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Excess Returns
The Market the Tweets Can’t Break | What the Options Market Tells Us About What Comes Next
01:09:02
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- [00:55]
Podcast Host
is there with the Iran war and oil shock that followed it, many investors have been surprised that the market remains near all time highs. In times like these, we always find it valuable to talk to our friend Brent Kachuba to get a behind the scenes look at the flows that are driving the market to help understand what is going on. Jack was able to do that yesterday for our monthly podcast the OPEX Effect. If you are interested in looking at the current market through the lens of the flows driving it, I think you will find this discussion interesting and valuable. We have included this episode in the Excess Returns feed. If you want to keep receiving new episodes, you can subscribe to the OPEX Effect on all major podcast platforms using the links in this episode. Description thank you for listening. We hope you enjoy the show.
- [01:27]
Brent Kachuba
Only one time ever did we have a bigger drop from Vix 25 down and that was in 2007 in the GFC. Looking forward here into where we are, this oil equity volume correlation seems to have, at least for the time being, snapped. A lot of this is just reciprocal or reflexive in nature, right? And because the flows I think now are so automated and people are aware of volatility as an asset class and the options market's getting to be bigger that when the market rallies 3%, you get vols dropping so fast and it makes people have to buy more stock. It's a balance of risk. Again, I don't want to buy that, but I don't want to be sitting there selling this volume anymore, right? Because that's so cheap. It's like what? Even if you're right, what are you making? Basically nothing. Everything is on the put side of the fence. Right. We're all concentrated on. Left this. Everyone's in. Puts in all these names.
- [02:30]
Jack
So, Brent, I feel like we're kind of where we were last time in a lot of ways. I mean, the. We've still got the oil shock. The war is, I guess, questionable. What's going on with that? This market's still not down that much. And the rural. The world is still ruled tweet by tweet or truth by truth or whatever we're calling them these days. I mean, it seems like we're saying the same thing we said at the beginning of the last one.
- [02:49]
Brent Kachuba
Yeah, it's been, I guess, an exhausting month. You know, I was talking about, like, how, like, I basically just has ruined our lives because all we do is, like, try to make stuff now. So there's that. There's that. Which, remember, software stocks crashing because of Open Claw was just our March episode. That seems like years ago. And then we got this Iran situation, which who knows where that's at? Right. I paused because I don't even know what to say about it anymore. And so, yeah, so on that point, I left the title of my presentation the same. We've never done this before that. Well, I've never done this before that. I just left the presentation the same because it's kind of all the same stuff. We're off the extreme, that's for sure. But the clarity of the situation seems less. The tweets are no less extreme now. Maybe they gotten more extreme. I guess if there's a Trump tweet index, it would be more extreme than it's ever been.
- [03:41]
Jack
Yeah, I think so. I mean, we've gotten the profanity, the lace tweets now made an Easter high.
- [03:45]
Brent Kachuba
I would say.
- [03:45]
Jack
Yeah, yeah, I think it is. But, you know, every time you think it's made a high, it makes another high. You know, it's like one of those growth companies, the Mag 7, you know, you just thought they can't go any higher. And they do. It's like, it's the same thing here with the tweets. Like, you're like, there's not going to be a tweet that's going to take it to a new level. And then the tweet takes it to a new level.
- [03:59]
Brent Kachuba
Yeah, there was this hilarious. And this is, we're going to dive into the realm of stuff. But someone had tweeted that. Okay, I actually, actually finally forgot about the Epstein files the other day. And I was like, that's. That's true. We did, we stopped talking about that.
- [04:14]
Jack
Now it is, it is interesting. Like not even to get the political part of it though. It's like these stories that are like these massive stories, like they keep getting exceeded by other massive stories to the point that like this thing that would have been like something that would have like been the top of the headlines for six months just goes away, right? Because we're, we're like escalating to the next level. So it's just, it's a weird world. I mean you and I are not political commentators and nor does anybody ever want us to be political commentators.
- [04:36]
Brent Kachuba
But you're, you couldn't, you couldn't be more right on that. It's like the, the idea that, that it gets, it keeps getting more extreme is just so very true.
- [04:47]
Jack
But we do see, I mean we see it in the market and like people are I think to, to some extent surprised. Like this war didn't have the impact people thought it would have. I mean we went down, but we didn't go down that much. And that's what we're going to get into today. We're going to get into some of the stuff that's going on behind the scenes. But it's just been interesting for me as like a market observer. I mean I'm a long term investor. I'm not making changes based on this. But just seeing like the reaction to this whole thing has been pretty surprising to me in terms of. It's been more muted, I guess than I thought it would have been.
- [05:15]
Brent Kachuba
Yes, I would totally agree with that. And I like to sort of point out when I'm right about things here, as many people do, and we should have a new segment.
- [05:25]
Jack
The things Brent was right about. I'll do a little screen that flashes before we did.
- [05:29]
Brent Kachuba
It would be a blanket and we would just move on. But, but on that point the idea that Vol would just go crazy, particularly when oil just went over 100, it was like there was just no reaction. It was very, very strange. I have a slide on that and I talked to shout out to Michael Ball at Bloomberg if you listen to this one. He was filling me in a little oil. So it was just basically the idea that people assumed there would be a taco trade in there. And I'm paraphrasing it greatly, but you know, that's kind of what the idea is. And I was like, I guess that makes sense because you know, it's okay to be wrong about something. Of course people are wrong all the time. But you want to know why? Usually, right, like, why did I get that so wrong? And there hasn't really been a great explanation embedded in there other than people are expecting, you know, this taco situation. And I don't know how easy the taco is at this point, which is I guess up to some other people to understand we got earnings.
- [06:19]
Jack
What's interesting is like, the more something happens in the market, the more people assume it's going to keep happening. And so every time we have one of these crisis and then we have a taco type situation, like the market's going to predict in advance that we're going to have the taco situation, so we're not going to go down as much. But you also wonder like on the other side of that, like, do we get to a point where we really do have a bad situation? Then we do go down a lot because people are kind of assuming, assuming the taco to some extent.
- [06:43]
Brent Kachuba
Yeah, and I think that's exactly right. And I think everyone's trying to parse through if this is that moment. But then when you also just step outside of the Iran situation, you said, you say, forget Iran. What is the reason that we all want to get long stocks right now? Now there's these stories going around that Nvidia, you know, should be valued at something. Is it 400 times higher? So I forget what the number is. Some absurd number. Four times forefront, whatever it is, is like Nvidia should be way more so it's like, okay, there's some of that, but you and I are living the experience of the deflationary impulse of AI. And you know the software story, which that was, you know, software stocks were oversold in March. That was true. Now they're making new lows. And you look at some of these stocks like Monday or Teams or Asana, and those things are just getting pummeled. But you know, I go, I can, I could recreate like a salesforce for myself in about an hour and it would work, right? So why should I pay them a thousand dollars a month? I don't use, by the way, but you know.
- [07:40]
Jack
No, I don't either. But you've got, you've got like this, it's crazy because you've got this world changing long term thing that's sitting in front of us and then you've got chaos in the short term and it's like, how do you, how do you parse that stuff? And, and to some extent the market is good. Like sometimes what I think the market should be going down more because of something like the market is good at seeing through what's going on and maybe looking at the long term thing. Like I remember not to, not to bring January 6th up but like I remember when that happened I was thinking like the market should be down more. I'm like, why is like people are storming the capital, why is the market not down more? And the reason is because that didn't really have any impact on the long term value of corporate earnings of US companies, which is what drives the market. And so it's just, it's very interesting to me to think about like I'm not smart enough to break down what this means, but it is interesting. Like we've got this world changing thing sitting long term and then we've got this chaos in the short term and it's like, is the chaos going to get so bad that it's going to override all of this? And like, and I don't think any of us know, but it's just interesting to sit and watch it.
- [08:33]
Brent Kachuba
Yeah. And if you look back, you know, two months ago, let's say, yeah, we had chat gdp, fine, AI was coming, that was fine. There was no Iran situation. Right. So the idea that inflation maybe could be coming in, we're going to change. The Fed, you know, apparently was maybe the thing we were talking about, but it was a much different environment. And it's like, you know, people talk about timeline shifts with the AI stuff and I know, I'm almost getting tired of talking about because you just talk about so much but you know, the open claw situation and what clog can do and the deflationary impulse, that's all just come in in the last couple weeks. And you, you know, I were just talking to about this like the fintwit universe seems to really be onto this stuff early. And I think the average person on the street, if you go up, you know, who doesn't pay attention to markets as much, probably doesn't use it quite as much maybe is my guess. So like it hasn't set in there. But the other crazy thing is now the talk is that Powell may just stay in his chair now. So like that's now changed in the last few days. The, the cabinets are changing over. Right. They're flipping people over there. And so you know, oil changing, the inflation, forget the spending on, on the war, you know, it's just like everything suddenly is topsy turvy last six weeks and I don't know that it can all be digested, you know, as Quickly as maybe we think it should be. And the other thing I would note is that I think the, in hindsight, the idea that everyone knew there was going to be Iran situation because we basically sent every single ship that we have over there, you know, into the situation itself, maybe people were fairly well hedged into this escalation and maybe that absorbs some of that downside. But, you know, the nice thing about this is as we move from our small talk onto the presentation is call options are very cheap right now. So we can say that. And that is, that is a fact. Right. And so the fact that is that no one is, is positioned in a bullish stance for any type of equity market upside as we go into earnings. And so, you know, that is the takeaway that I will take that, that I will give from this at the end. So we can kind of, you know, our feelings aside, the fact is no one in the option space is pricing in much of an upside move for like the mag Sevens, for example.
- [10:38]
Jack
Yeah, and I'm interesting to dig into that. And for people who aren't familiar with us, what we're looking at in this, in this podcast is what's going on behind the scenes. So people talk all the time about what they're doing. You see the flows that options, you know, that options traders are making behind the scenes and how that influences the market. And so as we get into what, we always start with this idea that more and more people are using options because they use options. There's people on the other side of that trade, the options dealer, who's. Who has to make trades to hedge themselves. It impacts the market. And although a lot of times when I'm seeing something that's going on in the market, I'm like, why is that going on? I don't understand it. A lot of times these flows behind the scenes are what are causing it. Yeah.
- [11:11]
Brent Kachuba
And the great thing about options is that there's open interest. Right. And that is a public, that's public information that tells us, and we have some extra data that tells us whether contracts are being bought and sold. And so it's a little bit different from a stock because we can ascertain what people are doing. And options prices also there's what's called an implied volatility, obviously, with options prices. So we can tell how much movement traders are forecasting into the future. So that's a little bit different from the stock positioning or, or reading the stock tape, for example, because we have that extra data and extra information. We can infer not only intent, what traders are positioning for, but also how hedging flows that you just mentioned can impact the market. And the big rub here is that options volumes are growing like wildfire. We constantly have record options volumes here. In January, end of January, we launched Monday, Wednesday, Friday, expirations in the mag sevens. So more products come on, the volume gets bigger. And with that, we think that the impact of the options flows on the market gets even larger. As a rough example, if we all got together and bought a bunch of AMC calls, we trade with the market makers. 90% of options flows is done by market makers. They have to hedge that position. So in this example, if we all bought a hundred thousand calls right here, right now, market makers in this basic mass would have to buy about 5,000 shares, excuse me, 5 million shares of stock. So we like to give this example just as a very quick showing of how options trades move their way to the stock market, right? Because when you're trading options and those have to get hedged, you can hedge that with stock, and that is what is the driver of, of the market, of the stock market from those options flows. And then this chart looks complicated, but it's just some charts that explain that once you hedge a position with stock, you constantly have to update that position, right? So your options are hedged for right here, right now, at this time, at this price in the underlying. If the underlying move changes, right, the underlying stock changes. You have to adjust that position. That's what we call delta or gamma hedging. If implied volatility goes up or down, like VIX goes up or down, you have to adjust your hedges. So that's implied volatility adjustments. And then not only that, over time, the, the hedge will just change, right, because your option decays. So you have to adjust your hedge on that. So these are the dimensions that force market makers or other entities that hedge this. These are the forces that make them adjust those hedges. And we like to model these out and forecast their impact not just in the s and P500, but individual stocks as well.
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- [14:46]
Jack
Yeah, the reason you and I are talking now is we're a week before options expiration. And options expiration is a big turning point a lot of times because a lot of these trades clear.
- [14:53]
Brent Kachuba
That's right. And the third Friday of the month is generally the biggest options expiration. Now there's more expiration, so it clouds that a little bit. But generally what happens is the big funds position on the third Friday and as we get closer to that, the hedges tied to that third Friday expiration build up. Right. As those positions build up. And then all of a sudden on expiration itself, you go, bam. Contracts expire and hedges have to be reset. And that is what makes it oftentimes a turning point because the options flows that sort of reinforce the trend, not just in price terms, but volatility terms, that that trend gets reset when the positions expire. And we have.
- [15:29]
Jack
I'm just curious, do we see, like you mentioned, the idea that there's more expirations now? Like, are we going to see a trend over time where like these specific expirations are less important because we're spreading things out to more expirations? Or is that not true?
- [15:40]
Brent Kachuba
I think that's going to be the case. Like zero dte, for example. We never would talk about zero dte. Like we would, you know, two years ago. Forget it. Right. We didn't talk about that. Now with more expirations and Nvidia and Tesla, you know, it's still a little too early to draw conclusions from that because it's only been about two months now and then been a while, two months. So I want to see a couple of stable months so I can sort of really assess what's happening there. But the idea that the, the volume sort of just concentrates in these shorter duration expirations I think makes a lot of sense, Jack. I mean, the big guns still have to hedge at some of these bigger expirations. If you look at like the JP Morgan position and stuff like that, but the. The idea that we sort of take away from longer date expirations and pull that positioning forward in time, I think is true.
- [16:25]
Jack
Are you not gonna have to launch the daily OPEX effect?
- [16:30]
Brent Kachuba
Maybe. I mean, never say never. People listen to us banter once a month is probably enough, but maybe they wanted.
- [16:37]
Jack
I know. Yeah. People would not be able to tolerate us probably once a month.
- [16:41]
Brent Kachuba
We have some statistical evidence here about performance in the S and P flipping. So what does this mean? If the market rallies into opex, it tends to sell off after OPEX and vice versa. If we crash, we'll rally. And what's interesting about this is that it matters more if VIX expiration occurs before expiration. And so we talk about expiration windows being VIX expiration to equity expiration as the timeframe for the positioning to sort of start to shift. VIX expiration this time is on Wednesday, this upcoming Wednesday with expiration on Friday. So this is one of those two thirds of the time. Plus, we see a trend change in the market now. The market's rallying pretty strongly here into this expiration. So it will be interesting, and I think on default, you would probably think that we would give some back after this rally. I'll talk about this a little bit more. The idea of volatility, also trend change as well. So the red bar bars here show that volatility, when it's low, it tends to contract even more in expiration. So now we're trending lower. And then after expiration, that volatility expands. Right. So it's like we talk about like the finger trap, the Chinese finger trap. Right, Right. You pull it hard and you can't move anymore. And that's kind of how it is. The harder you pull, the less you can move. Like a straight jacket. And then the straight jacket comes off. And Jack, you can go psycho after. After expiration.
- [18:01]
Jack
I'll go psycho on the podcast. Brent, whatever we got to do to get views, we'll do it live.
- [18:05]
Brent Kachuba
We need more subscribers.
- [18:07]
Jack
We do. Yeah. You can never get too many subscribers, Brent. That's the thing. It could go to infinity. So you'd never be happy with your subscriber level.
- [18:13]
Brent Kachuba
Never.
- [18:14]
Jack
But as we move the next chart, there's this idea of gamma and predicting volatility. I think we've moved a little bit to the right, a little bit less volatility than last time, but we're still a little bit to the left where we've been in the past.
- [18:24]
Brent Kachuba
That's right. And the core point here is that this is our gamma index. So how much hedging flows in the market is on the x axis and then on the Y axis axis is forward future one day volatility. And so the idea here is that the less gamma we have or the more negative gamma is, the more market movement there is in, in the next day. So we take this reading every morning and we say, okay, based on our reading, we should have a crazy day today or all sequel. It should be a pretty quiet day today. And so again this just statistically shows that there are these relationships between the size of options positions and how much the market is moving.
- [18:57]
Jack
What's Vix at these days?
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Brent Kachuba
19.
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Jack
Oh, so it's way down.
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Brent Kachuba
It got crushed, right? We're going to talk about that in a, in a second here. But it never, I, I did think it was going to go 40 to 50 with the huge oil move, right. And, and that didn't happen. Right. And now it's getting crushed. And it's funny on Twitter, people going, don't people understand? We have a chart on that too. And so the movement of that, that index is really quite, quite what did
- [19:22]
Jack
it peak at this time?
- [19:23]
Brent Kachuba
Through about 36 I think we got was the high. And so we like to talk here about how big the options expirations are. And for us we like to measure this in delta terms. So normally what happens, you'll see a chart from Goldman or one of those banks and they'll say $3 trillion worth of expiration. Because what they're doing is they're assuming that all contracts equal 100 shares of Notional value. That's not true. Right? Because if you have a call that's expiring, that is 20% of the money right now and it's never going to be in the money that's worth zero. It's not worth a hundred shares of stock. Hopefully that makes sense. So I measure by Delta and Delta is basically another way of saying share equivalent of of position. So here, what you see in the big takeaway is I think people don't understand just how big the S and P options complex is. In this case here you can see it is bigger than the rest of all other options assets combined. Right. So bigger than the single stock complex, bigger than NDX, Russell, bigger than individual ETFs combined. Right. So that it is just a monster of a, of an asset. And the other thing we like to look at is what is the put versus call weighting. Single stocks are almost always call weighted. And the fact that they're you know, they'll peak out around 80 to 90%. So this is actually a relatively bearish position, as if you look at the breakdown here. But the index position which is NDX and Russell and the S and P position is actually leaning fairly bullish here, which, which is interesting to me given the fact that you know, obviously we have this Iran situation. You know, it's, it's fluid and yes, the market's only 3% from highs, but it is, you know, it's quite curious that there does seem to be just a lot of, of driving into call positions at a high level. I'll break this down a little bit more.
- [21:04]
Jack
Isn't this the opposite of last time? Didn't we, weren't we put heavy last time?
- [21:07]
Brent Kachuba
Yeah, well the market was getting quite a bit weaker into March. Right. It had sold off from February to March. And so that drives put values. So anytime the market rallies, call values extend. Right. That grows the delta of calls. So that gives it a little more, more weighting. So some of this is almost like a barometer for what has the market done. Has it rallied or it crashed into expiration?
- [21:27]
Jack
And so is this the idea we were talking about earlier that like people, people real think we're going to taco think we're going to go back up so they're, they're buying calls. Is that or is, are we seeing that reflected in the data here?
- [21:37]
Brent Kachuba
I, I think it's a little bit that and also a little bit of the fact that this market just rallied, you know, 5, 6% up from those March highs. I mean we're almost back to all time highs, not that far off of it. Right. And so when the market rallies, call values increase and that's, and that's a signal of what's, what's showing here. You know, if we're in a situation where these are 90% weighted to calls, then you go we're an extreme call position and it makes calling a top a lot easier. Right. Because you just know that there's so much baked into this. And then on this point, how big is this expiration? Right. Is 7, is this 700 billion number that big? Not really. If you break this down, this is the April OPEX compared to March. Right. So this expiration is in the S and P, a fraction of a quarterly expiration. Quarterly expirations are always the biggest expiration in single stocks. It's a decent size expiration as you can see here. But you know, this is not the mother of all expirations. And So I think the effects of it can be a little more idiosyncratic in terms of it will, may matter more for like a Tesla or a single stock that has a big expiration versus you know, the, the market as a whole.
- [22:42]
Jack
So overall you're not seeing this as a, as a huge deal expiration like some. Sometimes we see these expirations where we've moved heavily into it and it's huge and you know, we think there might be potential impact. You're not seeing huge potential impact here.
- [22:51]
Brent Kachuba
Yeah, I mean in a perfect world we see a massive market move into a giant expiration and we see volatilities either super high or super low. And then it's like, okay, you know, the stars are all aligning here and it makes a little, a little bit more clear here. It's tricky because it's not necessarily huge positions across the board. Vols are getting low in the index side. I'll talk about that in a second. Single stock balls are pretty cheap. We're going to enter earnings and then we also have the, you know, the Iran war situation with peace deal, no peace deal tolls, whatever else is going on. Right. So it makes it much trickier to call I would say again from a kind of a macro equity perspective.
- [23:32]
Jack
So on this next chart we're getting into. Yeah, we're not that far from all time highs given, given all the events we see here and everything that happened. We're not. Yeah, we're pretty close to the all time highs here.
- [23:41]
Brent Kachuba
Yes, it's pretty shocking really. And, and you know, you look here at February OPEX and was a couple days after that that things got loose and really came, came lower. And that's funny because that seems to happen very often that February having a weak period into, into March and even April. And in this case what was interesting is we hit the March OPEX and we got much lower after that. Right. A lot of this, you know, with the war situation, but the, the absolute low was on the JP Morgan collar day. Right. And, and yes, there were some tweets going out about that. But it's just fascinating to me how, how that position will always mark some lows. We talked a lot about, about that a lot on, on our March episode and I have a slide on that in a second. So we rally right from that position that gets the ball rolling. This big gap here is the initial peace deal, I guess or third peace deals. I don't know how many peace deals had one of the recent peace deals. And so you can make the Case now that we're rallying into this vixx April OPEX position and we have a lot of resistance building up in the 6800 area from calls being sold. And I have a chart on that here in a second. So my general feeling here is that we'll peak out around 6,800 and probably consolidate some while we stage for earnings. Tesla for example, and some of the bigger tech companies will start to report just after April opex. So Iran headlines aside, my expectation here is that we would sort of consolidate these gains. You know, I'm not a big person on gap fills and stuff, but I know a lot of people are looking at this giant gap and thinking, okay, you know, maybe, maybe that kind of gets filled. But some general consolidation here after April OPEX is what I'm going to be looking for. So just, you know, think about topping out, you know, Monday, Tuesday of next week and then a couple percent, maybe contraction following that and then it's earnings. If earnings look good, there's a lot of cheap calls out there and, and maybe that started get something rebid, particularly if we get an actual, you know, full on peace deal in, in, in the Middle East.
- [25:43]
Jack
Yeah, Earnings and tweets. Right. That's what's going to drive us from here on. You know, which one's going to win, we don't know. And which side they're going to be on, we don't know. But those are probably the two drivers of the market.
- [25:50]
Brent Kachuba
Yeah. And I got out my fancy pen tool just for this chart. So we launched a new product, it's called Trace, we updated it and we have a little deal at the end of this. I never pitch deals on here, but we got one here, Jack. But the nice thing about this is we added this feature that allows you to see how gamma is going to change in the Future, up to 10 days. So today obviously is the 10th. And then here's how the gamma position is going to change in the future. Blue on this map is support or resistance. Right. Sticky zones we call those for the market makers. Whereas red is area to fluid market movement. And so I bring this up because I was mentioning the heavier resistance. And so each one of these days is an expiration, right? So that's why there is these lines. Some expirations aren't very big, that's why there's not a very big line. But here is your April expiration. So why I think this is interesting is you can project this forward if I just draw this sort of line and you could say okay, like this is the zone in here and it's a pretty wide zone, but this is the zone where the market's pretty well supported right now. What does that mean? Dips should be bought and rallies should be sold. Now what happens in actuality is at any given day after about 10 o', clock, 0dt people come in and they really reinforce these ranges. So this really bright blue zone is a zero dd position. So that means on Monday we'll see some zero dt people come in and you'll get. The map will be a little more bright blue. But the zoom out sort of high level takeaway here is that when you look towards VIX expiration and then you start to get into options expiration on Friday, you can see how these positions decay. Right. And that band of support really starts to. Starts to wear away, if that makes sense. And so this is a great visual depiction of that. But the other thing to me that's interesting is this is all generated up here by traders selling calls. So when the market seems to rally into the 6008s area, we see people respond to that with selling of SPX call options. So in I interpret that as sort of a fair value assessment. Why do I say that's fair value? Because those calls weren't there until we get the giant rally off of the peace tweet. And then calls get sold hard, particularly in that 6800-6900 area. And that forms new resistance in the market. And the fact that this is blue across all these days tells me that's not just zero dte, that's people taking a stand against a couple of days out at a minimum. Right. It's different from. I don't think the market's going any higher today, Jack. So I'm going to sell the 6850 for today and then tomorrow I'm going to recess. You know, recess, maybe I'll sell 6900. Right. These are people planning a little bit of a flag in the ground, if that makes sense.
- [28:21]
Jack
So now I know you've been working on your Open Claw brand. This is quite an impressive chart going on behind the scenes here.
- [28:28]
Brent Kachuba
I'll figure out how to get rid of my. If I could do that in Open Claw, that'd be impressive. Um, our engineers are. I have to give our engineers credit for that one. Um, so the things I build on openclaw, they basically give it a dirty look and then say not yet.
- [28:44]
Jack
And then, yeah, you're kind of. You're like the mad scientist working off on the side that the engineers, like, have to shut down when it gets to production.
- [28:51]
Brent Kachuba
That's basically what it is. There's like this Brent queue of, of requests that's just building up with AI.
- [28:55]
Jack
They're just like, deny, deny, deny, deny. So as we, we always start by looking back here before we look forward, and we're gonna look back at what you talked about here in March.
- [29:06]
Brent Kachuba
Yeah, and the big thing was the J.P. morgan collar trade. Everyone was talking about this thing the day we blew through it, but I don't think a whole lot of people were talking about it like we were at OPEX in mid March. We tagged that level perfectly. You know, if we go back to this chart, 6,500, you know, was the area roughly those puts. So we go right through that strike, and then we get a little bit of positive news and clearing of that strike. And there was just a massive dip rally, right, right at that, at that quarter end position. And so, you know, that was one thing. I think that if you were aware of that position, weren't there, like, a
- [29:41]
Jack
lot of people that were kind of calling the JP Morgan thing into question this quarter? Because I think there was a massive rally, like, on the last day of the quarter, and it, like, moved it away from the magnet or something like that. Didn't, didn't I see, like, some controversy on Twitter around that?
- [29:54]
Brent Kachuba
I, I, I think what it is is that people assume that we would pin straight to that strike. And there was some positive news that day. And so what ended up happening is we, we really moved up and through that strike, we rallied from, you know, percent below it and then just kind of finished higher. And so what you, what you ended up having here, if you think about that position, is the market makers were short the 64, 75 puts, I believe, was the strike. And so really anything above that made them money. Right? I mean, they're hedged generally, but just as a, as a function of that specific strike in that position, looking at just that options position, that position expires worthless. Right? And so you also had the news. So you just get this kind of negative gamma rally. And I think a lot of people are saying, well, it doesn't count because we didn't pin that strike. But we're pinning, we're talking about pinning in the context of, you know, 2% equity moves with tweets going out left and right. And so the fact that we sort of gassed back up and through that strike when we're at 6,300, you know, here, right. And you are positioning for the possibility of a huge move like that based on that position. You know, you very easily could have made some money and those options were very cheap to trade. Right. Going into the end of the month. So I think some people kind of nitpick about, about it. And, and the point is clear. It's like, well, how do you express a rally back into that move? Like, would you bet on a $10 wide lie? Right. Where if the market closes $10 outside of that strike, you lose? That doesn't make a whole lot of sense when volatility is just going bananas. Right. So I think the, I think you could tell people who lost money betting on how the market would react to that position is basically how it is. Like, if you had calls or call spreads, you did great. If you bet on a pin at that strike, you probably lost. And, and then you said, you know, this is garbage, and you throw your towel.
- [31:38]
Jack
And I also think people have to realize, like, everything in markets is probability. Like, we, we talked, you know, we, you and I talk about options. We talk to technical analysts. You've got fundamental analysts, macro people like, you can all have your views and put the view together. But if Trump tweets, you know, the war is over and we've developed super intelligence, like, the market's going to go up a lot, like, irrespective of what everyone else has analyzed. So, like all this stuff is looking at probabilities and looking at the range of things that can happen. It's not necessarily like, nothing's like, this is the line in the sand and this has to happen no matter what.
- [32:06]
Brent Kachuba
Yeah. And on that point, if you were playing the JP Morgan dip and you just bought, let's say, futures and the market rallied up a lot, you know, even if it went through that strike, you're probably even happier that it went through that strike. Right. And so you're not going to complain on Twitter. If you, you know, put, put on a, a trade that bet that we're going to pin there and you lost, then you're, you're going to be mad. Right. So the expression of the trade is also another important thing. And, and you know, we don't talk about that necessarily here, but on the point of probability, the way that you trade also changes the probabilities and, and payout structures. And so, you know, that's another, I think, interesting part of the equation. But, you know, did, did the JP Morgan position take part or lead to the rally? I think so. And we talked a lot about the fact that, that was a level to watch going days into that. It did rally through. It did rally through that strike 100%. So, you know, had we not gotten a good tweet and we were at 6,300 on that day or, or decent market move, that strike may not have come into play. Right. And we would have possibly closed below it. So we needed some positive news to get the momentum going up. But then once you got that momentum, you have your target, right? Your target is sitting there a percent above. And so I think that's kind of the critical thing here, you know, to understand it's like the position is there. We just, we needed something to kind of shift, shift the momentum that way. And then, you know, it's like lighting a fuse. Things can. Things could really take off.
- [33:29]
Sponsor Announcer
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- [34:10]
Commercial Announcer
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- [34:14]
Jack
It is our larger honor.
- [34:16]
Brent Kachuba
No, really, stop.
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- [34:24]
Jack
and participate in McDonald's while supplies last. And so on the next slide. Another thing we were talking about last time was this idea of correlation spike.
- [34:31]
Brent Kachuba
Yeah, I think the, the, the idea was out of the March OPEX that everything was starting to get warmed up. It was like volume was starting to wake up. Correlation was starting to wake up. We were paying a lot of attention to, you know, the very low call skus and high put SKUs. And just the overall idea that, you know, everything was sort of the oil vol trade. Right. It's like we were all essentially just oil traders. Even, even if you're trading stocks, you're just trading essentially oil and the oil price. And I think that largely played out up until about a week ago, right, where volume started to spike. We talked a lot about the fact that, yes, there was A big volatility spread, for example, because the distance between VIX and realized volume was very wide. So smart guys like Noel Smith was, oh yeah, volume is rich. And he's right, but volume is rich on a basis of Vix being 22. To me, that's different than saying Vix is 80 in volume rich. Right? Because obviously at Vix 22 you're pricing in only about 1%, one to one and a half percent moves in the S and P. That's not that much. Right. So realized volume hadn't started to move all that much yet. And that really changed again here in mid March after the war had started. Realized volume was only 12%. That's about 75 basis point moves in the S and P, which was average. So we were trying to make the argument, I was trying to make the argument that volatility itself was going to start to expand. And I think that view was right. And volatility certainly did expand as well as we'll see. But to the point of not being correct about something. I did think when oil broke over a hundred, that we would see, you know, a Wikipedia type moment in the VIX space where you would see an entry in Wikipedia about the time that vix went to 40 or 50. Right. Cause you really need to see big volume moves like that to be headline news. And we didn't really get that. So this is the oil VIX correlation chart that we really ended with. And this was true through the rest of April, the fact that oil hire meant VIX higher and volume higher. And so it was really, you know, such an interesting position there. And also on this point we were talking about this analogy of when March quarterly expiration rolled off. And then last April we had this giant market drop. Right. Remember the tariffs sort of like the tariff fears really kicked in in 2025 and the market dropped so substantially. The analogy worked out perfectly. And Trump even caused oil to go to 115. With some of the tweets in the escalation, oil went up 15% and the equity market the next day was flat. And it was like, holy cow, this analogy was set up to work so well. And it was sort of like, what the heck just happened? Market didn't move. It was really pretty fascinating. And that goes back to the taco idea where people just weren't buying it, I guess.
- [37:20]
Jack
Yeah, it's interesting. We have gotten a little bit away from the idea of oil driving the bus last time. Oil was driving everything. The vixen oil were moving together. The market was down oil was up. And I don't know if people are getting a little more comfortable with where the level of oil is even though it's still high or but it is driving things less. But obviously having said that, if we have some bad news and oil spikes, you know, quickly, it's going to drive the bus again.
- [37:40]
Brent Kachuba
Yeah. You know, and I had put in in my conspiracy corner the 2008 crash where oil super spikes and then you have all these other cascading issues. Right. And so being correct on the idea that realize volume starts to move was right to a point. We were given these higher oil prices and the equity market just really didn't and equity volume just didn't really, you know, move much. So looking forward here into where we are, this oil equity volume correlation seems to have, at least for the time being, snapped. And so the red line is just the correlation between VIX and uso, which is my proxy for oil. Historically these things really aren't really, you know, related. Right. It's like on a normal the day I don't care what oil is doing and I'm not gonna use that for my VIX proxy. If there's a credit market crash, oil's probably not doing all that much. This is the latest last five data points here in in black. And you know, a couple days ago we just had such a massive VIX and vault collapse. That's what this day was. I believe this was the seventh and the into the eighth. So there is still somewhat of a relationship here, but that's really cooled off now. And here is mid March when we're talking about the correlation right between this is the March OPEX effect basically and this is oil in blue and the VIX is in candles. And then what you see here now is after the alleged deal was announced, we had this big gap in oil, right. But equity volume just got, I think you call it shanked. And now you see there's this big divergence there, right, right between the two and oil is holding up. And I think oil is smarter in this situation in that the oil prices have a better beat on what the geopolitical situation is. And I say that not knowing much about the oil space, but what I also think is interesting is that equity vols getting sold down very hard. And I see people on Twitter and stuff saying what don't people get about the, you know, about this risk? Right. The Houthis are still fighting and Lebanon is still fighting and this and that and the other thing, I don't know anything about that. But it doesn't seem like it's very calm over there. And oil holding up is telling me that, you know, maybe it's not all that calm. Right. But equity volume, meaning the vix, is just cascading lower. And it, it's interesting to me because there is a, a path dependency of how I think these trades can play out. And that's kind of the divergence that we're seeing. And so, you know, getting to the point, I think that after April opex we may see, see these things sync back up. So we go through April opex, barring some material change in the Iran situation in the next couple of weeks, or, excuse me, the next week after equity expiration and VIX expiration, we may see volume kind of move back into line where volume gets a little bit more rebid and we'd have to kind of resync this re. Resync this relationship. That's kind of what I'm thinking is going to happen right now that we've essentially just ended up in this situation where the correlations separated right now because there's some short term piece, but we need that long term piece to sort of pack it up, you know, break that correlation forever. I don't fully understand the war situation, but this is the contango, this is from Javier Bias at Bloomberg. And I included this chart because the best explanation that I have, and a lot of you are probably going to throw your shoe at the screen at this. So I'm not going to dig into it too much, but it's just the idea of the taco trade where short term, the crude contracts are bid up. There's a huge backwardation here and people have just not bought into the idea that this is going to be a lasting confrontation. So I'll park that there and say this to me is the best explanation as to why we seem to have equity volume kind of get sold off on, you know, rumors of a peace deal just because people believe basically Taco.
- [41:35]
Jack
Yeah, I mean people basically don't believe oil is going to stay up.
- [41:37]
Brent Kachuba
Right.
- [41:38]
Jack
Whether they're right or wrong, we don't know. But I mean that's, that's what the curve is telling us. Right?
- [41:41]
Brent Kachuba
Right. And then the other idea is that, well, the demand destruction from higher oil prices then also means that longer term oil goes down too. So you know, there are these other kind of 2D 3D chess ideas going on. Again, I'm not going to delve in that because I don't quite understand, but this is the best under this is the best explanation for, you know, why we didn't seem to get that equity volume just released because people are still digesting this is fairly short term situation. Like no one actually believes that Trump was going to drop a nuke, I guess is what the situation. And you're like, okay, I'm, I'll take that.
- [42:14]
Jack
Yeah. And what you're saying is why like the oil, the macro guys, you know, oil shocks are one of the hardest things to deal with because it's short term inflationary, but long term it's economically problematic. So it's like for the Fed or for anybody like figuring out what to do with these oil shocks, I mean hopefully we get what's on this curve. Hopefully we get prices come down because if they don't, it's a very challenging thing for markets to deal with.
- [42:33]
Brent Kachuba
Yeah. And I think, you know, like Marjorie Taylor Greene, her seat just went to a Democrat. That's the first time I've forgetting how long that that seat went that way. So you have this political impetus also where you know, I think Trump probably realize he's got to try to put this away as fast as possible. And you know, so he's behooved now maybe to bring out, you know, piece of, there's all these interesting dynamics of why this situation's got to get cleaned up as quickly as possible, I think. And I think that's what people are betting on. Again, I'll move through that before people get more agitated about my oil macro discussion. But here's what's interesting to me about this and where I think some of my data comes in. This VIX move in the VIX crush, you know, was very, very big. And people will say, well it's not the biggest point move in the VIX ever because you know, you have some situations where the Vix was at 80 and the next day it drops to 60. So that's a 20 point fall move. So if you try to make this on a relative basis, I, I saw that this was the second biggest VIX move From mid Vix 20s to we went from Vix 20 to 25 and that was the second biggest Vix move ever. When you're looking at that band, right? And I had 20 different ways of looking at this and this was the simplest. Only one time ever did we have a bigger drop from Vix 25 down. And that was in 2007 in the GFC right before it they had a surprise rate cut of 50 bips. Marco was expecting 25 and that led to a Bigger VIX drop. That's the only time in history that we had a bigger VIX change, right. So that's a massive drop and I think that frames it in a really interesting way.
- [44:18]
Jack
Is there anything like about the dynamics of what's going on that it was able to drop that fast? Is it like anything interesting behind the scenes that tells us.
- [44:24]
Brent Kachuba
Yeah, so what I'm showing you here is the market maker gamma exposure related to VIX contracts. And the reason I'm showing it like this and I kind of spooled this up for this presentation so it looks a little bit different than my normal charts here. But what we saw was in the S&P 500 and in the VIX just the options space. So you could also sell VIX futures which I know is a popular trade or short the VX ETNs, et cetera. But what we saw was bigger VIX call positions at 30 strike and above they got closed and people rolled that protection down, right. So what that did was we saw basically people sell calls in vix buy VIX puts, close up their S P puts or roll them down and out kind of monetize them essentially. And so what this is is the market maker gamma exposure, remember negative gamma means that market makers are short options in this band. And so to get out my fancy pen tool again what that means here is market makers into the 31st and the first kind of particularly, right, they had on a very heavy short gamma position, right? What does that mean? Vixen vault starts to rise. They got to start hedging that position. They would hedge it by buying VIX futures or shorting S P stock, whatever however it might be. But that's bearish order flow would have to come into the, to the equity market due to that positioning. Does that make sense?
- [45:49]
Jack
Yes.
- [45:50]
Brent Kachuba
And, and then what is down here market makers are, they have positive game exposures. Means basically they're long, they're long puts and then they're long these calls way up here. So the belly here of their real risk with expiration and this was the March 31st to the 1st, right, the day we rallied around the JP Morgan position. So you saw that exposure really drop quite a bit. And then here's the seventh to the eighth where we got that second piece deal and you just see this exposure tranche down, right? Come down and come down and come down. And so what that is telling me is that those hedges are, are not getting completely cleared up and removed but the weight of exposure for that market making community and the ones that Are liquidity providers seem to really drop quite a bit. And so when I think about the fastest reversion ever, right? Or one of the fastest reversion ever, one of the major sources of alpha in this current market is volatility, right? We all VIX mean reverts. It's like this mantra and it does over time it mean reverts. And so everybody wants to try to play that. And you'll see Mer and other people put notes like the, the. The Sharpe ratio of selling puts right is as good as it, you know, it beats equities 10 to 1 or whatever. And so there's this idea that selling options volatility is a, is a real way to generate alpha for your portfolio or just as a, as a strategy in and of itself. And so people are always waiting now for that opportunity to smash that ball down, right? To essentially short VIX is the way to say this. And so you see that exposure really reduce for the market maker here as a sign to me that that's actually what happened. Right. And so what does that mean? Well, the VIX is an index that measures the price of S and P options. So when the market rallies a bunch, the VIX is naturally going to go down because the options are going to get cheaper. Right? The options that go into the VIX calculation get cheaper. And then when people are selling VIX calls and selling S and P puts, those options that go into the calculation get even cheaper. So you have market rally which naturally leads to the VIX come down in price. But then you have this extra fuel of people selling options positions that make the VIX calculation drop. Right? The VIX index drop as well. And so there are, it's sort of this reciprocal feedback loop. Then volume comes in, equities have to get bought, makes volume come in more, means more stock has to get bought, right? And that's the feedback loop that snaps in so effectively now. And not only that, you have this whole zero DTE community which can pile drive that thing even a little bit more by forcing the equity market to go up even higher. 0dt options don't go into VIX calculation. But when you push the equity market up right, the, the based on we call it skew slide options naturally get cheaper which forces the VIX to, to. To decline in price. I said a mouthful. Hopefully you could take away some of that understanding. Let me know if that was bad.
- [48:50]
Jack
It seems like kind of like a through line through. The whole episode though is like when we get these VIX spikes and we get the Market down, people are like, this just can't continue. And they sort of position themselves in such a way that they're going to benefit when it doesn't continue. I mean, is that right?
- [49:01]
Brent Kachuba
Yeah. And, and a lot of this is just reciprocal or reflexive in nature. Right. It. And, and because the flows I think now are so automated and, and people are aware of volatility as a, as an asset class. And, and the options market's getting to be bigger that when the market rallies 3%, you get vols dropping so fast it makes people have to buy more stock. Right? Makes the hedgers have to buy more stock. When they buy more stock, the S and P goes up more, volume comes down even more, and that's the feedback loop. Right. And so you get these excess moves and these surprising moves in both directions. Right. Sometimes volume spikes more than we think it should because liquidity gets pulled. But in this case you just see again, these, these. It's just a momentum machine basically that spools up and then when you see that momentum and S and P rallies 3% and the Vix goes down at a record basis, people go, no one understands the, the Iran war. This is ridiculous. Has nothing to do with that. Right. The VIX isn't actually a measure of fear, it's a measure of S and P options prices. That's all it kind of is. And so when you look at VIX and say no one's scared anymore. Well, it's not really necessarily that. It's just that volume got pounded because people are trying to extract that alpha right of volume mean reversion. Now the VIX is completely mean reverted. So that alpha is not really there anymore. And that's why it's interesting to me say, well, the volume premium's gone and we're going to go into options expiration next week. So now do we start to get a more responsive equity market to the headlines? Right to those things sink back up a little bit. You know, when Trump tweets Iran's not holding their deal, the market doesn't move much next week after VIX expiration. Opex, if he tweets that, maybe we get more of a response.
- [50:50]
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- [51:22]
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- [51:52]
Jack
I need with my client calls and stuff is we start, we start on a daily basis with the tweets. We start going up and down 2 or 3%. It's no fun for anybody. But you're probably right. It was probably where we're headed.
- [52:01]
Brent Kachuba
That's my favorite time. I mean, I don't want it in the context of war, credit crisis, sure, but people, people, I'm sure as an
- [52:08]
Jack
options trader, like, that's the best part of the most fun time, right? When you're getting those swings back and forth, it's great.
- [52:12]
Brent Kachuba
I mean, there's a lot of mispricings that you can try to exploit. A lot of interesting trades you could set up. You know, there's a lot of interesting opportunity, and the risk reward gets a lot better. Days like today, you know, the market's pricing in 35 dips of movement. It's like, what are you gonna do, right? Like, it's just boring. So.
- [52:29]
Jack
So when you think about, like, trade opportunities as an options trader, like, are those the best environments? The environment. The environments where we've got crazy volatility.
- [52:36]
Brent Kachuba
Yeah, absolutely. Vault premium gets rich, you know, so there's a lot more opportunity there. That's trade structures you can set up get better. You know, you want to buy cheap options and you're hoping for volatility, right, because those options will pay off more if we get a big, you know, move in a name, for example. So you really, you know, you want that change in volatility either from high vol to low volume or going from low ball to high vol. That's where the money is sort of made. And, you know, you get the markets where nothing's going on and the market's pricing in nothing going on. It's, it's, it gets hard to sit there and, you know, I guess now you can play with your open AI and make some new apps or whatever. But oftentimes it can get quite boring.
- [53:17]
Jack
So this next chart you're looking at realized volatility.
- [53:19]
Brent Kachuba
Yeah. And we generally watch one month realized volatility as the barometer for what's happening. But in this case, also pay attention to five day volume because what this is saying is how much movement do we have for the last one month on average or five days. And this is an annualized number. And so why this matters is because you can see the trend here was higher, right? And five day volume is now at 15, let's just call it 16%. And one month is at 20%. 20% is 1.25 daily percent daily moves in the S and P. So that's decent amount of movement. And what you got here was a big spike when the market was really crashing around that JP Morgan 331 expiration time. But you can see that short term volume is mean reverting, but the volume mean reversion now is even faster than it used to be. So it's like the Vol of volume is greater than. And to kind of put that into context a little bit here, what this is comparing is the VIX versus realized volume. So if you remember in our last episode we were talking about that record spread, right? The difference difference between Vix at 25 and at that moment S and P realized volume is 12. So that spread of 13 to 15 points was one of the bigger spreads you've ever seen. Particularly with the Vix at 20, it's very unusual to have the S and P at 12, right? That's, that's 75 basis point daily moves in the S and P. We, we finally started to get that realized volume, meaning S P finally started to move. And then once S P starts to move, we get the peace deal and the VIX collapses. And so why does this matter? Because we were up here before, but now we're at this level, right? What does that mean? The realized volume, the volume premium is now gone. So if you're trying to say, hey, I'm going to short volume as an asset class and get, get me some of that premium, the premium is kind of gone. You need the market to go very calm again. So like you would need the S P roughly to say I'm going to trade back at a 12 realized volume and you have the Vix at 20, go, okay, that premium is back. But in. Until and unless the S P now just cools its jets, that premium isn't so easy to harvest. Does that make sense?
- [55:24]
Jack
Yeah, it makes complete sense.
- [55:26]
Brent Kachuba
So, you know, this spread being gone is interesting. You can make the case now over the next couple of days that S and P is just going to kind of pin. So there's a little more volume premium that can kind of drift out of this market. But when that volume premium is really wide and it gets smoked like it did, that makes the S and P rip like a trampoline, right? We just bounce higher. And so now that volume premium is gone, it's going to drift out. Kind of this charm effect or vanna effect, they're kind of related. So, you know, that bleeds out. And that's lightly supportive of markets into expiration next week. And so I don't think a whole lot is going to happen, obviously, barring an Iran headline of some kind with
- [56:04]
Jack
this next one, this zero dte straddle. Before we talk about what it means, can you define what that is?
- [56:08]
Brent Kachuba
Yeah. So what this chart does is every morning at 9:30 it says, look at what the price of for an at the money option. So if the S and p is at 6800, we look at the price of the call and the price of the put for today's expiration, right, the zero dt. And that's called a straddle. Buying the call and buying the put at 6800, you add those two numbers together. Now you can normalize this and tweak a little bit. But I just add those two numbers together because it still conveys the point. The straddle here is in terms of dollar value, right? And what we see here now Today, Jack, is $31. And you can see that that is the cheapest straddle price that we've had in at least a month, if not more, right, since the start of the Iran situation. So what does this mean? $31? Well, if you take $31 and you divide it by 6,800, right, you come out with something around like 35 bips. So to me, that is a dirty way of saying the S and P that, that the options market is pricing in for today. Today's Friday, February 10th. 35 basis points of movement. That's nothing.
- [57:11]
Jack
It's like not a lot at all.
- [57:12]
Brent Kachuba
Morning market does not care right now. You think about this in terms of that volume premium getting squeezed out, right? And you think about that positive gamma chart that we said. The market makers are now positioned to kind of keep things stable right now. And if you're in the zero dt space, do you care about Iran right now? Not really. Because your position's going to expire at 4pm and then it's the weekend. What do you care? Right? Your position is long gone. So what you get is now the zero dt and the short term options. That volume just gets crushed because there are risks. And you talk about the known unknowns. Everybody knows the possibility that Iran could get a whole lot worse. We hope it doesn't, but that's a problem. But it's not today's problem. Right? Everyone's sleeping over there right now. And you know, and so 4 o', clock, after 4 o', clock, something may happen. Who knows, right? But that's not my problem. If I'm selling that straddle, it's like
- [58:03]
Jack
their risk, the 0dte people's risk is the intraday tweet of some kind. Right? I mean, that would be the thing that would blow them up.
- [58:08]
Brent Kachuba
Yeah, exactly. And you know, there you can make the argument that, hey, this is too cheap. Now, with our new trace positioning, we're seeing some really big 0dt trades in the market today. So it's like, okay, I'm not going to fight against that position because it just doesn't make sense. But at the same time, do you want to sell that idea that, that the market's going to move less than 35 basis points? Like, wow. I mean, just because you don't want to buy something necessarily doesn't mean you want to sell it. Right. And so you start to get this price for perfection thing where we've talked about this in the past many times, where the market's just priced for perfection to the point of your tweet. One tweet. And we're moving 35 bips in a second. Like literally a second will gap lower. Right. So, you know, it's a balance of risk. Again, I don't want to buy that, but I don't want to be sitting there selling this volume anymore. Right. Because that's so cheap. It's like, what? Even if you're right, what are you making? Basically nothing.
- [59:02]
Jack
So it's become a popular trade. Right. Even though it may not make the most sensible trade. Aren't a lot of people doing it?
- [59:06]
Brent Kachuba
Yes. And, and you know, and again, the point of, you know, how can the VIX collapse so fast? And you say, well, Brent, 0dte isn't related to the Vix, but when you, when you crush the front end of the volatility curve, right. Or. And just milk that, it kind of reverberates out in, out in time. So what do I mean by that 0 to D, get in there, cause the market to rip and you squeeze that volume. The short term, well, the volume starts to shift or come, come down and in longer dated expirations. Right. So, so there's a relationship there. And you know, they've milked this, right. There's nowhere else. Like you're not going to have a 30 or 25 basis point straddle price. So there's nowhere else for this to go except for up. Generally what happens then is people come in and sell it again and sell it again and sell it again. And then you have the tweet and then suddenly these people go, oh, they have to cover. And then ball sort of jumps, right? The risk sort of jumps and the price sort of expands. It's like a kid keeps putting his hand in the cookie jar and you're like, stop, stop, stop. And then you slap his hand. Finally he's like, oh, okay, I get it now. You know, so that's the kind of, that, you know, it's kind of the moment we're at. And this lines up with expiration, you know, next week where, and I'm not saying we should get Vix 80 or something, just the 1 2% normalization. Vix kind of wakes up a little bit and some mean reversion off of the gains that we had.
- [60:23]
Jack
Yeah, it's just interesting to me because like, I know nothing about options, but if you ask me like, do I want to, would I want to sell this? I would say no. Like, would I want to bet that the market's going to move less than 35 basis points at any given day in the environment we're in? Like, I would say absolutely not. But like a lot of people are doing it.
- [60:38]
Brent Kachuba
That's right. And, and so, you know, all these people that like to sell, you know, I talked to a lot of retail traders and they're like, I sell zero D options and that is the only thing they do. Right. And, and I'll say, well, you know, are you sitting out then during these times when ball's too cheap, you know, it's like there's not. Today's, today's a terrible day to sell options. Risk reward wise, right? Well, no, because I sell options. This is what I do. And you're like, you know, well, you can buy options or you can choose to do nothing. Right. In, in these environments. But, but I think by and large they're like, this is my opportunity to make money today. It's a new day. I gotta sell something, I gotta Sell a call or sell a put. Like what do I do? Like a crack addict. And so, you know, you see these flows systematically come in not, not all of it is kind of, you know, retail, pure retail. There's a lot of obviously sophisticated flows coming in, doing stuff as well. But the overall point is still the same. It's milked because you can't really get much smaller moves in 35 basis points. And yes, you could get a couple days in a row of 25, 35 basis point moves in the S and P. But at some point it's going to move more than that is being, you know, priced in this next chart
- [61:43]
Jack
is talking about what you've alluded to throughout the podcast here, which is we've, we've got earnings season coming up and in addition to the tweets, what's going to be driving us here is probably the earnings.
- [61:50]
Brent Kachuba
Yeah. And earnings start on Tuesday I believe with the banks. They start to report. And then you get Taiwan Semi Netflix and then you know, a little bit just after options expirations we started getting the Teslas and some of the mag sevens of the world. Right. So the credit stuff is still simmering depending on who you listen to. Right. And I think that the bank earnings updates may be interesting to that obviously asml Taiwan Semi reporting on Monday, Tuesday are gonna be our first look at how the AI software semi chip space is doing. So the idea of is there a bullish vector here? If these guys all start crushing it and they give us a reason to believe in a new bullish narrative outside of the most bullish thing being hopefully the war ends, you know, then, then there may be a reason to start to move up over the 6800 level, you know, after options expiration and you get a cooling of tensions. Okay, maybe we do rally back to all time highs. Right. But we, I think we need that narrative, we need that thing to kind of grab onto and earnings are, are going to be a great moment for that. And, and I think give some people some new stuff to talk about.
- [62:55]
Jack
Are Nvidia earnings as important as they once were? Like we would always talk about that. You'd see kind of in the volatility, you see the spike like for, for expected Nvidia earnings. Is that still there or is it, is it kind of reduced over time?
- [63:05]
Brent Kachuba
It's, it's definitely reduced over time. It's still there. It has reduced. They report a lot later than everybody else. So we'll have the rest of the mag seven out a good what, two weeks I think before Nvidia they're closer to kind of middle, middle of May. So you know, Taiwan, Semi I think is, is a big proxy for them because they do so much business together. And then you know, you have Google, Apple, et cetera. They're going to be the last week of April. So we'll have a really good picture coming out of OPEX of, you know, maybe a very bullish narrative or a bearish narrative. And on that point of just general positioning on one hand, I'm sitting here saying, well I'm looking for some consolidation right after April opex. But the most interesting trades I think there are in the market right now are looking at buying those mag seven calls for, you know, two to three months out. Some of those names are very, very cheap and no one is leaning to the call side. And the way that I can back this up is if you look at this chart right here, this is put SKU rank. So what we do here is we look at one month expiration options. We say what is a 20, we call it a 25 Delta put so slightly out of money put. How rich or cheap is that? And what you can see here is that it's about as rich as it's got as it's been, you know, since early 2024. So that includes the tariff drama of last year. Right. So they're pretty bid up puts are. What about calls? Calls are the opposite situation, right, where there is not nobody really wants calls right now. And so that's the side of the boat that everyone's on is everyone's slightly hedged for downside right now implied volume overall in the single stock space is mixed depending on the name you look at. But the reason that I also like these single stock calls is because implied volume options prices are held up due to earnings. So if you buy like a two month expiration Nvidia option, earnings coming up in a month is gonna hold up the implied volume of those options. So they're already very cheap and there's not really much else for those options to decay. And so I really like the idea of buying some of these tech calls because I do do believe that they're quite cheap and just substantiate that a little more. In this case we have our compass and I know this is one that you like. Here's low IV ranks. So kind of just cheaper rich options. And then if, if we're heavy into puts or traders are heavy into puts, that shows up on the left side of this chart with calls on the right you know, you can call this pretty high correlation that everything is grouped in here, but these IVs are all starting to reflect earnings. Right? And that's why the IVs are getting so rich. But the core, the core idea here is that everything is on the put side of the fence, right? We're all concentrated on left this, everyone's in puts in all these names. And so what I would like to do and the kind of the idea I'm pitching is I can sell QQQ and Spider volume and buy Tesla and Nvidia Vault on just a relative basis at a high level. Like IV rank for Nvidia is like a 5. And I believe if the market rallies, let's say 3 to 5%, Nvidia is probably going to go up. Right? I mean I feel like that's a pretty safe bet to make is the biggest stock in the index. So you know, there are a couple of these type of opportunities where I think you could fund Nvidia or Tesla calls with saying selling spiders or something like that. And if earnings catches this stuff and we start to go this way, you know those stocks could really rally as people have to reposition into the bullish side of this equation. But here's the other nice thing about the Nvidia calls. Let's say we buy in cheap Nvidia calls and we're totally wrong. And God forbid the war in Iran gets totally worse and things just crash. Well, you bought cheap calls and they went to zero. Okay. Like that's the, that's the best way to express bullishness is to buy something for cheap and it goes to zero. Okay. You know, no, no problem. As opposed to if you get into Amazon or Microsoft which are pricing in a lot more risk, those options on a relative basis are more expensive. So I'm less interested in those right. If I think a bottom is in and they may bounce. Okay. Selling some puts or put spreads might be interesting there, but particularly on this Nvidia and Tesla stuff they seem to be cheap. And if you look a little bit further, you'll find there's some other tech names that are trading for, for pretty reasonable prices as well as industrials and some other things. So I think you can kind of fund some, some interesting trades here where you're selling that index of all to buy single stocks. And, and, and those are the trades that I like at the moment given the situation.
- [67:25]
Jack
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Brent Kachuba
Can I ask it to turn our meeting notes into a launch plan? Sure.
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Jack
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Brent Kachuba
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Jack
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- [68:11]
Jack
Yeah, it's always interesting me as a fundamental person, like, this is not something we're going to comment on, but like how people, what this says about what people are thinking, you know, the fact that Amazon and Microsoft are more expensive, Nvidia and Tesla are cheap, that obviously says something about, like what people are thinking about the stocks and the risk of the stocks right now, which is, which is interesting just to think about.
- [68:27]
Brent Kachuba
Yeah. And, and look, you know, the, the case for Bitcoin being, no, not so great with Coinbase is fine. You know, you can kind of understand this stuff. But the, the, the absolute takeaway from this chart is nobody's interested in calls at all. People are inputs, no one's bidding up calls. And that is, that is full stop. The takeaway from this, vols are a range of, you know, of prices here.
- [68:50]
Jack
Right.
- [68:51]
Brent Kachuba
Amazon, this is saying, is relatively, the options are relatively richly priced versus Tesla obviously here, but earnings naturally raises these implied vols up a little bit. Right. Cause of the event. And then you have the Iran situation, and then there's obviously some idiosyncratic risks of, you know, meta versus somebody else. So there is a fairly wide dispersion here of volume in terms of option prices. But the fact is that nobody is bullish right now. Right. In any of these things. And if they were bullish, you would see dot plots on the right side of the chart. It just, they just don't exist. You want to make the case.
- [69:21]
Jack
So what I was referencing before could really just be a function of the fact that their earnings are coming up sooner, Right?
- [69:25]
Brent Kachuba
Correct. That's exactly right. And so that's why I'm highlighting kind of Nvidia at this moment. But the other, you know, the thing that you would think about and just back to the, back to the SKU chart before is people are positioned for the downside already. So if you're positioned for that and we start to get some downside, well, that's what you expected. So you can close that downside up and it supports the market. And so the idea that we'd never really crashed that violently because it was a well hedged market, I think does have some validity to it. And so kind of to the same thing to the upside here. If no one's positioned for a rally and you start to get a rally, well, that rally could be more expansive than you would expect because simply no one's ready for it. Like no one's positioned for it. So, you know, to me, that's the soft spot in the market. Does that mean that it plays out? Not necessarily. But if I can buy cheap calls as a way to express that, then great, I'll try it. Right? If the calls are super expensive, then you're going to say no. I mean, how many episodes have we done where the calls are ridiculously priced? And you're like, jack, this is ridiculous. You know, you just can't justify buying calls in this situation. Right. In this case, it seems to kind of be the opposite. And so, you know, do you buy a hundred shares of Nvidia, for example, and the market goes down 5%, you're going to be crying. Well, no, because you can buy very cheap calls and if the market goes down, you lost your money on cheap call. So it's pretty defined risk. So that's why I feel pretty comfortable about, you know, pitching this idea at this, at this kind of juncture.
- [70:52]
Jack
So as we wrap up here, you've taken things up a notch here. You've got the summary slide here to bring it all together.
- [70:56]
Brent Kachuba
Yes. A lot of times people will say, you know, Brent, you didn't say that or you were wrong or you were right or, you know, there's a lot of shades of gray. So I was going to be like, pretty clear here. The volume premium is now gone and that zaps the bull run. I think we're going to stall here at 6800, 6850 into Vix expiration. Now if we get an Iran peace deal, we could push up to 6,900. Don't, you know, and I won't have debate about, about that, about being wrong in that instance. So take that indication. So those first two options, you think about the gamma exposure, right, being thick around 6868.50. I think we're kind of capped out into VIX expiration. The single stock calls are cheap relative to the index. Nvidia, Tesla in particular. You can find some other ones as well out there. And I like the idea of selling S and P calls or Q calls to buy those single stocks. And then the last thing is hedge protection was rolled out on the index side. And so it is a, it is a well hedged market, I think, or decently hedged market still. But as we go through expiration, if there's some bad news, right. We could sort of have a little bit of a spicier initial move down, call it back to that 6600 level like I think pretty quickly. But then I think we would kind of get the market would be support and get caught in that area. So there is a little bit of a downside room right now. 1 to 2%. I think that could be pretty easy. Maybe as much as 3% as we move through expiration next week because we don't have that immediate support anymore. Right. So to paraphrase all that, again, I would love to see a 2, 3%, maybe 2% decline next week. I think that could happen kind of quickly. But then I would be monetizing or closing out the single stock calls that. Excuse me, the index calls I sell. Right. And then I'll hopefully be holding essentially free Nvidia or Tesla calls with a look to earnings maybe being bullish. That was the cheap spot of the market. And that's kind of what I'm thinking about into next month. And we'll be able to go through this here in May already. It's like the year's almost halfway over, Jack, and we'll see how these positions played out. Yeah.
- [73:00]
Jack
And hopefully for all our sake, we're not talking about war again. Next time I have a feeling we probably will be.
- [73:03]
Brent Kachuba
Amen.
- [73:04]
Jack
But maybe we'll get you live from the suite of straight up our moves or something if. If it's one ups the treaty. If this keeps going.
- [73:13]
Brent Kachuba
I don't need likes that much, man. I'm all right.
- [73:17]
Jack
Well, Brett, thank you again for doing this. Thank you for joining us and we'll see you next time.
- [73:20]
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- [73:41]
Brent Kachuba
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Brent Kachuba
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Jack
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Brent Kachuba
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Brent Kachuba
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Brent Kachuba
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