Jack: Welcome to The OPEX Effect, where we take a look at the flows behind the scenes driving markets. I’m Jack Forehand, and I’m joined as usual by our actual options expert on this podcast, my good friend Brent Kochuba. Brent, what’s going on?
Brent: Not much, Jack. I’m sad. Summer’s kinda winding down over here, which has got me a little bit gloomy, but overall, I’m doing great. And I can’t believe we’re here at August ‘26 options already. I was looking at our presentation from about a year ago, and you know, so much has changed over the last year. Our August of 2026 is called Honey Badgers, and I forget exactly why we called it Honey Badgers, but here we are.
Jack: I don’t remember either. It was a good title, though.
Brent: Yeah. Well, the idea was, and I think why it’s apropos, and I’ll kinda bring it up—I know what honey badgers means. I don’t remember why I was a honey badger. I guess it was kind of just off all the terror stuff. But the idea is that it doesn’t really matter what happens. You just buy the dip ‘cause the honey badger don’t care. That’s sort of the meme.
Jack: Yeah. And I think, you know, as much as you’re gloomy towards the end of the summer, the market’s not gloomy. The market seems to be more at a risk on move.
Brent: Yeah, that’s right. And it’s a vol crush environment as well. You know, the Iran situation, people—I think they didn’t care before necessarily when things seemed to be more hot than they are, and they certainly don’t care now. Oil’s kinda coming down.
But it is a fascinating moment in time here because we have this big wave of AI, and now AI is starting to transition off or away. So the interesting thing that’s happened here is we had this giant AI trade, and you and I have talked recently about the strange behavior in Nasdaq and tech vol relative to the S&P index vol. And just kind of the stock up, vol up mania that we had into July—excuse me, into May. And then in June, the S&P held up very well, and as we’re gonna talk about here, the Nasdaq and these tech stocks have really come off quite sharply.
Yes, there’s been a rebound, but there’s been really a transition, and I’m just getting into this ‘cause this is why I’m calling it rate maxing, because we have verifiably, at least according to the options data, shifted from this regime of caring about AI as the major source of growth. I mean, I think it still is if you look at GDP and things like that. But the market and the options market is definitely starting to pay a lot more attention to rates right now. And even though the Iran situation seems to be subsiding, you can see the fingerprint in all the vols, and we’ll show this today, is really about what is gonna happen with interest rates as opposed to what’s going on in the token world.
Jack: With rates becoming prominent here, you and I are gonna have to be turned into macro experts again, right, Brent?
Brent: Yes, that’s right.
Jack: People don’t want that, I don’t think.
Brent: I know everyone likes Jack and Brent’s poor macro takes, macro corner. But the thing that I thought was interesting, and I’ll just point it out because why not give a bad macro take, is, you know, about two weeks ago now, we had Trump commenting that we’re starting to run low on missiles, and I certainly know nothing about defense. But at the same time, there’s this famous notepad scribble from Bessent saying, “Buy,” I forget what it was, “$5 billion worth of yen,” or something like that, right?
And what’s fascinating to me about that is at the same time, the long-term yields, right, 30-year was starting to break out to highs not seen since 2007. And so there’s clearly this pressure starting to happen, and I think you could see this thing where it’s like pressure maybe having to offload or off-ramp the Iran situation as we get into midterms. Whether or not that matters, I don’t know. And certainly we had CPI and PPI were fairly flat here. And so rates are still sticky.
And all of this sort of comes to a head here because we have OPEX and then we have Nvidia earnings next week, which is always a big market event, followed by Jackson Hole. And so again, this idea that this tokens versus rate thing is starting to peak right now at this moment, I think is the critical thing that all of us need to watch. It’s kinda like before we were all trading oil, then we were all trading tokens, and now we’re all kinda, I think as equity traders, back to really just trading almost rates in a way.
Jack: It is interesting, this flip back and forth between, like, tech matters and macro matters. It seems like we’ve had that several different times, where we get a big development in AI and then everybody cares about AI, and then we get something on the macro side, everybody cares about macro, and we definitely seem to have shifted to the macro side.
Brent: Yeah. And I think for a while too it was, AI can wash over a lot of bad stuff. And I still think that’s probably true to some extent. But the FOMO has definitely, and the leverage was definitely taken out of that trade to some extent. Now they’re talking about the Anthropic IPO coming up pretty soon here again, and so maybe that re-energizes a little bit. But as we stand right now, here mid-August, it’s definitely a rate trade seems to be what people are focused on. Now, as much as that may sound a little bit dire, S&P is trading at all-time highs. And so things can’t be all that bad.
Jack: So I know we have a little less time than usual right now, so let’s get into the presentation and let’s talk about why we’re here. Because obviously the use of options has increased dramatically. That creates flows behind the scenes. And I see you’ve actually updated your record options volume slide here.
Brent: I did.
Jack: I was a little late in seeing just how much it’s grown.
Brent: Yeah. I was a little late in updating this from previous decks, and the big thing that you see here is that record options volume again on August fourth, so about two weeks ago now, we had record SPX calls, four million calls. This was the day that I think it was Bessent actually came out and said the Iran situation is over. So it’s kind of funny that he now carries the torch there in terms of the geopolitical situation, I guess, a bit.
So huge call buying, huge stock up, vol up move in the S&P, pushed us to all-time highs. And now we’re sort of digesting the other way with that vol finally getting crunched. But just record volume continues to happen, and it continues to spike.
And Jack, just for the record, this is also the month here where Trump has sold his rights to his Truth Social API. And so that is a new thing that’s in the markets. I don’t know if we’re gonna talk about it in the future, but as the AI records all of our transcripts, it’ll be interesting to sort of mark that this has just occurred as well.
Jack: Yeah, I mean, we try not to get into political stuff here, but that is certainly an interesting decision, and one you think would probably not fly in most worlds.
Brent: I don’t think it’s political. I think across the spectrum of politics, people generally think it’s bad. And the reason I bring it up here is because that record call volume was tied to news out. And I don’t think the API was running on this date yet, right? But it’s just this news driver of some of these events and some of these shifts can drive giant options flows that drive giant moves in the market. And at $100,000 a month, there’s only a few firms out there on a relative basis that can afford that. And so it’ll be quite interesting to see how those tweets drive volumes going forward.
But back to the point here, record volumes in options. Options are typically hedged with stock or futures, and so that is the link between huge options volume and impact in the equity markets. And so in a quick example here, if we all go onto our E-Trade or Robinhood or whatever it may be, and we all buy AMC calls—in this instance, no one buys AMC anymore, but if they did—if you are a market maker and you sell 100,000 calls (90% of options flow is traded by market makers), let’s say it’s a 50 delta. So the delta is just an output of a Black-Scholes equation or a basic options calculation that says, “Hey, how many shares do I need to hedge these calls?” So if it’s a 50 delta option in this example, that would be about 5 million shares of stock to buy.
So don’t get glossed over by the Greek term there. This is simply showing you exactly how options trading can lead to a large amount of stock having to be bought or sold. Now, the trick about this too is once you buy that 5 million shares as your initial hedge, you have to continuously update that hedge. We call this dynamic hedging, and these charts here all show you how the rate of hedging changes as the stock price moves. That’s what’s over here. As time passes, we call this decay, theta decay. Some people talk about charm as an impact of hedging. Those are terms you’ve heard. And then as implied vol goes up and down—and implied vol is such a key term here because if you think about it, the VIX rises or drops, for example. If you use VIX as a proxy for IV, that tells us how hedging flows around vol going up or down can move as well. And so those dynamics are all important as we break down how options flows are moving stocks.
Jack: And the key for average investors like me is this often causes price movements in the market, and often price movements we can’t explain. A lot of times you’ll see this big move in the market, and you’ll see the people on CNBC struggling to be like, “Oh, it was this or it was this or it was this.” And the reality is a lot of times it is these flows behind the scenes that are driving the market.
Brent: Yeah. And options flows are certainly a giant part of that. And linked to that in many ways is now the levered ETF trade. We’re gonna talk about that here in a second.
And what I find is interesting is I’ll listen to guys like Gavin Baker, for example, who was just on Invest Like the Best. And he was talking about the crash, and I listened to it ‘cause I wanted to hear the crash through his lens. And he had this very big narrative, which may, in a large way, explain some of the price action in July as a lot of these memory names come off. And he did reference Leopold and that hedge fund, situational awareness, and how they kinda declined.
But nowhere in there was a mention of the giant levered margin call in Korea, which was a huge thing. Massive options, record options volumes—and I wouldn’t expect him to note those record options volumes, but options are leveraged, right? Huge options volumes in that same time period. US-based ETFs that had to contract. We’re gonna show a slide on this shortly.
So there are these levered flows that exacerbate volatility. They exacerbate movement. And I think this is a trip for a lot of macro fundamental investors now who go, “Hey, I can’t figure out the price action here. Let me search for a narrative in maybe some more obscure regions of what’s happening on the fundamental side,” as opposed to saying, “Oh my gosh, you know, we had three hundred billion dollars worth of leverage,” or whatever the insane number was in Korea. All those people just got margin called. That’s gonna drive price action in a lot of these memory names. And so fundamentally, the story is intact, but these people all got washed out, and that explains why the stock price just made such a low, right?
And so I just think it’s so critical. You know, we joke about the Truth API, but what is that? That’s short-dated momentum trading that’s gonna be driven off of Trump’s tweets now on steroids, right? So there are these short-term flows that come into the market that exacerbate volatility, and I think that unlocks potential for more macro or fundamental investors, because they can take advantage of that short-term price dislocation.
Jack: So Brent, I usually get an average of between two and four likes on my tweets, so I don’t know if you think I can launch an API, but maybe I’d have some buyers for that thing. I basically only tweet podcast episodes too, so I’m not sure what kind of market-moving information is in there. But, you know, if I can get the profit, I’ll take it.
Brent: Yeah. I think it’s a good idea. We can launch the Jack anti-social API and live stream these things and see what happens.
Jack: So the reason we’re talking right now is we’re a week ahead of options expiration, and that can be an important turning point a lot of times in these flows, right?
Brent: Yeah. And some of them are more short-term in nature. Like August, for example, is a monthly expiration. It’s not as big as a quarterly expiration that we see in March, June, September, and December. Those are giant expirations on a relative basis. We’ll show stats on that in a second.
But the point here is we wanted to show some stats, some proof, get some receipts, so to speak. And what you see here is that the performance of the S&P tends to flip sixty-six percent of the time around options expiration. And so that means if the market rallies, it tends to sell off, or vice versa. Now, some of these are softer price movements. Others of these can be a little more violent and extreme. But for fundamental and macro long-term investors, if you see a giant crash into an OPEX, for example, oftentimes that can mark a significant low. And so that’s something to pay attention to. Same time with relative highs, right? If we’re just ripping into an OPEX, sometimes we tend to sell off a little bit after. And so you can maybe position a little bit around that or rotate around that a little bit. So that’s what this plot is showing.
More evidence here is on low RV—in this case is realized vol. And the point of these two charts is that vol tends to either... if it’s low going into expiration like it is now, it tends to contract fully into that OPEX window and then expand after. Or vice versa, if vol is ripping, right, and VIX is at like eighty into OPEX, it tends to sell off right after options expiration. So it’s not just price action. It’s also a volatility, or market movement generally speaking, behavior that we see.
And Jack, right now we have a very positive gamma environment, and what that essentially means is that if you look here on the X-axis, this is our gamma index, and the farther right you are in this index, the more positive gamma we have in the market. That is linked to lower volatility. So when I look at volatility contracting into an expiration, I think that is position driven, and I have evidence for that based on high positive gamma, for example. What that means is that when the market rallies, dealers sell stock. When the market drops, they buy stock, and that straitjackets volatility, right? It keeps volatility contracted. And so there’s evidence here that it is these hedging flows that contract volatility. Now, at expiration, these options positions get wiped out by and large, and that allows volatility to expand. And so that to me is why you see these relationships in price behavior switching or flipping, and also volatility flipping back and forth. It’s positionally driven, and that positioning changes at OPEX.
Jack: So we’ve got a new slide here on autocorrelation. This is something I haven’t seen before. What’s going on with this one?
Brent: Brand new slide, and I put this together for a MoneyShow presentation I did recently. And what is interesting about autocorrelation here in this case is autocorrelation is essentially saying, does price action in a trailing timeframe match with the price action in a forward timeframe, right? Are they correlated at all?
And what we essentially find here when we broke this down—and these are thirty-minute bins—is that the correlation of the market, or the autocorrelation, in other words, the way the price action behaves, changes around options expiration. And so what this essentially means is that if you have a situation where the autocorrelation is declining, it means that the price action that we’ve seen over the last thirty minutes doesn’t necessarily sync with the next thirty minutes.
And so when I look at this, what I take from this and what the evidence shows me is that zero DTE in particular—we oftentimes say that it is declining volatility because zero DTE people come in and they buy the dip, or they sell short-dated puts, and that’ll have the market rally. Or if the market rips, traders will come in and sell short-dated calls, and we see the price action kind of mean revert, right? So this mean reversion is a feature of the market. Think about low autocorrelation being if we drop, then we rally, right? That’s lower correlation. Then you can actually see the fingerprints of this peak into options expiration week. And so this is just another piece of evidence that says, “Hey, there is something to this options expiration window.”
Jack: And going back to your slide about the growth of options, I assume a huge portion of that is zero DTE, right?
Brent: Yeah, if you look at the percentage of SPX volume, it’s now seventy percent, pretty stable around sixty-five to seventy percent at zero DTE. I just did a study on the Nasdaq. Eighty-five percent of flows are at expirations that expire five days or less in the Nasdaq. And a bulk of that five days or less expiration is, of course, zero DTE. So it is just a massive driver of positions, and they continue to roll out shorter dated expirations in single stocks as well, and so we’re just getting kind of more of that short-dated positioning coming on board.
Jack: So as we get into this expiration, it’s not a quarterly, so I’d expect it not to be huge, but what are we seeing?
Brent: Correct. Yeah, we’ll show you that breakdown here shortly. Actually, let’s start with that, Jack. This shows you how big expirations are relative to historical standards. And so in the SPX and SPY, which is the biggest options complex, you can see it’s quite a bit smaller than the previous expirations here. A lot of these are the quarterlies or end of year expirations. But on the single stock side, it’s a pretty good size expiration. Not quite as big as last month with July, but it is fairly sizable.
And so when you break this down, again, SPX and SPY is just so big. Overall, I measure this at about a trillion dollar expiration, and the way that I measure it is I look and then say, “Hey, what is the delta equivalent?” And I look at delta because delta tells us essentially how big, in stock terms, the options values are. Goldman and some other groups will put out a total notional value, which just says every option is worth a hundred shares of stock, which is verifiably false, or hyperbolic I should say. So they’ll come out and say probably this is a four or five trillion dollar expiration. This is a trillion dollars. Most of that is SPX and SPY, as you can see here. All the other stocks, Nasdaq, et cetera, quite a bit smaller.
And the feature here is that most of the value expiring here is in calls. Now, what’s interesting about this is that stocks are at all-time highs, but the extreme positioning in calls is not that big. Normally, Jack, I would expect to see at all-time highs more like eighty to ninety percent of position values being in calls, and it’s just not at this moment. And so that is something that I think is kind of interesting. It speaks to the positioning maybe not being so extended or overextended, despite the fact that we’re at all-time highs.
Jack: So are there any other takes? I mean, it’s pretty balanced here between index and SPY and all that stuff. So are there any other major takes on this?
Brent: No, I think it’s important to note that this is not super extreme positioning, and I think that matters as we approach two key events coming up here. If we’re at ninety percent call values, notionals, and vols are going up into that, I’d be much more worried about a huge sharp correction here. Whereas right now I’m a little more neutral on my view into this options expiration. Also, not only because of the positioning, but it also ties to the Nvidia and Jackson Hole situation coming up here in about two weeks.
Jack: So on this next slide, you’re looking at some of these events that are coming up, and we’ve obviously got expiration next week.
Brent: Yeah. And you look at March quarterly expiration this year—what a low that was. And yes, this was timed up with a pullback in the Iran situation. But it’s ironic how all these things tend to happen on these quarterly cycles where you get the big news event, it makes a huge low. There was a big JPMorgan expiration around there. And we just sort of rip.
And you can see that not every one of these expirations is a giant top like in May here. But you get this short-term consolidation off of strong movement, right? And then in here, same thing, right? SpaceX and VIX expiration, there’s some consolidation in there. Same thing around July options expiration, kind of marks this short-term top, right?
And I think that could be a situation here where vol—as we speak here on Friday morning, vol’s getting smashed. We’re gonna show you that in a second. S&P is kind of rallying. I think we have a few more days of that before we get, at a minimum, a short-term pause or slight pullback or contraction in the market into this Nvidia and Jackson Hole event again. So again, short-term correction. Not every single OPEX is marking an all-time high. But you can see the behavior here of how there’s rotations. And this matters for single stocks as well. If you have a giant rip into options expiration, a single stock could pull back very sharply into an expiration depending on positioning. And so that’s something that’s important to mark.
Jack: So this next slide gets into what you just mentioned, which is vol’s getting beaten down pretty good here.
Brent: Yeah. And VIX is at lows not seen since certainly December of 2026. I suspect that we will make an ultimate low into next Tuesday or Wednesday, which is when VIX expiration occurs. And there’s an expiration cycle to this as well. In fact, July expiration was right here. So after July expiration, vol spiked. And this ties back to our stats that show, okay, when vol gets smashed into expiration, it tends to sort of like a breath, you know, it goes in and out. So here we’re sort of exhaling, and we’re gonna have to inhale and push vol up likely into expiration. And that vol also is gonna be driven higher by the anticipation of the events, Nvidia and Jackson Hole.
Jack: So before we look forward, we always like to take a look back and hold ourselves accountable a little bit for what we said last time.
Brent: That’s right. In July, we had a big positive gamma position which was offering market support, not only on the index side—so purple here is S&P positive gamma that, again, supports the market, keeps volatility on the index side fairly muted. This was the single stock positive gamma, very big and positive as well, another supportive fact. Correlation, which is something we watch so closely here, Jack, was the second lowest ever. This is a risk-off flag for us, and for this reason, we were really talking about being concerned about a sharp pullback in stocks and some spasms, as we like to call them.
And to sort of fast-forward there, to talk about the Nasdaq volatility, right, was such a difference versus S&P vol, right? S&P vol here, sub ten percent, back to where it is now. Now we’re sub ten percent, but Nasdaq vol’s a lot higher. So there was this dislocation in tech vol versus S&P index vol.
And as we forward through this, what was so interesting about this, Jack, is that S&P vols were at bottom basement lows, and the correlation we saw was high risk. Now, if you fast-forward what happened, S&P had about a two percent drawdown after July options expiration. That’s not all that much. Nasdaq, though, had about an eight percent drawdown. SMH, DRAM, they dropped about thirty percent, right? They had huge drawdowns. And so tech spasmed. It had a giant spasm. We had this big deleveraging event where the index side, though, the S&P index side, was kinda like a meh.
So I don’t know if we can necessarily spike the football on that, but what is interesting to me, Jack—and I go back to guys like Gavin Baker talking about the fundamental side—is the positioning was all out of whack into July, right? That was the summary of what we talked about into July. It reared its head in tech, in Nasdaq vol, much more than it did in the S&P. And so, again, such an interesting situation where you can mark that prices are so out of whack and vols are so out of whack, and then we have this kind of big disturbance in the force, right?
And in fact, when we look at the projection for August here, you can see that big drawdown here off of July options. Here was VIX expiration. Down comes DRAM, which is in blue. The green is SMH, right? Nasdaq here, you can see six to eight percent off, whereas S&P just had, again, pretty quiet downside period. So it was such a dramatic, somewhat uncorrelated sell-off, I guess, is the way that I would put it, in July. But if you were long tech, you were feeling the pain, right? Especially if you were in the Korean market.
Jack: So yeah, it’s this idea, I think, of when you have a fundamental change, positioning can exacerbate it, right? So Gavin Baker might see things that changed from a fundamental perspective, but the degree and magnitude of the move is in large part explained by maybe what was going on behind the scenes.
Brent: That’s right. And you listen to all these podcasts, same thing. They’re waxing poetically about fundamental narratives kind of in hindsight, right? Unaware of this short-term positioning. And I think that’s very dangerous in this time and age because, yes, there can be fundamental shifts happening behind, but you may assign much more importance to some fundamental driver because you associate it with this price action. And the price action is levered volatility, ETFs, giant options volumes—all that stuff is, again, leverage that drives momentum.
And if you say, “Well, some development happened at Google selling TPUs to Meta, and that’s why this whole thing happened,” you’re over-assigning that importance based on this price action in the stock, and that price action in the stock is exactly correlated with us saying, “Hey, look at how offsides this positioning is. It needs to re-sync itself.” And then when it re-syncs and the vols all go back to normal, you can go, “Okay, we saw this into the event.” So there’s a lot of correlation there between positioning and price action, and it’s not so much looking in hindsight trying to say, “Hey, why did DRAM drop fifty percent? Because no one’s ever gonna use memory again. That must be true based on the stock price action.”
Jack: So this next slide gets to this idea that we had a significant leverage reset there.
Brent: Yeah, and this comes from Citadel. This was just showing you, again, across ETFs, levered ETFs, and the like. I don’t even think this includes the Korean situation, which is just so concentrated in SK Hynix and Samsung. It’s basically just a memory stock, is all the Korean market is. And the Korean market action was driving Micron, SanDisk, et cetera, which was driving so much of what was happening in these stocks here, right?
So down comes this leverage. It has bounced a bit since this chart was created, right? Because the market has rallied some. But it was so extended and so much value in this that this perfectly explains not just the sell-off, but I mean, look how much leverage went into the rally, right, Jack? I mean, that upside was insane in May, in April. And that had to come down, right? That’s the mean reversion quality.
Now, is this chart going up over time? I think unfortunately it is, and I say unfortunately because the bigger we get in this leveraged ETF complex, which is linked to options and derivatives to get that levered component and swaps and all these things—you know, that creates more instability in the market overall. I like the instability, but I think fundamental investors, if they’re not paying attention, they’re gonna keep getting more and more caught up by this.
Jack: How much has options pricing reset, like, in places like the semis? Is it back to normal? Is it still above average? What’s happening since then?
Brent: It’s really fully reset. I mean, the tech vols tend to be higher, but we’ve had a giant reset in that complex. Now, I think the tech vol’s gonna stay higher, broadly speaking, because of the fact that there is so much driving and so much focus on these positions. You know, you look at the Anthropic IPO and just the data center build-outs and all these things. It’s such a giant driver of the economy. But the vols have really mean reverted quite a bit, somewhat like you see on this chart.
Jack: So this next slide, we’re getting to this idea that there’s a thing that exists called a put, and many people don’t use those these days.
Brent: Yeah. And, you know, Jack, mid to late 2022 is when zero DTE options started to trade in the S&P. And you can see there’s a lot of oscillation here in the put/call ratios, right? As fear and greed would sort of build up and subside, et cetera. And that waveform has just turned into just a downtrend, and we have record low put/call ratios now in the S&P since zero DTE came on the scene.
And the reason I think this is, is because people now feel like they can hedge idiosyncratic events. I think that’s part of it. But also just the open interest now—if you’re trading zero DTE, that doesn’t show up in open interest, right? And so I think that’s what’s critical to note about this. So do I not have to buy one-month puts now because if I wanna hedge Jackson Hole, I could buy a one-dated option or a zero DTE option, for example, right? And I think that’s what’s changing the complexion of the flows quite a bit.
But this is also a single stock phenomenon. If you look at the bottom there, put/call ratios, despite the Iran situation and everything else, they’re hardly moving, right? There’s been just a real bottom there over the last really year, kind of after the April tariff situation, where people are really just expressing upside in calls. And this is sorta just an interesting meme mania. I mean, that’s what April of 2021 is. So in 2022, we had that big bear market. This sort of reverted a bit, as you can see in that chart. But this is still a market that on the single stock side, it’s about the buying and selling of call options as opposed to people wanting to hedge with puts on the single stock side, also in the S&P.
Jack: So this next slide gets into something I think it was like two episodes ago we talked about a lot, which is this idea of implied versus realized vol in tech.
Brent: Yeah, that’s exactly right. And I wrote a pretty long piece about this, and you can find this on Twitter. I think we also put it on Substack, about the Nasdaq vol and the S&P vol being so disjointed and dislocated. And this is part of the positioning we’re talking about into the July spasm, right?
And the reason I posted this chart specifically is you can see that implied vol, or traders’ expectations about the future—that’s red—is below realized vol. And that’s a very unusual situation. Why is that? Because the best baseline for what’s going to happen in the market is what has happened. So if realized vol has been twenty percent over the last month, that’s what realized is, then I would expect twenty percent vol going forward as a rough base case. But then I would add some premium to that, right, because of unknowns. Unknowns like wars or rate hikes or earnings or whatever it may be, right?
And so here what we’re seeing is the red line, which is implied vol, is getting smacked and is going back to certainly year-to-date lows right now, if not quite longer term. And the reason this matters is because clearly now traders are pricing less tech vol going forward. And why does that matter? It matters because we had a spike in implied vol here with Nasdaq when these stocks were going up. It was stock up, vol up, because people were tripping over themselves to buy SanDisk and Micron and AMD and whatever other tech story was coming about, right?
But now the fact that this vol is starting to come down, to me is a sign that traders are now shifting away from that hyper-focus on tokens largely and data centers and whatever it may be. They’re starting to sort of normalize that behavior, right? Or the concentration is broadening out, or at least they’re not as willing now to buy calls at any price. And I think that’s an interesting development here for the market.
I would actually suggest that it’s a healthier market because if you talk about breadth and you want to see breadth widen out, that’s kind of what this is in a way, right? That vol coming in and saying, “Okay, we’re starting to now price AI stuff better. We’re starting to get a better idea of the landscape. We can project things going forward a little bit.” And I think that vol coming down now says that upside tail risk is cooling off a little bit. At the same time, it also says people aren’t worried about the future, which is just kind of another interesting moment. And this ties into the rate thing as well, right? Because people aren’t chasing the AI story as much. They’re a little bit more focused on rates. And I have some more evidence on that here. But it’s an important development, I think, in the Nasdaq, and actually in the short term at least, I think it’s a healthy development.
Jack: Yeah, it’s funny. If I’m an AI bull, this is healthy for me because what I don’t want is for things to get completely out of hand and then we end up in 2000 again. These corrections and digestion, this is all good, I think, long term in terms of AI.
Brent: Yeah. I mean, just look what happened into April and May, right? These stocks were up twenty, thirty percent a day. If you read stories about the Korean market and all the margin trading, people lost their life savings, right? I mean, they were all geniuses in May and June, and then they lost their life savings in a month because they were all levered on these names that had just ripped ‘cause it was stock up, vol up, and all that crashes, and their levered trades get wiped out, and they’ve lost life savings in the course of two months, right?
So that behavior drives momentum, which is tied to so much short-dated flows now that you don’t wanna see that behavior. It’s not healthy long term for markets. Now, traders and people like me, I love those dislocations because it offers opportunity in the options trading space. And if you’re fundamental, you have a long enough view, okay, but you need to understand that a lot of price action now is just being driven by, again, short-term, very short-term herd-like behavior.
Jack: Yeah, we won’t harp on it ‘cause I know we gotta keep moving, but that Korea thing was insane. Just for us to picture how much of the average investor was caught up in that is crazy. To even fathom something like that happening here.
Brent: Yeah. And look, the vol coming down now says that cooler heads are prevailing right now, and I think that’s obviously, again, a more stable situation. But you think about the explosion of zero DTE trading, and then now we’re getting into more sports betting than anything else, right?
So I don’t know. I don’t wanna misstate this, but I think Koreans are well known for gambling from what I’ve read. That could be wrong, so sorry if I’m off on that. You know, so I think their behavior tends to be a little more risk acceptable, right? But you don’t wanna see that instability in your local markets, and unfortunately I think it’s been a little bit too unstable for the average investor if you’re caught in this strange timeframe, right?
Jack: When you and I start betting markets podcasts, that’ll be the top, right?
Brent: Yeah. Strange timeframe, meaning fundamental people who just didn’t look at their portfolios for two months are like, nothing happened, right? But if you’re sort of like a one or two-month momentum chaser or something, you can get really blown out. Or zero DTE people really can get tagged there too.
Jack: So on this next VIX crush slide, you broke out the big yellow arrows, and when you do that, I know something important’s going on.
Brent: Yeah, this shows the VIX term structure. So if you look at the VIX tenor, so to speak, over time, this shows you how crazy VIX was backwardated in the middle of March, which is the peak of the Iran, or at least into the death throes of the Iran situation. And then what you see is that this curve has gone from backwardation to contango. And what that essentially means is that when those short-dated VIX positions are getting sold, the price is going down. You end up with a curve that is lower to higher, and that’s this contango.
And now the VIX curve is showing us that it’s the lowest it’s been. This is something like third percentile over the last year, meaning in the next week really, traders have no risk. They see no risk until Nvidia, Jackson Hole, which is basically two weeks out. But then there’s also this very interesting kink to the VIX curve, and there’s always a little bit of calendar stuff to this. But you also think about the risk of rates going forward, right? And I think that’s that kind of October, December timeframe, people are starting to still price in a little bit of a rate hike. And so I think you’re seeing a little bit of that VIX curve, which is that right arrow, showing a little bit of that bump, right?
Which is saying, okay, if we come out of Jackson Hole and CPI and PPI and these other macro data, and oil comes down and all that sort of stuff, and we can say we don’t need a rate hike, then I would expect that vol curve to sort of flatten out and come down even a little bit more. And if vol comes in, that’s a boost for stocks. And so, again, right now people have not a worry for the next week or two. That’s what that left arrow is showing you. And that right arrow is showing you a little bit of a kink. We have midterms and some other situations here coming up. And so there are some unknowns, but I think Jackson Hole could change that pricing a little bit. And this again ties to the rate situation, which is why kind of rate maxing is the name of this presentation, because it’s not so much about AI now. I think it’s more about forward rate expectations.
Jack: So this next slide, the great dispersion unwind. This is pretty impressive when you see it on a chart.
Brent: It is. And so what was dispersion, Jack, going into July? Dispersion in the DSPX, which is a CBOE metric, is looking at how different implied vols are for the top single stocks in the S&P versus the S&P itself. And so if you have a lot of dispersion, that’s saying that, “Hey, I wanna buy calls hand over fist in SanDisk and Micron. I’m not gonna buy calls in software names. I’m not touching index calls, but I’m gonna mildly bid up Google ‘cause maybe they’re a hyperscaler.” So the implied vols for single stocks were all over the place, right? Just not correlated or linked to each other at all.
July OPEX and this huge memory unwind has absolutely crushed that. Now, earnings coming off adds a little bit to this as well, but you can see that this is kind of a biblical, I’m gonna call it, dispersion unwind. And this also to me relates to this rate situation because now, if you still think that Micron is the story to be in, or whatever the hot AI stock of the moment is, you would see higher dispersion, right? But the fact that this dispersion has really totally normalized in a way, right, we’re kind of back in the range, is telling me that now we’re not so focused on one idiosyncratic sector as much, right? We’re thinking a little bit more about other positions.
Now, I don’t know how these two are related, Jack, but you can see here in July and June is kind of when this peaked out, right? Well, look at when tokens peaked out. And I just... Is this a perfect analogy or perfect overlay? No. The token prices seem to sort of peak here in mid to late May and June. But look at how that has come down.
And why I think that’s so interesting is because if you look back over the last two, three weeks, or month, what’s happened? These Chinese models have come out. The token prices are coming down. I think a lot of us are starting to understand, hey, it’s not all about the prices that Anthropic or OpenAI can charge. Like, this is all such a brand-new industry, and people, I think, oftentimes project what has been happening over the last month. They sort of just project that infinitely into the future. Like, oh, look at the rate of tokens going up. They’re $2 now. That means they’re gonna be $10, right, in six months. Well, things are changing. It’s such a dynamic industry. Prices are—and that translates to stock prices and fundamentals and different things like that, right?
So I just think it’s a super interesting analogy that right here under the peak of FOMO of the token prices also syncs to top implied vols in a peak kind of in dispersion, in options prices and call prices in these top memory names. And then suddenly, as these token prices have basically fully normalized to where they were a year ago, oh, look at that. Well, the options prices have started to normalize so much here in these leading sectors. And again, you think about the shift from token maxing, or from focusing only on the AI sector, to, oh, what’s going on with rates in this macro picture? You can really see all this story kind of be put together, I think, here in mid-August.
Jack: Just really briefly on the dispersion unwind, how much of that was the July OPEX? It’s amazing how tied those together are on the chart.
Brent: Well, July OPEX zaps a lot of those expensive calls, right? And so OPEX removes call positioning, and you lose that upside momentum in a lot of ways. And then that’s followed on by earnings. When earnings happen in Google and Meta and all these things, that also reduces some of the implied vol.
But the fact is that end of July, it was stock up, vol up in all of these leading stocks, right? And then what happens is July OPEX kills call positions. You see the momentum unwind, which is not solely an options story, right? But the options position, I think, can trigger a lot of that. And then you see the levered momentum unwind, and all that brings stock down. Remember, it was stock up, vol up in these top names, then it becomes stock down, vol down in these top names. And so that is really what you’re seeing, right? It’s a confluence of events. I clearly see, like you do, a trigger with July OPEX there. But what is July OPEX doing? It’s killing positions that help the momentum upside, right? So what does that mean? Well, you get kind of momentum downside. And that compounds with these other positions that we’ve talked about here, with levered ETFs and the like.
Jack: The next slide, we’re back into Cor1M here.
Brent: Yeah, and so this is an interesting dynamic, right? Because what is correlation telling us? Correlation is simply saying, are the vols going in the same direction or not for the top names in the S&P and also the index? So generally, when does correlation spike? Well, if Iran or the tariffs hit and every stock is selling off, right? When we’re buying puts in every stock you can name and the index because the VIX is spiking, that syncs with correlation spiking.
When correlation is at lows like it was into July, right? Record low correlation, Jack, into middle of July, which is right here. That is saying that people are so bulled up, they wanna buy Micron, SanDisk, et cetera, and then they tend to sell index vol.
Now, correlation is still quite low, which to me says, okay, around this eight level, we’re quite low, which says that index vol is very low and single stock vols have come down quite a bit, right? We’re not at these record lows, but we’re not in this sell-off stance. If you looked at this dispersion unwind, you may think that stocks really got crushed over here because dispersion spiked as market spiked, right? But now dispersion has come down. Tech has also come down. But the S&P index has been largely pretty flat, right?
And in fact, if you look forward here at XLF, right, it’s been at record highs. Software stocks, Jack, ripping, right? You remember the Citrini bottom, right? When he wrote that article that was a... I don’t remember what it was. And everyone’s freaking out about software stocks. That was the low in software stocks. Software stocks now are back near highs. So there’s a bunch of other sectors now, and there’s been a rotation out of this AI stuff and into these other sectors and avenues for bullishness. And that’s kind of breadth widening out, and I think a little bit more of a stable market here.
You know, correlation at eight is not great, but what would cause correlation to spike, Jack? Rates jumping, right? So if we come out of Jackson Hole, and we all think that rates are gonna go up, and that’s a pretty nasty picture, then you’re gonna see correlation spike because why? I don’t wanna necessarily be in this equity position if rates are gonna go higher.
Jack: So this next slide, as you know, is my favorite one, your four quadrant slide. And I guess what you notice right away is there’s nothing in the top of this.
Brent: Exactly. So dispersion—if I was to plot single stock dispersion here, you would see dots or plots all over this map, right? In every quadrant. That would be a very dispersed market. This is looking at top names, and the reason I showed a more macro picture here is because you can see the bond picture: TLT, IEF, LQD, right? Bond ETFs are all on this left side of this quadrant. Lower vol, which is down here. So it’s not a huge bid or people panicking in the options in the bond space, but they are positioned on the put side. They’re more worried about these bonds making new lows, kind of rates making new highs. That’s definitely how they’re positioned.
Conversely, look at how people are positioned in SPDRs, diamonds, right? They’re max bull. Now, this is a low vol position, meaning it’s not stock up, vol up. But everybody here—and you look at gold, commodities, silver, right? People are pricing in this sort of... I guess I’m calling it the run it hot scenario, which is like we have inflation, but the Fed isn’t gonna do anything about it, which means that we all need to pile into assets because of inflation. That’s sort of how we’re thinking about it, right?
Now, SMH, which was up here into July, which was stock up, vol up, the vol is still fairly high there because of Nvidia earnings coming up. But you look at DRAM, for example, low vol, people are pretty neutral on that. Oil is starting to come down now. But you could see this cluster of stuff over here is highly correlated assets, right? I wanna own assets if they’re not gonna do anything about raising rates, which is seemingly how people are positioned, right? Basically nothing done on this rate scenario is kinda how people are positioned cautiously.
And so out of this, if indeed it looks like we’re not gonna raise rates, or that’s what people think out of Jackson Hole, then I think we could have a pretty sharp rally here, because people sort of start to pile more into this bullish trade. And the other thing to note is that UBS had put out a piece recently saying that the CTAs are all record positioned into essentially bond shorts, right? So if we aren’t indeed going to raise rates and people think that rates are even gonna start to come down, that could exacerbate some of this positioning where, okay, there’s a lot of bond flows that may flow into equities as people go, “Okay, rates aren’t gonna go higher now, so I’m gonna maybe get back into bonds or I’m gonna get back into equities.” We could see a big tilt or shift in flows kind of at this juncture based on what happens in the rate picture.
Jack: So this next slide gets into what you talked about before, which is we’ve got some market-moving events coming up here.
Brent: Yeah, just to quantify this a little bit about why I say Jackson Hole is so important. Because forward implied vol, which is that lighter teal line, looks at what the volatility expectation is between two essentially expirations. Now, why is that important? Because events occur between expirations. So in this case, you can see this big spike in forward implied vol saying that when we get around to this event, traders are expecting a lot of vol in between Nvidia and the Jackson Hole situation, right? That’s what that yellow line is showing us.
Conversely, the red arrow is kind of like, okay, nothing is going on next week, so you’re seeing sub eight percent implied vol for next week. That’s about as low as it gets. And so that’s why for Friday, Monday, Tuesday, maybe into OPEX, I would normally look for vol to get kinda bid in the market, to have a little bit of a sell-off, and I think some consolidation here would probably make sense starting next week. I don’t know that we’ll have a bigger contraction because people are hedging this event, right? It’s almost like a VIX expiration or a volatility event unto itself here, because that implied vol’s so high. And so I’m not so strongly looking for this kind of August OPEX correction, because we have these two events that the market is positioned for and staring at. And so what I think will probably happen is kind of like a nothing done for next week into August OPEX, with all the focus on that end of month data points.
Jack: It’s funny, what you were talking about in your next slide came up in our recent episode with Jim Paulsen, because he thinks rates are going lower, but he’s pretty much alone, as you can show here, in that view.
Brent: This is showing fixed strike vol in TLT. Now that sounds complicated, but these are all the strikes on the X-axis and expirations on the Y-axis. And if the number is red, it means people are selling vol at those strikes. Well, what strikes have the lowest vol here, Jack? It’s TLT upside. What would have to happen for TLT to go up? Well, rates would have to come down, right?
And so what we’re pricing in here—you see the green, and it’s lighter shades of green—is TLT actually going lower, which means that rates would go up, right? So the market is positioned... and TLT is a proxy for long-dated US bonds, right? And so when I look at this, I go, everyone’s short TLT calls, kinda longish, not massively out of the money TLT puts, not expecting a ten percent rate hike or whatever, but maybe fifty bps or something like that, which would push TLT down to seventy-seven-ish into next year. And so that is what you see in the bond positioning.
Now, to the point of the UBS piece and what we’re looking at here, if there’s any upset in that view, I think there’s a decent trade unwind here, right? And maybe that’s what you’re getting at with what Jim was saying, in that no one is positioned for that, and the market tends to move to what no one is positioned for. That’s something we’ve seen many times, you and I, over our last however many decades of watching stocks.
Jack: So this next one, we’re getting into gamma.
Brent: Yeah, and the reason I’m showing this is because it’s an interesting position right now where this solid line is today’s gamma position. If you remove one-day expiration, you get this dotted line. So this dotted line is actually one I pay attention to a little bit more because it shows a little more of the more stable gamma picture as opposed to what short-dated options are doing.
And you see a little bump here around 7,700. We’re calling this our risk-off level. This will show in a second here. If we move below 7,775 is the number right now, the positioning says that gamma decreases sharply into 7,500, maybe a little bit lower. So what does that mean? If we break 7,775, I think we could see a pretty sharp move at any time here down into 7,500, which would be a 1% to 2%, maybe 3% correction. That’s kind of the most risk that we’re showing here. And that’s because this negative gamma picture flattens out into that level. Hopefully, you can see that.
The other thing that’s interesting here, Jack, is to the upside, we also have negative gamma up into the 8,000 area. And that’s unusual. What that means is that if we start to rally, I think that that rally could have some legs to it and be a little bit squeezy up into that 8,000 level. Normally, what you see here is gamma would be positive like this peak above. And why is that? Because traders tend to sell calls into market rallies. They’re not doing that right now.
And I think this ties back into the rate situation where we’re expecting some vol. We don’t know which way the vol is going to express itself. But once we go, okay, no rate hike, great, I’m going to bid this market up. And I think we could have a good 2% to 3% rally. Conversely, if it’s like, uh-oh, they are going to hike, then I think we could see a pretty sharp move down, certainly of at least a 2% to 3%. When you look at the way that vol is positioned, though, it’s really quite cheap. If you look at that Nasdaq vol, no one wants puts. So if we do have to price in a rate hike, I think that 2% to 3% could start to become a little bit sharper, maybe towards the 5% variety.
But at any rate, if we just get into the summary here: the trigger for me that says, “Okay, this is actually bad,” or what is happening is a risk-off scenario, is losing that seventy-seven seventy-five level that you can see on your screen. And then you have to pair that with the fact that vol is so low. Dispersion has come way off of its highs, but correlation, what that should say is it’s quite low. And so you could see a real re-rating into some put options, right? You could see vol start to spike in the equity space. And so you put that negative gamma together with a spike in volatility, and Vega becomes a source of hedging flows. Think about VIX spiking, right? And that adds downside hedging flows.
So I worry about risk off being quite sharp below that seventy-seven seventy-five area. And I think we could actually hit eight thousand by the Jackson Hole, Nvidia moment based on how things are positioned. So that’s sort of what I’m seeing across the space. It’s really sort of event-driven. And the key thing here is you know what the guardrails are. I think that’s quite easy, and so you can position the options space for that quite easily. And then if we break seventy-seven seventy-five, I really wanna think about adding put hedges, right? Making sure that I have some short positions of some type, be it options or VIX calls in particular, I think are a good hedge there, or even maybe short some stock, because you do have the fuel there for a rate hike driving some pretty sharp equity drawdown.
Jack: That’s probably a good note to wrap up on. We’re a little shorter than normal this time, but next time, Brent, we’ll give people forty minutes of our macro takes to make up for it. We’ll break down the worst Fed. We’ll break it all down for people.
Brent: Yeah, and September’s gonna be a big quarterly expiration. There’s certainly gonna be a lot happening by then, and so it’s gonna be pretty fascinating. And here again, it’s a little bit of wait and see, but hopefully, you know, you see here again, positioning has largely reset. If there is a little bit of a left tail risk, it’s that no one is expecting a big drawdown here. And when you’re not expecting a big equity drawdown, that’s where it can drive a little bit. So it’s gonna be a fascinating two weeks, Jack, and appreciate all your time today, and look forward to reading all of the fun comments.
Jack: Thank you. We appreciate you doing it. Thank you everybody for joining us, and we’ll see you next time.