Full Transcript: The OPEX Effect - January 2026

Inside the Flows Driving Markets

Jack: So Brent small caps are back. I don’t think you have that in your presentation, but I’m putting it in the beginning anyway.

Brent: Yeah. This is where we’re at now where the start of the opex is a conversation about how small caps are ripping. So, I think what we said in the past is when small, small caps and value becomes, in vogue, we’re gonna have to change roles here.

And you’re gonna make a presentation. So maybe Feb Opex will be, Feb Opex by Jack forehand.

Jack: Yeah. Yeah. I don’t, I don’t know. I’ll probably keep the viewers for what, like four or five minutes before they, we’ll have like the lowest average watch time in the history of our YouTube channel. But nonetheless, yeah, I, I, I’m, I’m more than willing to ramble on about whatever topic I need to ramble on about.

Brent: What, what is hilarious about this is because you have some zest in your step about this small cap value rotation and the title of my presentation, I don’t have one ‘cause it’s been so boring. And the meme here is, come on, do something. And it’s a man poking Jan Opex with a stick because he’s so bored. So I’m falling asleep.

But you’re, you’re excited. I like that. But

Jack: this has kind of been the market, right? For like these last however many years. Like, it’s like no excitement and then lots of excitement. And then back to no excitement again. It seems like we have these huge bursts

Brent: and then we’re just done with it. It’s true. We’re not really allowed to sustain drawdowns.

I guess 2022 was a decent period, and, and then April things felt kind of icky. But you zoom out a little bit and all of a sudden it’s like, oh, we’re at all time highs again. Like, I never lost faith.

Jack: So I should, before we start here, I should, I should intro what we’re doing here because we just had, our last three guests were Grant Williams, Lizanne, Saunders, and Ooff, the voter in before you.

So we, and then me, we had, we, so we, yeah, you, so obviously the biggest guest we saved before. So you put the peak, you put

Brent: the peak in and you’re on the, the downside.

Jack: But I should, I should probably, since we got some new subscribers in the channel, I probably should intro what, what we’re doing here, why these two finance bros are sitting here talking to each other.

So, so the, the general idea behind what we do here is, I’m a long-term investor as we’re just making fun of me. ‘cause small caps are back for about two weeks and then they’re gonna be not back again. But I’m, I’m a long-term investor and, and like I was noticing all this stuff that goes on behind the scenes that I couldn’t explain.

And, and you’re an expert in options. And you’re, you’re an expert in all the flows that are going on behind the scenes from options that sometimes can cause these things that people like me see happening in the market, but we don’t understand. And that can be individual stocks, like the whole GameStop thing back in the day.

It can also be that the fact that the market, the exact top of the market was on an options expiration at COVID, and then the exact bottom was a month later on the options expiration. So obviously

But, but it helps us understand what’s going on in the market. So that’s the idea of the show and that’s the idea of what you and I are gonna do today.

Brent: That’s right. And for those of you who are new, I apologize for our witty banter to start this. And usually I have a, a, a nice, funny, kind of, attention grabbing title.

But today, my title is A Man Poking Jan Opex with a Stick, simply because it’s been very quiet. And the idea here, as Jack, alluded to is that there are these moments and, where in the options market is in control or is heavily influencing. Price action both in the s and p, as well as in single stocks.

And so we try to highlight how those flows, may come into play as OPEX happens. And the largest opex is the third Friday of every month. And so this January opex is a fairly large options expiration, and there could be some interesting flows coming outta that. And Jack, I think we’ve done a pretty good job highlighting, how there’s been a bunch of transitions here into the end of the year.

A lot of people call Santa Claus rally, for example, and we’ll talk about this for a second. Hey, there’s a lot of seasonality, right? And a lot of that is related in my belief too. The December options expiration and a lot of flows happening around those holiday periods. So you can kind of put some, positions and maybe a bit of math even behind, why the options expiration drives bullish or bearish behavior.

And this is typically in pretty short windows, right? I, we’re typically looking at most 30 days out in time, but oftentimes I’m looking kind of in the, 1, 2, 3 week. Time period, certainly, not much longer than that.

Jack: And we will get into all that as, as we go through your presentation at the beginning.

We’ll explain a little bit more about how this works. But before we start here, I just wanted to, congratulate you because you, you have, I believe, indirectly been mentioned in a Matt Levine piece, on Bloomberg.

Brent: That’s right.

And what we’re gonna talk about, some of my accolades, I’ll leave up, my picture here. I guess we’ll just land on that for a second.

The action

Jack: shot. We,

Brent: we love

Jack: the

Brent: action shot, as a, I call myself a finance bro, and I guess that’s probably accurate. I’ve, what, 25 years of working at banks and things like that

. So one of yours were my, the, the, the guys that I put on a podium is Matt Levina, the, the editor at Bloomberg, or he opinion writer at Bloomberg.

And he included Spot Gamma. It was a quote of a market watch article about Captain and Condor. We’ve talked about Captain Condor I a hundred times, probably Jack, and so MarketWatch and, and Joseph did an excellent piece there. And, Matt Levine quoted me being quoted in MarketWatch. So we’re calling that a quote derivative.

You frame that as, Matt Levine getting along, spot Gamma or Brent calls, and I said, that sounds great. And he’ll never talk to us to refute that so we can run with it. Yeah,

Jack: exactly. And if that’s further the, like, that’s more than Matt Levine will ever mention me. So you, you’re already moving in the right direction.

And I do think, like for, for people like in our space, like Matt Levine is like the one person you’d want to mention. You’d probably like, if you could pick anybody to mention you, it probably, it would probably be Matt Levine. So

Brent: you should take it

Jack: when you can get it.

Brent: Yeah, I geeked out about that a little bit.

Some people may get excited about like a Kim Kardashian shout out or something, but I’ll, I’ll take Matt Levine. That I, I was, I was pretty happy about that, so,

Jack: yeah. So we should just, just very briefly before we start, we should do the Captain Condor thing quick for people who haven’t been watching us all along.

‘cause it was a really interesting thing, like what he was doing, and obviously it didn’t end that well firm at the end, but it, it’s, it’s kind of an interesting story. So maybe you can just really quickly talk about like, what he was doing.

Brent: Yeah, and it’s very, it’s a fascinating, story because there, there’s a, a gentleman, David Chow, his name is, and he built, these zero DTE condor positions.

So what that means is every day you come in, you sell a call, call spread in the SPX zero DT options, and you buy, put spread, excuse me. You sell put spread. So you’re selling call spread, selling a put spread in SPX zero, DT options, and your goal there is to bring in some income every day. And so he wouldn’t do this exactly every day.

He had a, a model which was a bit opaque, what the model was. So he would come in, every couple of days or maybe, once or twice a, a, a month depending on what the market was telling him. And what was interesting about this is if he was wrong and the s and p moved through, either his call spread or put spread, he would double down the next day.

And there was no other rule than that. If you lose today, you double down tomorrow. And if bet is he betting against

Jack: volatility. Basically

Brent: he’s betting against volatility. He’s betting that the market, the s and p 500 is going to stay in a range on a daily basis. And he would typically put this trade out at 4:00 PM for the next day.

So specifically, it’s actually a 1D TE option, meaning that I put it on about four 12 is when you trade it and it would, it was for an expiration tomorrow. And so. He had amassed quite a following in a discord room. Thousands of members paying about $5,000 a year to get his signals because his strategy was working very well in bringing in, a lot of income.

And he’d show pictures of his, McLaren, for example, on his, Twitter feed or his X feed. So, he is getting a lot of bravado. And we had talked a lot about, a lot about, excuse me, a lot about this trade for a few reasons. The first one is that it was getting to be very, very large size. There was oftentimes where he would be wrong, 8, 9, 10 times in a row, for example, not, not that many, five, six times in a row, and it would be a very large size position, right?

20, 30, 40,000 contracts, for example. And the s and p 500 would, this data would show up in our tools and the s and p 500 would react to those levels, right? So. He would’ve a call spread at say, sixty nine fifty and the s and p will move and pin to that strike. And so we would talk a lot about, this gentleman and his strategy because we would watch for him to be out in the market because we believe the market would move to or respect those big levels and that it was generating signal for us to trade off of.

And so what ultimately happened, long story short, is we had written or, or worked the Wall Street article, excuse me, wall Street Journal. We did a bit big article about this trader and how these positions were, were growing to be very, very large in size on a consistent basis. And the Martin Gale’s, what, what you call it when you double down your positions.

We talked about the risk embedded in this, right? Because what it would take was a series of about six, seven, maybe eight times of being wrong in a row, right? For you to lose all of your money. Yeah, not just kind of what you’ve gained, right? But you’re gonna lose everything. So if you think about that in blackjack, right?

Jack, when you are wrong on one hand, right? You double down. So you lose 25 bucks, you double down 50, and you double down 50, you double down a hundred, right? So very quickly you get large numbers, right? It’s exponential, values that you’re getting here. But let’s say that you have the capital to keep going for a hundred turns, right?

At some point, the bank or the casino comes out and says, guess what? you can’t do this anymore, Jack, right? You’re, you’re done. We’re not gonna take your bets anymore. Or you become so, so big that the bank can’t take your bet or the casino can’t take your bet. And what was interesting in this case is they had lost about six times.

It was a 50,000 lot, and then they doubled down again. This was in, mid-December to a hundred thousand, and there was a signal in some of the data we saw that the way that the trade was put up that. The size was being split up between different liquidity providers. To me that sort of suggested that the trade is now getting too big.

So that’s, if they had to double down from a hundred to 200, that maybe they wouldn’t have had a liquidity provider put them up, which would’ve killed the strategy. But ultimately what happened with that a hundred thousand lot is the market on a very quiet day, moved through their strikes. So his, his spread was only about 30 bips wide.

So that meant if the s and p moved more than 30 bips wide on Christmas Eve. They would lose. And the market did of course move, more than 30 bips. They lost about a hundred thousand, on a hundred thousand contracts. This is around a $30 million loss just on that trade. I estimate about $50 million lost overall over the six days, right of this, of this swing of his strategy.

There’s sad stories about people losing their life savings and the discords and kind of everything else. And so, that story led Matt Levine to make these comments and he quoted us in the Wall Street Journal article from. April when we highlighted this story to the Wall Street Journal and we were sort of the only voice of reason saying, look, this is risky.

Ultimately you’re gonna lose everything, right? It’s just the, it’s just the law of probability that eventually you’ll get a streak, that, that will go through these numbers. And then not only that, there’s a whole bunch of other reasons. That, that this just makes sense. For example, the whole street knew what you’re doing, right?

So they start to price trades against you, that kind of thing. If you’re interested in digging in this a little bit, we have this on our, our YouTube channel at Spock Gamma. You can look up, captain Condor’s, $50 million loss, for example. But, this was one of the major stories that we were tracking really for the last year.

And so he’s outta the market now. He says he’ll be back, but, time will tell.

Jack: Yeah. This was a strategy that was essentially guaranteed to lose, like you said. Right? It, it was funny, I dunno if you saw this, but like Cliff Assness. Retweeted, something about this, ‘cause Captain Condor had kind of said, I’m going back and I’m redoing my model and I’ll be back doing it again.

And Cliff Asness was kind of saying, the problem here is not your model. The problem here is the overall strategy you’re running. Like even if you change your code, it’s probably gonna still end the same way. And what’s

Brent: interesting to me particularly about it is that he had said, this is the condor. Uh.

Captain Condor himself had said that, and, and by the way, captain Condor is a name that we coined to sort of, name this trade and name this person. Trademark uba. Yeah, a trademark. I should have trademarked it. And so, thi this gentleman had said that he doesn’t look at options, levels and things like that to put trades on.

He uses technical analysis and the, and, and the problem with that is that what you’re doing is you’re selling options, right? You’re selling volatility. And so options, prices are not the same thing as just levels on a screen, right? And, and the reason I bring that up is because he would not, he would sell options, prices at times where implied volatility is very low.

In other words, options, prices were in the gutter oftentimes, and he would come out and he’d sell these trades, and then the next day he’s forcing himself per strategy to double down no matter what was happening, right? Sometimes he doubled down on an FOMC day or a huge CPI day, for example. Or, he, he put his trade on when.

Implied volatility is maybe at one year lows, like just kind of things, moments in time where options traders, like myself would like, this is a terrible moment in time to put this trade on, right? based on these options trades. And so, it, it seemed like he was somewhat ignorant to some of just options pricing, just basic options, pricing or basic understanding of options pricing.

And what’s funny about that is, is that you may say, Hey, this individual doesn’t sound too smart, but. When you’re trading 50 or a hundred thousand lot order, that’s about as big as it ever gets, right. We spend a lot of time talking about the JP Morgan collar trade, for example, and that’s a 40,000 lot position that gets rolled once a quarter.

And this guy was trading oftentimes, 25, 30 and up to a hundred thousand contracts. So the, the, the, the trades were huge. And then the individual, after all this happened, kind of put out a, a, a brief or a primer on. We’d never seen in our back testing a streak of losses like this before, for example, and he made some allusion to, or, or, or mention of black shoals and, and it sort of dox them as someone who just really doesn’t understand options pricing at all.

And so, it, it, it, it’s just a very interesting thing because these, these individuals which are clearly very ignorant, that doesn’t stop him from generating a ton of revenue in his Discord channel with his subscription service, which is selling, an options trade and options strategy. That, is just completely ridiculous, right?

But, but here he is still able to, to, to get these assets together and trade a bunch of size and, the thing goes sideways. But, I guess kudos to him for, for not giving up. Hopefully he comes back with a, with a little bit of a better strategy next time.

Jack: Yeah. And this, this, unfortunately, this has never happened in our back test or famous last

Brent: words, in the world.

Famous, famous last words. And the back test will never show you how market makers move prices against you because they know that you have to trade tomorrow because. Your strategy says you have to trade tomorrow and everyone knows what you’re doing, right? It’s like, your liquidity is, is kind of perverting prices or so that that will never show up at a back test.

And that,

Jack: that sort of gets in the, to the presentation here and what we wanna talk about because we’re, we’re talking about how what’s going on behind the scenes, what people like him and other people are doing are affecting what the rest of us as long-term investors are seeing. So this first slide talks about how much options have grown and in 2020 was kind of a turning point here, right? In terms of the use of options and we’ve just been straight up into the right since then.

Brent: Yeah, that’s right. And, and we start with this slide so that we put this into context.

Just since COVID options volume has, grown massively. This was through, the rise of the GameStop trading and everything else, but also zero DTE options and just investors are getting in retail traders in particular, getting smarter about their use of options to the point of someone like Captain Condor who’s trading just massive size.

And so. We see about 150% growth over the last, say five years. And that’s compared to only about 30% stock, growth in stock volume. And so the change in stock volume, we think is actually somewhat, you could attribute some of that to, the hedging flows of, of options, right? And so really the, the options volume is, is significantly outpacing stock volume.

And we continue to set records, in terms of, of options volume. So this flow, right, this options flow and the related hedging flow, we think is exerting more pressure on the underlying. And we can explain, here how that works. In this example, we use a MC calls replace a MC with any stock.

When you have a situation where a lot of retail traders are out there, right? Jack, you’re out there buying a MC calls, I’m buying a MC calls, that adds up, right? We go down and we put our order in through an interactive brokers or whatever the retail platform you’re using. And that goes down to one of the 16 options exchanges.

Now, 90% of the time when you are trading on an options exchange, it is against a market maker. And that’s pretty unique in in the options space. Those market makers, there’s not very many large options, options market makers. There’s only a handful like Citadel, Susquehanna, Wolverine, names we’ve heard of.

And so they are required to post liquidity. They’ll get into these moments in time in particular where all these retail orders come in as a rough example, like in the GameStop saga, all of a sudden these small orders, right, aggregate into something big. So in this example, you go, oh no, we just sold a hundred thousand calls because someone posted on wall streete bets.

Let’s buy this stock, or let’s buy calls in the stock. And if you use a basic Black Shoals measurement, it computes something called delta. What does Delta mean? That’s the hedge ratio. So if you trade one call, right, one call equals 50 shares of stock. 50 delta means 50 shares of stock. That’s the initial hedge in this example.

So if you do a hundred thousand calls, that’s 5 million shares of stock. And if it’s a fast stock and there’s a lot of pressure, you can’t sit there and say, I’m just gonna trade this 5 million shares over the course of the day, or I’ll just let this go and see what happens. Like, no, you gotta get into the market, right?

And start buying those shares. ‘cause as the, as the options market maker, you need to be hedged out so that delta changes and a couple of other variables change. Like the stock price goes up and down and that’s how, and we can compute, right? The hedge ratio that has to change as stock price changes, as you can see here on the left, or implied volatility changes, right?

If you think about VIX going up and down, that can exert force or, or changes in head ratios. And then last as time passes. Just as time passes alone, let’s say the stock doesn’t move and volatility doesn’t change each day, that ticks pass, right? Or x each hour that ticks pass. In the case of zero DTE, that also changes the hedge ratio.

And so why this matters is ‘cause when we aggregate all this options flow across the entire US listed. Space, right? We can compute using open interest in some of our proprietary, positioning systems, right? How hedging ratios have to change. And that allows us to forecast, the related impact on stocks in the s and p 500.

Jack: So the idea here is these people are the casino, basically, right? So they don’t want to have positions in one way or another on any of these things. People are trading options and they wanna make their fractions of a penny every single time, and they’re gonna make tons of money that way. They don’t want the risk is, is that the general idea?

Brent: Yeah. And that’s a general idea. And, and if you get into the specifics of market making, et cetera, will they sometimes let the hedge not be perfectly laid out and et cetera? that stuff’s true as the general sort of one-on-one understanding what you said is exactly right. Jack, their goal there is to provide liquidity capture, bid as spread.

They can, they can play some of these other dynamics to, to generate incremental income. But the name of the game as a market maker is collect bid as spread, keep risk, pretty neutral. And we do that through, buying and selling shares of stock.

Jack: Right. So in the process of them offloading that risk, they create these flows which can then have impact on the market.

And that, that’s the whole idea behind what we’re gonna talk about today.

Brent: That’s exactly right. And it’s not always just offloading, it is also, adjusting, right? So sometimes they’re buying, sometimes they’re selling. And why we talk about this at OPEX is because at options expiration, all the positions for January options expiration expired at 4:00 PM today, right?

Eastern time, those positions are all gone. So then in theory, there are a whole bunch of hedges that these, options market makers or dealers have, and they go, we don’t need these hedges anymore. Right? We don’t have to also hedge the way that we were if we were hedging in a way that suppresses volatility, right?

We call that a positive game of hedging. Well, if all those options expire, guess what? We’re not suppressing vol anymore. Our flow’s not gonna suppress vol anymore. For example, if we were short a bunch of calls and we owned a bunch of stock against that and the calls expire, what are we gonna do? Well, I guess we gotta sell, sell our stock, right?

We don’t need it anymore. So those are, that is why we focus on this a lot at options expiration in particular, because. The, the removal of big options positions can be a catalyst for change.

Jack: So I’ll use this as an example ‘cause I’ll never be able to use it again. But, so say people are long calls on a lot of small cap value stocks heading into this expiration.

Those calls have gotten more and more expensive. But when we get through expiration, so dealers have been hedging against that. When, when we get through expiration, those positions clear, we kind of start over. It allows maybe the market to move again.

Brent: Yeah. I mean the, the premise is ridiculous on, on its face that people would buy a bunch of calls in value stocks, well, let’s just say in some fantasy, but I gotta is actually up this

Jack: time and they haven’t been for a long time.

So

Brent: some fantasy world, that is how it works. We’re using it anymore. When people buy, when I’m buying call, right? If I’m the trader and you’re the market maker, I’m buying the call, you have to sell it to me, right? And, and then you would have to buy stock, right? So to that point, if I keep buying more and more calls, guess what?

We get squeezed. Or you get squeezed because you’re short calls and you keep buying stock and then all of a sudden one day options expire like they did today. And then suddenly you’re sitting there with a bunch of stock and you go, I don’t need this stock. I gotta sell it.. And so the cycle is, the positions build up and we’re now at options expiration, right? So the options expire, we gotta get rid of these hedges and then we’re gonna build positions back up, into the, February options expiration.

We should also make a note that there’s so much activity now in short dated options flows that you can advance this cycle. Like for the SPX options on a daily basis, there’s sort of a small cycle there. And then with weekly options, so the single stock options expire every Friday. There’s kind of a short cycle there as well.

So, there are sort of these cycles and cycles with opex, but monthly opex is still, kind of a marquee time to, to watch these flows. ‘cause there still is on a relative basis, a lot more, options expiration. Now, statistically, we found that when VIX expiration follows opex, like it is now, VIX expirations next Wednesday.

There’s a performance flip in the s and p. What does that mean? If the s and p is rallying two thirds of the time, it sells off after opex, right? So you could think about just an example before, okay. Dealers short calls, they’re buying stock calls expire, they sell that stock and the market goes down, right?

There’s a correction. Same thing. If markets crashes into opex, the market tends to rally afterwards. And so you can see there’s, it doesn’t matter a bit where VIX expiration is relative. And we think, that that’s a, we’ve done some exploration of why that is before. But the idea is that ops expiration holistically, right, ties VIX expiration to opex, which was today.

And so this could be a moment where we see a correction next week, right? If these stats hold true.

Jack: So just thinking about it, like thinking about COVID, what you were just talking about, like at the bottom in COVID, obviously there were, puts were increasing in value a lot. The market was moving in that direction.

You hit opex, all that stuff cleared. It’s sort of allowed, it was part of what allowed the market to buy.

Brent: Yes. And we’ve seen this many times since COVID as well, where if you think about puts right, the market is crashing. People have puts, that means, if deals are short puts, they’re selling stock right to keep up.

Vol is spiking, right? The VIX has gone to 80. It’s like, it’s just calamity. And then what happens at opex? All those puts go away. Now, if you own hedges, what do you do? You roll your hedges. Well, what do you do with those hedges, Jack? You don’t take a a a million dollars that you made in your put hedges and then go spend another million dollars.

You spend a fraction of that, right? You adjust your hedges, for example, or you just don’t reh. And that alleviates the pressure, right? That downside pressure because the big, rich, expensive puts that you had that expired. You, you’ll roll them down to something, that has lower exposure, right? You roll them what we call down and out, right?

So you, you drop the strike down or whatever, and that reduces the pressure, right? And then vol comes down. When vol comes down, that further reduces pressure and that allows market makers to cover short positions, right? So you could talk about this as a short covering rally, for example. Many of you have heard the term Vana flow, right?

So if, if VIX comes down, if vol comes down, that allows market makers to buy stock, if we’re talking about the s and p 500. So, there’s a lot of these, these different flows that are sort of intertwined, but the opex really triggers them. Oftentimes as it forces, remember, it forces position shifts.

You don’t really have an opportunity to say, oh, I’m gonna keep the stock for a while, right? I if you own the calls or, or own the puts, the put is expiring. It is going away. You have to do something, as a put holder, right? I mean, you could choose this, let it expire. But you can’t just keep that exposure.

‘cause the exposure’s, it’s, it’s expiring, it’s going away. So, so it compels action. It compels activity. Yeah.

Jack: So, and also the I on this next slide, the idea of what’s happening in terms of realized volatility heading into the expiration can also also help us explain things, right?

Brent: Right. And this chart, when it says delta into and delta out, it means the change in vol, right?

Not, not delta, the Greek. I should, I should change that, to be a little confusing. But all this is showing us is that realized vol changes into expirations. So if you look at realized vault or different windows five day, 10 day, 20 day, what you see is if that vol is contracting into an opex, vols been contracting into this opex, for example, it expands after, right?

There’s the, the red bar before shows us vol contracts and then after vol expands. So statistically there’s a lot of evidence for this. And not only that, it works the other way too. If vol is spiking the opex, it tends to contract after, which proves the turning point theory, right? Uh or the stats around turning points, not just from a price action perspective, but also from a volatility perspective.

And the fact is that in the s and p. 99.9 times out of a hundred, right? What you have is if the market is going up, if s and p is going up, vol is contracting, right? That’s almost always how it works. And if s and p is dropping vol, IE, like Vix for example, is expanding. Sometimes in single stocks, you can have the opposite where vol is expanding, right?

‘cause everyone’s buying silver and silver’s going crazy. And then if silver sells off, vol actually contracts, right? So when we’re talking about vol expansion, contraction, that is specific to the s and p 500 and the nasdaq.

Jack: So in this next slide, we’re looking at Gamma and we’re looking at it in relation to like one day forward volatility, right?

Brent: Right. And so a lot of the work we do here is we measure gamma. Why do we look at gamma? ‘cause gamma tells us how much dealers and market makers have to adjust when the s and p moves around. So if s and P goes up, how much hedging flow has to be adjusted? If s and P goes down, how much hedging flow has to be adjusted?

And not only that, not only how much, but what is the action? And so what do I mean by that? If you have a positive gamut environment. Which is right where we are now, kind of where this, this line is. What happens is when the market goes up, market makers sell into that rally. That’s what happens in positive gamma hedging.

If it was negative gamma hedging, they would do the opposite. They’d be buying into a rising market. And similarly, if it was negative gamma environments, a downside, if the market’s going down, positive gamma means dealers buy. And if it’s a negative gamma environment, market goes down, they sell, right? So positive GA means the flow is contracting volatility, right?

I sell into a rally, I buy a dip, I contract vault. Negative gambling do the opposite. Dealers are selling stock when market goes down, they’re buying when it goes up. And so you can imagine if those flows get big enough, it drives volatility. So the farther on the left we go here, the more we push towards a what’s called negative gamma regime.

And what you see via the Y axis is on a forward one day basis, this is a short term timeframe. Volatility expands when that gamma gets more negative. And so statistically we have this evidence that. The gamma that is there. Pre-market is an indicator of how much volatility we should spec expect during the next day’s session.

Jack: So in this next chart we’re getting at what you talked about at the beginning here, which is quiet, other than my raging, exciting world of small cap value where things have just, just wild out there.

Brent: That’s exactly right. And this happened in November, which I realize is kind of cut off the chart here.

But if you look at these opex and, and we talked a lot about, we’re gonna show this in a few minutes where we’re looking for a move into 7,000 based on how positions are gonna change and also the holidays, because we talked about how time decay or the advancement of time affects options, flows and hedging, right?

And so when you move through, Christmas holiday, that affects that, that time decay, right? That hedging flow. And so what you see here is right at VIX expiration, right after the day after we make a low, right? FOMC sparks some downside. And then look at this rally Jack. You see right at de opex, we rally right to Christmas, the Christmas holiday, right?

You have Christmas and then, no one’s really shown up for work the day after, right? and then there’s this self, there’s mean reversion. So you can see, you’ll see this time and time again where the market will have these short term directional shifts at options expiration. Now, not every one of these options, expiration is like the moment in time that the all time high is put in.

There’s sometimes shorter changes in trend or some mean reversion, right? so, as a, as a asset allocator or someone who has a longer timeframe, you can use these moments in time where these shifts in time to maybe adjust some of your own object exposure. If you’re selling calls, for example, or tactically making some adjustments in your positions, buying and selling to Reweight, for example.

There are other times if you look at, like in April for example, or March of, 2020 with the COVID situation where you’re putting in a a, a systematic or a, a, a long term, excuse me, low in the market, right? Or, or an all time high kind of thing. So. Again, we’re not trying to say every single high and low of all time is put in with these options expirations, but absolutely, you can see time and time again this very high correlation between an options expiration, and, and some short term highs and lows.

And on that point, if you look at where opt expiration is right now, Jack, you can make this case that maybe we have a con a a correction. We’re gonna kind of lay that out for everybody here as we hit this Jan Opex vix expiration window.

Jack: Yeah. To this next slide. This is a for, for a non quarterly expiration.

This is a pretty big expiration, right?

Brent: It is. January tends to be a little bit bigger and, usually our slides in this a little bit more robust. I’m in, I’m in a different situation here and I’ve had a bunch of data connection issues. We lock our data service down, a lot of firewalls and things like that with AWS and, and they don’t like, connections from foreign countries, which is where I happen to be now.

So, apologies for that. Everybody’s looking for a little bit more robust, information on this one. But to your point. Normally the monthly expirations are not all that large. Like if you look at February options expiration, that’s about $250 billion notional, right? and this expiration’s quite a bit larger, around 500 billion.

It’s not as big as a quarterly expiration, like a March. March or the December that we just had, for example. But this is a pretty sizable expiration. We’re gonna lose about 35% of s and p gamma, roughly, and then it’s also fairly large on the single stock side because what happens is there’s a lot of leap buyers.

And what that means is that if you remember the famous Nancy Pelosi trades, she buys leaps and at the market rally significantly over the course of the year, right? Those leaps tend to expire in January. So this month you’re buying next year, 2027 Jan calls. And, and those will gain a lot in value if the market rallies, for example.

And so that’s the case here where I think we’re gonna lose a decent amount of single stock. What we call Deltas. And that means that there could be some extra stock to sell right around this timeframe, because a lot of in the money calls that have to get sold, and so that could help us to shed, some single stock, flows.

And so I think that what this does is, possibly puts a little bit of a headwind into the s and p rally here. Based on the way that I’m reading things Now,

Jack: I assume we don’t know what Nancy’s put on for this year right? Yet, because I would wanna close my portfolio. I mean, when you look at her performance against some legendary investors, she she usually takes them down.

It’s amazing.

Brent: 2, 2, 2 questions on that. I don’t know if she still has to report, right? ‘cause I think she’s no longer gonna be active as a politic. Oh, yes. We may not know

Jack: anymore.

Brent: That’ll be curious. But also, does her performance when she starts a hedge fund or

Jack: something,

Brent: will her performance continue if she’s not active in, in, in politics anymore?

I don’t know. It’d be interesting to, well, that is true.

Jack: Yeah, you could, you could definitely argue that was part of the

Brent: contribution to it, right? She could be an amazing slinger or she could have some information that the rest of us don’t. I don’t have any idea. So, I obviously can’t make any allegations and, and maybe she’s just an amazing trade.

Jack: But, but moving forward, we always like to look back at what we talked about in the previous episode before we get into the current one.

Brent: Yeah. We fact check, well, no, we, we back test ourselves or, or see how we did. I like to start with this because, I think we like to get things right around here.

We get a lot of stuff right. And occasionally we’re wrong, right? So we like to just show both sides here. And, what we were looking at into, this, the December ops expiration, a lot of it was setting up to us for a rally, right? And we were kind of calling this opex miss. And what was interesting about this was that on Twitter, such a joyous, positive place to hang out.

We’re catching some flack from people around. Seasonality doesn’t exist and it may exist or it may not, but we’re not here to talk about seasonality. We talk about options, flows around big options, expirations, and if there’s holidays, that sort of perturbs options, values, and hedging flows. And so that’s really what we focus on.

And so what opex Miss was about was not only did you have a big options expiration, right? But you have holidays and not only are there holidays, as in the markets close, people are just off the desk generally, right? So the sessions get a little more quiet. It’s just you are not likely to add on, let’s say a hundred thousand lot of puts and then say, alright, I’m gonna go home with my, wife and children, to have a bunch of eggnog and not watch the markets for the next two weeks.

You just wouldn’t do something like, right. So there’s this decay factor. It’s the end of the year. You’re not gonna put these big positions on, et cetera. So it allows this moment for volatility to come down, right? VIX comes down, positions are shifting. Bears positions lose a lot of value, and that helps the market to rally.

And so into December, as you can see here. Um. Number one, small caps are leading after FMC. So Jack, that, that was a big thing for you. I know that that rally has continued Well, this is, this was

Jack: right

Brent: though, right? Small caps over semis is definitely the way it’s played out so

Jack: far.

Brent: Totally, totally right.

And and a lot of that was about the fact that, there’s a lot of rate adjustments and changes in forward guidance around the stuff. Now, a lifetime of stuff has happened in the last few weeks. And with respect to Powell and some of the other rates stuff we to talk about, but zooming back to December was sort of like, okay, everyone’s very comfortable around the Fed for guidance.

Obviously, Trump is sort of a pro stock individual and so people are getting very comfortable with this rotation. And the rotation was kind of out of s and p tech heavyweights and into small caps. Doo was breaking out. You still seem to seem see some of those flows right now. But looking back, we, we clearly had this opex Miss rally where s and p, and, and the Nasdaq had a nice strong rally, into the year end, right?

Opex, EXUS was the peak. We kind of contracted a bit in, into, new Year’s Eve. And New Year’s. And then, and then obviously we just put in fresh new highs last week. The other thing we were focused on was this correlation. We’re gonna talk about correlation again today. Jack correlation is a metric of how high are single stock implied vaults versus index.

Now, why that matters is because single stock and implied vaults are generally driven by call buyers, right? When they bid those calls up, what they do is they generally will sell s and p vol, right? So the spread between those two gets widened out. That’s only something that you see in very bullish markets.

So what does that mean? Well, equity markets are stable right now, right? So, okay, do I need to own small caps? Do I need to own Nvidia? Do I need to own Tesla? Do I need to own memory stocks? Which has been all the rage lately, right? What stock do I own to express this equity upside? That’s a much different environment from do I own equities at all?

Do I own bonds? Do I own cash correlation spikes during those times where you have those asset allocation conversations, right? So like in April, for example, with all the tariff drama. No one was sitting there trying to pick a stock, right? You’re like, do I own stocks at all or do I sit in cash or like, what do I do?

I don’t know. You certainly weren’t sitting there having a conversation about do I own, Ford or SanDisk or, silver Miner, right? That that was not the conversation. So correlation spikes when equities as a whole gets sold off correlation drops when people get extremely bullish. And in this case, that room there for correlation to drop a little bit lower was a signal that there’s some more squeeze that could be had in the equity upside as people were turning to those single stock stories.

Jack: Yeah. What’s interesting, by the way, on the, on the small cap thing is I’m sure we’re going to, next episode we’re gonna be saying the back seven is back. We, this will be a short lived thing. Did by the way, that only two of the Mag seven outperformed last year? I did not know that. Is that right?

Yeah. One was Google and I don’t know what the other one was, but so it is interesting that like we did see. I, I don’t think it was that. I’m not sure which one it was. It’s a good, it’s a good question. I’ll have to look it upt after this, we look it up and I’m sure the, I’m sure the commenters will be kind and will go ahead and tell us Yeah.

What it is. But it is interesting to think about like, there’s this idea that like the market can’t, you can’t have a good year in the market. Like if the mag seven’s not leading it. And it’s true, the last year was kind of an example of you, you can because, five of the seven

Brent: underperformed and we still, we still did.

Okay. That’s pretty fascinating. ‘cause that breadth is so still so concentrated over the course of the year. Right. But, but I guess it sends, you look at like a name like Aga I guess that had, quite a bit of, of strength and stuff. So, that, that is quite fascinating. It’s less Mag seven maybe in top, maybe it’s, more of a top 20 thing.

Jack: Yeah. Yeah, I would think so. So I mean, it was, it still wasn’t a great year for small stocks and it still wasn’t a great year for value stocks. But it, it was interesting. You at least saw, you didn’t just see all the Mag seven outperforming like

Brent: they usually do. And it certainly, I mean the story s and p hitting all time highs without Mag Sevens really doing much.

Oh, granted is only, only the first two weeks of the year, but, but certainly Max seven has not been a part of these, these rallies ex Google at the moment.

Jack: So on this next slide, we’re getting into some up upcoming, some upcoming things as well here.

Brent: Yeah, this was a view, well, this, this particular slide is a view, oh, this is the previous one, sorry.

That target right into December. And you can see we rallied right up into this green area, right at December. Options expiration. So again, it’s the, it’s the triggering of opex allowing for a market rally. In this case it was a one week, two 3% rally. And so again, this stuff really helped us to line up, the JP Morgan collar was major resistance, right?

Into the end of the year. That proved to be true. We talked about how vol was very cheap. S and p upside was very cheap. Right around December, options expiration, these options paid off nicely into that market rally. And so, there was, there was a lot of these flows that really seemed to play out.

Oracle was getting pounded, I remember after earnings, right, Jack, and people were responding to that by selling puts as an example. So there wasn’t this downside risk appetite. That was a great signal that the market was set up to rally. Through that December options expiration. Did we close, close to the JP Morgan strike?

We, we moved just, a bit under it. And so if I zoom back here a little bit, we can take a look at what the market’s done, here over the last two few weeks. So, we never got that close. 69 40, right at Christmas was the closest we got to that 7,000 level. And if you’re new to this idea, what the JP Morgan collar trade is, it’s a big JP Morgan fund that sells a call to hedge a a put spread, that’s their hedge.

They roll that once a quarter. And that rolls at the end of the month, right? So that is that, specific trade, expired on 1231. So that was a kind of a New Year’s Eve trade and, and the market just never quite got in there where that strike could really pull it higher. And so it wasn’t much of a factor, in this case.

But the idea is if we got up a little bit closer right in that last week to 7,000, we could likely see the market pin at that level, which is why 7,000 was a major resistance strike into the end of the year.

Jack: Yes. The idea is it’s like a magnet, right? If, if you get close enough to it, it becomes a magnet,

Brent: right?

A magnet and also pins, if you think about it, is like if you’re a futures trader or equity trader and you’re thinking about resistance, right? That’s what that pin is. It’s resistance. It brings the market in and kind of, holds it down, right? So

Jack: as we look forward to the January opex, which is, it just happened today, you’re looking at this idea of correlation again.

Brent: Yeah. And, and so, we at Spot Gamma have what we call a risk pivot level. And that’s a level where we see, okay, as long as the equity market or s and p specifically is above this level, then things are stable. And below that level, we look for downside in the market. And oftentimes that downside or that risk is driven by what we see happening in the volatility space.

So sometimes they go, okay, mild correction, versus maybe we have something like a volatility spasm. Like we had, if you remember back in October when we had Trump tweeted something, market drops 3% on the day, right? And so one of those major metrics is correlation, and we mentioned that. We talked about that in December.

Jack. And so we’re talking about again here, and the reason that we’re paying attention to it now is that red line. And this is a SIBO index called Core one M. And so it’s an index level of volatility, but we like to show to, to the audience because it’s a very simplified measure of understanding kind of excess bullishness in the option space, right?

And so what we found is that certainly over the last year, every time this metric crosses eight, it’s a signal that the equity market is due for a correction. Sometimes that correction can be pretty violent. Other times it can be a little bit more mild. But what happened here last week is we crossed this level eight, and that’s telling us that s and p index ball is too low relative to single stocks.

And that that relationship, when it’s triggered to con, triggered to correct, excuse me, it can lead to some violence right in, in the equity space. Now, what’s interesting about this is it crossed seven last week, and that was with the s and p just above 69 50. Yeah, we got about a 1%, not quite 1% correction in s and p, but vol jumped quite a bit, right?

Vix went from around 15 up to 17, 18. And that has come off a little bit, right? That corrected slightly, but we saw sort of the first, I don’t wanna call it spasm, but there’s a little bit of movement there. And so we’re watching this closely.

Jack: So the idea is in the past when we’ve crossed this level, it’s been sort of a sign that we might have a correction come. That’s right. And what

Brent: does this mean? Well, if, if people are buying single stocks at prices that are too high, that’s not really sustainable. And the, what happens is there’s literally trade here, right?

Sometimes you, you frame it, or it’s the dispersion portfolio, but there’s also correlation trades you can make. And what the deal is basically is like, I’m gonna sell s and p options, right? That generates income. I’m gonna use that income to buy Tesla calls, send this calls, whatever the, the, the trend is at the moment, right?

And so you drive. Difference or spread a pairwise difference, right? Between those values, right? And, and you can push s and p, there’s a lower bound to vol, right? So you can push s and P down to that lower bound where it can’t really move anymore, right? And so that’s where we start to hit this area in correlation and this metric where look, we’re stretched like, and the stretch shows as very low values on this chart, right?

‘cause that index vault is getting smacked and that can’t sustain itself, right? At some point, that relationship sort of has to mean revert. And when you get that mean reversion, it means that s and p vault spikes, and then that single stock vault comes down. And that generally means that the stocks kind of get sold off.

S and p vault spikes right now s and p vault spikes that, that means s and P generally goes down. So everything sort of syncs back up, if that makes sense. And you see that correlation metric shift back higher. As a nice way to sort of monitor this trade. It’s sort of interesting also, Jack, is that there was some news out about QVR and Ben er, very smart options guy and they’re putting out a strategy related to taking the other side of this correlation trade saying they were seeing it sort of too stretched.

I’m not saying that they’re relying specifically on this metric. I’m sure they have much more sophisticated models obviously in this. But it’s interesting that they’re noting this stretch and this correlation trade is sort of overdone and they kind of wanna take the other side of it. For example,

Jack: I’m just curious, and this is an aside, but on the single stock options place, like who is the king of the single stock stock options space these days?

It was, it was Tesla for a while. It was Nvidia. Is it still Nvidia? Is that like where, where most people are focused?

Brent: Nvidia and Tesla certainly have the size. I mean they trade a massive amount of size and so you talk about the correlation trade, there’s some type of trade where you see people trading on an intraday basis, Nvidia and Tesla, and they’re trading that versus SPX options, for example.

So you see massive volumes in. Tesla and Nvidia on a daily basis, and that correlates with Spider and Q volume and SPX volume. So those are the top ones, and then it’s a rolling kind of cadre of names. The biggest stuff trading the last two weeks has been Silver Options. S-L-V-E-T-F. We’ve seen 3 million, contracts trade a day and in the S-L-V-E-T-F complex, which, for someone who doesn’t watch the opposite space, you’re probably thinking okay, like, but that is massive, massive, massive volumes.

Freeport, FCX, if of that name, traded nearly a million contracts yesterday. So you’re seeing those types of names, something bubble up and to me, oftentimes that’s indicative of kind of overinflated values, right? Because you’re getting these massive volumes that tells you that a ton is going on in the complex, and that generally means sort of a washout in a directional position.

That’s generally how I like to look at it.

Jack: Yeah, it’s, it’s interesting too, like these names come outta nowhere sometime in your world, like of the option space. Like I remember like Opendoor wasn’t, Opendoor last year became like a huge thing for a short period of time.

Brent: Huge thing for a short period of time.

The vol spike, in, in a name like that. And it just kind of, it’s the memification of a lot of these trades we like, that’s how we like to sort of state at it, I guess these days, right? Where, people just want to go where the action is. And that’s so true, particularly in this day and age.

And you see stuff just, so much volume flood to just what’s trading right. For really no other reason. That’s where the action is. I gotta go trade that, for example. It’s not so much belief in the story, it’s just, hey, that’s where the action is, that’s where the vol is trading. So it’s go.

Jack: I wonder, just, just on the side, does it, like, does that become a huge source of profit for like the market makers when something like Open Door happens?

Like obviously they’re, they’re seeing a very low level of volume open door and then it goes like crazy. Does that become a big

Brent: profitable thing for them?

Jack: A

Brent: hundred percent. And if you look at the optional flows, it’s not just the market makers, but there’s certain types of. Professional hedge fund trading outfits like the volatility, trading outfits that we’ll step up to, particularly if they think it’s, it’s kind of, ignorant order flow, like retail order flow coming in.

And what happens in those moments, right? Where there’s huge options trading, like particularly huge call buying stocks gapping up as a market maker, you widen those spreads out, right? You wide your bin that spread out the vault gets lifted up to, to just ridiculous levels and you’re just collecting wide spreads at ridiculous prices because traders are so, anxious to go and trade these names.

So that allows you, to, to just gain a bunch of edge there right over over the market participants. ‘cause you’re getting a lot of either kind of ignorant order flow trading at prices that are too high or forced order flow right? There can be a lot of margin calls and things like that, occurring into those instances.

And so those are generally great situations for options market makers.

Jack: So this next chart is one of my favorite you do in every podcast, which is this quadrant chart. And it gives us like, there’s always some insights about what’s going on in the market in certain areas of the market inside of this. So can you explain what this is?

Brent: Yeah. What we’re actually looking at here is in the quadrants to the right of this chart means calls are rich relative to puts. So if you think about the right side of the chart is a lot of call activity. Calls are rich, people are buying calls, it’s bullishness to the left, it’s the opposite. Names on the left people are buying puts, they’re bearish.

So that’s the left, right? And then the Y axis is high implied vault. So if you think about that as expensive options, prices, and then the bottom, it’s low implied vault. So what does that mean? Well, if you look at silver jack silver’s just been going absolutely bananas, right? jumping five, 10% higher every day.

So implied volatility, that is the cost of options are extraordinarily high at the moment, right? And what that generally means to us is the move is sort of cresting. Now silver’s kind of been fighting that and keeps putting in new highs. So that’s been a little bit of enigma. But that high implied volatility we’re just talking about generally means.

That options are getting very expensive, relative to the last year. That’s what this data shows us. So the rank is very high, and that oftentimes coincides with a pause in the, in the prevailing direction or the trading action. Now, what’s interesting here is that almost all single stocks, the big ones are in the blower white quadrant.

What does that mean? People are very bold up, in these names, right? All the top tech names, Delta Airlines you see in there, JP Morgan, people are buying calls, right? and then we’re also kind of midway on the volatility range on this chart. What’s interesting about that is earnings are coming up in the next 30 days, right?

So this looks at one month options. So Apple, Microsoft, et cetera, they start reporting in about two weeks. So volatility is a little bit elevated due to that fact, right? Implied vol is always higher into an earnings event. So that’s causing these names to be a little bit higher in this chart. But Jack, look at spider’s, IWM Tesla stuff that doesn’t have those earnings necessarily in the next 30 days.

That implied vault is very, very low. So the single stock stuff is bid up, right? Calls are very, in vogue at the moment. The index stuff, the vols pretty low, right? The IV rank is what catches Mya there. It’s neutral in terms of puts and calls, but the IV rank is very low. And then the Q side you could see is low and skewed a little bit towards puts.

So that index is not getting a lot of attention. If you think about correlation at all time, lows, right? Index is very low. No one really wants those spider IWMQ, QQ calls, but they do want meta calls, intel calls, Microsoft calls, et cetera, right? That’s what this charge is telling us. And so this to me reads, people are certainly bullish, but you could start to make this argument that are they a little bit too bullish?

Maybe that, that that signal’s, showing up here. It’s not, an incredibly skewed, set of data in this case in terms of bullishness, but people are certainly learning, leaning that way.

Jack: Yeah, but to your point, it’s interesting to see all the major tech stocks on the right

Brent: here in QQQ, all the way to the.

Right. And that plays into this correlation idea, right? ‘cause what do you do? You sell cues, you buy single stock, you sell spider, you buy single stock, options. And so that this is the manifestation, right? And just another view of this correlation, correlation at Lowe’s, you would, you see QQQ all the way over here and, and the so, and single stocks to the right.

What happens if correlation spikes? What would you expect to see? You would expect to see all the names probably in the top left quadrant, right? ‘cause people are buying puts and involves spiking across all names, for example.

Jack: So in this next slide, we’re looking at implied, versus realized volatility in the nasdaq.

So what do we see here?

Brent: Yeah, if you think back to the start of the presentation where the, there was no title and the images, a character poking the Jan Opex with a stick. And the meme there is, come on, do something. If you’ve ever seen that meme and so you’re like, please make something happen. And, and why that’s interesting in relation to what we’re seeing here is.

Realized vol, as you can see, is quite low. We’re not at one year lows, as you could tell on this chart, but it’s really very low and it’s getting lower, particularly in the S&P But what is interesting to me, and what catches my eye here, Jack, is that implied volatility is starting to lift, And it’s starting to lift over realized vol In other words, the two are bifurcating, right? There’s a spread is widening between those two. And what was really interesting, last week, we saw the VIX start to move up, right? VIX was hitting 1718 when s and P hadn’t broken a 50 handle range of two weeks, right? A 1% range of two weeks, for example. And what was happening is.

We had the criminal investigation into Powell, right? And I, I don’t know anything about that. It’s just, it seems like that’s gonna create some contentious, put a possibly contentious FOMC meeting in terms of forward guidance. I I would, you don’t, you

Jack: don’t have

Brent: sources in the Justice Department, Brent?

I, I don’t. And every time I, put in my 2 cents, people go, I’m gonna give you 5 cents to shut your mouth on this topic. So, well, bad macro takes are kind of our thing, right? Yeah. Hot macro takes is why people come. So, that just breeds uncertainty, right? I think we can all agree on that.

It, it, it’s, it’s a contentious situation. Now, second one is the Iran situation, right? That started to flare up. Now, p more pizzas were getting sold in DC and, and, and some threats were being passed back and forth. Now, yesterday that seemed to be taken down a notch, right? That, that rhetoric and, and, let’s all hope for peace, et cetera.

But vol started contract suddenly around that a little bit. So the vol started to warm up. We had a one day pause right here at opex. The reason this matters to me is that we can’t, in my view, see a sustained selloff now in VIX or NASDAQ implied volatility, for example, from this point, probably until FOMC now, right?

Why? Because those events hold volatility. There’s some other macro data like GDP, et cetera coming out next week. Those hold what we call event vault. FOMC holds what we call event vault. That simply means that because of that date, because of that event coming up, that keeps volatility elevated, right?

Because you can’t, you’re not gonna short a whole bunch of puts when you have FOMC coming up in two weeks, as an example. So. The Iran situation, which is I don’t think has gone totally away. Again, I don’t know, I’m not gonna be a hot geopolitical, messenger now, but, that’s a situation. You got the Powell situation where the forward guidance matters.

We include, included a chart here of, the rate prob probabilities from CME Fed Watch, 95% chance that there’s no rate cut. I think everyone knows that. But what is Powell gonna say about this investigation? I was listening to Jared Dillon, recently. He brought up the fact that, Lisa Cook, right?

She’s still there. Not a prot Trumper, possibly, right? So there’s a lot of, there’s just a very interesting dynamic happening there now. And so the Ford guidance and just the readout, that’s gonna be fascinating. And I just think that means this uncertainty around that guidance means that, hey, we can’t just willy-nilly sell puts and not that you’re selling puts when s and p and QQQ vols pretty low, right?

We’re at the bottom of this chart. So what’s the risk reward of selling puts in this environment. Not that great if spiders was way up here. 90th percentile rank. For example, you may sell a put into an FMC anyways ‘cause the ball’s so rich and there’s so much premium. Right now it’s a little bit tougher, to make that case right?

Because yes, the spread between implied ball and realized ball is widening. So you say, Hey, there’s some ball premium there, but that realized ball is about as low as it can get. Like it’s, there’s not a big fat, amount of ball that’s been happening that you can kind of mine, if that makes sense.

Jack: Yeah.

And it’ll be interesting to see what Powell says. I mean, that video he put out, he’s not, he’s not playing games. He’s not backing down here.

Brent: I, I totally agree with you and, and again, I, I, I don’t know much about that, specifically, but what I could tell you, Jack, is this is s and p term structure, right?

That darker teal line is the current term structure. And so you could see from Monday’s vault and Tuesday’s vault. Implied vault. We’re sub eight. That’s as low as you get for s and p. Short dated options, full stop, right? You rarely see something like that. It happens, on a, on a, on a decent enough basis, but you’re talking about one percentile vault there, right?

So that’s as low as you can go. And then it glides higher up into the 12%, which is about averaged, right? Over time, 12% implied vol. But what we, what I wanna point out here is this lighter line is what we call forward implied vol. And what this does is it measures the rate of implied vault between two expirations.

And why that’s interesting is ‘cause that is a little more effective for capturing things like an event. So what does that mean, Jack? Well, if you buy a option that expires on Tuesday night, right? That doesn’t capture the FOMC, but the option that expires on Wednesday night does capture the FOMC, right? So we can measure the vol, estimate a vol between those two data points.

And the reason this matters, to simplify this a whole lot is that when Ford implied vol is above implied vol, which is the, was the teal line that’s telling us that. Volatility is being anchored higher, it’s less likely to be sold off, right? Because if anything, vol should be increasing to what this Ford implied vol is showing us as we start to move to those events.

Does that make sense? Yeah, it makes sense. So if you’re looking at earnings, you’d see something else in earnings. You usually see implied vol for a single stock, extremely high. And then you would have Ford Implied Vault for that. Earnings will be much lower. Why? Because as soon as earnings is announced, nine times outta 10, that implied vault collapses on single stocks, right?

Yeah. Earnings is out, event is gone. Vol collapses. So this is the opposite. It’s telling us that vol is being pinned up. Why does that matter? Because one of the biggest drivers of equity price action s and p price action is volatility. We call this the Vanna flow. What does that mean? When vol goes down like a VIX drops, it lifts the equity market up, right?

And it’s the opposite if vols stagnant or going higher, right? That means that the equity market has struggles to go up and if vol starts to crank higher, it could start to push the market down. And there’s market dynamics. We talked about that. Hedging dynamics related to this. But a lot of people think about the VIX as just being the fear gauge, but you can actually think about it that there’s flows related to the way that VIX is shifting and adjusting, right?

And VIX obviously is a measure of s and p, implied volatility. So those two are very heavily correlated when I’m talking about VIX as a kind of a euphemism or a marker for s and p in volatility. They’re very much, very, very similar, things.

Jack: So being the below average host that I am, I think I missed one of your slides here too.

You were talking about the various assets, volatility across different assets.

Brent: Yeah. And I had skipped forward Jack, so, that one’s on me for going little too fast. But one of the other things I was pointing out, by the same Jared Dillon, so he’s gonna a lot of shouts, not that he’ll see this, but if he does hello, but he was pointing out just how low rate vol is and credit vol is, and you can see that there on the top right.

We measure TLT, which is long bond ETF, the implied volatility there. Very, very low, that I only have the last year of data, but you could extend much farther, right in terms there. Credit vol, HYG, bottom left, also very low, VIX, dropping. Fairly substantially. Sorry, my son, my

Jack: son just turned off the light.

I’ll fix that part.

Brent: VIX and, and the, and the equity ball is kind of at those lows. Gold and silver just going off Bitcoin really has woken up. I don’t know how much of that is related to the situation of Venezuela and Iran. If those, kind of, geopolitical, issues are, are driving flows into those assets, could be reasonable oil vol, fairly tepid reaction to some of the things that have been happening so far.

I mean, I know the Venezuela operation was like very quick, but who knows what happens if that Iran thing pops off? And so the point here is that as we and it go into this contentious FOMC, with 95% of people saying no rate, no rate cut or no rate change, of course no rate change for this, right? But what is that forward guidance is that forward guidance that really matters.

And when you have. The, the, the rate related vols at these lows. Well, that means there maybe there could be a little more of a, of a bond market reaction, right? If there’s some change in forward guidance so that bond volatility could create equity volatility, is really what the, the, the takeaway is from there.

So, those are just some interesting things to flag when we’re thinking about not only the kind of the tranquility in the equity market, but that tranquility also extends into the bond market as well.

Jack: So we’ve got a little, we’ve got a little friend who’s joined us here, little cameo, right? He’s putting call spreads on right now and is over at his iPad.

So, but yeah, as we wrap up here, I guess 6,900 is a key, is a key level for you.

Brent: Yeah. And this is our risk off level. And so, I think that the equity market has a window here to correct between now and FOMC, right? And so if we just zoom all the way back, to the start here when we. Have our equity chart, sorry, everybody zoom past it right here.

Right. We have this window between FOMC, which is on the 28th. That’s also when big earnings really start to kick off. So we have VIX expiration and Jan Opex here. If we break that six nine hard level, that’s where that negative gamma flow starts to pick up. And also think that vol can jump and we’d see correlation, have some type of retracement.

We can’t have a full retracement and correlation due to earnings, right? We have to, we have to wait for earnings for that correlation metric to sort of correct a little bit, or they’re fully correct, I should say. But it’s at the, it’s at an extreme right now, right? People are very bull up in the single stock space.

I think that, some of the flows, we talked about opex flows statistically, we have edge to sort of some version. I think we could see a brief correction here into FOMC, particularly with the VIX expiration. And then a lot of it is gonna be binary, the movement after FOMC, whether the forward guidance is finding can, we can resume the rally, maybe the news out of.

The chip sector and the AI sector and the memory stocks get everything kind of going again, right? And so I don’t wanna sort of project past that, but this is a window here where I think we’re ripe for a correction and we can kind of, have some mean reversion in, in this volatility space. And that puts us in place for FOMC.

Jack: So I, I think the good news, Brent, is for the new viewers, we mostly stuck to options This time. The bad macro takes, were pretty much kept,

Brent: under the surface. That’s right. And, and so, I think next time we’ll try to pump it up with more hot macro takes and geopolitical takes as well. I personally hope that value doesn’t lead us forward, because I would like to move away from hot value takes.

Jack: Yeah. Yeah. I probably did way too many in this whole thing, but, I, he mentioned it twice, which is enough. Yeah. If you stay tuned next month, Brent will tell you what’s gonna happen with inflation over the next, year or three to five years. He’ll, he’ll give you his whole forecast for inflation. That’s exactly right.

We could talk about, south American, political

Brent: situation as well.

Jack: Yeah, maybe even data centers in space like last time. You never know. Well, thank you Brent, and thank you everyone for joining us and we’ll see you next time. Thanks, Zach.