Tesla, Trump and the Return of Meme Mania | Inside the Flows Driving the Post Election Rally

[00:00:00] The markets were just going crazy. And I think that when you look at valuation now, people go,

[00:00:07] this can't get crazier. And then when I look at three straight people and I go, yes, it can.

[00:00:10] So it becomes this reflexive feedback loop because the more shares you buy, the more you push

[00:00:15] the stock up, which means that you have to buy even more shares of stock to maintain your hedges.

[00:00:19] And so this is the essence of the squeeze. And this is something that we've really seen in Tesla.

[00:00:24] If the VIX like it did, it went from 20 to 14. Guess what? The stock market's probably going up.

[00:00:28] And that's a result of flows, right? Nothing fun to learn about it, just flows.

[00:00:32] And the bigger the options market gets, right? The more this volume increases,

[00:00:36] the more hedging flows associated with all this. Welcome to The OPEX Effect,

[00:00:39] a joint podcast from Excess Returns and Spot Gamma, where we take a deep dive into the world of options

[00:00:43] and the flows they generate in the markets. Join Brent Kochuba and Jack Forehand every month

[00:00:47] on Options Expiration Week as they look at the major developments in the options world

[00:00:50] and how they impact all of our portfolios. No information on this podcast should be

[00:00:54] construed as investment advice. Securities discussed in the podcast may be holdings of clients

[00:00:58] of the Liddy Capital.

[00:00:58] So Brent, I think it would be fair to say things are going well in markets, you would say?

[00:01:03] Markets are up. Things are getting meme-y, I guess I would say. We were joking about

[00:01:07] Scottie Pippen entering the Decoy Arena now. There's been an appearance on Cathie Wood and

[00:01:13] Elon Musk and stuff. So yeah, we're in beginnings of meme mania, I think.

[00:01:18] Yeah, it's always hard to tell. And we're going to talk a little bit about this as we go,

[00:01:21] but it's very hard to tell how long meme mania will last. We've seen some in the past and they,

[00:01:26] you know, they can go for a long time, they can go for a short time. Sometimes it's hard to tell.

[00:01:31] Yes. And the thing that you think of now is the famous George Soros quote, you know,

[00:01:37] when he sees a bubble, he rushes in to buy. And that kind of feels like we're at the

[00:01:43] blowing bubble haze, but we'll see as we march forward here. But there's a lot of interesting

[00:01:47] signs out there as we're going to find out in the options market. A bunch of interesting things

[00:01:53] percolating here. It's the end of the year.

[00:01:56] And even my value stocks are getting involved. And when they're getting involved,

[00:01:59] things must be getting really crazy.

[00:02:01] That's what you said.

[00:02:03] I wish you were joking that for the first time in 20 years, maybe value stocks will start to work.

[00:02:09] But maybe we're hoping to be dashed by next week.

[00:02:13] I'll call Cory on.

[00:02:15] I'm pulling for myself as well. But what we tried to do with this podcast is we really wanted to

[00:02:20] explain, you know, flows are such a huge part of what goes on in the markets. And for long-term

[00:02:25] investors, I think many of them, including myself, don't really appreciate how important flows are.

[00:02:29] And so we wanted to use this podcast to help people understand what they're seeing in the market

[00:02:34] and what the flows are that are driving what they're seeing. And we have two really good examples

[00:02:38] right now, probably more so than we've had in any other episode to discuss this. We have obviously

[00:02:43] what's going on with Tesla and things have been getting pretty riled up there with Tesla.

[00:02:47] And we also have the election. And we've talked a lot in previous episodes about the election

[00:02:51] and about hedging into the election and about what that can lead to after the election. So

[00:02:55] we're going to dig into both of those today. And you have some great charts behind the scenes so

[00:03:00] we can see what's actually happening and people can better understand why they're seeing what

[00:03:05] they're seeing.

[00:03:06] Yes. And to your point on fundamental stocks, my position is that flows over fundamentals. And I

[00:03:12] guess if you have a 20-year view on something, then maybe you'd want to change that perspective a little bit.

[00:03:16] But the options market and the rush into the Trump memes as soon as Trump was elected kind of

[00:03:24] shows us that, right? I mean, a lot of these names, like you mentioned, Tesla's up 25, 30% in the two

[00:03:28] three four days after the election. And some of these other kind of themes that Trump seems to be

[00:03:33] standing for really, you know, we just gas those returns. And some of the things you would get,

[00:03:39] like you look at a part of General Mills, which is a sugar stock, you know, they sell a lot of junk food.

[00:03:44] That stock can't catch a bid now, which is, you know, a Bobby Kennedy set. So people are really

[00:03:50] entrenching themselves in these Trump themes, backing this idea of, you know, flows over fundamentals,

[00:03:57] at least in the short term.

[00:03:58] Yeah. You know, you can argue, and it's actually true that, you know, in recent years, we've been

[00:04:02] seeing this prominence of flows over fundamentals much more than we've seen in the past. But even

[00:04:06] for, and I'm a big believer in fundamentals, but even for those of us that are believers in

[00:04:10] fundamentals, we have to understand that fundamentals in a large part are important because they lead

[00:04:13] to flows. Like if people believe in fundamentals, their flows are then based on the fundamentals and

[00:04:19] you see it translated in the market. And maybe you've been seeing a little bit less of that in

[00:04:22] recent years. You've seen a little more of a flows dominated market where people don't care as much

[00:04:26] about the fundamentals.

[00:04:28] Yeah. And I think that the, the thing that ties into that is we spent a lot of time talking

[00:04:33] about the Nvidia options complex. I think that was in our September OPEX conversation. The idea

[00:04:37] or the, the, the TLDR of that is that there's not that much underlying liquidity less, but there's a

[00:04:44] lot of dollar floating around demanding sort of Nvidia shares, right? So you think about passive

[00:04:50] investing and indexing and, and, uh, all these new ETFs and, and individual holders and their 401ks and

[00:04:56] all that kind of stuff. Is there actually that much underlying liquidity left? And then you slap on

[00:05:01] top of that, all these options positions, which, which create hedging demand for underlying shares.

[00:05:06] And, you know, just the idea that it creates almost like a scarce share city, a share scarcity

[00:05:12] in some ways, um, that, that I think can be a real driver of things here. So, uh, it's a very

[00:05:17] interesting dynamic, you know, that, that I think is, this is a trend that's going to continue over time

[00:05:22] because that underlying liquidity may continue to dissipate as well as options growth, you know,

[00:05:27] continuing that, it just, you know, kind of break the link between fundamentals and, uh,

[00:05:34] and stock values or, or reset them. And one of the things I realized, you know, when you realize how

[00:05:38] important these option flows are in terms of what drives the market on a day-to-day basis,

[00:05:42] the other thing you realize is as more and more people use these options, it becomes even more

[00:05:46] important. And that's what this first slide gets at is this idea that way more people are using

[00:05:49] options now than used to. Yeah. The, the growth is, uh, I mean, that's a convex, uh,

[00:05:55] a chart that you're looking there. It's hyper, it's a, uh, uh, it's just this hyper growth that

[00:06:01] we're seeing, uh, driven now by, you know, a large part by zero BTE and short dated options.

[00:06:05] That's not the entire story. Uh, you can see that longer dated growth and, you know, the,

[00:06:10] the rumors are they want to increase to daily options in their single stock side. And, you know,

[00:06:15] we see growth from international investors coming into us markets. And, and so look,

[00:06:19] uh, you know, this is a, this is a theme. I don't think you want to short options volume,

[00:06:24] uh, anytime in the, in the near term, um, as, as the growth just keeps accelerating.

[00:06:29] And it's coming from a bunch of different sides, right? Like put buying, call buying indexes,

[00:06:33] single stocks, like it's all, it's all really, uh, increasing.

[00:06:38] So on this next slide, this is a good opportunity to talk about Tesla, because this is something we

[00:06:42] talked about with GameStop in the past and with Tesla now, but first of all, it would be fair to

[00:06:46] say that a lot of what's going on with Tesla right now is options driven flows, correct?

[00:06:51] I, I firmly believe that. In fact, on Friday, we saw 4.8 million Tesla calls trade. That was the

[00:06:56] most since early 2020. Um, and, and that is a, a, it's an obscene number of calls traded. And so,

[00:07:04] you know, that volume coincided with, I think a 15% rise on, on Friday. So, you know, you see the,

[00:07:11] the most volatility in the days when the most options, uh, contracts are trading. Those,

[00:07:16] those two are very high relate. And so, uh, you know, there's a lot of evidence,

[00:07:20] statistical evidence that supports, you know, more call buying with higher upside volatility in stocks.

[00:07:26] Can you use this slide to sort of explain what's going on behind the scenes? Because this does a

[00:07:29] really good job of, of explaining what's happening and maybe relate that to Tesla to what we're seeing

[00:07:33] now. Yes. So in this chart here, we have AMC calls, but we're going to talk about Tesla here,

[00:07:38] because it's, uh, you know, just replacing the stock name here. Uh, all means, uh, trade the

[00:07:42] same way. So what, what happens is there's 17 different options exchanges. I believe that's

[00:07:47] the latest number. Um, there's going to soon be 18. And so what happens is when you or I,

[00:07:52] we're on our E-Trade or IB or whatever our platform is, and we go out, we buy some calls,

[00:07:56] that goes down to the options exchanges and 90% of the order flow traded on the exchanges is done by

[00:08:02] market makers. And so what happens is when we each go through, we're buying a small amount of call

[00:08:07] contracts, right? In this case, it's 10 Tesla calls or 10 ANC calls. Um, that exposure that the market

[00:08:14] makers, uh, have starts to increase rapidly, right? Cause they don't know ahead of time that

[00:08:19] this order flow is going to come in. They just suddenly start getting hit, right? Uh, you know,

[00:08:23] they start selling you calls. They start selling me calls. They start selling everyone else on wall

[00:08:27] street bets or Twitter or whatever else it is. And then on top that you have institutional buyers

[00:08:31] as well, which can get bigger chunkier position. So what happens is everyone buys small

[00:08:36] odds like 10 lots, but then suddenly that exposure can increase rather sharply.

[00:08:40] And in the market makers are sitting and saying, Oh, we're now short a whole bunch of calls.

[00:08:44] In this case, a hundred thousand calls. And so if the stock starts to go up, uh, those calls

[00:08:50] which are short will start to, they'll, they'll start to lose money as a result of that position,

[00:08:54] right? Cause, cause if you're short calls and a stock was up, your, your P and L is going down,

[00:08:58] right? You're losing money. But the way that you would hedge in theory is by buying the underlying

[00:09:02] stock. Uh, and not only that you have to buy more stock as the stock continues to go up to maintain

[00:09:08] your hedge profile. And so this is what we call a gamma squeeze, right? Because, uh,

[00:09:13] gamma measures how much stock you have to buy, uh, as the underlying goes up. And so what that

[00:09:19] essentially means is that when the, uh, underlying in this case, if we're looking at Tesla here,

[00:09:25] uh, the market maker shorter a hundred calls in this example, that's a 50 Delta option,

[00:09:29] which means that they have to buy 50 shares for every call they sell. Um, that's their initial

[00:09:34] hedge, right? In this case, 5 million shares. That's your initial hedge. But as soon as the

[00:09:39] stock price starts to go up, you have to buy more shares of stock in addition to that, in this case,

[00:09:44] 5 million shares that you already bought. Um, and so the result is obviously that when they're big

[00:09:49] enough and you're buying enough shares, you're pushing up the price yourself, right? So it becomes

[00:09:53] this reflexive feedback loop because the more shares you buy, the more you push the stock up,

[00:09:58] uh, which means that you have to buy even more shares of stock to maintain their hedges.

[00:10:02] And so this is the essence of the squeeze. And this is something that we've really seen in Tesla,

[00:10:06] uh, over the past week. You also see in Palantir as well as some of the Bitcoin names,

[00:10:11] which are just going kind of bananas as well. So, you know, this is a feature of markets,

[00:10:14] um, that, that is really pertinent, uh, in the current environment.

[00:10:19] What ends something like this? I mean, obviously these things go on with GameStop. We saw something

[00:10:23] go on for a lot longer than we thought it would, but what leads to one of these things finally ending?

[00:10:27] Yeah. So in this chart you can see here is that, you know, we're buying calls,

[00:10:30] the deer short the call and they have to buy the underlying stock. So they're trading with the

[00:10:34] market. Um, there becomes a certain point in time where, and the market makers are better at this now,

[00:10:40] they, they move the price of calls to such a level that they become objectively expensive,

[00:10:46] right? Meaning that even if you buy the call, the odds of that call paying off because you paid so

[00:10:51] much more decreases, right? So let's give you an example. If I say, Hey Jack, do you want to buy a,

[00:10:57] stocks at three 50 right now? Let's say right. Three 25. Hey Jack, do you want to buy a 400 call?

[00:11:01] And I say, and you say, yes. And I say, it's a dollar. You say, great. I'll buy that call right

[00:11:05] away. But if I go to you and say, Hey Jack, you want to buy that 400 call? The same one,

[00:11:08] it's now a hundred bucks. You're probably going to say no, right? Because the odds of you making money

[00:11:12] on that call have dropped significantly, right? It's not worth the risk anymore.

[00:11:16] And so that is a, that what that does when they raise the prices of the calls to extreme levels,

[00:11:21] it does a few things. Number one, it incentivizes call selling, um, which either if you own the call,

[00:11:27] right? And you say, Oh, they're going to sell this. I could tell us for a hundred bucks now,

[00:11:30] good. I'm out. Uh, or you want to short that call, right? Cause it's just so expensive. They

[00:11:34] don't want to short that call option. Um, and the way that we can see this is through

[00:11:42] it's very high. That could be a sign that this is going to tip over. Um, because again,

[00:11:47] once those calls get really expensive, that, that drives up the bond and it starts to incentivize

[00:11:51] sellers. And that kind of turns the momentum of the stock the other way.

[00:11:56] And I think you're looking at this a little bit in the next slide. You're looking at implied

[00:11:58] volatility. You're looking at time and you're looking at how all that impacts everything.

[00:12:02] Yeah, that's exactly right. So in this case, you know, here's a standard Delta curve for a

[00:12:06] 60 strike call option. Um, and what you see is that again, in this case, if you were to buy

[00:12:11] when the stock is at 60, you could see that's a 50 Delta option. That's 50 shares.

[00:12:15] And remember before I said, if the stock was up, you got to buy more shares. Well,

[00:12:18] that's why this Delta curve is going higher, right? Cause at 65, the Delta of this particular

[00:12:23] option goes to 65. So what does that mean? Well, I had a 50 Delta before now my Delta 65,

[00:12:28] I had about 15 shares, right. To make up for that difference. Um, and then, so, you know,

[00:12:32] that is the, that is the squeeze part or the squeeze component. And on the right chart here,

[00:12:37] you can just see that as implied volatility shifts, so as, as options demand, uh, increases or decreases,

[00:12:44] that changes the hedging profile as well. Uh, that can dictate. So some people would refer to this as

[00:12:50] Nana flow, uh, as implied volatility goes up and down, that increases the number of shares that have

[00:12:55] to be bought and sold. And then the last one here also is time as time shifts that can also dictate

[00:13:00] the number of shares that have to be bought and sold as well. So if you think about Tesla in the

[00:13:05] context of this week, it's options expiration week, and there's a lot of positions expiring at

[00:13:09] Tesla. So Tesla implied volatility is currently very high. So look at this out of the money option.

[00:13:14] Remember the stocks that 60 in this case, in the implied volatility chart, if implied volatility is

[00:13:19] 40% for that Tesla call, and all that happens is implied vol goes from 40 to 20. You can see

[00:13:25] that Delta decreases, right? So that infers that dealers would have to reduce their long position,

[00:13:30] their long hedge position because that Delta is dropping. So that gives you an example of how

[00:13:34] a decrease in implied vol can start to lead, lead sellers, lead to sellers. And then the second one

[00:13:39] here is time. It's the same thing here where you see out of the money options, uh, as we move closer

[00:13:45] to expiration, those options lose Delta. So a month, an option with six months expiration as 25 Delta,

[00:13:52] that same option at the same price. So all else equal when there's only a month to expiration,

[00:13:57] that option Delta goes from again, 35 down to about five. So that's kind of the charm or time decay

[00:14:02] aspect. And so, you know, this all sounds rather complicated, but what it lead allows us to do is

[00:14:07] we can map out dealer positioning, uh, in the curve position, right? What they currently have on

[00:14:12] and then say, what happens if implied vol shifts, what happens as time decays or moves on how those

[00:14:17] hedging flows set to, to, to shift and adjust. And so you get extreme market environments like this,

[00:14:23] where Tesla implied vol is extremely elevated as we're going to show in our presentation.

[00:14:27] And you just say, look, odds are that this is not sustainable. And so this is likely to reverse.

[00:14:33] And then we can map out using these metrics that you see in our screen here, how those flows may

[00:14:37] drive the underlying price. And we're going to get into this later as well, but this,

[00:14:42] this works as well with the election, right? The idea of options flows, because we have a lot of

[00:14:45] people hedging something like an election. We, we just, you and I just interviewed Chris Sidial,

[00:14:49] and he was talking about what he was seeing behind the scenes. And we had a bunch of people

[00:14:52] hedging this election. And then we, that event passes and we don't get the crazy negative outcome

[00:14:58] people are hedging for. Then these flows drive the whole market up. Is that, is that right?

[00:15:02] That's exactly right. And so we mentioned that the idea of Vanna as a area market flow. And when,

[00:15:08] when volatility drops, just take the VIX and the VIX goes from 20 to 14, that is in a simplified

[00:15:14] version. That means that stock buyers are going to come out. And why is that? So let's take this

[00:15:19] chart as an example. Yeah. As you can see here, let stocks at 60, right? But look at the out of

[00:15:25] the money put, right? The, the 50 strike put when the put implied balls at 40, the delta of that put

[00:15:31] is 10, which means that if I'm the market maker and I'm short that put, because I sold it to you,

[00:15:35] Jack, you're hedging the election. I need to have short 10 shares to hedge my position. Well,

[00:15:39] the minute that the election comes out and implied ball drops on this case, it goes to where the green

[00:15:43] line is. That's 20%. That means I don't need any deltas up to hedge that position anymore. So what do

[00:15:48] I do? I buy back 10 shares of stock. And so when you think that, Hey, there's millions of

[00:15:54] put contracts on right now, and we just take implied ball, we smash it. What does that mean?

[00:15:58] Well, you can see here, that means that their stock hedges to buy as a result of just implied

[00:16:03] volatility dropping, right? Not as the bullish expression of Trump, not as anything else,

[00:16:09] just the fact that we no longer need to be so short as, as market hedgers, as options hedgers.

[00:16:13] And we can, we can start to buy underlying stocks, which moves the market higher. And then obviously,

[00:16:18] if you move the market higher, put values decrease as well, right? Because that, uh,

[00:16:23] that's a negative deltas, uh, that you can then cover as a result of, of, uh, of the market going

[00:16:28] higher. So again, that's a reflexive loop, but you can, you know, we refer to it as this kind of

[00:16:32] van of flow, this, this driver, uh, driver of market flows due to changes of implied volatility.

[00:16:40] Yeah. I mean, this was really eyeopening for me when I realized this, because you sort of see

[00:16:44] with a lot of these elections, people are panicked, people are worried about something.

[00:16:47] And we've seen it, I think three straight elections in a row now for various reasons. And every single

[00:16:51] time we rallied, you know, post-election, um, that all that stuff came off, you know, and we rallied.

[00:16:56] Yeah. And we have, we have a bunch of charts that will detail exactly how implied ball,

[00:17:00] you know, shifted after the election. But, you know, if you just take, I know there's a lot of

[00:17:04] complicated terms and frameworks in here, but if you just say, Hey, look at the VIX goes from 10,

[00:17:08] you know, to 15. Well, that means the market's probably going to go down. Right. And there's

[00:17:13] flows associated with that. And then reverse wave, the VIX, like it did, it went from 20 to 14.

[00:17:17] Guess what? Back market's probably going up. Uh, and that's a result of flows, right? Nothing

[00:17:22] fun about it just flows. And the bigger the options market gets, right? The more this volume increases,

[00:17:27] the more hedging flows associated with all this. And so the more impactful, uh, you know,

[00:17:32] these, these hedging flows become. And one of the things we always talk on the podcast is,

[00:17:36] this is not just elections or the fed or these other events, but we also have these expirations.

[00:17:40] Yeah. And these expirations, you know, when we have these types of things going on, something like

[00:17:44] Tesla, these expirations can play a big role in what goes on going forward.

[00:17:48] That's exactly right. And it ties into these, these, you know, fundamental, uh, examples we gave here,

[00:17:53] uh, because, you know, there's kind decay, right? Which shifts hedging profiles. There's changing,

[00:17:58] uh, positions around big expiration. Gamma increases as we get closer to expiration,

[00:18:04] for example. So there's a lot of, again, uh, you know, sort of modeling behind this that just shows

[00:18:09] us that these options was really start to grab hold, uh, into big expirations. And the third Friday

[00:18:15] of each month is really the biggest expirations. And so the idea here is that there's a cycle when we

[00:18:20] get into options expiration, which is where we're approaching here for Friday. Um, that is where the,

[00:18:26] the maximum positions are right. So positions are at their biggest gamma is at its highest. And then what

[00:18:31] happens after options expiration, the contracts expire, positions are reduced associated to the

[00:18:36] hedges are covered. And then we start the next cycle in this case in the December. Right. Um,

[00:18:41] and that is what we've referred to as the OPEX cycle. And you can see that in price movement

[00:18:45] in some of the statistics, statistics that we have here, uh, that, that this can be impactful to the

[00:18:50] way the underlying, uh, shift. Yeah. This next slide really shows that, right. It shows some of these

[00:18:55] expirations were major turning points. And it seems like whenever the market's moving in one

[00:19:00] direction and everybody gets on that side of the boat, you, you have more odds of a turning point.

[00:19:04] Yeah, that's exactly right. And so, you know, the, the, the cleanest, most indisputable moments had

[00:19:09] been during large drawdowns. And that's because the S and P volatility get it to its highest point when

[00:19:15] the market's crashing, put positions, get to their largest size when the markets are crashing.

[00:19:19] And so, you know, those mark literally, you know, uh, the day to the biggest drawdowns that we've had

[00:19:26] over the last five or six years in this case, you know, March of 2020, December, 2018, uh,

[00:19:32] September of 2023. I mean, you can go through the list of, of major lows. Um, and there've been some,

[00:19:37] some significant highs as well. I think, you know, you look at this chart and we say, uh, there's a lot

[00:19:41] of red X's on here, but not all options, options expirations are massive, right? Uh, not all of them are

[00:19:46] impactful. So to your point, when you really stretch the ball and you really build massive positions,

[00:19:51] that's when you really see, uh, major turning points. And as we look at the current expiration,

[00:19:56] I saw you posted this on Twitter that 6,000 was a big number. Yeah. Um, you know, this is beast mode

[00:20:02] here. This is, this strike has about seven or $800 million in, you know, I call absolute gammas.

[00:20:08] Let's just take them out of open interest. And you say, how much game is that? Uh, I don't net positions

[00:20:12] at all. And this is what you see here is that there's this giant massive level at 600. Uh,

[00:20:18] the 600 spider calls are also bigger. So that's around 6,015 in spider equivalent or SDX equivalent.

[00:20:25] And this is just a source of hedging flows, right? I mentioned gamma's highest for at the money.

[00:20:29] Gamma also increases as we get closer to expiration. So what does that mean? Well,

[00:20:33] that means that if we're anywhere near the 6,000 strike, uh, over the coming days, that 6,000 strike

[00:20:38] just becomes a bigger magnet, right? It becomes more of a source of hedging flows.

[00:20:42] And to that point, we had an SPX low today of, uh, 56, 60 and the market very quickly in the next 10

[00:20:50] minutes just rallied right back to this 6,000 level. Right? So it becomes like this, you know,

[00:20:55] magnet area for, for flows, uh, into Friday. And then on Friday, we're going to lose about a third

[00:21:00] of this position, which kind of untethers the market to this strike. So to 6,000, once we break

[00:21:07] through it, does it, does it become like a significant support for the market on the downside?

[00:21:11] Yeah. I, it, it, so the way that I look at this is that you have these big levels, right? That will,

[00:21:17] once we get kind of to the upside of them, they become these support levels that are,

[00:21:21] are baselines, right? For the market to move forward. And so you can see there are previous

[00:21:25] baselines here, right? 5,900, 5950, et cetera. And so the market naturally works above those. Um,

[00:21:32] this is what we call a positive game environment where those positions create buyers if the market dips

[00:21:37] down to those levels, right? So if we dip down to 5950, this positive gamma flow that we're monitoring

[00:21:43] here dictate that market makers probably have to buy that dip, right? Or they're going to continue to buy

[00:21:47] that dip until you get to 6,000 and then, and then they stop. So eventually as we work above 6,000,

[00:21:53] right into the 6050 area, for example, there's a big position there. Um, those market maker flows will

[00:21:59] start aggressively being buyers at the 6,000 strike, right? So the level at which they become

[00:22:03] aggressive buyers continues to sort of slide higher, uh, as the market works higher. So the

[00:22:08] result here is that we're in a very positive game environment. I have to update my little arrow here,

[00:22:12] but we're somewhere north of 1.5, closer to two on this chart at the moment. And what this basically

[00:22:17] shows you is the forward one day return is on the left axis here. Uh, we call this volatility.

[00:22:22] And then on the X axis is our gamma index. So the more positive game we get, the tighter the

[00:22:27] returns are. As you can see that, that dispersion of the return really kind of shrinks,

[00:22:32] right? We, we just don't move much, but we have a lot of positive gamma. So what's going to happen

[00:22:36] here in theory is that we go through optimal exploration. We're going to lose about a third

[00:22:40] of the positive gamma position in the market, which means that we slide through the left on this gamma

[00:22:44] index, right? And, and in this, around this yellow era, you can see that we're getting a little bit

[00:22:49] more volatility there. So that's kind of the setup for next week, right? That we're going to lose or

[00:22:53] unclench from this current 6,000 area. And that will allow the market to start to shift a little bit

[00:22:58] more. And how major is this OPEX? I mean, it's not, it's not a quarterly, right? We've got the next one

[00:23:02] coming up in December. This is going to be bigger. Yeah. It's not a quarterly expiration. Uh, it's a

[00:23:06] little bit smaller than, uh, it's certainly smaller than December. It's about a quarter to a third of

[00:23:10] September options expiration. So, uh, it's a, it's a very average monthly expiration.

[00:23:16] And it's December like always the biggest of the quarterlies because it's the end of the year or

[00:23:19] does that not really true? Indeed. Yeah. It's always the biggest options expiration. Uh, there's a lot of

[00:23:24] end of year positions that expire there. And so, you know, it, it often means a lot to the market and

[00:23:28] then it's always followed by the JP Morgan collar position, which, you know, that dominated September,

[00:23:33] for example. So that, you know, just adds a little more attention to that timeframe. Uh,

[00:23:37] that comes up at the very end of this, uh, end of year, right? The 1231 or 1230 expiration,

[00:23:42] we call it the quarterly expiration, uh, the official quarterly expiration.

[00:23:46] So in this next slide, you're looking at the price action as we go through the different

[00:23:49] OPEXs and the VIX expirations, um, moving through the year.

[00:23:52] Yeah. So statistically, if you look at what happens after expiration, 68% of the time,

[00:23:56] the market changes direction. So if we rally into an option of expiration, 68% of the time we reverse

[00:24:02] after the expiration, or if we're dropping in the expiration, 68% of them will change,

[00:24:06] it will start to rally. Right. So that, so the, the 68% is we sort of flip the sign on,

[00:24:11] on the market direction. Um, in this case, VIX expiration is after OPEX. And the way you can

[00:24:17] see is that changes the odds, it makes it almost more 50, 50, if we're going to get,

[00:24:20] our odds are still with you that we get a flip at 58%. But because VIX expiration is after,

[00:24:26] um, that directional change signal isn't quite as strong. I will also note that into this

[00:24:31] expiration, we have Nvidia earnings on the 20th. Um, and you know, that's clearly going to be a very

[00:24:35] major driver of, of direction, I think at the year end. So, um, the odds of us having a performance

[00:24:42] flip, a sign change, right? Um, direction I think into this expiration is, uh, kind of more of a,

[00:24:48] a coin toss than what we normally get. On this next one, we're actually seeing this in terms

[00:24:53] of playing through the different options, expirations, and the different VIX expirations

[00:24:56] we've seen in the last few months. Yeah. And what you really, I think want to take note of here is

[00:25:01] that there's a lot of volatility into these expirations, right? And then after the expiration,

[00:25:05] there's, there's this period of cleaning out. Um, that's really what I noticed over these last

[00:25:09] several expirations where, um, you know, you get these events where we're almost rallying to the

[00:25:13] expiration and kind of like, again, uh, the market sort of, uh, consolidates for a while,

[00:25:19] but into the next expiration, we rally and then we consolidate for a while and then we just kind

[00:25:22] of rinse and repeat. And so again, you know, with w we've rallied sharply, you know, three,

[00:25:27] 4%, depending on the index you look at after expiration, excuse me, after the election and

[00:25:32] after FOMC, we're now consolidating, we're going to move through expiration. And then between VIX

[00:25:37] expiration and Nvidia earnings, you know, we're, we're likely to get the next catalyst for,

[00:25:41] uh, for movement, uh, towards the end of the month. And in this next slide, um, with implied

[00:25:48] volatility, we see what we were talking about before, which is people were hedging the election.

[00:25:51] Yeah. Into the election. Um, as you can see on this chart, this is from,

[00:25:55] this view was from October and you could see the applied volatility, uh,

[00:26:00] bump or jump due to the election and FOMC. Right. And so, you know, that event ball premium was very,

[00:26:06] uh, obvious. You could see in charts like this of term structure, a lot of people in my space were

[00:26:11] talking about the possibility or, Hey, if we'd get a Korean election, uh, vol gets crushed and,

[00:26:17] and the market should rally. Um, I remember talking to Chris before, and you said that,

[00:26:22] Hey, if we know what the results of the election are, then the market should rally tomorrow.

[00:26:25] And I was like joking. I didn't think that the rally would be, you know, so one sided. And so,

[00:26:30] I mean, it's called the night of, right. Um, I didn't think that was going to happen. Uh,

[00:26:33] and when that happened is we're going to show you vol just got smoked. And, and that of course,

[00:26:36] we think led to these bullish, uh, options flows. So, you know, it was obvious that the election

[00:26:40] was there, the event ball premium, it was obvious that that was there too. And so once we got a

[00:26:46] decisive election and Powell basically just saying nothing, uh, that ball really got crushed.

[00:26:53] So on the next slide, we're looking at the November OPEX again, and we're looking at 6,000 again.

[00:26:57] Yeah. And, and we were, this, this chart is from the October expiration period. And we flagged

[00:27:02] this 6,000 level. We said, look, if there's upside, this is the level you want to watch because it is

[00:27:07] going to be so large. So this level, remember, gamma is high, is high for at the money option.

[00:27:12] So during our ops conversation, we were closer to the 5,900 level, uh, maybe a little bit below

[00:27:18] that. Right. And so what happens now is you slide up, right. As the S and P rallies and 6,000 becomes

[00:27:24] the at the money option that gamma increases. So, you know, this chart really is, is these positions

[00:27:30] are very similar, uh, from an open interest sign. But when we get to the, at the money position,

[00:27:35] you can see that 6,000 strike. It's again, so dominant, uh, as a, as a level. And so,

[00:27:41] you know, for us, it's no coincidence that we had the rally and we stuck at this spot. Again,

[00:27:46] S and P is rated 6,000 as we're talking here on, on Tuesday. I think this next one is one you

[00:27:51] definitely got right, which is, uh, talking about how NVIDIA calls last month were cheap.

[00:27:55] Yeah. And it's just so, and this is January skew. So this was not a short day to you. And we

[00:28:00] were just really pounding the table on this because you didn't know if it's, I mean, we,

[00:28:04] we believe that if there was a clean election and the Powell odds are, our ads are that Powell's not

[00:28:08] going to say anything to offset the equity market. Right. It just doesn't usually happen. So that

[00:28:12] event ball contracts, which leads to a market route. That's just the playbook. Um, and so when you look

[00:28:17] at NVIDIA, which is, I haven't checked recently, uh, I mean, it's been flickering back, you know,

[00:28:23] day to day, but I think NVIDIA is the largest stock in the world right now. Um,

[00:28:26] um, if it's not as top three. And so you have the number one stock in the world having almost no

[00:28:33] bid to the volatility, right? There's, there's no, no positioning for calls, uh, at the time

[00:28:39] into the election. And so it just didn't make sense for us at all. Um, and we, now, as we're going to

[00:28:43] show you this, this picture has changed and videos rallied, you know, pretty well, it's not gone Tesla

[00:28:47] crazy, but it's had a pretty healthy return. And so, uh, this view has worked out, worked out pretty well.

[00:28:52] And I think the episode, the big thing here is like, look, sometimes you, you just find the

[00:28:57] cheapest way to express an idea, right? You don't know if the market's going to go up, but you find

[00:29:01] the cheapest way to express the market going up. And then this turned out to work out pretty well,

[00:29:05] uh, for, for people listening to Spockhammer. And the, the last thing you point out as we look

[00:29:11] back at what we looked at in last episode is this idea of the election twist. Yeah. And the funny

[00:29:15] thing here was that the twist was occurring into October expiration. So it's almost like the market

[00:29:20] was sniffing out the Trump win, um, you know, ahead of time. And so what you're seeing here is

[00:29:25] one month option. So this was, uh, 11 to 15 expiration from 10 one. Um, you can see there's

[00:29:31] a big bid to puts, right? This downside. And then by the time that we, we got to our opics,

[00:29:36] uh, conversation, which was mid October, you could see that put wings started to decrease

[00:29:40] and the call wing started to increase. See that? So this was a, you know, this twist was telling us

[00:29:46] that people were starting to sell puts in favor of buying calls. And in hindsight say,

[00:29:49] hey, people are sniffing out the Trump trade. I think that's kind of what was happening.

[00:29:53] Uh, those people could have been very wrong if, you know, we've got a different outcome,

[00:29:56] obviously, but, but this, this twist or this rotation has really started to has really

[00:30:02] continued now, right? Puts are continuing to get sold. Cause are continuing to be bought.

[00:30:08] Um, and, and that's really what we're seeing as the major setup here, uh, into the end of

[00:30:12] the year. It's interesting when you talk about the market sniffing it out. I mean,

[00:30:15] the prediction markets did too. It's like the places where people were betting money

[00:30:18] got this election. Right. I remember like Nate Silver, like a lot of the people were

[00:30:22] polls and the people running these models. I mean, Nate Silver was like, I remember he tweeted,

[00:30:26] like it was a dead 50 50 the night before the election. Like he had no idea which way it was

[00:30:30] going to go. And it ended up being very one-sided. So in this case, like the prediction markets,

[00:30:34] the market, they got it right. And a lot of the polls didn't.

[00:30:37] Yeah. And, and, and, you know, Nate Silver was famous for screwing up the first Trump election.

[00:30:41] Right. Um, yes, that's good. And, and so, you know, uh, I'm just sort of beside myself and the

[00:30:47] thing is the guy gets kind of engagement and it just wastes a lot of everyone's time with this

[00:30:51] stuff. So, uh, you know, it's, it's, it's crazy, but to your point, uh, you know, people put money

[00:30:57] where they have the most conviction. And, and so I think he could pull somebody. It's like that French

[00:31:01] trader, right. He was saying that they looked at these neighbor polls, right. Where, where if I ask

[00:31:06] you, Jack, who you're going to vote for, you're going to be a little bashful saying, you know,

[00:31:08] where you want to vote for, but if I go, Hey Jack, who do you think your neighbor's going to vote

[00:31:12] for? And you'd be like, Oh, that guy's definitely a MAGA guy. Um, you know, that, what that means

[00:31:16] that you're actually, I don't know if you are, I'm just saying this to, uh, I have no idea if

[00:31:21] you're a MAGA person. So don't give Jack an email. Um, that's just the example, right? He found

[00:31:25] out from the neighbor polls that, that, you know, that's super interesting, right? Uh, and he put a

[00:31:29] bunch of money where his mouth is on that view and currently he's doing pretty well.

[00:31:33] This has been kind of a phenomenon, I think, because to some degree, people don't want to admit

[00:31:37] in polls, they were voting for Trump. And so he's always outperformed his polls. Um, so like you

[00:31:42] think they would have adjusted somehow in the polls for this, but they, I guess they really can't do

[00:31:45] that, but it's been interesting. Like he, he's consistently throughout his whole, his time here

[00:31:49] at like outperformed what his polls look like. Yeah. And there's a large sampling bias, I think

[00:31:54] with that stuff and the other thing. And so, you know, I, I think that what that's, what's

[00:31:58] interesting about wall street just in general is a lot of times people will say like, how's the

[00:32:02] market not going down more to this war, right? Or this bombs just went off and how are people

[00:32:06] not selling stocks? And it's like, I think there's so much truth in that price action,

[00:32:10] right? Where is this really a bad event? Um, you know, well, people aren't buying puts anymore.

[00:32:15] I guess, you know, they don't think so. And that's kind of the sum of all fears in some ways.

[00:32:19] Um, and so, you know, I think the more money that flows around this stuff, you can generally

[00:32:24] get a better barometer for, for, for things, uh, than, you know, than just surveys.

[00:32:30] Yeah. So as we switched to our, what is move section here? Uh, you, you, you're highlighting

[00:32:34] a point you highlighted earlier in the podcast, which is the vol was crushed. Um,

[00:32:38] yeah. Yeah. VIX dropped from 20 to 14 in a matter of two days. Uh, it actually got crushed

[00:32:44] before the FOMC. I didn't think we were going to get so crushed at every FOMC. We also put

[00:32:48] on here, the skew index from the Stebo, um, that absolutely tank that's that dark red line.

[00:32:54] And then the VIX, which measures the value of essentially out of the money VIX calls, uh,

[00:32:58] just, you know, uh, pounded. Right. Um, and so, you know, vol immediately got sold. That is the

[00:33:06] strongest theme that I take out of this market as we're showing a few slides that people are pricing

[00:33:10] in like zero risk going forward. And, uh, and so I think that is a really important thing for,

[00:33:17] for people to understand as we approach the end of the year that, you know, this is a market that

[00:33:23] is not wanting to go down. Uh, you know, you get quasi credit crises or, or big geopolitical

[00:33:28] conflicts. Right. And that, that tremors the market a little bit. Um, but in this environment,

[00:33:34] there's, there's just no demand for, for hedges at all. Um, and it will show what we think is

[00:33:40] reasonable here, but, but that's really the big takeaway here is, is this is a market pricing zero

[00:33:44] risk. And what was interesting to me is like, I was thinking when we interviewed Chris Ciddle,

[00:33:49] I was thinking like, all right, two elections in a row, people were hedging. The market ends

[00:33:53] up rallying after I'm like, aren't people going to figure out this playbook and it's not going to

[00:33:56] rally this time, even though people are hedging. And we said, no, it's going to rally anyway.

[00:34:00] Um, even though people know it's coming, it's still going to rally. And that just surprised me.

[00:34:03] Like I figure out like when people figure this stuff out, eventually maybe it stops happening.

[00:34:08] And I think that's the thing with events, right? Is that we all believe that the market's going

[00:34:13] to rally out of the Trump and FOMC, you know, or excuse me, at the election and FOMC.

[00:34:20] And maybe even the people who have on the positions know that, but they can't remove the hedge before

[00:34:24] the event, right? Like you own the, you own the event heads. That's what you own. You can't close it

[00:34:29] before that. And so, um, you know, that, that event triggers and the benign passing of those events,

[00:34:36] you know, triggers these flows. And, and so unfortunately, even though we all think, well,

[00:34:40] why don't you just sort of front run this move? You know, the, you can't, you can't necessarily do

[00:34:44] it. Right. Because you're hedging this event, not necessarily an idea or a risk, right? Like a,

[00:34:49] like you can't always say, Hey, with Iran and Israel are passing missiles back and forth. And

[00:34:54] I don't know, I just don't think it's that big of a deal. So I'm going to short it tonight. Right.

[00:34:58] It's not like at three o'clock, you know, three o'clock tomorrow passes, then there's no more

[00:35:02] bonds going off. Um, so with the elections and, and again, the FOMC, like you got to own the hedge

[00:35:08] to the event. And then as soon as the event is gone, you know, then you can crush that ball and the

[00:35:12] market can catch a bit. So in this next slide, you get at where you talked about before, which is

[00:35:17] the high risks that's been moving. Yeah. Bitcoin. I mean, this chart doesn't really do Bitcoin

[00:35:23] justice, uh, as everything's on a percent scale, Bitcoin went from, you know, 70, 70,

[00:35:28] something like that up to, we touched 90 yesterday. Um, so that's a 25% of the election. Tesla is number

[00:35:34] one at the moment, shockingly, uh, 35% roughly were up. Um, but if you look at the spiders,

[00:35:40] you know, spiders up about 3%, which that's a healthy rally for three, four days. Don't get

[00:35:44] me wrong. Um, but I don't, I think when you think we talk to people, they're like, Oh,

[00:35:49] this is just uber bullish environment right now. And it's a 3% rally, which, you know,

[00:35:54] I don't think is statistically that much of an aberration. And so yes, we're at all time highs

[00:35:58] and yes, the market's up 50% this year, which is, you know, astounding. Um, but it doesn't

[00:36:04] have this overbought quality that I would argue like Tesla does in the short term or Bitcoin

[00:36:08] does in the short term. Um, so I think there is plenty more upside from the metrics that

[00:36:13] I'm looking at. And then I also just thought it was funny going into the Bobby Kennedy kind

[00:36:17] of cleaning up our, our food system, uh, general mills as a, as a proxy for that's down nearly

[00:36:22] 7% as, uh, as America, you know, is going to struggle with this drug food diet here. Uh,

[00:36:28] it's pretty fun to watch that as a, as a Trump theme go down.

[00:36:32] And that was something I noticed like particularly the day after the election. I think you're getting

[00:36:35] at this in the next slide is this idea that a lot of stuff was up a ton the day after

[00:36:39] the election, but a lot of stuff was down a ton too. It was, it was really like, like I

[00:36:43] noticed home builders got killed like the day after the election, people were really,

[00:36:46] it was the Trump trade. People were figuring out what's going to benefit here and what's

[00:36:50] not going to benefit.

[00:36:51] Yeah. People are, I think are, are maybe jumping the ship, extrapolating, you know, what

[00:36:56] the, what the policies are going to mean. Right. I mean, he's only now, um, picking cabinet

[00:37:01] people. There's a, there's a long way to go. I was, I've been talking about how people were,

[00:37:05] you know, flagging this Mitch McConnell, having a Senate voter, whatever it is tomorrow. Um,

[00:37:10] and he's going to try to call him this anti-Trump guy and, you know, that's going to throw a wrench

[00:37:14] into his part. So there's still so much that can happen between now and whoever, you know,

[00:37:18] whatever happens into January and then whatever policies Trump is able to, you know, enact and

[00:37:23] get, and get support out. Right. So, you know, there's just so much there and, and this

[00:37:27] is the flows of our fundamentals thing, right. Where people are piling into those trades and

[00:37:32] then just saying, this is going to go up because it's going up, uh, which is kind of, I think

[00:37:36] of what is happening with Bitcoin and Tesla. Um, and then in here, you know, the other

[00:37:42] thing that catches my eyes, TLTs, uh, which is purple. That's the long bond ETF, right.

[00:37:47] That has now gone inversely correlated to the market. There was a good while here from August,

[00:37:52] September, October, where the long bond was, was moving in correlation, right. Positively

[00:37:58] correlated with the equity market, which was very unusual. And now after Powell sort of said,

[00:38:02] no, we're on pay for cutting rates. Um, the long bond has started to act more kind of inversely

[00:38:08] correlated to market, which I think, you know, is the 60, 40 portfolio. So, um, so some of these

[00:38:12] relationships are normalizing, but the big thing was we talked about the NVIDIA, uh,

[00:38:19] industrial complex, right. It'd be a being read here and remember how NVIDIA was becoming

[00:38:23] uncorrelated because it was going up so much to the rest of the market. Tesla seems to be taking

[00:38:27] that position. And that's one of the big themes here is that, um, you know, with Elon getting,

[00:38:33] apparently he's having daily lunches with Elon or with, uh, with Trump and he's, you know,

[00:38:38] having phone calls with his old scheme stuff. And I don't know what that means for Tesla stock.

[00:38:42] Uh, but it does sort of, you know, if you want to buy Elon Musk, you kind of just buy Tesla stock

[00:38:48] and sort of, uh, the meme here. Right. And, and, you know, a lot of people are in on that trade at

[00:38:52] the moment and it's, and it's again, seeing stretch, but it's also gotten uncorrelated

[00:38:57] with the market in a, in a major way. Yeah. And as much as, uh, you know, I have mixed feelings

[00:39:02] about Musk. You have to say like, he played this election from the perspective of his personal

[00:39:06] businesses about as well as you could possibly play it. I mean, he, he got on team Trump and now he's

[00:39:10] like everything he's involved in, it's just, it's just going up like crazy.

[00:39:13] Yeah. There's, there's absolutely no doubt about that. And you know, I I'm, I'm with you

[00:39:18] in a lot of those ways that I don't know how, how I feel about them, but I think that we all would

[00:39:23] agree that the previous administration was not helpful to Tesla as an entity. Um, you know,

[00:39:28] they clearly had a contentious relationship. And so even if just now, you know, there's a better

[00:39:33] working relationship with the government, um, then that has to be a positive for, for Tesla. But again,

[00:39:37] I'm not a fundamental analysis. I don't know. I just know that when you start buying millions and

[00:39:42] millions and millions of calls, uh, stock probably going to go up and, and that's the, that's the

[00:39:46] play. Yeah. And this next slide is about Tesla and you're, you're talking about this ludicrous

[00:39:50] mode we've been in. Yeah. And we put this on the seventh and this was the idea of flows over

[00:39:55] fundamentals and that the market knew that if Trump won, Tesla should go up. And so the result of

[00:40:02] that, as you can see, this is from November 7th. Uh, we actually wrote this the morning of the

[00:40:06] election that there was a call skew. So this orange line, excuse me, the teal line is one month options.

[00:40:14] And so you can see that the out of the money calls, which is where my cursor is here. They had

[00:40:18] a higher applied volatility at the money calls. And that generally only happens where people have

[00:40:22] a pretty bullish view of the stock. Right. Um, and that is a, that is, I would say healthy,

[00:40:27] bullish view because you see this cone here, Jack, that we're at the bottom of this cone,

[00:40:32] which tells us that overall implied volatility is not that high. So yes, there's relative demand

[00:40:37] for calls, but the options arguably aren't super expensive. Um, I'm going to show you,

[00:40:41] and I think I had my next slide. This is what Tesla skew looks like now on a one month basis. And you

[00:40:46] can see that we're all the way through that, that shaded cone, right? And there's a tremendous bid

[00:40:52] for, for calls relative to the at the money options. So again, if you compare this apples to apples,

[00:40:57] the, the look of these two positions, um, what we were talking about in the summit is that yes,

[00:41:03] Jack, you know, that Tesla should go up if, if Trump wins, but what you're probably not pricing

[00:41:08] in is the gamma effects, right? The, the chase or the FOMO effect of this, which will exacerbate

[00:41:14] volatility. What does that mean? That means the stock is going to go up. And as it goes up,

[00:41:18] market makers have to buy more and that makes the stock go faster. And then the result is you get,

[00:41:22] instead of a 10, 15% rally, you get a 25, 30% route. So in that second slide, are we starting

[00:41:28] to see the signs that this Tesla thing could be starting to come to an end?

[00:41:34] In the short term, we're very, in the short term, we're very overbought. And this harkens back to the

[00:41:39] start of our conversation where I was saying, Hey Jack, if I sell you a 400 strike call for a hundred

[00:41:43] dollars, you're going to say, no way I got to sell that. Well, we're kind of in that zone of,

[00:41:47] you know, okay, the 400 strike calls aren't a hundred dollars, but they're very expensive.

[00:41:51] And so the problem is, is you buy that call, the probability that it goes in the money

[00:41:57] is much lower now, right? Because Tesla stock continue to go up, but if it's not going up at

[00:42:02] the five, 6% that the market is pricing each day, five, you know, this call needs a 5% or 6% daily

[00:42:09] rally for this call to pay off. Right. And, and the odds of that happening are very small. And so what

[00:42:15] happens is that value of that call needs to drop and that brings flows, which pressures the market

[00:42:19] down in this situation here, we have a big options expiration for Tesla that makes some sticky levels

[00:42:25] for the name that call buying is stopping. The momentum of the stock is stalling out. And so this

[00:42:30] ball is going to correct pretty quickly. And that's bringing some selling pressure for this week.

[00:42:35] But I think it's just a consolidation phase for the stock. I don't think the top is it.

[00:42:40] So on this next slide, as we look at what to watch in November, you're talking about Tesla again. And

[00:42:44] I want to ask about this because this gets back at the idea we were talking about before, which is,

[00:42:48] you know, when you've got everybody on one side of the boat and the market's moving that side of the

[00:42:52] boat to an expiration, you can get a reversal. But I think you're saying, you know, you don't expect

[00:42:56] a significant reversal here in Tesla. Yeah. I mean, significant is relative, right? The stock

[00:43:02] is up 30, 35% into Friday, right? And on Friday, we had record call volume. You can see in this chart,

[00:43:10] you know, we had just unbelievable amounts of calls trading. And so you go from Friday where there's

[00:43:17] 4.8 million calls at the second highest ever, then the weekend hits, right? That generally stalled

[00:43:21] momentum. The stock on Monday morning was in the 350, 360 area. Now we're down to about 328.

[00:43:28] There's a huge amount of positions at 300. So I don't think we go below that area,

[00:43:31] but the stock is definitely giving some back to a 10 or 15%. So, you know, there's a path

[00:43:36] dependency here. And what we generally need is call options to values to come down to make them more

[00:43:41] sensible for people to buy back in. And so this options expiration gives that cooling period, I think,

[00:43:47] for the stock in order for it to sort of rebase. Because this reminds me a lot of NVIDIA where

[00:43:52] we kept saying, you know, this stock has got to stop at some point. But every time the options prices

[00:43:57] would come in a little bit, people would start bidding the calls up, right? They'd start buying the

[00:44:00] weeklies again, and they would just continue to kind of ramp. And so, you know, this is the path,

[00:44:06] right? This is meme number one. Elon is the number one guy in the world right now. And so,

[00:44:13] you know, if you want the sort of, if you want the manifestation or the, you know, the archetype

[00:44:17] of the Trump trade, it's Elon Musk and it's Tesla. And so that's why I think that there's a huge

[00:44:22] level at 300. I still think, as we're going to talk about in a minute here, that we reach 400

[00:44:27] because these options spoilers are going to continue to be a major driver over the,

[00:44:31] over the medium term, right? Over the next couple of months.

[00:44:34] So in this next slide, we get the idea, Elon's here, I guess, Kathy, I didn't even know what

[00:44:37] Kathy's been up to, but I'm sure it's up. She's been up to no good.

[00:44:43] Kathy would disappear on us, right? And I always found this very agitated because she loses a bunch

[00:44:48] of money for people and, uh, and then she'd be on like all the media every day. And, uh, I just,

[00:44:54] I couldn't quite understand that. But what, what, what's interesting here is that ARK is a very large

[00:44:59] holder of Tesla stock. And so ARK is now up 6%, I think last week as a result of Tesla popping,

[00:45:05] right? Um, and then Elon was retweeting Kathy Wood this morning. And so I was like, okay, you know,

[00:45:11] these are, are two of the archetypes of the mean trade from 2021. And the only thing we're missing

[00:45:18] right now is Aurora Kitty of Paris. Um, if he comes back, then we have the full kind of 2021

[00:45:23] mania and 2021 was just an unbelievable market movement. If you remember that year, right? Um,

[00:45:30] you know, me mania was just going crazy. The markets were just going crazy. Uh, and, you know,

[00:45:36] and I think that when you look at valuation, now people go, this can't get crazier.

[00:45:41] And then when I look at three, three people and I go, yes, it can. Uh, we have a lot of reasons to

[00:45:46] think there's more in the tank here. I mean, it almost seems like the kitty has to get involved

[00:45:50] with what's going on right now. Like he would, it would be out of place for him if he doesn't

[00:45:53] get involved here at some point. I totally agree with you, you know, and he had pivoted to,

[00:45:58] I don't know if he pivoted to Chewy. I think he did. Um, GameStop has not necessarily caught a

[00:46:03] bit, but this is the thing, you know, if you look at Tesla, it was the original meme. And I,

[00:46:09] and I say that, you know, it was having this call options volume cresting in 2020, like before

[00:46:16] Ron Kitty was even a thing. Right. And, and I think Elon Musk knew that he would, he, he's made

[00:46:21] some jokes about, you know, black souls before, uh, not being a great, you know, uh, uh, I think it

[00:46:28] was a great equation. He made some kind of a joke about that. Um, it just kind of makes you believe

[00:46:32] that he sort of understood the power of this a little bit. And I know that I think he's paid out

[00:46:36] options and he was attacking shorts. And I think he was really able to squeeze Tesla to be in the

[00:46:41] S&P 500. Um, it peaked right after it was in the S&P 500. And so, you know, he's the OG,

[00:46:48] you know, of the, of the me mania. And, uh, and I think it'd be interesting if Rory Kitty sticks with

[00:46:54] the GameStop theme or if he starts pumping something new, but if he started pumping Tesla,

[00:46:57] then you got to start to watch out, uh, could happen. Maybe that'd be my prediction.

[00:47:01] I do wonder to some degree if he's lost his powers a little bit because you know, the,

[00:47:05] the whole live stream didn't go well. It was horrible. Talk about a loss of a vent ball,

[00:47:09] right? Um, yeah. Yeah. So I wonder if like next time he does it, if anyone's going to care,

[00:47:14] we'll find out, I guess. Yeah. Um, we will find out, right? That is for sure. Uh, what,

[00:47:18] that was a real waste of time and energy and a flop and excitement, uh, GameStop, you know,

[00:47:24] it's up 26 bucks. Uh, so it's an okay, uh, recently, but, but certainly not Tesla move.

[00:47:31] Um, so here we're looking at the current positions. This is three 35, uh, excuse me,

[00:47:37] three 40 and three 50 of these two big strikes in the middle. Tesla's really kind of rotating around

[00:47:41] that level. Uh, a lot of those positions are going to expire at this expiration, about half

[00:47:45] in these positions. And so what you start to look at here is this 400 strike. There are big positions

[00:47:51] up there that are out in December and January. And then you also have, yes, the applied volatility is

[00:47:57] very rich right now, but that can revert very quickly. Right? So by the end of this week,

[00:48:01] we could be in this 300 at three 25 area. This is 300. It's a very big level for Tesla. Um,

[00:48:08] and I think that could be, Hey, we consolidated that vol came down. Um, and then we could really

[00:48:13] start to re rally next week. And there's room now for call buyers to come in because those calls

[00:48:17] aren't so expensive and that can kind of re-energize things. The other thing that's interesting

[00:48:21] about 400 is that's the all time high in the stock that was again, late 2021. Um, and so,

[00:48:27] you know, that is a, certainly when you talk about, you know, technicals or whatever, that's

[00:48:31] certainly a level that people are going to be watching. Uh, and that's about what 20, 20% now

[00:48:36] from where we're trading at the moment. So that's certainly achievable in the short term.

[00:48:39] And that's something that I'm really watching here, uh, into the end of the year. And this could be a

[00:48:44] stock where again, you harken to this idea, you turn back to this idea of the NVIDIA

[00:48:49] industrial complex where there's a lot of ETFs that hold in Tesla shares, right? Tesla is not as

[00:48:55] big in the S and P 500 and the NASDAQ as, as NVIDIA is, but it still has plenty of sort of, uh,

[00:49:01] of offshoots, right? Like arc and like these other funds that if Tesla goes up, you know,

[00:49:06] they'll be buyers. And so, you know, there, there's plenty of fuel in addition to the call

[00:49:11] options complex to, to, to move this thing higher. So, um, you know, from flows over fundamentals

[00:49:17] perspective, uh, I think that this has a lot more legs.

[00:49:21] Yeah. And the next slide gets at what you were alluding to before, which is arc's been running.

[00:49:24] I mean, I was looking at, it's one of my proxies I use just to see on my dashboard, like to see what

[00:49:28] certain types of parts of the market are doing. And it was up like 7% plus the other day.

[00:49:32] Yeah. Yeah. It's really been rolling.

[00:49:34] Yeah. It's, it's really amazing. And I think that, you know, when Tesla implied ball gets crazy or a

[00:49:41] little too much, or you want to invest in the Tesla trade, but you, you know, the calls are too

[00:49:45] expensive. You can turn to something like arc where the implied ball be lower and you know

[00:49:49] that they need to buy up Nvidia share. So it's sort of like using SMH as a proxy for video back

[00:49:54] when the video ball seemed like it was getting a little too high. And actually I'm going to talk

[00:49:57] about that in a few moments. Um, but you know, arc is really an interesting basket, uh, to buy,

[00:50:02] you know, if you do want some exposure to Tesla, even though I think a lot of the other,

[00:50:06] you know, instruments in there are maybe questionable and Kathy Wood is a little bit questionable from her,

[00:50:11] you know, background, but if she just owns a bunch of Tesla and Tesla's going up, then,

[00:50:14] you know, we'll see what happens. Uh, does it have a, does arc have like a pretty active

[00:50:19] options as a very robust options complex? Yeah. So there's a lot of liquidity there.

[00:50:22] Uh, and you could definitely get, uh, get access to, to options, uh, in that space for reasonable

[00:50:28] prices. So in this next slide, uh, yeah, you're getting at what we're seeing, which is nobody wants

[00:50:34] the puts right now. Right. And so we showed the, we showed the skew rotation, um, into the expiration,

[00:50:39] but this is Apple, uh, one month expiration. You could see here from 11 four. So this is the

[00:50:44] Monday before expiration. This is the gray line ball has dropped. That's the whole surface dropping

[00:50:49] to where we are now, which is teal, but that put wing has lost a lot more value. The plot balls

[00:50:55] drop a lot more relative to the call side. Right. So this is the idea of people do not care about

[00:51:00] downside anymore whatsoever. There's a little bit of a relative bit to calls, but the calls in my view,

[00:51:05] they're not like overdone, right? This is not everybody loading up the truck. Um, so the memes

[00:51:10] are memeing right now, but people have not yet bought in. I don't think to the index or the kind

[00:51:15] of mag seven names, right? X Tesla, uh, looking to go higher. So if you look at Google or meta,

[00:51:23] uh, Amazon, you know, the skews all look like this, right? They haven't started to really,

[00:51:27] uh, they're, they're simmering, which is what you want to see if you're looking at the options

[00:51:32] floors as a bore signal, but they're not yet shifting to this kind of overbought territory at all.

[00:51:36] Uh, plenty of room for these things to get, to get bid up in my view. And, and I think when we

[00:51:41] see consolidation here, this consolidation is being driven by people monetizing upside

[00:51:45] positions right now, as opposed to saying, you know, Hey, I'm really worried about the future,

[00:51:50] right? We're seeing call selling right now, which is taking money off the table versus I want to buy

[00:51:54] puts. Cause I think the market's about to crash and those flows have those, uh, that matters,

[00:52:00] right? Cause if you're buying puts that has a lot more downside momentum than, than selling calls,

[00:52:05] um, as a function of hedging flows. Yeah. One of the, one of the things I've learned in my life

[00:52:09] is whenever Jack is like a contrary indicator on this. So whenever I think, oh, this thing can't

[00:52:14] go on any longer about pretty much anything, it always goes on longer. So you'd always in the

[00:52:18] background, the narrator is like the narrators like, and it did go on longer. Um, yeah,

[00:52:22] yeah. I think that's like, then these, this will probably be the same thing. Like I'm never involved

[00:52:26] in these types of stocks anyway, but it probably will go on longer than people think.

[00:52:30] Yeah. And I, and I think, you know, you highlight this thing that's so important about the options

[00:52:33] market is that we spent a lot of time just talking about the flows and that's what I focus on, but

[00:52:37] we learned to trade options. And I think there's a lot of funds or people in your space, maybe that

[00:52:41] don't look at options positions. Um, you could set up all sorts of structures to take advantage of

[00:52:47] this stuff, right? So like, Hey, I don't want to reduce my participation in this. I still want some

[00:52:51] upside, but I got to take some money off the table. You know, we saw a lot of stock,

[00:52:54] Tesla stock replacement trades, for example, where they would sell their shares and buy a bunch of

[00:52:58] January calls. Um, you could do all sorts of ratio spreads that still give you access to the

[00:53:03] upside. Uh, but you know, take a lot of the risk off the table. So that's, what's kind of fun about

[00:53:07] the options positioning is that you can still get that upside exposure if you want, but you can take

[00:53:11] some off the table, um, and you know, really dial in how you want to express views. And, and, uh,

[00:53:17] that that's what's so fun all the time about analyzing this stuff.

[00:53:20] Yeah. Well, if we won't talk about this now, but it was, as you probably saw,

[00:53:24] like I had this thing I put from Jim Grissan up on Twitter, this whole idea that like options are

[00:53:28] not a derivative. They're the underlying and the idea about how they reflect the full distribution.

[00:53:31] And I caused like more controversy. So I have no opinion either way, but like I caused more

[00:53:37] controversy than I, than I ever could have with that. Yeah. It's a, I mean, he brings up a bunch

[00:53:42] of interesting points and, and you know, anytime you see, I think one of the tricks is that anytime you

[00:53:48] see, uh, people just running into call options, right. As a first order principle, you know,

[00:53:55] if people are buying calls and we're getting better and better data and information that shows us,

[00:53:58] okay, they're definitely buying these calls. We could see it happening and that's going to change

[00:54:02] the distribution itself because of these underlying flows, right? Because of these hedging flows.

[00:54:06] And so, you know, that that's kind of what our whole business is based on this idea that

[00:54:10] these options flows could be a driver of the underlying. And so, you know, to the point on Tesla here,

[00:54:14] right? Um, when you're looking at, and we're forecasting Tesla and you look at this skew and

[00:54:20] if you just showed an autism practitioner, this skew and you say, what does this look like? You go,

[00:54:25] looks like people are pretty bullish on the stock, right? So everybody's already prepared for the Tesla,

[00:54:29] uh, trade. And then I go, no, it's not enough because when people start to buy calls,

[00:54:34] it's going to shift the distribution because the stock is going to go up a lot more, right?

[00:54:38] So that, that call barring is changing the distribution. And so instead of the distribution,

[00:54:43] you know, distribution argument should have looked like this into, uh, into, uh, into the election,

[00:54:49] if people really that bullish on Trump and Tesla, right? But it didn't, it looked like this,

[00:54:53] which had a much lower skew implied vols were a lot lower. And so I think the market catches on to

[00:54:59] this idea, um, or is catching on to this idea. And that's, that's a pretty interesting thing,

[00:55:04] right? Um, you know, and it kind of backs a little bit of, of Jim's point. Um, and I think

[00:55:10] as the options market grows and continues to mature and try to get more sophisticated,

[00:55:14] you know, they'll, they'll start pricing in the changes to that, that price distribution.

[00:55:18] And on this next slide, we're back to Nvidia, which is still around, even though everybody's

[00:55:21] talking about Tesla, Nvidia still exists. Yes. And so this is the Nvidia term structure.

[00:55:25] You can see that short date in implied vol. So this is this week's implied vol, very low. Um,

[00:55:31] and again, there's a couple of days of expiration, but, but this is,

[00:55:34] this elevated term structure is due to earnings. Uh, earnings obviously matter. I don't know that

[00:55:39] this stock is really missed on earnings. Uh, you know, it's like, how many buildings did you make

[00:55:43] here? And the, the thing that I find so fascinating is, uh, I'm skipping ahead a slide here is that

[00:55:51] the, the, when you go into earnings implied volatility lifts for our stock, right? Because

[00:55:57] everyone knows the event is there. It's just like going to the election, like we've got to hedge

[00:56:00] the election. So we're, there's a lot of vol priced in for the Nvidia earnings events for,

[00:56:04] for short term. Right. Um, and so that term structures in the center of this cone.

[00:56:09] So do I want to buy Nvidia options right now, uh, to express my idea? No, uh, last OpEx,

[00:56:16] that was the time, right? Now the skew is higher. The options are higher because we're going,

[00:56:20] or more expensive arguably, uh, due to the, to the, to the earnings. Right. Um, but I think that if

[00:56:26] Nvidia earnings are positive, I have no idea, or if the market just takes them as positive,

[00:56:31] that is absolutely the trigger for the market to start to move. Right. Cause the one thing that we've

[00:56:35] not really triggered yet out of this Trump trade has been the, the semis in the AI trade is not

[00:56:41] arguably fired up yet. Right. I don't know if that's related to the possibility of tariffs and

[00:56:45] moving shifts around, or it's just people are too busy trading Tesla. But if we reinvigorate that,

[00:56:51] that semiconductor space, then the market's going to start to go up significantly in my view.

[00:56:56] And I think that even though Tesla options are very expensive, right. And Palantir options are

[00:57:02] very expensive. The Bitcoin options are expensive, right? That stuff's all been bid up. When you look

[00:57:07] at something like this, this is SMH, right? And we were talking about ARK being a, a, uh, uh,

[00:57:15] kind of a sister trade to Tesla, right? Uh, or offshoot of Tesla. SMH is the same thing for

[00:57:21] NVIDIA, right? Uh, SMH is I think 25% NVIDIA shares and this is January call skew. And so you

[00:57:27] can see here that the shaded cone is 90 day implied vol. Well, implied vol is as low as it's

[00:57:33] been in the last 90 days. And SMH is not that far off all time highs. So if you want to bet on this

[00:57:39] idea, and I don't know if the market's going to go up, but let's just say you want to hedge out that

[00:57:42] idea. I think the SMH calls are pretty cheap, right? And I think that when the market starts to move

[00:57:51] extreme as Tesla, because there is an ETF, but it starts to move in that direction, right? The call

[00:57:55] wing starts to lift and implied volatility starts to lift up a little bit. So what I like about this

[00:57:59] is that this shows me there's plenty of room for demand to come into this space, right? To bid up

[00:58:04] these options. Um, and, and that tells me that, Hey, people are not all that bullish. Like people are

[00:58:10] saying, look, we're at all time highs right now. How much more can this go? Well, the options mark has

[00:58:13] not really been showing that bullish activity has been invoked yet. Right. And I think before this

[00:58:21] rally's done, you got to see, you know, these call vols list and things get a little crazier.

[00:58:25] Um, at the moment, they just really haven't, uh, haven't seemed to express that. Um, so that,

[00:58:31] that is really why I think this NVIDIA earnings event matters on 1120 is that this could spark a real

[00:58:36] rally, uh, in the space. And that is again, such a driver for markets writ large due to the fact that

[00:58:42] S&P and NASDAQ are 25%, you know, STEMIs, right? Directly related to the STEMIs.

[00:58:48] And so I think you were getting the same idea in this, this previous slide, but as part of that,

[00:58:52] I also want to compliment you on your dashboard because, uh, as a value guy, I don't really get

[00:58:55] to have dashboards and this looks really cool. Like there's, there's, you guys, you guys do

[00:58:59] dashboards about better than anybody. So, uh, I have to find some way with my value stocks to have

[00:59:03] like some sort of dashboard where I can see like stuff moving all day.

[00:59:05] Yeah. You can just, uh, make your Excel, Excel, sales, fish collars.

[00:59:09] My stuff like is like paint drying though. It's like a change is so infrequently that, uh,

[00:59:13] it would be like the slowest moving dashboard of all time. That's really funny. Uh, slow and steady

[00:59:17] ones in race though, Jack. Um, this is our trace tool and what's trace shows is real time dealer

[00:59:22] positioning for the S and P 500. So we're monitoring where we think dealers are buying

[00:59:26] and selling calls. Right. And so the, the takeaway from this is that if you look in that box,

[00:59:31] that is above 6,050. So everybody knows that JP Morgan collar position is struck for the end of

[00:59:36] this year at the 6055 strike. And so there's a bunch of positions. I kind of blocked it out a little

[00:59:41] bit at 6055. This is just open interest, right? Um, above 6,050, there's almost no positions in

[00:59:49] the market in the S and P 500, right? From the dealer perspective, we have basically dealers holding

[00:59:53] some short call positions was what these are, excuse me, some, uh, uh, some small call positions.

[01:00:01] Um, but that's really about it. Right. And so the, the, what this is signaling to us is that if the

[01:00:09] market starts to rally a little bit, there could be a real spark, right? Because people have to

[01:00:14] start to reposition or buy into the fact the S and P can move into the 6,100 to 6,200 area,

[01:00:20] right? They have to position for that. They have not yet positioned for that. In my view,

[01:00:24] it's similar to SMH where you go, you look at this call scheme to go, nobody's prepared for a lot of

[01:00:29] upside. Yes. They're not bidding up the downside right now. Uh, but, but I think that you have to

[01:00:34] give edge to this market wanting to go higher, given the Trump trade, just given the fact that

[01:00:37] for the last two years, every dip has been bought, even though risk has popped its head up. No one ever

[01:00:42] really buys those puts. We have little spasms in the market re rally. So if Nvidia is at all bullish

[01:00:48] or just kind of in line, it shows that that demand is still there. Then I think the market has to

[01:00:53] really reprice the, the odds of the S and P moving up to 6,100, 6,200 area that would generate some

[01:01:00] long call demand that could really squeeze this market higher. And so, you know, my takeaway from

[01:01:05] this is that based on the Nvidia earnings, if they're, if they're bullish, right, then I think

[01:01:10] you get a risk on move. And I quite frankly, don't have a great upside target for this, right?

[01:01:14] I think 6,100, 6,200 makes sense. What I have is more of a timeframe and the timeframe for bullishness

[01:01:19] is until really December options expiration. I think we'd have a really solid month long rally

[01:01:24] until the end of the year. Um, and so, you know, if we're above 6,000, if we hold that level,

[01:01:29] uh, then it's risk on into December options expiration. Um, we flipped a little more of

[01:01:34] a neutral stance murky in this 5,900 to 6,000 level. And if for some reason Nvidia earnings are bad

[01:01:40] in order to break 5,900 for any reason before that, then, then I think that triggers a much

[01:01:45] longer kind of risk off move, uh, into, into end of year, but I'm really edging on this rallying

[01:01:50] to the end of the year. Um, and I, and I think that's unique because some people are concerned

[01:01:54] that the rally maybe has been pulled forward at this moment, but I don't see any froth yet

[01:01:58] in options pricing for, uh, the, the bulge bracket names, the mag seven names, X Tesla,

[01:02:05] you know, send these here. I think, you know, expressing an end of year rally via

[01:02:08] J and, uh, SMH calls makes a lot of sense. Uh, and that's kind of the setup that we're seeing here.

[01:02:13] So, you know, Trump knee mania, I think is alive and well, it's a little rich in a couple of

[01:02:18] specific names, but, but this market overall doesn't appear from the auction's perspective,

[01:02:22] the, the overbought and people just don't have any interest in hedging the downside.

[01:02:27] Yeah. It's interesting. You, you and a bunch of other people on the podcast who follow flows,

[01:02:30] some option related and some other things have like shaken my belief in Santa Claus, because,

[01:02:34] uh, as much as I, there is a Santa Claus rally in these up years, what causes it is not exactly

[01:02:39] Santa Claus. Um, there there's structural reasons behind the scenes as to why we have these big up

[01:02:44] years coming through Thanksgiving. Why, you know, as you mentioned, going into that last act

[01:02:48] expiration, going to the end of the year, there's a, there's a good odds of a continuation of that.

[01:02:52] Yeah. And, and in this environment too, you know, there, there's those flows. I mean,

[01:02:56] Jim covers those a lot and Mike green, right? Passive inflows and all sorts of stuff. And,

[01:03:01] and in this case, not only do you have that, you have me mania, right? I mean, I, I make a joke

[01:03:08] about you're on Musk and Kathy wood, but those are the archetypes of the mean mania, right? And

[01:03:12] they're front and center now, at least the honest. Um, and so, you know, I think you have to count that

[01:03:17] in as well. Right. Because when, when Tesla rallies 30% over five days or whatever it was

[01:03:22] that added 40 bits to S and P performance, right? So, you know, there, there's just a reason that

[01:03:28] when these big stops start to rally, it drags the market higher. And, and, you know, that's a

[01:03:32] functional again, flows, not fundamentals. Like if, if NVIDIA goes up 10, 15, 20%, the S and P is

[01:03:38] going to get pushed higher as a result of that. Um, and, and so I think that is, you know,

[01:03:42] I think that people may be discounting to the year end and whichever way it plays out,

[01:03:47] you can pretty much guarantee with the big expiration December, we're going to have a

[01:03:49] lot to talk about in our next episode. Yeah. Plenty of stuff to talk about, plenty of stuff to trade.

[01:03:53] So I'll be looking forward to that December conversation, uh, and go check out the

[01:03:56] interview of Chris deal. That was, that was a lot of fun. And, and, uh, we got a lot of great

[01:04:00] feedback on that. Um, so that was, uh, that was great. Yeah, that was really cool. Thank you.

[01:04:06] Thank you for helping me. Cause I don't know if I could have held that together on my own.

[01:04:09] You did amazingly well. Uh, you're a much better, uh,

[01:04:12] interviewer than I am. So we'll anoint you the ball interviewer.

[01:04:19] That's a title I've always wanted to go for. Well, that's a good note to wrap up on. Thank

[01:04:22] you everybody for joining us and we'll see you next time. Thanks so much, Jack. This is Justin

[01:04:25] again. Thanks so much for tuning into this episode. If you found this discussion interesting and

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[01:04:35] We appreciate it. The opinions expressed in this podcast do not necessarily reflect the

[01:04:38] opinions of Olivia Capital. No information on this podcast should be construed as

[01:04:42] investment advice. Securities discussed in the podcast may be holdings of clients of

[01:04:46] Lydia Capital.

[01:04:46] See you next time.