and that's probably part of it. But another part of it is just earnings are really coming in very, very strong despite everything that's going on. So that's a huge part of what's driving the market. Yeah, and there's this other idea, I know Namur put forth that, and some of these other

[00:31:21] research arms, I'm drawing a blank on some of the names, but they were basically saying that if you're not in these names, you have to chase these names, right? And so there's a lot of kind of force buying into the space as those names gain in size. You know, you need that exposure, for example, or underweight, this stuff. And so use the word reflexivity again, there is this buyback. So, you know, Warren absolutely nailed this thing, and the narrative is there, but the earnings have also been good. And, you know, I was looking at AMD, and you go, this thing is pricing in a 20% move after being up 75%, right, into earnings.

[00:31:50] And they reported after many of these names, and you say, you know, how can the options market be underpricing the move coming out of this? Now, it turns out that the name did move about 15%, 20%, which is roughly the earnings. But you would just assume that the market would be already pricing in, you know, some of these moves, but you still see these giant, giant reactions, right? And I guess that is surprising to me that there's still so much upside left in a stock into an earnings report like that, after so many have beat.

[00:32:20] Hopefully that line made sense. Yeah, no, it did. It's hard to, like, underestimate the magnitude of this move. Like, I think the semi-index had its greatest 18-day return in history on this part of this thing. You know, comparison for it. And you have something like a Micron, which a year ago was trading for, what, 100 bucks, something like one times four earnings.

[00:32:47] And now it is not that unreasonable to think that that is a trillion-dollar company, you know, in the next couple of months. That's a rate this thing is going. I think it's at 700. So, you know, it's really just pretty incredible, just the industries that are changing, the values that are changing. You think back about the fact that Avis is trying to sell some stock, well, what can this company do now when it has such a massive, you know, massive market cap and the financing and the attention on it and everything else?

[00:33:15] It's, you know, the industries are really shifting so rapidly here, kind of under our feet. I think the only thing we need now is for Avis to rebrand itself as like an AI-powered car rental company or something. I mean, it's great to bring it up. Another 10x out of it. You talk about the memes, you know, the Allbirds 2 company changing, and a lot of these Bitcoin miners, I think, have shifted. I mean, some of that maybe makes a little bit more sense or whatever, but, you know, we've had just a lot of, you know, rebranding and that was popular in the crypto space.

[00:33:41] And so I do think that a lot of us, there is this idea that it can be valid as an industry growth, but there is a lot of that meme behavior, which just doesn't ever feel like it ends great. And so you have the DeepX situation where if you remember DeepX or excuse me, DeepC came out and it really caused that big drawdown in NVIDIA, for example. It feels inevitable. We're going to get that headline about a new advancement or maybe OpenAI has a contract that they reduce or something.

[00:34:09] You know, this is all riding on these very clean and pure expectations about a very, you know, perfect future. And so what happens if you do get one of these random headlines when everything is so built up and levered to the upside with big call positions, for example? You know, you can have some pretty ugly downside reactions, you know, very quickly. But in this game of musical chairs, you know, you don't necessarily want to bet on that because you don't know what happened. But I do think you want to be prepared mentally for, okay, where it's inevitable.

[00:34:37] We have this big kind of right tail reaction at some point that feels overextended just because we've built up so much upside energy. So in this next slide, you're looking at the VIX expiration impact. What did you see there? I wanted to highlight this because, you know, this is in the context of the Iran war, obviously. And so the line on the chart there, that VIX expiration line is the exact moment that VIX expiration contracts expire. They expire at 930 in the morning, this case on a Wednesday. And so what you see here is the VIX came sharply down, right?

[00:35:07] And this is during this Iran war situation. And it made this absolute low on the morning of 930, right when all these contracts expire. Put your conspiracy hat on if you want. The flows moved the VIX down. All these calls expire. Worthless. Great. And then what do you see right after this OPEX window, Jack? It's this volatility expansion, right? Now it is not this giant, you know, VIX move to 30 or anything like that. But you can see that produced this relative low in the VIX index, which ties with a little low in volatility.

[00:35:36] Now, a week later, two weeks later, we have a peace deal or whatever it may be. And so we did revisit those lows. But you can see in the very short term, this is the fingerprint of these expirations. And so, you know, if you expand further and obviously if you're a day trader or short term trader, you can understand the implications of this. If you're a longer term trader, though, think about this when the VIX is spiking, right? And you can have if VIX is at 50, when would you think that maybe this starts to come down? And maybe when I want to reallocate into some names I was waiting for. Oh, VIX expiration.

[00:36:06] OK, because that may mark this significant low, for example, in markets. Or what happens if the VIX makes its low at 10, right? Some absurdly low number. When can I think about that changing? Well, think about it during a VIX expiration period where, OK, then maybe I will add some downside hedges because the move may be ending, right? An upside stock move may end with lows in VIX, for example. So I do think it's an important thing to point out here just to show the fingerprint of these expirations in a situation like this.

[00:36:36] So before we look forward, we always like to look back and hold ourselves accountable for what we said, other than our macro takes, which we give ourselves a pass for. But what did we talk about last time? A lot of this was about oil. And what we did flag, and this is the same order, was the change in VIX and oil. Because previously in March expiration, we were talking about the correlation between oil and VIX, and we were all just oil derivative traders, right? And that relationship really started to break down in April. And it was like, oil was still going higher, and VIX, as a measure of volatility, obviously

[00:37:05] just did not care. As a measure of hedging equities, did not care. And that correlation really started to break down. Here's another example, VIX versus oil futures. And I thought, and oil broke back over not all that long ago, the 110 mark. And the equity market really didn't have much reaction, just didn't seem to care at all. And so in April, we did see this breakdown of this relationship. Now, I was, as a responsible investor, Jack, suggesting you should maintain tail risk here

[00:37:35] and be worried about this right tail with the idea that oil would hit this level that suddenly the equity market just had that kind of COVID reaction to, and we would just snap and move down. Certainly, the very strong earnings out of these tech companies absolutely moved the market up. But I would say, just even irrespective of that, the market never really just seemed to care. It's just sort of this idea, well, we'll get a deal. And if you want to call that the Trump taco or Trump will negotiate us through this or whatever it is, right?

[00:38:03] Market really didn't react to that, which was significant. We talked about the oil curve here as the reason why the market wasn't reacting to these higher prices simply because maybe people were just saying, look, if oil remains this high, then we'll have demand destruction. And so longer-dated oil will just never matter. And so VIX coming down despite the war obviously trended and continued. And now when we look at it, maybe it's right because there hasn't been that much engagement in war and oil is kind of 90 to 100, so it's not that big of a deal.

[00:38:32] It's pretty – there's a lot of theories to this, right? We saw one of the biggest drops in the VIX ever. Remember, when you're at the 25 to 30 level, we had just an epic decline in the VIX. One of the biggest moves we've ever seen, in fact, over the last 20 years, was from VIX dropping in the 25 to 20 is what happened. That was the second biggest decline from that level ever. The only time before that was a Fed surprise rate cut that dropped vol.

[00:38:59] So there's a lot of these never-seen-before kind of things happening. The market makers were short upside VIX and volatility, so vol did get spicy. Again, we were worried about the – excuse me, the right tail didn't ever really seem to manifest. And so we did see realized equity vol start to peak up. And again, all these signs were like, be careful of this right tail. Be careful of this right tail.

[00:39:22] And between the market not caring about oil and never sort of biting on the right tail – excuse me, the left tail downside equity move, we saw a right tail equity move, right, where we saw 28% returns in, I think, the NASDAQ and just 100-plus percent move in AMD over last month. Just this giant move to the other side as vol collapses, equity vol collapses, that helps the market to rally. So that's one move.

[00:39:52] The second one obviously being just the repricing and upside in anything related to AI and tech. And so, again, a really fascinating situation. And, you know, Jack, I mean, clearly the idea of going full hog into the right tail and all these tech names was not something I saw. And I think if you look back at this and saying, well, you would have to say the same things again, right?

[00:40:15] Because when you're watching this stuff and you're saying the market's not pricing in this sort of right tail – excuse me, left tail move, the drop in stocks, we really should be careful about this because we could wake up and see the VIX at 30, 40 very quickly. I still think that was the prudent way to go about it and to be, you know, cautious there.

[00:40:33] And, you know, you don't necessarily mark that wrong, but the fact that the market never reacted to what seemed like a pretty significant event is one that I do think I certainly was wrong in. You know what's been interesting too, and it's not in the presentation, but this idea that, you know, at the beginning of the year, like we were seeing sort of the market of the broadening plays. So, you know, the average stock was beating the big stocks. Small caps were outperforming. The international was outperforming. And, like, the moment the war started, like, all of that flipped. Yeah.

[00:41:01] Like, now it's basically right back to your tech market you've had all these years. And who knows if that'll last, but it's just been an interesting change. Yeah, it's totally right. And, you know, there was a rate component to this, an interest rate component to this. We saw a 20-year go over 5%, which, you know, some of the banks were saying this is the Magno line, right, the line you cross it, and we're all in trouble. But, you know, the market doesn't care right now. So, CapEx is washing away, I think, a lot of these things that are a little tricky.

[00:41:30] And I'm not here to argue that point and say that's right or wrong. You know, you trade the market you're given and all that is fine. But you want to find these transition points because if you can find the transition point and be prepared for when the market, you know, changes its direction or view from both a price direction but a volatility perspective, you know, that's where a lot of this money can be made, right? And you want to make sure you're being aware of those inflection points.

[00:41:55] And so, this was looking at how low the 0DTE prices were on a daily basis. We've seen some of this recently, too, where, you know, you have an FOMC day recently, for example, and the market's pricing in on the 0DTE, 40 bps of movement. And you go, well, there is an FOMC day today, right? And there's a peace deal later, and the market's just kind of like, whatever. We just don't care. And I think a lot of that is like, well, why should we care when there's, you know, tokens to produce?

[00:42:23] And so, don't argue with that. Just understand, you know, the thing you're given. Yeah, and on this next slide, this was something we were talking about. We were talking about last time, like, we don't know what the earnings are going to be. Now, we kind of know more what the earnings are going to be, and they've been really good. Yeah, they've been great. They've reinforced the story. And, you know, if you're going to have a summary from what has happened over the last month, it's the tail risk to the downside didn't matter with the oil, and the tail risk to the upside due to earnings 100% mattered.

[00:42:51] And we still have, you know, right now it's pretty quiet on the earnings space, but we do have NVIDIA coming up on the 20th, which is obviously something the market will watch closely. So, is there anything else on the previous one before we get into the current expiration? Yeah, I just want to cover this one because this is our compass map. I know this is one you like, Jack. And if you're on the right side of this chart over here, that's when people are leaning into calls, right? They want to position for upside. They're not really worried about the downside risk. They're simply sort of chasing, right?

[00:43:18] And if you're on the left side of this chart, there's two interesting things here, right? And this is from April OPEX. Puts are more bid than calls, right? So, people want that downside. And the second one is the higher we are on this chart, the higher the implied vol is. What does that mean? You're basically kind of in a crash position, right? You're protecting yourself from a crash. The second one is the fact that all these points are pretty well concentrated on this chart, right? Yeah, there's a little bit of a spread there, but they're all pretty concentrated.

[00:43:46] Let me know if you don't believe or agree with that, Jack. But they're pretty concentrated. What does this mean? Across the equity space, people are in a bearish position. And this was the look into April OPEX, which is pretty fascinating to me. I have an update on this chart. So, remember what this chart looks like, Jack. And we're going to see what it looks like now here in a second. And you'll see why this is a pretty interesting and amazing chart.

[00:44:12] So, as we move forward to May here, you have this chart here showing dealers supporting the S&P. Yeah, and these were the projections, lastly, that we thought. Just real quick, Jack. The vol premium was gone. What happened then? The premium was gone. Realized vol came in because people thought, okay, peace deal is really coming, right? And that allows more premium to build up when the Iran thing is totally gone. The single stocks relative to cheap index side was one thing that absolutely repriced. So, here puts were cheap, calls got rich.

[00:44:42] That absolutely came out to fruition. And then the idea that hedge protection was rolled down, it was, but we simply did not decline. So, certainly a mixed bag out of the views that I had from April. But now let's look at May. This is a gamma chart, and I know it's a little bit confusing or new for people. And so, this is part of the reason I prepared the pen tool here is because if you just look at this, right,

[00:45:10] these positive bars are supporting positions in the S&P, right? So, we're right about here today in the S&P. I haven't checked the market since it's open. But what does this mean? Short-dated options are going to offer resistance here and support here. We call this positive gamma. It's like this, again, the straight jacket on the market. Now, what's interesting about this line, right, is this line is just the summary of gamma. So, you can see these curves, right, Jack? So, the curves are the sum of gamma. Again, where you see curves should be support and resistance lines for the S&P. Does that make sense?

[00:45:39] Yes, it does. Okay. So, what is the dashed line? The dashed line is if you take out today's expiration flow. And so, what do you know by that, Jack? We go from positive on this axis to negative on this axis if you remove today's positions. So, what happens now in the S&P is that the positioning in the S&P is very transient. It's here today and it's gone tomorrow. But you get these trends, right, where every day the zero to T people come in because they go, the tail risk doesn't matter. There's no risk for today. I'm going to sell a call. I'm going to sell a put. I'm going to sell a call.

[00:46:09] I'm going to sell a put. And then you get the unknown unknowns, a bank collapse or a war, whatever it is. And then the zero to T flow goes away. So, what happens now is you get this persistent short-dated call selling. And this is there and it matters up until it doesn't, right? And I'll show you why that is on the next slide. I'm going to put this into some context. So, this is another view of the same thing. The blue on this chart is positive gamma. What does that mean? Market makers are long options.

[00:46:38] That means they have positive gamma. If they have positive gamma, they should be supporting the market, okay? So, look how deep and concentrated those positions are for zero to T. That was the seventh, right? And then the next day, you can see that the color of that blue, that shade of blue gets lighter. There's less positive gamma. And so, you can see what happens is market opens today. People will come in intraday and sell a bunch of calls and puts, which would make that chart for today brighter blue, which is more supportive of the market or more restrictive

[00:47:07] of movement. Does that make sense? Yes. And then what you see here is May OPEX. So, at May OPEX, you're going to remove a whole bunch of gamma and you can see the way that the chart changes color. That's the example of how the position changes. So, the gamma is still positive. It's just much less supportive of the market versus today, right? So, you can see how this changes over time. It's very short in concentration and the monthly OPEX also has an impact.

[00:47:35] But the other thing I just want to note is when you go farther on time, they have this negative gamma position. What does that mean? The market is more free to move about. And the reason I think this matters is headlines for the next 10 days probably aren't going to matter very much unless it's a really major headline, right? If that UFO lands, then we have a problem. Unless we get something like that, this market is in this very supportive position up until May OPEX. Now, at May OPEX, the positions shift. Then we also have VIX expiration.

[00:48:05] Then we also get NVIDIA earnings. And so, the idea that we're now more free or things are less restrictive really comes into play. Now, historically, when we're really bid into expiration and the equity market's really rallying, we'll have that downside consolidation. But maybe NVIDIA has just the best earnings ever, and it just reinforces the story in the SpaceX. And then we have another major breakout, right? So, the idea here is looking for an expansion in vol.

[00:48:31] I would assume that that would bring some possibly an equity market correction. But some of that does weigh on what happens with NVIDIA as well as do we actually get a signed piece of paper with the Iran deal, et cetera. So, there's some nuance here. But the big thing is expect contraction over the next 10 days in market prices. And then an expansion. And then figuring out which way to lean into that expansion will be a key piece of this out of that, particularly that May 20th. And you can see that, right? Equity.

[00:48:59] These are random places for positions to be, but it's due to that VIX expiration NVIDIA earnings moment. So, the idea is how as we clear the expiration and as time passes, we're going to be more free to move here, but in both directions. And obviously, what happens with NVIDIA and all this other news is going to determine maybe which way we go. That's right. So, first principle is volatility to go from being contracted to expansion. Now, vol means you can have a stock up vol up environment or stock down, you know, VIX spike environment, right? So, which one will I position for?

[00:49:29] And if I'm a zero DT trader, I don't want to sell all these options if I think vol is going to expand, right? So, if I'm zero DT, I may back away, which changes the liquidity profile a little bit until I sort of, oh, it's all clear, I'll get back in the pool, right? So, these are the dynamics that are all kind of shifting over the next, you know, 10 to 15 days. And on this next slide, we're looking at gamma in single stocks. Yes, exactly. And so, this is a new chart that we started to produce here. And what I did here is I summed the gamma across all the top 100 stocks in the S&P.

[00:49:58] And what's fascinating about this, and I don't think a lot of people understand this, is that when you look at the gamma positioning, NVIDIA, Tesla, Apple, Amazon, et cetera, there's a ton of dealer positive gamma. Well, what does that mean? How is that generated, Jack? It's generated from people selling calls and selling puts in these top names. And what is that flow? A lot of that flow is people own NVIDIA, they own Apple, but they want to generate more yield, right? So, what do they do? They systematically sell calls, for example.

[00:50:27] And these positive gamma complexes are really big in these top names. And so, I think part of the reason when you look at like an Amazon earnings, which are really good, and the stock doesn't have just a really big reaction, or like Microsoft and Apple have a negative, excuse me, they have a kind of a negative reaction, then all of a sudden, like the move stops, and they're just sort of supported, right? It's because of this on your screen. It's this supportive positioning. And you can see it persists out in time. So, this is not as big as the S&P complex.

[00:50:53] But when you look at the top stocks, this is how the market makers are positioned, right? They're positioned in this way that sort of is just like, okay, S&P, we're going to buy the dip and sell the rip. What about single stocks? Same thing. I'm going to buy the dip and sell the rip. And so, we're going to be supportive of the market. And so, why doesn't Iran matter that much? Well, the positioning really didn't shift, for example. And so, is that the whole story? No, but I think it's a big contributor here. And so, it's important to note this. Now, when you look at some of the other names, AMD, Micron, Sandisk, it doesn't look like

[00:51:23] this, right? They're more red. What does red mean? That means people are buying Sandisk and AMD calls, right? So, the dealers are short, and you get a lot more relative volatility out of those names. Short gamma, that is. So, this next one is crazy. This is SPX call volume over time. And it's, yeah, when you look at it this way, the spike is massive. Yeah, Goldman just put this out. And this was as of two days ago.

[00:51:48] They were noting it was the biggest call volume day ever for the SPX measured in notional value. And so, you know, you look at the convexity of this, and it speaks to the growth in options over time. And there are a bunch of other implications I think a lot of people would take away from this chart. And some of those are, you know, in some shade of right. But this is the thing, when I show you this next chart, Jack, I don't even see it yet.

[00:52:17] I think you kind of go, oh, and you kind of draw back. Because we spend a lot of time talking about zero DT, and what are the impacts of it. And, you know, even at the options industry conference, you kind of want to downplay the impact of this stuff, et cetera, et cetera. But what does that actually mean? Largest notional ever. That's just a measure of total call volume, right? Well, how do you break that volume down, Jack? And that's what I did here. And this is the type of thing we see a lot. So this was the record, you know, record day.

[00:52:45] And on that day, we had an 18,000 lot call spread, for example. Huge size, zero DTE, right? 60% of that volume on that day was just in the zero DTE bucket. The second one, Jack, you can see there, it was all around 1% roughly at the money. And that at the money target moved a little bit because the S&P was moving. But the point is, is it's near-term options. Zero DTE explains 60% of that chart we just saw. The other 16%, 20% is in the one to seven days to expiration.

[00:53:14] So why does that matter? Because if most of that volume was people buying December calls, Jack, or August calls, betting that, hey, this is a different situation. SpaceX, OpenAI, Anthropic, the whole story piece deal. Like I need to have August exposure because this thing's going to go crazy. That tells a totally different story than people piling into the short-dated chase, right?

[00:53:37] And I would never want to short a market or I'd be very reluctant to want to short a market that people are piling into longer-dated calls. Why? Because as those calls grow in value, dealer hedging flows have to keep buying the stocks. And if I know those positions aren't going to go away for a couple of months, that's a dynamic that should remain in play, right? But if that dynamic is based on today to maybe tomorrow, how confident do I feel about chasing that position, for example, right? They can be transient positions that are here this second and gone the next.

[00:54:06] And that invokes a lot of short-term or local volatility. Yeah, that's eye-opening for me because we've talked about how big zero DTE is a lot. But seeing it like this and how much of the growth of zero DTE is pretty eye-opening for somebody outside the options space. Yeah. And options are leverage, right? And so the more short-term options you have, you know, you have this leverage that is like here right now, gone the next.

[00:54:29] And the reason I think this is also so critical is because even if you're a longer-term investor and you're seeing the rate of change of a name like a Micron or an AMD or even an S&P where you go like, this is like so much so fast and a lot of it's short-dated flow, you don't want to bet on that necessarily persisting, right? So you can still have your trend being lower left to upper right, but amongst that is this rate of change that can be really pretty wild, right? And so can you tactically take advantage of that when you're like, all of this flow is short-dated,

[00:54:57] it probably means we're due for a correction or a reversion to the mean a little bit. And so I can sell some calls here or I can lighten up on this position and try to buy back some later. Or I can use the correction knowing that the correction is based on volume reducing and we are too far extended. Options like helps to deflate the balloon and then I can buy that dip with a little more confidence if I believe it's because, you know, options market-induced leverage goes away a little bit.

[00:55:24] So on this next chart, we're looking at call volume, but we're looking at it at 70s AI and memory. Yes, and to be honest with you, when I was building this chart, I would have expected the single stock stuff to be new highs. But what you see here is that we're actually kind of where we were last September, last November in terms of those call values or call volumes in these top names. You know, the size of certain names has changed a little bit, you know, Intel obviously picking up a bigger piece of the pie, etc.

[00:55:54] But to be very honest, you know, this is not a, I would have expected really big new highs in these semi-AI type, you know, type space, right? And so this is indeed very high call volume. I thought we would have had a little bit more if I'm being honest, but still you can see there's just been a really big surge here since May 31st through April, kind of as you'd expect given some of these earnings. Is this sustainable? I don't know. I mean, you can see how quickly some of these call volumes can dry up, right?

[00:56:23] And that is generally going to be associated with the stocks coming back in or having a correction. So this next one, we're looking at the vol premium on. It wasn't too long ago we had a historic vol premium, but it still seems like it's somewhat above average here. Yeah, and so, you know, I spent a second talking about our projection from April into this month and saying that the vol premium was gone. And what did I mean by that? You can look at the vol premium actually right here, right, Jack?

[00:56:48] And the idea is that if you have a war that people are worried about, you can't have the VIX go to 10 or you shouldn't. The VIX should hold a premium to wherever the market is the realized vol is trading. So realized vol, just to be clear, is how much has the S&P been moving? So how much has the S&P been moving is the best barometer or the best forecast tool to believe what's going to happen tomorrow, right? What has been happening probably projects into the future. So if you say, well, realized vol in the S&P is at 15, the VIX should have a premium to that, right? So the VIX should be at 20.

[00:57:16] What we had happen in April was realized vol is, let's say, you know, 12, 13, 15, somewhere in there. And the VIX is basically on top of it. So there's no real premium to the market, which led me to make that statement that, look, there's no real vol premium because the VIX is simply pricing in the amount of movement that we've had. That doesn't make sense if you have to worry about the Iran war. But what you can see is happening now is realized vol in the S&P is coming down. What does that mean? The ranges in the market are starting to trade less. I think that realized vol is going to continue to contract into expiration, right?

[00:57:46] What does that mean? Well, if the realized vol goes to 10, 8, 6, shouldn't the VIX come down? And if the VIX comes down, that's this flow we call VANA, which helps to keep the market supported. So if RV realized vol comes down, then that gives space for the VIX to come down. And that can be kind of irrespective of the spread, right? Because those two aren't, you know, the spread is just the relative number between them. But if RV realized vol comes down, the VIX come down, that supportive dynamic into that 515 to 520 period

[00:58:15] when we have VIX expiration and we have equity expiration. So this next one, you mentioned earlier that this grid system was going to look very, very different. And it does. Yeah. And so if you remember, pull up the fancy pen tool again for everybody. All of these stocks were right here, right? They're all right there. All highly concentrated, right? The correlation was very high. What does that mean? If you're worried about oil prices and the impact on the credit market,

[00:58:40] then you don't really care about owning Apple versus IWM versus Tesla, right? Because you're worried about our equity is going to crash. And so in this case, what we have is a dispersion. The dispersion is I need to own whatever is related to the AI chase, right? Or the hardware name that matters the most. I'm going to buy that stock. I'm going to, you know, chase into this very kind of idiosyncratic corner of the equity market. And I'm only going to do that if I believe that equities writ large are very stable.

[00:59:10] So again, this is the dispersion of the equity space, meaning I'm going to chase all of these different names. Okay. So just to pick this back up, a slight venue change here for me. We have this dispersion. And this type of dispersion, it only happens in very bullish equity environments because you have to, in order to go into an idiosyncratic kind of idea in the stocks and chase them to very high call prices,

[00:59:33] which is what we see, then you have to have a very safe feeling about the equity market writ large. And so this is what we're seeing, right? This is what happens in sort of peak bulls is the way that I would frame this. So we went from incredibly bearish positioning to very bullish positioning. And on this next one, we're looking at this idea of oil and volatility. Yeah. And I want to just give a final nod here. I mean, this morning, Rubio says we're going to get a peace deal. I hope we get a peace deal and that everything just goes back to normal.

[01:00:03] I also don't want to pay $5 in gas anymore, Jack, probably like you. Let me fill up your G6 or whatever you got. It's expensive. So what you want is the oil prices and peace to come down. So that's great, right? That being said, what you see here is this kind of weird moment where we had negative correlation between the S&P and oil prices, right? What did that mean? Oil prices rip, S&P goes down, right? And you can see over time the relationship between these change.

[01:00:31] But when you have these geopolitical situations where you really get a giant rate of change in oil, that is where you generally see the inverse correlation. So if USO or crude rather goes to 115, you would expect stocks to have a pretty nasty reaction to that, right? But what has happened now over the last couple of days, as you can see here, is they moved to a positive correlation, which is weird because there's not actually a peace deal. And oil is not down at 50. We're still in the 195 to 100 area. So we've actually moved to positive correlation.

[01:01:00] What does that mean? When oil is going up, so are stocks. What I think is interesting about this is that when you read a lot of the bank notes recently, and the theme over the last month, I would say, is that when oil is going up, stocks are going up. But what is the trade you want to put on right now? You want to be long energy, long semis, right? Because the energy tail is the Iran situation, but also what does all of AI need? More energy.

[01:01:25] And so there's this weird barbell strategy where it's like, instead of hedging with VIX options or equity puts, let's just buy oil or energy-related names as my hedge so that if Iran does get worse, God forbid, then guess what happens? Well, my hardware stocks are supported by the fact that I'm along this energy stuff. So this next one is oil and the VIX, and that's something I would expect to have nothing to do with each other unless you have some sort of crisis situation, and then they have a lot to do with each other.

[01:01:53] Yeah, and the stats nerds are going to throw their shoe at the screen based on that regression line. And so just to prevent them from taking their shoe off, generally these two are totally unrelated to each other, right? They have absolutely been related to each other in recent weeks and, I guess, months at this point, right? And the reason I show this is because the black dots are just the last 10 days. And so the thing that you see here is that the relationship has changed from an albeit kind of shady regression, right, over time.

[01:02:22] It's certainly pivoted and shifted around a lot. So what does this mean? Stock up, VIX up, still seems to be in play. So even though equities, the S&P equity price is now positive correlation, we still see vol negative correlation. What does that mean? When oil goes down, vol comes down, VIX comes down, right? So that is still in play, which, again, it's a very interesting dynamic. Normally what you would expect is when the equity market goes up, vol comes down, right? So you would expect that.

[01:02:51] But here, you know, it's a very strange, subtle nuance, which kind of speaks in a little bit of the way the fact we have a lot of stock up, vol up positioning right now. And I think what's going to happen is we talk about transition change. I think that vol is really going to start to concentrate, you know, pretty sharply here, which may change this oil VIX correlation as well as the equity oil correlation. Because we have this OPEX that's really going to suppress vol, seems like we're going to have a peace deal.

[01:03:19] So maybe the rate of change in oil is going to slow. And so I think we may kind of like unlink largely from the oil complex now. And it may be something we don't talk about from the sort of May to June OPEX cycle. So this last slide, speaking of correlation, is this Core 1M that we've talked about a lot before. And, you know, when we've hit this red line in the past, it hasn't been a great thing. I mean, we're above it right now, but it hasn't been a great thing for markets when we've hit that thing. Yeah. And in the correlation, this chart is very related to this, right?

[01:03:49] The more dispersed and to the right we get on this chart is the lower we go on this Core 1M. Now, Core 1M, what it's specifically doing, it's a SIBO metric. Anyone can look at it. It measures the implied vol in single stocks to the index. And generally what happens is single stock calls get bid up, right? Because people are buying them, they're chasing, and then the index vol gets sold. And that, what we end up seeing then is Core 1 really drops. And this is my favorite metric because when we get below that eight, and we seem to have really kind of ugly equity periods,

[01:04:19] and the kind of like four, you know, two to three weeks, sometimes a little bit shorter timeframe. Generally, what happens is that when I see we go below eight, I'll generally buy one or two month S&P puts, right, as a hedge. If we get sub eight on this metric at 519 or 520, like right into that NVIDIA earnings moment, right, and vol has been really concentrated, right, VIX makes a low, and this metric gets sub eight, you know, and we have the NVIDIA earnings,

[01:04:47] so this transition period that's going to change positioning, I think that is like a bat signal for wanting to own some hedge protection or putting on some downside bets or just sort of like trying to lock up some equity gains, right, if we get this signal flashing eight into that OPEX, you know, NVIDIA earnings time period. So that's what I'm really watching and paying attention to right now. We may not drift that low, which simply tells me that we're not fully overbought in the options space,

[01:05:13] but fully overbought in the options space will happen if Corwin M goes below eight, that's the signal that options are super overbought. So as we wrap up here, you've got your new summary slide, which I love. It kind of gives us the takeaways from everything we've talked about. Yeah, and I really want to be very, very clear about this stuff, I think, and so, you know, Corwin M below eight is the bat risk. We may or may not hit that, right, but if we do, then, you know, I'm really looking at that, and the window for vol expansion happening, you know, next week, so another 10 days of relative calm, I think, is true.

[01:05:43] I know I'm going from bottom up here, but top memes. You know, if you look at, like, Tesla over the last couple of days here, Jack, the calls are very, very cheap in Tesla. They're the cheapest calls that are around, and they've started to move up towards the call skew. So what does that mean? They've gone from put skew to call skew, and you're seeing that name really start to wake up. So what other names have lagged, right? And so can I get exposure to those names over this next week? So it's like, I don't want to chase AMD anymore. What else has not really moved up that much that I can start to chase, right?

[01:06:13] I think we're going to start to see some of that environment. And again, IV continuing to trend lower is just that the market, I think, is going to get less volatile here. That goes for gains as well as sales. Now, we get an actual signed peace deal in Iran. Maybe we get one more little pop here. But I think the chase in the tech stuff, I think, is going to cool off here a little bit as people await NVIDIA earnings. So as we wrap up here, Brent, we've given people everything they could ask for, right? We've told them aliens are real. We've given them some bad macro takes.

[01:06:41] We've even given them some well-informed options analysis along the way. Thank you. Yeah, a lot of poor macro takes covered about half of it. Aliens covered our 10% and then maybe some moons. And then some options stuff in the middle. We could have made this about 30 seconds long. Well, hopefully the viewers stuck with us. If you did, we appreciate it. And thank you, everybody, for joining us. And we'll see you next time. Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube.

[01:07:07] You can also follow all the podcasts in the Excess Returns Network at excessreturnspod.com. If you have any feedback or questions, you can contact us at xsreturnspod at gmail.com. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.