Brent is joined by Imran Lakha of Options Insight to discuss the positioning around May OPEX.
Below is a transcript that is automatically recorded – please forgive any typos.
SUMMARY KEYWORDS
vix, market, rally, s&p, crypto, position, calls, bit, vol, trade, point, equities, buying, options, put, stocks,
people, big, week, short
SPEAKERS
Imran, Brent
Brent 00:00
They were flagging is a lot sort of like what you just were talking about that and this is a very
overcomplicated chart here but I bring it up for one reason. If you remember back at the end of
April, April 19, was right before Vic’s expiration, power spoke, I believe on that day or the next
day. And there was this weird move in the market where it rallied about 100 handles and s&p.
And that’s basically this move right here. And this was the VIX got dropped, kicked. It just
tanked. And because expiration is at 9am On Wednesday, the VIX closed rate at 20 at 9am on
Wednesday, and then it just sort of hung out there on Thursday and then Friday, we had a
pretty big reversal and that’s what this is. This is Friday optics right here and a pretty big
drawdown. So the synergy to me is like it’s so similar because again this morning, like futures
were up a lot and I don’t know there was like a couple of like, people were searching for a
narrative and felt like there wasn’t a strong reason. And please correct me if I’m wrong in that,
but I didn’t see a strong reason as to why the market is gonna be up especially ahead of Powell
at two o’clock. And this idea that again, last time, it was the Tuesday before vix expiration that
there was a real strong rally. We got such a similar move today. And it’s another, you know, put
heavy expiration on Friday. And so, there’s these positioning dynamics. I think that I think catch
some people off guard like everyone wants to say, this is the bottom we’re gonna rally real
hard here or this is the end of the world right here. And it doesn’t all have to happen in one
singular move. Right?
Imran 01:39
Yeah, I mean, I don’t think it was necessarily that strong reason for the rally. I mean, Friday,
you know, we got potential some optimism out of China, saying that, you know, the COVID
restriction did towards the end of the month, let’s say the market kind of took that as a
positive. People also saying that the Fed the rhetoric out of the Fed speakers was that, you
know, we’re going to do 50 bits in the next two meetings, and then maybe we’re going to pause
and see the impact of our hikes. Right. So that was kind of a slowdown in the pace of tightening
later in the year. That kind of was taken positively, but they were maybe the things that kind of
lit the match to get the rally going. But then, you know, we were coming from a place where vix
was still you know, around 30 or above and things were a bit oversold sentiment was pretty
beaten up so that you don’t necessarily need that much of a reason just to unwind some of that
bearishness and if you look at some of the most shorted stocks, they were leading us out of this
right like the Ark names were rallying hard, I think our bounce like 20% off is low.
Brent 02:45
I don’t mean to laugh. I’m just looking at this move and you go like this. That’s a big move here.
I stopped 20%. But look at this chart. I mean, holy cow.
Imran 02:56
When when you get leadership from the shittiest parts of the market, you know, it’s it’s nothing
more than a short squeeze.
Brent 03:03
Yeah, you bring I mean, that’s, that’s a beautiful point. Right. And, and I was and it’s something
that, you know, sinks I mean, one month realized volatility is up around I think 28 in the s&p
right now and so the market is pricing in big moves. That’s what we’ve been getting. And in a
very big, you know, put heavy position. So, I couldn’t agree with you more. And that’s why we
say that a lot of times when we’re getting these rallies, they’re short cover rallies, and so don’t
count on them being stable, longer term, you know, moves or shifts in sentiment. You know, I
know WalMart reported last night, that’s obviously not looking very good. Someone else was
getting home depot, which is, you know, hanging in there a little bit better than some of these
other things. But, look, I mean, I think last week was so interesting, and it’s a segue here that
we did break this 4000 level, which we’ve been talking about for a while. But as we march
towards again, this very messy chart here. We’re gonna lose about 30% of the s&p options
gamma position on on Friday, and NASDAQ is basically the same so yeah, we tested and broke
below it was pretty violent drop but we popped right back above 4000. So in our view, we’re
clearing out some of the VIX position. It’s a very big vix call position in the market right now. We’re clearing out some puts below. Here we had just I think crypto liquidation was a big driver
and those crypto names that were in the market just got you know, absolute smoke. I don’t
know you want to touch on crypto for a second. So I think this is just again, the right positioning
we’re gonna bounce here and Powell is probably not going to change anything that he’s
forecasting. Nobody knows really what the path of interest rate increases are love to hear your
comments on that as well. But I don’t think anyone can forecast any material, you know,
fundamental. No one can provide a fundamental forecast for what any given tech name or
really kind of any name in general is until we know exactly how many hikes are in what is
inflation going to do all these other things. So it’s really you know, why why is anyone buying
here, right? Really?
Imran 05:02
Yeah, but exactly that no one’s buying because they’ve got a bullish fundamental view right.
Now, I don’t think certainly not over the next few months, right. I mean, all of the sort of
respected macro. Commentators seem to be pretty bearish with targets on the s&p you know,
3500 to 3000 Somewhere in that range. For a number of reasons, obviously, pretty much in a
nutshell, it’s saying that the only way the only power the Fed has to have any impact on
inflation is to you know, bring the stock market down and bring the housing market down right
and create this reverse wealth effect. That’s, that’s their only tool, and that’s the tool they’re
going to use, right? They can’t do anything about oil prices. They can’t do anything about food
prices from the supply side, or they can deal with this demand side. And they’re going to do
that with rate hikes. Basically now, the only sort of saving grace might be that as we’ve started
to see some growth concerns come in, and most of those have really been coming from China. Why China down as impacted Chinese growth. We’ve seen some horrible macro data out of
China over the weekend. You know, worse than expectations, even though expectations were
already going to be low. So whilst China is happy to beat the shit out of their economy, that’s
not good for the global economy, right? And that’s reducing demand that’s creating commodity
prices that are rolling over a bit and that allows maybe the Fed to slow down a bit on rate. It’s
kind of the balance we’re kind of tooing and froing between you know, are we gonna go into a
recession and if we are that’s almost being met by a rally in the market to say, okay, that
means that Facebook will screw the market too badly, because Because growth is so bad,
right? Yeah. I know the tug of war that’s going on right now.
Brent 06:52
It’s very it’s very well put in and I think that the the idea basically, the Feds gonna keep going
until they break something is basically what I have in my head and it’s your chance to find a
solid on Twitter, please, you know, I see a lot of things before but apparently Shanghai did sell
a single car last month. You know, and even if that’s off by a magnitude of 10 it’s still an
unbelievable statement, right? I mean,
Imran 07:19
yeah, retail sales, industrial production. They’re all like negative prints. They proper screwed.
They’re cut. I mean, there’s really is though, there’s got to be temporary, right? I mean, their
policies seems a bit crazy, like how strict they are with like, full of cases or deaths or whatever
it is, but at some point, it can stop and they got to re open and they gotta let people do what
they want to do. And that’s going to, in theory, create a bit of a impulse of demand, and things
will come back. Right. So I think we’ve got to be careful there about getting too bearish. And
then on top of that, you know, they’ve been talking about stimulating what they’ve been talking
about infrastructure packages and stimulating and I think late in the later half of the year, a lot
of that is coming right the Chinese cycle is quite far quite far ahead of ours. And he’s kind of
inflicting higher, whereas west we still got some pain to come over the next few months.
China’s kind of coming out the other side of their pain. They’ve been in the pain for much
longer. And so I feel like there may well be a trade in there. To get long China somehow, like flu
spreads or whatever when we get green light. Yes, they reopen. Yes, they’re stimulating again.
Away we go. All right now, risk assets over overall you want to be cautious and US risk assets.
You want to be extremely cautious and probably use these rallies to either raise cash flow or
get into short positions.
Brent 08:44
Yeah, I echo that sentiment at least in terms of the US market markets oil this is the this is the
Yeah, I echo that sentiment at least in terms of the US market markets oil this is the this is the
K web, the internet the Chinese internet ETF and the destruction there’s just I mean it’s it’s
really something else. And oil Zealand when that came to mind when you’re talking about you
know, China maybe coming back a lot because that was sort of a story as to why oil pause in
the first place. Right. And I think we’re up around 113 I think I have that here somewhere. But
you know, it was a little bit over, like 105, maybe whatever it may be, and if China does come
back online and oil has been able to maintain that $100 level. I mean, that’s it could be, you
know, a real second leg there as that narrative of like, well, we, you know, Chinese oil demand
or energy demand is really kind of tanked here. That was a good point. But
Imran 09:31
you’re absolutely right on that front. I mean, the thing to watch on on the oil is that it’s
compare it to the metals the metal sector is getting crushed, right? Yeah. Copper aluminium. I
mean, you look at aluminium chart is frightening how much that’s come off, right. But whereas
oil is holding in there, and it’s holding in there for a number of reasons why OPEC is struggling
to meet production. quotas. Right. So OPEC spare capacity just isn’t really there. Obviously, you
know, Russia and sanctions are hitting supply. We’ve got potential sniff that China COVID
situation is improving. And then the US is entering but you know right us is entering peak
driving season. European air travel holding up all these things are showing that demand side on
the oil isn’t really collapsing like you think it would, and the supply issues are still there. That’s
what we’re seeing.
Brent 10:22
Yeah, in the in the commodity volatility too, is it’s it’s been remarkable how much has kind of
come down and I’m not sure how much all that continues with the energy stuff, the stuff where
there’s real supply issues, you know, seems like it’s gonna continue because if you get the
obviously the economy coming down, the Fed just looks Fed says look, we’re going to just
completely stop the economy here to just crushed demand, and that’s going to bring prices
back in line, you know, still doesn’t fix you know, oil production in so many ways. And I don’t
know what what oil prices and gas prices are out there in London where you are, but you know,
diesel here is 650 a gallon, which is the highest price I’ve ever seen and and you start to talk
about some of these things. Well, companies now the fundamentals are the lifeblood of our
economy is trucking, and that’s how everything happens. Definitely here in the United States
and and they start to worry about not just the cost, but is there going to be a supply just period
right. So
Imran 11:22
there’s products like diesel gasoline, jet fuel, those prices have just gone parabolic. Right. I
mean, they are one of the big reasons as well why crude prices have been well supported by
because prices of the products are just going crazy.
Brent 11:35
Yeah, I’m not sure if I have that. That gasoline chart here but But at any rate, you know, I think
we’re I think we’re along the same in the same frame of reference here that again, you know,
we’re I think we’re along the same in the same frame of reference here that again, you know,
there’s no reason for the Fed to sort of back off or offer support for this market. We’re gonna
get this sort of positioning rally and we’re getting like these cascading destructions I mean, first
it was the mean stock destruction and then I want to pivot slightly to crypto because that was a
story of last week. you track the crypto market closely and and I think even if you don’t, at this
point, care about the crypto markets that much. You have to when these companies start right
when you get Coinbase and mstr. And yet these are all smaller cap companies but if you start
to get a liquidation events there credit events there that that just as like some some whipped
cream on the on the bear Sunday, I guess.
Imran 12:30
I mean, it was a pretty epic move in crypto after so it’s probably one of the worst weeks in a
long time. Brilliant, no dollars of market cap wiped out between Tara and Luna. Yeah. I mean,
you know, I was never invested in Luna or Tara. I mean, I stick with the large caps right. So my
exposures are Aetherium and Bitcoin. I dip my toes a little bit in Solana but that’s about as far
as it goes. But you know this the the idea that these guys were like you know, trying to peg to
have a stable coin and then back it with Bitcoin collateral and having collateral that isn’t at vol
asset against your stable coins sounds a bit nuts, right. Like think about I mean, I I don’t know
I’m sure they had reasons to think that that it would work. Clearly. They were proven wrong,
right, but and they got taken to the woodshed but, you know, in terms of crypto markets
overall, you know, we were looking for a downside leg. We thought it was going to be driven
more by the equity sell off than anything particularly crypto specific. Obviously, this was a
catalyst for it to be a bit more crypto specific, but we had a big flush out. The old coins got
absolutely destroyed Solana effects were down 50% apiece. Even Aetherium touch 1700 Right,
which you know, a few weeks ago you’re looking at that that was miles away. Right. So I think
we’ve reached some quite interesting levels. If you obviously you look at volume skew. So
skew. I mean, just think about this right? 25 Delta skew, in short dates got to like 30 volts puts
over, right? That’s astronomical, right? That’s pretty much as high as it ever gets. It got there in
May last year, when China was liquidating and getting out of crypto. So the fact that it
managed to get there so quickly, kind of gave us a bit of a signal that things are probably a bit
overdone now. Yeah. And then after the terror peg when they started to go off to tether, right,
which is obviously the biggest stable coin in the market. They’re trying to break the tether peg.
And that actually traded down to around point nine five or something but managed to recover
because they redeemed about $7 billion worth and showed that it had the money to be able to
do that. So that kind of recovered that went back towards parity with the dollar or close enough
and then that’s where the recovery came in. And we got nice temps in bounce off those lows.
Right. So on Friday. Interesting time.
Brent 14:57
Yeah, and that’s so it’s a very succinct analysis there. And you know, we were looking at some
of these names like Coinbase. At one point somebody flagged yesterday. It was late late last
week that the the January straddle and Coinbase when the stock was trading around 50 was
going for $45 was the straddle man alive. You know and so what what I love in this market is
you get such incredible vol there you know, it reminded me of me mania a little bit only those
were crashing up where vol just blows out and skew gets so crazy and all these wild things are
happening that you can find some great risk reward in those situations, and it’s these
liquidation events, right that that sort of whether you’re liquidating buying the cover or selling,
you know, selling short.
Imran 15:46
That’s, I mean, that’s a perfect reason why you need to have some cash on the sidelines, right,
because that’s exactly what happened, right? I mean, I didn’t look at the vol market and
Coinbase Coinbase because I assume that it was pretty untradable right, given how volatile
things were. But I because I had cash on the sidelines and I had I had already got a small
Coinbase position, which was massively underwater but down at $42. I mean, it was a no
brainer to double my position, right. So I was able because I had that cash lying around, I was
able to then double my coin base position in the 40s. And two days later is back in the 70s
again, so then, you know, so by having that cash, I’ve now flipped out that position that I
bought in the 40s and I’ve basically got my cost basis down on my residual position that I
started was everything I was underwater, I’ve kind of made it back by being able to
opportunistically by that ridiculous crash that happened and when it opened down things like
down 20% Three days in a row or something. Yeah,
Brent 16:44
yeah. I mean, it’s it’s yeah, it’s been unbelievable. And the nice thing I get, I don’t wanna say
the nice thing but but but the thing here is you understand the catalyst, right? We’re aware of
what the catalyst was, we’re where there’s a lot of fear. And people start talking about
Coinbase, basically, defaulting and these kinds of things. It’s, it’s sentiment gets extreme and
it’s great place for options because you have that fixed risk reward now, just sort of in general,
when you get these high ball environments, how do you like to play upside with with options
because we’ve talked about before that you don’t really want to buy calls when balls just
through the roof, right? Because if you do get a rally, ball is going to come down so your your
calls really don’t pay off. So do you typically look at one by twos or what sort of like go to
Imran 17:26
type of structures that I was doing in crypto when we were at levels where I thought okay, kind
of bottomed out we’ve probably got a 10 20% rally, generally very short dated, call ratio
structures. So when I do like we’ve quit with Bitcoin down at 28k. Doing something like the 30k
calls versus the 32k calls, one by one and a half or one by two, depending on like how
comfortable you are with the breakeven. Obviously if you do it with a one bite if you don’t want
by two your breakeven state 4k ish, if you do, if you do one by one and a half, it’s 36. It gives a
bit more breathing room and you can be pretty confident that if we bounce to 34k vols gonna
get annihilated, right because you’re selling that fall 100 Plus, right so so that’s that’s how you
tend to structure it like little bit long. Delta a little bit short Vega, and get more short Vega in
the rally knowing that that was going to work for you. That’s typically what I do. And I try and
find structures that have a breakeven are uncomfortable with in that timeframe on the upside
and trying to get a leverage in terms of the premium I spend versus how much I can make
leverage anywhere between five and eight to one. That’s just how I tend to structure it.
Brent 18:44
Yeah, I think that’s those are useful structures. Even the s&p now like, you know, I wanted to
bring this chart up. So I was running some code to pull this up. This is the implied vol for coin
Coinbase this past week. Obviously the stock hasn’t been around for all that long but the
implied vol just you know, it just went insane. And the other thing was interesting is look at the
put positions that picked up this is put volume here in the maroon color. This is put open
interest in call open interest and so you know the the the boat the deck so far to one side that
it just really blew volatility out and an offer just really interesting trading environment if you’re
if you’re active in options.
Imran 19:23
Yeah, and if you haven’t got a coin base position and you’re comfortable owning it down there,
then you can sell naked puts right I mean there are an amazing trade down there. The vols well
over 100 You don’t have a coin base position is trading at $40 You’re happy to sell the 30 $30
put and you’ll probably get some really decent premium for it and if it goes below 30 You sold it
in a size that you are comfortable taking delivery in then then that’s that’s a no brainer. Yeah, I
did that trade in Solana and a Vax. And obviously selling for that like close to 300 is insane.
Brent 20:00
That’s crazy. Yeah and us here we have a hard time getting access to that derivatives market,
the options market and crypto. So we’ll just listen to you salivate over some of those fun trades
and wish we were there. So that kind of segues back a little the s&p because the structures
that I liked trying to play you know, rally here were called flies or sort of kind of selling put
spreads looking for that rally. But again, just being very careful because you don’t want to get
in that situation where implied vol really drops so hard that you just can’t your your calls lose a
lot of value even though you’re directionally correct. You need to buy deltas really in this case
deeper closer to at the money options in order to I think get a relevant payoff, as you can see,
obviously after Powell we’ve got a decent rally here.
Imran 20:52
Yeah, we’ve been chopping around back to where we were right. Yeah. 100% Right. Yeah, the
worst thing in the world is getting your directional view, right and making no money on the
Brent 21:02
opposite work. And as the worse. I mean, nothing makes me go. I’m out of this business when
that happens. But so, and I know we’re coming back full circle again, but I want to highlight this
so anyone who has a broker’s platform, I guess we all do. And you look at the open interest rate
now for tomorrow’s vix exploration. There are big put positions in the VIX at 25 down to 20. I
think there’s like 200,000 calls just under 200,000 Excuse me just under 200,000 contracts
each add all those out all those put strikes and so again, circling back to the top of the
conversation, we talked about this rally that occurred around vix expiration. I mean, we put this
in our founders note this morning that this was where vix expired in end of April. On Thursday,
we had a very quiet session nothing happened and then Friday the market just totally mean
reverted. I mean, I just I can’t shake that this feels very similar thing where the VIX is getting
driven down. And I had this feeling it’s gonna, again, this is a feeling don’t take it to the bank,
but I had the feeling we’re gonna pin somewhere around 25 just above where all these big put
positions are. So all those puts are gonna be losers. And then that kind of loosens things up,
you know, for Friday trading here. But we will we will see what happens so far. Palace help and
give us this rally that we’re thinking into topics.
Imran 22:21
So I’ve got a good question for you, if you don’t mind, Brent. So obviously the price action we
saw in volatility last week was very bearish for for those bearish, all right. And, you know, given
all of the gamma models, you know, typically assume dealers are short puts and long calls. So
we’re in negative gamma territory, as we’ve traded down here towards 4000. There’s a big
open interest here as well. You’d have to assume dealers probably show a fair amount of puts
there right now, do you? Do you factor in the fact that volatility is collapsing down there, which
is a suggestion that actually the street might not be a shortlist strikes as we think? Because
what if they were part of a put spread? What if a client what if a client bought the 4400 puts
and sold the 4000 puts at a 400 point wide put spread and he’s happy sitting there chilling,
because it’s a June expiry or something right, and dailies are actually getting sucked into long
strikes, which is creating this need for dealers to sell volume, maybe even sell skew. And that’s
the price action we’re seeing in implied volume implied skew. Do you is there a way that you
factor that into your models or how do you think about that?
Brent 23:35
Yeah, that’s a that’s an awesome question. So we’ve had this theory, and we’ve called it the
lower bound. We wrote about if you Google Spock and lower bound, you can read about it and
while we have a base assumption that dealers are short puts, we also believe that they’re long
tail risk, right? They’re long out of money options, aside from maybe their position put spreads
because that’s what people are buying or trading but as we all know, you can’t just be short
puts in perpetuity because if you get a major move and volatile tire, everyone’s gonna get
blown out. And that’s going to be an awful circumstance. So we’ve understood this dynamic
and if you just even watch sort of the VIX and said, Okay, well, why isn’t the VIX you know? You
mentioned some of the skew indicators and things like that. But if you just watched the VIX, the
higher the VIX is still on February 24, which is the day of the Russian invasion into the Ukraine
and despite the s&p being a couple 100 handles lower at one point last week, the VIX still never
took out that hot so, so that is sort of just the the most basic indicator, you could look at it from
our position saying, Look, if if dealers were short puts, and they were worried about this, we
thought vol would be going much higher, right? We thought that, that we would get this
cascade move lower. And the question sort of came back to us is the options market is at this
lower bound. I mean, we have this similar metric called the The Delta tilt indicator. I don’t think
I’ve posted it here. I could show that a second but basically what it shows is that there are
these giant in the money put positions. We believe that dealers are long tail risk, right and
when ball spikes that’s starting to pay off and that allows them to provide liquidity to the
markets. And that’s the whole concept of this lower bound from 4200 down to 4000. Now, like
you said, we broke below last week. And one of the indicators and I want to turn the question
back back slightly to you because you posted something very insightful to Twitter on this topic
is about this delta risk reversal but let me finish that first thought is we had this max put
position. But we also knew that there could be liquidations coming from something that has
nothing to do with the options market so even though we think that look the the options
positions are likely full up, balls not increasing even though the markets going down. Single
stocks where crypto is getting rolling sort of liquidations across, but look if there’s margin calls
going on the stock market’s going to keep going lower if if fundamental guys are shifting out of
equities, and maybe they’re going back into treasuries now. Yields are getting higher or
something I don’t know. That’s just going to also push equities lower even though we think that
that options market makers have sort of a max put position and also trying to buy puts at this
level right with the VIX at 30 and implied vol the s&p You know, short, dated, implied vol still
quite elevated. It’s just very hard to get a payoff in that in that sort of situation. And so I
wanted to talk about some weird price action for last week, but you pointed out something
interesting. So we have this 25 Delta risk reversal looks at the 30 day options, and s&p and it
looks at a 25 Delta put versus a 25 Delta call. Now it’s so weird about this are different. Usually
when this metric is up around negative six or negative five. That is because calls are getting
bought up usually. And that generally tells you people trying to get long calls. So this is one
way we adjust the way that we look at the market. Now in this case, no one’s really buying
calls, maybe some short data positions, but the bulk of positions are puts and this indicator is
shifting up. And you had noted very adeptly or insightfully on Twitter that when you see this
rising up, it’s a signal that the dealer’s positions are likely full and we could get a rally and I
think you said that, you know three days ago or something like that. Walk us through that
dimension a little bit.
Imran 27:17
Yeah, I mean, it’s similar to the argument when you’re not seeing vix spike on making new lows
in spot. Why is that? Right? Why, you know, typically, you see some sort of panic, the fact that
you’re not seeing that you’re not seeing that from clients. You’re not seeing that from dealers.
It means they’re all pretty comfortably position. Yeah. And so that you kind of reaching that
point of exhaustion to the downside, no one’s reaching for protection, no one needs it. And then
once once the last of the selling that’s not options related is done, like the retail capitulation or
whatever it is, then we can get our bounce right? That doesn’t mean it’s gonna be a big, strong
sustainable bounce because there’s no fundamentals driving it, but the options market is telling
you that the panic is in there’s no no one reaching for volume anymore. Everyone’s got what
they need to the downside. Everyone’s scenarios are fine. So that that panic is kind of close to
being over right? That was all it was. I mean, it’s not I wouldn’t say it’s 100% hit rate signal, but
it’s uh, you take these signals as a combination, right? You look, you look for these ingredients,
and then you try and say, Okay, what is the overall what is the probabilistic outcome here
based on all the things I’m seeing and seeing that in fixing that volume? divergence in fixing
skew getting crushed on the s&p? We’re making me think, right, probably want to be taking
some hedges off here. We’re likely to get a rally right and then we kind of did get a decent
bounce off that for now. It’s kind of hanging in there, right? I mean, it’s it’s staying above 4000.
I was looking for it to kind of get to 4130 between 4130 to 4200. I was looking for it to get there
over the next week or two before loading up on shorts again recently, right. But then by then I
think we’ve unwound a lot of the bearishness, we’ve squeezed a few of the shorts and we can
do our usual and go back to trending lower, which I think we’re gonna keep doing for the for the
foreseeable few months.
I
Brent 29:09
Yeah. And a few people are talking about you know, this correlation between vol coming off and
the market rally and that is that is what a lot of people frame is the fan of trade. If you want to
label it but basically when that vol comes off, not only the VIX comes off puts are losing value,
not just from the decline in implied volatility, but also from just the decay right as we marched
towards this fairly big Friday expiration. And so all these puts that are concentrated at the 4000
level in the s&p bring that up for everybody here and then there’s a bunch of points as well at
the 300 level and the Q’s. You know, like you mentioned before, none of these indicators have
a 100% hit rate. But we what you need to do here is you got to put together all the pieces of
the puzzle, right? You can’t in our view, in my view, I should say I can’t speak for him Ron, but
in my view, you know, last week that’s a very tough market to short like yes, it is getting
dropped hard right. But vols really jacked in single stocks across all these different names and
like you don’t you just don’t want to buy a put there more times than not because at that point
you’re literally betting I think on our limit down situation to really get paid out on there. Right.
And so it’s kind of like, you know, it’s extreme positioning. And so the smart thing is, and again,
this is my point is that the only trade and you could do it for fairly cheap with some interesting
and the ratio trades that you mentioned, you know, you can get a really good risk reward if
there’s a rally not the rally doesn’t pay out okay, you know, you want to control your risk and
reward but with that cascade lower yesterday in the crypto debacle and everything else, it just
sort of almost took shorting off the table because it dropped so much. Puts are so expensive.
There’s a max put position, you see skew starting to turn all these different things and, and
kind of the only trade arguably was trying to take a take a shot at like an upside model, right.
Imran 31:01
Yeah. And you know, it looks similar to the trading we’re doing in crypto, right. It lines up pretty
well on s&p, you could do a Friday expiry 4040 100 call ratio that was coming in at around 20
ticks to make 80 ticks if you get to 4100. So you get four to one payout on that really help,
right if you if that’s the scenario play and we were practically up for 100. Now, it needs to stay
there for the next few days for that trade to play out but that scenario is quite possible on
what’s something that kind of occurred to me on the on the whole like why skews getting
crushed? You know, it’s been so telegraph, like how screwed up the macro backdrop is. Yeah,
and that I just feel that a lot of INS D risks so much their equity exposure that actually the puts
selling may well be coming from the fact that some institutions need to sell put some buy calls
way out the money to get some participation in a rally in case it happens because there’s so
underweight equities, right. So I think some of the discretionary Instow community because I
used to see that when I was on on flow desks in banks, right? I’d see hedge funds type in so
those are a bit more bit smaller and using options and stuff. They would just be underweight.
They wouldn’t own the market because they didn’t like it. But whenever we reach these kind of
really extreme low points of sentiment, they’d come in and sell put some buy calls naked, not
willing to dip not willing to change their allocation but just knowing that in case we’ve got a
snapback they participate in some of that upside basically and they’re no problem selling those
puts because there were so underweight those puts effectively get them back towards a bit
more allocation if the market dumped another 20%, which is probably fine. Right? Yeah. That
put flow. I think that skew selling that we’re seeing is partially coming from those type of flows
as well. Yeah,
Brent 32:54
that’s a beautiful observation. I would also say that I think a lot of the selling has been I mean, I
mean stock are speculative Tech has gotten crushed in a way that like the s&p really hasn’t,
right. So the s&p also, I think, has probably gotten a lot of rotation into the s&p at a tech and
out of NASDAQ. And the SP is outperforming and I think there’s certain sectors that are
obviously doing a little bit better energy and things like that, you know, apples down, I don’t
know 10 or 15% off the tie, which is real, but when you compare that to, you know, some of the
moves that we’ve seen on Facebook, Netflix, you know, Pay Pal, some of this stuff’s gotten just
taken, you know, out to the garbage and so I think you’re right, that that it’s not there. There’s
pockets of equity selling and certainly it’s it has this goes back to the capitulation argument in
a way still haven’t seen capitulation. We’re just everything you know, baby in the bathwater, all
goes out, right? It’s been kind of controlled. And more to your point. A tell this was sort of
telegraph, right? What pals goes going to do at the tail end of last year, and if you look at the
position it it drops. So as this delta reading drops, tells you that puts are going more than
money, there’s a larger put delta position relative to calls and when this drops, it’s a bearish
indicator right or tells you that there’s that puts her in the money that trapped in the beginning
of January, this is the March of 2020 low and it stayed down there for this entire year. So far. We’re already halfway through this year, which which told me that look, these big put positions
were put on there. They’re entered into, you know, probably at the end of last year, kind of to
your point, and they just keep getting rolled down and out. You know, every quarter as you
know, these big foot positions go on June has a huge expiration, about a month out from here.
And so that’s why I think we’re getting we get you know, 2% down days, right? We’re not
getting five to 7% down days, despite the fact that seems like risk is escalating. Right despite
the fact that the Ukraine situation popped off and and there they may default and all these
other you know, trying to lock down blah blah, blah. It’s keeping the pressure lower. But you
know, we didn’t get that 60 vix with 7% limit down day, you know kind of any point
Imran 35:06
it’s like the the cohort who has got that discretion to sell has already sold and the people who
are buying are the passives right. The passive flows. The the corporate buybacks May the
authorizations or corporate buybacks are massive this year, apparently five or $6 billion of
delta is gonna get bought every day for the next
Brent 35:26
month, right? Yeah. Google alone or just Apple, Google, Facebook, Microsoft
Imran 35:31
are all doing massive buyback programs. They’re pricing sensitive, pretty much you got passive
inflows coming in from the pensions and those are the things that have been buying those are
the forces that have been buying market, right? And then it gets that you got all the
discretionary guys who’ve been getting out and shorting it and being more tactical around it
and and they’re not in it. They don’t have a need to panic, basically. Right, because they’re
already light in terms of positioning.
Brent 35:55
Right. Yeah, it’s a very good point. And one of the things that I also want to mention somewhat
similar to this, this capitulation point, I mean, the story or what has supported a lot of the worst
stocks and in a lot of these kind of crypto names, stories have changed drastically and they’re
getting punished right and if your earnings aren’t good you’re getting punished. But you know,
someone mentioned before earnings at Home Depot. That was okay. I think Walmart is quite,
you know, down to the weakening consumer, but so far it’s not, you know, those aren’t the
doldrums or the, the, it’s not March of 2020 in terms of the panic level across. And the other
problem, you know, here that the interesting thing was from last week that I want to bring up
with the fixed conversation before is, is that when you get these situations where people are so
short, and you’re getting these capitulation moves that move last week, I don’t know if you
caught it was on Thursday or Friday right here ratio in a bunch of these means stocks and a
bunch of these most speculative names I mean, GameStop rallied 30% intraday got halted on
that rally right? This these are these types of trades are margin call types of trades to me.
Right. This is one of our Risk Officer conferences. Alright, you’re closing your book up now
because no one’s going to enter a long position unless it’s an error. And this happened in a
whole bunch of different things. We also saw positive deltas at all the same time and always
really speculative names. You know, these are the types of capitulation events that are taking
place. And so there’s like localized capitulation, right. There’s localized liquidations, but equities
still. I mean, I hate talking about capitulation because that’s what everyone is focused on. But
you know, you’re seeing capitulation is just not in the s&p 500 because it still is the best game
in the world, I think, right?
Imran 37:49
Yeah. It’s gonna be the last shoe to drop always is right. So there’s a lot more weak spots
around the world, typically. I mean, it’s funny, like people get all excited about buying Europe
on relative valuations and blah, blah, blah, and then first sign of trouble Europe just puke so
much harder than the US every single time. Right. So yeah, I mean, the s&p is the is the flight
to safety in the in the equity space it has been for for a very, very long time. It will continue to
be I mean, you know, it became so tech heavy with those mega cap texts. That’s what that’s
what made it potentially a little bit more fragile, right in that if those texts if those texts
bellwethers need to rewrite because of rates going significantly higher, right, then that we’re
starting to see that right, we’re starting to see Facebook massively derating Netflix massively
directly. I mean, I’d say Apple still kind of hanging in there, but Amazon’s massively off its highs
as well, right. Yeah. You know, so my, I think Microsoft and Apple are probably still hanging in
there on a relative basis being crushed. Facebook’s crushed Netflix crush, so all of them,
they’re kind of one by one, the generals as they’re called.
Brent 39:06
I think of the generals Tesla’s arguably the last one that hasn’t quite. Kramer had his generals
and, you know, Tesla’s kind of last one that really hasn’t gone full, you know, Netflix, so to
speak yet. Unbelievable.
Imran 39:23
Amazing.
Brent 39:24
But who’s gonna I don’t know what to buy this right now, maybe, maybe. I don’t know. I’m
waiting at some fundamental wires. It’s probably gonna get a few.
Imran 39:34
You obviously got all your subscribers short Netflix for that happened, right?
Brent 39:39
Yeah, right. I saw there. I saw there. There’s earnings coming for that. No, I had no idea. But
you know, it doesn’t have a consistently strong options position. So I think a lot of these names
though, you get vol spikes so much that might just wait for a good play in the office market
with false spikes after the fact events out, you kind of know what’s going on and oftentimes you
can get some interesting setups and and to that point, you know, I think, for the last two years
for sure, this book dip would have been bought, I mean, it would have fallen 20% In first place,
but the dip would have been bought so hard. And now it doesn’t. It doesn’t spike at all. You
know, there’s a little wick there, but Facebook and PayPal says the same thing. Like yeah, drop
20% But I can’t. I mean, I’m sure someone’s done the study back to back quarter where your
stock drops 20% on a mega cap stock. like Netflix. I mean, that’s amazing.
Imran 40:31
I mean, Facebook did something similar than this this time around. They did well, but the
previous few quarters, they had a shocker, right? Yeah. But yeah, I mean, the market is just
less forgiving now. Right? That’s the liquidity is being withdrawn. You know, that earnings just if
earnings disappoint, they get punished, right. People got no more patience for it, right. They
want. They want stocks that are safer, basically. And that’s why you’re seeing this rotation
towards utilities staples. Health care, right? That’s a sign under the hood that people just want
to park themselves in equities that they deem safe, because they know the macro backdrop is
so precarious, right.
Brent 41:15
Yeah. So I think we’re covered coming up towards the top of the hour. So I know we’ve got a lot
of questions here on just kind of our view over the next couple of days. How this may play out. I
think you and I are on a similar page that we’re looking for a rally here we’ve been looking for
rallies and we can talk about our in our source subscriber notes and that is off the basis again
of implied vol dropping into fixed expiration puts getting burned up etc. I I think that there is
some potential to get over 41 100 But I lose a lot of conviction as we get over 4100 particularly
into Friday. And if we hold up over 400 into Friday, then I think that just drains a lot of the rally
fuel out because of the fact that most of the puts are down around 4000 at the moment. So I
think in general looking for a rally here and then that’s clearing out some foot position. And so
we could see lower lows kind of in the future flag June op x as a major event. I don’t know
obviously how the markets going to trade into that event. But market on your calendars is a
major turning point maybe from a high to going back to a low or big buy the dip opportunity I
don’t know what’s gonna be it but but mark that and so I’m looking for the market to more or
less pin the 4100 area here and then potentially even some weakness on Friday just off the fact
that we’ve already burned up this, you know this vana charm fuel already on this rally Do you
have a kind of a similar synopsis here? What What’s your
Imran 42:41
Yeah, so I, I agree this week, you know, it’s definitely being impacted by the charm of those of
those puts that are parked around 4000 So you’re gonna get bit of futures buying coming in
into expiring, you know, we needed to unwind this oversold condition. We’ve kind of done that.
I’m probably a little bit more bullish than you just because, you know, at the margin, I don’t
think we’re going to get that much new news in the next two weeks. With regards to what we
already know. Right, right. We already we already know what China I think at the margin, I
think we’re probably going to get better news out of China than we currently expect. I they
might reopen sooner, right? And we’re not really going to get any inflation data for a little while
to get to to get to see you know, what is has inflation really peaked and stuff like that. So I
think we might get this kind of news vacuum for a week or two, where you’re not getting a lot
hitting the tape. And you’ve got these buybacks coming in behind five or 6 billion a day. Right
and you’ve already had a load of people puke the market right and get out of the market. So
just don’t know if the marginal sellers there for the next week or two and if they aren’t, given
how far we’ve come, I don’t see why we can’t continue short squeezing a bit more right so fast.
You know, I would probably start to add shorts at 4200 I wouldn’t be stopping out of those
shorts of 4300. But I’d be I’d be leaving myself room to add. They could extend a bit further
than I think right? That’s what these short squeezes often do that right? You get about. It’s a
short squeeze. So I’m going to sell it and then it goes another 200 points in the face. And it still
is a sell but you just got to give yourself the bullets to be able to do that. And that’s where
options are quite useful. The way I would do it is by put spreads as we rally probably out to July
maybe August because I think the next two weeks I had some June’s on already was able to
monetize some of them but that’s kind of how I’ll approach it basically.
Brent 44:43
Yeah, you raise a good point and in the fact that the short route is can extend you know farther
than you can expect and, and just the fact that that these puts are rolling off doesn’t mean that
the market has to trade lower. That should be clear in that I just think that if you do start to
turn lower, and we sort of had this 4000 level as a rough bottom, well, maybe you want to start
to discount that what is possible on the downside. You bring up some good points on the on the
extension on that extension higher. Somebody asked me about Tesla, do we think it needs a
class? I don’t think it needs a collapse. I have no idea what may or may not happen. Tesla don’t
follow the fundamentals. I certainly don’t know what’s going on with Elon Musk and Twitter and
his collateral and all these other types of things. I just simply note that it was the last one that
hasn’t, you know, Netflix of papers general. So a couple of comments on Tesla there.
Imran 45:35
General Tesla is gonna have some betas in the market right? So if you believe that the broader
market needs to rewrite you know and you know, the guys who do sort of the more
fundamental valuation side of things are looking at multiples looking at what their equity risk
premium right so your equity risk premium is basically the difference between the 12 month or
the forward earnings yield of the market compared to real interest rates, right? You take that
differential and you compare that to historics and where it’s been basically right. And that
measure is kind of looking at the relative value between owning stocks or bonds. Okay. And
while stocks have D rated, yeah, arguably, there’s still room for that because real yields have
gone up so much, right? Real yields have gone from negative one to negative half nearly
basically, right? So it’s just you got to look at that in the context of where bonds are and say,
yeah, actually, equities don’t really look down another 15 20%, basically, right. Just be aware of
that. And if you if you buy into that sort of valuation in that idea, then Tesla’s gonna go down
with the market rates. Matter of when right
Brent 46:48
yeah, it’s a it’s a very good point and and answer to your your, your idea of the rally extending
a little bit. I mean, we haven’t seen what Powell has to say, but the there was a pause at least a
brief pause here in the 10 year, which which a lot of people have been flagging, maybe that’s a
little bit of relief. And the rate game I think, just we’re not going to bother them until, until
people really understand what’s happening with rates and so it’s probably a situation where
they go look, we’re having one of the worst of the worst recessions of all time, we’re gonna stop
hiking and then the market will start to rally because you know, bad news, you know, horrible
news is good
Imran 47:25
afternoon, in March 2020 After 35 by 35% sell off in two weeks, we’re staring at 100 year
depression and then they print however many trillion and the market goes up in straight line for
the next two years.
Brent 47:41
Puts expiring March before
Imran 47:45
we close to the June, JP Morgan put spread collar trades that expires at the end of the month.
Do you know what strikes are on that put spread?
Brent 47:56
I just was looking at those someone will be able to put them in the chat. I believe the calls were
at 4300. Okay, we’re trading with a cause of trading a free 300 And I don’t remember where
at 4300. Okay, we’re trading with a cause of trading a free 300 And I don’t remember where
the put spread is. Look it up quick.
Imran 48:15
Again, that put spread that long strike on the put spreads likely to get tested, unless the
dealers are going to be longer in some size. Right. That’s like 20 billion notional that trade, isn’t
it?
Brent 48:24
Yeah, that’s correct. And it seems because those that position gets so deep in the money now
that there’s a chain of events of if that strike is in the money or if one of the strikes is in the
money. How does that affect the role? And has it you know, kind of wag the market in between
there so I’ll have to look up exactly where those strikes are. But I believe one of those actually
in the money. I’ll put that in a subscriber note today, but we’re we’re trading stocks in and
around that area. I think maybe at the low last week. We’re testing one of those strikes. I was
gonna I was gonna mention that the portfolio 135 Thank you, Paul. Very much. See, I knew Paul
was watching and he knows everything. I was the long like,
Imran 49:08
but what about the what about the short
Brent 49:11
short isn’t a 36? I want to save 3600?
Imran 49:16
Oh, is it good? Yes, I mean that and those June to June 3600 are probably quite low delta, right.
They’re probably 15 Delta puts right now, I guess given where volleys of top my head. So that’s
downside right that downside is getting offered. That downside is getting crushed is because
the street sitting there long you’re about 36 puts 20 billion not sure what to do, right. So it’s
Brent 49:43
it’s a lot of size. If you if you look at just the overall deltas and the expiration. It it’s it’s just it’s
there’s a big there’s big positions there anyways, so here’s the total gamma and delta expiring
for Friday which is this is a decent amount of delta and gamma expiring. Typically over 30% is
where it gets really large. But if you look at the expiration here, you can see what the forecast
is the moment is this has a lot of deltas there’s a lot of in the money puts that are that are
expiring So 3620 is a short Yeah, roll it I don’t know how to pronounce your your handle there
and rolling to be Thank you very much for we shouldn’t know is off the top of our head. And so
I’m standing here like a deer in headlights.
Imran 50:30
That basically tells you right that there’s a pretty high probability that vols not going to supply
that hard until the market breaks the 600 I thought when we broke 4000 We were going to get
a voltage spike. We didn’t get one right. So now when we retest the 100 you’re going to be
what 200 points away from a 20 billion notional launch strike to the dealer’s overlook and a
spike down then right are the guys the JPMorgan guys aren’t going to touch that for Sprint. Just
gonna sit on it. So you’re not gonna get a real superduper volts bike to like 50 Plus, unless we
break that put spread strike, get away from it and go into territory where the street isn’t long
anymore, right? So that’s that continue that it will probably be a continuation of the kind of
dynamic that we’ve seen where vo underperforms the sell off like we’ve seen over the last few
weeks.
Brent 51:25
Yeah, that’s a some some very interesting insight. So and I think it makes sense and that’s kind
of the idea of of exactly what you said. You go from the position where they’re long to short and
that and that creates the cover which which, you know, creates puts demand and that and that
that causes vol to increase so. Alright, and Ron, well, I know we’re coming up on the top of the
hour here. Your insights are very valuable as always you want to mention to people how they
can get a hold of him.
Imran 51:56
Sure, sure. So options underscore insight is my Twitter handle. Options hyphen. insight.com is
my website. We obviously offer. We do training courses. One of them sits on the spot gamma
Academy, it’s called the hedge. So check that out if you want to learn about options. And I think
now is the market where you want to know about options, right? Yeah. But then we I also run
my own boot camps and things like that. I’ve got one coming up in July, which I’m doing in
conjunction with 42 macro that those of you those of you who know my good friend and Brett’s
friend, Darius Dale, so he’s going to be attending my boot camp in July with a bunch of 42
macro subscribers but anyone’s welcome to come. And yeah, feel free to book a you can book a
15 minute call with me from my website as well me or my team and we can have a chat about
you know the market and what you guys want to do in options basically.
Brent 52:52
So free 15 minute calls them wrong. That’s good offer man I might call you myself.
Imran 52:58
Anytime, anytime.
Brent 53:02
And we are asked by calm academy that spot gaming calm is is our course offering with Imran.
He’s got his handsome photo up here. And if you have any questions, please leave them in the
comment section and we’ll be happy to get back to you. Thanks for taking the time to watch
and we’ll see you next month. Next options expiration. Thanks for tuning in guys and that’s the
big one to the June topics. So
Imran 53:26
yeah, we’ll be there.