Friday, July 22, 2022

Morning Note: Big Money Betting on Big Volatility

JPMorgan notes that there's some not-small money making some not-small bets that volatility's going to be rising in not-small fashion over the coming months:

"Call open interest tied to the VIX jumping to or above 40 is at a record."

Our friends at Spotgamma acknowledged that this morning and pointed out that the bulk of those call options are struck at levels that would coincide with a major market selloff:

"Most of this open interest is at the 75-85 strikes and out in October/November."

Recall that, per our recent market snapshots, our analysis of SP500 weekly and monthly charts points to that timeframe in terms of hitting what our technical work says looks like a reasonable bear market bottom -- only for now, and hugely subject to change between here and there, that is...

Now, whether or not there's strong conviction behind these big-money bets on big volatility, well... Spotgamma points out that, in their view, option traders' positioning has a lot to do with the recent bullish action in stocks, and that, at the end of the day, those bets on a 75+ VIX are simply cheap, and hard to pass up, just in case:
"As we all know this type of move has not happened this year, despite large equity drawdowns. That's made these hedges rather worthless. We believe this lack of tail move is part of the reason equities have recently bottomed – it was clear traders were starting to sell deep OTM puts likely spurred on by the fact that they didn’t pay off YTD."

"There is a well known axiom “hedge when you can, not when you have to”, and we think that this tail protection has simply hit prices that make it interesting from a risk/reward perspective."

So, should you hear some smart-sounding bloke on CNBC sounding the alarm based on the options positioning referenced above, know that it's likely not the smart money panicking over a highly likely meltdown to come. That said, we still see odds favoring lower lows before all's said and done for this particular bear market experience...

Stay tuned, our weekly economic update is up next...

Asian equities leaned green overnight, with 10 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US stocks are mixed to start the session: Dow up 60 points (0.19%), SP500 down 0.14%, SP500 Equal Weight up 0.21%, Nasdaq 100 down 0.44%, Nasdaq Comp down 0.52%, Russell 2000 up 0.03%.

The VIX sits at 22.60, down 2.21%.

Oil futures are down 0.02%, gold's up 0.38%, silver's down 0.57%, copper futures are up 1.77% and the ag complex (DBA) is down 0.97%.

The 10-year treasury is up (yield down) and the dollar is down 0.18%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 25 -- led by energy stocks, Brazilian equities, treasury bonds, MP materials and base metals futures -- are in the green so far this morning. The losers are being led lower by communications companies, AT&T, ag futures, semiconductors and Dutch Bros.


"Whoever could make two ears of corn, or two blades of grass, to grow upon a spot of ground where only one grew before, would deserve better of mankind, and do more essential service to his country, than the whole race of politicians put together. --Jonathan Swift, Gulliver’s Travels"
--Ridley, Matt. The Rational Optimist: How Prosperity Evolves 

Have a great day!