The 10-Year Just Hit 5.3%. Brent Kochuba Says That’s the Line Stocks Can’t Ignore. — watch on tastylive
SpotGamma founder Brent Kochuba joined tastylive to explain why index put protection stays cheap with the 10-year at 5.3% and bond volatility climbing.
The 10-year treasury yields now sit at 5.3%. Bond volatility has climbed almost every session for the past two weeks, and the equity index has barely flinched. Brent Kochuba, founder of SpotGamma, joined tastylive to analyze how index put protection has rarely looked this cheap against the risk stacked in front of it.
Rates And Equities: Only Corrleated In The Tail
On a normal day, a tick in yields and a tick in the S&P 500 have little to do with each other. The relationship is a tail one, remaining dormant until the move in rates becomes large enough to truly matter. Brent frames this relationship as an “if-then” statement: if yields keep grinding higher and the bond volatility grows meaningfully, he does not expect strength in equities to hold.
The old line in the sand was 5% on the 10-year, which has already been broken. Oil has come down somewhat, yet that divergence between crude and yields leaves rates reflexive — higher yields squeeze the traders who bought the dip in bonds last week, and the covering drives yields higher again.
Relatively Few Traders Are Paying Up For Downside
The head-scratcher is not the bond market. Instead, it is the missing demand for protection against growing headwinds. Index put demand runs low, and IV rank in SPY sits toward the bottom of its 1-year range. SpotGamma’s pre-market Founder’s Note on Thursday, October 1, flagged traders were largely short single-stock puts. VIX held 16 for most of the session before lifting to 17.5, which is meaningful movement.
Bonds tell a different story, however. Bond ETF TLT’s one-month options now carry a skew rank of 100. Protection has been bid up where the stress is visible.
Why Traders Don’t Appear to Be Hedging
Five years of selling puts has beaten the index handily, and long-dated puts bleed when price rips back. One recent drawdown took the NASDAQ down 8% before recovering the entire move. This phenomenon largely explains the absent put bid.
Short-dated structures may provide an alternative for those seeking to hedge: out-of-the-money put butterflies, one to five days to expiration, rolled forward. Roughly 20 cents buys a fly about 1% out of the money in QQQ. The point is not to cover half a percent, as this position instead covers a 2% to 4% move. The index has gone about a year without a 3% drawdown, against a historical rate of roughly one a year. Brent reads this as the wrong moment to sell the volatility risk premium and a reasonable one to own it.
Negative Gamma Cuts Both Ways
Dealer positioning shows negative gamma to the upside as well as the downside, so hedging amplifies a move instead of damping it. That argues against financing a put by shorting calls. A headline can lift this market as fast as rates can break it, and shorting premium is not necessarily the base case here.
What Would Confirm The Read?
The confirmation sits in skew, not in price. When index put demand finally lifts and put skew steepens alongside VIX, the equity market has likely stopped ignoring the bond market.
We encourage traders to watch two things from here. Non-farm payrolls carried the largest event volatility for this week’s data, and a weak jobs number pulls yields down on the bad-is-good reaction. A further leg higher in yields pushes the pressure into credit instead, and equities do not ignore a cracking credit market.
Brent Kochuba founded SpotGamma and contributes to tastylive. He was previously a portfolio manager at Seven North Capital Management, building options-based strategies, and a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.
Watch the full segment on tastylive.
Brent contributes regularly to tastylive.