Big Rally Collides with Oil and Rate Reality | What the Options Market Says Comes Next

0:02 Welcome to the OpEX Effect, where we look at the flows behind the scenes driving markets. Uh, I'm Jack Forehand, and I'm no longer worthy, I think, because I'm joined by CNBC contributor Brent Katruba. Now, Brent, >> uh, that's right. Hey, Jack. How you doing? Um, I'm going to be doing a little bit more work with CNBC and uh, been doing some new work with Taste Trade as well. So, you know, I'd like to give you some credit for this because um, our our options content is getting out, I guess. >> I don't Yeah, I don't think I get any credit. And also like it must feel good to work with like a true professional in some random setting like that versus what you're doing with me on this thing. >> Maybe you know on second thought no one probably saw this because if they did then uh then there would definitely be no contributing anywhere for anything. >> That's true. Make sure they don't know anything about this. It's probably for the best. >> That's funny. So uh but uh but digging into the market yeah it's been uh I

0:51 don't know if we could say we've had a pullback but what we're a couple percent off the highs. So maybe in the world we live in today that probably classifies as a pullback. Yeah, I think we put a I believe we put an intraday high in on Jackson Hole, which was a big topic of our conversation August OPEX around 7775ish somewhere in that neighborhood. And then we pulled back uh pulled back now to as we're talking now, we're about 7,600 in the S&P. So about percent and a half somewhere in that neighborhood. Um you know, really kind of just a whisker from all-time highs. Um but the risk I think here is is really to the downside. And I think a lot of times in these presentations, you know, we kind of talk down volatility a little bit. Um, but but right now, this is this setup is not looking very good as we talk about uh this on Thursday afternoon. We have CPI tomorrow and the Iran situation is

1:36 unfortunately flaring. Um, and it's flaring, you know, on September 11th, which I know people who are our age, Jack, or older in particular, uh, you know, really kind of that that day hits home a little bit more. So, uh, yeah, it's just kind of kind of a gloomy moment here, I would say. >> Yeah. And then we've also got the we got the Fed next week and, you know, people are I mean, I guess the odds are in favor of a hike, right? Um, but it's not it's pretty close, I think, still. >> Yeah. Well, well, actually, uh, it's interesting because this morning that changed with PPI, we went from about 65% to north of 80 now, according to the CMU Fed Watch in terms of a rate hike. and and from some of the macro people I've listened to and I'm sure you've listened to as well, you know, the the 25 basis point rake hike is just kind of like no big deal, right? Um it's sort of like you want, you know, red or purple

2:24 sprinkles on your on your your cupcake jack. Uh it doesn't really matter, right? Uh there there's a lot of other things going on um in terms of yields and debt and everything else. Uh and so maybe the 25 basis point hike is just sort of ceremonial. And truth be told, when you're looking at the way the options market in stocks were starting to react, even as we had some good jobs data that that sent the rake height rate hike odds to 60%. Um stocks were starting some stocks in particular starting to break out. We saw we started seeing tech rebid uh for example. And now as we're sitting here, oil is over 100, depending on which oil measurement you use. We're over 100. VS are starting to pick up. Um, and then not only with the rate situation, the token situation, which we talked about last August, is interesting too because token prices are

3:12 are really dropping pretty sharply. Uh, and new models have come out that are even better, which seems to be leaning on software a little bit. Uh, even today as we talk, DeepSeek launched a brand new model which is getting some nice traction or or getting some headlines. So, you know, that that tech space is suddenly angsty, I'll say. Uh, has a little bit of anxiety there. uh which is um you know which is again cast a little bit of a shadow over the the current stance in the market >> and also we've had the random former employee from OpenAI out there like saying they're all going to be dead in five years. Um >> we got that too. >> It's what what a world, huh? Uh and and that has to be one of the more liked tweets I I've ever seen. I actually looked up what was the biggest tweet ever. Um, and uh I'm I'm forgetting what it was at the moment because it was

3:57 somebody that passed away that got uh about 10 10 15 years ago. Uh a name I hadn't heard. Um prior to that it was some Obama tweet. So you know this thing last I saw had something like half a million likes. The tweet you were referencing and and the reference was simply that uh Anthropic and Chad DP are building something that's probably going to kill us all. You know has a good chance of killing us all in the next couple years. So great. Well, if we're going out, we'll go out with a bang here. Brand on the OpEx effect. You and I you and I do a celebration post the end of the road. >> That's right. Uh, you know, I always figured that we could do some kind of you get camcorders back and you I could just draw on pieces of paper what we're thinking and uh >> Yeah. If we have to, right? If they if the internet gets shut down or whatever. I don't know. We won't even have any way to distribute it to anybody. We'll walk around the neighborhood with tapes or something. >> Um, so people can watch us.

4:44 >> You know, I read a newspaper not too long ago and I was like, it was very satisfying. You know what I mean? It was like, you know, when the front is, you know, when the back is, you kind of just scroll through the It was just nice. And when when you're done reading it, it was interesting and it was over. It wasn't like this endless. It was uh it felt nice. >> Yeah. You kind of missed that from from your childhood. Uh being able to like sit down and read a newspaper. >> Yeah. Yeah. Uh it was very like calming and it's like, okay, I've read the news and now I can move on as opposed to now um where most of you are hopefully checking spot with Twitter every other minute for what's happened. But I don't know. Uh moving on. Uh >> so yeah, go go go and give your your title of the presentation here, betting against the house. Uh yeah, reverse investing quote, I believe. >> Yeah, th this is maybe one of my favorite quotes of all time. Uh most of you probably know what I'm talking about, but uh Bent was out there and

5:31 he's he's a key character in the narrative today. Um he said yesterday, "People think I'm taking risk as Treasury Secretary, but this is exactly what I wanted. I've got inside info on the House now." And so that I'm the house now quote is is has gone viral in the uh in the financial sphere. And it's very interesting because he said that and then he went to make some moves uh as the house and rates actually busted a bit higher. And so now we have major highs in the 10-year and then what happened after that we had PPI which solidified the rate hike I think for next week. I don't know about solidified but now odds on you know strongly favor that and then the Iran situation just peaked up again uh ticked up again so rates now are really moving against uh you know he as the as the as the

6:21 house uh he's going to be kind of put to the test at the moment so it's going to be a very interesting couple of weeks here into uh not just the Fed situation next week but midterms right Jack they're they're not that far away only about six weeks away it's hard to believe And so that's that's another kind of thing we're gonna have to think about as we uh as we move through October. >> Yeah. Appar apparently we're all getting five grand after midterms. Uh Brandon, I don't know if you saw that, but >> it's deflationary, I'm told as well. >> So I'm excited for that. >> If you uh if you can't afford the inflation that we've created, then we will give you some money. >> Create some it create some more inflation, right? It's a good it's a good it's a good spiral we could have going. >> Yeah. I think they call that the the death spiral. But but before we get into our presentation, we probably should stop at the uh at slide three here because uh given your new role at CNBC,

7:06 the look of Brent in his suit giving giving the presentation uh it's it's more true than ever right now. >> That's true. You know, I actually uh I probably have to get another suit or two, I'm imagining, because it's not often you wear suits these days. Um and uh you know, you go to like a Bloomingdales now and it's pretty thin, I would say. There's not much people don't get dressed up anymore, which I think is a sign of the times I believe. Uh and sign of the economy. May maybe as things get hard harder people will dress a little bit nicer, but we'll we'll see. Um, so I got to extend my formal repertoire, I guess. >> Yeah, I'm the proud owner of one suit, which I've had for probably 20 years. So, uh, but thankfully I don't do anything ever that requires requires a suit. So, >> 10 or 20 years ago is every day wearing another suit, you know, and at the banks and and now again that, you know, that has just worn away. Uh, I know you got a

7:52 bunch of those financial financial guys uh sweater vests, though. I don't but I pro I should maybe I should start doing that to podcast. I'll go I'll go sweater vest if you I think the viewers >> anyone anyone who could send what Jack will be uh will be helpful. >> So anyway as we as we get in here I think you've updated this slide again here. This is this is why we're here and this idea that options are getting used more and more and more and particularly since since the pandemic the the usage just skyrocketed. >> Yeah. record volumes and in the in the the uh expirations continue to grow, the products continue to grow and and one of the interesting developments here, Jack, in terms of demand on stock is actually outside of the options volume. There's been a lot of uh stock tokens and perpetuals trading and things like that that that volumes are starting to come up and I think the options market is

8:38 trying to respond with more zero DTE and different things like that. So it's a very you know there's a lot of products coming on and those products be it options and and other instruments ETFs and the like they're a demand on underlying liquidity and so you know the the idea here is that when you trade an option um you are selling or buying or selling those contracts against the market maker market makers trade 90% of the flow and they need to dynamically hedge. So in this example, if we all go on to E Trade and buy AMC um or Tasty Trade I should say and buy AMC um market makers are selling those calls and they have to hedge. So if you consider this example of 50 delta which means 50 shares of stock to buy for each call uh you can see there in that example that very quickly with 100,000 calls which is a

9:23 lot could add up to be 5 million shares to buy right and they have to do that very quickly and then they also have to adjust that hedge. So as the underlying stock is moving, as implied volatility is changing or as time is passing, you have to continuously adjust those hedges. So we use this type of uh modeling to forecast how options hedging flows in the S&P 500 in single stocks can impact the underlying stocks that you and I are trading every day. Well, you as a value guy don't trade probably ever, but >> no. >> Love it. >> Once every seven or eight years, Brent, I throw trade in. Other than that, >> uh you're probably outperforming almost everybody else. So, kudos to you. >> It's funny. We just had uh our our 100redy year thinkers episode we had like they were just talking about a woman from Nucket. They met on a plane who basically like had just bought Berkshire when the partnership started

10:10 and like never did anything for her whole life and she was like she was some kind of billionaire now. So, uh it is true. The problem with that though is is if the thing you buy is Enron or something, then you've got a problem on your hands. So, there's a little bit of survivorship bias in looking at the people that did that because they did the people that did that with some other stock. It didn't necessarily work out as well. That's exactly right. There's a lot of survivor survivorship bias in uh in a lot of investing. That's uh that's very true. But but maybe she understood some we didn't. So kudos kudos to her. >> I'm just curious going back to the record options volume. The the symbols on the left is that like all the new products that's that have been coming out like over the years. >> These are all the um yeah these are the exchanges and and we're going to uh introduce a couple new exchanges here. Um is going to launch another exchange and so as you can see there at the bottom. So, we're moving towards 20 exchanges

10:59 here by Q4, which is which is pretty wild. Uh more places to give liquidity, I suppose. And um you know, and it is also just an interesting point in the options market and in the stock market in general because you know, event contracts are are picking up a lot. Uh sports betting is getting more popular. So, you know, the the the ability to keep the retail trader interested in options is is a critical thing here for the industry as they continue to sort of expand their offering. And no signs of it slowing yet, right? >> No, not yet. And I think, you know, uh August and September are typically, you know, quiet because people are on vacation. Uh September starts to build up here a little bit, but you know, nothing builds options volumes like a big volatility spike. And you know, if if my hunch is right, we may see one of those fairly soon. And and that would you know, then you get the VIX contracts

11:46 trading and big S&P options trading quite uh quite with a lot of liquidity. So, um, you know, lot a lot of things happening in the market to keep people interested and engaged and that generally drives a lot of options volume. >> If we ever get like an extended bare market, does that further this? Does that make the options growth continue or does it slow it down? >> You know, if you look at I mean, I was going to bring up 2022 because that's kind of the most extended bare market we've had in in a while, I guess. uh and and you can see the volumes there were kind of flat and and generally speaking now if you get a bare market and falls higher. I think that creates a lot lot of opportunity for options traders the risk there is that the retail crowd kind of gets taken out right and that retail component is a bunch of of options volumes. Um and also

12:33 just generally speaking when stocks are down uh I think demand for you know leverage ETFs and different things like that probably subside. So, I would imagine options volumes would contract a little bit if we did have an extended bare market because I think a lot of these products that are beneficiaries of higher markets or higher stocks, right? Again, like all these different ETFs, they kind of go away uh if people start to hide out in in in treasuries or gold or whatever the safe havens are. >> And this next slide we're getting at why we're talking right now, which is next week, next Friday is options expiration. And and this slide looks at the opex cycle and a lot of things are going to clear out next Friday, right? >> That's right. So we we tend to build to the third Friday of every month. We call it the monthly options expiration. Positions build, options positions build, the hedges associated with those positions build up. Uh and then when those positions expire, suddenly there

13:20 has to be in uh we argue that there's a lot of hedges that have to be adjusted, right? So a lot of buying and selling of underlying shares of stock uh to adjust hedges as options expire. Now the September options expiration is set to be one of the bigger expirations uh that we've ever had. We're going to talk about that here in a second. And so the idea is that there's a lot of positions set to expire here. Uh big positions and that could drive a little more volatility uh related to VIX expiration and FOMC also happening on the same day. That's the upcoming Wednesday here as well. >> Well, Goldman tells me it's what like 200 trillion or something we're doing at this this expiration like that. >> Yeah, shout out to Citadel who's getting the uh getting a lot of the attention in this cycle because they've quoted $9 trillion of of value expiring. And so um you know, big numbers get big attention. And so I've been out there trying to shake my fist at uh at those kids for uh

14:09 inflating things inappropriately. Um we have a little bit closer to two trillion which I'll show you here in a second. U but this chart here just shows you statistically there's some evidence that OPEX has an impact on the market. Uh performance tends to change in the market. So twothirds of the time we flip. So if we rally into opex we sell off after or vice versa. Um and same thing with volatility. If volatility is is low uh into expiration, it tends to expand afterwards. And so that's a critical thing. Vice versa too. If volatility is high, so like if VIX is at like 80 and opex, it tends to come down as an extreme example. So there's a churn in volatility and a turn in uh price often associated with those expirations. And from a gamma perspective, this actually is a little off. this this uh line should be a little bit more to the left here as we're going to talk about we're we're at

14:55 a lower gamma position almost to a gamma negative position and the the rub there is that the less gamma we have or the more negative gamma we have forward volatility tends to expand is a one-day forward volatility uh but you can expand us to three or five day volatility and the idea here is that the positions that the the hedging flows that generally keep volatility tight uh they loosen up and and the hedging flows actually can ex uh inhibit hit volatility uh excuse me they can increase volatility uh when when it goes uh negative when gamma goes negative. >> So on this next slide before we look at the slide you should probably explain the concept of autocorrelation. Yeah. And autocorrelation is just another statistical measure. And what this basically says is that typically you can expect uh what happens today or tomorrow based on what happened yesterday or the day before. Right? So things are are

15:43 tend to be correlated. And what you see here with this is that um I did include a zero tot measure here. But what we can simply see here is that correlation tends to shift lower or the autocorrelation tends to shift lower or more negative I should say which simply means that opex seems to change the way the market trades. So if we're kind of stable into or trending up or trending lower uh in the days lean into opex that tends to flip afterwards and and that's what the what the autocorrelation measure is showing. So you know again uh in stock trading if you look at what the best predictor for today or tomorrow is it's what happened yesterday right and so this is simply saying that that behavior seems to change a little bit uh around options expiration. >> So as we get into the opex here um like you said we got a pretty big one here and I think that's a fairly normal level of calls. Is that Is that right?

16:32 >> Yeah. Uh you're right, Jack. And and in very bullish markets, we'll see the call versus put breakdown to be about 90% in like the really bullish leaning markets. At 68% here, this is a moderately bullish stance. And with the S&P only about 1 and a half% off all-time highs, that's not terribly surprising. Uh and what this is measuring specifically is what we call the delta notional. And and why delta is important here is because delta tells you the stock equivalent value of what is set to expire. And so when you hear a number and so we quote two trillion as you can see here is this amount set to expire which is still a lot for an expiration but when Citadel says hey 9 trillion is set to expire they look at every single contract that's set to expire whether it's a penny option that's 50% out of the money uh or it's a deep in the money option

17:17 say hey that one contract is worth 100 shares of stock and that's just not correct obviously right because some options are are worthless and so we measure in delta terms to give a little more veracity to uh to focusing or or towards our um towards our projection. And the other thing to note here is that you know the S&P SPX spy is just so much of what is set to expire. You can see how big that complex is relative to everything else uh on your map here. And so you know this is why we focus so much on the S&P index in particular because it is just such a beast in terms of the size of position. So even on our measure at $2 trillion, you know, this is going to be one of the bigger expirations that we've ever had. Uh because it is a quarterly expiration and those quarterly expirations tend to be bigger. So you know um two trillion trillion is still a

18:03 lot uh Jack even though you know in this current day and age we hear it all the time. Uh but but this is a pretty meaningful impact should or could have a pretty meaningful impact I should say particularly if the market is really dropping into the expiration or really rallying into the expiration. I think uh then you may see a bit bit more impact from that. >> Do you know off the top of your head like what the largest one ever was? Are we are we in that vicinity or I know it's going to change between now and next week. >> Yeah. Uh if you go back and you look at I think uh September of 2024 was the biggest expiration. Uh we had a little over rough 2.1 or 2.2 trillion uh was the number that I have from that. And so I think that expiration was a little bit bigger uh if my memory serves uh right. >> So we're in we're in the vicinity though of that. Yeah, we're definitely in the vicinity and and this is Thursday, right? Um a lot of these position change

18:51 sizes can change over the next week. Uh you know, so so there's still room for positioning to shift over the next week until expiration next Friday. Uh so you know, this very well could be the biggest options expiration ever by the time we get to that to that moment. >> Well, you know, Brent, I'm just trying to put this in my YouTube thumbnail. I'm just trying to get you to say largest options expiration ever so I can put it in there. So, uh I'll just take I'll just take the should be out of there and we'll go with largest options expirations ever. So, I'm good to go now. >> So, on this next chart, you're alluding to what I was saying before, which is I was joking about like we're having a pullback, but it's it's not much of a pullback. Like, we're still pretty near highs here. >> Yeah. And I like to plot this out because you can see how the options expirations can time with with shifts in the market. And sometimes those shifts are fairly large. Another time, you know, like in August, they they were a little more uh benign. I I you know, there's a little lull there uh in the

19:38 market. Then we had Jackson Hole, which tripped some things up. Uh I mislabeled this. This should be September's expiration. Uh Brent is failing on his chart back here today. Um but the the the point here is again if we kind of drip lower that 7350 is a very interesting downside area based on the positioning I'm seeing if we do start to melt down. Uh but you know the point here is that with the bigger options expiration we may see this be a bit more of a turning point here. Um particularly again if the volatility picks up uh over the next couple of days. >> Yeah. At the very least we got a bunch of events coming right. I mean, we've got we've got CPI, we've got the FLMC, we've got the opex, we got VIX expiration, we got a lot coming up. >> That's right. And and there's a lot of event volatility tied to those dates. And what that essentially means is that options carry extra implied vault due to events. And so, as the events pass, typically that vault contracts, right?

20:28 Uh and in this situation, will we see that volatility contract or not? It kind of depends on on what's being said here over the next couple of days. And so, um, you know, we're really going to have to to watch this closely. >> The next thing we like to do is we always do like to take a look back and hold ourselves accountable, and I can blame you if anything is bad, and I'll take the credit if anything is good. So, uh, this is what we talked about in August. >> Yeah. And, and the title of the presentation from August was rate maxing because of Jackson Hole and all that sort of stuff. Everyone's trying to figure out, are we going to get a hike or not? And for most of Jackson Hole presentation, it seemed like things were going fine. And then at the very end, uh, Warshed, you know, basically gave a hawkish lean and then suddenly everyone's like, "Oh no, we're going to get a hike." And and kind of despite that hike, the market digested it very well. And so what the theme of August was was look, like tech got wrecked and

21:15 and there was a big mean reversion in the leverage in the technology space, right? The Karine margin calls, situational awareness, all that froth from kind of the April May rally and tech had given it all back. So we did a lot of mean reversion and even though we did the mean reversion like no one was interested in hedging uh even though the market had given some some back a little bit right so you can see put call ratios for example were very low um the implied v here when you're looking at this was actually underrealized v so the the QQQ options were cheap uh the term structure was coming in so volatility is really getting smacked uh you know we talked about the dispersion unwind for example this is the sign that the tech balls were coming down so it was a big resetting positions. Um, these token prices are now subdoll, which is kind of

22:00 interesting also to note as we we talked about here a second ago. And correlation was very low as well. And so, you know, this was a market that even though it had contracted into August options expiration, it sort of like we cleared out the dead wood a little bit. And that seemed to have a little bit of a bullish lean to it. Uh, and not only did it have a bullish lean, you can see here that bonds had a bearish lean. In other words, on the left side of this chart means that these options have a little more put skew to them. Uh, to the right is call skew. And so, you know, semi spiders, IWMs, all that stuff actually had traders leaning into a call skew into those kind of mild lows, I would say, into August expiration. And so, you know, the thing that we had talked about is, hey, Jackson Hole is the thing that matters. No one cares about anything until Jackson Hole. And and then we come out of Jackson Hole with uh traders not expecting lower rates, right? But, uh, positioned

22:49 for a little bit of volatility around that Jackson Hole event. And what comes out of it is, you know, market rallies on a huge initial move on Jackson Hole to all-time highs intraday and then kind of pukes it all back. But that being said, we're still around 7,600 7,700. You know, there there there was not a big breakdown even though uh we thought that we were going to see that that um uh even though rates are going to get shifted up. So um the summary from that was that you know the VSS were pinned at the end of August and equity uh markets were no more now watching the risk rate risk right versus AI hope and I think that actually has now extended through maybe some of the AI hope has kind of gotten you know stamped out a little bit here uh just in the last couple of days but we're still really focused on this rate risk. I actually think the rate

23:36 risk was starting to get shoved aside uh over the last couple days until the Iran situation just just really ticked up. Um, so we did almost hit eight on Jackson Hole. Well, excuse me, not on on Jackson Hole day. Uh, you know, we we were breaking higher, not all the 8K on the morning of Jackson Hole when wor first started. Uh, but once we broke that risk pivot 7775, we very quickly dropped to 7,700. Now the Iran situation upticking, we're down to 7,600. And you know, true to kind of what we're saying in August, we're really worried now about this negative gamma uh and correlation shifting higher and things like that. So, uh I think in August, you know, maybe I had a little more of a glimmer of hope in my eye and and here, you know, things are are looking uh a little bit more negative as we look into September options expiration.

24:23 >> Yeah, this this balance of AI hope and AI reality is just such an interesting thing as as you go forward. Like you get these periods where everybody's really worried and then you get this new model and everybody's really excited about it and it's just gone back and forth. I don't know if you've used any of the new models that come out like Chatch GBT's new model and stuff, but uh I mean these things keep getting better and better and better, but that doesn't necessarily mean it's going to translate into anything in stock prices. >> Yeah, that that that's right. And I think you know a week ago we were talking about tech balls starting to kind of get rebid like calls were starting to get rebid. You saw Dell have great earnings. you saw uh a bunch of different components of the semispace start to pick up or AI space I should say and and it and it looked like tech and tech earnings could sort of say all right fine we'll get a 25 base basel point rate hike but but we're making so much money and AI is you know so uh so positive we can wash over you know a

25:13 little bit of the negative macro situation and over the last couple of days that tone has totally shifted and I think a lot of that is more has to do with you know maybe Iran uh and the rate you know rates going high and people are a little more focused on that macro piece but again you know you had the Astra come out which from from OpenAI which I think is uh caused a lot of people some some consternation in the software space for example and some of those other areas and then you also had the doomsday you know piece out from uh from that guy at Anthropic and then you have the Deepseek model come out today and the you know that so so the the argument there is like we can do a lot more with cheaper tokens and and So do we have to start revaluing you know uh anthropic and open AI right? So anyways the the point of the whole thing is that

26:00 that that situation the the AI environment is really dramatically or dynamically changing and so you know the bid that was there or seemed like it was forming and we were going to say okay fine rate hike but tech is doing so well we'll just move on with it. Um that seems a little bit under fire again now as well. And this matters because if we all start to shift to just everything, you know, looks at macro only um then it's a very important dynamic for risk and how we all trade uh in the next month or so. >> And we're a little bit off topic, but like the the anti-AI sentiment too is definitely rising. Um you know, we see that all the time. Like it's it's funny. We did a uh one of the people in the comments on Matt and I's podcast we do together joked about like Jack being an action star or something. They put like some comment about that. I don't even know I don't know where. It's something

26:45 we talked about or something. So, I decided to make a I made a fake AI video of Jack being an action star like you know rolling out of the fire and stuff like with all the muscles and stuff and uh I put it in the podcast and like we got a bunch of backlash from that like how could you be using AI and this AI slop and like there there's like a generation of people who believe like any potential any potential use of AI in any way is bad because I mean realistically we could not have done that. Like we were not going to bring in a film crew and like have me rolling out of fire and I would have died anyway because I'm not capable of what that person was doing. But like it's just interesting to see like the backlash is getting stronger and stronger of like anything that uses AI in any way. >> Yeah. And you know, is that warranted or not? I I think that we need the growth engine of AI and we better hope it works out. I think for for economic growth, but just for example on the water thing,

27:32 like I've always heard, you know, the water usage from the AI is a hu is a huge problem. And this is going to get you a bunch more comments. Um but from what I read, I didn't listen to a podcast on this. I actually, you know, was reading some actual articles on this and broke wrote down a bunch of things because I I wanted to know definitively. And so what I found was that Colossus, which is the biggest data center in Memphis, that's the Elon's data center. So that's the biggest data center in the world, it uses less water than three In-N-Out Burgers. Now, you don't hear people protesting In-N-Out Burgers and you don't hear people protesting golf courses in the same way. And that's just the water usage topic, right? Um but I think that you know there is definitely this mantra of you know hey we don't want these data centers and power and everything else getting more expensive and

28:19 there's correlation is not always causation I should say uh but you know to your point um people really are are against AI and and if you want to blame the economy on that and and and people think job losses are because of AI or whatever else it is like that that is definitely the poster child for kind of most of what's going wrong uh for people at the moment and and that may or may not be true, but that's certainly the the meaning. >> Yeah, that's right. Like it's the same thing I'm trying to do is what you're doing, which is I'm trying to look at the facts. I'm not trying to have like a pro or an anti-AII thing. I'm just trying to look at the facts and you know, particularly when you get towards, you know, when you have some of the issues we have in society and you also get towards a midterm election. Like people are going to take this stuff and do all kinds of different things with it. So like what I'm trying to do is just figure out what the truth is. And obviously we're getting off of options here, but it is it does drive the market. um you know when you as like the market is going to be impacted by the

29:08 growth of AI in different ways um and so to the extent this political stuff results in a slowing of of a lot of that you know there there's certainly implications of the market of that >> and it matters for the market because tech is outperforming the market in a in a in a in a broad way right like the NASDAQ is heavily outperforming the S&P 500 um and and so you know if you let that cloud your judgment from an investing perspective right that that matters. You're like you're anti- AI and you don't want to invest in tech right now. Well, if you look at the equalated S&P 500 or the IWMs, which don't really include as much tech, they're not performing very well. And so, you know, it's just a very interesting thing. Another like Trump accounts, right? Feel how you want about Trump. Not this isn't this isn't like a political statement. People won't get Trump accounts for their kids because it has the name

29:55 Trump, but they literally will give you free money to invest. We have a baby and people will still say no. So, you know, it's just odd things that that you know, uh some odd seemingly odd things that disadvantage yourself based on um some principles. Some of those may be right, some of those may be wrong. To be determined, I suppose. >> Yeah. Either way, it's just going to it's going to play a big role in the landscape we're in. The division of everybody and you know, people taking sides and you know, it certainly has implications for what we're talking about. I don't know. I'll get us back on topic here, but uh because you have used uh you've brought in a little technical analysis here, Brent, and you've you've introduced the wedge. Um >> that's right. Normally, uh we we cover Brent and Jack's macro minute, which I know is really popular with everybody. And uh so now we have a new segment called technical analysis and and the the reason that I like to bring this up is because, you know, people know about

30:43 the wedge, I think, you know, broadly speaking. And this is just a nice summation of what has been going on, right? We had this incredible V from April, May, June, upside V. Stocks were up with Vall up as as AI was just creating a boom town in the stock market. H and then we gave it all back. Situational awareness and the Korean margin calls and all that, you know, as these prices came down into August, the VSS also came down sharply, right? And now we sort of trended sideways through most of August and and we're at this seeming inflection point where look, you know, if rates start to break out or break down, right, the the market's going to move. And then we have the midterm elections where I think a lot of us back to the the quota with percent, you know, you you normally would say no way do

31:29 they make the market rally into midterms, but if anybody could do it, it's trumpet, right? So, you know, do you want to be short stocks? uh when you know into October uh if if Trump and Benton start talking the market up like no uh I don't think you do right and and there's some path dependency before that you know time period here is the Iran conflict unfortunately you know spirals we have FOMC and stuff like that but you know just broadly think speaking it seems like we're due for a pretty good move out of the kind of this wedge and this wedge can be seen a bunch of against a bunch of different uh stocks so in in August we had talked about the reversion and dispersion And one of the other charts that's getting a lot of attention out there is the uh SMH VIX. So the semi stock VIX index. You can see how that has dropped

32:16 as well. And you can see the correlation between those two. Um whereas what dispersion is simply saying in what the SMH VIX is saying is look the implied VSS of these single uh tech stocks have come down sharply. That means dispersion comes back in and everything, all single stocks now are starting to act a little more in concert with each other, right? Uh they're sinking up a little bit more is what this is saying. And I think that's important because what it could be telling us a bit here is that the AI story at this moment is maybe a little bit more second fiddle to this rate issue. Um and I and I think you could see that VS started to look like they were going to pop back up here. See that, Jack? like we started to get back in gear with the tech stocks and that and that looked like we're going to start breaking higher, but now as soon as I ran ticked up, we see that that dispersion come back down and that

33:05 single stock tech ball start to come back in. And so, you know, if that wing of the market isn't working, that upside tech, I think it's very hard for the stock market large to rally, especially in the face of of the rate situation. So, the fact that, you know, these charts are coming down is telling us, you know, kind of two things. Number one, the tech fall is cheap. I think whether or not those stocks go up or down, the semis go up or down, I think we're gonna see a lot of volatility for September or October coming out of this. So, that's important. Like I think buying options can make sense. Uh but you got to figure out, you know, which way you're going to position there obviously. Uh you know, that's that's a big part of the trading game, of course. Uh but that's that's a big difference from live when those options were just ridiculously expensive. Um and and if you bought options, you know, back in

33:51 late June, early July, you probably lost money on them, right? Uh if you were making a directional bet, um just because that volatility was saw. >> So the this is our gamma picture. Normally I hold this to be kind of the final slide, but one of the reasons I'm so uh I have some anxiety here as we dance around the 7,600 level today is because on your chart here is is what we call positive gamut in purple and negative gamut is in red. So if you think back to those statistical charts before when we have positive gamma that tends to be supportive of the market a lot of the positive gamma now supplied by zero DTE and so what this map is doing is it says where's the negative gamma over the next week and you could see that under 7600 this map is all red so what that implies to me is that if the market or S&P starts to move under

34:39 7600 market makers are going to start selling futures uh or selling stock as the market goes down and that would make things more volatile and I don't really see a trough in this negative gamma till about 7350. And so, you know, this dynamic is different from what we've seen over the last several weeks. Um, and and to me, it has me concerned about this level of 7,600 um as we as we try to search for a mechanism to support the stocks. If anything, you know, we have some other things like higher rates that could shove us lower, force equities lower, and then once equities start to spill lower, some of the options positioning could start to make things more volatile. And that's one of the things I'm I'm concerned about with with current positioning. >> Does some of this get reduced? Like you see bright red going into expiration next week. Like once the expiration clears, does some of this get reduced?

35:27 >> Yeah, definitely. That's and that's a very, you know, key point here, Jack. Uh if we crash like tomorrow, right, puts are going to get added and removed very quickly. So the map can change. Also, the zerod traders, if they detect that today is not that risky of a day, then they will come out and start selling shortdated options. And I think that that zero DTE flow um generally supportive for stocks like today, you know, some people were selling big positions at 73 at 7530 for example. Um and so you'll see that short-term flow kind of come in. Um but normally you will see a blue or positive gamma below when you look out in time. You don't have kind of this big zone of negative uh positioning. So, you know, if there is a a I mean, I don't even know if what we what we would need to all believe that there's an Iran deal anymore. Uh,

36:14 but let's say there is a magic deal, then obviously this p picture would change. If people come in and start selling puts, you'll see this map will update in near real time to uh to be more blue or show more positive gamma. But, uh, you know, at this moment, and you consider the events going forward, it makes sense to hold hedges, right, over some of these events. Um, and so I I don't anticipate the map changing all that much between now and uh next Wednesday. >> I'm just curious like how well can you forecast this through an expiration? So like if this chart did continue like how much do you know now about like how what how this might change or is the expiration such a changing event that it's hard to it's hard to figure that out in advance? >> No, I mean right now we could forecast that about uh roughly 40% I would estimate of positions are going to expire. It's probably going to be a little bit bigger as we get closer to expiration. And so, um, this map projects five days out in time. But what

37:02 you would see is that, uh, so if we were to hover over this this map a little bit, you would see, okay, in certain pockets here, there's 8 to 10, uh, billion dollars of negative gamma, for example, right? And what expiration would likely do is just drop that, right? So instead of having 8 to10 billion of negative gamma, we drop to something like four to four billion dollars of negative gamma, right? Uh it depends on exactly where you are in the S&P at the time of of trading because game is highs for at the money options. Um so you know pat dependency sort of aside what you would generally see is a muting of the of the magnitude of the of the positions here. Uh >> so red but less red basically. >> Say again >> red but less red. >> Correct. Exactly. >> Okay. >> And that's what I would anticipate kind of going forward like positions cleared up the field is cleared off and then and

37:48 then we sort of reset. So on this next slide, you're looking at a single stock gamma. >> Yeah. And in this case, I I like to show what we do here is we take the top 100 stocks in the S&P 500 and we aggregate their gamma and then normalize that to an S&P level. So the S&P index levels here and dark blue in this case is the same as purple in the other map. So very big positive gamma. And what's happening here is traders are short uh put options. So they're short downside put in Nvidia, Apple, etc. And then they're also short call options uh on net, right? And this is skewed by the MAG sevens because they are such big options complexes. Um but what this kind of tells me is that okay, the index side is getting kind of chippy, but people are still short ball or short options on the single stock side. And so that is uh a

38:35 bit supportive. You can see here as we go below and that remains fairly supportive in even in through options expiration. In this case, Jackie, you can see this map shows you after the big 918 expiration, there's still a fair amount of of positive gamma on time, but the magnitude where the color is just not as as bright telling us that the flows are a little bit lighter or the positions are a little bit lighter. >> Does that first chart like dwarf the second chart because the size um like relative to the impact? >> They're pretty they're pretty equivalent. I mean, uh here we see, you know, you're talking about 10 billion dollars of of gamma, right? And and that's about what you see uh in this chart as well. So they kind of offset each other, funny enough, right? Uh that these two things would kind of offset each other in magnitude. >> So the next slide we're getting at is it's back in the news now because it keeps spiking here. O oil's back in the

39:20 picture here. >> Yeah. And and Bent yesterday with the eye in the house thing. You can see the 10-year yield on the candles here started to move higher as he as he tried to do some uh some uh alterations, I guess, in the Treasury market. And you know, then Iran also ticked up even worse. And so now we're really seeing a break higher in yields. And the the reason I show this with oil or this is crude oil, the the future in blue is you can see the correlation between these two, right, Jack? I mean, it's it's not uh it's no secret here that in March, you know, war uh war picks up, uh oil prices surge, and then you see, uh yields go right with it. And so the two are moving in tandem here. And what this is basically oil is doing is turbocharging the higher rates. And so the higher we go in oil, the higher

40:06 we're going to go in rates. And at some point, the equity market is not going to be able to ignore that, right? And I think we're kind of at that juncture right now where, you know, Bent was already trying to play with the Treasury market before, you know, when I when I ran it settled down, right? When when oil was kind of in this zone and now that oil's picking up higher, I think I think that they have less control, which goes back to the betting against the house situation because, you know, the house, you can control your own casino, so to speak. uh but but they've seen seemingly not been able to control the Iran situation and you know now that oil is going higher uh it's pushing rates higher now that matters on the stock side because blue here is still oil but look at this correlation index this is the core 1M we talked about it a lot in the past here Jack where when we have significant riskoff situations you talk

40:53 about the tariff situation or the bank collapses uh Silicon Valley bank right or in March of this year you see correlation spike right and it spiked with oil at the same time. Now, correlation was at all-time lows uh in in July when the AI rally was really uh taking shape. And we've we spent a bunch of time going through this because what is this telling us? It's telling us when correlation is low that single stocks are moving a lot in the index um versus the index, right? So, when correlation is low, you have people expressing bullish ideas. I'm going to buy Nvidia and you know Coreweave or uh whatever the the hot AI stock is the moment. Uh I think that's going to rip and then the index balls stay much lower, right? So I'm going to buy all these calls that

41:38 bids up single stock balls and the index stays lower. And you're only going to do that or express those opinions in a situation that you think is stable. If you think that the Iran situation is going to crash the market, you're not going to try to express your thesis on, you know, uh Salesforce stock, for example, right? you're less likely to. So when you see correlation spike, usually that's an event where index V goes up along with single stack VS because people are buying put options and they're worried about downside or the market is kind of crashing. And so in this case, what you see is correlation is starting to move higher with oil moving higher kind of at the same time. And I think that that you know we were ignoring this link for the last couple of months. It was all we talked about in March and now this link really seems to be reforming and kind of crowding out the picture or becoming I

42:25 think a dominant a dominant theme here. >> Yeah, it's interesting because oil and rates one thing they have in common. It's interesting you showed them together because both of them can if they can go up within reason and stocks can keep doing their own thing but both of them like the big spikes have major negative impacts of stocks. So like thinking about those correlations between rates and stocks and oil and stocks like you get the big spike that can change very very quickly, >> right? If if tenure goes to 5 5.5% let's say no one's going to no one's going to talk about what latest model SGP has right like you're just not going to do it you're going to be trying to find a place for capital to hide out and you know in 2022 I think that the 60/40 portfolio broke right typically Jack for most of our lives it was 6040 right you

43:11 you own a bunch of bonds and you offset that excuse me you own a bunch of stocks and you offset that with bond holdings right and the idea is that if the market crashes, equities crash, well, the bonds offset your your risk there because treasuries is the safe haven. But now with rates going up, particularly in, you know, in these long ends, if you own treasuries, they're going down. So stocks and bonds now are positively correlated. So if you have a 60/40 portfolio, bonds and stocks crash at the same time and you kind of get wiped out. So you know, we we were we're seeing now or what we saw in 2022, right, was the dismantling of that 60/40 portfolio. And then in March, what was the trade? The barbell trade, right? energy and AI uh own energy as your hedge and own uh AI as your upside your upside trade. And that trade seems to be coming back in vogue now as people are starting to pay attention to higher oil prices because

43:57 you can't buy bonds as a hedge at this moment because the rates keep going higher. Um and so you know do you want to go to cash? Well, how long can you go to cash for if inflation is 4%. Um you know that makes a little bit tricky. You know certainly in the short term you could do that but you know obviously asset allocation is is quite tricky in this type of environment. Um, and so, you know, the higher the rates go, uh, the more of a quagmire, I guess this is. >> And the other thing people miss about rates a lot of times is it's why they're going higher is so important. So, like we've had rates going higher because real growth was high. And that's actually a good reason for rates to go higher. So, stocks can go higher in that same environment. If rates start going up because of inflation, you know, or unexpected inflation, that's a bad thing. So, it's not necessarily like rates up bad for stocks. It's like why are rates up? And then that tells you something about if whether it's bad for

44:43 stocks or not. And it's funny that you bring that up, Jack, because one of the things that the narratives that started to sort of permeate the ether, so to speak, uh was that the data center um demand, right, the buildout for the data center and the capex from the MAG7s was actually one of the major reasons that we have inflation and rates are higher because that's just so much debt, right, that's coming on uh coming onto the market. And you know, while I think that's true, that's not something that was really talked all that much about until maybe the last one or two weeks. And so I was sort of thinking about that as like okay they're trying to explain away some fla inflation as saying look the reason that we're getting this inflation is because there's a lot of debt because the the promise of AI is just so good right now and all this makes sense and it's actually kind of bullish like people want to people want

45:31 to uh raise capital so they can start to build you know uh data centers and and the compute buildout and blah blah blah and it was just sort of funny because you know that sort of ignores the tariff situation which added a bunch of inflations. The the Iran situation has added a bunch of inflation. Um, and you know, and added a bunch of inflation just to kick the things off, you know, a couple years ago. So, they've done a whole bunch of things over the last few years to just make inflation rise. Uh, and then they're trying to say, well, it's actually a good thing because of the the the compute buildout, so maybe maybe these rates make sense. And I guess there's a little bit of truth to that, but I just thought that the narrative was was kind of amusing. Um, and now you have Beston saying like, "Hey, you know, I'm the house." And he he was trying to intervene in in in the Japanese uh, you know, market not that

46:20 long ago. I don't think that's worked all that well. And so, you know, he's clearly very active here. And I don't think that this is what he wants, but is it seemingly maybe out of his control at this moment? I mean, that's beyond our pay grade here. Uh but what I do understand is that these correlations really matter to me because if I'm trying to figure out where equity volatility is going to go uh and then equity direction is going to go you know I need to watch these uh these metrics. >> Yeah. And so much of it comes down to does this AI spend pay off and we don't know the answer to that. Like if this AI spend results in like significant deflationary growth, you know, this could all be worth it and it could all be fine. If it doesn't, we could have some of the stuff you talked about in terms of a bad outcome. And and I think you have people who are very bullish on that. you have people who are very bearish on that, but I think the honest answer is nobody has any freaking idea. Like we've had a lot of people on the podcast to talk about this and like they

47:05 could all have their data to support it, but we just don't know yet. Um we're spending a ton of money and as we have in many of these other in innovation type periods and we'll see. Um we'll see if it pays off or not. >> Yeah. And and here's the other thing about that, Jack. It becomes harder to grow your way out of higher rates, right? So So like the more these rates go up, the higher the AI bar for growth has to be. And and yes, these are all short-term dynamics, but uh we were no one thought that the Iran situation was was going to last this long. I shouldn't say no one thought that. We were told it's not going to last this long. And I think the consensus was though in fairness that we would have a major energy crisis if the war which started in kind of March lasted more than you know 3, four, five, six weeks. Um so you know I do think we the things have remained contained for longer than than

47:52 people think. uh but you know right now seems to be a crux and and a turning point unfortunately uh and it doesn't look like it's going in the in the right direction. So this this next slide gets into what I asked about before which is the events coming up and and how much volatility is being priced in the options market. >> Right? So the dark the dark teal line is S&P term structures. That's at the money implied balls right now. And and the light teal line is what we call Ford implied ball. And so what Ford implied ball allows us to do is see where traders are pricing in the event risk. So the bigger the the differences between these two there's more event risk in in essence. And so CPI for tomorrow obviously is garnering uh some some attention. We'll see what what happens with that. Uh but the big the biggie here is the FOMC which is next week. Now FOMC happens the same day as VIX expiration. So VIX expiration is going to start to free up some positions

48:38 in the volatility space that can have a bit of impact in markets. Um and then we have you know the rolling cadray of of economic data that comes up kind of monthly cyclical data uh that comes up. And then the other you know really big one too is elections. um elections here kind of at the end of the uh at the start of of November. Elections typically carry a bunch of wall and then that vault just gets sold off. Um like it doesn't, you know, like what are people hedging? I honestly don't really know. In this case, too, it's like what are people hedging? You know, Democrats take this or Republicans keep it or whatever. I don't know what the near-term impact is, particularly if we have, you know, a rather large war. Uh and that's why the events matter has an asterk because you know FOMC matters and the higher but but the higher oil goes

49:24 and the more rate impact there is it probably matters less right because wars can't control that geopolitical situation. So it it is a it's a weird thing where um you know people start I think losing a bit of control over over what they can do and how they can impact things unless they really want to start you know the proverbial position. Uh was that Bernick the bazooka? >> I don't know. It it it is funny like uh two two things on your on this. One is the elections thing. I mean you seem to be right that it seems like always we overpriced the risk of these elections. Like I remember when Trump won the first time like or the one where we were going to have the disputed election like we always price some catastrophe and then the market rallies after. And I mean maybe that's just an indication of one of these times we're going to be wrong about that and we're going to underpric the risk of what could go wrong. But it

50:12 does seem pretty consistently like we under we overpric the risk at these elections. >> Yeah. Particularly for a midterm, you know, um I I just think it it doesn't uh I I don't know it matters all that much to to the equity market in the short term, right? I'm sure there's people out there who think it's, you know, critically important for political reasons or whatever, but I'm, you know, as far as it pertains to the equity market, I don't think it matters all that much. Uh but, you know, to be determined and a lot of that can shift again over the next month. So, we'll keep an eye on that. But, you know, no, no secret here. The FOMC is the big thing. It's just again, you know, look, if if oil goes to 120 by next week, hopefully it doesn't happen. I don't think it can happen, but if it does, then, you know, um the FOMC situation probably matters less. >> Is this a big spike in implied volatility for FOMC? Because this is, I

50:57 guess, the second meeting of what is it actually an uncertain Fed? Um, you know, we've had for for a long time, we've pretty much known exactly what they're going to do. Like, is that reflected the uncertainty? Is that reflected in this relative to previous meetings? It it looks pretty similar to me at this at this juncture and we're still about a week out. So what I would expect to happen is, you know, depending on CPI um tomorrow, right? And and maybe oil sevens back down and then all a sudden uh rate, you know, worst can just do is 25 pips and fine. Um so there's some path dependency. I've said it so many times I feel like here today to to the level of volatility that people are assigning to this. So right now looks fairly normal. I would anticipate that that volatility probably increase a little bit for FOMC if everything kind

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