On Sep 23, in our post, “Is bond vol a cheap option here?“, we asked ourselves;
“Fed has definitely managed killing bond vol, but given the recent moves across assets and bond vol still in “coma” maybe it offers rather cheap optionality if things go very “fluid”?
MOVE has really been moving lately…
Refinitiv
As Chris Cole of Artemis tweeted last week;
“Fundamentals are dead…flows are the only thing that matters today”.
Below are two charts showing the retail call options mania well. The data measures “customer” flow which is essentially retail and “buy side” trading.
So the retail client buys a call option resulting in the market maker having to buy stocks to hedge the book. Before the “rise” of the mighty retail, things worked orderly, but when a tsunami of retail clients all start going the same direction, things get hard to hedge. Options flow do matter, always, but the heavy options call buying, especially in the shorter term options have most probably magnified all moves (and greeks).
The fact most of this call buying by retail is done on screen results in all the tiny options summed up equalling to huge flow but nobody is “controlling” it. A “huge” institutional order is conducted by the client buying a big position from the bank’s trader/market maker (taking into account liquidity etc). The risk is “contained” with the trader who then after hedging the delta can decide how to hedge rest of the options risks. By using interbank brokers and buy back parts of the risk, hedge with other related instruments etc. The point is, if one trader has all the risk he/she can “control” the hedging. With retail trading all this flow on the screens, the aggregate risk is never “controlled” the same way as market makers “on screen” behave differently, but this is a much longer conversation on the market microstructure…
Another “anomaly” is the fact index and ETF call volumes have remained normal, despite the surge in single name calls. It is hard to put on dispersion trades when retail is busy buying just a few names…
Let’s see where this call mania goes, but one thing people do not talk much about is the fact a lot of the premium spent has not produced overly impressive returns. The most extreme call mania was seen just before the early September sell off, and the parabolic moves in Apple, AMZN etc have cooled off. Retail has probably learnt the hard way how options work (just look a the expiration in Apple last week).
What about puts?
The second chart shows put premium spent. Put premium spent is much less, but do note the surge inputs when it comes to index and ETFs back in March. This is nothing more than a classical macro hedge by funds, usually conducted at wrong times.
Let’s see how the above develops as we get closer to elections…
US Equity Strategist, Mike Wilson is “tactically bearish”….
“Last week’s failure to break through technical resistance for second time suggests the correction isn’t over. We expect softness into and past the election before next leg of bull market…Lack of a deal on fiscal stimulus, election uncertainty, and the second wave of the virus are likely to keep volatility elevated near term and realized volatility around current levels. This suggests the equity risk premium may be full at its current 380 bps.
In fact, we think a 50 bps buffer to current ERP levels may be more appropriate, which would be about 10% on the S&P 500 P/E multiple assuming constant 10-year yields. Such an adjustment would also bring the market down to more substantial technical support levels near the 200-day moving average (3123).
Wilson, Morgan Stanley
Some restrictions will now be eased.
BNO
Tech relative EPS revisions are weakening now, while the sector keeps outperforming, which is opening up a significant gap… Rotation upcoming?
JPM Equity strategy
Still trying to digest…
“The number of tourists during the Golden Week holidays were 618 million people, about 80% of the level in 2019” (Nordea).
(US population aprox 330 million, Europe 740 million).
Nordea
…and SPX to the upside.
Refinitiv
Just a follow up chart to our earlier post, “It is all about call flow mania“.
The upper chart is filtered for small lots (retail) compared to the total “customer” call options premium (notional weekly).
Retail has only taken a small pause when it comes to trading calls it seems.
In this world of regulation, we ask ourselves if the new retail “trader” actually understands what he/she is doing, especially when it comes to options trading.
CFD brokers must have the warning text about some 75% of their clients losing money. Will the hot retail call punter soon be seeing a similar warning sign?
Spotgamma
The Paychex/IHS Markit Small Business Jobs Index stands at 94.44 as of September 2020…
IHS Markit
Only bull in NASDAQ at the moment is NASDAQ “VIX”, VXN…as all that tech call mania goes wasted…
Refinitiv
…where selling must be met with more selling as stimulus talks continues spooking the markets.
Spotgamma
Apparently Chinese diplomats gate crashed a Taiwanese event on Fiji. “Later the two Chinese embassy officials allegedly assaulted the delegation member, “beating him up so badly ” – according to these accounts – that he required hospital treatment in Suva.”
From Chinese foreign ministry briefing “Beijing explains there can’t have been an incident involving Chinese and Taiwanese diplomats in Suva because “Taiwan has no so-called diplomats in Fiji” and Chinese Embassy staff were provoked by _a cake_ bearing the ROC flag”
Things are definitely heating up.
Forget reshuffling big books in this environment.
Magnified options flow is not helping…
GS
Announced global deal volumes for the industry were up 98% q/q to $1.1T in 3Q20, a new high since 2Q18. Volumes in September alone came in at $488B, the 6th highest month in the last 10 years. All M&A cylinders are firing – market rebound to pre-covid highs, Fed support, lower for longer interest rates, wide open capital markets and rising CEO confidence. Corporates and financial sponsors are accelerating M&A plans. Pent up demand from 2Q20 is already coming through. Buyers have adapted to working virtually with sellers to close deals. A potential increase in taxes next year could also drive a more accelerated timeframe from announcement to close, particularly as sponsors look to lock in a lower tax rate. MS Analyst Manan Gosalia expects total completed volumes for the industry to rise 27% q/q in 4Q20 and 24% y/y in 2021.
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