Quick insights from our ORCL time & sales (TAPE):

Based on the 1.1MM options traded today:
☑️volume 50% higher for calls - makes sense given 40% up
☑️premium & delta much higher for calls - makes sense given the stock is up 40% so many deep itm calls rolling
❓gamma is heavier in puts?
❓vega is heaver in calls?

hmm...⬇️ The put gamma is driven by huge volume in 9/12 exp puts. gamma is highest for near term & atm options. We read a lot of these puts as sold, and that helped to push the stock up. A lot of these may be covered as the stock reverts. This all adds short term volatility/reversion

From our AM Founder's Note on recent $VIX $SPX:

We've discussed the link between rates and volatility at length over the past few weeks. Into last Friday, as yields (10Y shown below in blue) shifted, the VIX (candle plot) moved in lockstep. That correlation saw a sharp short term deviation last Friday when traders rushed in to buy weekend volatility protection (green box), and this drove this VIX up toward 20. This vol bid in turn pushed SPX down to 4,325. This was VIX moving over rates, as you can see by the 10Y not moving higher on Friday (under green box).

On Monday AM we reiterated that the VIX should mean revert as geopolitical hedges rolled off, and into the downward VIX pressure of Wednesdays VIX expiration. This reversion/decline in VIX/volatility came, and helped in turn to boost the S&P back into the 4,375 area on Monday & Tuesday.

This equity rally/VIX pin was in the face of higher rates, which started to move markedly higher on Monday as highlighted by the blue arrow. As is shown rates continued higher Tue/Wed (red box), but, again, the VIX remained pinned down at 17.50, which corresponded with SPX in the 4,350-4,380 range into Tuesday PM.

VIX Expiration landed on Wednesday AM at 9:30 ET, and VIX immediately ratcheted higher, with equities sliding to 4,300. Powell failed to talk down rates yesterday, which provided the final leg higher in VIX/leg lower in SPX <4,300. We now have the US 10Y at major 10+ year highs, with the VIX matching at recent highs.

Figuring into volatility today is the geopolitical situation, which likely supports VIX/volatility on the day. We'd wager that there will not be much short-vol demand over this weekend as traders seek to avoid geopolitical risks.

https://x.com/spotgamma/status/1714233600642547946?s=20

The impact of rates on options 🧵

JEPI is the largest ETF, with $28bn AUM.

They overwrite a portion of their stock holdings with SPX Index Calls.

Per the PM, they look to sell ~30 delta, 1 month calls.

As rates ⬆️ the relative strike at which they sell in theory goes ⬆️: The foundation of options pricing, black scholes, uses the following inputs:

stock px, strike price, volatility, dividends, time to exp and rates.

In this post, we're only looking at shifting rates for the 0 , but all of these inputs matter to options prices.

This call trading is getting a bit nuts, as depicted in the following charts.

Yesterday was the highest SPX call volume ever!

At first look - its not "0DTE" (see next slide)... HIRO, which measures hedging impact from options trades in real time, shows us that "all expiration" flow is well above that of 0DTE.

Side note: no one was buying puts >0DTE.

What was this longer dated flow, you ask??

1 Month Realized Volatility (RV, blue line) is at 1 year lows, & thats dragging Implied Vol (IV) lower

We use VIX (orange) as an IV proxy

The spread between IV & RV, in the short term, is bullish

We'll show you why

If this RV/IV stuff is new, we'll walk you through it

🧵👀 📚 Quick recap: Realized volatility (RV) is the actual, historical price movement of an asset, while implied volatility (IV) is the market's expectation of future volatility, embedded in option prices.

4000 SPX is what we're 👀 & it's particularly important this week

Why?

Position guardrails around 4100 have worn down after OPEX now allowing more S&P px movement

Implied vol (IV) has compressed to levels where "something has to give"

Enter: Fed mins Wed & GDP/Jobs/PCE Fri In regards to 4000, it's been a strike which has had massive options positions for over a year.

Thats still the case today, as shown here with call gamma in black and put gamma in teal.

Below 4000 are fairly light positions, but predominantly puts & therein negative gamma

👇Evidence that we are at an interim high.

Its a noisy chart, but stay with me.

➡️green = SPX
➡️orange (RV) = 1 month realized volatility: how much the SPX has been moving
➡️white (IV) = 1 month implied volatility: how much volatility traders expect in the future

🧵 In the red boxes you can see that the spread between IV and RV compress as the market peaks.

In other words, traders expectations about volatility in the future shifts under the rate of volatility we've been seeing.

Its a signal that IV is too cheap, or risk(s) have cleared.

I have been trying to find ways to explain the stock market to my kids.

I thought, lets ask @OpenAI to "write a funny children's story about how the stock market works".

The results were...wtf

"Once upon a time, in a land far, far away, there lived a group of animals...👇🧵 who decided to start their own stock market. The leader of the group, a clever fox named Felix, had read about stock markets in a book and thought it would be a great way for the animals to make money.

The first company to go public on the animal stock market was a bee honey

Coming out of 🦃 the specter of risk looms

To be clear, a catalyst is needed, but given a catalyst the market may underestimate volatility

The vol would be driven by:
👉IV supported by 12/14 FOMC
👉Massive 12/16 Dec OPEX

See Dec '18 which was -10% from 12/1 Dec OPEX
🧵 Here is total delta notional by expiration, broken out by puts & calls.

As you can see the size of positions tied to Dec expiration is massive relative to all other expirations.

In theory downside movement may drive large Dec put values higher, leading to short hedging flow.

Today we're extremely excited to launch our real time 0DTE monitor.

This is a critical tool given the rise of same-day expiration trading, which we believe exposes the markets to certain risks.

These impact & risks are highlighted here 👇



🧵 Note these new expirations come as overall options volume is at record highs.

Last Thursday & Friday were the 4th and 5th biggest options volume days in history.

https://twitter.com/callieabost/status/1591865538313342976?s=20&t=HzVR0GQkN9AUlNE8w1L-gQ

There's a chart going around showing record "retail" put buying last week of $19bn vs $6bn calls

If retail is based on of 1-10 lot trans size, those charts seem wrong

Retail calls (blue) & puts (orange) were low & equal

Further, those charts ignore RECORD PUT SHORTING

👇🧵 What those charts seem to show is all customer flow. Not just "retail" but Hedge funds and other buyside entities.

There certainly is/was a sustained spike in put buying vs call buying when you factor in those larger entities

But, again, check out HUGE put shorting👇

What's VaR and why should you care?

VaR stands for "Value at Risk" and is a core method to monitor portfolio risk. Brokers use VaR models to determine customer margin

The problem is VaR may be based on long held relationships across assets, or even equities & equity vol.

1/n There are diff't ways to measure VaR using historical relationships, proprietary models & tests like Monte Carlo

VaR models calc your max portfolio risk across various levels of confidence, like 99.5% or 95%

i.e 99.5% of the time your 1 day loss is less than this VaR number

There are lots of things happening now we’ve never seen before.

Sometimes, this breaks things.

Things like Long Term Capital Management (LTCM) which imploded in August '98

There are many similarities with today.

This is a reminder of correlations, black swans & leverage

👇 LTCM launched in 1993 with ~$5bn in AUM (a lot back then). Returns soared, with annualized gains after fees of 21, 43 and 41 percent in its first three years.

Institutional Investor called the founders of this fund “the best finance faculty in the world”

Ryan Cohen & Weaponized Distributions

We all know that stock returns aren't perfect, normal distributions, but they are close.

To this point, here are the $BBBY 1 day returns since 1992. Nice bell shape, with a few tails

as you'd expect over 30 years.
(1/x) Over those 30 years, there have been some volatile times for BBBY, namely 00's bubble, '09 GFC and '20 Covid Crash.

But, then came Mema Mania...and Ryan Cohen.

To be clear, I'm not accusing Cohen of wrongdoing, he just seems to enjoy large stakes in WSB-focused companies.

The "Rule of 16" options cheat code & how it works:

Rule:
Divide an options implied volatility(IV) by 16 & you get an estimate for a 1 day stock move based on options prices

ex:
IV = 32%
32/16 = 2% = 1 day stock move

Why divide by 16?

(1/x) IV is a 1 standard deviation (SD) estimate for stock range over 1 year

1 SD = a 68% probability that the stocks price falls within the IV estimate over 1 year.

If a stock is $100 & IV = 20%
$100 * 20 = $20
There's a 68% chance the stock stays between $80 & $120

30 day realized $SPX vol (per @SPGlobal) is now trading above the VIX, something that generally shows after major selloffs wherein IV "premium" needs to reset to calmer/higher equity markets.

Often that vol premium can be serve as rally fuel

But this time it's different®... Major recent lows were tagged by a confluence of large options expirations and accommodating fiscal/monetary policy i.e. positional + fundamental catalysts
This year there were +7% rallies around OPEX (positional sup't) but no policy (fundamental) sup't

What does it mean when deltas are negative or positive? Many talk gamma squeezes, but its options delta that can start a stock move

As options are traded it impacts the risk of market makers who may then need to hedge

The initial hedge for a new options trade is delta

(1/x) When "deltas are negative" it implies that traders are buying puts &/or selling calls.
This is shown by the purple line having negative values on the right Y axis.
This means market makers have to sell stock to hedge.

Wicked few sessions...some introspection
The rally felt strange due to coinciding with vol sellers bent on getting 20 VIX right at 9AM ET
Further, lots of S&P gamma (>20%) expiring y'day which is odd for a Wed OPEX. Suggests very concentrated 0DTE options. Transient buyers Making things trickier y'day was QQQ -1.2% while SPX closed flat. S&P relative strength seemed real.
Then AM opening >4500 was met w/negative delta which combined w/fed comments to push back down to Mondays levels.

(1/) Here's options data from the OCC. These plots show the premium per trade aggregated each week, with calls in blue and puts in orange. This is only customer flow(i.e. retail, hedge funds)
Starting with equities, call buying this past week was at LOWS going back to '20 (top right).

TLDR:
Call buying, but timid
Puts are being sold, but its mild

Options utilization is now much more dynamic.

Below are customer buy to open premiums across all options categories (equities, etfs, index).

"customers" are funds & retail

(1/x) Above is just "buying to open premium", here we've netted premiums buying to open vs selling to close.

Based on this, both index puts & calls were net sold.
The other clear change was buying equity calls.

The "Gamma Trap"

Dec SPX has 3.3mm puts which is the largest of any expiration.
The chunkiest of these puts are likely held by funds which will hold to 12/17 expiration.
The 4000 strike has the most put interest.

If the market goes under 4500, the gamma trap could set:
(1/n) A declining market means dealers have more futures to sell in order to hedge those existing puts. This fuels volatility like pushing a ball down a hill. Furthermore implied volatility rises, increasing put values, requiring larger hedges.