Brent Kochuba on the Gamma Flip That Could Turn a Dip Into a Slide

0:00 I do enjoy volatility, but uh this is a little bit shaky here um with the rates, you know, PPI is is pushing rates higher, but rates were already creeping higher. And we've covered the last day or two how the increase in oil prices, um generally, if you look at the correlation between equities and oils, there's a loose kind of positive correlation, meaning that they tend to kind of go up and down a little bit in tandem. Um it's not a very strong relationship, but that relationship has really flipped the last week where oil going up now is starting to sink with equities going lower. And as that situation appears to be, I mean, it's been untenable, I think, for months. And a lot of oil experts were saying, you know, we can only survive this for a few weeks. Well, now we've passed months, right? And um and now oil, you know, WTI

0:45 is pushing 100. Uh crude is is up in that same neighborhood. And if you look at the correlation between 10-year yield and oil, like they're they are very much in sync. And so, you know, that Iran situation, I think, is maybe more in control of rates than some people give it credit for. And then you throw PPI on top of it. And what you basically end up with is a situation that is not great for equities. And so, I think that the market could have probably said, hey, you know, yes, rates are going up, but in some ways that's under our control, right? uh meaning productivity and and the AI story using capex and blah blah blah, right? But the Iran situation seems to be something that we can't control at all. And if oil goes up more, that's really going to kind of like create another impulse higher in in rates and that's going to really force equities

1:30 lower. So, um that has really changed. I think you know last week when I was talking to you guys, I thought things were pretty well supported and and now things are not looking very good. Uh, in fact, there's a chart I brought up here, uh, today with the team to look at the gamma positioning the S&P 500. And if you go back over the last couple of weeks, you'd see that there's there's been positive gamma around at the money options or excuse me, around where the stock uh, excuse me, the S&P has been trading. Get it right, Brent? Um, and that's been supportive of the market. And then you'll see these zerodt guys come in and they'll sell spreads below or spreads above these condor trades. And that's generally been a pretty supportive market. If you look on that map today, you will see I highlighted the zero DT positioning for today which which provided some positive gamma today right around 7600 and we're kind of, you know, we we've tested that level bounce.

2:16 We're kind of again uh turning in that just below that level. But when you look forward in time, so what that map is showing you is the next week, right? And what you see below 7600 is pure negative gamma. Now, if you prescribe or or believe in this idea of negative gamma as a as a hedging flow, if the S&P starts to decline, then there should be some selling, some futures that get sold, some stock that gets sold from the dealer community, and that in theory would start to shift volatility higher. Now, that's just the gamma positioning, right? If you start to look at volatility, uh you know, the VIX is shifting higher today. Fixed strike V is moving higher today. Um that is a downward pressure on stocks as well. We talk about VANA exposure and simply essentially what this is is if V goes up well puts get more expensive right so

3:01 you got to sell more futures to hedge those puts for example so you end up with a bit of this spiral that can show up down below knowing or believing that hey maybe CPI will be just this amazing print tomorrow and the powers that be make it be a beautiful print tomorrow and it gives a little bit of relief but then you're going to go into a weekend now with this Iran situation that seems to only get worse um and so you know it's just a very murky situation situation right now. Uh, and it's it's one that I think you want to tread lightly or or be kind of cautious here uh until we get a bit more clarity on Iran and then we we process some of the macro events that are coming up and and just so people are clear, I mean obviously there's a divergence between S&P price and and uh ES's price, right? And so when you say 7,600, are you referring to uh which one are you

3:47 referring to? >> I always refer to the index price, S&P index price, >> right? Yeah, we talked about this this morning with uh the VIX futures. The contango is less than a point now. It was like two and a half points for the last couple of weeks. So, I think we're seeing that shift in real time as well where the U contract is getting much closer in price to the V contract. They're both in the 18 handle now. And uh we're we're definitely seeing a flattening of the curve with the U up 6% relative to the V's increase of 1.75%. So craziness. craziness. >> Yeah. And if and if you look at where like Russell or IWM implied V rank was and Spider implied V rank was just a

4:32 couple days ago, it was like a zero or a one. It was very very low, right? And so there's a lot of space for V to start to lift up here. Uh if people start to look for some hedges hedges and in fact if you look at what's been happening over the last, you know, few days and I imagine today, you're going to see that really start to lift. You're gonna see that put skew start to lift and you're going to see that implied V start to lift and and you know I'm just looking at fixed uh excuse me fixed strike VS here and at the money fixed strike V day overday we're up you know we've gained a point for about a week out for at the money and plats that's a pretty big lift uh for the S&P kind of at the moneys right here so you know this VIX pop is real it is you know estimations of volatility increasing and you know again you can do what you want if you're and try to talk uh I think rates down and do twists and and you know treasury

5:19 buybacks and whatever else you want. Uh but you can't really control the Iran situation I think as we've all seen and and I think that is one that's that's challenging. Added on to that I will just say is you know there is now this sort of we've had this semi- love condition like people started to come back and saying hey we love we love AI again and and Astro is so great and all that kind of thing and the software stocks started to roll over a bit. Um, there is now this kind of new AI doomer lens that's coming back out. Uh, that anthropic fellow started talking about, you know, how AI may may kill us all in the next couple of years. So, that's kind of like a little bit of a negative lens. But even bigger than that is, you know, Deepseek just put out a new model today. Then people are saying, "Hey, this is great." And so those token prices are kind of trending back lower as well. So, you kind of have this like moment in time where it's like, I need

6:05 to wait for this the smoke to clear, right? I think you could still put on put spreads or put flies for pretty cheap and and say IWMs which would be the most sensitive to rate conditions. I I think into this weekend in particular with you know CPI tomorrow and then you know who knows what happens over Iran. Uh unfortunately tomorrow's the you know 911 anniversary and uh you know as someone who's over 40 that kind of impacts me I think uh a lot and so um you know you just had this kind of gross situation I think right now where it's like look steer clear and and wait for this the the the smoke the proverbial smoke to clear until we have uh rates kind of settle in a little bit maybe oil starts to mean revert and then and then we can have a clear picture to put capital at risk. Yeah, I mean this sets up an interesting scenario over the next uh 24 hours and and even the next couple

6:51 of trading days uh here as you kind of mentioned. I mean of course we got PPI, who knows what happens there, but then we got of course the Fed meeting coming up on Wednesday and and that's going to be an interesting scenario now. I mean we already just had PCB raise rates today. We know we're essentially in a global rate hiking cycle at this point, especially when you're even hearing about the Bank of Japan raising rates. I mean that's just that's just uh that's just crazy. So, is there any scenario you see where we don't raise rates somehow next Wednesday? >> I think the the Fed watch says we went from 60% implied uh raise to 80 today. So, I I think that's kind of baked in and from some of the macro people I listen to, you know, the podcasts that we all listen to, a lot of them are saying, look, 25 bips on the margin is sort of just like a show of not force, but hey, like, okay, Kevin did it, you

7:38 know, put the 25 bips in. Well, that doesn't really matter in the bigger scheme of things. And I and I think that's probably true. I think the market had already put in the probability of a hike next week and you know now what the problem is is that again oil is starting to move higher and you're seeing the 10-year move to even newer highs right and I don't think that has anything to do with the 25 basis point hike next week so you know there there's a lot of uncertainty and I think when you start to look at these situations you start to worry about control right like do they have control of the situation uh and you know are they going to need a to bring out a real bazooka at some point to to possibly calm this thing down um and so That's what equities doesn't like. Equities don't like uncertainty. If we all know a rate hike is coming, great. We can put that into our models. We can adjust to it and say, "Okay, here's the new, you know, for value of equities or whatever." But in this case, again, with

8:24 with oil going higher and and you know, gas prices are jumping higher and all this other stuff, um, you know, you just have this pressure that is that is hard to to understand and hard to estimate. And, you know, at that same point, how many times have you heard don't worry about it's going to be over in two weeks. Like, nobody believes that anymore, right? So no one knows I don't think how to price in the end of of this conflict. And as oil goes higher, it's only going to put more pressure on inflation and rates. And that's I think what the challenging part is. And then from a trading perspective, you know, what is going to clear the smoke to want to have me come out here and start buying calls or or putting, you know, capital at risk. Well, fixed strike V is jumping. Um if equity market does start to rise, then V comes in that that's just a tax on your call call positions, right? So that kind of makes me want to sit on my hands to bet on the upside a little bit here. So, you kind of just

9:10 end up in in this locked space um where where you're not really again incentivized to take risk at this moment, particularly when you look at like the negative gamma landscape. You're seeing that V start to lift with VIX now at 18. Um and so, you know, it it's a it's a quagmire as the kids like to say. And um and Brent, that's why you don't necessarily just straight out buy the calls. That's why you do Super Bowls like we love to do. You just sell the put spread to finance buying that call spread. And then it's not a straight up volley. It's just a directional play. And if you're wrong, you're wrong. It is what it is. Like, we can't predict direction. But that's the way I end up doing it. Um I don't know. I do want to get your thoughts though on something we haven't even really touched on yet, barely, because we've just been watching all of these other things. We got some earnings tonight, and one of them is Oracle. And um it's a big one, I think,

9:56 in some ways. And I I would say prior to the last couple of trading days, a lot of people were probably playing it to the upside, thinking upside because you look at some of these other software names, they absolutely exploded. But that might have changed. What do you think? >> Yeah, the the move for Oracle is 10% which is a which is a pretty uh robust move. And there is a big call skew in that name right now. Uh if you look at what we call a risk reversal rank, that's 95. So that's telling you that a 25 delta call is richer than uh the 25 delta put. Uh and and it's more so than in basically 95% of the other previous readings over the last year. So what is that telling you? People are leaning into that upside. They're hedging that upside move. And so in these situations we saw with Dell uh we saw a similar positioning even to the Apple event

10:42 yesterday in terms of that rich call skew. The IV rank is 65. So that's quite rich. Um it's hard for a stock to exceed expectations when the IV rank in this case is 65 and the risk reversal rank is 95, right? Like people are already expecting amazing things and they have to deliver kind of amazing squared in order to get those uh that that upside upside skew to pay off, right? And so doesn't mean it can't be a good earnings report. Uh just for me when I look at something like that, I I start to think about selling like call diagonals and some things like that. Um that just bet on that skew coming in near-term. Now the the hard part I think for Oracle here too is if you want to bet on say hey I think V's going to come in which nine times out of 10 after earnings it does you're now throwing throwing in a bunch of these macro prints, right? and and that can make it hard where you have

11:28 that sort of beta to the S&P or beta to the NASDAQ is going to add noise to your uh to your trade. So to case in point, maybe Oracle knocks it out of the park uh but S&P drops 1% tomorrow and that sort of just washes over what's happening. So the the macro situation just I think clouds a little bit uh the possibility for earnings here. But, you know, looking at the numbers, roughly speaking, I'll probably look into doing some uh call diagonals in these situations where selling, you know, something like next week's uh upside calls and then trying to pair that off with a with a longer dated long call as a hedge. And and I like to do those for kind of even money if I can. >> I love that, man. And this thing's probably going to take, but you know what? All that said, I'm going to buy some calls. I'm buy some diagonal. Go make a move. That's how I am. >> I mean, I'm already in that. So, I know. >> Yeah. But it's it is there is something

12:14 to be said about that upside call skew and just how how aggressively you can reduce your cost basis on these positions. Uh to Brent's point like these the one day calls the one day calls are at a 200% I IV and the 8day calls are at 100% IV and they have almost the the same expected move. Uh so you can get big cost basis reduction by just selling anything in the one day against anything you buy. Uh and you can see that drop off visually. you have a massive drop off to October where it's sub 70% IV and then all those back months kind of flatten out around 60%. So that's what I like to look at is like what if I'm buying this option, what is my perceived V floor? Uh and that's the nice thing about the Tasty Platform uh addition to the implied volatility. We

12:59 can just literally chart it. So, the recent implied volatility, the 30-day rolling aggregate in Oracle this year, the lowest print we've had from a raw volatility standpoint is like 50%. Let's call it. So, if you're if you're looking at these positions, we're looking at 64% in November, 70% in October. So now you can say, okay, if we get back down after earnings, if we crush back down to the low of the year, which I think is a conservative estimate, you're looking at a 20% fall crush in October, a 14% fall crush in November. And you can model what that looks like for your position and and get a a really accurate reading of like my worst case scenario is Oracle's raw IV goes back down to 50%. And this is what the position looks like

13:45 from a Theo standpoint. And that's really the importance of selling that one day or selling that 8day V against it is that you can offset a lot of that crush in the longer term cycle that has naturally a lot more time value exttrinsic value premium versus VA premium which is really going to be uh accentuated in that 1 day 8 day 15day range. >> Yeah, it seems like fair has been like uh just 60 or just a little bit under for the past year. But yeah, Brent, Mike and I were looking at this on um on two days ago and stock was trading like 160 162 or somewhere around there and uh we were looking at the 200 strike and and the SE1 expiration. It was 130 bid. I was like are you serious right now? Like >> yeah. >> Holy cow. >> Cuz they had they had no strikes. They

14:30 opened up more strikes. That's what I'm saying. That's my that's my theory. if you have a limited amount of strikes on that upper band. So like literally it was the 200 and the 202 and there was no other strikes listed. So all that premium was just like flattened out like you could see how flat it was. There was very little difference between the 195 197 and a half the 200 and the 205 premium and now they've added all these strikes and those people may have left those strikes and gotten into others. So, uh, obviously Oracle's down too, so that doesn't that doesn't help. But there is I think there is something to that when you have that limited strike selection and you get that kind of forced premium uh into those strikes because there's nothing else available. >> Something else. >> I think I think that's true. you see sometimes when they open up new strikes too that often times that caps like those real meme moves

15:17 >> um where where the addition of new strikes and and and those vS are typically expensive when they have to add new strikes and and people do like to sell those and and that can work against it but I also like to wait till earnings day to put those counters on because case in point like today stocks down 3% so that would kind of up offset or upset your your positioning a little bit uh and I'm looking at skew premium here and if you look out in October you know you're getting 40 50 60 cents of of skew premium uh based on our models here around the 190 to 200 strike which is that previous crazy high from from June right so these options are rich and they're and they're meaty meaning you know you are yes you are selling fairly expensive V but the options prices are pretty solid right sometimes you go to trade some of these things it's a 200 V on a $5 stock and you get a nickel for that or whatever right and it's just kind of noise so you know I do think

16:02 that this is a decent one to trade given that skew premium uh and it's a pretty nice setup >> before we let you get out of here man anything else that you're got your eye on today in this it. >> Yeah, you mentioned SpaceX. Uh SpaceX is is kind of the or at least it was is starting to roll over here a little bit. Uh that stock is doing pretty well. You know, there's this big thick band of gamma, I would say, that we've been seeing around the 155 area. So, I just want to bring that up as as a major resistance point. It rejected that one again. And so, we we covered this a bit uh on my show on Tuesday. And so, what we're seeing in some of these top tech stocks at the moment is some call selling into those new high prices. I think as people are waiting to see, you know, some of these things clear up. Uh we saw a bunch of call selling for example on all the crypto names as well uh and onh Friday and and Tuesday and so I think people have monetized a bit of

16:48 the upside in some of this stuff as we waited for clarity. Now obviously with the with the oil and rate situation uh those call cells are are looking pretty good. Uh but it did seem like people had sort of parked their upside expectations for the moment which makes sense ahead of FOMC. Uh but now we obviously have have more things uh to to deal with here. So again, the the big thing is just watching for this slippery downside here uh when we're under 7,600 and and trying to uh be respectful of the risks. >> Yeah, it does seem to be clinging to that 7,600 level. We've gotten low as like 75, I feel like 87, but we keep kind of hanging around there. So there's clearly that's clearly an interesting gamma level. Well, Brent, thanks for joining the show, man. Um you are on the network on Gamma Guy on on Tuesdays at 10 a.m. Central. Tell the people more about that and what what they can expect when they tune in to that show.

17:34 >> Yeah, thanks. Uh we're doing about 20 uh 20 to 30 minutes of me riffing about what I'm seeing on the markets. So we bring up a lot of our latest data, options positioning, options prices, and just talk about what traders should expect on the week. And hopefully we're highlighting a couple of interesting trade ideas for people as well. And so that's been a lot of fun to do uh in my first two episodes here the last couple weeks.