Full Transcript: Inside the December Options Expiration with Brent Kochuba

A Look at the Flows Driving Markets

Jack: So Brent, I’m planning a very, very aggressive biggest obs options expiration ever title for this. So I’m hoping I haven’t looked yet, but I’m hoping you’re gonna deliver the goods in the presentation to back that thing up.

Brent: I am, I’m, I’m gonna go for it. I think this will be the biggest options expiration ever. And options, volumes, they just keep growing. And so that’s good for us. here at the Opex Effect because, you want bigger volumes. We’re just talking about this, we’re gonna talk about this in a couple minutes, as we usually start with about 20 or 30 minutes of banter with the goal of losing as much of our audience as possible,

Jack: right?

With like two minutes of options, expiration analysis after that.

Brent: Yep. Because that’s usually our plan. we were talking about this before. Do you know who originated the Santa Baby? Now? This is supposed to be Santa Baby. Like, are you gonna give us the rally? And statistically the evidence is that we get a Santa Claus rally Jack.

But, but, well, it’s ruined now. But the original, the originator of Santa Baby was Earth Kit, which I didn’t know.

Jack: I did not know either. You just, you just educated me right before we started on that.

Brent: Yeah. And then so you

Jack: learned something, you learned something with every Opex Effect brand. That’s right.

Brent: Something Then, Madonna, the other version, we still

Jack: learn it.

Brent: Madonna 1987, Jack, that makes us feel pretty old. Taylor Swift. Alicia Keys, Michael Bule did it. Apparently. Er Grande. And then we’re joking now us, so here we are. Yeah. Yeah. No one wants to see that

Jack: Live Duet brand, I’m pretty sure of, of us performing Santa Baby.

That would be probably, if anybody’s left at this point, they’re gonna be gone if, if we try to do that. Yeah. but I’ll have shifting. We’ll shut

Brent: it down.

Jack: Yeah, exactly. But, shifting to the markets, I mean, it’s been a, yeah, I mean it’s, this AI just won’t stop. Like, it, it just keeps going. You know, you, you think there’s like something that’s gonna derail it and then it’s like.

Here we go. We’re going again.

Brent: It’s such an enigma to me because, I, I guess when you think about the internet bubble and all that, and you’d see like the advertisements on, tv, like pets.com and yeah, fibers getting laid, but it wasn’t just like this thing that felt really useful. Maybe ‘cause, like we weren’t all shopping on the internet at that level or whatever it is.

You know what I mean? I, I’m guessing that you use like AI as much as I do for just like everything now, and it’s like, that’s my default search and it’s like, so you’re using it, but then it’s hard to like realize that it can be a successful product, but the billions and billions now trillions of dollars flowing into it, still might be a bit too much money.

So it’s like, it’s a very hard thing to reconcile. When you’re sitting in the woods in Connecticut. trying to think about the economic impacts of this.

Jack: We’ve talked about the podcast a lot. Is, is the idea that it, it’s, it’s obviously going to be a huge thing, but whether the builders of the infrastructure will be the beneficiaries is a very big open question.

And, with the internet and stuff, that was not the case. I mean, a lot of those companies didn’t make it, that built out the infrastructure. So that’ll be the question as to whether it’s different this time. And, you and I are probably not. Capable of analyzing it. But I, I will say like the more I, the more I, I look at it, the more I become, I go away from like my, my value investing skeptic that I am of this.

Mm-hmm. And that’s probably when, when I’m all in on this, it’s probably going to be the top. But like I find myself now when they’re saying, oh, well, power is gonna be a huge problem for ai. I’m like, well obviously it’s not because we’re just gonna go, we’re gonna build data centers and space and they’re gonna communicate with lasers with each other.

Like, why would we, how could that possibly be an issue? That’s, that’s not even a, it’s not even a minor problem. And like when I get into that, you probably are, maybe you’re getting towards the end of the road. I’m not sure.

Brent: Yeah. I have two questions on that. number one, have you bought silver yet? ‘cause if you have, then, then that’s an important signal for later here in the conversation.

So are you into I’ve not bought silver. No. You’re, I’m not a commodity. We have more room to go, everybody. but then the second one is, this whole thing struck me that it’s basically a call option and. You know, you gotta spend the, the, the money on the data centers and everything else. If you wanna be in the AI game, you don’t wanna lose.

That’s the argument. But you can pay too much for a call option, as we’ve discussed many times on this, podcast, Jack, where, may maybe you are right? And AI continues to be this incredible thing, but. Maybe you spent too much on your data center. So I guess that’s what, the macro powers are trying to sort through at the moment, but that’s causing some gyrations in the equity market.

And, a little bit of uncertainty. And that’s why Santa, it’s Santa baby as opposed to Santa baby. We’re here, we’re ready.

Jack: and that’s why, that’s why I look like it. Look at the options with you because like they say, price is truth and you know, the options market’s gonna tell us what people are actually betting with their money.

versus you and me, spewing ridiculousness about AI that we don’t know anything about. Like the options of market’s gonna tell us how people are betting. So it’s, it’s always good to do these, to get behind the scenes and see what’s going on.

Brent: Yeah, that and that’s right. And there’s another component here, there, there’s price and there’s time.

And I think those two things are very important considering trading, because two things can be true. AI and the whole thing could be a bubble top right now. And, That’s bad for those stocks. But are we there yet? From a seasonality perspective, is the market ready to roll over at this moment? I’m, I think not quite yet.

I, I’m not here to say that it will in a month ‘cause I really only see about a month out. But, I think that the seasonality right now is supportive of the market and we’re gonna talk about why that is. And then maybe in January, all hell bricks is, well, we’ll see. we’re always, yeah, we can

Jack: say this for, for later when you talk about it, but this, this whole idea of the Santa.

You know, the Santa Rally at the end of every year is, is an interesting one. And I think there’s more flows driven stuff behind the scenes going on than people realize when, when they talk about that happening at the end of the year. There, there’s a lot of reasons and flows and stuff behind the scenes that cause that to happen or not to happen.

Brent: That’s, that’s exactly right. And, and November was an excellent example as we’ll talk about here shortly.

before we get into that, why do we pay so much attention to the options market options, volumes continue to grow, as you can see here, from 2020 to the present, up 150 plus percent. and that’s greatly outpacing stock volume. And I think a lot of that stock volume is driven by options He flows. And then in the recent record stat, the SIBO just reported in, I believe it’s November, that they had record a DV in the SPX options, volumes of 4.6 million contracts, and Jack 2.8 million of that on the zero DTE zero dt on an average daily basis, which is just kind of bananas, that, that these average, that is average, average daily volumes are just so zero DTE based.

So, more records. and, and the way that this works and works, that’s institutional,

Jack: right? Like zero DTE is is mostly institutional, I would assume,

Brent: and, and retail. I mean, there’s a bunch of different, players that I think are in there and, it, it brings up this, like this really funny thing, because I was, I was scrolling through Twitter and I try to make a habit of not doing that anymore, but I was slipping through and there’s this guy who’s an alleged market maker saying, the options flows don’t offer any insight.

something along those lines. And he is like, and, and thanks from my brand new, fancy car or whatever, basically saying that. Tongue in cheek that the opposite flows don’t really matter. And, and, but he’s able to buy this really expensive car. And the funny thing about this too is like the sebo will tell you the same thing.

That, that, that there’s nothing to the zero DT stuff, just like look away. But then if you go and try to buy that data, it’s very expensive, right? So it’s like we all know the game. Like if it’s, if, if there’s nothing in there, there’s nothing interesting, then the data is free. That’s just how it works. So, to that point, some of this data tells us that it’s not purely institutional, it’s not purely retail.

It’s a decent mix. You know, captain Condor continues to have this massive size in the zero DTE space. And is he institutional or not? I don’t know. He sells a Discord service. Technically that’s a business, but, so it’s a mix. And I think the other thing about it is that who participates changes based on how much volatility there is.

what the prices of the options are. Is there a dispersion trade on or not? So, it’s a blended mix, but I wouldn’t say it’s all one thing or the other, one group

Jack: or the other. What are the, what are the retail people doing? Like I, I’d assume institutional is mostly hedging. Like is this the gambling stuff we’re seeing everywhere else where like, people are betting on these one day options or are they doing like, hedging stuff as well?

The retail,

Brent: they’re not hedging. What they’re doing is selling iron condors and the frequency is that it’s picked up. And what that is, is you come in and you say, okay, I don’t think the market’s gonna move more than 1% today. And so you sell a put spread and you sell a call, spread that brackets that bit, right?

So brackets around where it’s trading, the way this works is they’re wrong and the market goes through one of their levels, they double down for the next day. It’s a Martin Gaye betting strategy. So it’s kind of a thing. This is the Captain Condor thing, right? Yeah. So they, that size has grown.

The frequency of those trades has grown. I don’t know if there’s a lot of copycats out there. I mean, I’m sure there are. but that trade continues to work. And, the argument that we’ve been making is, it’s gonna work great until you get that situation where the market has extended volatility for more than, five, six days.

And if you keep doubling down, the exponential values of this thing, say at some point, you could have a, a capital constraint that kind of blows that, that trait or that idea up. Now, does that happen in a month? Does it happen in years? You know, whatever. who, who knows, right? And, and, and maybe, maybe it’s not an issue for those guys, because the odds of it happening are pretty low, right?

But that’s the point. just sort of like betting on, black at the casino or whatever. You can go for a while until, it doesn’t work out that great. So, point is, is that the volumes there are increasing and we see the fingerprints of those trades in the market every single day now, nearly every single day, which is really important.

If you’re trading the s and p 500, you gotta be watching those zero DT flows. and the way that this works to this point is here we see the example of a MC calls, but if it was zero TD options, in theory, it would kind of be the same thing where individual small trades aggregate into being a big position.

And if you’re a market maker and you’re there, you 90% of the trades are facilitated by market makers. So they’re buying and selling contracts. And this case everyone’s buying a MC calls. And if the market makers are the ones selling those calls, in this example, if they’re 50 delta options, so kind of an at the money option, that means that they need to buy 50 shares of stock to hedge out every one of those calls.

You could see in this example, just a hundred thousand calls is 5 million shares of stock. That could be a lot of stock to buy, especially if you gotta do it right now. And basically any name you trade 5 million shares, like right here, right now, is a lot, for example. So that is the transmission mechanism from the options trades to the actual underlying flows.

Not only that, once you sort of hedge, you have to adjust your hedge based on time, which is an important dynamic we’re gonna talk about here. Volatility. So is implied. Volatility is the value of options going up or down. Very important topic. as we get into here, and then obviously as the stock price changes.

So you have to con, constantly update these hedging flows, and that’s what we’re monitoring for here, right? We’re trying to predict how these hedging flows are gonna change and how that’s gonna impact the market.

Jack: And the, the reason we do this today and today’s, December 12th, that we’re a week from options expiration on December 19th, which is also my birthday, by the way.

but, we, so the reason we do it now is because we’re, we’re up ahead of this and we know that this options expiration can be a turning point in these flows, right?

Brent: absolutely. And I say absolutely because we just had a very great example of that in November. We’re gonna talk about that momentarily, and I think it matters for December as well.

That’s my forecast here. Not all options expirations matter in the same way. There’s some that have a bigger impact based on the positions there, based on the volatility of the market, et cetera. But the idea is that into that third Friday of the month where the bigger positions expire, we, see hedging flows related to those positions build up as well.

And then at options expiration, those hedging flows goes away. The positions go away. Excuse me, the positions go away, then the hedging flows go away, and that can be, lead to turning points in the market. So that is why next Friday matters. Again, probably the biggest options expiration ever. At least that’s, kind of what it’s projecting right now.

And there is a statistical edge to this, in this case you can see here. And it matters if VIX expiration occurs before or after in, in terms of these stats. VIX expiration is actually before, in this case. And so you can see what tends to happen is the market will trend higher or trend lower into an expiration, and then that performance will flip, or the trend, the trend will change after the expiration.

You can see here it’s about a 60, to 65% chance of the performance shifting, based on our data from, that we’ve compiled over the last, about the last three, four years. One of the things about this options expiration data is the options volume has continued to grow so much over time that you don’t have 20 years of data that you can kind of go back towards.

Right. You really got three or four years where the options volume is, is material, or as material as it is now. Right. Plus we have zero DT expirations, which are only a couple years old. You know, it’s not the same thing as five, 10 years ago where there was one expiration a month or one expiration a week, et cetera.

Jack: So we found that when realized Val is high coming into these or low coming into these, that can sort of change what happens. Right,

Brent: exactly. The volatility trend is the same. So to the point of November, vol was spiking into November options expiration, and then vol got crushed after expiration. And it’s a similar thing here where we’re gonna go into December and I think that the vols gonna get crushed.

It’s getting crushed now, and I think that’s gonna continue because of holidays and some of the things we’re talking about. And then what happens after New Year’s? Everyone gets back in seat. Those suppressive flow suppressive flows are gone. And then maybe things can get a little more, volatile right into, into January as an example.

So the stats show us that the realized volatility, IE how much the market moves changes, right? High vol shifts to low vol, low volatility shift to high volatility, around these options expirations. And, and right now, if you were to say how much is the options market suppressing volatility? It’s about average, I would say.

one of the things that’s changed to the point of the data changing is that so much of the volatility suppressing positive gamut driven by zero DTE traders, right? They come in today and they sell their options. So some of what I have to do now is trying to predict are they gonna come in today? Are the size, is the size they’re gonna trade?

Is it, gonna be similar? What’s happening in that zero DTE space as sort of an active volatility suppressor? Whereas if you see vol start to spike and risk pick up, those zero GT flows often go away. And so that’s an important dynamic to understand as well.

Jack: So this next slide gets into what we were talking about before the Santa Claus rally.

And, and I also would think, I mean, there are not many, I mean, we had fed yesterday, so I, I would, or two days ago. So I would think there aren’t many huge events coming up right on the calendar either.

Brent: Yeah. You know, it was funny because after FOMC, the vol stayed a little bit sticky and I was looking at non-farm payrolls and CPI next week there’s a little bit of event vault tied to those, data prints.

and those data prints take place right before Christmas. So how much are people really gonna be sort of immediately reacting to that, especially in the year? but what was interesting is the vol seemed to really kind of shift around Oracle earnings on Wednesday night and then AAV go last night.

The both of those stocks are down sharply, after earnings. I mean, Oracle more so than AAV go, and, and the Nasdaq is kind of getting beat up a little bit on this, so. Those to the point of the, our, our conversation starting about ai, that is definitely hitting that Mag seven complex right now, right?

And, and so there’s some stock rotation we’re gonna talk about, but to the point of volatility, we always cover what we talked about in November. But you could see the market absolutely was dropping like a stone here into November opex. And the low of the market was on opex Day on November opex. So there’s the absolute low of the day.

And then look what happens after that. You clear out these positions, you clear out the expensive, volatility, the positions that had a high volatility that brings this relief rally. And where does the relief rally? Time out, Jack It times out on Black Friday. And if you think about what’s Thanksgiving, it’s a week of holidays, right?

People kind of stop paying attention to the market ‘cause it’s a short week. You start traveling, there’s Black Friday’s a half day. And so that’s just a vol crusher, right? If you’re owning puts over that holiday week, it just stinks. And so, you get that decay. And so here you see, you can, I mean, you time it literally to the day.

This is Black Friday, that little green bar, and then we sort of just trended sideways until FOMC. Now F OMC has released a little bit of positive market sentiment. Some of that’s getting unwound a little bit here today. as we talked, the market’s down about 60 bips, but we’re still about one to 2% of all time highs.

And so, things are seasonally looking like they’re gonna be in line. But we’ll see if that continues. we’re talking about the size of options expiration. We measure options by Delta. Delta explains how much stock value these options positions have. You’re gonna see Goldman or some of these other groups come out and say, six, $7 trillion in kind of like the Michael Burry in the 13 F episode, where one option they consider to be worth 100 shares of stock.

That’s actually not true. the delta gives you a more fair approximation of how much that options, notional is. And so in this case here, you can see, that most of the weighting of what is expiring is in the s and p 500. It’s always like this, but the call values are much higher relative to puts.

This was not the case in the November options expiration. So this is a call weighted expiration to the point of market, sort of rallying into an options expiration like this and vault getting crushed. This should be a tailwind. This, this flow should help to keep the market propelled into this options expiration next week.

And then volatility sort of subsides. And then you have this situation where, okay, end of December, these bullish positions are removed and, and maybe that allows January to be a little bit more volatile.

Jack: So am I not allowed to use the $7 trillion expiration on my YouTube thumbnail or,

Brent: no. You still can.

I think you can put $20 trillion if you want. whatever.

Jack: Yeah. I try to have at least some basis, in fact, for what I’m putting on there. So, I mean, trillions isn’t even

Brent: like a number that we even bat an eye at anymore. It used to be billions was this big number, and now it’s just like, ugh.

Jack: Well, if you, it’s the same thing with a YouTube thumbnails.

Like, ‘cause people don’t care about billions anymore. You gotta keep escalating.

Brent: I think to get to

Jack: the point that they’ll click, you’ve gotta put like ridiculous numbers. I mean, I’ll, I’ll be to quadrillion probably fairly shortly.

Brent: I always think about at times like this, that, famous scene from Blaze of Glory where Will Ferrell’s walking on the treadmill and like, no one even knows what it means, but it’s provocative and it’s like, that’s basically, that’s basically, that’s what, I guess that’s what I need.

Jack: I am interested though, like going back to that other slide. We, we had one month here where sort of the call heavy expiration ended. Like we had call heavy expirations for a while. We had one month where a change, and now we’re right back. And I, and I’m wondering is there any, is there anything to read into that?

Like from what the changes that happened there?

Brent: A lot of that is a function of, is the market rallying or not? Right? Because Delta is. Is going to be higher when options start to go in the money and call values pick up. Right. And that’s, and that’s really what this is seeing. So if you look at a chart like this, you assume that okay, the market has been rallying because these deltas are getting quite big and you know, that suggests that call values are increasing, market is rallying, vols probably coming down.

So as that expires to the point of this slide with the meaner version, right, okay. That probably sets us up for an opportunity for the market to have a bit of a, of a correction. So those are the, that’s kind of what this is showing you. It’s sort of giving you an indication of what the market has been doing.

Now on the downside, you can have a situation where we’re not, I wouldn’t say that this is extreme. We’ve seen 90% I think over the summer, and some of those extremely bullish months. So this isn’t like extreme calls. It’s big because the December end of year expiration’s always the biggest expiration of the year.

And I think this one, again, ‘cause the options market continues to grow in size, then you have the situation that. you’re getting, sort of the, the compounded growth of that, right? all those bigger options positions benefiting from this size. So it will probably be the biggest options expiration ever.

but it’s not super extreme call weighted.

Jack: Is it a thing where the more call heavy it is, the more chances there are of a flip? Like the more people are on one side of the boat, the more you have a chance that maybe something happening in, happening in expiration?

Brent: I believe so. Particularly if you feel like people are long calls.

there are these situations where everyone was piling into Nvidia calls or piling into, the AI trade was so hot over the summer, for example. And what happens in that scenario is you end up where the call values are being pushed up a lot, right? And, and you’re getting the dealer or the hedging flows, I think really weighted to one side or the other.

So people can both buy and sell calls, obviously. And so in this situation, there’s evidence that people are selling a fair amount of calls and that’s suppressing volatility. But if you had a situation where everyone is buying calls and, and, and deals are short calls and there’s this chase, well that chase can die, right?

When these options positions expire, it’s the same thing with November. Everyone was buying puts, right? And what happens at options expiration? Well, those puts all go away. So once those puts are gone, it’s like, what am I hedging now? I don’t have anything else to hedge. So up we go. And that was kind of an extreme expiration in terms of the put size.

The vols are getting rich heading into this options expiration. So, you have this situation where when you wipe the weight clean in a, an extreme scenario, and November was a little bit extreme, then, then you can really get a stronger, reversal.

Jack: So this next slide gets to what we talked about before, which is this is a very, very large expiration.

Brent: Yeah. You can see here the call values, delta notions for single stocks is just massive. this is the January options expiration, which is not, January tends to be a fairly good sized expiration, but you know, the December is just huge. and, and so this just puts that into a little bit of context.

Again, I think this will probably the, the largest ever. options expiration. And so, the, the impact of this, should be, pretty decent in terms of, releasing volatility. The issue with this is that not only do you have the December expiration, but then you go to Christmas and the holiday, and then we have the JP Morgan position, which may or may not be a funta, in, in play here at 7,000 we’re gonna talk about as well.

So you have to think about this as like a season, expiration season, right. As opposed to like a single event, I think in this case.

Jack: So as we look back to what we said last time, the, the first thing we had looked at is this idea that no asset is safe and a lot of the safe assets had been pulling back and coming into our last episode.

Brent: Yeah. It was interesting because gold was dropping, Bitcoin was dropping, stocks were dropping, bonds were reversing. Right. so, there was this real sort of asset spasm where it’s sort of like, it wasn’t this rotation outta stocks and into bonds or whatever it may be. It was sort of just like dump everything and.

We had titled our, our November expiration piece, con Jensen Wong, save Us. Right? And, and, ‘cause that Nvidia earnings was so important. And if you just fast forward or, or reverse, excuse me, back then, the, the government shutdown was there. We weren’t getting data points. The Trump approved rating, which I haven’t checked, recheck, but it was in the dumpster, maybe it’s gotten better.

There was a lot of uncertainty around what the rate cut was gonna be. Obviously we got that cut now, and now there’s uncertainty about what the next, January rate situation will be and who will be the next Fed governor and all this other stuff, right? So that uncertainty is still sort of kicking around.

The Oracle credit default swaps were surging. That was another thing. And so that’s why NVIDIA is so important. Like, tell us that everything is still okay. And it turns out that the Nvidia earnings were kind of like, they’re all right and the stock is very flat relative to earnings. And so that’s a, a, a critical thing to, to note here.

but. The, the overall sentiment was just very ugly. And, here’s MicroStrategy. MicroStrategy. People were starting to talk about like, is this thing gonna get liquidated? Stock traded down to, I think one 70. They were able to, kind of buy themselves some time with, I believe a, a debt sale.

and so, the pressure here came off and Bitcoin’s rallied a little bit, but you know, everything was sort of crashing. We were looking at, this is our compass. The more you stocks are to the left on this chart, the more put weighted they are, the more people are buying puts versus calls. And so we had this situation where earlier in November people were pretty bulled up on all these names, and then suddenly it’s like, I just want puts, and you just sort of fast forward to this, the sentiment was pretty bad, but vol wasn’t going crazy.

So like, vol was sort of like the Goldilocks situation where it was like, not too cheap, not too rich, but you know, kind of just simmering. And we didn’t see this massive bid details. And so the, the problem with that was in our view was like. If you didn’t buy puts, you didn’t really wanna buy ‘em now ‘cause they were a little bit too rich.

but they weren’t so rich that they were an obvious sell, right? It was kind of this weird middle spot. and, and not only that, the other thing to take from that is that there wasn’t a panic in the market. So we were getting a sell off, right? But there wasn’t like this reach for, tail hedging protection, where you’d see these vols sort of spike and you’d see like the VV rich, and, just go crazy.

so that stuff really wasn’t necessarily showing up. And so our point here was that it looked like people were sort of, not bidding up the, the put protection, even though it was a little bit rich and you were gonna have this clearing event, and a lot of that clearing was based on Nvidia. And if Nvidia was no big deal, then the market kind of continued to rally.

And you sort of fast forward, obviously Nvidia was just sort of like whatever was in line, no big deal. and we’re talking about this 7,000 le level into the holidays. That’s still the big level, right? So, so there’s no sort of difference there. And interestingly, we thought that given that Vols were expensive and that the vol clearing function may help the market to rally, we, we were talking about this call fly, position into December expiration.

And this position has been all right. It was a sixty seven hundred, sixty eight hundred, call fly. And, and that had a decent return on it. And the point that we were also trying to make was, if you’re trying to buy puts, when the VIX was already at 25, you probably already missed it. Now, if you had to hedge, well, that’s a different story, right?

If you have an equity portfolio, you need to protect it. Well, maybe you gotta buy puts, but if you’re just speculating trying to buy puts, when the VIX was already at like 25, you’re probably, it’s probably a little too rich, right? And, and these puts obviously got eviscerated

Jack: on the Nvidia thing.

Like how much of that reaction we say we see like in the day after earnings. Is options driven. ‘cause I do remember like the earnings were pretty good for Nvidia and like people thought the stock would be up and then it was down. And I’m just wondering like how much of that back and forth, like those reactions are, are based on what’s going on in the options market.

And we see a big stock, like that report

Brent: Nvidia is a, is a beast into itself. you’ll see the s and p term structure reflecting the Nvidia earnings report, which is really quite unique. There’s really, at the moment another stock that does that. And is, I, Nvidia represents so much of, of the, the trade, right?

Not only is it huge in terms of its size and the s and p and the nasdaq, but also, it represents the AI trade. And, and so, not only do you have a situation where vol contracts around the Nvidia itself, but you also have the market volatility contracting and generally vault contracts. The market’s gonna catch a tailwind.

We, we call this kind of a Vana based tailwind. And the idea is that as vault contracts, it invokes buying of equities. Now Nvidia tends to have a lot of. Short call positions now. So if you think about it in Apple and Nvidia, like everybody owns those, right? That’s just, I mean by the fact, by, by, by fact.

If you own the s and p 500, the nasdaq, the QQQ or spotters, you own a big chunk of Nvidia, for example. But a lot of people also just own them ‘cause they’re the best of breed. And then what do they do? They sell calls systematically to try to increase their income, right? It’s kind of the, the Boomer strategy.

Lemme just keep selling calls. I’m never gonna get rid of my Nvidia stock, lemme just keep selling calls against it. And so I think that leads the actual volatility of Nvidia to be quite a bit less right than, than the market. So if you think about like the beta, the s and p, it’s not that high. Like NVIDIA’s not this crazy volatile stock anymore.

that’s something maybe like a Palantir or even like a Tesla is, right? There’s, there’s kind of like a different tier for Apple and Nvidia and even Microsoft where they’re becoming kind of these, I mean Microsoft and Apple I think are already a little bit sleepier in terms of their volatility, but in, I think NVIDIA is, is kind of coming that way where it’s like event comes out, vault contracts, stock does nothing.

And that’s kind of. You know, seems to be the way that behaves.

Jack: Yeah. In the video you’ve also got like those leveraged single stock ETFs and I mean they, they may not be big enough to make any kind of difference, but there’s, there’s just all kinds of stuff going on with the, like a big name like that.

Brent: I think they did.

And those things are kind of reflexive. What I mean by that is like when people were buying tons of calls, like in January, in June of, of last year for example, and you know, that was when Jensen is signing women’s chest and stuff and like then you get that leverage right, of the options market. ‘cause people are buying so many calls and it’s making the stock go up and then people are piling into the, to the upside.

‘cause no one buys a five XETF in some stock that hasn’t been moving for 2, 2, 3, 4 months. Right. You buy the five x levered thing in the thing that’s going bananas because you think it’s gonna continue. So that’s where this leverage sort of spools up and, and feeds on itself. and, and again, Nvidia by, for, I think by a lot of measures, it’s sort of just stalled out as a, as a stock in terms of a leader.

Right. doesn’t mean I think you shorter whatever. It’s just sort of like the more mature these names get, the bigger they get. It’s like the harder they are to move is is sort of what it, what, what it is.

Jack: Do you know, like, or there, I know you may not know this either, but are there like billions of dollars in these like leveraged single stock ETFs like Nvidia?

Or is it, are they smaller than that? I, I don’t have no idea. No concept of ‘cause that valuable, the size ebbs

Brent: and flows quite a bit. The okay. the ETF con complex is huge. You know, billion, billions and billions of dollars, are, are in there and, and it ebbs and flows, right? Interestingly, you keep getting these new ETFs, but for the first time ever we’re, we’re just talk, talking about this recently with, Matt Cashman, who I know, where they’re starting to pitch these five x lever ETFs now and, and now there’s starting to be some comments from the SEC and some other entities, quasi government entities saying like, okay.

Let’s, let’s slow our roll here a little bit. five X ETFs are probably a little bit too rich for the US markets, like, let’s chill. I think in Europe there might be some five, five x you know, American based ETFs. But the point is, is that, and I think that stuff has gotten a little bit over it skis, and it’s also a function of how well is the stock market doing.

I don’t think those, levered five x long ETFs are gonna do that. Well, if the market starts to have a, a material correction, obviously. Right. So I, I think the, the, the capital is very transient in there. It comes in and it comes out really rather quickly and, clearly the AI momentum is not there like it was in, in, over the summer for example, when a lot of this stuff was rallying quite a bit.

if anything, people are a little more focused on, that soft downside, I think at the moment, as opposed to saying, we’re gonna get another five to 10% of growth and it’s our manifest destiny that, we continue to rally here.

Jack: And to your point, I think Dave Nodey tweeted about this, I think they did reject finally, like they found a level of leverage that they, they were gonna reject in some of these ETFs.

Like it’s gone too far. Which I, I think everybody was trying to figure out what that’s gonna be. Like, how far will it go before they finally say, all right, this, this is too much. We’re not gonna allow this.

Brent: Yeah. And I don’t, I don’t know. I mean, I think it’s harder to make money in ETFs than, one would think.

It’s like, how big can the ETF ecosystem get, right? it’s not free to open these things and to keep ‘em open and you gotta have your swap agreements and blah, blah, blah. So, I don’t know, at some point Does, does, do you just sort of like eviscerate the landscape? ‘cause there’s so much being offered that, capital really can’t flow into any of them.

So, it’s sort of like, a, a a balancing system where you just go, okay, like, there’s too many of these things. Now we gotta stop creating new ETFs so that, we consolidate the number of ETFs so that capital can sort of concentrate on a couple of these things and, and you know, kind of, kind of the economies of the whole thing start to make more sense.

Jack: And to your point, like the, the market deals with this stuff over time. I mean, when, when there’s some sort of significant blow up, some sort of significant down market and a lot of these products get destroyed, I mean that, that gets the capital out of the product. So, to some extent the market takes care of this at some point on its own.

We just haven’t had that because we’ve just had this consistent rally.

Brent: Right. Right. And the best example of that obviously is the 2019 balage thing where the XIV, blew up and all that. So as much as we hem and haw about the ETFs, we made it through April this year. Right. With a lot of ETFs and the market didn’t, didn’t blow up, and, and die.

But you know, you, you look at some of the fingerprints of these things and you can see them right when they start to spool up. And so, all is kind of quiet on that front at the moment. but we will see, what comes in the new year.

Jack: Well, as we move into December, you almost gave me the title here I wanted, which is value is Back, but more small caps over semis is what I will take more small caps over semis, and I’m hoping at some point we will get the value is back and the projections on one of these.

It,

Brent: I mean, the data value’s back. We’re, we’re flipping around here. You’re gonna start making presentations and I’m gonna ask you, bad questions about value stock. So, the, the iwms are, are moving, right? You can see here. So I’m a little bit guilty of not paying a ton of attention to IWM, the auctions complex and, and the Russells smaller than the, than the s and p by by orders of magnitude. but so I was thinking that the IWM breakout was more of a phenomenon of the FOMC, but if you look back to sort of rate post Nova opex, you can see it really started to outperform.

That’s the green line on your screen. So I just thought that was overall pretty interesting. You know, even here, it’s given some back today. but after hours last night when the Nasdaq was kind of feeling it because of poor ail earnings, the iwms are up, and the Dow obviously performing a little bit better.

So the reason I think this is, is, is important here is because it, it speaks to capital rotation inside of the equity space. So moving towards maybe some of the value stocks, God forbid, Jack, that you mentioned, or some other equities kind of out of AI and into some other stuff, is what this speaks to.

And the reason that matters to me is because if you have a situation where people are selling equities to go into bonds or cash or whatever, then you’re gonna see correlation, spike, equity, correlation, spike. So in this case, if it’s a rotation, the rotation can be. You know, not good for you if you’re long tech and, and not, underweight of, of value or of iwms or, or anything else, right?

but that’s not as dangerous as situation where people are bailing outta stocks altogether. And the, and the barometer for that, we talked about correlation in the core one m signal many times here before. but when we dump equities together to go into, into bonds or some safe haven, then you see correlation spike.

What that tells you is that people are selling all equities regardless of what’s happening. ‘cause we gotta go into something else. And when correlation spikes, usually you get v spiking involved. Sp and those are the really big risk off scenarios in case in this case, you’re seeing the correlation index spike around the tariff situation, for example, or in mid-November, mid to late November when there was a lot of consternation around, are, we’re not gonna get a rate cut anymore, or no.

Or no. And, and Bitcoin was dropping and gold was dropping, and bonds were, going the wrong way and, and stocks were going the wrong way. You saw this correlation spike, right? ‘cause people are getting out of equities and going into cash or whatever it may be. So right now, even though we’re in this weird rotation, the market’s trying to digest things and it feels chippy.

‘cause Oracle and ail are both not great. and, and the fed uncertainty is kind of there still. We get the rate cut, but what happens next? Correlation is coming down, which to me just suggests that again, right now it’s an equity rotation. Now this can change pretty fast, but that gives me a little bit more reason to think that we’re supported here as opposed to, or equities are supported here as opposed to a situation where it’s a, major, risk off scenario.

Jack: Yeah. The one thing I never like when you, when you say small caps might be back, is that you only think in one month timeframe. So my, my decade of small caps that I’m looking for, you just, you’re not gonna be able to tell me when it’s coming.

Brent: The problem, the, the problem with small caps, Jack, is that there’s so many like false breakouts.

I mean, I was, I posted a chart of, this is our, our founder’s note this morning. I can just bring it up here just to bring an example, what they call us. Breaking the fourth wall, I think is what, what I just did. so there’s so many false breakouts in Iwms, and I was kind of looking at the chart like, ‘cause normally you think like new all time highs are great, right?

That that generally means like, I don’t wanna sell new all time highs, but like, Russell’s done this fake, fake out thing, and again, I, I’m in short term, so many of you probably look at this trend and go, the trend is up, don’t wanna fight that. But you get these weird false breakouts, right? Like here or here, and then that leads to pretty good downside.

And if your view is 30 days like mine, well that’s a pretty nasty downside. So Russell does this weird thing where it’s like false breakouts all the time. and it’s just, just another one of those. I don’t, I don’t know. I wouldn’t, I would say that I think before these December, end of December, I would say that we’ll probably still continue.

That’s the way that I, that I’m leaning right now, for reasons that we’re gonna discuss. But, yeah, Jack, I don’t, I don’t know that I’m gonna load, load the boat on WMS at the moment. so. Maybe that’s your bicycle signal.

Jack: Yeah. Yeah. Well, whenever, whenever, as, as you know, on anything, it’s, it’s going down.

So, I, I won’t say anything one way or the other, but, but anyway, as we, as we move on to your next slide here, on a real basis, the

Brent: value stocks are doing great.

Jack: yeah, we’re, we’re looking at some events that are coming up here, and what you’re seeing.

Brent: Yeah. And the reason I’m starting, usually I finish with this slide.

Like I always like to say, what’s the trade? And, and that’s what people want. Well, 7,000 is this level. It’s not a new level that we are flagging in the November expiration we’re talking about as well, this big level for end of year. And the reason is, is because there’s a ton of open interest, not at just at the 1219 expiration, which is next Friday, but this is also where the JP Morgan collar trade is.

We talked about the JP Morgan collar trade so many times here in the past. And why this matters is ‘cause there’s about 70,000 total contracts at the 7,000 strike for 1231 expiration. Not 1219, but 1231. So what that means is that if we can get up into that. Kind of over 6,900 area and close. Then I think that that 7,000 area becomes just this sort of magnet where it’s like it just sort of locks the market in.

Now, of course we can’t, as we speak right now, we’re 68, 63, we closed at 6,900 yesterday, so we just can’t seem to get ourselves over that level. But it sort of becomes this, this, again, area of pole where if we’re close enough at the right time, then it matters. Obviously, if we’re kind of below 6,900, then the pole of that strike starts to dissipate over time as opposed to strengthen.

So that’s why that level is so important to the upside. It’s also a big round number and people love big round numbers. Now, at what point do we have to say Brent’s thesis about the market holding steady and rallying into the end of the year? What, at what point does that trade off for us, it’s still 6,800, and that’s because under 6,800 we have a lot of negative gamma.

that negative gamma increases. It means vol probably spikes, and it means that. The directional flow start to push the market down. And so that’s our risk off level. If we break 6,800, then we’re gonna be looking for the market to trade quite a bit lower, possibly as much as 6,600. At the moment though, we’re still favoring the upside.

And why is that? Because of the holidays coming up, because of the volatility crush that we’re experiencing. and so that is a tailwind for markets and seven thousand’s only about one, one point half percent up from here, Jack. Right? So it’s not, you’re not talking about, thinking that we’re gonna get like a 5% end of year rally at this point.

It’s a, it’s a mild increase. and again, the, the, the, the, the holidays and in the passing of a couple events I think could help. Not only do we have the holidays coming up, you have CPI next week and non farms, which have a little bit of event vault. Not a ton, but enough to sort of, if they pass that issue, that can offer like a little bit of a kicker to stock.

So this is why I’m leaning along at this moment until, and unless we break that 6,800 level, again, that would be the signal that, it’s so over as the kids like to say.

Jack: I’m wondering, just, just looking at the fed meeting on, on the thing, I’m wondering like if Fed meetings will kind of be back from a volatility standpoint next year.

I was just thinking like, what, what do we have? I think we had three descents in the last fed meeting. We had one to one to cut more, and two that didn’t wanna cut at all. And I, I’m just wondering as that plays out, like it seemed like as we’ve done these month to month, like the event fall for the Fed meetings hasn’t been what it was once back in the day.

And I’m, I’m wondering if that’ll pick up maybe as we head into the new year with more uncertainty about what they’re gonna do and more dissent and stuff like that.

Brent: Yeah, it, it was kind of a funny thing because I was talking to some new traders and, the market was up a lot after fm, not up a lot, it was up about half percent.

And, they were going, how can this be, everybody already knew we were gonna get the ray cut. And it’s like, look, the, the, the cut itself was priced in 90% chance. Right? It’s about the forward guidance and the forward guidance. From what I understand from guys like Alden and Darius Dale was like, we got, we’re getting qe.

The, they joke about it like qe, not QE thing. and so that’s why the market sort of wasn’t anticipating that. But to your point, there was a lot of descent. And then adding onto that is like, who’s gonna be the next Fed governor? And Trump says, we could have 25% GDP growth. Like, so, I’m not even gonna pretend to know.

But to your point, the uncertainty around the path of this stuff definitely seems different. Like there’s no clear odds of a rate cut for, next year’s, meetings at all. Right. And that adds the volatility or adds to the volatility of those events and makes them arguably a little more, impactful.

Jack: Well, you’ve now teed me up to actually have my best macro take of all time, which is we are not going to have 25% GDP growth. I could actually say something, I could actually say something and haven’t actually turned out to be correct, potentially unlike my other ones.

Brent: That’s so funny. is this

Jack: a, just as we get into this JP Morgan collar, like is this as big a deal as it used to be?

I, I feel like people talk about it less, but I don’t know, like in your world maybe they talk about it just as much. Like, I feel like is, is it as much of a big deal in a potential turning point and a pin for the market as it once was? .

Brent: I think it still matters in the ways that it has always mattered.

And the reason I say that is because if you’re near the strike at, into expiration, it’s going to matter. And I can think back to March where the put was in play and the market really respected that level as a downside level. And then the, the, the levels really have not been in play, in, in June and September I would argue.

But if we just go back a few slides here, Jack to, well, let me, I can bring it up here just to talk about this, in September, right? The, the strike was, was possibly in play into September. And I say possibly because this is September options expiration rate here, right? And you would say, Brent, we didn’t do anything for Friday, the 19th expiration, but when was the end of the month?

Right? if we fast forward this just a little bit. You know, where was the JP Morgan collar? It was sitting right in this area where the markets seemed to kind of make a low, and I believe there was a situation with Iran around here if, if I remember that correctly, where like the Iran situation was on again, off again.

So that added a little bit to, to this market movement. But the JP Morgan collar tour was like right in here. And so the answer to your question is, it still matters if we’re near the strike To that point, the strike right now is 7,000, as you can see in our slide here, sorry, I’m going the wrong way on my, wheel here.

the, the 7,000 strike is huge and there’s a ton of gamut at that strike. The gamut is sort of the volatility suppressing flow in this case, but the gamma only matters if we’re near 7,000 as we get towards that expiration and near changes based on how, how far in time we have to go, right? So. A hundred points or, or 1% away from the strike right now is probably near enough.

But if we’re on 1228 and we’re a hundred points away from that strike that, that strike probably has no impact anymore, right? ‘cause it’s too far outta the money. And so that’s why we measure the game of that thing too. now there’s massive 70,000 contracts outta specific expiration is, is quite big for a random expiration like that.

And so again, if we’re within kind of 1% call it, into that last week of that strike, then I think it really is gonna be a, a pretty big force, in play. But if we lose that 6,800 level, then obviously, 7,000 doesn’t, doesn’t matter. Nor do any of the positions at that strike matter.

Jack: And for those who haven’t watched us talk about this before, the, the idea is this strike is a magnet.

So if, if it gets closer, it’ll get pulled in. But I think also like, it, it makes it harder for it to run through it and break on the other direction as well. Right.

Brent: That, that’s right. And there’s been several times where you kind of, we’ve, traded over the strike because to the same point, if it.

Let’s say this strike doesn’t expire for two more months and we’re at 7,000. Well, that strike doesn’t have any impact, right? It is just not, it’s not near enough to expiration where that gamma is not so, so big. Gamma concentrates we’re at the money options. And gamma also increases as we get closer to expiration.

So if you think about gamma, just replace gamma with hedging importance. And so the hedging importance of that strike is gonna be biggest if we’re near the strike at expiration, right? That’s where the, the, the hedging impact matters the most. So that’s why, it is a, a, a bit of a, a moving target.

And that’s why I’m saying, look, if we can close over 6,900, then that strike is really in play, from a hedging flows perspective. From a pinning perspective, right now we’re, we’re, we seem to be sort of, if anything, shooting the other way. you know, we’re at 68 50 in the s and p right now headed down, so that’s gonna reduce the impact of that, of that strike.

Jack: And in this next slide you’re getting at the idea that it can dampen volatility.

Brent: Yeah. And this is from this morning. And again, s and p was at six to eight 90 this morning. I’ll write this, again, market is a little bit weaker here, but what is fascinating to me about this is that if you track the s and p 500, implied vol levels, so we have strike across the x axis expiration on the Y.

And so this is called fixed strike vol, and it’s showing you the implied vol value. So what’s the options price essentially for every strike at every expiration and highlighted in these boxes are implied vols that are eight, nine, 10%, right? That’s as low as you get in the s and p 500. maybe we’ve, we’ve scraped a six by some point over the last five, 10 years, but 99.9 percentile readings here.

These are very, very cheap options to the upside, and they’re not that far outta the money. It would be one thing if you go, Hey, this option’s 2% outta the money and it’s a 9% applied ball or something like that. But in this case, they’re near the money options. There’s sort of options that were in play, at least as of this morning.

They were in play, right? . And so this stuff is very cheap. And why are we getting this so cheap? Well, it’s not only the holidays, but I think it is also related to this JP Morgan position. Why? Because the dealers are long that position at 40,000, contracts at least, and there’s a total of 70,000 or 8,000 contracts sitting there.

And so they may be offering calls around that, trying to offset some of that risk. And I think that is adding to sort of the vault dampening that we’re seeing at these upside strikes. you also see that between these two yellow boxes, the vaults increase and that’s ‘cause we have the CPI VIX expiration, non-farm payrolls, opex, and I think all those keep vault a little bit higher, right?

That’s the event vault that we talk about. So I think that the reason that this vault is so cheap is it’s a vault dampener. And the argument that I’ve been, the JP Morgan callers, the dampener, the argument that I’ve been making is that these calls are very cheap. And so I am tru, I am choosing to express upside by buying these calls.

The advantage of this is that they are cheap, right? They’re, they’re the, the price is low, right? That’s, that’s an objective statistic. Does that mean the market rallies? Not necessarily. But if you’re buying a cheap option, right? Then the, the, the glory of that is that if you’re wrong, well, it was a cheap option.

It was a low price option. I didn’t overpay for it. I was wrong. Fine. I lost my money on a cheap options. It’s great. Conversely, if you buy a put when the VIX is at like 80, you’re paying a ridiculous price for that put. And so you, your odds of getting paid on that are very low. Right? So the argument here is that you buy the cheap calls and if the market rallies, they should pay off s handsomely.

And you know, I’ve, I’ve laid out this construct for a while. I also think the market could rally, there’s plenty of times where I don’t think the market could rally. So in this case, it’s like, I think there’s a chance and the calls are cheap. So we’re gonna lean into these things a little bit as a, as a way to express upside.

Jack: Do you know if that, is that JP Morgan fund still growing?

Brent: I haven’t looked at it recently. I know the options income strategies have continued to grow, but I haven’t checked out the A-U-M-O-B, I should do that. ‘cause there’s not only the collar trade itself, but there’s also Jpi, JEPI, which is one of the biggest income ETFs and it’s run by the same portfolio manager.

And then there’s QYLD, which is the NASDAQ equivalent. So same guy, his name is escaping me at the moment. I apologize, is responsible for, just billions of dollars of volatility suppressing flows. That’s is a pretty,

Jack: that’s gotta be a freaking tough job though, right? He, he’s got this massive trade he is gotta execute that everybody knows is com knows is coming for the most part.

Like, that’s gotta be hard to do. Right?

Brent: I, I mean, it’s a funny thing because people love income and they perceive option selling as income. And so you have this basket of essentially s and p 500 stocks, right? And I think there’s a little bit of a stock selection process in there, but when the market just keeps going up over time.

and you’re selling some income and people are getting like this quote unquote income check every month, generally pretty happy. And what’s funny about it is those funds trail total return in the s and p by a fairly large amount. So actually as an investor, you are hurt by owning this product or owning these products versus just owning spies themselves.

Right? But it doesn’t stop the assets from going in there. So, from a total return basis, they’re not great, but people don’t seem to care. you know, it, it’s like sports gambling. It’s like you’re going to lose to the bookies, but people don’t care, right? So it’s, it’s kind of a funny thing. It’s.

Jack: I wanna do an episode eventually.

I think I mentioned this to you at some point with you, where we go through like all these different ways options are being used inside of ETF strategies. And you can kind of explain, ‘cause I think people who are buying these products a lot of times have no idea what’s actually being done like in the options market behind the scenes.

Yeah. It would be interesting just to go through some of these and be like, I’m getting a 20% yield on Nvidia. Like, here’s where that might be problematic. You just to, to think about like what actually is happening behind the scenes to make these things. And I know this is not an ETF, I don’t think, but just to think about like, what’s going on to make these things work.

Brent: Yeah, that’s right. And when these things get so big and they’re trying to sell calls, for example, to your point before everybody knows they gotta sell their calls and they’re gonna do it on a systematic basis every week. So what happens, like, are you gonna offer a higher price to these people when you know they’re coming?

No, you’re gonna offer a lower price, right? Like, oh Jack, you’re gonna come sell your calls again. Great. Here’s, here’s my price and it’s 10 cents lower or 20 cents lower, or whatever than it was last month. Like, oh, ‘cause I know you’re coming and I know what you have to do. It’s not like you can be like, don’t wanna sell the calls this week.

It’s in your perspective. So your mandate is you sell calls every month against these positions. It’s like, okay, you’re, so, you, you’re at this kind of economic disadvantage ‘cause people know you’re coming. you know, which is just another reason that it’s suboptimal, even if you believe in, in the idea of, of the systematic call overriding.

Jack: So getting to the next slide, what’s interesting to me about Oracle is like two years ago nobody cared about Oracle. Like, I mean, I’m sure it was a big company that was successful and everything, but it was not talked about like, at a market wide level. And then, they, they spent a bunch of money in AI and take out a bunch of debt to do it.

And now like Oracle’s like turned into a very big deal that like, you and I have probably never discussed Oracle before, recently on the opex effect ever. And, and now it’s like a big thing.

Brent: Yeah. It just didn’t matter. And, bring up the chart here because if, to your point, a year ago no one cared.

And, and even, in April of this year, obviously was still pretty flat. And then all of a sudden it like percolates out of nowhere with the AI thing. And I think there was a little bit of a TikTok thing and there, and like all, all of a sudden it’s like, what? This is like the most important thing ever.

And they’re. Spending money like nobody’s business. And what’s funny about it is I write that it’s all that’s impure because we were just talking about in November, opex, opex effect about their credit default swaps and you know, what an issue that was for the market. And suddenly it was sort of like, if you’re gonna again measure what is wrong with this trade, it was like the credit default swaps of Oracle are, are ripping.

And that was like this manifestation or the, the sum of all signals of, of the AI issue. So they come out and report on Wednesday night. stock is down 14% here, as you can see after earnings. And, and as we talk right now, we just made new lows. We, we touched 180 5 here this morning. So fresh new post earnings lows.

Now, Jack, if you saw that the stock dropped 14 plus percent, what would you think put values would be doing, would you think puts would be increasing in value or decreasing in value? if the stock was down substantially,

Jack: I would think they’d be increasing. Am I right?

Brent: you are wrong. This is, this is what we call put skew.

Now there’s a couple of different ways to measure options and so you options of aficionados don’t, don’t throw a shoe at my screen. The point here is what is the implied volatility of these puts? This is Gray Line is for, this is the same expiration January expiration. So it’s a, not a superlong dated expiration, but what I would call a stable one.

In other words, the passing of a few days don’t affect the pricing. The gray line is from 12 nine, so it’s before or fed before Oracle, right? That’s what, that’s what we were looking at in terms of, the, the, the Vols and the stock was around 200 ish at that time. And so you could see the implied vault for these options up here, 67% is what that number is.

I know it’s a little hard to see, so you know, the one 50 puts just as an example, right? Were about 68% implied Vault earnings come out. Stock drops 14% and what do you see here, Jack? You see the implied ball for that option dropped about 50. So the fact that this trough here dropped. Particularly for the put side tells us that, or, or suggests that after earnings, even though Oracle stock dropped so much, that puts were being sold by traders.

Right? And you may say, well Brent did, they were they long puts and they sold those puts like they’re monetizing their hedges ‘cause they were right. And Oracle is a piece of junk. No, we have this data, we call it some spot gamma synthetic open interest or SGOI. And if you see a blue bar on this chart that tells us that the market makers are long puts, so how do market makers get long puts Jack? someone else has to sell em.

What does that mean? That means that what people are doing is selling puts in Oracle as Oracle is careening to lower prices. Right? The fact that these blue bars are higher. So this is telling us that people are selling puts which syns with the fact that this s skew right, is now lower.

Because what happens to options, prices when, when you offer supply, when you sell a bunch of puts, the prices go down. so they’re short puts and they are long calls. Now, they were positioned like this into earnings itself, and that had us writing in our founder’s notes that into Oracle earnings. The bar was set so high ‘cause everyone was already long, so much stock that it was like look, or position long in the stock that there was no number that Oracle was gonna pull, pull out of their hat to, to make those traders happy.

To the point of like, you paid too much for your calls. Oracle, I still think put up a stinker of an earnings of, event and the stock is down. But the, the point is the same people didn’t really rush out of their short put positions. If anything, they seem to be doubled down a little bit, which if you think Oracle’s gonna go outta business in the next 20 days or something like that, or 30 days, you’re not gonna be selling those puts.

Now you could argue that the AI CapEx story is not gonna come to a head over the next 30 days. And so selling short data puts is fine. But at the same time, if we are in this super risky environment, then you wouldn’t expect to see these put values, dropping like they are.

Jack: Is this similar to the GameStop thing?

‘cause like, like I remember at the peak of GameStop, like people who bought puts, I think either lost money or didn’t make much money because like implied vol tanked. Is, is this at all related to that?

Brent: The, the, it’s a little bit different. The GameStop situation was, the implied vol was hitting around four to 500%.

So you compare that to about 60% and in the teeth of the GameStop situation, you are able to buy, put options for basically their intrinsic value. What do I mean by that? You could excuse me, trade put options. So what I mean by that is you could sell a 50 strike put in GameStop for like 45 bucks, which is like, and like on one two month basis.

So, so ba basically GameStop would have to go to zero over the next 30 days, right. For those puts to pay off. And even if they did pay off, they’d only be worth, $5 of extrinsic value. Right? Because I’m selling a 50 strike put for 45 bucks. Like that’s crazy. And that’s ‘cause the vol just got so whacked out.

In this case, it’s almost the opposite. It’s sort of like the vol is percolating and credit default swaps are raising all this other stuff. But we’re seeing people selling puts as a response to that. Feels a little bit weird in this situation. If traders really thought that Oracle was about to go outta business, they would be buying those puts.

And then the other part of that is, and when you have credit default swaps, you could bet on or you could hedge out the risk of the bonds defaulting. Right? Well, the other way to hedge or or protect yourself from the bonds defaulting is to buy equity puts. Why? Because equity goes to zero before the the credit does.

So you could buy equity puts and in credit market calamities or crashes, that’s where you see equity puts get bid. and their bid just sort of, regardless of price, oftentimes ‘cause people have to hedge their bonds, right? You get this sort of price agnostic buyer of equity protection only because they gotta hedge out their bonds.

And so if I buy the puts and the equity goes to zero, then at least I’m gonna cover some of my potential losses, right? So in this situation, we’re just not seeing that. Does that mean that these traders are right or wrong? I don’t know. But you gotta figure, the options, market is a positioning system for not only retail, but also smartest hedge funds in the world, for example.

And no one at the moment seems to be wanting to buy Oracle puts, which to me suggests that Oracle is not about to go belly up, which to me suggests that equity still should have a bit of support. Now I’m saying this with the equity market down 1% as we speak. So we’ll see how well all of this holds up, into next week.

but still this doesn’t, this doesn’t scream to me that we’re all ready to capitulate and die yet January maybe, but. It doesn’t scream to me at the moment.

Jack: So as we get to the next slide, this is why you were asking me if I had a silver position, I guess, earlier in the podcast.

Brent: Yeah. And, and we’re, we’re, we’re gonna wrap this one up here.

And I just wanna bring up this la you know, kind of last core point. So just to summarize this whole thing, there’s a lot of reasons that I think 7,000 comes into play. Volatility, contraction being a driver for equity markets, and the price to bet on that is very cheap, right? So there are reasons to think the market goes up and the implied vol is seven, eight, 9%.

to bet on that upside. So you can buy an s and p call for 9% implied vol. And if the market goes up, great, you make some money, awesome. If you’re wrong, you lost an option that you paid 9% implied vol for no big deal, right? And so, as long as we’re over that 6,800 level, I like leaning long. If we lose 6,800, then.

It shows over, right? I think we trade down to 6,600. So that’s where I wanna be short. That’s where I wanna be hedged in my equity position, et cetera, et cetera. So those are the sort of binary outcomes or the levels that we’re really watching, watching here. Now what about Silver Silver’s? Just really interesting ‘cause it’s getting so much attention and it’s up 6% since FOMC and 30% since basically December.

First call, call it Thanksgiving. It’s quite a move. Gold obviously doing pretty well. and so, my response to that is, is dang, I was gonna put in the Tommy, Tommy boy meme of, Chris Farley with the glasses I flip up. I dunno if you know that one. But anyways, this is moving quite a bit.

And the reason I think this is interesting is, and I’m hedging, my discussion here because I focus on the commodities or equity space. I, I, my. Many years of experience in markets is all around equities. Silver, obviously the commodity, and SLV is the ETF, the biggest ETF, but ultimately it’s silver and silver futures in the commodity.

You know, that’s gonna dictate a lot of what happens. Now that being said, I think SLV implied vols and options, prices should mirror that of silver futures. Otherwise, there’ll be an arbitrage there. And, and to my knowledge, there’s no arbitrage, right? So, I look at silver positioning, SLV positioning and SLV implied Vols as a barometer for supply and demand, right?

In these, in, in these extremes. And I think it’s fair to say, Jack, that these are extreme price movements. If you go on Twitter, people are telling you that JP Morgan’s about to go belly up because of their silver exposure. and, and I wanted to pause on that for a moment. The problem with this is that, let’s say that you did have, in fact, JP Morgan on the ropes used silver buyers and they had so much silver exposure that they the largest bank, I think in the world. maybe the Federal Reserve is bigger, but whatever, whatever is like biggest bank in the world, Jamie Diamond, who could call Trump and ask a favor at any moment, probably he’s gotta be one of the more powerful people in the world.

Let’s say that it’s true, that silver could, could crush them and turn them and go belly up. Well, if you know your history at all, do you know the story of the Hunt Brothers Jack?

Jack: I, I don’t know it well, I I definitely know. I, I know the, some, the basics of it a little. Yeah.

Brent: They, they cornered the silver market in the eighties.

Fascinating story, right? They started to, build a huge position and that position, sort of like a gamma squeeze, it became this reflexive feedback loop where the prices were going up and they had a huge position on, and they had really, they had cornered things, which I, I, I have to remember. But I don’t think at the time what they were doing was sort of illegal necessarily.

. And so they had built this position. The silver market was squeezing. It was this incredible trade. They’re becoming fabulous, wealthy. And then what did the exchanges do? What did the regulators do? They jacked up the margin rate on those positions, and that blew the whole trade up. Well, you fast forward about 20, 30, 40 years to the nickel trade.

Remember, nickel just went kind of bananas. Not all that long ago. Yep, I do remember

Jack: that one. yeah.

Brent: And what happened there? What did they do? They changed the rules of the game. IE They just jacked up the margins and, and before you sit here and say, well, this is like some kind of crazy conspiracy nonsense, blah, blah, blah.

There was a whole thing where they think it was Cliff. Cliff Asne said at a qr, right where they were suing. I’m allegedly, I can’t remember the entire story, but one of, there was a hedge fund. I’m pretty sure it was a QR, who was all up in arms about this because that change in margin, and I think they broke some trades as well.

Basically what happens is the system protects itself and that’s what it’s gonna do. So if JP Morgan wasn’t indeed on the ropes, they will change the rules of the game. In my belief and the evidence shows in history that, they won’t let JB Morgan go down. They will change the rules to screw one out of their positions.

Anyways, diatribe there, Jack, but maybe that can be your title. Well, no, it’s good.

Jack: I, I don’t really know a lot about the behind the scenes of the silver market. So that actually, that was interesting.

Brent: and so the nickel thing was the same thing. I think they busted trades in nickel, which was what a QR was all really upset about.

Not necessarily. I think that’s what it was. Yeah. I think they did bust trades the margin, but they change the margin rates as well. Why? ‘cause you change the margin, margin rates, making it more expensive to play, which means the leverage has gotta come out and it reverses the whole thing. So that’s, at the end of the day, the situation, like the, the marketplace is going to survive.

Right? That’s what’s going to happen. And it doesn’t matter what your position is, if they change the rules of the game, your position doesn’t really matter anymore. Right. ‘cause you’re gonna get squeezed out of it anyways. Alright. That was a lot. What does this accent do with anything?

Jack: It’s just good to, it’s good to see the behind the scenes of that.

‘cause I, yeah, as like I said, I’ve never been, I’ve never been involved in the silver market in any way. so, but what’s your point? I mean, I haven’t, obviously there’s been instances in the past where they’ve broken trades and they’ve done other things and said, you all right. You know, if, if this much worse outcome is out here, like, here’s, here’s what we’re gonna do.

We’re gonna do whatever we do to, to maintain the system. I think, I think that’s certainly been the case throughout history in many cases.

Brent: Yes. And so when you go on Twitter and you look up silver and you see this whole JP Morgan and they’re showing the silver ETF holders, it’s just so stupid.

The problem with that is those tweets, like the dumber, the tweet, the, the more attention seems to get, and then there’s actually no value in offering a different kind of opinion. And then people are like, you’re like, in the GameStop days is like you’re an anti A whatever, people are calling you and you don’t know about the latter attacks and stuff.

I think ultimately, just to make sure it’s clear, not that anyone asked or anyone cares, is like, I think all these assets are gonna go over time. Why? Because the dollar keeps losing value. It’s like, that all makes sense to me. So I’m not gonna sit here and say this as like a giant Silver Bear. silver Bear could be the name of our next presentation.

Maybe

Jack: Silver Bear.

Brent: I like it. The point is here, Jack, is that when I look at implied Vols here on December 1st, what this, what does this tell us? This is our compass, right? Compass is the highest IB rank. So the most expensive options are on an annual basis and, and then the lower they are. So on December 1st, we had the highest options values for SLV and there were extraordinarily weighted towards calls.

That’s why we’re at the top right of this chart. If we’re on the left side, we’d be more put weighted. What’s interesting to me about that is that on December 1st, it’s right here, right? So silver kind of flagged once we hit that high implied vol. It flagged for about a week to two weeks and then it broke higher again.

Right? So that there’s this relationship towards extreme options, prices, and the asset price pausing, if that makes sense. Yeah. And as a trader, there’s a bunch of interesting trades you can make around betting that the volatility sort of comes down, and in this case with the stock going up or the asset going up, vol is going up.

So you’d expect if the stock goes down, that the vol would come down. And so our pitch at the time and, and subscribers and I still personally have this position on is put flies in, in in silver because that would bet that if silver comes down, if I’m short, some put options right, the vol will come in as well.

And so that it’s called a one by two or a put fly, and that’s a structure for another day. but the point here is that what is interesting is silver keeps making new highs, but this trail is showing is that over the last 10 days, we’re seeing the implied volatility of those silver options come down.

And now the board is tilting from extreme call prices to sort of more neutral. Does that make sense? ‘cause we’re in the middle of this graph. If we were all the way on the left, then we would be skewed towards put prices. Does that make sense? Yes. So it’s a very weird thing that we’re making new highs, but the board now, the options board is tilting and shifting.

And if you think about the extreme price reaction we’ve had over the last week or in month, right? Two weeks or whatever, it’s like 30%. That’s a crazy rally. But the options market now, the, the Vs. Are shifting in such a way you go, Hmm, something here seems a little bit weird. And to me it suggests that we’re maybe due for like a, a more legitimate pause, in silver.

And again, in put flies, you can structure great risk reward. I, the one thing I would say here is that if you wanted to bet on silver going down, the last trade I think you should make would be short calls because silver could continue to go up even more in this type of environment. And so if you’re short calls and silver goes up under 20%, then that’s the kind of thing where you get carried out on a stretcher, right?

You don’t ever wanna do that, obviously. But in this case, what we’re seeing is the fact that these vols are changing, suggest to me that we’re getting in, in as a, as a full reference. SOV right now, is trading, sorry, I wanna get a price quote so we can fact check ourselves next time here, Jack. so we’re now trading 56 19.

That’s SLV, the ETF. So, we’re watching this. I think it’s a signal that vol could come down, and we’ve discussed this with our members. If you subscribe to spot ga, you can look at our, our one by two trades that we, have been suggesting here. but I just think it’s an interesting kind of mark here and we could check, fact check the snack time next time to say what did Silver do?

You know, did this signal prove that silver was due for a pause here? Because these options, balls started to suggest that, some positions were, were starting to adjust.

Jack: Yeah, it’s interesting to look at this stuff in real time then to kind of come back the month later and say, all right, here was the setup.

We saw like what actually happened for like, people like me who don’t know a lot about options. It’s just interesting to see that and carry it forward to the actual result.

Brent: Yeah, and you see here is like December 1st to, so this is 10 days of history, so 1, 2, 3, 4, 5. We kind of got down here where vols were still elevated but neutral.

Right? Were neutral in terms of call versus put positioning would suggest that people either sold their calls ‘cause they were long them and they sold ‘em to make some money or they shorted them. Right? So that just tells us the options market, kind of like regulated and just to see how that looks in terms of price action.

again, it’s this period right here. If you look at December 1st, and lemme make sure it’s the day trade, I just want to, I wanna show how the, how the market sort of responded here. This is those five days, right? So 1, 2, 3, 4, 5 days of. You know, this is the consolidation where it turns out if you’re a short vol in this period, you actually made a little bit of money, depending on how you structured.

Exactly. But, this wasn’t this like holy heck, full mean reversion type scenario. Now you’ve added another eight to 10% on silver prices. And so now you may get, again, you could just get a five to 10% correction, which in terms of the overall trend is meaningless. But it does again, highlight how you can use implied vols to help you navigate different price changes, right?

Both in an individual stock, but as well as in some assets or commodity. So even if you’re not an option trader, you can use these options and values, I think, to help you out. And then back to the point of income and selling if you’re long, SLV could be a great time to sell some calls against that, right?

because those values are, are getting to be, pretty rich. So that’s the, that’s Brent Silver Corner for today. And, we will, love a new segment,

Jack: Brent Silver Corner at the end every time. . I won’t, I guess I won’t be able to use the silver will break JP Morgan thumbnail. unfortunately I think you could.

And then,

Brent: that would’ve been

Jack: aggressive. You know, I had that thing of the thing at the beginning where you’re like actively presenting that. We have the picture at the beginning of the presentation. I was gonna have that there with you, like with your hand and then silver will break JP Morgan some fire.

But, unfortunately you’ve taken the opposite side, so I’ll, I’ll have to go a different direction on that. Well anyway, as we wrap up here, people have gotten bad macro takes uninformed AI analysis and, and a bunch of informed options analysis. So, hopefully everybody enjoyed it and, thank you for joining us and we’ll see you next time.

Brent: Yeah, thanks so much. Happy holidays to you, Jack. And, it’s been another year of doing the OPEX effects. Let’s, very exciting. Our last one in 2025. thanks to everyone who’s, watching these, we get a lot of great feedback, surprisingly on them and, and so that, yeah, we really appreciate it and

Jack: it’s like, and happy holidays to everybody and it’s pretty cool.

I mean, we’ve been doing this for a long time now. I was, I was looking at, I forget what it is, but I was looking at the episode count the other day and I’m like, you, you and I have been going at this now for a while. Yeah, it’s true.

Brent: And I, I de of gratitude to you because you produce all this sort of stuff and your, your channel’s growing quite a bit.

So, that’s fun to see and and hopefully we can keep it going for next year

Jack: and a debt of gratitude to you for listening to my uninformed options analysis, every month. ‘cause I’m sure, I’m sure it’s, I’m sure it’s taxing on you

Brent: and you gotta listen to my allegedly formed options analysis. So,

Jack: well thank everybody and happy holidays and we’ll see you guys next month.