The Return of Volatility

[00:00:00] Welcome to The OPEX Effect, a joint podcast from Excess Returns in Spock Gama where we take a deep dive into the world of options and the flows to generate in the markets. Join Brent Kochuba and Jack Forehand every month on Options, Exploration Week as they look at the major developments in the options world and how they impact all of our portfolios.

[00:00:30] What is next to you? I've got my great red writing. Is it time? Can I finally get my market in turmoil episode and get it ready to go?

[00:00:37] I think we have temporary turmoil, that's for sure. Unfortunately the Iranian Middle East conflict has escalated, I guess, and we're hoping that cooler highs prevail there.

[00:00:50] I'm in favor of a piece forward resolution, I'm going to call that but right now ball is increasing and so there's a couple of different reasons for that.

[00:00:59] I think the geopolitical conflict is just one of them, so we'll dig into that for sure.

[00:01:04] Yeah, and also to your point, and we obviously talk about markets but there's a lot more important things going on in the world.

[00:01:10] As we talk about this stuff, we have to make sure we keep that in context. But also from the perspective of the energy, like we were just talking before we started, like the S&P is not even down very much.

[00:01:18] When you have these low volatility periods, you tend to react a lot to these types of declines because I mean the S&P is I don't know what it is but it's not more than 5% up the high, I don't think.

[00:01:28] Yeah, where there was only a week ago, roughly that we were flirting with S&P all time high and then the market flushed violently.

[00:01:39] That was two thirds days ago and interestingly you and I have recorded this presentation about volatility suppression the day before or two days before that Thursday flush where the S&P just kind of went from 5250 and just dropped like a rock all of a sudden.

[00:01:53] And we've been sort of that base of support has been wearing away underneath.

[00:01:57] And so not only do you have the Middle East conflict, you have a lot of rate volatility which I don't think is generally a great thing for markets.

[00:02:06] There's a lot of things happening right now and I think it's easy to assign the narrative to the unfortunate situation in the Middle East but the fact is that there's a lot of process at volatility increasing.

[00:02:17] And I think the theme for this presentation is simply that we had this volatility suppression these flows whether you know some of it I think is zero D to E some of it is this call overriding that people are flagging some of it was just.

[00:02:31] Just a belief in stable policy that people were you know counting on I think from the Fed and elsewhere and you have these hot CPIs changing rate expectations etc and that's really starting to.

[00:02:44] And so that's what it calls a lot of shifts under the hood and I think we're exiting this volatility suppression regime.

[00:02:51] So i'm excited to ask you about all this as we dig into it but before we start, we always like to talk about the op x cycle and how it works for people who haven't watched our previous episodes.

[00:03:00] So we cover this pretty quickly just an idea how we look at the markets and then general ideas, we do this at options exploration by the way I apologize for the night back our noise on this one everybody and.

[00:03:10] Away from my house and so my primary position that weighs that secure in the parts of a mouse.

[00:03:16] I'm outside you would totally different backdrop as the question we've.

[00:03:20] OpX doesn't wait for anybody so the show must go on so at any rate so when this works not separation, which is of course on Friday we also have this expiration on Wednesday and what happens is after off this operation we have a bunch of positions expire and then.

[00:03:35] The 30 day cycle starts to build positions back and we build positions around strikes near where the markets are trading and at positions build hedging flows associated with those positions also build and then we hit this kind of crescendo into.

[00:03:49] The week of options exploration, which is incidentally this week and so what makes this week interesting is we have VIXX brace on Wednesday.

[00:03:57] I thought that if we didn't have a you know it is real today is that they're going to have a response back to the Iranian kind of first.

[00:04:07] Israel said that they're going to respond today to to some Iranian I guess the sense of missiles over this weekend and I certainly don't want to get into that but the market you know did drop at that news and I think boring that.

[00:04:18] We really would have seen or could have seen a pop this morning we open pretty strong and the reason I bring that up is because there is a pretty high level of VIXX into today which is Monday.

[00:04:29] And I think that VIXX really could have dropped by their substantially based on the fact that there was a lot of flows are set to expire on Wednesday, which is big exploration calls get closed out quits get close out and I could have really lifted markets.

[00:04:41] I still think that could be in place for the rest of this week is just part of this option cycle and I think is something that's important to understand so we're going to clear on a lot of positions this week with VIXX preparation in this Friday's.

[00:04:54] And then we'll obviously shift to May expiration so that's the cycle of the way that we look at things as you can see here on this chart the red X is our expirations not every single expirations importance for all stocks with certain expirations that are that mark significant market lows.

[00:05:11] You can look at something like March of 2000 and 24 example we've talked about similar frame runs December of 2018 and a lot of times in these lows what happens is big put positions get cleared out.

[00:05:23] Hege's associated those put positions also get unwound and then markets can really rally and that's why I think you need to understand some of the positional aspects of options expiration and the associated flows.

[00:05:36] Yeah, a couple things in that first I was looking at the VIXX I was looking at the VIX recently and it's like higher than I thought it was.

[00:05:43] I don't pay attention to today is as a value investor but I think it was like over 18 or something like that last time I did trade.

[00:05:49] Yeah, we had to come up a little bit but to your point it's really common and so the idea here is that if you have VIXX calls and there's a lot there was a fair amount of VIXX calls out there right now.

[00:06:01] In fact Friday was the highest VIXX options volume ever but call open interest actually only increased a little bit and I think what happens in that case is if you have e for a VIXX calls you weren't expecting those to be all that valuable.

[00:06:14] And then not only that the situation is like look I can monetize these things they're going to expire on Wednesday so yeah, the the gold the due political situations and all that great but I still got to sell these calls on Wednesday right they're going to they're going to expire.

[00:06:28] And so you have to bounce out like hey is tension going to get worse there today and tomorrow or my better off kind of monetizing and rolling these things now we saw a lot of rolling on Friday with people taking advantage of that VIXX pop to 17 or around 18 right now and rolling positions out to May or June as their as their as the hedge.

[00:06:51] And just on your point about the cycle the cycle can be worse substantial right when you couple it with like some sort of major outside event like I was thinking about you had something going on the expiration you also had covid.

[00:07:02] Like if geopolitical stuff does pick up here you know options could really play a role in some volatility right.

[00:07:09] Yeah your harm set right about that and if you think about we talked about this in this volatility suppression video that we did and that there are these reflexive flows these feedback loops that that pick up and it's not just the 30 day cycle sometimes it's an investment sentiment like hey we can buy every dip we can continue to sell puts in the sharp ratio shorting puts is incredible and selling vaults is great thank for example and there's call overwriting hedges and things like that if you want to dig in on that please check out that video but back to the point.

[00:07:38] People here are very comfortable buying dips and selling volatility up until last week because they felt very comfortable sort of about the the implied said put the path of rates all these other things and now what happens the last time we saw an environment like this at all was the March 22 banking crisis.

[00:07:54] Excuse you 23 banking crisis when we have what we call known unknowns that's the famous when down a rumve spelled quote but the problem here is that you can't be short ball right now because your right now.

[00:08:06] Because you're worried about the geopolitical situation and you also or and or you know that rates may be shifting right now it got rid of rate hikes and inflation is a problem again so you have to hedge things that you're concerned about like more is escalating right conflict is escalating I know that but I can't use a zero dt option to hedge that out right I got an longer dated option we're going to show this in.

[00:08:29] And a couple of slides later but that risk right is something that you have to all longer dated options at time and you can't just be short ball against something that you know as a material risk.

[00:08:40] So as we get into your slide here about the zone you know one of the things that struck me is I think in previous episodes when we've talked about the zone we've always been either been in it or above it and now we actually are below it so what what are you thinking about this zone and what it means going forward yeah we saw so 5200 was the level we kept bumping up against last week 50 or more.

[00:08:59] 100 was born on Friday that's where broke today as you could see here this is the size of game in orange and put game in blue 5000 is a massive strike in the S&P 500 and so we lost at 5100 support which in our founders.

[00:09:13] So 5,000 is a big long term level it's also big fan three round number there's a lot of funding positions we call them box trades hide to that strikes that adds a little bit of size to this but I think there should be some pretty material support at that level which is coming up kind of high and heavy as we talk here so.

[00:09:31] From an options positioning standpoint we're really watching that is low and as you can see there's very little in the way it puts below here we don't see you know really big bars below that 5000.

[00:09:41] And it's a level that you know we we wrestled with not all that long ago but it should act as pretty big sport going forward now it's going to happen is it options expiration will lose a fair amount of these positions and if I go two slides ahead you can see this this is delta by.

[00:09:56] Exploration and so you can see this is the size of April expiration it's a fair amount of bounce of actually calls and put so even though like you said April or the last week we're down to 3% it's still been pretty bullish month.

[00:10:08] Ritlarge for equities in the context will pull pretty bullish year and so you know we have it yet seen a big build up inputs one thing he can flag here is there are massive positions here in the June quarterly expiration that's always a big one as a move ahead but you know this is a market that I think went from overheated to sort of neutral it's threatening to get a little.

[00:10:28] Real risk here but but the context what we're going to talk about here is really this transition from kind of over bullishness and shorting ball to having to be a little more tempered in in the way that I think you go about trading.

[00:10:42] I'm just curious like these 500 increments of the S&P 500 or whatever will of the SPX here always seem to have like massive interest at them is that just the fact that they are like these 500 increments does that play a huge role in why that's there.

[00:10:55] I think a lot of it is well there's a couple of factors to I think longer data positions there the strikes then out a little bit so you know they tend to be at the more round numbers like that if you're trading.

[00:11:05] You know a leap or something and it's also I think just sometimes the law of round numbers in what I mean like 15 to 100 is around number so there are 5500 that's the number i'm going to this that's why I'm in a position you know in zero DTE space we're needing to shorter you see a little more some kind of a call it dexterity where people will trade the you know 52 35 strike or something instead.

[00:11:26] So you know I think that's just a function of ease of use basically.

[00:11:32] So on your next slide we've kind of it's lighting left here as we've been doing episode after episode we've been moving a little bit more to this higher volatility and you know regime.

[00:11:40] Yeah and the link between this is so this is our game index which is the why access and what we do is we measure gamma from yesterday's positions and we project.

[00:11:48] What the forward one day volatility is that's the trading range of the S&P and as you can see the more negative gamma we get or the more.

[00:11:55] We shift into the transition of larger put positions the more volatility comes in the market so right now we're you know down and around this area which generally tells us that forward volatility is going to be more elevated when we get into markets that have a lot of call positions and pure call positions I'd like to say then volatility tends to contract pretty sharply and so we're now in this regime.

[00:12:17] Obviously with the fixes 18 19 where the you are hedging profiles should support larger interday swings.

[00:12:25] I mean this is a forward looking based snow be interesting is the April optics in a white way a lot of positions which in this case may alleviate a little bit of the downside pressure if we continue to kind of move lower so could be an interesting time we get to 5000 a bunch of positions expire we could see a little bit of a relief rally between fix expiration and opics at least that's how we're going to look at it.

[00:12:46] Assuming again that the geopolitical situation doesn't ratchet a lot higher.

[00:12:51] Yeah that's interesting because a lot of times in previous episodes I think when the market was going up we've talked about like when those positions come off it introduces the possibility of further downside but you're seeing it a little bit different here because we're not in a situation where we've run up and like all these calls have a lot of value so we're sort of a different situation am I interpreting that right.

[00:13:08] Yeah that's right in this case we have puts and high volatility and you need one of the things I think when you're when you're trading in volatility particularly we have shorter dated puts or long calls you need to actively monetize those positions right because if the big is at 25 for example your fix calls or your.

[00:13:25] It infers that your S&P puts will be worth a lot but if suddenly ball drops like a rock then then your put positions are going to get really crushed or your fix calls are really good.

[00:13:34] You want to more I think be more actively rolling and adjusting those positions and I think that oftentimes add to the ball adds to the ball of all delivers how much volatility is moving because people have to be so active in adjusting their position.

[00:13:46] I like you have a situation where I'm going to call on the market drift up over time right just come sleepy summer days no big deal this is a lot of activity a lot of stuff moving and your force to sort of take action into that point we had that record vix call volume Friday so a lot of stuff is adjusting in these types of markets.

[00:14:04] So as we move to what moved we like to always do before we talk about what's going to have what potentially might happen going forward is we always like to talk about what's we said it might potentially happen in the past.

[00:14:14] And so here you've got a summary of what we were looking at in our last episode.

[00:14:20] Yeah so in March we talked a lot about the fact that the call bid was breaking apart so so much of the first order of the year was the stock up ball up you know by chips semi sector stocks are just going crazy and we started to see some signals that that was cooling.

[00:14:36] And with that we saw these measures that we call dispersion and correlation which were showing kind of like market bret at the only thing that was leading stocks higher at that point the only thing left right to really hang your hat on as an equity investor was certain sectors that were really screaming above the rest of the performance of the broader market the broader S B butter so this is again tied to low market brought the base because like look chips are doing great financials of the financials of the market.

[00:15:06] And so we were doing great and then the rest of the market was really kind of lagging quite a bit.

[00:15:11] And what was interesting about that was volatility was very low and the last time we had or in other times I should say that we've seen signals like this was during which you could flag its bubbles in our view at the time was like look this is a flag that there's a problem coming we don't know when that when is going to one wine we need a trigger

[00:15:34] I didn't think it would really start to break apart until the November election but you know geopolitics being what they are and some of these CPI prints being what they are what's happened now is correlation is spiking up we're going to show that.

[00:15:46] And the chip sectors don't really matter like they're like no one's talking about Nvidia when it was all anyway talk about two weeks ago and on that point the thing that we were looking at as a trigger to really cool off that semi stock trade or some chip stock trade was on 318 that they called the GTC event is kind of you know there in video.

[00:16:04] And there was a huge event volatility we have a chart of that here this was the term structure of Nvidia into that 318 event this cone shows you the average range of the 90 days of term structure for Nvidia before the event so you can see how elevated it was and now this is today's term structure and you could see that we're pricing way below right where term structure was so this is all coming down.

[00:16:30] And so we have all this elevated here is for the Nvidia's earnings coming up but right now the expectations of Nvidia being this leader are early off the people's radars people are focused on macro events right geopolitics rate etc and as a result you know correlation is really jacked up now if the situation in

[00:16:49] in the middle east comes down a little bit and these earnings are bull out then maybe you know we'll start talking about in mayor June op X you know the chip sector trade but right now that trade is dead as everything is about macro.

[00:17:00] Yeah it's interesting like the leadership of the market change even before this decline you could see like it wasn't the Nvidia the big tech leading the market anymore like the things that kind of brought down a little bit and now obviously the

[00:17:10] yes decline in that you know geopolitics will take precedence of everything else probably but it was interesting to see that before all this happened.

[00:17:16] Yeah and financials were at record highs meaning X a left just reals were doing pretty well crypto is going bananas and now you know with JP Morgan's earnings were not all that great obviously the rates changing puts a damper on that sector Bitcoin is hanging in there pretty well at 65 to 70,000 gold had a massive move

[00:17:39] and so you know some of this stuff just again starts to almost flag that the macro sector or macro macro influences are starting to matter nor which again speaks to correlation really jumping which means that all stocks are going to start moving together in more in unison now is that macro as those macro factors pick up more.

[00:17:57] You know and that's really what the what we're talking about here today what matters one thing I want to notice we talked about the record call volume which tied to the skews into March you can see here in blue were those record call volumes and this tied to the kind of the peak of the semi sector chip sector for all right stock up all up just this chase the chase is over at the moment because of this macro sector but what I wanted to show was interesting was Friday was a massive call volume this is equity call volume.

[00:18:26] It's equity call volume of blue massive equity call volume day in single stock so you know it speaks to this idea that if we get a little bit of a cooling in the geopolitical tensions and maybe you just get a little more rate clarity I mean I don't think it was expecting a hike at this point until the election then.

[00:18:44] Then the dip could get bought pretty violently it's something that you know we all need to consider particularly the ball so high ball collapses we call it the vanna kind of lift the ball comes down you know equities can really rally off that but.

[00:18:55] People I think are still trying to buy dips and stuff i'm just curious we saw like in the wake of 2020 we saw a massive increase in the use of options like is that line continued to go up like now is it still rising I mean we see we we see slides like record call volumes a lot on the podcast so i'm assuming part of that is also you know just options uses is up a lot from where it was.

[00:19:17] 100% I mean s a p index volume is huge we just had it again record vix options volume on Friday I believe this point right here November of 2021 was the highest equity call volume we've ever had as a whole and so you know we're really sniffing that still so I think the the pace of increases slowed off you know maybe we've

[00:19:40] Latin out a little bit in terms of the options adoption but it's still growth industry certainly and I think with zero dt in short they've options people are finding more.

[00:19:49] And unique ways to express their views with options because it's great you know risk defined trades that you can set up and there's a lot of different ways using I think that the use cases really brought about.

[00:20:01] With the growth people have you know really come to focus on and understand those different use cases and do you think that exacerbates like moves both to the up on the downside.

[00:20:09] You know because we use these flows there's a lot more money out there that can create these flows.

[00:20:14] Yes options are leverage and that's really what it is that's why it's great for you know us as traders when we want to buy a call we're we're making a levered bet right that stock will go up and so I may spend just a few hundred bucks saying that I think whatever AMD is going to go up and if AMD goes up and my call goes into money the note that contract obviously represents you know tens of thousands of dollars worth of Nvidia or excuse me AMD stock.

[00:20:38] Right and so you know someone has to hedge that position out and they're required to hedge notionally way more than the couple hundred bucks I spent on buying that actual call right and that's the leverage component and that adds to volatility.

[00:20:52] It adds to market movement and and so you know to your point anytime you're kind of invoking leverage it adds to just volatility and think the system.

[00:21:05] Does it could lead to so what I want to notice and this may be completely wrong relative to market history but in recent years we've had like these extended periods of very low volatility and then like explosions like you get that more that type of profile do you see that more as you see more use of options.

[00:21:23] Well yeah and that's about imbalance I think you know and the most famous example of that was you know the volum again in February of 2018 which you know if you're going to compare the volatility of this past year the only year sort of lines up with is that February of 2018 period.

[00:21:39] It's not that the same in terms of you're getting these short volume TPs and things that could really make the market just sort of break off sudden but there's a lot of other flows that the market I think has extrapolated in the future meaning that you have.

[00:21:52] Call over writing you have zero DTs and we can in and we assume that the liquidity provided by those flows is omnipresent right that it's always going to be there week strapped late that in the future and so I think put selling becomes very popular buying the dip becomes popular and then suddenly what happens is the market gets weak and these bigger flows are unlocked because of rates or geopolitics would are maybe and suddenly you know there is a coverage rate right all these people that we're counting on.

[00:22:18] The market acting the way it always does certainly was that the paradigm is different they have to cover their trade and then generally ball quite a bit and I think you know that's what we're experiencing now right is the unwinding of a lot of these flows that's leading to higher volatility than we'd expect.

[00:22:36] You know given the given the situation right good look the situation is bad but.

[00:22:45] You know i'm not convinced that this yet should be the reason that the market is like the vix is at 20 right or 19 or whatever it is I think a lot of it is driven by this volatility coverage.

[00:22:56] So on this next slide you're looking at dispersion correlation and ball and this is a slide we looked at other episodes on what sort of changing in this slide.

[00:23:04] Yeah this is a recap from what we saw in March and I'm going to show new reason why I want to show this is because we talked about this all just that background noise.

[00:23:12] We talked about this in March topics and you can see that these measures of correlation where it loads which tells us that not all stocks are moving the same direction this is the charts of dispersion you can see dispersion is high and then the comparison is this is from the sd global they said look this reminds us or they didn't say this reminds but they said in there.

[00:23:30] In this dispersion literature they put out that if you look at February.

[00:23:35] To me April of 1999 into 2000 dispersion was extremely high in the market but the ball stayed flat and I thought this was just a very interesting thing they said the basically this is the tech bulb right because tech stocks are ripping and balls not doing anything else.

[00:23:50] And so this is a bubbly type environment and to me it looked a lot like what we're doing.

[00:23:54] The type of environment that we have now and the question is what would make what would force the cover trade to take place right at what point you say I don't want these ship sector stocks anymore correlations going to go up because I need to sell all my stocks because there's something else happening that suddenly I don't care what stock is going to lead the market because the market's going down and in videos not going to make you know in videos not going to lead us out of this situation right now.

[00:24:19] And it and it.

[00:24:21] And you can't help but look at this geopolitical situation plus rate situation as that event that is maybe causing some of this unwarranted.

[00:24:30] Yeah these geopolitical things are so challenging I think because it you can't it's completely unpredictable in terms of what's going to happen I mean you know the options you know once something does happen options are going to play a major role probably in that move.

[00:24:41] But you know it could go either way at any time I mean it's it could very it could de escalate rapidly could escalate rapidly which makes it very very challenging to think about.

[00:24:50] It's the it's the known unknown right you know that there's conflict missiles are flying around fortunately and so you can't sit short ball because you don't know what's going to happen and you know I'm not going to get a geopolitical analysis because you know what the heck do I know about this other than you know it's a risk.

[00:25:11] And you have to head just out and you're hedging it out into markets that are on all time highs and then again the rate balls in the show is also very high which you know is not something that you can just brush off so there's like how many factors do you want to understand that you just can't sit your short ball and just assuming that market they're going to keep doing what they did till last six months right.

[00:25:32] We have a litany of we have litany of reasons to be cautious here right now to your point if everybody shakes hands in the Middle East and says I like you know.

[00:25:41] Like what's let's find a path for peace and then you know maybe people can look past the right thing a little bit for eight now it's an election that maybe markets recover I do think that you know there are forces at work that want the market to go higher into the elections as that's a you know a measure of success or how the US is doing.

[00:26:01] And so you know we need to keep that in the back of our minds right now but no certainly the forefront is worrying about hedging out risk and suppose to hey you know

[00:26:11] you know we have to catch them upside.

[00:26:14] This next slide was one of my favorite in the volatility suppression video we did because I didn't even know this like thinking about how long we've had since we had a 2% decline and I'm not watching the S&P while we talk I mean we may be having one right now but when we started we weren't.

[00:26:27] But it was just surprising to me how long it's been.

[00:26:30] Yeah sorry again I'm trying to let me in an airfield.

[00:26:34] I think it updated this chart.

[00:26:38] It was accurate in the words this is from our presentation I scrub the screenshot I still don't think we've had a 2% down day today maybe the first day so you can add another whatever news 10 days or something like this.

[00:26:51] To this period what was so fascinating about this is that we also did not have a 2% update and was so crazy about that is that if you think about this period.

[00:27:00] You know that this streak officially broke on 222 because of Nvidia earnings but if you skip that one day and I know your cherry picking but you skip that one day there's still another 2% update up until when things fall apart so we have this incredible low volatility period that you know simultaneous.

[00:27:17] Don't get down moves and we don't get up moves and I think that maybe some of the market not just fully cukeens here is still some these you know flows that are supportive of markets zero DTEs.

[00:27:28] And call writing the game would provide about call room et cetera if any of these flows are you know curious to please watch our presentation there but what's interesting about this and I just flag it again is that these periods tended to end many of them quite violently so if you look at 2007 that was no right before the GFC the GFC started in June of 2007 so that wasn't immediate but this period number two was volume again that was that's how that's streak broke.

[00:27:58] So you find number seven very bad period right q4 2018 was really very ugly number eight was the covid crash of March so soon as we hit up that's basically that's what that is market just one of the worst drawdowns you ever had right so these periods of real calm can break.

[00:28:14] And then to the upside you tend to get your big upside moves after the market has dropped a lot that makes sense right the market was about 20% in three days you're probably going to have a 2% update mixed or nothing there somewhere right so.

[00:28:26] You know it's a there's some interesting overlap here but but again the idea is that there were these forces that were suppressing volatility in a major way.

[00:28:36] When you look back to like 2020 with the covid thing like when what you were seeing in in the options flows are into positioning going into that is it is very different than what you're seeing now because i'm just thinking like you've got a certain positioning and then you've got a catalyst at that time it was covid and this time maybe or maybe not you a political stuff depending on how it plays out but.

[00:28:56] Or is it a very very different positioning situation now that it was then.

[00:29:00] I think that there was a lot more i mean there's a lot of leverage back then and you know look covid obviously was a forced the unwind of a lot of trades for a lot of reason we understand was that was the volatility of that period made worse by.

[00:29:21] Leverage in the system you know there's always basis trade that were blowing out and people unwinding short volatility all that adds to the market volatility going down so the vol of balls worse in other words like we didn't have derivatives and it was just a plain old stock market you know maybe we wouldn't have crashed a while ago right.

[00:29:37] And I think that's kind of what you're looting to is like the vol of all so much higher because of you know the financialization of the market wherever you may want to call it and you have to unwind these.

[00:29:47] Trade that are tried and true I mean that's what long term capital man was like the first major you know one of the first major blow up trade of.

[00:29:55] You know you you you build a strategy that based on these things that can never happen and suddenly something happens that makes that thing that never happened before you know fire off and then your screw and so you know there's.

[00:30:09] You have a situation like oh I never thought I ran and and that situation would get to this you know where we are and no one thought we're going to rate hike maybe and suddenly we're fake we're facing a right hiking and so again it's those.

[00:30:22] You get these known unknowns at forces power trades and and on winds these these reflexive flows that have build up so so you know in a way I can I can understand what you're saying and I think there are some parallels.

[00:30:37] So getting this next slide you're getting more evidence of how low volatility was.

[00:30:42] Yeah and so a few slides we talked about the S&P global.

[00:30:47] Slides on dispersion correlation volatility these slides here is this is three month correlation this is the CBO measure and all you can see this was March topics that low basically right and so again what happens now because of the environment we're in all stocks are going down right nothing is saved because people are selling equities they want protection.

[00:31:06] Whatever it is so correlations that's higher and look this is a baby moving correlation compared to March of 2020 where everything went down right we're just sort of unwinding some things now into this also we had very very low volatility this is the ball index which measures one month spider ball of volatility and it's obviously spiking you know but you know.

[00:31:27] That all those flows that were into March these consistent flows on you know correlations going down volatility is going down that's all unwinding and that's what he's charged our highlighting and I don't see a reason for this to go you know back in the bag at this moment right because what's going to happen is if the market bounces now all stocks are going to go up which is going to keep correlation high.

[00:31:46] correlation high in for at least the next couple weeks you would think right because okay there's peace in the Middle East or whatever it is and so all stocks are going to go up you know it's not going to be the same chip sector chase I mean chips are going to do well obviously but all stocks will blow up and that drives correlation up so.

[00:32:02] You know same thing with volatility.

[00:32:05] Voltaux likely to mean somewhat elevated because I think if we do bounce in the situation we got a pretty you know good substantial bounce so again it's about breaking some of those flows are so persistent in the past.

[00:32:19] This was a fastening slide actually just hit my inbox this morning we in the ball suppression slide talked about how low.

[00:32:25] But ball was a cross acid so if you look at oil and gold and credit but all the and you can see here right into March ops is expiration I'm not saying that March ops is expiration was the trigger for.

[00:32:37] Filth global cross acid ball to break out it just happened to line up with that that suddenly now you see gold ball going crazy I mean gold was going nuts the last couple of days all time highs.

[00:32:48] And now you can see.

[00:32:51] These other assets reflecting higher levels of all and then down here again is the chart of the highest big options volume sense ironically volume getting so.

[00:33:02] You know this is again to my point there's a lot of unwind going on now things are shifting I think the period of relatively calm that relative calm that we've all enjoyed.

[00:33:12] For some time you know is certainly I don't think we're going to go back to those lows of volatility is what the point is.

[00:33:19] Yes interesting because we did have a period for a long time like I don't know year or two ago where the move index was really really high but the VIX was low so you were seeing like a lot of volatility in the race space we were not seeing a lot of volatility in the equity market.

[00:33:31] 100% and the move index which measures treasury bond volatility it went under 100 for the first time I think since early 2022 it's now back above 100 it popped quite a bit off of essentially what we're looking on on your screen here this week with the CPI printing hot.

[00:33:48] This is the five year treasury bond the one day trade a one day change and this was the biggest one day change since March of 2020 so to your point on rate volatility it went crazy and honestly.

[00:34:00] I saw it and I wrote in the founders note that that would transmit or would sort of make its way into equity volatility space but initially the equity market just kind of ignored that you know that treasury market volatility.

[00:34:14] And so you know that that rate ball cannot be ignored by equities I would argue for all that long and I don't know if that read balls going to pause now or cool off I think we're still thinking there's one more hike of the people are pricing in.

[00:34:29] And who's to say if that works out or not.

[00:34:32] But you know maybe think some side a little bit I don't know how world impact those everything that that was interesting is that if you look at seasonality this is I think this is from Morgan saying this chart right.

[00:34:42] Um.

[00:34:44] Hax day you know is today the 15th people had maybe shift a lot of equity and other asset positions late last week which I was flagging in a couple of other people started to talk about as well that could be a reason that there was initial weakness on Friday extra volatility on Friday because people had to

[00:35:01] Hey got a summit Bitcoin or gold because they took interesting dumpster just have to sell my stock to pay my tax bill.

[00:35:07] So seasonality wise no maybe this was also some of the trigger of some of the recent volatility now today the headlines with Israel and in their response to Iran certainly added to the mix but I thought that you know it's

[00:35:20] again it's another signal that hey Iran is not in the in the geopolitical situation not the only thing on the docket here you do have a lot of shifts or other things happening under the hood.

[00:35:30] Yeah and also the election you know you could argue that a lot of people have interest in driving the stock market up you know coming to the election year so that's something kind of on the other side you've got positive seasonality and typically at least in these election years you get a decent run into election day.

[00:35:45] Yeah and I think you know um there's this very interesting intersection now between you know inflation and

[00:35:55] You know gold breaking out it I think it brought it wise gold breaking out right why did goals ball finally start to move up.

[00:36:02] I think that you know watching balls very helpful for for trading commodities as well and gold wall started to move up in Bitcoin has really been pretty stable honestly through through this last couple of weeks um and so you know the general idea is is that

[00:36:17] You know is there a paradigm shift here and in terms of people not necessarily having a lot of faith in our fiscal and monetary policy right and the reason that gets interesting to me is because we've seen this last year you know a bid for call options in the right tail and all that kind of thing.

[00:36:37] Um and I don't think war is great for inflation I don't I haven't studied just in the past but I do think that at some point you know this idea of mark.

[00:36:47] I'm not going to ball up people really start to have to watch that and paying a lot of attention to that right um and so you know these are bigger macro things we can ask a lot of people in our charity day on August.

[00:36:59] Excuse me April 30 comes up but but there's a lot of people that are talking about then so I think when you watch these shifts and rates and think about how it pertains the equities.

[00:37:08] The reason that I really pay attention to it now is because if you can't use bonds to hedge equities anymore because that correlation is broken right and other words used to be able to own bonds to hedge out your equities right 60 40 portfolios or something you know up at an item.

[00:37:22] Um and and now with rates possibly going higher you know you can't really hedge your equity portfolio with bonds the same way that we were before all these rates shifts changed my long winded point about this is that arguably the only

[00:37:38] place to start to hedge your equity portfolio would be with volatility right and if credit markets start to get weak you have to own volatility if the right tail comes in the place you need to own right tail volatility if the equity market is going to crap out because of the geopolitical

[00:37:51] association you need to own volatility right and so that is the common theme that keeps coming up for me that okay we're waiting for this trigger maybe on one of these ball suppression flows

[00:38:01] and now you're starting to see all of these reasons that you want own kind of that optionality right whether it's right tail or left till or whenever it may be.

[00:38:11] I think that the focus on volatility large is going to be something that a lot more investors are paying attention to.

[00:38:19] Yeah, and you mentioned it so I should just bring it up because I should have brought it up at the beginning like our charity day April 30th it's something we're really excited about we're going to we're going to do it together.

[00:38:27] Spock MNXS returns we're going to have some great guests you and I are going to for the most part from 8 am to 8 pm be doing 30 minute interviews all day we've got Jim Kerson we've got my green.

[00:38:38] We've got people in options experts we've got people in value investing we've got macro experts we've got a really good docket it's going to be a lot of fun and there is a placeholder I believe on both channels now.

[00:38:48] For this so if you are on the Spock MN Channel or on the Excess Returns channel you can go click the little remind me button and be alerted when it comes out and we're really excited to do it.

[00:38:58] Yeah, absolutely I can't wait and it's great you have so much street cred so you can line up a lot of these great people to come and talk and I wish the first people to do this kind of charity day you know long form stream of interviews and you know fortunately we're getting wild markets right which if you want to have a bunch of people to talk about stuff this kind of market.

[00:39:18] You like to have where there's a lot of interesting things to discuss so really looking forward to that.

[00:39:24] Yeah and before the day before the Fed too so we will definitely be trying to help promote the market.

[00:39:29] Whether the markets are all a little or calm we're going to plenty to talk about.

[00:39:32] That's a good thing right.

[00:39:35] Oh the next slide here you're talking about the vol space unwind slash cover so what are you getting at here?

[00:39:41] Yeah this here was just showing the VIX role that we alluded to before you can see these are the April contracts with expire in two days there's a lot of positions getting close and you could see or tough I mentioned it was the record.

[00:39:53] VIX options volume but because it was a role it incrementally wasn't all that much new call open interest I would say so the idea here is just simply that to this whole theme of that vol press and trade may be coming to an end in a lot of ways

[00:40:07] you know or at least being delayed or pushed back I think it's a really interesting one and it's going to be the steam I think from April into May options expiration kind of long volatility as a default position as opposed to short wall.

[00:40:23] And with the with the VIX expiration before optics we've talked about that in the past like that does tend to increase risk a little bit right and does that play into the fact that there's also like a lot of VIX volume right now

[00:40:33] I mean to those things together creates a little more risk in the situation.

[00:40:38] Well what we saw a lot of times would happen in gen in 2022 when the VIX was just sustained at a very elvic levels you would get these very bizarre head scratching rallies particularly on the Tuesday before options expiration which is tomorrow and I think a lot of that would be because people are monetizing their VIX call positions are just an evolved positions writ large right yes it's VIX expiration but there's a lot of other like VIX futures are tied to that

[00:41:03] which links into the S&P 500 options complex so that's when positions start to shift and adjust and I think when you have extra high volatility like we do now we have extra high ball relative to all you had that will get sold as positions get rolled out and when that happens I think you can get this weird sneaky bit and it was funny because we were talking about this in the last VIX expiration there's a guy in CNBCs I just can't explain this move it doesn't make any sense you know like well if you're new VIX options expiration that this happens like you can kind of time that a lot.

[00:41:34] And so you know I think that tomorrow we could see a little bit of that but once those VIX positions are rolled then you know what happens before opX then there's not that same stability that's not that same stable flow that is offered

[00:41:49] you know possibly going forward so it's often referred to as this window of week this around options expiration and VIX expiration and in this case because VIX expiration is before equity options expiration then

[00:42:02] you know you have this period of shift shift right starting on Wednesday to Friday as opposed to VIX expiration happens after opX then you'd have a Friday to Wednesday window.

[00:42:11] Now it's interesting again here obviously is that ball is pretty high going this event so I do think that the clearing of these volatility positions assuming that there's even just a slight cause in some of the just rhetoric or whatever

[00:42:23] the situation may be you know geopolitically you could have a pretty substantial relief rally just on the adjustment of these positions so in this case you know I think opX

[00:42:32] expiration flows could be supportive over the next week which could lead to a pretty strong in rapid recovery.

[00:42:39] So what are we looking at in the next slide here the volatility cover.

[00:42:43] Yeah and what this shows is basically long dated and I say long getting spawning because now long

[00:42:47] there's two months out it used to be a lot of people would own one year off the volatility but

[00:42:52] so what this shows is yellow is the one excuse me two months S&P skew from two weeks ago since this is April 1st

[00:43:00] and you can see that where the yellow line is the bottom of this shade and calling the shade and cone is

[00:43:04] statistically the 90-day range and so you know we were two weeks ago at the bottom of the range and in the

[00:43:12] range was during a very quiet market period just writ large. So now we see to this point of hedging unknown

[00:43:19] known unknowns this morning we see that there's a big lift in that longer dated skew which is simply telling us that

[00:43:24] people are hedging out longer dated rigs though right and to your point before we're

[00:43:30] yes we're far from the election but we're not that far from the election and so we have this

[00:43:34] period of volatility now certainly Powell is going to adjust some rate expectations with FOMC coming up

[00:43:39] in a couple of weeks then the rhetoric around elections are going to pick up and that's if the

[00:43:44] geological situation just sort of like totally cools off in the next couple of days which I don't

[00:43:50] know that anyone thinks there's a short term solution to that. So this idea that the ball kind

[00:43:54] of balls going to be out of the bag right now seems more reasonable when you start to think about

[00:43:59] the fact that geopolitics are calling off we're not sure about what's going to happen

[00:44:02] monetarily and then there's always hedging around the election right there's always a ball bit into

[00:44:07] elections it's just the way that things work so I wouldn't expect this here to be any different.

[00:44:12] Yeah I was just thinking when you were saying that we've got a serious like game of three-dimensional

[00:44:15] chess going on right now you've got the geopolitics you got how Powell reacts to it and you've got

[00:44:19] the election there's a lot of moving parts here they can go in a lot of different directions.

[00:44:23] Yeah and I think it's a weird situation you know Powell are Biden saying we're going to get a

[00:44:30] rate cut and I've never paid so much attention to rates in my life but now you have to pay

[00:44:35] attention to rates if you're an equitability operator because they're such a linkage there.

[00:44:41] So there's just to your point all these dynamics at work especially into this election cycle

[00:44:49] which makes things even a little bit more challenging so no rest for the weary here I think

[00:44:53] over the next couple of months. And so on this last slide you're just getting some more evidence

[00:44:59] on this volatility cover. Yeah and the reason I want to end with this is that VIX here isn't

[00:45:05] D-Dretting 20 but if you look at where we then over the last post March of 2000 in the COVID crash

[00:45:13] you know this is an unprecedented level of calm right and it's

[00:45:20] it seems like we're starting to lift off of these lows of 2023 in 2024

[00:45:27] and to have a sustained environment with the VIX around 20 is not all of that crazy that's why I

[00:45:32] wanted to end with this. I don't know that we have a record spike you know the sort of recent high

[00:45:38] if you look at 2022 was an intraday VIX spike to route 3839 and that was before the Russian

[00:45:45] Ukraine war kicked off in February of 22. And so you know there's precedent for volatility

[00:45:52] really shift by a bit higher and I think that you know think hey VIX 18 that's pretty high

[00:45:59] this it's a lot it is high in the context of the last year but if you zoom out a little bit

[00:46:03] you know there's plenty of reason to think that we could be living kind of in a little bit of a

[00:46:07] different ball regime over the next several months. So to summarize you don't you don't think that

[00:46:12] the VIX of 13 you probably don't see where I think we're going to see that for a little while.

[00:46:17] I mean if indeed we're starting to cover a lot of these flows and shifting the paradigm a little

[00:46:22] bit from you know focusing on zero DTE and there's this big call you know hedging flows that are

[00:46:28] in the market and some of that is not worn away and people are worried about hedging with volatility

[00:46:33] and kind of the idea of like bagas just follow that matters again. Then I do think that you know we

[00:46:38] could be living in in this more sustained environment where no VIX of 16 which implies 1% daily S&P

[00:46:44] moves becomes a little bit more of the norm as opposed to something down in the 12 to 13s.

[00:46:50] So we got to comment on the last episode that all the content was excellent but that we were too

[00:46:54] long waited and went on for too long so the good news is 46 minutes this time we we heard your

[00:46:59] feedback we've answered it we're going to be shorter and thank everybody for joining us and

[00:47:06] we'll see you next time. Thanks, sir. This is Justin again thanks so much for tuning into this

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