The Rally No One Trusts | What the Options Market Tells Us About What Comes Next

[00:00:00] Forced Trading Into Poor Liquidity Is What Makes Volatility Events, And The Liquidity Is Not Returning. So The Value Of The Positions That Are Set To Expire, 80% Of That Value Is Calls. Traders Have Been Holding These Puts Through This Big Rally In The Spiders, Right? And What This Tells Me Is That Kindling Is Still There To The Downside. A Lot Of The Close-To-Close Volatility That Is Being Kind Of Hidden Is Zero DD People Coming Out And Helping The Market To Mean Reverse. That April 9th Move, We Had

[00:00:29] A, I Think It Was A 10% Intraday Swing As You Can See Here. That Was The Largest Intraday Swing Since I Believe 2004. Totally, You Know, Totally Bigger Than COVID. And As You Can See Here, Our Daily Moves Are At A Sustained At A Much Higher Level.

[00:00:47] So Brent, I Know You Follow The Markets Closer Than Me, But I Was Looking What's Going On Here And I Thought A Month Ago Or So There Was Something About Tariffs, But Then I Looked At The S&P 500 And We Started Recording And It Doesn't Seem Like There Was. So Did I Make That All Up? Yes, You Definitely Did And Your Returns Are Better Off Just Doing Nothing And Buying Each And Every Dip Is Still The Winning Ticket, Jack. So It's All Good, Man. That's The Name Of Our May Opex Now, To Your Point. It's All Good.

[00:01:15] It's All Good. Well, It's All Good Is Not Going To Get Views On YouTube. So I'm Going To Need Some Bearish Dish In You Somewhere In Here To Dial It Up A Notch If I'm Going To Make The Cover Work. Yes, I'm Actually Quite, Well, Here's The Problem, Jack, I Would Say. Have You Been On To Twitter Port, Port Twitter Traffic? Sorry, Port Traffic Twitter. That's What I Meant To Say. Have You Perused There? I've Seen A Little People Talking About It But I Have Not Been In There But I've Been Told The Ports Are Pretty Empty.

[00:01:42] That's My New Doom Scroll And I'm Fascinated With That. I Have Absolutely No Insights On This But, You Know, Watching The Boats As They Don't Come Into The L.A. Marina Or Port Or Whatever. It's Becoming My Favorite, Not Really Past Time, Current Time Activity. And That Seems Doomish. So If You Want Some Doom, Call This Port Traffic At A Standstill And Then We'll Get Some Views. Apparently There's A Port YouTube Channel As Well, By The Way, That Is Also Doing This. You Just Watch The Boats Come In And Out?

[00:02:10] That Is Like Blown Up, Yeah. Like Somehow Highlighting That There's No Boats In The Port Or Something Like That. So Whatever, If You And I Were Port Experts, We Could Be Blowing This Channel Up But Of Course You Are Not. There's An Excess Returns Channel Podcast In There Somewhere Where You Could Just Give Us The Daily Port Traffic Update. Daily Port Traffic. If It Comes To That, That's What I'll Do. And Anything To Get The Clicks, Brent. But It Is Interesting To Me Because On One Hand, I Can't Really Explain This. I Mean You Think About The Pain Trade And The Market Always Does What You Don't Think It Should Do And That's What It's Doing.

[00:02:39] But On The Other Hand, I Do Think Back To COVID And I Think About A Situation Where We Had All This Negative News That Wasn't Getting Reflected In The Market. Okay, We Had An Options Expiration, I'm Like At Some Point Are We Going To Have That? Like I Can See Both Sides Of This As I Think About The Whole Thing. Yeah, You And Me Both And You're Sort Of More Free To Say Whatever You Like To Say I Think Than I Am In Terms Of Macro Standpoints Because My Macro Views Are, I Know They're Not Correct So I Try Not To Say Anything. Mine Are Worse Than Yours.

[00:03:06] But I Keep Getting That Feeling Like You're Looking And Maybe It's Because I Watch Too Much Port Traffic Twitter. But, You Know, People Are Like Falling In The Streets And Like Stuff Doesn't Make Sense And, You Know, Trump Yesterday Saying It's Good That The Truckers Got Laid Off And All Stuff And You're Kind Of Like, Oh Man, Like, I Don't Know, This Doesn't Feel Good. And Then Like We Were Talking With Chris Sedil On His Podcast, Which Kudos To You For All Those Views, You Know, The Problem With Being Bearish, At Least Recently Was Everybody Was Bearish. I Think We've Cleaned Some Of That Sentiment Up.

[00:03:34] The Greed Monitor, The Fear Greed Monitor Is Now Greed, I Think. Like We Were At Excess Bearishness. So Maybe Some Of That's Alleviated. But I'm Kind Of With You, Like This Feels Like We Can't Be Out Of This Thing Already, Right? And So I Try To Really Balance What I See In Positioning With That Kind Of Narrative, That Gloomy Macro Narrative That Seems To Be Creeping. And That's Cool About What We're Going To Do Here Is Because We Are Going To Rely On Data And We're Going To Rely On What You're Seeing Behind The Scenes. You're Not Going To Get Jack Or Brent's Macro Views, Both Of Which Are Going To Be Incredibly Wrong. Right.

[00:04:03] So That's What We're Going To Go On Today. And Then Also, I Have To Say As A Good YouTube Host, Stay Tuned Until The End When You're Going To Find Out, Why It Says Saul Goodman On Here Right Now Because I Don't Even Know That. So You've Got To Stay To The End And You're Going To Find Out What Brent's Talking About There. I'm A Big Fan Of Breaking Bad And The Show Saul Goodman. So We'll Work That Into The Podcast. And I Just Thought About This. From Now On We Could Do Two Things. You Could Give One Macro View And I'll Give The Opposite Macro View. And Then You Can Say Always Right. And We'll Be Right No Matter What.

[00:04:29] That's The Whole Thing With The, You Know, If You Predict A 40% Chance Of A Major Market Meltdown, Like You're Always Right Because 40% Is Actually Above The Actual Odds Of A Major Market Meltdown. So You Can Say You're Right There, But It's Also Less Than 50%, So You Can Say You're Right On The Other Side. So It's Actually If You're Going To Be A Forecaster, That 40% Chance Is It Always Works Really Well For You. Right. That's A Really Good Point. Maybe That'll Be My Title Here. Something The 40% Chance Of A Market Meltdown. That Would Be A Killer YouTube Title Thing. Probably Not Actually.

[00:04:59] The 100% Chance Probably Does Better Than The 40% Chance. But You Know, Whatever. So Before We Get In This, We Always Like To Talk About Behind The Scenes. Obviously These Options Flows Have A Big Impact On The Market. You've Got A Chart Here That Shows How Much More People Are Using Options, Which Exacerbates These Flows. So I Think Our October Episode Is One Where We Went In This In A Lot Of Depth. But In General Here, Can You Talk A Little Bit About These Flows And How They Impact The Market? Yes. We're Going To Weave Some Of This In When We Talk About Liquidity Or Lack Of Liquidity. But Options Volumes Continue To Surge At Records.

[00:05:26] Those Record In March, Record In April, Zero DTE Record Volume. And Now The NASDAQ Announced That They Are Going To Offer Zero DTEs For The MAG 7 Stocks. So More Volume Is Going To Come On. There Was A Big SEBO Zero DTE Report That Came Out That Everyone Was Talking About At The LCC Conference I Was Just At. So More And More And More Volumes Are Coming In. And Obviously, If You Want To See A Nice Stock Chart, You Can Look At The SEBO Chart. Because When The Market Crashes, People Buy Puts And VIX Calls And Volume Goes In.

[00:05:55] And Then When The Market Stabilizes, People Flood Into Zero DTEs. And So They Are Winning 100% Of The Time At The Moment. So These Volumes Just... When You Are Adding More Products, There Is Just No Reason For It To Stop. Right? And So That Is The Tailwind That We Have In Reading The Options Market. Because The Bigger Volume Should Mean More Impact. Yeah. And This Next Slide We Talk About This Sort Of Path Here And This Flow. Yeah. And The Way This Generally Works Is Everyone Jumps On Their Trading Platform, Be It Retail People

[00:06:24] Or Hedge Funds Or Whatever It May Be. And 90% Of The Orders That We Send To The Exchanges Are Facilitated By A Market Maker. So You Take All Of These Small Orders And They Add Up To Big Exposure. And So The Market Makers Are Required To Offer Liquidity On The Exchanges. And So They Are Sitting There And All Of A sudden They Could End Up Buying Or Selling A Bunch Of AMC Calls In This Example. I Should Update This From AMC To Something More Pertinent. Micro Strategy Maybe.

[00:06:50] But The Point Here Is That We Can Get Some Basic Assumptions Around How Much Underlying Flow That Leads To. Right? So In This Case We Had 100,000 Calls Being Bought Either By Retail Or A Combination Of Retail And Hedge Funds Or Whatever It May Be. And If You Look At The Delta Of That So It's The Hedge Ratio. In This Case We Use The 50 Delta As An Example. Delta Ranges From 0 To 100. That Could Be As Much As 5 Million Shares To Buy. And That Is Just The Initial Hedge. That Hedge Has To Be Adjusted As AMC Price Goes Up And Down. As Time Passes As Vol Shifts Around.

[00:07:20] And So As Those Dynamics Change, They Have To Adjust The Shares That The Market Makers Have To Adjust The Shares They're Buying And Selling All Day Long, Kind Of Every Day. And So That Is How The Options Orders Kind Of Start To Work Their Way Into How The Underlying Stocks That We're Watching Move. So Before We Start On What We Are Looking Back Here, I Want To Ask You What's The Update On Captain Condor? Is That In The Presentation? Or What's He Been Up To? Captain Condor Did Poke His Head Out.

[00:07:46] He Lost A Few Rounds And So His Size Got Up To Be About 50,000 Or 30,000 I Guess It Was. The Wall Street Journal Article Came Out About Captain Condor Also A Couple Weeks Ago So That Got A Bunch Of Attention. But He's Been Suspiciously Quiet As Volatility Has Spiked. And So I Thought That's Interesting. From What I've Been Able To Tell Captain Condor Actually Doesn't Seem To Use Vol Or Options Prices As A Trigger To Trade. Seems To Be More Like A Technical Analysis And Then He Enters This Option Spread Trade Which Is Interesting.

[00:08:14] But He Has Admittedly Been Quite Quiet Even Though Volatility Has Been Higher Which To Me Is Interesting. Because You'd Think When Vol Is Higher You'd Want To Sell Options More In That Type Of Environment. That's Not A Sign He Blew Up Or Something Is It? No He Didn't Blew Up. He's Won Again. But You Know He Seems To Constantly Kind Of Escape Death Here. Basically The Rub Is I Think If You The Most He's Been Wrong Is About Five Times Meaning Five Days In A Row He's Put A Trade On That's Lost. I Think If He Got To Six Or Seven Days Then The Amount Of Capital He Would Need To Support That Trade Would Kind Of Of Sky Rocket.

[00:08:45] And You Know There's Convexity There Because He Doubles Down Right Every Time He Loses And So It's Called The Martingale Betting Strategy. And So As You Know With Martingale Or Playing Blackjack And Doubling Down At Some Point Either You Run Out Of Money Or The Bank Comes Out Or The Casino Comes Out And Says Hey You Know No More Jack. We're Not On The Irregularly In Everyday Life. Yeah You Like To Sling It Over There At The Mohegan Sun. Yeah Yeah I Do I Just I Slip Down In The Middle Of The Night You Know When The Kids Are Sleeping. And Throw It All Down.

[00:09:13] Well Anyway Back To This I Always Have To Just Ask About Captain Condor I Know You Were You Were Involved In The Wall Street Journal Out A Good Article That Outed Him So We Got Always Got To Make Sure He's He's Kind Of Become A Role Play In The Podcast So We Got To Make Sure That We Always Know What He's Up To. That's Right And We're Constantly Looking For Someone Else To Name Around Here So As Soon As We Have Some More Names To Dish Out. You're Good At The Names Too When Somebody Comes Out You're Going To Come Up With Something Good.

[00:09:31] I Got That From Macro Risk Advisors They Named 50 Cent Back In The Day The VIX Traded Up Just By 50 Cent Options And I Always Admired That They Were Able To Get That Guy So Much Attention Turned Out To Be Like I Think Like A French Quant About As Far From 50 Cent As You Can Get But You Know It's A Cool Name. So Anyways As We Move On Here This Next Slide We're Looking At The OpEx Cycle And How It Works. Yeah The Way That This Works Is Options Positions Build Into The Monthly Expiration In General And So The Monthly Expiration Is The Third Friday Of The Month.

[00:10:01] So As The Options Positions Build At That Third Friday That's Next Friday The 16th In This Case Hedges Associated With Those Trades Build And Then Options Positions Expire And Then The Hedges That Are Associated With Those Options Positions Shift And So As You Can See Here There's A Lot Of Expirations On This Chart But Some Of These Expirations Are Really Pivotal They Tend To Be The Quarterly Expiration So We Have Big Eyes On June Expiration Which Is Next Month But They Can Be Real Turning Points Because You Can Take This Extreme Positioning Either On The Call Side Or The Put Side

[00:10:30] You Clear It Out And Then Hedges Associated With Those Positions Again Are Removed And Volatility Can Change And Volatility Can Change And Market Direction Can Change Around Those Expirations Yeah And You Know Looking Back To COVID I Mean That's Obviously The Most Obvious Example On The Chart Of Looking At These Things As Turning Points Yeah February Really Unleashed The Downside As You Can See Here And Then March It Was The Day After March Expiration That We Bounced You Can Look Back In 2022

[00:10:53] There's A Major Low Associated With That As Well Last Year In 2024 You Know The Quarterly Expiration Is Again So You Can Go Through All These Dates And Find You Know Key Turning Points And As We'll See Here Shortly And As We'll See Here There Was A Brief Drawdown After The April Expiration And This May One Is Really An Interesting Moment Which We're Going To Dig Into Here In A Few Slides Yeah So On This Next Slide You're Looking At How We're Setting Up Headed Into May Here Yeah And To Your Point Jack Earlier You Know If You're Going To Tell Me What Happened

[00:11:21] You Know We Did Have That Extreme Early April Volatility And Went Through April OPEX Which Removed Some Of Those Positions But There Was Still A Lot Of Volatility There In Mid-April And Now What You See Here Is Almost All Call Positions Right If You Go Through The Index Stuff So At The Top Here The Index Stuff Is NDX Russell Primarily Are Those Two Big Index Positions It's 80% Call Delta So The Value Of The Positions That Are Set To Expire 80% Of That Value Is Calls ETF Same Thing 70% Single Stocks Tesla Apple Blah Blah Blah Blah 70% Of That Value Is Calls

[00:11:52] In April This Was The Opposite Right We Were More Towards The Put End Of The Spectrum And So This To Me Is Fairly Surprising Surprising That Was The Word I Was Looking For We Have Had A Nine Day Rally We Had A Big 10% Drawdown From The Recent Low So There Has Been A Lot Of Bullishness Kind Of Built Up Here But You Know The Fact That We Are So Skewed To The Upside To Me Is One Reason That I Think May Could Mark A Short Term High In The Market

[00:12:23] And Is That Some Of That Is Because The Market's Up Right So The Value In These Positions Just Goes Up When The Market Goes Up But Also Some Of That Is Probably People Are Legitimately Buying Lots Of Calls People Are Buying Calls And Because The Market Rally So Much Those Call Values Increase And That's What Drives This We Measured This By Delta Notional So Remember Earlier We Referred To Delta As The Share Ratio You Can Also Look At Delta As The Share Equivalent Right So The More The Larger The Delta Is The More Value In Stock Terms That You See Out There

[00:12:48] You're Going To See Goldman Push Out Some Numbers That Will Be Like $5 Trillion Dollar OPEX Because They're Looking At They're Assuming One Option Is Worth 100 Shares Of Stock And When You Look At It Through The Delta Notional Lens What We're Saying Is No This Option Is Actually Worth You Know 50 Shares Of Stock Not 100 Shares Of Stock And That's Kind Of How We Break This Down So We Think This Is More Accurate But The Point Is To Your Point Market Rallies Call Values Increase And At The Same Time You Would Sort Of Expect There To Maybe Be A Little More Put Selling

[00:13:18] You Know Those Puts Are Losing Values As The Market Goes Up But I Would Just Expect In This Environment That Should Be Maybe A Little Bit More Hedge Flow Maybe People Would Be More Actively Monetizing Some Of These Positions It's Just Interesting To Me That It Is So Skewed But Again If You Look At The Last Month's Performance As We Could Do Right Here You Know We Could See That It's Just Been Nothing But Up Really Since April OPEX So On This Next One We're Looking At This Expiration And You Can Tell It's Pretty Small Relative At Least Relative To What's Coming Up Yeah And This Is Not A Bad Size For A Regular

[00:13:47] Monthly Expiration But It's The Quarterlies And I Mentionedded June Before You Can See This Is June Here We're Measuring Single Stock Delta So Again Blue Is Calls Orange Is Puts In Terms Of That Delta Value So More Calls Value Certainly Expiring Versus Puts And Then You Know The June Is The Really Big One Right So If We Were To Rip Into June Options Expiration Or Tank Into June Options Expiration I Would Be Looking And We'll Be Talking About This Likely Next Month You Know This Is A Much More Significant Position Right Or Significant Turning Point I Think

[00:14:14] Possibly Coming Out Of June Versus May Will I Get To Break Out My Largest Options Expiration Ever Cover For June Or Is It Not Going To Be Competing For That No I Think We'll We Can Break It Out Regardless We Can Always Find Some Stat That Supports Your Yeah But It Probably Will Not Be Like One Of The Biggest Ones Ever Or Like I Know We've Had Some Of The Biggest Ones Ever Recently A Lot Of That Is Path Dependent Meaning You Know If We Have A Big Move Right Higher Or Lower That Drives Those Options Values Drives Those Volumes So It's Absolutely Possible Given The You Know The Increase In Volumes And All That

[00:14:44] But If We Just Sort Of Trend Side Sideways Then Maybe We Don't Have A Lot Of Reason To Add New Volumes On Right But But That Potential Certainly Is There So On This Next Slide We're Looking At Gamma And Realized Volatility And We Are Not As Far Left As We Have Been That's Right We Finally Moved A Little Bit More To The Right Here Which Is Where We've Been Used To Over The Last Few Years And The Deal Here Is We Measure S&P Gamma So How Much Gamma Is In The S&P 500 Index And The More Positive We Are On This Index The More Volatility We Have On A Forward Looking Basis So It's Predictive And To Your Point Here

[00:15:13] When Markets Are Crashing And Put Positions Are Relatively Larger Than Calls We End Up On The Left Side Of This Chart With A Bigger Negative Gamma Position Negative Gamma Tends To Say Hey Volatility Is Going To Increase In The Future And So You Want To Be Wary Of That Right So We're Drifting Towards The Right On This Chart The Market Volatility As We'll Talk About Here Shortly Has Been Coming In And Things Have Be Getting A Little More Calm Right Back To The Saul Goodman Reference Nothing To See Here As Per The May Price Action So Would We Expect Like Once

[00:15:43] This Exploration Clears Like An Opportunity For A Little More Volatility I Believe So Because We're Going To Remove A Lot Of These Call Positions Right And There's A Lot Of Reflexivity In These Positions So If You Are A Market Maker And Your Short Call Options Right Because Jack You've Been Buying Tons Of Calls I'm Assuming So When The Stock Market Goes Up And The Market Maker Short Calls They Have To Continue To Buying Stock Right Into Those Highs And When The Market Continues To Go High They Buy More Shares Of Stock And As The Stock Goes Up Because Of That They Have To Buy Even More Shares

[00:16:11] So There's This Reflexivity In It That Helps Momentum To Continue And So You Know That Is A Big Driver Of This Recent Price Action And Per The Expiration Chart This One Here We're Going To Remove A Lot Of Those Calls Right So That Momentum Really Starts To Get Zapped We're Also Going To Talk About Vanna Or Implied Vol As A Flow As Well And That To Me Also Seems Zapped As Kind Of An Upside Momentum Tool So You Know We Really Need A Deal A Possible China Trade Deal Which Is Coming Up You Know This

[00:16:41] Weekend Maybe They Advance That We Need Something To Kind Of Keep That Momentum Going Otherwise We're Sort Of Floating In The Upper Atmosphere Without A Rocket Pack When Is The VIX Expiration This Time? It Is After Expiration It's On The 21st And So What You Can See Here Is That We Tested This Out And The Deal Is Here That We Talk About Flips Right So If The Market Is Rallying Into An Options Expiration It Tends To Sell Off After The 2rds Of The Time As You Can See Here And That's True

[00:17:09] When VIX Expiration Occurs After Options Expiration That's What We Have In This Situation Otherwise We're Closer To 60% Chance Of A Flip And So The Since We Have Such A Strong Directional Rally Into This May OPEX There's A Great Chance I Think That We Do Actually Kind Of Sell Off Or Have Some Consolidation After This Expiration Of Course That's Going To Go Up Against This China China US Meeting This Weekend To Advance Trade Talks And Then We Have CPI Next Week As Well So There's A Few Macro Data Points That May Mess With My Stats Here But Statistically

[00:17:39] You Know We Seem To Be Lining Up For A Reversal Here Yeah I Think With Any Data You Look At With The Market Right Now You've Got To Like Take It With A Grain Of Salt That Like Any Day There Could Be An Announcement On Either Way That Has Just A Massive Impact It's Just It's Very Hard To Look At Any Of This Stuff Right Now When Something Could Change So Rapidly Like That Yeah And That Takes Us To The Saul Goodman And For Those Of You Don't Have Never Seen Breaking Bad Or The Saul Goodman Show He's Having A Hard Time So He Changed His Name To Saul Goodman Because It's All Goodman And That Is What You See Here When

[00:18:08] You Look At This Chart Where We Rallied Nine Days In A Row I Think That Was The Biggest String Of Days Rallying In Something Like 20 Years I Forget The Exact Metric But We We've Exactly Closed The Tariff Deadline Liberation Day Gap And So To Your Point If You Went To Sleep In And Slept Through April And Basically Just Woke Up A Couple Days Ago Nothing Happened Right And Now You Know Trump May Give Kind Of Some Nastier Tweets Out There Like Hey Today Should Be 80

[00:18:36] You Know 80% Tariff Sounds Good For China And Market Doesn't Really React To It As Much Right Clearly People Are Getting More Bullish We Were Talking About The Fear Greed Index Right We Went From Extreme Bearishness To Greed Actually Right Now Bitcoin Is Ripping It's Over 103 So Everything Seems To Be Saul Goodman At The Moment And So That Is The Way People Are Choosing To See People Who Have Not Looked At Port Traffic Twitter Are Feeling Pretty Good About Things

[00:19:05] Right Now I Was Hoping You Were Going To Go Like A Minute 42 With Saul Goodman Because I Need People Hanging On By A Thread To Give Me The Watch Time So I Was Hoping You Weren't To Be Revealed Towards The End Of Our Presentation All We've Got Now Is Our Engaging Personalities To Get People Through The Rest Of This Sprint So I Don't Know If We Can Pull That Off Or Not See The Views Drifting Drifting Away Like A Big Downward Spike In The Chart Right Now But But Anyway So We Always Like To Look Back I Want To Also Just Add Quickly That I Made You Wait 15 Minutes While I Added The Saul Goodman Slides Into The You Did It Was It Was An Essential Part Of The

[00:19:34] Presentation You Had A Lot Of Grace Waiting For That So Anyway We Like To We Always Like To Look Back At Some Of The Slides We Looked At Last Time Before We Look Forward Yeah We Like To Check Ourselves Before We Wreck Ourselves I Just Can Continue Driving This Show Into The Ground Last Last Month It Was About Kind Of The Known Unknown So Trump Pushed Off 90 Day Tariffs We Had Entered Kind Of The Edge Of The Abyss With The Huge Vic Spike Treasuries Were Doing Weird Things You Know It

[00:20:03] Was Really Kind Of A Nasty Nasty Period And The 90 Day Pause Gave Us Some Breathing Room And We Did See The Market Turn A Little Bit At April Opics Gave Back You Know A Little Bit Of Performance A Little Bit Of Weakness And We Bounced From There One Of The Big Things About April Opics Was The Dry Up Of Liquidity Right Liquidity And This Is A CME Depth Of Book It Had And Per Norton Goldman I Think It Was The Lowest Liquidity We Had In Something Like 20 Years So That Liquidity Dried Up Volatility

[00:20:32] Spiked It Was Really Quite Nasty Heading Into April Opics And Our General View Was Hey Vol Should Come In A Little Bit Because We're No Longer On The Edge Of The Abyss But We Should Maintain Some Type Of Vol Premium And You Know If You Were Just To Kind Of You Know Scroll Through Our General Thesis Here We Thought That Vol Would Come In A Little Bit I Think That You Can See Here We're Looking At The Market Rallying A Little Bit More Into The 5400 Maybe 5500

[00:21:01] Area And So We Definitely Moved Above I Would Say Where We Where I Was Expecting Based On Some Of The Volatility Metrics Right The Squeeze Has Been A Little Bit Stronger Than I Think Than What I Saw Kind Of In The Cards Here So Normally I Kind Of Like To Say Hey Look At Us We've Got Everything Like Pretty Accurate Here But The Market Did Certainly Shoot Above The Bounds That I Saw In The Options Prices Yeah And For People Who Want More Information On That Liquidity Thing We Talked To Chris City A Lot About That Podcast You

[00:21:30] And I Recorded Last Week And He Had A Lot Of You Know It Basically Apples What You're Saying But He Had Some Interesting Behind The Scenes Stuff Of What He's Seeing With Liquidity As Well Yeah And This Is Going To Come Up Here When I Do Some Projections Here In A Few Slides And The Interesting Thing I Would Say Is You Could See That You Know Traders Were Definitely Selling Some Puts But That Made Sense Off Of That Record Volatility You Know The VIX Was Still Around 30 Into You Know April OPEX And So That Did Get Sold Off And Vol Overall Has Come Down A

[00:21:59] Bunch As We're Going To Talk About Here Shortly But The Idea Of Volatility Normalizing To Higher Levels Is Still I Think Present Right And We're Going To Talk About That Dynamic A Little Bit So On The Volatility Space We've Definitely Come In A Little Bit More Than I Thought We Would From Those April OPEX S&P Is You Know About 200 Handles Probably Higher Than I Was Really Expecting We're Sitting Here At The 5650 Area We're Kind Of Pegging 5500 Is Maybe The Real High So We Overshot A Little Bit Out Of That April

[00:22:28] OPEX And The Last Kind Of Thing That We Stuck The We Stuck These Slides In Here Was On Gold And The Idea That Implied Vols In Gold Were Just Starting To Get Really Quite Rich And You Can See It In This Slide Here And So Gold Actually Did Come Down Pretty Sharply And This Is Going To Be Relevant Because We're Going To Talk About Bitcoin Right At The End Of This As Well So The Idea Here Is That How Can You Forecast When An Asset Is Just Kind Of Overbought Or Oversold Well If You Look At Options Implied Vol That Could Be A Really Interesting Signal And So Gold

[00:22:57] Has Kind Of Peaked A Little Bit Over That 300 Mark In The ETF GLD ETF And Has Definitely Come In A Little Bit Since We Saw That Signal I'm Just Happy You Didn't Asked Me To Do That Goal Call Like The Goal From Like The Soccer That You Put It Like That Because I Just I Don't Have The Voice For It I was Going To Go With The Austin Powers I Love Gold If You Could Do One Of Those Would Be I Can't Do That Either I Gotta Keep Things Straight Here Brent But So As We Look Forward What Are You Seeing Here We Got The Not So Saul Goodman Not So Saul Goodman This Is Saul After

[00:23:25] He Messed With The Drug Cartels And The Gangs And Everything Else And You Know Now We're Playing With Tariffs Where You Get A Bunch Of That's That's The Analogy Here Right Now You Play With Tariffs Tariffs Look Good And Then If It Doesn't Work Out We're Going Up With Saul Not So Goodman And So Why Do I Think We're At Risk Of Not Working Out I'm Trying Very Very Hard Not To Let Any Port Traffic Twitter Views Make Make Its Way Into This Presentation So We'll See Here I Mentioned Earlier As We Look Forward We Closed The Liberation Day Gap Which Is That Red

[00:23:55] Line S&P Actually You Know Looked Like It Was Going To Bust Straight Through This Yesterday That Would Be Thursday The 8th When You Know Trump Said Hey We Got A UK Trade Deal And I'm Going To Back Off On China And Then He Said You All Need To Buy Stocks And Then A Few Minutes Later He Called J-Pow Foolish And Then You Know So It's Kind Of Whipping Back And Forth Here But It's Interesting To Me The Market Really Is Stalled At This 5700 Level Which Is That That Gap Close I'm Not A Technician But This Is Where The Options This Is Where

[00:24:24] Options Zero DT Options Are Being Sold And That's Adding A Little Bit Of Local Or Short Term Positive Gamma And The Market Is Really Having A Hard Time Digesting That Yeah The Fed Meeting By The Way Was Just Kind Of A Non-Event Right It Didn't Seem Like Much Happened There It Was A Total Non-Event It You Know To Me That Wasn't Bullish Because It Just Seemed To Be Like We Don't Really You Know We're Not Really Sure What To Expect Here I Don't Know CPI I Mean It's Hard Obviously With The With The Chinese U.S. Meeting Again This Weekend And Then We're Going To Get CPI You

[00:24:53] Know The The Worry Here Is That Inflation Picks Up And Then What To Do With Rates And All That And You Know Powell Is Just Sort Of Like I Don't Know We'll See Right And I Thought That The Market Would Have Maybe A Little Bit More Of A Negative Reaction But Funny Enough As Soon As As That Press Conference You Know Ends Trump Comes And Says Hey I Got A Huge Announcement Tomorrow And Then A Huge Announcement You Know Come Up This Weekend And Blah Blah Blah So Maybe The Trump Pump Kind Of Pasted Over That In The Short Term Was There Less Hedging Into That Meeting Were People Pretty Hedged

[00:25:22] In That Or No No The Implied Move For For The Fed Was Less Than 1% And If You Remember Back We Had Non-Farm Payrolls Last Week The Implied Move For That Day Was 1.1 Or 1.2% So People Weren't Honestly Expecting That Much There Was A Fair Amount Of Intraday Volatility You Know Around That Print But Honestly The Market Just Sort Of Slept Through It And My Take On This Is That It Doesn't Really Matter What Powell Has To Say Because We Really Just Need To See This Data Like Is Are We Going To Get

[00:25:49] Inflation And Unemployment And Then People Can Just Assume Powell React Accordingly Right And If A Trade Deal Comes And Maybe It Doesn't Matter What Short Term Macro Data Says Because We Got A Trade Deal So I Don't You Know You Talk To A Lot Of Macro Folks That Can Give You Better You Know Feelings About That But I Can Say That The Options Market Is Just Pricing Lower Volatility In The Future Kind Of Like Everything'S You Know All Good So That That To Me Is The Really Interesting Part Here Yeah I Think Even The Macro Guys Are Kind Of Throwing Up Their Hands Right Now

[00:26:19] They're Like We Don't Know What The Next Tweets Gonna Be Like What Can We Do About This Yeah Like At Least When They're Trying To Prediction Inflation They Could Use Some Data Like Some Historical Data To Try To Come Up With Something Like With This Like Who Knows Yeah And You Know The Funny Thing Is Is That If You Try To Say Well When Did We Last Have I Don't Want To Keep Talking About The Poor Stuff But You Know You Go Back To These Dates Right Like COVID And Some Of These Other Moments In Time Where You Know That Stuff Didn't Seem Like It Was Going To Go Pretty Well And And You Know You Want People To Lose Their Jobs To Get

[00:26:48] Rates Down Because That's All Part Of The 40 Chess Thing I'm Not Sure But They're What's Nice About The Options Mark And The Options Pricing Is It Comes Down To Risk Reward Right And And The Risk To Bet On The Market Slide Has Come Down Significantly In The Last You Know Couple Of Weeks And So You Know To Me That's Where Kind Of Opportunity Starts To Open Up Because I Have No Idea About What The Macro Is Going To Bring But I Know I Can Bet On Sort Of Tail Moves Now At A Much More Reasonable Price Yeah I'm Gonna Have To Put

[00:27:18] Like I Can Put New Backgrounds On People Behind People On Our On Our Program Now So I'll Have To Put Like Empty Port Behind You There's Like Your There's Your Back I'm Gonna Fold By Myself Yeah Correct So You Could Just You Could Just Take A Deep Dive Into Port Twitter Or Wherever You're Going Down That's What We Talk About From Here On Out Oh Gosh People So This Next Slide You Got This Idea Of Negative Gamma And How It Works Both Ways Yeah I'm Gonna Go Through The Rest Of Stop Saying The P Word Again So Let's Talk About Gamma What You Look At Gamma What You're Seeing Here Is This Is Part Of Our New

[00:27:47] System That We Rolled Out About A Month Ago Honestly We Launched Our New Product On April 9th Which Is A Pretty Good Day To Launch A Product That Was For Those Who Weren't Keeping Score The Biggest S&P Move In Like 20 Years Anyways So We Had This Gex Line Right Gex Or Gamma Line And If This Goes Up It's Positive Gamma Which Means The Market Should Be Supported By Dealer Hedging Flows And If The Line Is Down Then It Should Be Then Volatility Should Increase Right Remember That Scatter Plot Earlier And When You Look At This

[00:28:16] What You Take Away From This Is That You See These Positive Bars Here And The Fact That This Line Is Shooting Higher At Lower Strikes That's Telling Us That Traders That Means Buy Side Have Been Selling Puts Through This Environment Right And That Has Been A Great Trade Right Because Vols Come Down And The Markets Rally That's Great But If There Is Any Weakness Right If The Market Starts To Turn South If China U.S. End Up Fistfighting At Their Negotiation Tables Weekend There Is No Long Put Hedges That Are In This Market In Terms Of The

[00:28:45] SPX Positioning Right Similarly If You Were Thinking That Everyone Was Positioned For Massive Upside You Would Look For This Negative Gamma Which We're Seeing But As You Can See Here Jack This Line The Bottom Of This Line Is Right Around 5800 In That General Area And Then The Line Shoots Markedly Higher After That So What That Tells Us Is That There's Some Traders That Are Long Calls In The Kind Of 5800 To Maybe Up To 5900 Area But There's Not A Lot Of Positions Here In The SPX Saying Hey I Think That This Thing Is Gonna

[00:29:15] Rip Up You Know All Time Highs By The End Of This Year There's Been A Some Light Positioning Coming In With That In That Respect But The Thing That I Really Watch For You Know The Soft Spot In This Market To Me Is The Short Put Positions Right Because What Happens In This Situation If You're Short Options In The Market After We've Been Up 10% A Month And VIX Is Now At Kind Of 1 To 2 Month Lows The Market Starts To Slide At All Those People Have To Cover Right And When They Cover And People Start To Enter Into Long Puts Right

[00:29:45] Because They Want To Hedge Some New Event Then There's A Lot More Downside To Be Had In That Type Of Environment So It's Kind Of Like The Old Saying A Well-Hedged Market Doesn't Crash You Know That That's Kind Of This Situation To Me A Little Bit That This Is Not A Well-Hedged Market This Is Sort Of A Risky Market In The SPX The Other Thing You Can See Here Is There's Some Pretty Big Call Sales In Here And We Look At Call Sales They Generate Positive Gamma In The Market Those Are Oftentimes Big Resistance Points And So In This Case I Think Those Call Sales Are At Are Are Are

[00:30:14] Where The Market Sees Okay This Is Sort Of Fair Value Maybe Or Best Case Fair Value And That 5,900 To Maybe 6,000 Area Really We've Seen People Sell Calls Into Earlier Rallies And That's That Big Round Number Syndrome Where You Know I Think Even We Do Get Some Kind Of A Deal Or Positive Talks Like That Upside Into June OPEX Is Really The Area That I'm Looking Because These Call Sales Are Being Made At That Level So What Are We Seeing Differently In The Next Chart?

[00:30:44] Most People If You Were Going To Say Hey You Know I Only Look At SPX Because That's The Institutional Flow Right But There's A Ton Of Very Large Positioning In The Spiders And In This Case The Notional Value In The Spiders Is Much Bigger Than The SPX And Not Only That Remember This Slide Here Shows Positive Gamma Below Right And This Is About It's Roughly Flat So This Purple Line Here Is On This Left Y Axis So It's Kind Of Flat To Maybe Minus 100 Million Dollars Not Very Much If You Look At

[00:31:13] The Spiders We're At Minus 2 Billion Dollars In Terms Of Gamma So That's Gamma Per 1% Move So What This Is Telling Us In The Spiders Is These Are All Put Positions Right I'm Going To Show This In A Second But This Is Huge Negative Gamma To The Downside In The Spiders So What This Means Is That If We Start To Sell Off The Spider Hedging Flow Is Somewhere In The Tune Of About 2 Billion Dollars Per 1% Move In The S&P So Every Time We Go Down 1% In The S&P There's Another 2 To 3 Billion Dollars Of Stock That Has To Be Sold By The Market

[00:31:43] Makers In This Instance Further To The Upside As You See Into That Kind Of Same Level Like 5900 Or 590 Up To 600 Those Positions Really Wane And This Tells Me That The Bull Fuel Really Dies Off As We Rally Into That 590 To 600 Area So For Me Into June Opex This Is A Major Resistance Area That 590 5900 To 6 6,000 Depending On Whether You Look At Spiders Or S&P So If You Look At SPX You Say Not Much Risk If You Look At Spiders You Go

[00:32:12] That's A Lot Of Risk And Typically You Think Spiders Are More Driven By The Retail Side Of The Equation Makes Sense To Me We Have A Hard Time Breaking Out Retail And Institutional Buy Side In Our Data But This Is The Embeded Risk That's In The Market In Terms Of Really Invoking Downside And We Would Assume That Institutions Have Yet To Hedge Is The Other Takeaway Here So The Idea Is If We Start Going Down We Could Have More Risks To Down Then We Would Have Fuel

[00:32:42] To Up Up Up Does That Yeah Yeah And What Happens When The Market Is Dominated By So This Is The Market Maker View Of The Equation So If The Bars Are Negative That Means Deals Are Short These Puts Or Market Makers Are Short These Puts And

[00:33:32] That Call Buying Or Call Trading Is Not Really Invoked In The Spiders In This Case Until Higher Strikes And To Me This Is Interesting Because If You Think About Short Covering And We Talk About Vanna Oftentimes If There Are These Spider Puts And Implied Vol Is Coming Down The VIX Is Dropping And The Market Is Rallying That Is A Terrible Situation To Own Put Put Values And Market Makers

[00:34:02] Have To Buy Stock In That Situation Then They Have To Also Buy Stock As A Functional Effect Of The Market Is Rallying So When You Look At This Chart And There Was A Somewhat Similar Chart In SPX Weeks Ago You Start To Get The Feeling That This Was A Tremendous Put Cover Or Short Cover In This Index Flow This Is Very Unusual To Me That

[00:34:32] These Puts Still Exist After This Big Rally They Have Been Very Beat Up But It Gives You This Feeling That There Was A Big Kind Of Index Short Cover That Must Have Added A Lot Of Fuel To To This Rally Over The Last Couple Weeks So Would This Give Me An Idea Like There's Lack Of Calls That There's Not A

[00:35:20] into a lot of these positions. So the way that I'm sort of looking at this is that there's longer dated put holders and there's a lot of short dated kind of momentum trading, weekly options, zero DT options being traded on the index side. And when you have, again, this sort of tinder, it's like this was a real supportive flow. This put crush was a real supportive flow to the market. And I think it's part of the reason that we are able to have nine days worth of rallies

[00:35:49] because these puts stayed in place and they've just been, you know, just destroyed as the market has rallied, but they're still there and they can reflate if vol starts to spike and the market starts to slide back lower. To your point on earnings season, this has been a really interesting earnings season because on one hand we're reporting earnings that had nothing to do with this whole situation because Liberation Day was after the earnings. So like on one hand we have that. And then on the other hand, like in terms of guidance, like a lot of companies are just kind of throwing their hands up. They're like, yeah, whatever you tell us. So you're not learning a lot. I don't think

[00:36:17] out of this earnings season. Yeah. I mean, I think that's totally true. It's like we do, we just pulled guidance and a lot of times that, that seemed to, to, to be enough for people. And then it would be like, well, you know, we're going to remove, uh, we, we may reduce like chip exports or, or, or restrictions and some stuff like that. And that gets me around. So a lot of that, you know, seems to be based off of, uh, you know, people looking for an excuse to buy. And it's like lack of bad news is the, you know, the only excuse they needed. And, you know, that that's worked

[00:36:46] out now for, for this past month. Um, but, uh, you know, Microsoft really solid earnings and meta and, and all that. And so, you know, if you just look at the response, the earnings is clearly, clearly very strong and those call positions have built up. So, you know, there's been a lot of momentum in this rally. I think that's a function of poor liquidity. Uh, I can talk about that here in a second. Um, but you know, there, there is not, there's not a lot of hedging in the market right now. The only thing that I can find that's of interest really is this spider positioning,

[00:37:14] which is material. But again, the SPX where the big boys play, um, if anything, they seem to be sitting here kind of short puts and, you know, uh, and that offers like a little bit of support, but in a material risk off situation, uh, that cover flow could really add to this, to this downside. And you can see in this case, you know, the negative gamma in, in SPX, when it gets larger, you're talking four or $5 billion, right? So that can, that can be much larger, even though

[00:37:41] right now, spiders is kind of the bigger of the two. Okay. So this next one, you have, uh, realized vol has been sinking, which we've definitely been seeing, uh, you know, we had that big spike and now we're, we're kind of back to, uh, yeah, back to lower levels at least. Yeah. Per our, our April notes, we, we thought that, Hey, look, you know, vol should, should remain elevated, right? It's kind of this new vol regime is really what the takeaway was that, that this tariff era is entered, we've entered a new vol regime. And so that commands a little

[00:38:08] bit of premium. Um, and then in this case, what you can see here, a 10 day realized vol, it's absolutely been getting crushed. And we're actually now below level seen in kind of December or in January. So we're kind of moved from a realized vol perspective to before the April, early April crisis. Um, and the VIX is right now, as I, as we're discussing, it's at 22. Um, so 10 day realized vol, which is a kind of a medium term in, in this, uh,

[00:38:34] time term, uh, in this day and age, that's a rare on 16 or forecasting 1% daily moves. And so when you look at this, you kind of go crisis over arguably. And then when you compare the spread between these two, you go, well, VIX is at 22 realize while it's at 16, that's a pretty healthy vol premium. You know, typically that the spread between those two is closer to a three or four. So we've got a six point premium between the VIX at 22 and realize vol at 16. You know, like that seems like a pretty good padding, right? For a implied

[00:39:01] vol or a pretty good risk premium, you would say. Um, but, but this number is, is very strange to me. And I'll, I'll tell you, this is why, um, this is the daily range. So what I did here is I take the S and P high for the day versus the low for the day. And I compare that versus the open enough in a fascinating, uh, measure is that April 9th move, we had a, a, I think it was a 10% intraday swing. As you can see here, that was the largest intraday swing since I believe 2004

[00:39:30] total, you know, totally bigger than COVID. And as you can see here, our daily moves are at a sustained at a much higher level, right? So the intraday volatility is still massive. As you can see on this chart, um, even though the close to close volatility, which is what this measures seems to be smaller. And at the same time, we're having record zero DTE volume. We just had 67% SPX zero DTE volume last week. Uh, that is just keeps going bouncing higher and higher and

[00:39:59] higher. And so I think that a lot of the close to close volatility that is being kind of hidden is zero DTE people coming out, uh, and, and helping the market to mean revert. So people always ask me kind of what's the impact of zero DTE. I think this is part of it, right? You just sell calls or, uh, or sell puts and you kind of like force the market to, to mean revert, right? As a, as a, on an intraday basis. Um, and so those traders, if you consider these big swings and they help the

[00:40:26] market to mean revert, then zero DTE rating could be quite profitable if you're positioning to get that, you know, intraday mean reversion. But that is all that, that this realized vol is hiding this big trading ranges that we're seeing. Does that make sense? Yeah, it makes complete sense. There's nothing with, uh, with realizing implied vol, there's nothing rule that says if when they separate a lot, like one usually pulls the other in its direction, right? It could really go either way. There, there's no rule. And, you know, historically you look at one month realized vol and you compare

[00:40:54] that to, uh, to, um, to the VIX because the VIX measures kind of one month forward volatility, uh, implied volatility. In this case, I had it set to 10 days because I wanted to take that, you know, big jump right from early April out of the, out of the matrix, so to speak. Uh, I could expand this a little bit, but you know, one month realized vol is a little bit closer to 30. So it's, it's still quite a bit higher. Um, and if you look at the, the, the spread between them, again, historically it's about 3%. But the, but the rough idea, if you're just going to put your

[00:41:24] finger in the air and say, is vol too cheap or too rich, you would compare the spread between these two. And so obviously when you look at this and you can see, okay, the VIX spiked quite a bit over realized earlier. Does that mean that there's a, you know, too, uh, too fat of a risk premium? And maybe I want to start to sell options. Like, so like if VIX goes to 65, do you want to start selling vol in that situation? Right. Just cause that premium is so fat. Chris Cedillo probably make fun of us for, you know, for suggesting that, uh, and I think a lot of the vol guys would make,

[00:41:51] you know, would, would throw shade on that idea, but kind of to your point, the vol premium expands and contracts. And, and so, you know, that can tell us, uh, how well the market is hedged or if it's not hedged enough. So the confusing thing here is I would say that this looks like a fat vol premium, right? Because you say realized vol is at 16 and VIX is at 22. So that six points of premium is pretty, pretty healthy. Um, but I don't think that this is doing a really fair job, meaning realized vol is

[00:42:18] doing a fair job of, uh, of suggesting or showing us what the actual embedded risk is. Right. Because when you look at the intraday swings, they're very large. Um, and that doesn't necessarily show up in, in realized vol metrics. On this next slide, you've got this, uh, the lows of the new normal. Yes. So the Saul Goodman, uh, to, to injured Saul Goodman, um, really comes into this idea that the

[00:42:43] market is, I think underpricing risk in a significant way, uh, in this market at this time. And the idea is that we had a ton of volatility, right? Everyone's well aware of that. We're still getting these giant intraday trading ranges. We've now moved to a greed cycle with the market, you know, ripping. Um, but as far as I can tell, there hasn't been the, the solving of the kind of

[00:43:11] known unknowns has not happened. So typically a crisis ends when the fed comes out and does what they have to do with rates, either they stop raising them or they cut them, or there's some type of government response, or in this case, we signed tariff deals with China, which seems to be a big thing. And, and we can all move on with our lives. And we really haven't gotten that right. Um, and so the idea was entering a new volatility regime. And so I know there's a lot of, uh, of lines on this chart, but what I want you to just sort of do is we have correlation. We've talked about this a lot

[00:43:38] in the past is the SIBO correlation metric, which just tells us our stocks moving together or are they, you know, moving in, in distinct ways. And so the general idea is that in high risk environments, you know, Nvidia, Apple, Tesla, they all trade in the same direction in very, very bullish environments like late last year or towards the middle of last year, I guess about a year ago now, uh, you would see like Nvidia outpacing all other stocks by like 20%, right? When you see that

[00:44:02] correlation drops. Um, then you also have VVIX, which is the vol of all we have the VIX on here, and then we have the skew index. So what's the value of an out of the money put versus an after money put all of these levels are basically just where we were for essentially most of the post COVID period, right? So if you're going to say, what was the anomaly in this chart? I look at this and I go, well, it was 2024 largely, right? From basically the start of 2024 to mid last year, that was actually the anomaly that this excess bullish period that we had

[00:44:32] driven by the AI semiconductor chase, right? That was the crazy period. And now we've really just sort of arguably normalized to where vol was in the kind of post pandemic era. And that makes a lot of sense to me when you think about now having stable volatility, because we have, you know, even if we solve the tariff issue tomorrow, maybe if we, I don't know if we could get pen to paper tomorrow on a deal with China, maybe we do. And then this whole thing goes away. But if we don't, you know, what are the economic impacts of this? Like Powell, like,

[00:45:02] Trump still wants rates down, you know, and all these other things. So there's a lot of uncertainty out there, you know, with respect to these, you know, different policies. And so that to me says we should command more volatility premium here, which means that these levels, which are sharply down from April highs, they're kind of just where we were for 2020 to 2023. So this is the kind of, maybe this is all the mean reversion we're getting in terms of volatility.

[00:45:31] Yeah. And this also echoes what Chris Cidio was saying, which is he, you know, he came into this year expecting like an above average volatility year. And, you know, we got that and, you know, this is not something that seems like either one of you is thinking is just going to, you know, head right back down to where it started. Yeah. And again, it's very hard to not let a macro view bake into this. And my second concern here is this idea of liquidity. And so we talked about this in April, you mentioned, we just talked about this with Chris recently. This is that same CME liquidity tool chart that

[00:46:00] we mentioned before. And this is the April low. You can see, hopefully you can see where I'm pointing. On the right here's a chart from Goldman Sachs. This was from the peak of the crisis, really. And meaning April, early April, right? And what they showed here was that E-mini top of book liquidity went as low as, I believe they said in 20 years, you could see it's basically the lowest in the modern era. And that syncs right here with the lows that we had on this book depth chart, right? But at that same time, equity volume hit all time highs, as you can see on that chart. I

[00:46:29] believe that was the largest equity volume ever. So you had volumes go crazy, liquidity go just dry way up. Options volume at the same time was hitting records. And so the liquidity just totally evaporated, right? And this purple line is bid ask, the bid ask spread in the E-mini futures market, right? And what you can see here is that there's a pretty clear bound through the last two years.

[00:46:55] This is the farthest back this goes on this chart. And we've maintained a higher level of bid ask spread. So liquidity in the E-minis is not returned. It's up off of those lows, but it's far from where we were a year ago, for example. So the liquidity is still not there. And the problem is, is that when you have poor liquidity and you have record options volume, stock volume, I don't know if it's still going to maintain, but options volume only continues to increase. Though hedging flows

[00:47:21] associated with options are kind of like, they're not margin calls, but you know, when you get a margin call, your broker calls and he says, Jack, you're getting out of this position, buddy. I don't care what you got to do. Like 345, we're just going to push your orders out there, right? You're a price insensitive trader at that point. You're just going to get the liquidity. You can't, you know, they don't let you VWOP out of your margin call, right? So a market maker in a hedging position when they have to hedge because the market's moving quite fast is sometimes I think

[00:47:48] in that same thing, they are liquidity taker and they sometimes have to be an aggressive liquidity taker in a fast market with lots of volume. So you have those types of flows increasing into a market with much lower relative liquidity. If you look at the relative liquidity though, in December of last year, it still wasn't very good, right? You remember when Powell came out in mid-December last year and it really spooked the market. We had like a big drawdown, right? And vol spiked. And you look back

[00:48:15] to August of last year, Jack, as you can see right here, same thing. Liquidity evaporated and then what happened? VIX went to 60-60, right? And of course, didn't really trade there, bro, and all that sort of stuff. But the index marked at that level, right? That was a liquidity event. And I don't care what you say, the VIX really spiked to a pretty incredible level. You know, throw shade on 50 versus 60, whatever it is. It was a big VIX spike driven by a lack of liquidity. Around in that case,

[00:48:40] it was the yen carry trade thing. In this case, it was a whole bunch of other flows, basis trades or whatever you want to blame it on. So forced trading into poor liquidity is what makes volatility events. And the liquidity... Sorry, I'll just make this last point. Liquidity is not returning. Yeah. And I think there's a good underlying point here in the difference between volume and liquidity because people like me who sit outside the space think volume is like a measure of liquidity. I remember I was trying to do a paper a long time ago where I was going to verify Mike Green's work

[00:49:08] around this idea that these bigger companies are more impacted by passive flows. And I did this whole analysis and I had this great conclusion, but my big mistake was I had used volume as my measure of how liquid these stocks are. And that's not a measure really of how liquid they are. Yeah. I mean, it's a great point. And the options market felt like it was actually pretty liquid. And that's an anecdotal statement through a lot of this drawdown. But in those environments,

[00:49:33] they do great because they widen their bids and offers way out. And the amount of liquidity they post drops. And again, it's because people are coming to them to trade. They collect that spread and it's great for them. But this record volume into that lowest liquidity tells you that people were being... They're forcing trades out there is what that is. And that's all big transactions for people, right? That makes it very expensive to trade in that environment, but you don't have

[00:50:01] a choice. You got to trade, right? In some of those situations. And so there's a lot of alpha decay in there for people who are trying to put together decent strategies through those periods. So this next slide gets to what we talked about earlier, which is these record highs and option volumes. Yeah. And again, the point here is a great tailwind for us as we keep doing our monthly podcasts because more volumes equals more importance, I think. But overall, the point is that these

[00:50:25] options flows invoke hedging flows in the underlying stock and that's increasing into lower liquidity. So I think that makes the importance of these options flows more critical to pay attention to. And this next one, you're dealing with the fragility of the VIX. Right. On this chart is a... What is that? 30 years of VIX tradings, right? And the VIX ultimately

[00:50:52] is an expression of how much the market thinks... How much traders think the S&P is going to move, right? That's kind of what the end of the day, the VIX is really telling us. And so you can go back here to the internet bubble and the VIX spiked to 50. And then five, six years later, it spiked to 50 again. Then we had the 2008 crisis where the VIX went to 95. And then there's a few more little periods every five, six years or so, right? There's a decent

[00:51:17] little VIX spike. Obviously, we had the COVID crash in 2020. VIX went to 85. And then a lot of calm. And then we had the VIX in August of just six months ago, maybe a little bit more now, time is flying on me, where VIX went to 65. And then we just had another VIX 60 here about a month ago. And so two data points does not make much of a statistical certainty, right? But the point here

[00:51:45] is that it feels like this lack of liquidity is starting to show up in the vol of vol, meaning VIX needs ultimately low liquidity in bids and offers to widen out, right? As vol jumps in order to start printing at this plus 50 number. And again, two data points don't make a trend here, but the idea is that this is a, to me, a signal that the liquidity is drying up. And when you have

[00:52:11] that lower liquidity, you get these higher, you know, these volatility spathoms, right? And that really starts to, starts to show up. And I wanted to bring this, you and I talked, I think briefly with Chris and about this paper written by Chris Cole from Artemis. And, you know, Artemis is not, doesn't really exist in the same way it used to, but he used to write these awesome papers, right? And I think he was sort of the, the, the godfather of, of writing pictures of like, you know, those Roman kind of

[00:52:37] like Gothic pictures or whatever. Um, and he writes this really interesting thing and you know about the David Foster Wallace poem, right? And that's what he starts us off with. So it was a speech, I guess. Right. Um, and, and the joke is about, you know, you know, it's the fish, two fish are swimming along. One says, how's the water? And the other one goes, what's water, right? Those are the two fish. And so what Chris wrote about this, and I just think it's super fascinating. And, you know, because I'm reading this probably means the market's just going to rip and nothing will ever

[00:53:03] happen. And volatility goes to zero and we get bored. But, um, he writes volatility is the failure of the meeting, the crumpling of a reality. We thought we knew to, uh, we thought we knew to a new truth. It's the moment where we learn that we're a fish living in a false reality called water. And that reality can change. And there are other realities. True volatility isn't the change of a thing. It's the changing of the medium around it. And it's the realization that the thing never really existed in the first place. That's like a very dire, a very dire statement. But what

[00:53:33] he goes on to say is this is all you need to know to understand when volatility, when the volatility storm will truly come. It's not about valuations, money printing, or where the VIX will be. Uh, it's the consciousness so that you can stop believing the growth essentially of liquidity. And so the idea here is I, is I just sort of move off this a little bit is that liquidity when it dries up is when true volatility really starts to emerge. Right. And he calls it the

[00:53:57] fragility of the market medium. And I don't know that I'm at so, so much end of days as, as Chris was maybe in this July, 2018 paper, but it brings up a lot of interesting ideas when you start to look at the liquidity here and the volatility spikes we're getting, uh, and the movement around Trump's tweets and, and, and, and kind of the pain that was, you know, invoked. And so, you know, this all kind of brings up this idea that yes, the VIX is still elevated right now, but if we're at this

[00:54:24] new stable norm, um, then owning put protection here or hedging that downside risk, which could be very material, uh, makes a lot of sense. Right. Particularly as we move into this very large June options expiration. And for anybody who hasn't watched it, I would really recommend that David Foster Wallace commencement speech. Uh, this is water. Um, it's, it's on YouTube and it's, it's, it's really, really good. Um, like, yeah, I've watched that at least a few times. Yeah, it's, it's, uh, it's great. And I can include a link to this paper as well. Um, you know, it's,

[00:54:52] it's, uh, it's really fascinating when you read this cause it's from 10 years ago and you, and you think about, you know, all the things that have, that have happened here and, uh, and, you know, reflexivity and liquidity and those types of things that we've talked about here today. So if I was a stronger host, Brent, I could probably segue from David Foster Wallace to Bitcoin, but, uh, unfortunately I cannot do this. You might have to just come up with something to lead into your Bitcoin breakout slide. Oh my gosh. I just go from like,

[00:55:16] look, uh, the world is about to end sounding to Bitcoin. Um, but I believe we touched on this in April and if we didn't, it was in, in, in another, uh, uh, video I did probably just talking to myself on, on screen like I normally do. But one of the most surprising things to me, and I know I talked about this with Chris too, is that, you know, do you track Bitcoin Chris? And I don't know if that made the cut in your, in your editing there, but Bitcoin vol was the lowest, the lowest volatility of

[00:55:45] any asset through the whole crisis, you know, uh, which was over the last month. It was shocking to me. Like S and P vol is going crazy. Single stock vol is going crazy. All these different, you know, uh, bond vol is going crazy. And Bitcoin vol is like just slept through the whole thing. And like, as you can see here, like there was a pretty good 20% drawdown in Bitcoin. So I don't want to say that like nothing happened, but it was the lowest vol asset that we monitor. Um, and as you can see here, it has just gone absolutely bananas. It's, it's, it's ripping now. And, you know,

[00:56:15] today we're over 103,000. Um, and I don't, again, this is one of those situations where we're going to go into the macro here. The, the argument being that it's a neutral asset that we all go into or whatever it is, I, you know, I'm not even going to start to, to, to wax politically why, but it's certainly very interesting because normally, if you're going to ask me, what would Bitcoin vol do? If VIX just went to 60, I would be like, well, Bitcoin vol must be at like 200. Right. Um,

[00:56:42] but it was very stable and now we're seeing obviously a significant rally here. Um, and, you know, just being objective and looking at the data, this is what we call our compass from spot gamma. All you're getting here is implied vol on the Y axis. So if it has high implied vol versus low implied vol, uh, is that's the X, Y. And then left to right is our call price is high. If so, that shows up on the right side of this chart, our put price is high. That shows up on the left side

[00:57:09] of this chart. Does that make sense? Yeah. So a lot of these names here have high put prices, but low implied vol rank. So puts are a little bit rich relative to the calls, but the options overall aren't expensive. Right. So we're talking about skew when we look left to right. And if you remember before we showed gold, right in, in April and gold was way up at the middle of this chart, which told us that options were really rich. They're a little bit skewed towards expensive calls. Um, but that was kind of our topping signal. In this case, what we've seen is Bitcoin has gone

[00:57:37] from the lower left of this chart where puts were expensive to, or pits were relatively higher to calls are now relatively rich, but implied vol has not really lifted. And so if we're going to say, when is this Bitcoin move over? Um, it would be when that implied vol really starts to lift. And that's what would be signaled as we're trying to show on this chart here, where all of a sudden stock of vol up hits. And when that generally hits the time, those calls get too rich. And that's usually a topping signal for, for something like Bitcoin. So that doesn't mean Bitcoin

[00:58:06] couldn't just sell off because of something not related to the options market. But if we're sitting here and call options, uh, in, in IBIT or micro strategy, it's, it's fairly comfortable. And there's not a great reason to sell them because the, the assets moving up and we haven't really gotten that big vol lift. And generally that vol lift comes when the trade gets very crowded. And so on that point, you know, micro strategy was something that we were dunking on a lot late last year. Um, you're starting to see those posts come back in X, right? Like I put my

[00:58:32] whole retirement account into micro strategy because blah, blah, blah. And Hey, those people are winning right now, as much as I kind of made fun of them. Uh, they looked like, you know, jerks are earlier this year, but now with micro strategy at 400 and Bitcoin ripping again, you know, they're, they're kind of creeping back out of the woodwork. So when you get more of that course showing up, you'll see, uh, that implied vol get rich. And I think that'll be kind of a topic signal. So, um, that is kind of the one thing that we're really paying a lot of attention to here, uh,

[00:59:03] because that volatility is really starting to creep up and it's becoming a really interesting moment for Bitcoin. Yeah. An interesting thing on Bitcoin, and again, I don't have any macro reviews just like you don't either, but the idea, you know, you have kind of two camps on Bitcoin you have, it's the leveraged NASDAQ and then you've got, it's the new version of gold. And this is sort of the first period we've gone through where the price action kind of gave you some evidence for the new version of gold versus just the leveraged NASDAQ. Cause it did decouple from the NASDAQ for the first time, you know, or at least in a significant period that I remember

[00:59:29] in a while. Yeah. Uh, I mean, absolutely. And, and to your point too, like, you know, there, there's trying to figure out why it's happening and there's a couple of good narratives around there. And then at the other side of the equation, you know, the option space, sometimes you just buy options because they seem cheap. Right. And there's a realistic chance that, you know, the asset starts to move. And to the same point, when options seem expensive, that could be maybe an opportunity to sell until in gold, it was very rich. Bitcoin is starting to

[00:59:56] creep up a little bit in terms of, of expense, but you know, the, the move from this perspective doesn't seem to be, you know, overstated, uh, which is very interesting. Cause I don't know, you could have a situation where Trump signs a trade deal and then it's risk on. And then Bitcoin seems like it'll go up. And then you could also have a situation where, you know, we're all fighting, all the countries are still arguing with each other and people just want to own Bitcoin. Cause it's not a country, you know, related currency or whatever. So to your point, uh,

[01:00:24] I don't know, but there's a bunch of interesting scenarios that you could play out where Bitcoin does just keep, keep, keeps rocking here. So, uh, really interesting moment and, uh, be fun to update this for, for the next, uh, OPEX effect. Yeah. And as we wrap up, we always like to look at some upcoming events in the path forward. Yeah. So we have, uh, May OPEX next Friday, and then VIX expiration follows that. There's also CPI on the 13th and we have the China U.S. talk. We've already mentioned about 10 times here, right? So, um, there's a lot happening the

[01:00:50] next couple of days, but for me, you know, there's the opportunity for this to be a turning point, but honestly, you know, if they sign or if they have some big advancement and the CPI is no big deal, then, then it's going to be hard to say, Hey, we're going to see an extended short period out of this, uh, out of this options expiration. Statistically, we should have some mean reversion. The market should correct here. The more interesting thing is going to be into June OPEX, right? Cause those are where the really, really big positions sit. Um, you know, you start talking

[01:01:18] about the JP Morgan collar again, those kinds of things, uh, into the end of June. And so that has the opportunity to really attract price and really drive returns, uh, both to the upside and downside. And so when we're looking here that 5,900 to 6,000 as a possible upside scenario into June OPEX makes sense to us based on positioning. And then to the downside, we're really looking at the 530 area cause that spider positioning, uh, where all those puts sit kind of into that, you know, 5,000,

[01:01:47] obviously if we're going to drop that much, you're going to have a pretty wide range of outcomes there. Uh, but that, that 5,300 is, is the big downside target for us. And if any bad news, like if the China medias go well, if, if the CPI comes in a little bit hot, something like that, uh, then, then we think there's easily, uh, you know, move down into that 5,300 area, uh, on tap. So I think the takeaway is people need to set their calendar to watch us in June cause things

[01:02:11] can get wild here. We did Scorched Earth, Saul Goodman, uh, port Twitter, Bitcoin call. So we made a lot of calls here. So, uh, a lot of opportunity for people to make fun of us in the comments. Which they will have. I've learned as the channel gets bigger, that it, that is something they're going to go ahead and do. So just, just as a sort of some housekeeping here, we are going to do these now on Friday before the week of optics. I'm going forward that way we can do them a little bit more of a preview as to what's up, what's coming up in the future. That's right. Um, and so, uh, I,

[01:02:40] I, I love that idea. And if you're interested in getting the slide deck or signing up for more of this, you go to spotgammon.com slash OPEX. So OPEX, um, you can get again, the slide deck, and then we will be updating some of these, uh, expiration slides, uh, next week, obviously, as some of the positions change into OPEX itself. Yeah. And if you didn't like any of the content, make sure to comment about Brent, um, in the comments, uh, because in, even if you do it, the algorithm likes comments. So the negative stuff, the positive stuff will take it all. Yeah. Um, and, uh, I won't be reading the comments anyway, so say what you want.

[01:03:10] Yeah, no, I don't really read me. On that note, uh, thank you everybody for joining us and we'll see you next time. Thanks Jack. Thanks so much for tuning into this episode. If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube or leave a review or a comment. We appreciate it. Jack Forehand is a principal at Validia Capital Management. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Validia Capital.