Behind the Scenes of the Recent Market Volatility | The OPEX Effect Ep. 11

[00:00:00] [SPEAKER_02]: Welcome to the OPEX Effect, a joint podcast from XS Returns and Spot Gamma, where we take a deep dive into the world of options and the flows they generate in the markets.

[00:00:06] [SPEAKER_02]: Join Brent Kochuba and Jack Forehand every month on Options Exploration Week as they look at the major developments in the options world and how they impact all of our portfolios.

[00:00:14] [SPEAKER_00]: No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of a day cap.

[00:00:20] [SPEAKER_04]: So Brent, I feel like we've been talking about low volatility forever, but I think this week we get to take things up a notch.

[00:00:25] [SPEAKER_01]: We do. It was a wild week last week. Things are tentatively calm because there's a lot of stuff coming up that could move markets.

[00:00:34] [SPEAKER_01]: When you and I were just talking about the last few episodes we did was all about the bizarre low volatility, high correlation regime.

[00:00:42] [SPEAKER_01]: I was looking back. We did an April 2024 podcast or episode about volatility suppression and all these flows are keeping markets down.

[00:00:50] [SPEAKER_01]: We turned to volatility spasms in our last topics conversation. That all seemed to come to fruition.

[00:00:57] [SPEAKER_01]: The unwinding of those trades all seemed to come to fruition here this last week.

[00:01:02] [SPEAKER_04]: Yeah, I've got my Brent Kochuba emergency podcast indicator.

[00:01:05] [SPEAKER_04]: I believe I saw last week you were asked to be at a couple of emergency podcasts.

[00:01:09] [SPEAKER_04]: So I know it's time to pay attention when I start seeing you flashing with the emergency podcasts.

[00:01:12] [SPEAKER_04]: I know I got to peek my interest in what's going on.

[00:01:16] [SPEAKER_01]: Yeah, there's a good amount of that. It's funny because we're like banging the drum on this stuff.

[00:01:21] [SPEAKER_01]: I feel like...

[00:01:22] [SPEAKER_01]: And we were saying last week or last month, excuse me, to Joe Apax, one of our largest or longest episodes ever

[00:01:29] [SPEAKER_01]: because there was so much to cover in terms of the anomalies in the market.

[00:01:33] [SPEAKER_01]: We're going to cover some of those as we come up here, but there was so much to cover

[00:01:37] [SPEAKER_01]: and we're sort of like boy who cried wolf or something like that

[00:01:40] [SPEAKER_01]: or for a beautiful like crying over here like watch out everybody.

[00:01:45] [SPEAKER_01]: And that doesn't get a lot of attention till stuff breaks and then everyone wants to talk

[00:01:48] [SPEAKER_01]: about stuff after it's broken. So here we are.

[00:01:51] [SPEAKER_04]: So we're going to get into all that today. We've got a lot of stuff to cover, but first

[00:01:55] [SPEAKER_04]: we always like to talk about the OpEx cycle and how it works because that's really important

[00:01:58] [SPEAKER_04]: as we analyze these things.

[00:02:00] [SPEAKER_01]: 100%. And so obviously we're doing this podcast today, the OpEx effect because

[00:02:04] [SPEAKER_01]: we have Friday options expiration and then we have VIX expiration which follows next week.

[00:02:08] [SPEAKER_01]: And so we want to talk about some of the short term impacts of that as well as just

[00:02:12] [SPEAKER_01]: the general options flows that were a big driver of volatility this past week.

[00:02:17] [SPEAKER_01]: So the way that we look at things here just as a primer is into options expiration which

[00:02:22] [SPEAKER_01]: occurs the third Friday of every month, we see options positions build up and the hedges

[00:02:27] [SPEAKER_01]: associated with those. These are market maker and dealer hedges, those build up as well

[00:02:32] [SPEAKER_01]: and that can often drive price action and that's either expanding volatility,

[00:02:36] [SPEAKER_01]: making markets move more or sometimes we see a pinning effect into options expiration as well.

[00:02:42] [SPEAKER_01]: And then when we get expiration, positions expire and the hedges associated with those

[00:02:46] [SPEAKER_01]: positions unwind. And so that's why we watch this cycle so closely.

[00:02:51] [SPEAKER_01]: These red Xs all mark options expirations and the reason we show this is because

[00:02:56] [SPEAKER_01]: not every options expiration matters all that much because positions aren't that big

[00:03:00] [SPEAKER_01]: but there are certain expirations and we measure them in terms of their size of

[00:03:04] [SPEAKER_01]: either gamma or delta occasionally Vega as well. But you can see that there are significant turning

[00:03:10] [SPEAKER_01]: points historical turning points and markets associated with options expirations which are

[00:03:15] [SPEAKER_04]: denoted here by red Xs. So on this next one the zone, this is interesting as we've talked

[00:03:20] [SPEAKER_04]: about these zones a lot but it seems like these zones might be more important now

[00:03:24] [SPEAKER_04]: given we've got some volatility coming back into the market here.

[00:03:27] [SPEAKER_01]: Yeah, that's right. And we watch these zones because these are transitions between

[00:03:31] [SPEAKER_01]: what we call positive dealer gamma positions and negative dealer gamma positions. And we have a

[00:03:36] [SPEAKER_01]: few visuals in the following slides to explain this but the zone right now is 5300 to the downside

[00:03:42] [SPEAKER_01]: that's a support level that if that breaks then expect volatility to rear rate back up.

[00:03:47] [SPEAKER_01]: And then to the upside we think that there's a lot of call selling I'm going to detail this

[00:03:50] [SPEAKER_01]: later in the 4400 to 5450 area. So above this zone is where there's a lot of positive

[00:03:57] [SPEAKER_01]: dealer gamma and that matters because dealers are going to suppress volatility up there

[00:04:01] [SPEAKER_01]: in slow market movement. Whereas to the downside in the negative game environment they're going to

[00:04:07] [SPEAKER_01]: sell futures and sell stock. And so that's why 5300 breaks we could see volatility really pick back

[00:04:12] [SPEAKER_01]: up. Now this zone shifts often it's going to shift a lot here this next week due to

[00:04:18] [SPEAKER_01]: both a lot of data coming out as well as options expiration. So we watch these zones

[00:04:24] [SPEAKER_01]: and they really helped us to navigate this market volatility of the last two weeks.

[00:04:28] [SPEAKER_01]: So specifically this idea of negative dealer gamma when that hits dealers start selling futures

[00:04:33] [SPEAKER_01]: and then we get a lot of volatility movement and movement in markets. And then now that we regain

[00:04:38] [SPEAKER_01]: 5300 volatility's come in a little bit these last few days. When did we go negative gamma?

[00:04:43] [SPEAKER_01]: It was the week before last so right after July options expiration we broke 5500 and that's

[00:04:49] [SPEAKER_01]: really what onset volatility. And that happened mid last week Wednesday or Thursday of last week

[00:04:56] [SPEAKER_01]: and then Friday things really started to fall apart right. And then it was the weekend where

[00:05:01] [SPEAKER_01]: we had the end carry trade trigger a bunch of other volatile moves. So we went from 5400

[00:05:05] [SPEAKER_01]: down to 5100 that's about 4% decline somewhere in that neighborhood you know over the course

[00:05:10] [SPEAKER_01]: of about two three sessions it was a very quick kind of vacuum down.

[00:05:14] [SPEAKER_04]: And I know in periods of negative gamma volatility is definitely higher I know

[00:05:18] [SPEAKER_04]: that's been shown how about like downside I mean does the market perform worse in

[00:05:22] [SPEAKER_01]: periods of negative gamma? It does well what's interesting an interesting feature about this

[00:05:26] [SPEAKER_01]: market and just to jump to what you're talking about here Jack this X axis is our measurement

[00:05:32] [SPEAKER_01]: of dealer gamma as an index and so the more more gamma we have the more positive we are

[00:05:37] [SPEAKER_01]: you could see volatility which here is measured as one day S&P 500 realized vol on the Y axis

[00:05:45] [SPEAKER_01]: the more game we have the less volatility is in the S&P 500. We're in this negative gamma regime now

[00:05:50] [SPEAKER_01]: where you get much larger and wider swings in the market. Now as a function of the fact that

[00:05:56] [SPEAKER_01]: this market always seems to mean avert and always ends up going higher we just came off

[00:06:01] [SPEAKER_01]: of all time market highs to answer your question we generally do over some time

[00:06:05] [SPEAKER_01]: to recover right but those onset when you break into that negative gamma

[00:06:11] [SPEAKER_01]: territory you always get a big drawdown just as a function of positioning

[00:06:16] [SPEAKER_01]: that drawdown can be you know oftentimes very violent and the recovery period can vary a little bit

[00:06:22] [SPEAKER_01]: but but historically if you look back you know five days we tend to recover the bulk of losses

[00:06:28] [SPEAKER_01]: excuse me but it's been a tricky it's a tricky thing to measure right because the market just

[00:06:32] [SPEAKER_01]: continues to make all-time highs over some time frame so if you look forward enough we recover

[00:06:39] [SPEAKER_04]: the big risk with the negative gamma seems to be pretty closely after it happens

[00:06:44] [SPEAKER_01]: yeah when you break that you get that initial drawdown of of a decline in volatility because

[00:06:50] [SPEAKER_01]: dealers suddenly have to start selling futures as market goes down volatility increases and when

[00:06:55] [SPEAKER_01]: volatility i.e implied volatility increases put values increase so there's a double whammy here

[00:07:00] [SPEAKER_01]: of when prices go lower market makers where we generally consider to be short put options

[00:07:04] [SPEAKER_01]: if you're short of put in the markets going down that's bad but if you're short of put in

[00:07:08] [SPEAKER_01]: the markets going down and balls going up implied ball is going up that's like a double whammy right

[00:07:13] [SPEAKER_01]: because puts start to really gain in price and then what we look for is a time period for that

[00:07:18] [SPEAKER_01]: pressure to be relieved generally very very often that comes into an options expiration

[00:07:25] [SPEAKER_01]: because a whole bunch of puts will be removed from the marketplace right and then suddenly

[00:07:28] [SPEAKER_01]: dealers dealers don't need that short hedges anymore so that's why when you look at

[00:07:33] [SPEAKER_01]: this chart for example in march of 2020 the low of the market came the monday after options

[00:07:39] [SPEAKER_01]: expiration you can look in more recent periods you know there's a ton of recent periods as well

[00:07:44] [SPEAKER_01]: where significant lows like in 2022 uh as well as last year 2024 excuse me 2023 we hit these

[00:07:52] [SPEAKER_01]: lows in the market that come with puts being cleared out and then the market recovers after that

[00:07:58] [SPEAKER_04]: so going i skipped a slide here we're gonna talk about the august octane and

[00:08:01] [SPEAKER_04]: one of the things i was trying to i try to think about with these is like first of all how big it

[00:08:05] [SPEAKER_04]: is but second of all have we had a major move into it because those two things tend to tell me what

[00:08:09] [SPEAKER_04]: we might be seeing but you can you can tell me what you're seeing here yeah you're you're exactly

[00:08:13] [SPEAKER_01]: right on that um what's interesting about this expiration is not particularly large so this

[00:08:17] [SPEAKER_01]: is gamma uh excuse me put delta in blue and put delta excuse me put delta in blue and call

[00:08:23] [SPEAKER_01]: delta in orange and we're currently you know half of the size of what we see for uh september

[00:08:29] [SPEAKER_01]: expiration september's a big quarterly expiration so this is not a particularly large expiration

[00:08:34] [SPEAKER_01]: what is most interesting to me about this is that we had this crash and usually when you have a crash

[00:08:40] [SPEAKER_01]: that will charge up put values into an expiration but in this case you could see that the call

[00:08:45] [SPEAKER_01]: and put deltas are pretty new uh neutral uh or they're the same size because the markets rallied

[00:08:51] [SPEAKER_01]: back pretty strongly this past week so what's got cleared up very quickly uh in this past week

[00:08:57] [SPEAKER_01]: and we're in this kind of no man's land in mid 53 50 in the s&p where you know i think the the easy

[00:09:05] [SPEAKER_01]: play of mean reversion uh that already ran its course and now we need to look at forward data

[00:09:09] [SPEAKER_01]: to figure out what what happens next so uh again very curious that puts really wiped out here and

[00:09:14] [SPEAKER_01]: we're very neutral into this expiration so does that reduce the chance that it's a turning

[00:09:18] [SPEAKER_04]: point because we got that rally back already that maybe you would have expected might have

[00:09:21] [SPEAKER_01]: come at optics i think that's totally the case here you know we'll we will always

[00:09:25] [SPEAKER_01]: again bang the drum when we think hey there's a big options position here or it's skewed one way

[00:09:30] [SPEAKER_01]: towards puts or calls as that can be a really significant turning point we'll show some data

[00:09:34] [SPEAKER_01]: there uh but this is very very neutral and then we have ppi this week cpi this week retail sales

[00:09:41] [SPEAKER_01]: and then jackson hole immediately next week and so you know this may be a this is a less obvious

[00:09:46] [SPEAKER_01]: turning point here due to some of these macro uh events that are coming up yeah so and then

[00:09:52] [SPEAKER_04]: this next slide you get into this idea that you know often these are turning points um two-thirds of

[00:09:56] [SPEAKER_01]: the time s and p performs flips after op-ex yeah and there's a big difference here between if vixx

[00:10:01] [SPEAKER_01]: expiration occurs before or after options expiration so if vixx expiration occurs after

[00:10:05] [SPEAKER_01]: options expiration you would see uh 68 percent of the time vixx you get a market uh flip so if

[00:10:14] [SPEAKER_01]: the market is rallying into op-ex 68 percent of the time it will sell off and vice versa if

[00:10:18] [SPEAKER_01]: the market's selling off into options expiration 68 percent of the time it'll turn in rally on a

[00:10:23] [SPEAKER_01]: one week basis um and that that turns to only 58 percent so there's a 10 difference there when

[00:10:28] [SPEAKER_01]: vixx expiration occurs before op-ex so in this case acts vixx expiration is after equity

[00:10:36] [SPEAKER_01]: op options expiration so that falls into the 68 percent of the time camp and so i just want to

[00:10:41] [SPEAKER_01]: look back quickly and to show the importance of vixx expiration um in this case this is just

[00:10:46] [SPEAKER_01]: the s and p 500 and you can see into july vixx expiration uh happens at 9 30 in the morning

[00:10:52] [SPEAKER_01]: at the cash market open eastern time and you can see that the market high was right at vixx

[00:10:58] [SPEAKER_01]: expiration at 9 30 and then we sold off rather sharply to july equity op-ex and there was a

[00:11:03] [SPEAKER_01]: brief rally for a day or two after that and then the market you know really fell apart after

[00:11:08] [SPEAKER_01]: that um so this this didn't hit you know check the box of a full one week reversion you can

[00:11:13] [SPEAKER_01]: see we got a very short term equity uh op-ex related bounce here after july but you know we've sold

[00:11:19] [SPEAKER_01]: off really rather hard so in this case vixx expiration is after august expiration so the stats are that

[00:11:25] [SPEAKER_01]: we'd expect mean reversion here which in this case it seems like we're possibly rallying into

[00:11:31] [SPEAKER_01]: august op-ex but that's heavily related to the data that we're getting in this upcoming week

[00:11:36] [SPEAKER_04]: so as we move on to our projections from last time i mean you saw a lot of weird things

[00:11:40] [SPEAKER_04]: going on um that you thought might be warning signs in terms of what might happen

[00:11:45] [SPEAKER_01]: yeah so we we'd like to start with the review to keep ourselves honest here and

[00:11:48] [SPEAKER_01]: this is a tricky place to discuss the review because we had this

[00:11:53] [SPEAKER_01]: it wasn't a black swan but it was just unknown that you know known was looking for in the form

[00:11:57] [SPEAKER_01]: of the carry trade which triggered a whole bunch of things that we were watching uh to kind of

[00:12:02] [SPEAKER_01]: break um so our key takeaway is the quick ones were we were talking about how overbought

[00:12:07] [SPEAKER_01]: the russell complex was a small cap you know small cap summer and everyone was like super excited

[00:12:12] [SPEAKER_01]: about that trade and we saw record call volumes and this was all triggered by the cpi i believe

[00:12:17] [SPEAKER_01]: it's on july 11th if you remember that suddenly and you can see on this chart um you know everybody

[00:12:22] [SPEAKER_01]: just piled into small caps this is blue line here and what was interesting is you know you see

[00:12:27] [SPEAKER_01]: the the nazdak had outperformed the small caps so heavily into this period and then all

[00:12:32] [SPEAKER_01]: of a sudden one day it's like small caps just caught up and that was the trade of the

[00:12:35] [SPEAKER_01]: summer well that obviously exploded over the last uh week right and and so you know uh there were

[00:12:42] [SPEAKER_01]: signs that russell was overbought whether or not it would have sold off anyways you know who knows

[00:12:47] [SPEAKER_01]: but our other big view from july opx was hey tesla's really quite overbought uh that came down

[00:12:53] [SPEAKER_01]: as well again given the context of everything that happened um who's to say what would happen

[00:12:58] [SPEAKER_01]: if we didn't get that yen carry trade online on the on the small cap stuff like how much of

[00:13:02] [SPEAKER_04]: that is options like that that was a really really massive quick move in small caps and i'd

[00:13:06] [SPEAKER_04]: seen some people on twitter talking about you know it wasn't people buying the individual stocks

[00:13:10] [SPEAKER_04]: small cap stocks it was people buying things like i w m and that was then driving up the

[00:13:14] [SPEAKER_04]: price of the individual stocks like how much of that is exacerbated by options when we see something

[00:13:18] [SPEAKER_01]: like that yeah you know it's interesting point jack and i i flip forward a few slides because

[00:13:22] [SPEAKER_01]: we saw the largest ever call volume in in the i w m's this is ever um right around that july

[00:13:28] [SPEAKER_01]: 11th or 12th period and so if following the way that we look at markets if you have everybody

[00:13:35] [SPEAKER_01]: buying calls and this works for game stop as well as you know in video over the summer right

[00:13:39] [SPEAKER_01]: when you have everybody buying calls and dealers and market makers are then short those calls

[00:13:43] [SPEAKER_01]: they have to buy stock in order to maintain their hedges and so you know i don't think that

[00:13:49] [SPEAKER_01]: you know there were fundamental people looking to buy small cap stops that became a trend on

[00:13:56] [SPEAKER_01]: twitter you could watch uh there were a group of individuals who actually got fairly nasty

[00:14:01] [SPEAKER_01]: behind their position which was also a signal that is probably over but you know small cap

[00:14:05] [SPEAKER_01]: somewhere was a straight but then you toss on a ton of calls right millions of calls and

[00:14:11] [SPEAKER_01]: that makes the move uh that exacerbates the move right exacerbates in this case volatility to

[00:14:17] [SPEAKER_01]: the upside and then we could see in the signals and implied volatility signals that these were

[00:14:21] [SPEAKER_01]: extremely overbought such that if you were started to buy calls the odds are you weren't

[00:14:26] [SPEAKER_01]: going to make money even if you're correct that i w m was going to go up right because the price

[00:14:30] [SPEAKER_01]: you're paying for those calls is just too high and so you know the warning signs were

[00:14:34] [SPEAKER_01]: we're all over on this and our view was hey look this is short term overbought um

[00:14:41] [SPEAKER_01]: and so we were looking for a pullback and then you know the move to restart right because

[00:14:45] [SPEAKER_01]: that overbought condition had to wear off again i don't know you know suddenly everyone's

[00:14:49] [SPEAKER_01]: looking for a recession here and there's a lot of other stuff that's happened in the last week

[00:14:53] [SPEAKER_01]: so i don't know if this the rip part of our view will take place here uh but the pullback you know

[00:14:59] [SPEAKER_01]: the the stars were there but to your point also i would say that this volatility that we experienced

[00:15:04] [SPEAKER_01]: last week was also exacerbated by options market movements and positions right and we're

[00:15:09] [SPEAKER_01]: going to talk about that so you see this this occurring all over the place where options are

[00:15:15] [SPEAKER_01]: oftentimes a driver and if they're not a driver they are making a small move a much bigger move

[00:15:21] [SPEAKER_04]: because of of the positional effects yeah i've learned to never be the guy on twitter touting

[00:15:25] [SPEAKER_04]: the small caps when they rally because we've had so many false small cap rallies over the past

[00:15:29] [SPEAKER_04]: decade that you know often they don't follow through the way the way we hope they would

[00:15:32] [SPEAKER_01]: yeah and and you know what's funny me about is we posted a lot of content about how we thought

[00:15:38] [SPEAKER_01]: small caps were overbought and you know you could see that our previous presentation here

[00:15:41] [SPEAKER_01]: a month ago you know just on the basis of these implied vols and you know there's no

[00:15:46] [SPEAKER_01]: guaranteeing anything but you could tell when a bet is in your favor or not and when vols are very high

[00:15:51] [SPEAKER_01]: and prices are very rich on the options front you know that's oftentimes a signal that hey

[00:15:55] [SPEAKER_01]: like we're we're overdone where we need a cool time for cool off but i also learned when

[00:16:00] [SPEAKER_01]: you post something on twitter and you get a lot of people uh attacking you for those views

[00:16:05] [SPEAKER_01]: you're probably going to be right i mean sometimes some views are pretty out there

[00:16:08] [SPEAKER_01]: but if you're just going like look this is the highest implied vol we've seen in like five years

[00:16:12] [SPEAKER_01]: for calls uh and people are like you know you're a jerk for saying that then kind of you know

[00:16:18] [SPEAKER_01]: you can kind of start to understand what's happening um so i skipped ahead again we we had you had

[00:16:23] [SPEAKER_04]: this correlation spasms yeah which was basically the main topic of our last episode yeah and the

[00:16:28] [SPEAKER_01]: reason like i'm bringing this up and and i'm not one that likes to you know uh to say hey we

[00:16:33] [SPEAKER_01]: are right about this like you know just kind of go to over hype that view right but the

[00:16:38] [SPEAKER_01]: point about this is that if you were watching this stuff and you were aware i think it made

[00:16:42] [SPEAKER_01]: everything over this past week may wait make much more sense in the moment um if you knew that

[00:16:49] [SPEAKER_01]: we you know the last few episodes were called correlation spasms because we started to see

[00:16:53] [SPEAKER_01]: this with uh things breaking in terms of uh on this chart here this was from our our last uh

[00:16:59] [SPEAKER_01]: episode the purple line here's the dow and then in the oranges iwms they became inversely correlated

[00:17:06] [SPEAKER_01]: to the spiders and the cues themselves right so we saw the equity market in a way breaking apart

[00:17:12] [SPEAKER_01]: uh when everyone dove into small caps for example suddenly the mag sevens and the semis

[00:17:18] [SPEAKER_01]: started to sell off sharply so you had qqq and spiders down while iwm was ripping higher right

[00:17:24] [SPEAKER_01]: we saw the equilated spider etf the tickers rsp that became inversely correlated to the

[00:17:29] [SPEAKER_01]: spiders itself because of the concentration in the market and these options flows and everything

[00:17:34] [SPEAKER_01]: else and so if you were aware that this bizarre positioning was in place and then you see all

[00:17:39] [SPEAKER_01]: of a sudden this violent unwound on monday i think it makes it much easier to go okay i understand

[00:17:44] [SPEAKER_01]: these positions that have to get unwound this is not about a recession or the end of the world

[00:17:49] [SPEAKER_01]: or you know whatever else it may be i mean you have people like the the professor calling for 75

[00:17:54] [SPEAKER_01]: bit emergency rate cut and you're like hey uh i don't know about that but i do know that what

[00:18:00] [SPEAKER_01]: you're seeing on your screen is probably you know a levered outcome of some short term flows that

[00:18:05] [SPEAKER_04]: have to get unwound so in this next one we had looked at the potential past that could happen

[00:18:09] [SPEAKER_04]: and i'm not the smartest guy in the world but i think we got path two we got path two and

[00:18:13] [SPEAKER_01]: you know uh the the trick here is that we didn't know what the trigger was going to be right

[00:18:17] [SPEAKER_01]: and if you look at what i outlined as triggers i did not have you know as the saying goes it did

[00:18:22] [SPEAKER_01]: not have on my bingo card uh yen carry trade unlined um but i guess that sort of falls into

[00:18:27] [SPEAKER_01]: the bucket of rates increasing i mean they didn't increase rapidly it was like a threat of a

[00:18:31] [SPEAKER_01]: think 25 basis point rate cut over there doesn't matter the the point is that we got this

[00:18:37] [SPEAKER_01]: trigger that meant that correlation was going to unwind we're going to talk about it in a second

[00:18:42] [SPEAKER_01]: and that is generally associated with the vol shock because we're going to show you again

[00:18:45] [SPEAKER_01]: so this was the final slide of our last presentation which again sort of forecasted

[00:18:50] [SPEAKER_01]: you know hey when we get a trigger um this is you know this is what is very likely to happen

[00:18:58] [SPEAKER_01]: so um i you know jack you and i were talking just before about i think last opx was our

[00:19:04] [SPEAKER_01]: longest episode ever because there were so many bizarre moves and so i'm going to very quickly

[00:19:10] [SPEAKER_01]: just remind everybody all the strange stuff that we saw last month um so i know it's about

[00:19:16] [SPEAKER_01]: 10 slide move will go very quickly through this part just to remember where we were

[00:19:21] [SPEAKER_01]: um we talked about record i w m call volume that's here in blue by the way if you go to

[00:19:25] [SPEAKER_01]: spot gamma dot com slash opx you can download this slide deck uh as well as a spreadsheet for

[00:19:31] [SPEAKER_01]: this upcoming uh expiration so if you're interested in that and then i think jack we

[00:19:34] [SPEAKER_01]: can probably include that link in the episode notes as well anyways uh record i w m call volume

[00:19:40] [SPEAKER_01]: led to the i w m to become uncorrelated with the other position or other equity indexes we had

[00:19:48] [SPEAKER_01]: major lows in equity realized vol this is specifically the s and p 500 and so in green

[00:19:54] [SPEAKER_01]: here was a one month real as vol in the s and p we got like a six to seven percent there that's

[00:19:59] [SPEAKER_01]: the lowest uh we neared that in 2021 a little bit but you really got to go pre covid crash to get this

[00:20:05] [SPEAKER_01]: type of realized vol markets really weren't moving at all on the s and p 500 side uh we had the most

[00:20:12] [SPEAKER_01]: overbought reading ever from the russell 2k this is a purely technical indicator just backed up

[00:20:18] [SPEAKER_01]: what we were seeing in the options market this was from bespoke uh you could see that was on

[00:20:21] [SPEAKER_01]: 716 day before options expiration uh remember this famous chart uh we pioneered this one

[00:20:28] [SPEAKER_01]: we had the most number of days that a 2% one day loss since the great financial crisis it surpassed

[00:20:34] [SPEAKER_01]: vol mcgetten we have also uh there's a little asterisk to this but we've gone a long day a long

[00:20:39] [SPEAKER_01]: time without a 2% one day gain i checked the chart this morning we still haven't had a 2% one day

[00:20:45] [SPEAKER_01]: gain even though we had such a big rally this last week uh the reason that this matters is this

[00:20:49] [SPEAKER_01]: is part of volatility suppression people selling calls and dealers selling futures into that

[00:20:53] [SPEAKER_01]: not letting the market rally too fast the s and p uh rally too fast so lack of major just as an aside

[00:21:00] [SPEAKER_04]: we actually used your uh in our access returns episode today we used your presence here uh

[00:21:03] [SPEAKER_04]: no no 2% loss thing and we actually credited you which i think is a rare thing because i think

[00:21:08] [SPEAKER_01]: both people just take it and use it so they updated themselves to show up everywhere so uh

[00:21:13] [SPEAKER_01]: so good for good for those getting uh attention for that um yeah so you know the the lack of a

[00:21:20] [SPEAKER_01]: rally which you never get with those other charts is also a function of what's been happening right

[00:21:24] [SPEAKER_01]: gamma suppresses rallies and also keeps the market from falling too fast um what else did that mean

[00:21:31] [SPEAKER_01]: record low correlation so implied correlation this is the cbo one month in the cbo three

[00:21:35] [SPEAKER_01]: month correlation so they look at options that expire either one month or three months in time

[00:21:39] [SPEAKER_01]: they hit record low so below 2017 and what this was telling you is traders were expecting

[00:21:45] [SPEAKER_01]: more single stock movement relative to the index and that view got extreme now just a moment on

[00:21:50] [SPEAKER_01]: this correlation trade there's the kind of explicit correlation trade which is traders

[00:21:54] [SPEAKER_01]: using options to express this idea there was also you know the idea that people are chasing small

[00:22:01] [SPEAKER_01]: caps right uh not too long ago we had the nvidia call complex be larger than the entire rest of

[00:22:07] [SPEAKER_01]: the call complex for the us options market that's what i assume i'm sorry say that again jack

[00:22:13] [SPEAKER_01]: that's reversed i assume that's that's totally reversed very quickly you know you had the three x

[00:22:18] [SPEAKER_01]: and video long products you know it was a semi cap chase and that is you know in a way part of this

[00:22:23] [SPEAKER_01]: correlation trade right it's just everybody focused on one sector then that focus switched to

[00:22:27] [SPEAKER_01]: small caps right um and this matters for our punchline here when we when we get away from or when we

[00:22:33] [SPEAKER_01]: end this uh get away is funny when we when we roll to the end of this presentation i'll talk about

[00:22:39] [SPEAKER_01]: why this matters a little more but the correlation trade in my view is over now and i'm gonna again talk

[00:22:43] [SPEAKER_01]: about that shortly uh remember bret uh most narrow breadth we've ever seen we had the nazdak and the

[00:22:49] [SPEAKER_01]: s&p 20 to 25 percent of those indices were three stocks and video apple microsoft that's

[00:22:54] [SPEAKER_01]: now closer to 15 to 17 percent so it's still high in our view um but you know that that has

[00:23:01] [SPEAKER_01]: come off of this major high um this is a chart of correlation related to the vix so if you go back

[00:23:07] [SPEAKER_01]: to that pass forward thing generally the way that this breaks or unwinds is correlation

[00:23:12] [SPEAKER_01]: jumps higher the reason that correlation jumps higher is because all stocks are getting sold off

[00:23:17] [SPEAKER_01]: at which point the vix generally almost always spikes so we've talked about 2020 the greatest

[00:23:23] [SPEAKER_01]: uh depiction of this because all stocks got sold when the covid you know wave hit and

[00:23:28] [SPEAKER_01]: everything was getting shut down so vix goes to 80 correlation goes to one because people

[00:23:32] [SPEAKER_01]: are dumping out of stocks to try to save their uh to go into cash um interestingly we're talking about

[00:23:40] [SPEAKER_01]: how call heavy the put call ratio was so this is the lower this goes the more uh calls are

[00:23:46] [SPEAKER_01]: relative to puts and into june opx no this wasn't the 2021 style mean mania because bret

[00:23:52] [SPEAKER_01]: though is much more narrow here and we didn't have those meme stocks getting so much call attention

[00:23:56] [SPEAKER_01]: but we were at multi-year lows as you can see here um in the put call ratio so again call

[00:24:02] [SPEAKER_01]: were dominant over puts in a major way and do you have this you may or have this later in

[00:24:07] [SPEAKER_04]: the presentation but i assume that also is reversed 100 percent i got a i got a nice chart on that

[00:24:11] [SPEAKER_01]: okay we'll do that later then i won't disappoint you jack um record little short interest which

[00:24:16] [SPEAKER_01]: i thought was interesting just to to mention that one um this chart from the cibo showed how

[00:24:22] [SPEAKER_01]: single stock volatility hit a record high versus the indexes uh obviously this is now switched

[00:24:29] [SPEAKER_01]: and then finally one of my favorite punch lines here because we're going to talk about the vix

[00:24:32] [SPEAKER_01]: shortly is this chart was from the mirror uh they showed that the beta of the vix to the s and p

[00:24:38] [SPEAKER_01]: was at the zero percentile so essentially what that's telling you is the vix was no longer

[00:24:42] [SPEAKER_01]: responding to whatever it is that the s and p was doing obviously most of us know that when

[00:24:47] [SPEAKER_01]: the s and p goes down the vix tends to go up and vice versa and that's because vix is

[00:24:51] [SPEAKER_01]: priced off of s and p 500 index options and so you know there's this link between the two um

[00:24:58] [SPEAKER_01]: which means that they should really be related to each other but that had stopped to really

[00:25:02] [SPEAKER_01]: function in a normal way as you can see on this chart very rare for to have this you know this

[00:25:08] [SPEAKER_01]: type of rolling beta so unassociated with the market and then lastly um we talked about this

[00:25:16] [SPEAKER_01]: idea of choosing your weapon wisely and what that really meant was this was a year to date

[00:25:20] [SPEAKER_01]: chart and and i updated this but if you are invested in the cues um you know you had a great

[00:25:26] [SPEAKER_01]: year you're 22 percent into july op-ex that's not the case anymore what we updated this

[00:25:31] [SPEAKER_01]: fighters were up 16 percent but the dow and the iwm's are only up two to four percent right so

[00:25:35] [SPEAKER_01]: you had this big dispersion in performance if you were long tech and semis that was awesome for

[00:25:40] [SPEAKER_01]: you you're doing great but if you were long small caps that didn't really work out all

[00:25:44] [SPEAKER_01]: that well right you had this major issue and so um sorry i had to dump my apple watch

[00:25:49] [SPEAKER_01]: there was making too much noise um yeah this dispersion in performance and and uh this was

[00:25:57] [SPEAKER_01]: a function again of the momentum chase if you were falling behind in your equity performance

[00:26:01] [SPEAKER_01]: as a manager you probably had to allocate more to the nvidia to try to make that up um so you

[00:26:09] [SPEAKER_01]: know uh this idea of which sector you choose i think is changing going forward it's going to

[00:26:14] [SPEAKER_01]: be more about do i own equities or do i own bonds or or cash so that was a review of all the

[00:26:21] [SPEAKER_01]: bizarreness there was a lot of other charts that left out of there was just we can watch the

[00:26:24] [SPEAKER_01]: previous episode see how crazy all this stuff was so we'll flip to uh august now um let's

[00:26:33] [SPEAKER_01]: talk about this last week we had a a major drawdown from july options expiration uh

[00:26:40] [SPEAKER_01]: some may find that coincidental right but vixx expiration essentially mix mark the top

[00:26:45] [SPEAKER_01]: at july opx and then down we go and i drew these little lines in here this is vixen red

[00:26:50] [SPEAKER_01]: and in s and p in blue because going into where we were thursday into friday this is now you know

[00:26:56] [SPEAKER_01]: a little over a week a week ago um we've now recovered those gains right s and p is now

[00:27:00] [SPEAKER_01]: rallied back to fifty three fifty which is where we went into august second friday august

[00:27:04] [SPEAKER_01]: second roughly that's where the s and p was and the vixx is back down to 20

[00:27:07] [SPEAKER_01]: which is roughly where the vixx was headed into that event uh because of these data points we have

[00:27:12] [SPEAKER_01]: coming up um specifically here i'll pop forward a few charts uh here um you can see we have ppi

[00:27:20] [SPEAKER_01]: cpi retail sales all starting on thursday excuse me tuesday tomorrow that's going to keep equity

[00:27:27] [SPEAKER_01]: implied vol uh elevated right because we have these data points and traders are trying to

[00:27:32] [SPEAKER_01]: figure out the path of rates going forward so the reason i interject with that now is because

[00:27:36] [SPEAKER_01]: vixx the easy mean reversion play is now over it wasn't necessarily you know wasn't guaranteed that

[00:27:42] [SPEAKER_01]: vixx would mean revert even though that was a very popular trade and and that's obvious obviously

[00:27:47] [SPEAKER_01]: because volatility often mean reverts rather violently um but the easy money of that trade has

[00:27:52] [SPEAKER_01]: been made now it's about hey volatility is going to be controlled by these data points coming

[00:27:56] [SPEAKER_01]: forward as opposed to the settling of the flows that occurred the last week so in my in my

[00:28:04] [SPEAKER_01]: view we're done with what happened last week that's now not a function of how the market is going to

[00:28:08] [SPEAKER_01]: operate going forward um correlation it spiked higher uh you can see here we went on the cbo

[00:28:16] [SPEAKER_01]: index from under the 2017 low now we're about 25 on the cbo index um look we're still pretty low

[00:28:23] [SPEAKER_01]: relative to where we've been over the last you know five to ten year uh five years um so

[00:28:29] [SPEAKER_01]: you know correlation can continue to increase and i think it's going to i just don't think

[00:28:33] [SPEAKER_01]: it's going to have necessarily as massive of a one day move right uh like this vol shock that

[00:28:39] [SPEAKER_01]: created this and you can see that the vixx spiked exactly with correlation because suddenly

[00:28:43] [SPEAKER_01]: everyone was dumping equities whether that's because the yen carry trend on the line or some of

[00:28:47] [SPEAKER_01]: uh the other flows that we mentioned break or a combination of all those um obviously these

[00:28:53] [SPEAKER_01]: two are very heavily linked and so if we do get another drawdown in the equity market

[00:28:57] [SPEAKER_01]: because of some bad data coming up correlations likely to continue to go higher as well

[00:29:04] [SPEAKER_01]: um this dispersion that we talked about between the qqq performance and spiders etc you can see all

[00:29:10] [SPEAKER_01]: of a sudden now i wm's are up eight percent uh this is a little over the past year um

[00:29:16] [SPEAKER_01]: but they really all closed the gap right and what's interesting is you can see that q

[00:29:20] [SPEAKER_01]: spiders i wm dow everything just crashed last week right but before the last week's crash

[00:29:24] [SPEAKER_01]: suddenly that performance difference really started to narrow quite a bit um who knows

[00:29:30] [SPEAKER_01]: you know if that's going to continue i think if we are in recession i wm small caps are going to

[00:29:35] [SPEAKER_01]: have our time and then we when we have invidia earnings coming up if invidia pulls another you

[00:29:40] [SPEAKER_01]: know three bagger out in terms of earnings improvements um then who knows what happens right

[00:29:46] [SPEAKER_01]: we could see that qqq spider start to really outperform the i wm's again of course if we

[00:29:52] [SPEAKER_01]: get a recession then maybe all stocks just go down so it's it's a it's a tricky environment

[00:29:56] [SPEAKER_04]: going forward it is it is interesting as we work through like all these weird charts and last time

[00:30:00] [SPEAKER_04]: i mean basically every single one of them is reversed yeah um so like all those weird things

[00:30:04] [SPEAKER_04]: we we saw that were kind of outliers have gone back in the sort of the more normal direction

[00:30:08] [SPEAKER_01]: yeah and what's interesting about this too is if you look at april we had a correlation spasm

[00:30:12] [SPEAKER_01]: we called it and and that was the s&p went down five percent invidia went down 20 in that

[00:30:17] [SPEAKER_01]: period and that trade you know retrenched itself and then expanded again right as you could see here

[00:30:23] [SPEAKER_01]: and so the difference in the difference here is that the market and i have a slide on this is

[00:30:28] [SPEAKER_01]: pricing in a rate cut a hundred percent chance of rate cut in september and so the macro conditions

[00:30:32] [SPEAKER_01]: in my view have changed a lot from where we were in april and that's why i'm not so sure that

[00:30:38] [SPEAKER_01]: this trade immediately just kind of rolls back into the way that it was so this next one is

[00:30:43] [SPEAKER_04]: what i'm excited to talk about because everybody would talk about the vix spike above 60

[00:30:48] [SPEAKER_04]: it happened very very quickly what was your take on it yeah um so what this chart here

[00:30:53] [SPEAKER_01]: shows is it says variance premium but all this is showing you is the vix index minus s&p one month

[00:30:59] [SPEAKER_01]: realized volatility so the vix is a measure of s&p volatility looking forward compare that to what has

[00:31:06] [SPEAKER_01]: happened in terms of volatility and you can saw we had this incredible spike uh on this chart

[00:31:11] [SPEAKER_01]: showing that the vix jumped a lot relative to realize vol and that only matches a few periods

[00:31:16] [SPEAKER_01]: back in you know 2020 2021 and so the argument here that a lot of people are making is that

[00:31:23] [SPEAKER_01]: that vix 65 print was noise um and that was contributed from several factors um so vix hit 65

[00:31:33] [SPEAKER_01]: pre open uh on monday the fifth and the argument is that that was because of you know the vix

[00:31:41] [SPEAKER_01]: essentially broke and our view of this and we did a live q&a you can see in our youtube channel

[00:31:48] [SPEAKER_01]: to do with our partner imran and you know the vix is a product of s&p 500 index prices that expire 30

[00:31:57] [SPEAKER_01]: days out in time and so what happens in these environments where liquidity is very poor the

[00:32:03] [SPEAKER_01]: options been asked widened out right so instead of the market being a dollar at a dollar 10 for

[00:32:08] [SPEAKER_01]: some random s&p option suddenly that market goes 50 cents at five bucks right and when that happens

[00:32:14] [SPEAKER_01]: the implied volatility of those options is higher because the bin offers way much wider and so the

[00:32:20] [SPEAKER_01]: options that are going into the calculation of the vix are much higher in implied vol terms and in real

[00:32:26] [SPEAKER_01]: price terms and that makes the vix index jump and so a lot of the vol traders on monday morning

[00:32:32] [SPEAKER_01]: were saying hey you can't trade that 65 vix and you know what they're saying is you know the

[00:32:37] [SPEAKER_01]: vix futures are quite a bit lower the vix index itself is as this artificial high because of a

[00:32:42] [SPEAKER_01]: function of the lack of liquidity and the poor quotes in the market and you can't actually put

[00:32:46] [SPEAKER_01]: off a trade that's based on that 65 vix level um on the surface i agree with that you know you

[00:32:53] [SPEAKER_01]: can't you you couldn't get a fill in a lot of these products right in monday morning at

[00:32:58] [SPEAKER_01]: 8 am it was very tough um so i think the vix calculation was what it was um if you want

[00:33:07] [SPEAKER_01]: to throw a flag out and say it's exacerbated by this liquidity situation i think the

[00:33:11] [SPEAKER_01]: liquidity situation is real the fact that liquidity stinks and it uh and that led to this

[00:33:18] [SPEAKER_01]: incredible vix price that to me is a real manifestation of the risk in this market and i'm going to talk

[00:33:23] [SPEAKER_01]: about that in a second the other thing is and we put this on our twitter feed and there was a

[00:33:27] [SPEAKER_01]: bloomberg article uh that that we uh we read about this is that there was a very large vix

[00:33:33] [SPEAKER_01]: cover trade right at the vix as the vix hit 65 and we saw the vix uh i believe it was the

[00:33:39] [SPEAKER_01]: 30 strike calls for august those appeared to be getting bought and those were deep in the money

[00:33:44] [SPEAKER_01]: calls i think that was a margin call and so the fact that the vix had hit this high at the exact

[00:33:50] [SPEAKER_01]: same time this very large trade was going off told me that as soon as the market knew that this

[00:33:54] [SPEAKER_01]: person was covering they widened their bids and offers out even larger right it's just like margin

[00:33:59] [SPEAKER_01]: call or wall street or whatever other movie when you know someone's in pain in covering you got

[00:34:04] [SPEAKER_01]: to widen that market out you also don't want to wear those trades right you don't want

[00:34:07] [SPEAKER_01]: to necessarily be buying vix calls at the high so you widen your market out and that one one person

[00:34:12] [SPEAKER_01]: had to cover and as soon as they covered in the cash market opened that the market uh the vix really

[00:34:16] [SPEAKER_04]: you know declined rather sharply so so the two arguments i've heard is one the vix never hit

[00:34:21] [SPEAKER_04]: 65 and two was it hit 65 but there's no you couldn't have actually shorted it you know

[00:34:26] [SPEAKER_04]: volatility there so yeah you think the vix did hit 65 you think the calculation was correct

[00:34:30] [SPEAKER_04]: but there is merits this idea that you know you couldn't have actually shorted volatility

[00:34:34] [SPEAKER_01]: up there yeah and i mean the function of the market or or or of it being correct right is a is a

[00:34:42] [SPEAKER_01]: in a way there's there's sort of link i mean these bids and offers widen out liquidity stinks so

[00:34:46] [SPEAKER_01]: like when you're trying to quote the vix and gather up all these options prices you know it's not

[00:34:50] [SPEAKER_01]: this clean pricing surface that you get to use you know to put into your calculation it's

[00:34:55] [SPEAKER_01]: sort of like if you remember like in in the 1987 crash i mean you and i were both a little

[00:34:59] [SPEAKER_01]: too young for that like you couldn't or or a flash crash or something else a lot of index

[00:35:04] [SPEAKER_01]: a lot of components of the s and p 500 don't open right it takes them a long time to open so

[00:35:08] [SPEAKER_01]: you can't really get a clean calculation on what the s and p is right so it's a sort of a similar

[00:35:14] [SPEAKER_01]: environment where we go like well does did the vix really hit 65 well the vix is just

[00:35:18] [SPEAKER_01]: this index of s and p prices so the fact that you're having these weird calculation

[00:35:22] [SPEAKER_01]: problems that gives you this bizarre number to me it matters because it's a function of

[00:35:27] [SPEAKER_01]: how messed up the market is right now right um you know and anytime you have bids and offers

[00:35:32] [SPEAKER_01]: widen out well if you want to make a i guess what i'm trying to say is if you're going to

[00:35:37] [SPEAKER_01]: make the argument that the vix calculation broke or that wasn't real and it's only off of traded

[00:35:40] [SPEAKER_01]: prices then then the vix probably doesn't have a clean calculation ever because you know there's

[00:35:46] [SPEAKER_01]: a bid and offer every day all day long in the s and p 500 uh and sometimes those markets are

[00:35:50] [SPEAKER_01]: wider than what you can where you can really get filled right so maybe someone needs to

[00:35:54] [SPEAKER_01]: create a traded s and p options uh vix index or something like okay this this printed

[00:36:01] [SPEAKER_01]: so we'll use that for the vix calculation i don't know so this next slide also gets

[00:36:04] [SPEAKER_04]: to something i've seen a lot on twitter which is his idea that liquidity is just really terrible

[00:36:08] [SPEAKER_01]: right now yeah this is uh eminy futures top of book liquidity and so um you know this is a

[00:36:15] [SPEAKER_01]: two-year chart from goldman you can go to the cme and get the similar chart but in red here you

[00:36:20] [SPEAKER_01]: could see uh the top of book liquidity just evaporated so you know if you go down two

[00:36:26] [SPEAKER_01]: three levels deep in the order book it's not maybe quite as uh as significant but the point here is that

[00:36:31] [SPEAKER_01]: you know look when we just mentioned the vix calculation broke because these options markets

[00:36:35] [SPEAKER_01]: widened out you know this is a function of that right liquidity now seems to evaporate faster

[00:36:41] [SPEAKER_01]: you know than i've ever experienced in my life i've been doing this for 20 years and a function

[00:36:46] [SPEAKER_01]: of this i think is how electronic markets are now i think that you know the the market makers

[00:36:51] [SPEAKER_01]: and the dealers of the world are very very good um you know they can they can widen out and disappear

[00:36:58] [SPEAKER_01]: when when liquidity is not available you also had a lot of the retail brokerages go down

[00:37:02] [SPEAKER_01]: the morning of of monday so i think that affected liquidity in ways even though the retail

[00:37:07] [SPEAKER_01]: component is a huge eminy option eminy futures user um you know there was just those problems

[00:37:14] [SPEAKER_01]: you know linked and obviously us market volume rip because you have the situation where there's

[00:37:19] [SPEAKER_01]: a lot of forced trading right whether it's unwinds of you know yen related carry trades uh the options

[00:37:26] [SPEAKER_01]: flows that we're talking about in the underlying hedges like there's people who are forced to trade

[00:37:31] [SPEAKER_01]: in those environments which are you know either explicit or implicit margin calls taking place

[00:37:36] [SPEAKER_01]: so people have to trade and they have to trade at a point where bids and offers are widening

[00:37:41] [SPEAKER_01]: out and liquidity evaporates and when that happens you get extremely volatile events like

[00:37:45] [SPEAKER_04]: you know what happened last week does the fact that the the major market makers dominate the market

[00:37:49] [SPEAKER_04]: does this contribute to this like to the citadels of the world if they decide to back off it can have

[00:37:53] [SPEAKER_01]: like major market implications that that's a fantastic point and it's one that you know i

[00:37:58] [SPEAKER_01]: hadn't brought up recently uh i think you and i've talked about this in the past a little bit

[00:38:02] [SPEAKER_01]: but you know there's five-ish major options market makers and the options markets gotten so

[00:38:08] [SPEAKER_01]: large that the liquidity is just rests on the shoulders of really just a few players here right

[00:38:13] [SPEAKER_01]: and it's so hard to get into the market making business now because the technological moat is

[00:38:17] [SPEAKER_01]: so big the legal compliance moat is so big the capital requirements are so big that you know

[00:38:24] [SPEAKER_01]: you have both your arms tied behind your back and then you're going to go into the arena with

[00:38:28] [SPEAKER_01]: like citadel and try to quote better prices than them i think it's just extraordinarily difficult

[00:38:32] [SPEAKER_01]: and so you know this is a this is an issue where if they just you know citadel alone decides

[00:38:38] [SPEAKER_01]: to widen their their spreads out and you know this is not to say anything bad about them uh but

[00:38:43] [SPEAKER_01]: if they just decide to why they're well that's like 40 percent of the options market suddenly

[00:38:47] [SPEAKER_01]: is kind of like you know it's gone away a little bit right so um the the options market by and

[00:38:53] [SPEAKER_01]: large did function okay i think the brokers had a bigger problem here in terms of uh you know

[00:38:58] [SPEAKER_01]: connectivity and things like that uh then maybe the market makers did but but they certainly

[00:39:03] [SPEAKER_01]: widened out right markets certainly wind up and how was it i'm just curious like how was

[00:39:07] [SPEAKER_04]: it with like trading i don't know if you were trading on monday morning but i remember andy

[00:39:10] [SPEAKER_04]: constant had put something on twitter basically like based on the spreads he was seeing in the

[00:39:14] [SPEAKER_04]: options market like he hasn't thrown his phone in many years but he would have thrown his phone

[00:39:17] [SPEAKER_04]: monday morning um because i guess things things were pretty bad like he was having trouble

[00:39:20] [SPEAKER_01]: getting fills in anything yeah i was um i was fortunate to be you know has some long uh vix

[00:39:28] [SPEAKER_01]: etps in my portfolio um and you know those markets you would those markets are wide

[00:39:34] [SPEAKER_01]: generally speaking they're ridiculously wide on on monday morning and so you know i definitely

[00:39:40] [SPEAKER_01]: got a fill that i didn't love and you know your p&l's move around a lot i did get a fill uh i was

[00:39:46] [SPEAKER_01]: happy to get liquidity there i was happy to be able to log into my brokers platform and and to

[00:39:51] [SPEAKER_01]: get a fill um so you know that was fine but if you're trying to manage a large book you know

[00:39:57] [SPEAKER_01]: where you have tens of thousands of contracts you have to get out of you probably you know

[00:40:02] [SPEAKER_01]: we're really struggling on monday morning into the heat of the battle right um it's one of the

[00:40:06] [SPEAKER_01]: small advantages retail traders have i think is like hey you know if i can get out of this 10 lot i'm

[00:40:11] [SPEAKER_01]: pretty happy uh and i could probably get that liquidity right even in the even the death

[00:40:15] [SPEAKER_01]: throws of monday morning but if you're long 10 000 like you're probably just holding those and

[00:40:18] [SPEAKER_01]: you know good luck to you uh get enough fill then so this next is really interesting for me

[00:40:23] [SPEAKER_04]: because we've been talking about the rise of zero dte volume almost almost every episode

[00:40:27] [SPEAKER_04]: and now it actually went the other direction yeah and there was a good article in Reuters

[00:40:31] [SPEAKER_01]: about this i i had actually not realized this percent has dropped so sharply on monday morning

[00:40:37] [SPEAKER_01]: but you can see it was about 25 percent and this is the spx zero dt volume percent um and it you

[00:40:42] [SPEAKER_01]: know that's a significant low this is uh christmas eve here is a previous kind of weird

[00:40:46] [SPEAKER_01]: low that you see so you know kind of a holiday effect um but in this case related to you know

[00:40:53] [SPEAKER_01]: bids and offers not being there or being very wide related to volatility spiking so much which

[00:40:58] [SPEAKER_01]: brings attention to longer dated options uh related to these brokers not really being open a lot of them

[00:41:03] [SPEAKER_01]: weren't available for the first half of the day on monday um and then i also think related to the

[00:41:09] [SPEAKER_01]: fact that these correlation trades broke down or had to be unwound i think a lot of zero dt volume

[00:41:14] [SPEAKER_01]: is based on buying and selling you know short dated say invidia or apple options and then

[00:41:20] [SPEAKER_01]: selling or trading s and p zero dts against them i think that's a big trade and that became

[00:41:25] [SPEAKER_01]: under stress and so i think those trades just get turned off right the hft shops just shut it off

[00:41:29] [SPEAKER_01]: because the market's not doing what it normally does all that stuff sort of combines to having a

[00:41:34] [SPEAKER_01]: record low zero dte uh volume percentage right and you're going back to the start of zero dte here

[00:41:41] [SPEAKER_01]: when you're getting down under 30 percent um there's some other people who say look zero

[00:41:46] [SPEAKER_01]: dts just didn't function like it was just like shut off in the morning uh i saw zero dt trades

[00:41:52] [SPEAKER_01]: going up on monday morning so um you know you can take that for what's worth the takeaway here is

[00:41:58] [SPEAKER_01]: that zero dt liquidity evaporated kind of i think when a lot of people are thinking it would maybe

[00:42:02] [SPEAKER_01]: be a significant driver yeah i think i want to if i want to hedge like what might be a significant

[00:42:07] [SPEAKER_04]: event you know and on a day like that i'm probably not using zero dt i'm probably using

[00:42:12] [SPEAKER_01]: something from the ground yeah and it's hedging the known unknowns is when you don't go to

[00:42:17] [SPEAKER_01]: zero dt and the last time that we saw an event really like this is there's been a few geopolitical

[00:42:22] [SPEAKER_01]: conflicts but if you go back to the march uh banking crisis right of 2023 um you can see here that zero

[00:42:30] [SPEAKER_01]: dt really evaporated or decreased and and the reason is because everybody knew that the banks

[00:42:35] [SPEAKER_01]: were on the ropes right you didn't know when and if a bank would go down so you can't buy zero

[00:42:39] [SPEAKER_01]: dt against that you got to buy like one month two month three month option to hedge yourself

[00:42:43] [SPEAKER_01]: and that's the same situation here you know is the is the yen uh carry trade unwind and all of the

[00:42:49] [SPEAKER_01]: related offset effects here of correlation blah blah blah like are we really going to go much lower

[00:42:55] [SPEAKER_01]: that's not a data point i could hedge right um what we did see of the big zero dt flow is

[00:43:00] [SPEAKER_01]: call buying on the open and so if you do own a longer dated put and you can't close it

[00:43:05] [SPEAKER_01]: you can buy zero dt calls as a as a delta hedge in the short term right because that way

[00:43:10] [SPEAKER_01]: once the market opens you buy zero dt call if the market rallies well your long dated put's

[00:43:15] [SPEAKER_01]: going to get hurt but you bought this zero dt call to kind of hedge out that position on the day

[00:43:18] [SPEAKER_01]: right so you could kind of lock in some of your put gains um using zero dts and we did see a lot

[00:43:24] [SPEAKER_01]: of that flow uh suggesting that zero dte quote-unquote bought that dip hard on monday morning yeah

[00:43:30] [SPEAKER_04]: what's interesting too and i'm probably getting outside of my area of expertise here but

[00:43:32] [SPEAKER_04]: i think people have argued that zero dte makes the like made the vix the vix doesn't reflect

[00:43:38] [SPEAKER_04]: the zero dt reflected in the vix so like the vix wasn't as accurate as it could be because so many

[00:43:42] [SPEAKER_04]: people were using zero dte but then we saw it go the other way now we saw people using the options

[00:43:47] [SPEAKER_01]: further out and we saw the vix go crazy yeah and you're you're exactly right um you know the day

[00:43:52] [SPEAKER_01]: this goes to zero or low zero dt bomb goes to zero and vix goes to 65 that's not a coincidence

[00:43:58] [SPEAKER_01]: i don't think um like they both got exacerbated maybe by some of the liquidity issues and

[00:44:04] [SPEAKER_01]: calculation issues but the trend of those two not acting uh inversely correlated i think makes a ton

[00:44:09] [SPEAKER_01]: of sense um and uh you know i i think that the zero dt volume where it was stabilized at above 50

[00:44:17] [SPEAKER_01]: percent again was a function of you know trades that had been working very well correlation

[00:44:22] [SPEAKER_01]: trades and the like and people can count on hey the last 20 days this is what the relationship

[00:44:26] [SPEAKER_01]: between the s and p and invidious ben so let's continue this trade that's been working well

[00:44:31] [SPEAKER_01]: and now that trade is not going to work as well right so these this 50 plus volume being the standard

[00:44:37] [SPEAKER_01]: of zero dt percent i think is is probably not going to stick around here for the next month or two

[00:44:43] [SPEAKER_04]: so in this next slide you get it what i was asking about before which is this calls minus puts

[00:44:46] [SPEAKER_01]: yes this isn't a put call ratio this is just total net call volume uh minus put volume and we are

[00:44:53] [SPEAKER_01]: this chart goes back to jan of 21 um only january of 2023 did this go lower um and so

[00:45:00] [SPEAKER_01]: you know this is obviously a pretty significant event and this is a january expiration always will

[00:45:04] [SPEAKER_01]: cause weird things to occur in the market so you know puts dominated this past week both the

[00:45:09] [SPEAKER_01]: the buying of puts and the covering of puts call volume tends to not be that great in these big

[00:45:15] [SPEAKER_01]: drawdowns because you don't want to buy calls in a very high volatility environment because

[00:45:19] [SPEAKER_01]: the calls are very expensive so if the market rallies and implied ball comes down that's the

[00:45:23] [SPEAKER_01]: tax on long call positions additionally you don't want to sell calls in this scenario though

[00:45:28] [SPEAKER_01]: because obviously the market can rally rather violently and so up until thursday or friday we

[00:45:33] [SPEAKER_01]: didn't really see much in the way of call activity uh thursday or friday we didn't see a pick up i'll

[00:45:37] [SPEAKER_01]: talk about that in a second but you know we went from extreme call volumes now kind of you know

[00:45:41] [SPEAKER_01]: quite extreme put volumes we talked on this before this is s and p term structure and the shaded

[00:45:46] [SPEAKER_01]: cone is 90 day range of this thing and so you know term structure for the s and p was

[00:45:51] [SPEAKER_01]: way higher than this earlier this week but now we're at the top of this 90 day statistical

[00:45:55] [SPEAKER_01]: range and my point on volatility mean reversion is that you know those huge volatility shifts

[00:46:02] [SPEAKER_01]: higher have now completely reverted and we're likely likely to stay

[00:46:06] [SPEAKER_01]: in a higher volatility regime now because of these upcoming data points uh specifically

[00:46:11] [SPEAKER_01]: ppi cpi retail sales that's all this week op-ex on friday then we turn to vixx expiration next

[00:46:17] [SPEAKER_01]: week with uh fomc minutes and jackson hole and then we shift right into invidia earnings

[00:46:22] [SPEAKER_01]: and then right after invidia earnings is the september you know mid-september fomc which is

[00:46:27] [SPEAKER_01]: you know the most important fomc of our lifetimes uh so um you know there's not ball's gonna hold

[00:46:34] [SPEAKER_01]: what's called an event ball premium for these data points right so we'll get okay if ppi is okay

[00:46:39] [SPEAKER_01]: ball come down a little bit right shorted but then we gotta look at cpi so there's these rolling

[00:46:44] [SPEAKER_01]: uh risk issues here and i don't wait into the macro uh perspective here jack but um

[00:46:51] [SPEAKER_01]: i'm gonna fast forward to this you know macro and focus in my august path on something quickly here

[00:46:58] [SPEAKER_01]: over this past week we went from 100 percent in a 25 basis point rate cut to 50 percent you know

[00:47:06] [SPEAKER_01]: to so sorry let me restate that so we had 100 percent september rate cut was with market

[00:47:12] [SPEAKER_01]: was pricing in of 25 bits now all of a sudden it's 50 50 that we're going to get a 50 basis

[00:47:17] [SPEAKER_01]: point rate cut or a 25 basis point rate cut there was that worton professor everyone's kind of

[00:47:21] [SPEAKER_01]: you know unfortunately he's the brunt of a couple of jokes saying we need a 75 base point rate cut

[00:47:26] [SPEAKER_01]: because all of a sudden people are saying there's a recession and we're all in trouble i think like

[00:47:29] [SPEAKER_01]: air b and b earnings were really bad uh as an example and so um all these upcoming data points

[00:47:36] [SPEAKER_01]: like are going to be you know about inflation which hey if inflation is coming down that's good

[00:47:40] [SPEAKER_01]: for small caps but if we're getting into the recession do you want to own small caps as

[00:47:44] [SPEAKER_01]: a rough example i don't know that that's a clear answer you can check your favorite macro guy for

[00:47:48] [SPEAKER_01]: that uh my point being that so much of what was happening that was a driver of low correlation

[00:47:54] [SPEAKER_01]: into this period was hey equities are doing great rates are in the stable environment at some

[00:47:59] [SPEAKER_01]: point we'll get a rate cut we get it but you know i really want to own semis here versus s and p

[00:48:04] [SPEAKER_01]: or small caps because you know that's what's leading and that's where that's what i'm i want

[00:48:09] [SPEAKER_01]: to make as much money i can in the equity space right as opposed to how do i preserve my capital

[00:48:13] [SPEAKER_01]: which is i think what the environment is shifting to where you know you can say hey uh do i want to

[00:48:18] [SPEAKER_01]: own equities at all right now if rates are going to you know get cut substantially or am i trying to

[00:48:23] [SPEAKER_01]: jump into uh you know fixed income because there's still some yield there and if rates get cut 50

[00:48:29] [SPEAKER_01]: percent or there was a recession you know i need to own you know bonds over equities right so i think

[00:48:35] [SPEAKER_01]: it goes from this kind of like inter-equity correlation that everyone's paying attention to

[00:48:39] [SPEAKER_01]: to more of a macro bonds versus equity correlation yeah and we've put in certain uncertainty into the

[00:48:44] [SPEAKER_04]: picture here i mean that payrolls report brought some uncertainty in which makes these which is probably

[00:48:48] [SPEAKER_04]: to your point we're going to see more volatility around these economic announcements now as people

[00:48:52] [SPEAKER_01]: try to figure out what's going on yeah do you do the jobs number that's exactly what was escaping

[00:48:56] [SPEAKER_01]: my mind thank you for that um you know i think by and large small caps are more uh recessionary

[00:49:04] [SPEAKER_01]: sensitive you know or part of the economic cycle but again i'm speaking on my depth there so i'll

[00:49:09] [SPEAKER_01]: still be from that um we had a chart here uh that i that i wanted to finish with on this point was

[00:49:15] [SPEAKER_01]: and this is i think what the view is kind of going forward and this seems like a little bit

[00:49:19] [SPEAKER_01]: of a macro uh topic here and it and it is but from the options flows this is just what i'm

[00:49:25] [SPEAKER_01]: thinking i'm seeing is uh this past week everyone's making the joke that 60 40 perform great and so

[00:49:30] [SPEAKER_01]: here's the spiders was down 4% over the last month versus tlt which is the long us treasury tf

[00:49:37] [SPEAKER_01]: that was up 4% so 60 40 to create in this past uh month you know 60 40 was dead up until last week

[00:49:43] [SPEAKER_01]: so um this speaks to that you know equity bond rotation versus the inter you know equity

[00:49:50] [SPEAKER_01]: allocation so to speak um and and i think coming out of this next month when you got you know all

[00:49:55] [SPEAKER_01]: these inflationary and economic and dedicators printing uh and then jackson whole people are going

[00:50:02] [SPEAKER_01]: to be coming out of i think uh going into september really having a focus on macro and then of

[00:50:09] [SPEAKER_01]: course you're going to move immediately into the elections which always keeps the ball premium

[00:50:12] [SPEAKER_01]: as well so you know this this era of you know 15 and below vix i think is is probably behind us

[00:50:19] [SPEAKER_01]: in the short term and our call has been i think vix they stick around 20 through this um as well

[00:50:27] [SPEAKER_01]: and lastly just to give another view view going forward so this is what we'll be covering in

[00:50:32] [SPEAKER_01]: the next equity expiration these are our gamma curves from a new proprietary uh tool that we have

[00:50:38] [SPEAKER_01]: on beta beta testing this and i wasn't ready to kind of show this to the world but the

[00:50:42] [SPEAKER_01]: data in here has been so valuable navigating last week and giving the environment want to

[00:50:46] [SPEAKER_01]: show this so this is our our gamma curve here in black and the key here is that the more positive

[00:50:52] [SPEAKER_01]: this is is where the big resistance is in the market so right now that's at 5400 to 5450 we see

[00:50:58] [SPEAKER_01]: a lot of what's called positive dealer gamma and that is a big resistance area for us into

[00:51:03] [SPEAKER_01]: this next week in particular and then you know out of jackson hole we'll see kind of what happens

[00:51:07] [SPEAKER_01]: so uh because of this dealer gamma situation as the market rallies we're going to see people

[00:51:13] [SPEAKER_01]: likely selling calls into that in the short term and that means that dealers will be selling

[00:51:17] [SPEAKER_01]: rallies and buying dips that really kind of squashes volatility and keeps the market pinned in that area

[00:51:22] [SPEAKER_01]: so this 5400 uh to 5450 into kind of jackson hole is really what we're watching um and then to the

[00:51:30] [SPEAKER_01]: downside what you can see is when this black line goes into a what's called a negative gamma

[00:51:35] [SPEAKER_01]: position is where risk really picks up and volatility really picks up and what's interesting

[00:51:40] [SPEAKER_01]: about this is that there's not a lot of negative gamma now until you get really under 5200 in the

[00:51:46] [SPEAKER_01]: s&p so that's you know where you know we'd have a really major shock to the downside i think um but

[00:51:53] [SPEAKER_01]: that major shock to the downside is you know a function of a longer term trade in the short

[00:51:58] [SPEAKER_01]: term if we break 5300 there's this kind of like slipstream area about 5200 so in our notes

[00:52:04] [SPEAKER_01]: this morning wrote look we break 5300 of the downside we're looking for 5200 to get tested

[00:52:09] [SPEAKER_01]: and then we'll probably trough in there a little bit um and while we wait for another data point to

[00:52:14] [SPEAKER_01]: come along right so you know there there's a lot of instability i guess is how i take it under the

[00:52:18] [SPEAKER_01]: 5300 level in the s&p 500 we don't think you should be naked long of equities under 5300 in the s&p

[00:52:25] [SPEAKER_01]: you know look for some type of hedge uh at least right or make some downside bets in the option

[00:52:30] [SPEAKER_01]: space to to bet on more volatility um am i right in saying because this is usually the case

[00:52:35] [SPEAKER_04]: of these round numbers am i right in saying that below that there's probably big support at 5000

[00:52:40] [SPEAKER_01]: there there is not in this case you know there there there was because there's so many positions

[00:52:45] [SPEAKER_01]: there so i would look at that as being a sport and resistance line because there's just so much

[00:52:49] [SPEAKER_01]: options activity at that level um you know if we broke 5200 i think we would go down to

[00:52:54] [SPEAKER_01]: 5000 pretty quickly um and then you know as you can see this black line starts to really

[00:53:00] [SPEAKER_01]: drop and that's sort of like the abyss down there right so i do think 5000 uh is a support level

[00:53:06] [SPEAKER_01]: because of the size of options positions but as far as the gamelan specifically um you know there's

[00:53:12] [SPEAKER_01]: not there's not a big increase in positive gamma at that level uh which is why i say you know i

[00:53:18] [SPEAKER_01]: would be a little more more speculative speculative on support there um the other interesting thing

[00:53:24] [SPEAKER_01]: here is this is that same gamma curve from last uh thursday right so i compared them so what

[00:53:29] [SPEAKER_01]: you can see is all the positive gamma was up near 5500 remember we said when we broke 5500 last

[00:53:35] [SPEAKER_01]: thursday things just hit this slipstream right and we went down to 5100 which is where this troughs

[00:53:41] [SPEAKER_01]: and stopped and so what's the takeaway here is we lost a lot of puts puts were closed which

[00:53:46] [SPEAKER_01]: which is why this yellow line shifts up the black line meaning negative gamma went from negative

[00:53:50] [SPEAKER_01]: two uh negative two billion dollars per one percent moved to zero at downside strikes which tells us

[00:53:55] [SPEAKER_01]: that people just closed puts up the second thing is they sold calls when the market rallied so the

[00:54:00] [SPEAKER_01]: position of the market right now is they're short they're short calls over 5400 really which is saying

[00:54:05] [SPEAKER_01]: hey i don't think the market's going to go up that high anymore but we're also not long puts

[00:54:09] [SPEAKER_01]: anymore because vol was kind of high we closed up our put positions some short puts got closed

[00:54:14] [SPEAKER_01]: and we basically removed that that that downside flow so if there is another trigger of hey we

[00:54:20] [SPEAKER_01]: got to worry about a recession or downside i'm expecting a lot of people to start to buy

[00:54:24] [SPEAKER_01]: puts or reinitiating puts because i don't think that the market's all that well hedged at the moment

[00:54:31] [SPEAKER_01]: and then the same thing from the vix call perspective there's a big what looks like a big

[00:54:34] [SPEAKER_01]: vix short call not 21 uh which i think will be removed into vix expiration next week so i don't

[00:54:40] [SPEAKER_01]: you know unless there's a big standard deviation miss in cpi or ppi i think the market will remain

[00:54:46] [SPEAKER_01]: fairly stable and we'll just take it as a ball event but there is this fairly big vix 21

[00:54:50] [SPEAKER_01]: looks like call position and so dealers right now have actually a pretty favorable position in terms

[00:54:56] [SPEAKER_01]: of risk at the vix spikes that's why this black line is above zero um whereas heading into the event

[00:55:01] [SPEAKER_01]: which is the yellow line they were in a situation where they were going to have to chase to to hedge

[00:55:05] [SPEAKER_01]: volatility if it spiked so they're not really in that position anymore in through next week uh

[00:55:11] [SPEAKER_01]: and then next week with vix expiration we're going to remove a lot of positions that that

[00:55:15] [SPEAKER_01]: will allow the market to get a lot more volatile uh really into jackson hole so you know the takeaway

[00:55:21] [SPEAKER_01]: here is i'm expecting a pretty calm week um really through kind of vix expiration and then i think after

[00:55:27] [SPEAKER_01]: vix expiration that's where things can start to get a little bit wild again uh you know obviously

[00:55:32] [SPEAKER_01]: boring some type of multi standard deviation mission ppi cpi or retail sales so yeah this

[00:55:37] [SPEAKER_04]: is great we got we even got it in under an hour um we had our longest one last time we uh

[00:55:41] [SPEAKER_04]: we're still on the law of your side but i think there was so much good stuff this week and

[00:55:44] [SPEAKER_04]: it's just interesting i mean this this thing came up so quickly and was so violent like for people

[00:55:50] [SPEAKER_04]: like me who are outside of the options market like i think we're trying to make sense of this

[00:55:53] [SPEAKER_04]: it's like figuring out what happened you know sometimes these things like it's like did somebody

[00:55:57] [SPEAKER_04]: blow up behind the scenes what's going on like is there's something fundamental here that's

[00:56:02] [SPEAKER_04]: going to carry forward and it just seems like there's so many questions and i think looking

[00:56:05] [SPEAKER_04]: behind the scenes of what's going on here helps us to maybe find out what the answers are at

[00:56:08] [SPEAKER_01]: least partially to some of this yeah 100 and i think you know that's what my hope is is that

[00:56:14] [SPEAKER_01]: we could easily identify all these imbalances we started talking about these out imbalances back

[00:56:19] [SPEAKER_01]: in april right and so the reason i bring that up is because the imbalances were there and a

[00:56:23] [SPEAKER_01]: lot of times they were worsening or becoming more extreme and you don't know the trigger and and i

[00:56:28] [SPEAKER_01]: think that's oftentimes is that you get one of these triggers that comes along that no one

[00:56:31] [SPEAKER_01]: was looking at in this case with the n carry trade and then you get you know the flows

[00:56:36] [SPEAKER_01]: that have to get unwound and you can see them being unwound in the options market right in the

[00:56:39] [SPEAKER_01]: walls in the positions and all that and so when you know that you can have a more level headed

[00:56:44] [SPEAKER_01]: assessment of of what actions do i need to take right so on a monday morning what do i need to do

[00:56:50] [SPEAKER_01]: why did the vixit 65 is is the world really ending or are these flows exacerbating that and

[00:56:55] [SPEAKER_01]: you know should i play a bouncer should i sell ball or how do i handle this and i think

[00:56:59] [SPEAKER_01]: when you know hey people were forced to cover that's a different trade than hey you know

[00:57:04] [SPEAKER_01]: a bank is going down we don't know which bank and there's a systemic risk here right and so

[00:57:09] [SPEAKER_01]: you know that's the point of watching the options market these flows is because

[00:57:12] [SPEAKER_01]: you see the manifestation of the of the positions if people really are scared of a recession they're

[00:57:18] [SPEAKER_01]: going to buy puts and you're going to see that show up in the market as a very basic example so

[00:57:21] [SPEAKER_01]: i hope that it's helped everyone to navigate these last couple weeks and there should be some

[00:57:26] [SPEAKER_01]: very interesting signals here starting to form over the next couple of weeks looking for

[00:57:31] [SPEAKER_04]: yeah for your average investor i mean the brent donnelly had a really funny chart on twitter where

[00:57:35] [SPEAKER_04]: he was showing like all these big vixx spikes you know 50 60 and all of them had like this major

[00:57:40] [SPEAKER_04]: major event associated with him and then the last one he put slightly weak payrooms for this

[00:57:44] [SPEAKER_04]: all that's right yeah it just gets at the idea that like your average investor is being like

[00:57:48] [SPEAKER_04]: what the hell's going on here like you know this this doesn't make any sense that it's like to

[00:57:52] [SPEAKER_04]: 60 on something you know i'm in the end carry trade but it's it's just not at the

[00:57:56] [SPEAKER_04]: type of event your average investor would expect to see a spike to 60 on that's right

[00:58:00] [SPEAKER_01]: and if you said you know if he erased that and wrote hey look um you know breath the worst breath

[00:58:05] [SPEAKER_01]: we've ever had um or you know if lowest correlation we've ever had uh vixx beta at zero like i could list

[00:58:11] [SPEAKER_01]: on that chart 50 things that were incredibly strange um in positioning that you suddenly be

[00:58:17] [SPEAKER_01]: like oh okay vixx 65 suddenly i get it so maybe i should go and revise a brent chart one brent's

[00:58:22] [SPEAKER_04]: it's almost like that the pre-existing conditions were such that it wasn't going to take

[00:58:25] [SPEAKER_04]: a massive event like that to get the 65 spike because of all the weird stuff you had talked

[00:58:30] [SPEAKER_01]: about that was already going on yeah and this is the new environment in terms of options uh

[00:58:34] [SPEAKER_01]: space right record options volume has only been around for a couple years zero dts only been around

[00:58:39] [SPEAKER_01]: for a couple years right so so these are new you know a lot of new phenomenons and we are in a

[00:58:44] [SPEAKER_01]: very derivatives heavy market and i think things get unwound very quickly and so you see these huge

[00:58:49] [SPEAKER_01]: spikes and these huge jumps and you know the the other thing that i think is the red light

[00:58:54] [SPEAKER_01]: that people need to pay attention to is that liquidity evaporated in this situation right

[00:58:58] [SPEAKER_01]: and and i think that is you know that's going to be a hallmark of the next uh a crisis here where

[00:59:04] [SPEAKER_01]: we're going to get something that actually is a sustained issue and that liquidity may not

[00:59:08] [SPEAKER_01]: be there for a couple of days as opposed to just okay for a few hours like we don't have liquidity

[00:59:13] [SPEAKER_01]: right and i and i think that that is a you know that is a real risk that that people need

[00:59:17] [SPEAKER_01]: to be aware of things are very fragile i think you know they have per state perceived stability

[00:59:22] [SPEAKER_01]: but when you have the options market be such a huge function of what people are trading or huge

[00:59:27] [SPEAKER_01]: uh amounts of what people are trading when that liquidity evaporates like it is really gone in a

[00:59:33] [SPEAKER_04]: way that that is i think unique and that's what worries me is just as a long-term investor and

[00:59:37] [SPEAKER_04]: i'm always a positive guy not a doom and gloom guy so i don't want to be that way but like

[00:59:41] [SPEAKER_04]: what worries me like is with these pre-existing conditions like what happens if china invades

[00:59:45] [SPEAKER_04]: taiwan or something like what if you get a major event like what does it look like then

[00:59:49] [SPEAKER_01]: if it looked like this based on what we saw yeah you're totally right and but i the same tone

[00:59:55] [SPEAKER_01]: like if you know that this is what the issue is right and that will maybe prevent you from selling

[00:59:59] [SPEAKER_01]: in the hole right on monday morning and knowing like hey you know the reason that this is dropping

[01:00:04] [SPEAKER_01]: and i can't explain is because liquidity stinks and the options market's driving this thing and

[01:00:08] [SPEAKER_01]: i think you know you know invidia stock is value at 90 bucks um that can help you make a

[01:00:13] [SPEAKER_01]: better more level-headed decision i think if you know it's just sort of the positioning

[01:00:17] [SPEAKER_01]: aspects of what is is causing some of the chaos i think that could be a valuable lens to see things

[01:00:24] [SPEAKER_01]: through you know oftentimes because a lot of these moves people don't get it like the brent donnelly

[01:00:27] [SPEAKER_01]: chart i'm not speaking you know poorly about brent he's he puts a lot of great content but to his

[01:00:32] [SPEAKER_01]: point it's like i don't understand it and if you don't have our lens on the options market

[01:00:36] [SPEAKER_01]: you're not going to understand it right just like i don't understand a lot of how people are going

[01:00:39] [SPEAKER_01]: to navigate rate cuts and recessions and all stuff going forward i'll leave that to

[01:00:43] [SPEAKER_01]: to the other brent uh to figure it out yeah i think he was posting it mostly as a joke because

[01:00:47] [SPEAKER_01]: he was a very funny thing yeah like funny because i think a lot of people like that i don't understand

[01:00:52] [SPEAKER_01]: why the vix is at 75 like what is going on right so i think that's a good note to wrap up on you

[01:00:58] [SPEAKER_01]: said the slides are at spotgama.com slash opx is that right that's exactly right so opx you can

[01:01:02] [SPEAKER_01]: go over there and uh and grab these uh grab these slides and uh we'll be producing a lot more

[01:01:07] [SPEAKER_01]: opx content this week uh so please uh come check us out for that all right thank you everybody

[01:01:12] [SPEAKER_03]: for joining us and we'll see you next time thanks for this is justin again thanks so much for tuning

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