“A hedged pot never boils.”
-Tier1 Alpha
That’s a great one-liner that my friend Mike Green likes to use to describe the current dynamics of the US Equity Options Market. If you’d like to watch the Real Conversation I had with Mike on HedgeyeTV this past summer (it’s called “Options Gone Wild”), here’s the link.
Back to the Global Macro Grind…
If I were to go all probability-speak on you this morning, I’d change the word “never” (on a boiling pot) to rarely. Green gets that obviously. But not a lot of people get the super-short-term dynamics of The Machine’s Flows.
What happened in the US Equity & Options market yesterday was very similar to what happened on FEB 23, 2024.
For those of you who do “see” and get what’s going on out there (with > 50% of the daily US Equity Options Flow being ZERO Days To Expiration options), you’ll recall The Setup from FEB 22:
- NVDA was about to report earnings after the close
- Short-Dated Equity Implied Volatility ramped to 20.07 (in a day)… then
- NVDA “beat” and ATM Implied Volatility dropped by 7.2 Volatility Points, in a day!
If you’re new to measuring and mapping Options Data, you’re going to have to look up some of these terms and get educated. I get educated on US Equity Market Structure every day.
To simplify the complex, Realized Volatility is calculated from the standard deviation of actual day to day (log) price changes and expressed as an annualized percentage.
IMPLIED Volatility is different.
IMPLIED Volatility is what the options market is “pricing in” (in terms of expectations) on how volatile the PRICE of the underlying security could be in the future.
A 2-4 point move in super-short-term Volatility is big. A 7-point drop in a day is a monster move!
Here was The Setup going into one of the busiest Macro Tourist days every month:
- Headline INFLATION (CPI) was going to be reported before the US market open at 8:30AM ET
- Short-Dated Equity Implied Volatility ramped to 22.91 (in a day!)… then
- CPI was reported in-line with expectations, and voila … Implied Vol got smoked again!
Is there any irony that Implied Volatility is dropping like a Tom Brady dime for 7 Vol Points? I don’t think so.
Here’s how our Content Partners at Tier1 Alpha will describe what happened yesterday in their must-read (and study deliberately) Market Structure Report:
“The ATM Implied Volatility declined by 7.5 Vol Points yesterday, as short-term hedges were quickly removed after the CPI release. More notably, ATM Fixed Strike Volatility also fell, with widespread declines in both the April and May contracts, implying the risk from the event is expected to be contained.”
Again, if it takes you more time than it ordinarily does to read/understand this Early Look, it should. Reading about math and probabilities isn’t like reading Reddit memes. Math is hard. Do the hard work.
The most important thing for me is to know The Market Setup I see as the “play” of The Game is developing. While I can’t coach everyone to “see” it, I can try. And I can most definitely execute on it WHEN I see it.
Heading into the CPI “Event Risk”, this is what I did in my The MFO (my families Long Only Account) which you can also see, daily, in our new Portfolio Solutions product:
“Added EIS at my min. Bought QQQ, PINK, XLG, AMLP, ITA, ITB, SPMO, IWO, EWN.”
Obviously I wouldn’t be buying QQQs and/or S&P MoMo (SPMO) if I didn’t see a big Buying Opportunity. If we didn’t have the most accurate Nowcasts for headline INFLATION (CPI), I’d be less confident …
But I’d still likely act on my #VASP (Volatility Adjusted Signaling Process). That hedged pot didn’t boil.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 4.04-4.29% (neutral)
UST 2yr Yield 4.46-4.70% (bullish)
SPX 5071-5193 (bullish)
NASDAQ 15,890-16,390 (bullish)
RUT 2043-2108 (bullish)
Tech (XLK) 205-214 (bullish)
Insurance (IAK) 110.19-114.26 (bullish)
S&P Momentum (SPMO) 76.92-80.77 (bullish)
VIX 12.55-15.32 (bearish)
USD 102.23-104.07 (bearish)
Oil (WTI) 77.02-79.95 (bullish)
Copper 3.85-4.03 (bullish)
MSFT 402-422 (bullish)
AAPL 164-179 (bearish)
AMZN 171-181 (bullish)
META 480-517 (bullish)
TSLA 161-191 (bearish)
NVDA 794-951 (bullish)
Bitcoin 64,092-74,647 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
