What Regular Investors Need to Know About Options Flows | Brent Kochuba

[00:00:00] Welcome to Excess Returns, where we focus on what works over the long term in the markets.

[00:00:04] Join us as we talk about the strategies and tactics that can help you become a better, long-term investor.

[00:00:09] Jack Forehand is a principal Evalidia Capital Management.

[00:00:12] The opinions expressed in this podcast do not necessarily reflect the opinions of Volitya Capital.

[00:00:16] No information on this podcast should be construed as investment advice.

[00:00:19] Securities disposed in the podcast may be holdings of clients of Volitya Capital.

[00:00:22] Hey guys, this is Justin. In this episode of Excess Returns, we wanted to feature our discussion

[00:00:26] with our good friend, Brent Kochuba from this week's edition of our separate podcast, The Opx Effect.

[00:00:30] One of the big lessons we have learned in recent years is how much of an impact what goes on

[00:00:33] behind the scenes and options markets can have on the movements we see in the stock market,

[00:00:37] especially around major events and options, explorations.

[00:00:40] I can't think of anyone who can explain how all of it works better than Brent,

[00:00:43] and in this episode he takes us through it from the ground up.

[00:00:45] We discuss how options dealer flows work and why they matter for long-term investors.

[00:00:49] We also use both the current options expiration this Friday and the recent movements

[00:00:52] in the real world. As always, thank you for listening. Please enjoy this discussion with

[00:00:57] Brent Kochuba.

[00:00:58] So Brent, we're going to change things up a little bit this week because we've been doing this

[00:01:01] at its shocking but we've been doing this for a year now. I believe you've ever close to

[00:01:04] you. It's a nice or 12th episode.

[00:01:08] Yeah, so all of those are the top 10 video views.

[00:01:11] They are the most popular things of all time on Excess Returns already 12.

[00:01:15] But what is interesting is that I was just going through the day like one of the things I like

[00:01:20] to rank our episodes by as I look to like to look at the average watch time because that kind of

[00:01:24] tells us what people are engaging with. And I think we are now three of the top 10 and we've

[00:01:29] had 375 episodes and number one overall is an Optics Effect as well.

[00:01:33] Alright, so keep our listening through to a lot of it relative to our other stuff.

[00:01:39] I appreciate you trolling for whatever metric puts me at number one to make it go home.

[00:01:45] Just starting until I found the right one. But I think that is one of the most important ones

[00:01:48] because that shows people are actually engaging with stuff not just looking at the way.

[00:01:51] And that was our number one quick through for it though.

[00:01:54] But anyway, we're going to change things up a little bit because one of the things that's been

[00:01:58] great for me about doing this is I've learned a lot about what's going on behind the scenes and

[00:02:02] we're going to see some stuff this week so often you'll see the market will move and everybody will

[00:02:06] say, see NBC will say, here's why it moved. The Fed did this or this anticipation the Fed is going to

[00:02:10] do this and a lot of times that is going to do it. A lot of times there's something going on behind

[00:02:15] the scenes with respect to flows that's driving the market and it is a long-term investor.

[00:02:20] Like I found like a lot of solace in knowing that at least. You know, when I see these crazy moves

[00:02:24] that were in-interdue reverse wolves and all kinds of stuff happening that I used to have no idea

[00:02:29] it was going on and I still can't say exactly what it is but I feel better about it now because

[00:02:33] I know what's going on and so that's what we want to do today is we were going to go through options

[00:02:37] dealer flows. We're going to do an options dealer flows one on one at the beginning and we're going

[00:02:41] to talk about how all this stuff works and why it's important for investors to understand it.

[00:02:46] Yeah, I'm going to keep it, we'll keep it light here so this is not a super intense course

[00:02:50] so those of you already know this stuff you won't have to sit through it. But the idea here is just

[00:02:54] to explain I like to say the transmission mechanism between options hedging or options trades

[00:03:00] and hedging flows in the underlying stocks that we all watch and to your point, you know when you look

[00:03:05] back at a date like August 5th and the options market conditions into August 5th, you know they were

[00:03:13] they were breaking away before Jim Cramer and everyone else was freaking out on August 5th itself.

[00:03:19] So you see that the table set a lot of times we actually see it in a similar fashion from tomorrow

[00:03:24] just a quick one that you break this 5600 level in the S&P and there's negative game on right

[00:03:30] which everyone started this term but that means dealer has got a sell and Valsh had

[00:03:34] help and things to get a little squirrel in her there so you know these dynamics are still at play

[00:03:39] even as they become a little bit more understood across the equity landscape or investing landscape

[00:03:45] I should say to kind of your point someone like yourself who is in an options guy, no pay the

[00:03:50] attention. And just for a regular viewer we are going to get into this expiration which I believe

[00:03:55] is one of the biggest of all time if I'm correct is that right? Yeah, you know it's funny because

[00:04:01] if you look at sorry I'm flipping through the part of the presentation to earlier but if you look at

[00:04:05] the way so Goldman somehow got the jump on detailing up these expiration are so they'll say it's

[00:04:11] five trillion dollars and what they're doing is essentially taking the amount of open interest and

[00:04:14] translating that into stock equivalent assuming that no one opened interest is equal to 100 shares of

[00:04:19] stock or one contract. That's not the best way to measure it but based on that metric we are at a

[00:04:25] very, very large expiration were bigger than March quarterly expiration but a little bit smaller than June

[00:04:30] so this is a large expiration no matter how large you measure it but you know the Goldman quotes

[00:04:36] of the in the financial media we'll say five trillion but we think that the delta size which is a little

[00:04:42] more accurate way to measure it is in the hundreds of millions not quite a trillion.

[00:04:47] So to step into why is there important you've got a great slide in here about this one increase

[00:04:51] use of options activity. So the presentation is on itself first. Oh yeah that's important too

[00:04:56] that's going to you look like a star there in front of the neck thing. Yeah it's a lot of order

[00:05:01] to be working with a media star on the month my mom said I look very handsome with that photo so

[00:05:05] let's one that we stood anyway started or you've got a you've got a slide here about like

[00:05:12] I think the pandemic was kind of a big turning point with this right like the use of options is going

[00:05:16] up a lot. Yeah 100% 2020 we had the pandemic so everyone got their stimmies and then you got electronic

[00:05:23] trading options trading on your Robinhood app on your phone and that really electrified excuse the

[00:05:29] pun volumes and and that turned into so we went from like me mania and game stop craze to zero

[00:05:37] DTE's and zero DTE's are now 50% of volumes roughly not only in the SMPS and B5100 but also

[00:05:45] in the biggest single stocks. We're going to be talking a lot about Nvidia today

[00:05:50] which you know even if you don't trade options you're going to want to see some of this in

[00:05:54] video content it's really pretty interesting so volumes are increasing which means bigger hedges and

[00:05:59] more active hedges are taking place there's more hedging activity and that's really why we're

[00:06:05] so focused on this not just for the office trading community but they get for all traders.

[00:06:10] You mentioned zero DTE so they've also because there's more options activity there's also

[00:06:14] more explanations now is that right? Yeah every day in the SMP500 the NASDAQ complexes so spiders,

[00:06:21] cues etc there's an expiration every day also in IWM and there are there's a expiration

[00:06:28] every Friday for most US single stocks there's scuddle but that there's going to be daily

[00:06:33] listed options for single stocks as well Matt Levine had a hilarious Bloomberg comment column about this

[00:06:41] where you know you saw about zero DTE's and how retail traders really want this and how

[00:06:46] you know the market makers of the world couldn't be more happy to you know roll out the red carpet

[00:06:50] for these guys I think one guy was like a volleyball coach slash zero DTE trader so that was kind

[00:06:56] of those kind of his angle on how the market makers of the world are welcoming the volleyball

[00:07:02] coach slash zero DTE traders with open arms but in any rate those volumes are likely to

[00:07:08] continue those short dated volumes are likely to continue to increase so one of the things that I

[00:07:13] think stock people will probably not totally understand about this is when I'm when I buy a stock

[00:07:18] sometimes I'm getting matched with like a seller on the other side who wants the seller stock

[00:07:22] with options is not the way it works right if I'm buying an option I'll rents it out on the other

[00:07:26] side like selling me that option I'm dealing with a market maker in the middle like an option's

[00:07:30] dealer right hundred hundred percent so the the latest data saw which is admittedly about a year old

[00:07:35] reason to think this changed is that 90 percent of options volume is traded against a market

[00:07:42] maker and if you think about how many explorations are hard how many strikes there are you know

[00:07:46] it would be very random for another you know retail trader or institutional trader even

[00:07:51] to be on the other side of your or you can look and find those people there's some markers in

[00:07:55] the prices that I think allow you to reveal that a little bit but odds are 90 percent of the time

[00:08:00] you're going to interact with a market maker so Jack when you go buy you're probably getting

[00:08:04] the contract sold you by Citadel or Wolverine or you know there's really a couple of really

[00:08:09] big market makers out there and so that is a real that is a to your point that's a difference

[00:08:13] in the options of market versus equities and so when I'm yoloing my my games.co-l-options here

[00:08:21] that that market maker on the other side doesn't necessarily they now have a risk right and they

[00:08:25] don't want to have that risk that's right to take action right to do something about that risk

[00:08:30] that that's exactly right so in the example that we have here is look if if it's just me buying

[00:08:35] 10 MC calls the market maker that's a small order they go whatever and they don't even

[00:08:40] probably bother hedging that but if we all get together on on Wall Street bets if I think that's

[00:08:45] still around and we all buy at the same time right ten lots well that can add up very quickly and

[00:08:50] so the example here shows a bunch of small orders coming in from interactive brokers are

[00:08:55] trade or whatever and the market maker sitting there saying oh I just sold a hundred thousand

[00:08:59] calls because of some you know fin-twit put out some message so you have a hundred thousand

[00:09:06] calls that you sold as a market maker you're sitting there saying I don't want to be short

[00:09:10] this stock I don't know why I'm short this stock I you know I don't know what the catalyst is

[00:09:14] and so what do I do and for that you turn to what's called Delta hedging and what Delta

[00:09:21] hedging is it you plug your contracts into or you plug the parameters of an option contract into

[00:09:29] a calculator like black holes and it basically spits out this number there's a very simplified

[00:09:34] example but you say okay all these fellows came out they bought these calls from me for AMC my

[00:09:41] options calculator tells me these are 50 Delta options so what does that mean that means I need

[00:09:45] to buy 50 shares of stock for every contract I sold the hedge myself so in our example here if

[00:09:50] there's a hundred thousand calls that you sold as a market maker you can have to buy five

[00:09:54] million shares of stock to hedge that position right but the critical thing is that hedges you

[00:10:01] right now at this very time at this very price if the price of the stock changes you got to

[00:10:07] change your hedge if time passes you got to change your hedge if volatility comes down right or

[00:10:13] implied volatility goes up you know the anticipation about you know what's going to happen

[00:10:17] future changes for example the amount of shares that you need to own changes as well so you

[00:10:25] think about for example when roaring kitty came out recently had a webinar that he did

[00:10:32] and options implied volatility was at I don't remember exactly number so you know stick

[00:10:37] on here but you know options implied vault into him in his webinar was like 400% for like an

[00:10:42] amount of money one month option let's say and then as soon as he came on it was just like

[00:10:46] what's up everybody like there's no master scheme here I just want to say what's up implied vault

[00:10:51] is like taint and suddenly if you had to own say buy a million shares to hedge yourself you only

[00:10:56] need to like two million shares to hedge yourself because all some people go oh this is this means

[00:11:00] nothing right and volatility came way down so again you're adjusting your shares based on

[00:11:05] only price movement time passing and changes to volatility and what that means for us on the

[00:11:10] side is where these flows are impacting the underlying thing beyond that they're impacting the market

[00:11:15] yeah so the most basic way that we look at this through delta and gamma so delta is the

[00:11:20] initial hedge you have to put on to get what's called delta neutral which means that at this price

[00:11:24] right now if the stock goes up a dollar I'm hedged because I have these underlying shares but what

[00:11:30] happens is if the stock goes up two dollars then suddenly I may need to buy more shares of stock as an

[00:11:34] example or sell more shares of stock so with this matrix here shows you is very the the most basic

[00:11:40] implementation of this is if for example a trader buys a call the dealer or the market maker

[00:11:45] has to short the call right they sold to call to you the way did their hedge is they would buy stock

[00:11:50] and the way that it had to continue hedging is by chasing the stock so in this example if I'm

[00:11:56] short a call as a market maker and the stock is going up I got to keep buying shares of stock to

[00:12:01] maintain my hedge right this is the gamma uh reposition that would have to take place so what that

[00:12:06] essentially means is the more the stock goes up the more stock I have to buy and you could imagine that

[00:12:11] if I am buying millions of shares of sums of stock particularly some illiquid stock I'm going to be

[00:12:16] the market there I'm really moving things right so these break into you know the way that we

[00:12:22] gam hedge breaks into the idea of positive and negative gam hedging but through this matrix here

[00:12:27] hopefully it explains exactly why options volume translates into trading in the underlying position

[00:12:36] and then we also hear these terms vana and charm you'll hear those a lot on Twitter um it was really

[00:12:41] too yeah uh excellent question here so delta we explained it's the obvious you know the number

[00:12:47] shares we have to own changes as the stock goes up and down but I also mentioned time and volatility

[00:12:53] is the other parameters the idea of charm or theta decay you know their linked ideas is that as time

[00:13:00] passes the delta of the option that I own changes and so if the stock does not move at all but time is

[00:13:07] passing then it makes me adjust my hedge ratio and so what you can see here is some very you know

[00:13:15] crude examples of this on the bottom in terms of time but basically what you see happening is that

[00:13:20] as time moves out of the money options the delta starts to decrease right because the odds of that

[00:13:25] option being in the money essentially changes um so out of the money options will lose some

[00:13:30] delta in the money options will gain some delta that's a complicated way of saying that look if

[00:13:34] nothing happens even if it's not a volatile stock there's delta are shares that have to trade as

[00:13:40] result of time passing and the closer you get the expiration the more trades or more shares could

[00:13:45] have to change hands as a result of time passing so if you think about a zero d t e zero d t is like

[00:13:50] microcosm of you know a one-year option expiring there's lowly delta's change over the course of a year

[00:13:56] well zero d t options are you know like on steroids where the delta's can change very very rapidly

[00:14:01] over the course of hours and minutes into expiration so again the point here is that time makes

[00:14:08] creates delta flows or hedging flows and then the second one is the delta version of volatility

[00:14:13] in this chart we just show you an example of all we did is all you do is adjust implied volatility

[00:14:18] which is a key parameter in surprising an option if you just adjust that implied volatility it changes

[00:14:24] hedger ratios so think about tomorrow with the FOMC there's a volatility premium because traders are

[00:14:31] waiting for FOMC to come out if Powell just literally didn't show up and just said hey you know

[00:14:37] the rate cut is 25 bips and then the meeting ended, Wall would come down because of that right

[00:14:41] because the event passed and that would create delta hedging flows that would have to shift

[00:14:45] as a result of that volatility coming down so those three parameters price implied

[00:14:50] all time are really critical to understanding these hedging flows and you know create this kind

[00:14:55] of what it's a woven dynamic of how these flows shift and obviously it's pocket must

[00:15:02] would do it or try to model these flows and estimate when and how they're impactful to the underlying

[00:15:07] stocks and they change in somewhat particular ways right like I know the week before expiration

[00:15:12] Jim Krasano has that I don't know politically correct way to put this but he has the video of the

[00:15:16] larger person trying to fit through the inter tube and always getting through like it's like

[00:15:20] but the market always threads the needle the week before but then as we get into the week of you

[00:15:24] know you run into like the window of weakness people call it so yeah the activity around this right

[00:15:29] in terms of how you look at these and when there's higher risk or lower risk 100% you know

[00:15:34] VIX expiration tomorrow morning obviously so there were some big VIX trades at one of yesterday

[00:15:39] and well today and you can see that the actual VIX trades move the market themselves as they're

[00:15:45] you know being added and removed and then that time decay really picks up particularly into

[00:15:50] options expiration week and you know there used to be these dynamics that you could kind of set

[00:15:55] your watch to and they shifted now due to zero DTEs but I also think that the market makers

[00:16:00] and all our participants have adjusted some of the ways that they trade because the you know

[00:16:04] mark smarter market players started to catch on to some of these flows like you know the window

[00:16:08] weakness for example or different ways that prices are just so you know there's a there's a game being

[00:16:13] played here and the dynamics are constantly shifting but from a high level your point of

[00:16:19] options expiration mattering it's because big positions are changing time decay is a much bigger

[00:16:25] factor in those moments and both those link back into volatility because statistically speaking

[00:16:32] there are certain hedging flows with suppressed volatility or expand volatility and so

[00:16:36] you know get all these concepts or linked together yeah that was great and I think the the

[00:16:41] biggest takeaway for me from this is like a lot of times what I said at the beginning which is a

[00:16:44] a lot of times you'll see these things in the market like we're going to see all kinds of movement

[00:16:47] around the FOMC meeting but a lot of that movement may not be you know they may say on CBC it's because

[00:16:53] this the market's predicting this so the market's predicting that but a lot of times that this

[00:16:57] positioning is what's driving these things and so I think as a long-term investor it's good to just

[00:17:01] take a step back and say you know maybe whatever the economic reason for this people are talking about

[00:17:06] is not really the reason maybe these flows are actually driving what I'm seeing in front of me.

[00:17:10] Yeah that's exactly right and the last few slides here we're certainly not to meant to be an

[00:17:15] immersive course in this stuff but just to relay that exact idea like okay give me examples of

[00:17:20] exactly how these hedging flows move markets and you know there's there's a lot of resources that

[00:17:24] you can dig in more in this but that is the key takeaway there are times when the options market

[00:17:29] is calling the shots I think that is really exemplified on the daily today of VIXX

[00:17:33] creation occurring tomorrow morning or these quadwitching or triple-witching options

[00:17:38] operations like we have Friday or if you look at an event like August 5th where you can see

[00:17:44] these pressures build up right and the options market's screaming at you you know this is about to

[00:17:49] happen and these big flows are dominating what's occurring I think that is invaluable information

[00:17:55] for even long-term investors right because you know is this a time where you want to allocate

[00:17:59] some money or do you need to be defensive here for example a lot of what we talk about is

[00:18:03] on shorter timeframes but when you zoom out there are you know a couple times a year there are

[00:18:07] these moments where even longer term investors will probably want to sit up and see the signal

[00:18:12] that the options market is sending so as we move into our regular presentation that we've gone through

[00:18:17] some of this but this is this is the idea of the ethics cycle kind of the rectangle here yeah so

[00:18:22] options are about to expire as they're here on Friday as we just kind of outlead here and the idea

[00:18:26] that the monthly options expiration is the third Friday of every month and positions generally

[00:18:31] speaking build up into that option's expiration those options flows get you know larger and more

[00:18:36] impactful as we get towards options expiration and then the whole system kind of resets generally

[00:18:41] speaking on the third Friday of the month obviously that is September 20th here and this has

[00:18:46] marks some significant turning points in markets I highlighted the most famous of them generally

[00:18:50] on quarterly expiration we find these big bottoming cycles not every option's expiration matters

[00:18:56] but certain once you know really do December 2018 marks 2020 June of 2022 you know you can go

[00:19:05] through these dates and each red X here is an option's expiration and so you know

[00:19:09] particularly if you see an extreme move into an expiration you know you can generally count on that

[00:19:14] being a turning point and so you know those are the types of things we look for big

[00:19:20] balances right in market prices and in implied volatility into these expiration as a as a signal

[00:19:25] of a turning point so the general rule is the bigger the move into the expiration and the bigger

[00:19:30] the expiration itself those two things increase the chance we get it's earnings. Yeah that that's

[00:19:35] exactly right and so you think about marks 2020 is the most extreme example and there was these

[00:19:40] massive put positions on right I mean huge and and so all of sudden on options expiration day

[00:19:47] the third Friday of March all of those puts expire and then any related hedging flows

[00:19:51] suddenly aren't needed anymore right and then what happens on Monday we put it in a low in the

[00:19:55] market just rips because there's not that downside hedging that that that cycle is broken right

[00:20:00] the cycle is dealers and market makers need to sell shares of stock and they're so big that

[00:20:06] they're pushing the market down but as the market goes down they need to sell more so we call

[00:20:10] that reflexivity because by me being the whale and I'm selling big shares of stock I'm pushing

[00:20:16] the market down which means I need to sell even more shares of stock right and that becomes

[00:20:20] the cycle that can't get snapped until the positions expire right options expire and then suddenly

[00:20:25] I don't need all these hedging flows anymore. For anybody who's skipping this the the

[00:20:30] two thousand twenty things what I always like to turn to because basically the exact market

[00:20:33] top was a option's expiration and the exact market bottom was also an option's expiration so

[00:20:39] yeah clearly there's something going on there yeah and you can look at July I mean July 17

[00:20:43] was a VIX expiration that was this past July and that marked the top to the morning right because

[00:20:49] suddenly you get this destabilization in the market when these VIX positions expire

[00:20:54] so there are these moments in time and yes you look at this and say well there's a lot of

[00:20:57] these red Xs that don't matter and yet not every option's expiration matters for single stocks

[00:21:02] or individual stocks could, except etcetera but there are these turning points again that

[00:21:06] that really do matter as a two to your point. So on the next slide we're getting into the

[00:21:10] expiration. Yeah I made a little mistake here on this chart this should be 5500 to

[00:21:18] excuse me, 567 or so we'll apologize for that but the key here is that under 5600

[00:21:26] we enter this negative game of position in the market and that means that the window

[00:21:32] of weakness if you want to call it that oh the window weakness and the price area of weakness

[00:21:38] really picks up at 5600 so we're just above that level today it's Tuesday September 17th and so

[00:21:44] if we break below that level there are a lot of dynamics that we've discussed earlier this year

[00:21:49] that come back into play. So we talk about correlation in terms of correlation coming back

[00:21:54] down after Nvidia and all these stocks have been rally you know that that could really break

[00:21:59] up we're going to talk about 6040 portfolio allocation here in a little bit but there's a lot

[00:22:03] of themes that come into play if we break 5600 and dealers have to start selling shares of stock

[00:22:08] and volatility IE the VIX really likely starts to spike in our view if we can't hold 5600

[00:22:14] and so we were talking before this started about what is the outcome of the FOMC and we're going

[00:22:20] to dig in this a little bit more later it's 5050 roughly right now whether we get a 50 bit cut or 25 bit

[00:22:25] rate cut and I don't know what outcome matters for bulls or pairs here and you were saying

[00:22:30] but I can tell you if we break 5600 I personally am going to be looking for a pretty sharp

[00:22:35] quick drop in the market. So the idea is if we think about this kind of in the same way

[00:22:40] technicians think about support and resistance is that right like these are areas you've got

[00:22:44] to break through so the odds are you might stop there but if you don't stop there's move

[00:22:48] room to move in both directions yeah that's exactly right and so you know we're constantly monitoring

[00:22:53] you know the impact of volatility and time and in all those factors and what we found

[00:22:58] is basically when we just say look this is the level you want to watch so it sounds like a

[00:23:03] technical level but it's really us looking at positioning to understand what happens if then

[00:23:08] kind of statements right 5600 has all these positions if we break that level we think dealers need

[00:23:13] to start shorting so it's not a moving average thing or a fibonacci or trace murder or something

[00:23:18] like that it's simply saying at this level flows are locked which should lead to markets being

[00:23:24] all direct what is being sold so on this next slide we're looking at the current

[00:23:28] optics and this is interesting for me because we have if we look at our criteria from before

[00:23:32] we do have the hubo you job X part of it now we haven't really had I mean the market is definitely

[00:23:36] at highs but we haven't had like some massive run into the expiration it's kind of this

[00:23:40] floating around a little bit and then it's called heavy so you do think maybe some of the components

[00:23:44] of a reversal are here yeah um we you know a week ago we didn't have this much of a call in

[00:23:52] I mean obviously the move off of September 11th generated a lot of call values relative to

[00:23:56] the puts I've also seen over the last couple of days and I imagine we update this slide tonight

[00:24:01] this imbalance is going to be uh had well decreased a lot because I think a lot of people are closing

[00:24:06] up calls early in front of FOMC which is tomorrow the idea being that there's a lot of short

[00:24:11] they did flows you know I made my money on the 10% Nvidia rally over last week let me close up

[00:24:16] position right so we are planted towards the call side of the equation it is a little topy

[00:24:23] it's not a screaming top like you mentioned before but there's a really soft underbilly of this

[00:24:28] market and you know my TLDR on the on the September positioning is you know I would look for

[00:24:34] to be a period for consolidation um following this obviously the the grill in the room is is FOMC tomorrow

[00:24:41] and and you know that's really going to dictate a lot of what happens I think

[00:24:45] and on this next slide you really are able to look at what's going on and you're able to predict

[00:24:50] the kind of volatility we're in heaven and we're not seeing we for the most part we've been

[00:24:54] doing these we've been seeing things to the right which we're seeing now we saw a couple times

[00:24:57] we got to the left but we're not seeing high levels of predicted volatility right now

[00:25:01] yeah that's right so this chart shows our gamut index which we just look at how much

[00:25:05] S&P 500 gamut there is and we compare that to forward volatility forward one day of all

[00:25:10] utilities with the y-axis so at five in the morning our model spits out here's what dealer

[00:25:14] gamut is and the S&P 500 and we can forecast with some accuracy what the volatility should be

[00:25:20] for the upcoming session and and the deal is that when we have negative gamut we have higher

[00:25:26] levels of forward volatility and so right now we're waffling around zero gamut where below 5600

[00:25:32] we could there's negative gamut position which is statistically to spikes in volatility

[00:25:39] so on the on the next slide this is kind of what we talked about which is this idea that

[00:25:42] you know more often than not you do get performance flips at optics

[00:25:46] yes and and what's interesting is that there is a 68% of 68% of time the market

[00:25:52] reverses from whatever the prevailing price action was into optics to out so the market flips

[00:25:57] around options expiration 60% of time when the VIX expiration is after options expiration

[00:26:03] so that is not happening this time if VIX expiration is before optics then the performance flip

[00:26:08] is 58% so a little bit more of a coin toss and what's interesting about that is that the VIX

[00:26:14] absence expiration becomes a kind of destabilizing force and so you know this is why I think it matters

[00:26:21] whether VIX expiration occurs before or after in this case here we're losing a lot of VIX

[00:26:32] flows have been pushing volatility I either VIX down and so you sort of wipe the

[00:26:38] slate clean a little bit and so with the Fed isn't you know appeasing to markets

[00:26:43] that to me tells me that we could get a little bit more jumpy action in the volatility

[00:26:48] space as a result of VIX expiration happening today so VIX expiration again is destabilizing

[00:26:52] to markets on this situation okay and then the next one we're looking at the price action

[00:26:57] and the most recent expiration and then as we head into both the FOMC now and the September

[00:27:01] yeah and and I talked about VIX expiration in July I mean literally the morning of was the

[00:27:06] high that was July 17th August expiration you know you could say that markets topped out after

[00:27:11] August options expiration slash VIX expiration oh the monthly optics so it wasn't huge but now

[00:27:17] we're kind of cleaning at a triple toppy kind of area into FOMC in optics et cetera and so you

[00:27:23] know line this up as a turning point obviously given the FOMC you know clearly there's going to be

[00:27:30] days and it does sync up with all these various of us so we always like to look back at what

[00:27:37] we've done in a previous episode as before we look forward and and this one we've been talking

[00:27:41] about correlation like a lot in various ways or a different episodes and then we kind of had

[00:27:44] this vitulation so what do we see here yeah I mean August was August was crazy and we saw

[00:27:53] a big spike in correlation after the July slash August drawdowns and my view was that the

[00:28:01] correlation trade was dead that is what I thought and what I meant by that was this idea that AI

[00:28:08] and the chip sector was just going to be this massive outperformer for the rest of the year

[00:28:12] and everything was going to look the same way it did in 2024 where if you didn't know in video

[00:28:17] you just basically were got an F in terms of your equity allocation um that theme was dead and

[00:28:24] that this idea of 6040 portfolio was going to start to matter more due to rate changes which are

[00:28:30] upcoming um that you was not correct because we saw big brush into the semis on September 11 you

[00:28:37] know Jensen of all came out and said look customers are fighting over our chips and and that

[00:28:43] led this unbelievable rally uh off of the September 11th lows where the S&P you know is up

[00:28:49] five six percent in video game you know 10 plus percent in in a heartbeat and correlation decreased

[00:28:55] a little bit with interesting though is that we're going to show a side of minute correlation

[00:28:58] didn't give all the way back so I haven't you know the first couple rounds here I've taken a couple

[00:29:04] of punches to the face of this view but I'm not knocked out yet and this matters because correlation

[00:29:09] is only likely to snap higher when all stocks sell off and that's why this matters so correlation going

[00:29:16] up this is the CBO Coral one metric signals that the vix is likely to go up and things are

[00:29:21] likely to get nasty we saw we called this correlation spasms and you saw April, July, August and

[00:29:27] September all had these spasms where suddenly you know correlation freaks out and jumps higher

[00:29:32] and the vix seems to go you know volatility seems to jump more than one would normally expect

[00:29:38] and there's a lot of you know reasons we're going to talk about this but but that's why

[00:29:42] watching this correlation seems to matter because it's the signal of a trade or a predominant theme

[00:29:48] in the market i.e. semi-saving us all from certain disaster you know does that theme breakdown

[00:29:53] because of you know recessionary impulses. It's interesting because I've noticed that too like we

[00:29:57] we saw some vix spikes too like you mentioned and Jimmy Jude had a funny thing on Twitter he was

[00:30:03] talking about like after you got that initial vix spike it's like a grease fire like if you put

[00:30:06] a rag over it like you don't know what's going to happen until you take the rag back up

[00:30:10] like whether there's going to be further spikes in the future so it's kind of one of those things

[00:30:13] we had that massive spike and then you don't really know what's going to happen after that. Yeah that that's

[00:30:18] exactly right and and the August cell off our you know August fifth was met with massive vix

[00:30:24] shorting people about a ton of puts uh in vix they they bought these vix in vix in vc tp's et cetera

[00:30:31] and what this reminds me of is 2017 because you would get these flare ups in 2017 particularly

[00:30:38] q4 where you know the vix with spike and you'd short it and you make money and be that great

[00:30:42] next time this happens I'm crippling down right oh god i did it again i made more money i'm going

[00:30:47] to you know 10 times my money and putting down and then suddenly that ball doesn't mean revert

[00:30:51] right in january of 2018 and we get volume again and and and that kind of feels like what we're

[00:30:58] all spike short it oh vix short it and then eventually you know we get this move where

[00:31:02] all doesn't settle right back down and some people kind of get carried out and it you have to build

[00:31:07] that imbalance and you know that that I think is this kind of lurking risk that you know may

[00:31:12] maybe more for like start of the year kind of thing that you want to watch for so as you look at

[00:31:17] this neck then you're looking at all the indexes are you updated since the last one yeah that this

[00:31:21] is in in just the the August view again that you know still choosing you know which weapon you choose

[00:31:27] I eat do you allocate in the tech heavy space for so that will be one of them that really matters

[00:31:31] for positioning i didn't think that would matter that much because correlation was sinking back up

[00:31:37] obviously you know off these September 11th comments from from in video you know we got a short term

[00:31:42] you know out performance in this semi space so again you know i i i i admittedly taking a little

[00:31:48] bit of an of an early l here not folding on that view yet but but certainly it's not going my way in

[00:31:53] terms of you know the semi trade dying in favor of more macro flows um the the big thing that

[00:32:01] the way that i would categorize i guess flows coming out of of of this September drawdown

[00:32:06] is this idea of traders essentially sold tons of puts off of those August lows that was a

[00:32:19] it's like a lever right we pushed down on the puts out of the equation that it's selling puts

[00:32:23] below and that jacks the market up on the other side and as the market got jacked up in the other

[00:32:27] side we did see some call start to get sold in the s and p uh this chart here is from August 12

[00:32:33] but you can just see that there are these big positive strikes here which tells us that at those

[00:32:38] lows and august again people are selling puts in size um and that was a predominant lift this is the

[00:32:44] kind of the vana you know vana component here is ball got shorted and that really helped to

[00:32:49] lift the market that added a lot of fuel to the upside uh into September so let me see on this

[00:32:55] next one is August paths yeah and and the other thing in August we were talking about you know

[00:33:01] what is going to happen for the upcoming rate cut and I include this slide because I thought it's

[00:33:05] fascinating this was a chart from uh i believe August 13 it was a 50 50 odds whether we get 25 bit

[00:33:11] rate cut or or 50 right so 20 50 50 25 50 so no one knew uh and then we got CPI retail sales

[00:33:19] apex don't know all those things in August and guess where we're at well we're at 60 40 I think odds

[00:33:24] are of a 50 bit cut so really even though we got all these data points that people are

[00:33:28] having in home about uh still nobody knows right and that and that's the interesting thing

[00:33:32] and that matters to 60 40 we're talking about the rebirth of the 60 40 portfolio in August

[00:33:38] off of the idea that if you own in this case TLT or Long Bonds it actually pretty effectively

[00:33:43] hedged out your equity drawdown uh around the August 5 sell off and we saw the same thing I

[00:33:48] have a slide on this moment turns in September and now if we're going to start getting rate cuts

[00:33:52] cause the economy's bad and while their issues are happening bond should start to perform

[00:33:57] as a viable hedge or viable alternative uh we're in 2022 and kind of 2023 they didn't

[00:34:05] yeah and then we we've been seeing that on our side too I mean they have been it's interesting like

[00:34:08] you saw we went through this period like my whole career we didn't care about inflation reports

[00:34:12] and then we got in this period where we cared deeply about every inflation report and stocks and bonds

[00:34:16] became correlated and then it's like a switch just flipped and now we we care about employment reports

[00:34:22] we don't care about inflation reports anymore and stocks and bonds have become negatively correlated

[00:34:26] again so like bonds are your hedge and I mean I'm not smart enough to know what that will continue

[00:34:29] going forward but it's just interesting to see the way it all played out.

[00:34:33] Yeah and and I I'm in the same camp of not trying to start to put on a macro allocator sack

[00:34:40] cause that's certainly not me but the idea of that there is this now alternative to equities

[00:34:46] and what that means for this correlation trade and volatility you know those things are all kind

[00:34:51] of I think link together in a lot of ways. So I want to focus on what has moved and I think a lot of

[00:34:58] people who listen to this regularly probably mostly like this section of the presentation where

[00:35:05] you know we're kind of forward more forward looking. I mentioned before that I had taken an early

[00:35:11] round punch but I wasn't knocked out on this idea of correlation not all by moving back and

[00:35:15] what you could see here is again the seabull correlation metric and in September correlation spike

[00:35:21] back up right cause things got really squirrely in the beginning of September again not all

[00:35:24] squirrely but still squirrely and then the September or 11th of the comments from Jensen Huang

[00:35:29] dropped correlation back down because they were piled back into the semi trade. Well correlation

[00:35:33] spike in vixbike in to start September but now correlation is higher this metric is higher than

[00:35:40] it's been for 2024 and I simply use this as a brahmeter to describe a lot of trades right there's

[00:35:45] a lot of different correlation trades there's a lot of different you know correlation in disguise type

[00:35:51] and so this just gives you brahmeter or gives me a brahmeter for how extremes maybe some

[00:35:57] of these positions have gotten. There's plenty of room for this to get squashed back down if AI

[00:36:01] as our saver comes back but there's also plenty of room for this kind of despite if equity

[00:36:06] start getting so off in favor of bonds cause we suddenly have a recession right and with that would

[00:36:11] be volatility so again it's not clear that the AI trade is dead it it seems like it's kind of on

[00:36:18] ropes here and I think we're gonna know in the next week or two you know what type of environment

[00:36:23] we may be in this next thing's interesting because like in video for equity investor like in

[00:36:29] videos a pretty big part of the S&P 500 so it's it's an important stock but it's not the most

[00:36:33] important stock but it seems like in the options complex is the most important stock. Yeah um

[00:36:40] I might have to have to disagree with you on the horizontal board stock jack. Well at least

[00:36:46] it's not the biggest needed stock in the index. Your horizontal stock ever have a higher

[00:36:51] weight than in video dust. Yeah you are you are absolutely one of them so right about that

[00:36:58] I'm gonna present a couple ideas here for you in the next slide and we'll see how you feel about that

[00:37:03] but the point here is that off of the September 11th lows you saw SMH is now up 8% this was as

[00:37:09] yesterday, Q's up 5% and then I know you'm spies and dowels of 2 to 4% so you know if you own that

[00:37:16] tech sector that that chip sector you feel really good about what's just happened you know if you

[00:37:21] own the dowel you're kind of like uh you're you're loopworm on on this most recent rally

[00:37:26] and so this is the epitome of the correlation trade right that just the fact that if you own SMH

[00:37:32] your king of the world whereas you've just on the dowel you know you're probably getting your

[00:37:35] investors are calling you saying like give my money back so I can go triple long in video.

[00:37:42] The rate thing we just talked about this this was the probability as if yesterday 59%

[00:37:47] odds we get a 50% rate cut according to CME so 59% say 50 bips 41% says 25. I don't have any

[00:37:55] idea what the outcome is here. I wanted to ask you about this jack because the market doesn't know

[00:38:00] and I can't remember a time where there's this much uncertainty about the level of the cut that

[00:38:06] we're going to get or level of increase that we're going to get right and my my thing with that is

[00:38:11] that I don't know how you can efficiently allocate in front of this right and I don't know what the

[00:38:17] ramifications are for 64 or other types of allocations you know writ large until you know what the rate

[00:38:24] is going to be and that is uncertainty and uncertainty keeps volatility implied volatility elevated.

[00:38:31] So you know how much does this matter whether we get a 50 or 25 bit rate cut I mean you're

[00:38:36] you're definitely more of the macro man here so what do you what do you want of us are

[00:38:39] what's interesting to me about this though this is like this is the opposite of Powell

[00:38:43] and it's pretty good about saying like there's usually no doubt going into these meetings

[00:38:47] what they're going to do and he if he has to put governors out there and have them you know give

[00:38:51] speeches to say what they're going to do if he has to leak it to Nick Timareo's the Wall Street Journal

[00:38:55] like usually something happens before the meeting where it's like people are pretty locked in

[00:38:59] on what's going to happen and if we're they've let it go to this meeting we're really as a toss

[00:39:04] yeah and I think that that uncertainty is concerning to me because you know it makes it very

[00:39:11] difficult to position in front of it and I think that the upside is pretty clear in the S&P

[00:39:17] you know like at a 5700 area there's a lot of positive gamemma and that's probably where the

[00:39:21] rally in the short term you know quite down but this downside is very exposed in this environment

[00:39:26] and so I don't know if it's 25 cut is not enough and people get upset or 50 bucks says like

[00:39:31] 50 bits excuse me says hey we're in a recession and things aren't that great so we saw

[00:39:35] off of that I mean that you can make a case for either so from our lens it's this uncertainty

[00:39:41] is a is a breeding ground from more volatility than people expect or anticipate and so I think

[00:39:47] going into this puts are probably under price it doesn't mean that we get downside movement

[00:39:52] I have no idea it's just that if we do get downside movement I don't think that the options market

[00:39:57] is pricing in the level of volatility that we could see because of the correlation dynamics

[00:40:02] and some of these other things that we're talking about and to your point this is like a three-dimensional

[00:40:06] chest thing because first of all nobody really knows what the market wants here um you know I

[00:40:11] could make a case 50 basis points is good for stocks I mean I would lean the other way probably

[00:40:14] that maybe it's seen as a little bit of a panic if they do 50 basis points and maybe it's bad

[00:40:19] for stocks but on one hand you've got what do people want and on the other hand you've got

[00:40:22] the stuff you're familiar with which is how are people positioned into this stuff and so like to

[00:40:26] try to figure out what's going to happen you've got to take that whole thing and try to put it

[00:40:29] together into a puzzle which makes me happy I'm a long-term investor and I don't have to try to figure

[00:40:33] that out yeah and I like volatility I don't want prices to go down but you know I find that

[00:40:43] when you get these moves and I don't think the market is pricing in the appropriate

[00:40:47] or signing the appropriate volatility to a market you know those are the types of trades that

[00:40:52] I generally do best and so I am kind of helping for that we get a little bit of a draw on here

[00:40:57] I mean equity markets are not allowed to decline over the long-term anyways so as a long-term

[00:41:01] investor you don't care yeah I can make a few bucks it's also interesting like you'll see and

[00:41:10] this is also goes into the options market like when we did have periods where we had uncertainty

[00:41:14] about what the Fed would do a lot of times like the first move on the Fed day was the wrong move

[00:41:18] like you'd have some acid move in one direction and then and I'm sure this has to do with

[00:41:21] options this stuff and then it would just completely go the other way so like if it's not even like

[00:41:25] the way they react when this first comes out is going to be what the final reaction is going to be

[00:41:30] yeah you're 100% right and I think that you know to that point you could have a very

[00:41:35] volatile reaction on your 5600 and in these options businesses get cleared out and people buy

[00:41:41] zero DT calls like they tend to do on big dips like August 5th and then suddenly you know the

[00:41:47] market where like rallies back and then you you're back into a stable zone so these moves can happen

[00:41:51] very fast and you know I think writ large unless we're clearly in a recession or there's some type

[00:41:58] of a credit event you know the odds of a long-term pro you know protracted equity drawdown

[00:42:03] it's moment or probably not all that high so you know a correction here or another spasm

[00:42:08] certainly in the cards but you know as far as saying hey we're going to you know drop 20%

[00:42:13] by the end of the year I don't see the positioning for that but if anybody wants to subscribe

[00:42:18] the jack and brans macro newsletter 99 95 a month we're offering a free discount offer

[00:42:25] probably the last two people you want to subscribe to him I'm going to use letter crumb

[00:42:29] give me a good or a best shot yeah but look if you if we go under 50's 100 make a couple bucks

[00:42:35] and send 995 to jack you know this again just a 6040 portfolio idea that we saw bonds performed

[00:42:43] very well in the August or out and again in the September drawdown and so you know there is an

[00:42:48] alternative now to the equity space which is a different dynamic than we've had and so it makes me think

[00:42:52] about you know equity hedging how much equity hedging you know will there be if people can start

[00:42:59] to allocate the bonds it changes I think a lot of the dynamics that are that are playing the

[00:43:03] markets and I'm not here to say hey you know I fully understand the implications of this but I

[00:43:09] am here to say that we're seeing these flows in this change in trend or or or a change in

[00:43:16] investment opportunities for people and I think that can have some long-term long-term effects

[00:43:21] so as we move forward you guys have things here to watch as we head into September yeah um so I

[00:43:28] hinted at the being in this room we talked about in video in a big way and um and that's because

[00:43:32] for my seat it is the only stock that matters really and we wrote about the 911 move on 912 so

[00:43:41] I sure 912 founders note and basically we said there is that it was the Nvidia CEO comments in the

[00:43:51] hundreds of thousands of short dated next expiration slash zero dt you were going to call hundreds

[00:43:56] of thousands of calls for bought we saw about $2 billion worth of delta's bought in the S&P

[00:44:02] select you know implies that there's you know billions of dollars worth of stock that has to get bought

[00:44:06] by market makers and we discussed our outline the knock on effects of this coincidentally

[00:44:13] Charlie McGelligett who is you know the OG of gamma analysis and puts out a very famous

[00:44:20] you know daily note from a numeric said a lot of the exact same things and he put it and he

[00:44:27] called it the Nvidia industrial complex so I stole that tagline from him but they basically outlined

[00:44:32] the same idea and the reason I bring this up is because a lot of times I write some things

[00:44:36] we're putting some ideas out there that seem a little walkey or seem a little extreme and if I

[00:44:40] can get a big bank analyst to line up with me then I feel a lot more secure about my position

[00:44:47] market so Charlie probably doesn't this but thank thank you sir if you if you did

[00:44:53] I haven't write similar notes and so a lot of the notes a lot of the charts in here were interesting

[00:44:57] and the other thing that I want to talk about and this is that CBO just put out a piece

[00:45:02] and what's funny about this is we talked a lot about the correlation you know dynamic and the impact

[00:45:07] of markets there and we talk a lot about a lot of themes here and we put them out into

[00:45:11] ether specifically on this you know monthly call that we do and you often don't get a lot of feedback

[00:45:16] on these ideas right like people may talk about them but you don't get a lot of direct feedback

[00:45:21] some of the direct best direct feedback is in the CBO exchange notes they will respond to something

[00:45:27] indirectly and you know the themes getting out there so before it was hey you know correlation

[00:45:32] doesn't matter don't worry about it and in this one it is hey the zero DTE in video calls on

[00:45:40] September 11th didn't matter and that's when I know we're getting somewhere because if the CBO

[00:45:44] feels like they get to defend zero DTE options or whatever it is then I know like okay we're

[00:45:49] poking the right bear and so their comment here was that look don't worry about in video it was only

[00:45:54] 7% at most of Nvidia's daily volume on September 11th and they say that the gamma

[00:46:00] rebound is only 7% this leaves out respectfully to the CBO's I know of Ed Tom who wrote this piece

[00:46:07] he's so we're in cards with he can run academic circles around me no doubt about that and so

[00:46:12] I respectfully push back against this idea that 7% number one doesn't matter much they claim it

[00:46:19] only was responsible for 70 cents of impact I'm going to push back against that idea in the pursuing

[00:46:28] slicer we measured Delta impact which is dollars that have to be bought for these short-dated

[00:46:33] Nvidia calls at around 1.3 billion numerous note had it closer to 2 billion so that in first

[00:46:38] that roughly a billion dollars with the Nvidia would have to be bought just due to new positions being

[00:46:43] added so that would be in addition to the 7% of gamma hedging that would have to stay placed so

[00:46:48] you know you're talking about a pretty substantial amount of flows in addition to the limited view

[00:46:55] the CBO offered there this obviously has a bunch of knock-on effects that I'm going to talk about it's

[00:47:01] not just about the fact that people are buying Nvidia to your point before Nvidia is the biggest

[00:47:07] stock in a lot of different indices I'm I'm gonna talk about that in one second I just wanted

[00:47:12] to highlight first how crazy these Nvidia volumes are this is just September volume as of Monday

[00:47:18] you can see the amount of call volume calls and Nvidia and a lot of people listen to this on a podcast

[00:47:23] video so this is 25 million calls traded in September for Nvidia the next highest is

[00:47:30] is the SPY which traded 16 million calls and then you go to Tesla which is the next equity that's 8 million

[00:47:37] in apples only four so triple the next is like yeah it's like Nvidia is crazy it's an entity

[00:47:46] unto itself a lot of people have also pointed out that the it's weird that the Nvidia call volume

[00:47:52] is first but SPY to put volume at 22 million isn't eerily same number those noxial values are at the same

[00:47:57] but I've talked to a few people particularly smart guy Sam from up in armor who has said that there

[00:48:03] is a correlation trade between Nvidia options and SPY to options it's funny that the number of SPY to calls

[00:48:09] is almost equal to the to the excuse me number of video calls is equal to the SPY to puts like they're kind of

[00:48:14] related and there's a couple of people like my friends Sam and Abar's point of hey there's a

[00:48:20] link trade here between zero dt and video and zero dt spiders right I don't you know I don't

[00:48:26] have enough to conclusively say anything on that it's just Nvidia is a world unto itself if you

[00:48:31] just look at the launch okay this is from the mirror on September 11 they say in the math is pretty

[00:48:40] simple here that Nvidia was 44% of S&P's return so that accounted for 44% of the 1.1% return

[00:48:47] on 9-11 Nvidia accounted for 27% of the return for the NASDAQ on 9-11 and if you look at the other

[00:48:55] names that were responsible for the big movement of the equity indices that day you have Microsoft,

[00:49:01] Avgo, AMD, meta, Apple, A-Met, those are all chip AI related names right so Nvidia's

[00:49:09] comments of chip demand is in stationable sparks a chip rally led by Nvidia that just shoves the entire

[00:49:19] equity complex higher just as a fact of those stocks went up and then we obviously are sitting here trying to

[00:49:31] options force Nvidia up Nvidia forces everything else up and it's not just a matter of

[00:49:40] S&P NASDAQ being dragged higher the the only thing being dragged higher by Nvidia I looked up

[00:49:46] I should have asked you this quiz question I don't know if you read this slide already but

[00:49:49] how many for our listeners out there how many ETFs do you think Nvidia is part of? 528 is the answer

[00:49:58] of that. That's shocking including a bunch of just Nvidia that I've nothing else in them

[00:50:02] there's a couple that are only in a bit of the end of their lever so that's 2.3 billion shares are

[00:50:07] owned by Nvidia ETFs the biggest being spiders and the public float so the idea here that

[00:50:14] that I've been trying to mathematically kind of pin down but the public float of Nvidia's 23 billion shares

[00:50:21] and 66% of that it's institutional ownership which is about 15 billion shares obviously these ETFs

[00:50:28] are adjusting all day long but you have some people who just own Nvidia and their fund and

[00:50:32] their big holders and so that figures into that 66% number and then the average 80v is 344

[00:50:40] excuse me they're in 40 million shares so per the CBO note they said 7% of 80v was traded because

[00:50:48] of gamma rebalancing at most and so that's about 2 billion dollars worth of shares so if you

[00:50:53] believe in addition to that we had you know 1 to 2 billion dollars with the delta's that had to

[00:50:58] get hedge remember the star of our video set of people by calls dealers got a buy Nvidia stock

[00:51:03] you know that kind of doubles that 80v to certainly something close to 10 to 15% of 80v and

[00:51:12] on the right as a chart from the mirror talking about the leveraged ETF rebalances that have to take

[00:51:17] place because of Nvidia and you can see it's a eight billion dollar rebalance in these

[00:51:22] levered products as a function of this Nvidia move and it's not going to fix and so the point

[00:51:29] here is that Nvidia by itself is a small component of the S&P but it is a massive component

[00:51:35] of the equity complex writ large and so when you take a lot of options hedging flow in jam it

[00:51:44] into the market remember these guys you know by large if Nvidia's up 10% you can't sit there and say

[00:51:51] I need to buy stock I'm going to wait for a stock to come in a little bit right you need to buy

[00:51:54] stock you're going to buy it now it's a margin calling away these hedging flows in these active

[00:51:58] environments so you have let's say 4 billion dollars worth of dealer hedging flows that occur

[00:52:04] after the Jensen Juan comments at 11 and morning and then suddenly all stocks are being shoved

[00:52:10] and that creates this feedback loop of buying in the equity complex because of you know this

[00:52:15] butterfly effect of options trading and the other point here about the the float is that I think

[00:52:20] that the tradeable float for Nvidia you know instead of being call it 15 billion shares is a

[00:52:26] fraction of that right because there's a lot of retail people that hold it you know there's these

[00:52:30] more active ETFs that don't probably fagually into that institutional ownership number there's

[00:52:34] dealer hedging flows that you know they're long you know these deltas there's there's a whole

[00:52:38] bunch of other people that are probably reducing the float the tradable float of this name

[00:52:43] significantly and that is into the face of massive call volumes right I mean you have decreasing

[00:52:51] float and I actually pinged Charlie on this idea and he's like he added the idea buybacks into

[00:52:56] this right there's a big buyback in all these dams which reduces the tradable float and then

[00:53:00] you have record call volumes at on top of that which refers that there's more active dealer

[00:53:04] driving the Nvidia bus here so I don't know if you could put all that together in this matrix of

[00:53:12] words out but hopefully the theme is clear and the way that I kind of see the importance of

[00:53:19] Nvidia or how it lays out. It ties really well know what we did at the beginning which is we

[00:53:22] talked about the importance of options flows and this is a real world example of how important those

[00:53:27] flows are like in a particular stock which is and I was wrong saying I mean it is not the biggest

[00:53:32] but it is kind of even in my world and it's the bell weather of the market now you know people

[00:53:36] care less about Apple and Microsoft and they do about Nvidia so although it might have a smaller

[00:53:41] weight in the index like Nvidia tends to drive the market I think a lot more than those bigger

[00:53:44] names do these days like everybody's watching it it's like the bell weather for stocks at this point

[00:53:50] yeah what 100% and it ties into even forgetting the the linkage of these flows and everything I mean

[00:53:55] from a sentiment perspective you know if you're underperforming the market this year you don't have

[00:54:02] a choice but to probably allocate more to Nvidia in the semi space right because that's all that's

[00:54:06] performing so you know there's a chase that is involved there as well as just retail flows

[00:54:11] wanted to chase I mean there's just a lot of chasing it's a giant momentum trade at the end of the day

[00:54:15] driven by an increasing options complex and a decreasing float and the other reason that this is

[00:54:23] interesting is because when you had these risk off events like August 5 that zero DTE or short

[00:54:30] data options volume it's like the bid gets pulled and also you get this liquidity vacuum that

[00:54:35] that Nvidia just falls into right and so what happens is when we go risk off these flows that

[00:54:40] drive in video higher these momentum trades disappear the plug is pulled on those and then all

[00:54:45] of a sudden you go woosh and we just fall into a vacuum so you have a situation where like in April

[00:54:49] and I think it was the same in July and August S&P was down 5% over the matter of a few days but

[00:54:55] in video down 20% over those same periods right and that's the situation here that we sit

[00:55:00] here with the Fed and whatever is going to happen is if the plug is pulled and correlation spikes

[00:55:06] then Nvidia is going to get absolutely pounded and that's going to force the rest of the equity

[00:55:10] complex down and and and and and and shoots of all up quite a bit so go back to our original criteria

[00:55:15] though we talked about you know if you've got a big move into expiration if you've got a huge

[00:55:19] expiration you could have a reversal and is that true of Nvidia coming to this one?

[00:55:24] I think that the there there's a soft underbell here right we've rallied a lot into an area of

[00:55:30] uncertainty to the upside where the the predominant trade now has been to be selling calls into this

[00:55:35] latest September rally reducing maybe some of the calls short data calls that people have

[00:55:39] bought into so the call positions are light right now or lighter relative and there's no one really

[00:55:45] betting on a ton of equity downside at the moment and there's this kind of this point of this

[00:55:49] game at chart here you can see that that there are some short calls which are these positive

[00:55:56] game of bars appear in Nvidia but there's no real positioning to the downside right that there's a

[00:56:01] little bit of local positioning people don't believe in protracted downside until it's kind of like

[00:56:06] first shot is fired so we have this short call complex on this quarter of like the upside is

[00:56:11] stalled and we need another catalyst here besides gents and comments and I don't know if 25 bits

[00:56:16] is the answer or 50 bits is the answer to restart the bull but in the short term I think that if the

[00:56:21] market gets a little disappointed then you immediately get one of these kind of like correlation

[00:56:25] spasms where suddenly Vol gets very jumping and people are under prepared for it right

[00:56:30] and that you know that is the issue that's the risk of I see lurking right now that that you get this

[00:56:36] left tail you don't move because people aren't watching forward they're not positioned for it

[00:56:42] in the right way this next slide is interesting to me because this is something you've been hearing

[00:56:44] for a long time now which is basically beneath the surface there's not a lot of liquidity in the market

[00:56:50] so what are you getting out with this one this chart is from August 5th this is ES Toppa

[00:56:56] Bookle Quity that's the ESM in the future and this is from Goldman and and it basically showed that

[00:57:03] see the E-many future liquidity evaporate we also saw zero dt volume in the S&P on August 5th

[00:57:08] was only 25% which was the lowest really such zero tt started trading so this ties with

[00:57:14] this idea of liquidity you know liquidity is an illusion in this market and the result is that as soon

[00:57:23] as volatility starts to pick up IE the Vick starts to catch a bid bids it offers disappear

[00:57:28] really across all products and then suddenly you're seeing selling into this vacuum and

[00:57:33] that is a theme that is very consistent in this market and something that people need to be wary of

[00:57:38] and if you're a long-term investor you know that price is going to be more agitated when there's less

[00:57:43] liquidity right prices overextend to the downside and sometimes the upside but particularly the downside

[00:57:48] in this case because you know this momentum trades seems to shut off when valspikes and then you

[00:57:58] see if that's a product of poor liquidity bids and ask an option why now and that creates the Vick 65

[00:58:04] calculation September we saw that liquidity evaporate and again if I think we break 5600 tomorrow

[00:58:08] that's this you know flare going up that hey liquidity is probably going to disappear

[00:58:13] vals gonna spike correlation is going to spike and in the market it's going to have kind of a

[00:58:18] nasty couple of sessions is there more of a major risk like we've talked about like a short-term

[00:58:22] nasty couple of sessions and that's kind of the way it's played out so far we've got these spikes and

[00:58:25] things have recovered like this lack of liquidity is is it more of a risk we could get like a more major event

[00:58:30] because of this I think that the the the largest volatility events looking back are tied to

[00:58:37] credit events and you know the fed seems to be easing here in some former fashion which I think

[00:58:43] would ease credit markets again I'm stepping into a zone that I'm certainly not qualified you know

[00:58:51] for non-95 and can offer you great advice but you know when you see credit events or credit

[00:58:57] issues that's where you got a brace for higher vicks essentially right August 2015 those types of

[00:59:05] wild markets or 2018 we had these weird bank issues right and monetary system issues and so none

[00:59:12] of that seems to be an issue right now and so I think what you're getting is volatility is being

[00:59:16] activated by these correlation spasms again in positioning right as opposed to they're being a systemic risk

[00:59:23] so we could very easily see a 5-D-E-10% drawdown in markets and then we rallied to the end of the

[00:59:29] year based on you know whatever else is floating people's boat at the moment there's not a great reason

[00:59:37] for equities I don't think to reprise if if Nvidia starts to say hey actually we lied about

[00:59:41] chipsales going up they're going down and maybe but but their at the moment doesn't seem to be

[00:59:46] credit issues you know if you get a carry trade blow up of some kind that of course you know that can

[00:59:51] cause some certainly some decent drawdowns but but those moves seem to reverse and I don't know why

[00:59:57] we wouldn't see you know big mean reversion off of of drawdowns heading into the end of this year

[01:00:02] without some type of you know true risk of it let me just refer to that another way like

[01:00:09] the decision itself is not enough to cause a protracted prolonged decline in the sense

[01:00:13] as we wrap up this last live you always like to look at some potential outcomes as we hit forward

[01:00:19] yeah uh this chart was from yesterday um and we had 56 50 as our risk off area and and that's

[01:00:25] where we like to hedge or be more neutral in our positioning uh we upgraded this level to 5600 this

[01:00:31] morning cause of new positions that came into the market and so the idea here is that uh if we break

[01:00:36] 56 100 we believe that you should be long puts long vix calls a short future some type of

[01:00:42] you know having some type of short uh exposure to the market or reduce long equity exposure.

[01:00:48] If we hold 56 100 they're generally speaking as positive gamut in that area that positive gamut

[01:00:54] it creates supportive flows uh that that tend to lift the market up kind of positive drift and there's

[01:01:01] a big position particularly 57 50 which would kind of be the end of month target so you know

[01:01:05] the way that we're playing this is simply if we go through the fed flmc and we don't break 56

[01:01:10] 100 stay long and look for kind of a 57 50 area by end of month and if we break 56 50 you know we're

[01:01:18] we're playing the short side. Sounds good so uh yeah so to wrap up we break 56 100 we break 56

[01:01:25] 100 I think I just said 56 but so hopefully our extra terms of our reporting is out in the audio feed

[01:01:30] you know understood this part of this uh but I think it was great for us to do that at the beginning

[01:01:34] and it's really understand like why this matters and why even if you're not trading options I mean

[01:01:39] I never traded an option in my life um but I do like I learn a lot from this and it helps me

[01:01:44] better understand what's going on so hopefully our regular access to terms listeners got that part

[01:01:48] of that and then our loyal listeners is Jason Buck called them at our our fond cast our people

[01:01:52] hopefully Jason you're still listening here at the end but uh hopefully they got a lot out of

[01:01:56] these second part here where we looked at the current expiration but I really enjoy doing these like

[01:01:59] I learned a lot every time like I would have never had any idea like the degree of what's going on

[01:02:03] within video it's it's something like if I saw what's in video moving I would think like there's

[01:02:08] some fundamental catalysts or something going on and without looking at this stuff I wouldn't fully

[01:02:12] understand it yeah well thanks so much for that Jack I really appreciate the sentiment um we

[01:02:19] we hope we're able to distill why these why these flows matter and and immediately a lot of

[01:02:25] the flows and offsets seem like they're short dated but you do get these big moves right and

[01:02:29] they seem to be happening with a little bit more occurrence where longer dated investors may want to

[01:02:33] you know sit up and take notice of again the options market signal so uh so so so thanks very

[01:02:39] much for that and also shout out to Jason Buck because of him I drink liquid death which is very expensive

[01:02:44] so uh he's a supporter of that and hopefully he gets a feeling I'll never try that I don't know

[01:02:50] I know that guy should maybe he sounds like delicious water he said it was delicious and that

[01:02:54] excellent mineral content and here I am the sucker that's adding to the billion dollar liquid death

[01:02:58] so uh liquid death is looking to sponsor show maybe they will come on and help us out Jack well for uh yeah

[01:03:04] well we'll think of any sponsors we'll get this way right next to that chart we can have a nice little

[01:03:07] liquid death logo up here we're happy to do it we are very reasonable rates um but anyway for anyone

[01:03:14] who is listening on the excess of turns feed if you if you want to listen to these in the future

[01:03:17] there is an audio feed of the optics effect it's also on the excess returns youtube channel we do these

[01:03:21] once a month on the week of options expiration and I always find it interesting to see what's going on

[01:03:26] thank you everybody for joining us and we'll see you next time

[01:03:30] thanks Jack this is Justin again thanks so much for tuning into this episode of excess returns

[01:03:34] you can follow Jack on Twitter at at practical quant and follow me on Twitter at at JJ Carbano

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