 All right, good morning traders and welcome to the pro trader webinar series options focused webinar here With Brent Kachuba. So we've had Brent several times in the past. So what you guys know who he is he's Been in equities and derivatives for almost 20 years or I guess 20 years at this point worked at B of a and credit Swiss as both equities broker and in algorithmic sales and trading Following that he was institutional salesful Wolverine representing their electronic derivatives trading platform And then currently Brent trades some proprietary strategies and runs spot gamma dot-com Which offers the hero indicator which a lot of you are very familiar with And publishes very metrics various metrics on options data quite a few metrics in fact So we're happy to have Brent back again we have Let's see here His affiliate link and his contact information in here so If you're interested in their services, I'll put this into the chat both in YouTube and If you're interested in also in discord there for you guys so that you can reach out and find out more All right, so without further ado all I need to go through the disclosures and then let's turn it right over to Brent General disclosure all book map limited materials information and presentations are for educational purposes only and should not be considered specific investment advice nor recommendations risk disclosure trading futures equities and digital currencies Involves substantial risk of loss and is not suitable for all investors past performance is not necessarily indicative of future results Okay, so let's see here. I've got Brent's screen up. Let me pop it out and Yeah, I think you are good to go Brent Presentation is up there. Thanks. Thanks Bruce. Good to be back with everybody again. I think it's been a while So as it is options week, thank you guys for having me kick this off the Thing I wanted to talk about was sort of a new way to Visualize how the options market can impact equities I think if you've heard me talk before you understand that I talk about the different Influences of the options markets such as how the underlying moves how volatility moves how time moves and all these can kind of combine and congeal into options pressure on the market And so today what I wanted to do is I sort of wanted to Reset that framework for everybody try to new sort of analogy that I've worked out here and then explain how These influences may be coming to the market just this week Bruce as you may or may not know There's a very large options expiration on Friday the quarterly options Explorations tend to be very large. So when I say quarterly, I'm referring to the third Friday of each quarter So that's March June September and December those four months the third Friday is always a very big expiration And this time was no different and when I say it's big I mean, there's a whole bunch of big put positions expiring And so we believe that can be very impactful to the market and hopefully this will This presentation here will show you why that may be and how you may be able to take advantage of it So The idea I want to present or the analogy that I want to present to you all is this idea of an options chair or stool And when you consider sort of how options impact the market And I don't want you to think of this as sort of like you're trying to figure out if I want to buy or sell This single option I want you to think about this from a hedging perspective a dealer's perspective On the top of this three-legged stool here We have the options price and when I say options price I want you to think of that is not so much sort of how much an option costs, right? I mean in a way that's what it is But think about the higher price is for an option in this case One could argue that that means that the hedge ratio, right or the delta of that option needs to increase So when I'm talking about options prices here There are three main factors that determine the options price. That's the stocks price So if you're thinking about the SPX index or if you're trading Apple options, that's the Apple stock There's volatility in this case generally implied volatility. So what do traders expect for the market to do? Obviously, we have the FOMC tomorrow. So excuse me on Wednesday And so implied volatility or the amount of volatility traders are expecting in the future is pretty high, right? Because no one knows what the Fed may do. So, okay You can watch the stock move around you'll understand that volatility or sort of how much people think a stock or index may move Again earnings usually bring high implied volatility if a war starts God forbid we have more war That'll possibly raise implied volatility, right? All these things can Impact an option price and then the third one is time Time is fixed. It's very easy to understand. The closer we get to an expiration Particularly where there's large options expiring the closer you get to that expiration the more options decay, right? So that is that is sort of a factor now in your mind What I want you to do is imagine that you're holding this stool in your hands, right? You got your hand on sort of to the legs, right? If the stock price Starts to increase that could tip the stool to one side of the equation, right? And if it stock starts to drop that could tip the stool to the other side of the equation Same thing with volatility you raise volatility that'll tip the stool if you raise price and volatility You're gonna tip the stool if you start to pass time and shift those other ones The stool is gonna roll over and so the way that you present or excuse me prevent that stool from flipping over is To hedge your options, right? And this is what deals are trying to do They're trying to create or maintain that stable options Delta right their hedge ratio that that options price They want to maintain stability there and the way they do that is Generally by buying or selling the stock right they can adjust their portfolio around But the base sort of line the baseline that I want you to think about this is that as these three Variables are changing that stock price volatility in time as those are shifting around you can hedge with the underlying stock Buy or sell the underlying stock to keep that options price stable right to keep that top Imagine you have a ball rolling around on the top of that stool and you're trying to balance it The way that you balance it is by buying and selling stock throughout the day right to keep to keep your options portfolio bounce So when I talked about this large that options expiration on Friday It was a tremendous week rest last week like two weeks ago when the S&P was at 3900 We had a very large put options expiration Then we had an incredible rally right five and a half percent rally into CPI and I believe a chart of that here. Yep So we had this incredible rally into the CPI that's this rally right here and then an immediate crash Now the Delta notional right? This is how much stock in theory or futures need to be bought or sold To hedge the major underlying indices as the S&P in the Nasdaq We calculated Back here right was around 500 billion dollars If the market started to rally in that position The stool started to tip way over and the way that they would hedge that stool right would be to buy futures And that kept the stool balanced So the reason that is is because when puts expire right if dealers are Short put options because traders are buying them to hedge themselves if dealers are short put options And they're gonna be hedged with short futures and if the market starts to rally right that that chair that still starts to flip over They got to buy futures to maintain balance and so because you had all those big options expiring that led to this big cascade of buying Right and then immediately as the CPI number comes out and is a negative number and The futures gap down 3% in the course of about 60 seconds Then all of these futures need to be sold back to maintain balance right because imagine that the stool is Level right somehow as we hit CPI all of a sudden somebody just comes over and basically kick the stool over And then it's a rush to get the thing back up which involved sort of selling futures to get that balance or that stability back right to get This thing back to level and So when you think about the way that the options markets going to impact or you're watching or thinking about how price is going to Be impacted by the options market. You want to bounce these things out in your mind. So, you know right now I want to advance the sort of how you can take advantage of this Of this kind of concept in the moment But what I want to impart on you is that on Friday night this number was back to 500 billion right because of the fact Excuse me Friday morning because of the fact that the market had cascaded back down after that CPI So we had something around the neighborhood of I don't know three four hundred billion Maybe notional net inputs right because you want to net these numbers out expiring on Friday And our thought is that as those puts expire that leaves dealers sort too many futures and There's this phenomenon. I'm gonna present some data on this But there's this phenomenon where the market tends to rally the Monday after right? We'll typically hit a low the Monday after options expiration And then rally after that and we believe it's related to how these put hedges are unwound, right? Because if you think about if you're short a bunch of futures as a hedge a hedge against options positions and on a Friday Go options expire. They're all gone. Then you have these big Futures hedges, right? You're short these hedges that you don't need anymore. So do you got to do you got to buy those back? I Think the other thing that plays in this factor generally is a spider's dividends There's a couple billion dollars and in spider dividends that come out right those those will get reinvested in the like So I think oftentimes you get kind of this kicker right on Monday after these big options expirations And and this is not really a phenomenon that as I mentioned before you can see this phenomenon sort of The market turning around big options expirations You can see it pretty much every month But the quarterly quarterly options expirations are where this Really shows up as I mentioned before it's the quarterly options expirations that are the large Explorations where they're the biggest options positions are but you can see here back in June, right? We had the June FOMC and then here's June OPEX in the market rally pretty hard after that Same thing in July we had this gap up Greater on options expiration of these were these were expirations that had a lot of puts in them Just like we had here in September one interesting thing about August is that August was one of the only months this year that we expired With bigger call positions, right? We went into expiration with bigger call positions and put expirations And what you can notice is that we gap significantly lower, right? We went the other way so just as I said after big puts expire We'll get a rally after call positions expire. We see oftentimes the market will sell off And so there is this link between options expiration in the way that the market moves So I wanted to sort of add some data and some thoughts around these big options expirations This is the sum of returns and in the last so these are five-day sums Just for this year and what you can see is that these red arrows are options expirations And what you can see is that there are these cycles we get into right? And and the reason I think these are these cycles where it's a negative cycle here positive and then we kind of go negative It's like a wave form right and oftentimes that wave seems to cross sort of this zero bound around options expiration And I believe that is because we call it the option cycle I believe that's because as you get closer and closer to an options expiration That's basically every 30 days the positions build and that reinforces trend So what I mean by that well as we build into a put options expiration, right like last week Puts get larger in the market. It creates more volatility a little bit more chaos right things tend to get a little more wild and then on the call side call positions tend to build and implied volatility Right that other leg of the stool Shrinks down to not be as meaningful anymore in the market stalls out then calls expire in them And then volatility expands again, and you can see again this wave form and if you look at it This is a chart actually presented by a sober look on Twitter. You can see right here Reuters also put put out an interesting chart We did a video about this if you look at our YouTube channel at which is YouTube spot gamma You can see this just a discussion of this chart, but what I want you to know is here This is the week return into expiration Friday. So this week The markets return for every week going into expiration Friday has been extraordinarily negative Right is slightly negative the last couple of years, but very very negative this week. Excuse me last week That's going into options expirations and then look at the return out of options expiration. It's massive 2.3% So that's a huge swing right going into options expiration and then coming out is so positive now these last I mentioned this year that We've had primarily puts in the market, right? This is a different dynamic than anything. We've seen really in the last five or ten years This data here where we're minus 80% I think this is very skewed by the whole March of 2020 Escapade where we had the the the giant market crash So the point here is that these are call dominated markets and you can see the the returns are are smaller It's a little bit of a different dynamic, right where there's bigger call positions in the market and then this week Excuse me this year You just get kind of chaos into options expiration and then it's still chaos out of options expiration It's just you just it tends to be a big rally now if you sort of been subscribing to our daily notes here You know that we are calling for looking for a rally in the market Looking for the market sort of shift back over 3,900 today and and kind of rally back into FOMC And then you know, that's kind of what the difference is here We have FOMC on Friday and so you know back to this leg of the stool here, right? We think market will rally but volatility is not going to go anywhere Because you have FOMC so it was going to happen on FOMC as you're suddenly going to get the stock markets going to React wildly right to whatever may happen No, whatever the Fed positions itself and then volatility is going to react in kind Meaning that if the market rallies volatility is going to decline implied volatility is going to drop like a rock Right and and that will likely need dealers need to buy futures, right? So bounce that stool back out conversely if the market drops and volatility really spikes Then dealers are going to sell futures to keep balance and that could really you know start a major trend for the next couple weeks So In line with a lot of this idea here what I wanted to just touch on is this idea of volatility a little bit further If you all want to think about the VIX as our measure of implied volatility in the market when I say implied volatility I'm talking about is what does the market expect in terms of future volatility? How much movement is the market anticipating and that's essentially what you get when you're looking at the VIX now? A lot of people think okay Well if the VIX is high it means the market's going to crash or people think it's going to crash and that's part of it But but ultimately what the VIX is really just telling you is that there's going to be a lot of movement We tend to assign a negative direction to that movement But there's nothing to say that the market can't rally and have a lot of volatility And I bring that up because many of you have obviously seen incredible moves higher this this year, right? We'll rip 5% in two days like we just did it's just we gave all that back in the matter of 60 seconds, right? So what we're looking at here is realized volatility, which is how much the market has moved This is the S&P 500 how much the market has moved in the last 30 days So what I want you to focus on here what I want you all to see here is that this is 2022 and what you may notice is that we have a higher level of realized volatility We have more sustained market movement this year than at any point in the last 10 years All right, there's a few kind of episodic reactions here like flash crash Then of 2018, you know the market had a really bad year obviously the COVID crash is here But that that volatility tends to calm down after a while, right? It it what you generally have is the Fed will come out and say hey everybody Fed put is in place. We got your back and the market calmed down. We are not getting that at all this year It's a much different environment many of you who watch the VIX have seen okay The thing doesn't go under 20 anymore, right? We seem to have this sweet spot around 25 and What that is telling us obviously is that there's more volatility in the market that traders expect more volatility in the market well, you have to expect more volatility in the market if The amount of realized volatility so if past volatility is high Then we are all going to expect future volatility to be high, right? That that's sort of you set your base case for what's going to happen in the market based on what's happening And so this realized volatility, right? This is a different regime than we've seen arguably in the last 10 years and The interesting link here and I don't cover the macro as much but the interesting link here is that the Fed is increasing rates, right? They're tightening They are not offering that same Fed put in the market is a this is a different market now, right? It reacts much differently as a result So many of you and I get this question a lot So many of you make me wonder well, what's sort of what is when is the VIX going to go back down to 15 or under 20 or whatever? it may be and While you know, you would say look if we get realized volatility back, you know 2017 was probably the most boring year ever and VIX got around 10 or 11, right? You see realized volatility was just absolutely anemic This Realized vol you can sort of look at it and say okay realize vol is right now around 25 You can kind of just compare that to the price of the VIX and say what is essentially fair value for the VIX Well, it's basically what realized volatility is right? It's basically about 25 now The Fed put comes back out traders future expectation of volatility is going to crash right? The VIX is going to drop hard and it will take realized volatility a little while to come down But as we're sort of just sitting here The best sort of way to think about is the VIX fairly valued is based on what one month realized vol So if one month realized vol I eat this number here is about 25 when the VIX about 25 is probably about fair value Right, so what this chart does is it takes the VIX and it subtracts one month realized volatility So it just subtracts this number here and this is the spread between the two and as you can see we tend to revert in around 10 right that's generally the spread here You can see sometimes the spread gets negative and what that is is like after the COVID crash right the Fed put comes out And the market rallies hard and the fear is over in the market That's what all these negatives are because traders go okay the the catalyst for the market crash is now behind us We have Fed support. It's all good now, right? And then the VIX will very sharply decline but takes 30 days obviously for these big You know realize moves to come out of the market So that's what the other interesting thing is here is that You get more of these it seems like more of a cluster of these situations where people try to keep saying okay I think the I think the nasty part is over here, right? I think we can move forward here and then all of a sudden you know the market just sort of rat Sells back off right and VIX flies back up But the point to get back to here is that this spread is pretty much in line If not slightly lower than where we've been over the last 10 years, right? So based on this lens the VIX at 25 ish is pretty fair value people aren't really asking for Much extra they're not expecting much more movement than we're already getting so if you think about the rule of 16 What that basically tells you is that you can divide The VIX by 16 and that gives you a one-month forecast for what people think the market's going to do Excuse me a one-day forecast and so with the VIX around You know 25 26 you're getting somewhere around a one and a half percent move Essentially is what is what the forecast is, right? It's what the market is expecting for the S&P index on a one-day move is roughly one and a half percent That's a lot of movement, you know to have that as your average case basically over the year But I think most of you would say well, yeah We can get a one a half percent move But it very easily could get a two or three percent move today, right? Because of the fact that I think liquidity is very low and we just tend to whip around so, you know 25 Back to my sort of core point here 25 is is a fair value. It doesn't seem expensive to me, right? It doesn't seem like people are pricing in bigger movements than one percent moves per day now that is high, but Again doesn't seem like excessive You know based on this spread chart here You obviously are always going to keep a little bit of a premium on implied volatility This the base case because most people don't know what's going on in the future, right? You have to sort of look at your your base cases realize ball Then you add a little bit extra on top of that right in terms of your future forecast because of unknowns, right? Again war interest rate changes, etc. You want to hedge those right people generally want to own puts to protect their portfolio There's some demand there right that keeps a little bit of extra a juice in the VIX over realized And and again from this chart it just looks like We're fairly valued in the VIX So if the Fed comes out and says hey everybody I got your back now Fed put no more hikes The VIX is gonna collapse right and if the VIX collapses and you drop in that volatility component drops hard Then it's back to this idea of the stool right the stool is gonna flip forward And fall down because deals will all suddenly have to start buying tons of futures back to stay level Right, so this that's why we want to watch the VIX and pay attention the VIX kind of tells us how much Volatility is in in options right and if you think that the the Fed as your back and the VIX drops to 20 Well that tells us that dealers got to start buying futures back to to maintain their hedge right to keep that that stool bounced And as the market rallies right they got to buy more futures back to keep bouncing the In the market. So That's why this is such a critical idea When you look at again the VIX if if you guys go to vixcentral.com you can look at this VIX term structure and again the reason I'm showing you all this is because I know many of you are obviously here trading futures And in the movement of volatility right is so critical to understanding what options dealers may or may not do again Lower VIX lower volatility generally means dealers are gonna buy futures in a higher VIX or higher implied volatility generally means They'll need to sell futures and so this line here was from September 15th and then obviously we had just because of the Fed because of FOMC we have this Premium right in VIX and what's going to happen now is is the Fed is going to come out and say one thing or the other And the market is going to react to that right and if people are spooked by the Fed And you look at VIX central and you can see these lines flatten out right or go backwardated meaning that the front month Data points are higher than the back month That is a signal that the market is concerned But it's also a signal that dealers are probably going to start having these sell futures Right and that's going to really crush the market and add a lot of pressure Conversely if people like what the Fed has to say and you see these lines converge or collapse Or you see just you know volatility of 28 goes down to volatility 25 Okay, the the market is breathing a sigh of relief And and the market is going to start to rally off the back of this off the back of the FOMC One of the things that I really want to bring this all home for those of you again Who have been following me for for for a while know that I talk about the move index and what the move index is It's the VIX for treasury options works very close very similar sort of Logic there and You know if implied volatility is high in treasury options is the same thing as high implied volatility or high VIX inequities Right. It means the same thing people are very unsure Um about the the future prices of treasuries Now that's sort of the basis for most of the global financial system is us treasuries So the fact that the move index is telling us that there's as much anxiety In options pricing on treasuries as much anxiety today as there was going back to march of 2020 That is to me a signal that the core Sort of you know, the belly of the global financial beast is upset um And I've argued that you know while this is elevated if you look at the the VIX Uh, which is here in yellow and if you look at VIX and the skew index these are equity measures, right of of tail risk demands Those are all at lows going back to 2019. So specifically if you look at the s-dex that basically the skew skew index the sdx it tells us what What the demand is for out-of-the-money puts essentially right are people worried about tail risk in the market If it's if they are then the VIX index, right and the s-dex index are both going to be higher Right. Those are the the VIX is essentially demand for out-of-the-money VIX calls something that you'd want to own If you thought that the VIX was going to go to like 80, right? So nobody's worried about in the equity space. We're not all that concerned about that drawdown relative to the to this gap in the move index and and so When will implied volatility really start to drop and when will we get the VIX under 20 and when will we get a Sustained market rally I believe it's when the move index comes back down under 100 because that tells us that the that the treasury market is now Finally breathing a big sigh of relief That interest rates are probably the path of interest rates going forward You know is better is more predictable and then you know that that helps things out from a fundamental perspective Right because you can start to price future cash flows and you can start to look at You know what the yield of the s&p is versus 10-year treasury and you can you can sort of all of these Normal barometers for asset allocation, right can can suddenly come back into use because You know, we have better a more sound sort of anticipational prices are and so You know, that's our signal for long term You know wanting to get back in the equity market long term But even the short term here the fact that this gap is so big, right? Tells us that we are not going to get realized volatility This number is not going to come back down and and swings in the market are going to remain very very high Because the more volatility we have right the more this stool is going to flip all over the place and and the less out of balance we're going to be As a result So again, you know what we were saying this morning on our In our subscriber note if I just flip back over to a live chart here What we're saying our subscriber note is that No one really knows number one what the Fed is going to say. Yes, we have an idea of you know, our rates going to go up At least 75 bips. Okay, are they going to go up a percent? Some people think that's that could be So that's one side of the coin, but the other one is how are people going to react to that? You know as Trading mentors often say it's not the news that matters It's the reaction to the news that matters and so You know, we think very cleanly here You just wait for whatever the Fed may say and then you wait to see how that goes Wait to see how the market reacts and then because of this vixx at 25 or 30 because of Options expiration just rolling off right because of some of these different dynamics We think that there's going to be a very extended move So a one to two week directional sort of you know move out of the fomc That should be very tradable And if you look at that the way that this lines up You can see we're going to roll into this quarterly expiration and many of you are aware of the end of month Quarterly expiration because there's this big trade called the jp morgan collar I don't want to get into that on on this trade here But if you look at our youtube channel or just google, you know jp morgan collar trade You'll get a bunch of information around that But basically what that is is there's very large put positions Down below so if I zoom out a little bit here take my lines off the screen If we sort of zoom out here, you can see there's a big long put position down at 35 80 I know this is far away from where we're trading right now. It's about six percent ish below But this number I think you should keep this one in your mind until the end of the month Because we could see I think off the back of the Fed if it's not a good reaction I think we could very quickly slide, you know this far this fast Into end of month and see this long put strike So essentially jp morgan is long the strike and dealer short the strike So as the market starts to slide lower dealers are going to have to start selling futures This is the biggest position sort of in the market right now And because of the fact that the time is starting to shrink on it It becomes a little bit more sensitive To the to the way that the market is moving and then they the way they do it is they sell the long strike So it's hard to see here, but this is the jp morgan what they do is they sell this call At four thousand and five and they use that to buy this put and they they actually use to buy a put spread So that's why these levels the four thousand level And then this 35 80 are very important into The end of the year to watch and again It's this idea of the dealers needing maintain balance right at the market starts to slide lower They got to start to sell futures if vol starts to spike they got to sell more futures Right because the volatility is going higher. They got to sell more to maintain that balance Conversely if the market starts to rally these puts are going to get destroyed in value And the markets are going to start to head up and then dealers are going to start buying futures Right and vol is going to come down so they're going to buy more futures to maintain that balance so You know, it's all about this equilibrium And and that equilibrium Can exert, you know a lot of pressure on the markets As as this original chart that I showed here Implied or inferred So that is my very quick overview on sort of the state of affairs here in the options market and what we're looking at I'm happy to take questions bruce. I don't know if we can take questions on How that really works in discord again. I'm sorry. I'm a little bit of a discord boomer here Oh, yeah, it's no problem. I can I can read them out to you. Um, and and we also have some uh from In our youtube channel there, uh, a few. Okay, great. Yeah. Yeah. Yeah, happy to happy to feel those. Okay. Uh, so let's see here In discord, um, when you talk about options levels, uh, 3,900 you meet spx or is it the es uh, december contract Yeah, great question. So all the levels that we quote are in index and the reason is because we model index options and so we quote the The level in the index and then you do need to adjust it to the future Um, and obviously that that spread changes over time and we do some adjustment on our side So what happens is when you actually look at our levels, um Like if you load them in book map, we print the label that's in spx term So, you know explicitly what we're talking about but then you actually see the line drawn on the book map chart, uh at You know at the equivalent es as you can see here So this is our these are our key levels for today Obviously a bunch of these aren't in play because we're a little too far away. Uh, but here are the equivalent future levels And so just back to that point. We've we've been looking for a bounce today based on on that opx bounce information Um, we think that 3,900 a back over 3,900 was our call We made that call actually on thursday and mark it kind of went down against us on friday, but we're sticking with it Um into today and and we think that the rally, you know Normally we look for a little bit of a sharper rally into options expiration But because of the fact that the fomc is on wednesday We think that's going to keep volatility high in the market It's going to keep some tension in the market and that kind of limits how much the market can rally today So, um, you know, I think we'll I'm thinking we'll get into around the 3950 area kind of into wednesday morning And then we're just going to hit the pause button there while people wait for the uh for the fed Okay, uh, let's see here in um Uh in youtube, uh We have a question about uh, you never heard of the uh the fed put before is that a real thing? No, so there's a there's a famous sort of quote. I think it's bernikey ben bernikey Um, and basically what they say is the fed put is that the fed Uh, the fed is hedging the market and what that essentially means is that when the stocks crash too much The fed would roll out like quantitative easing or some other sort of uh support for the market, right? And so that's why people have said well, it's the fed put if the market drops far enough They'll come and save us Um, and that and that fed put is arguably not there anymore because here the market is crashing and the fed's going Well, I'm going to raise rates, right? Or I'm going to launch quantitative tightening Even though the market's down whatever 15 or 20 percent this year. Uh, we're going to keep ratcheting up interest rates Um, so that's why people say the fed put is no longer in place Yeah, and then uh, you were talking about the uh jpm collar. Uh, so we got a couple of just uh different comments about that Um, that that should suppress the um Volume or volatility there Yeah, so uh, a lot of people say that this should suppress volatility and my argument about that is um So the reason the reason that people say that is if I move my screen over a little bit here, um Let's zoom out All right, so the way that this specifically works is jp morgan this jp morgan hedge fund is long a bunch of stock, right? And they want to hedge that so what do they do? They sell The call right they sold this call the 4005 strike call and they use that to buy a put spread So the put spread they bought is 35 80 and short the 30 20 So the dealer position is going to be the exact opposite, right? Dealers are long this call They're short this put the 35 80 put and then they are then long the 30 20 So the idea with that volatility suppression thing is that when this short put here, right jp morgan short this But deals are long and so if we get down here and the involve really spikes enough Then deals are long this put they're going to start making money from that position in theory, right If the market drops that far and that's why that should suppress fall My argument here is like we got a long long way to go till we get down to this 30 20 area This 35 80 put is going to lose a lot of money, right before this this trade here makes money See what I'm saying? So this call that that market makers are long market makers are Dealers are long this call. They're short this put and as a result as the market goes down They got to sell futures. So as far as volatility suppression goes I don't think that's going to kick in until we get, you know, maybe down to the 30 200 That's a long that's a long long ways in the next 10 days, right? But I do think getting near this 35 80 With some bad Fed news is is possible And that's what's six seven percent down from here Yeah, yeah, I mean I always walk away from your presentations like like it's inevitable you know I mean, I you know, I have I literally have no idea and this is this is the thing about it And we were talking about this in the cpi number, right? We said we we It's about the distribution of outcomes ultimately and what I what I mean by that is that I don't know which way the Fed is going to go, right? I didn't know if the cpi number is going to be positive or negative Fascinatingly, I mean the thing that boggles my mind. I'm going on a die tribe here. I tend to do it, but um No one's going to be able to answer this question But what I found most interesting is we you know, we wrote every day and and quite frankly like we understood that The options market was helping drive that rally of two weeks ago where we rallied, you know, five and a half percent right here um But this didn't make a whole lot of sense and the thing that really didn't make any sense is at Everyone's watching this cpi print, right? It you know, we all It's almost like an fomc like people hedge the fomc or the cpi like they would hedge an fomc event, right and The the the futures hit a Like major high. What is that? I don't know three four week high 30 seconds before the cpi number comes out You know, why would you Is that just a shortcut or like, I don't know again I'm on a I'm on a side die tribe here, but I just couldn't believe that we're actually hit like an all Like a multi week high or whatever 30 seconds before this print comes out And then you can see this really destruction So back to the point of the distribution of outcomes if it was a good cpi number We've already gone up five and a half percent, right this all this put fuel that was in the market Had burned up to essentially zero so, you know, this was Again, sort of the extreme reading but if you look at this on the morning of the cpi This is call gamma here or excuse me call delta here and put delta here So what happened was the call delta and the put delta were even numbers Essentially all this all these deltas that were in the market, right? This is the size of hedging needed just for puts They had essentially moved to equal and what I mean by that is that You know dealers had to buy back all these futures as puts were losing value And then when we hit this point right here That hit equilibrium meaning that dealers didn't have any more hedging to do So when you're looking at the distribution of outcomes, you go, okay Well, what's the reason what is the impetus or what is the options fuel for the market to rally on a good cpi number here? It's really there's really not much fuel left like the market's not going to sell but There's not a whole lot, you know, this fuel is not there anymore However, if if it's a bad figure, right and we and we wrote extensively about this if it's a bad figure There were all those put options that were expiring on 916 that were just sitting there and while they're worthless Up here at 41 60 or 41 75 if we drop those are suddenly going to gain a tremendous amount of value and have to be hedged very actively So this was this is what we call jump risk Market drops here and and this means suddenly, you know to keep that chair balance You've got to sell tons of futures to maintain that hedging, right? It causes this cascade effect Now now the biggest options positions are out in october, you know, there are more out In the december now, so we don't have this same jump risk, right? The feds going to cause a move But we're not going to get a three four percent move in 30. I mean, I think this was the fastest 100 plus handle drop I've ever seen. I think it was something like 30 seconds. I mean, it was it was just unbelievable So, um You know back to sort of the original point here You want to look at the distribution of outcomes and and and as you can see here and we're talking about the fact that Yes, this jp morgan leg is You know six percent down That position the fact that that position is there if we as we keep getting closer to this position The more downside fuel it adds, right? Because as this put increases in value It tells us that dealers got to arguably sell more futures to maintain Hedges and so it's almost like a vacuum, right? You start to get close enough or like a tractor being, you know, like A ufo spaceship, right? It's going to suck you up Well, that's what happens to get close to 35 80 that that put value grows them and it helps to Pull the market down Well, I mean, what would happen, uh, brent? I'm you know, I I kind of hate to go this direction But I I just have to ask um if you know, uh The the news is is is good for the market. Uh, you know, all of this is we'll have to unwind here or you know, uh JP Morgan will have to figure out something Yeah, I mean, they you know, they're already long equities. So for for JP Morgan doesn't care They don't touch this position until expiration. So, you know, it's going to expire on 9 30 And and that's why we have on this chart here. It's it's this idea that You know price and volatility are to the dimensions and then the third one is time So, you know, this is when those options expire this, you know, the JP Morgan puts and so You know, if we rally out of this This put doesn't have a ton of value right now, right? But the closer in time you get it's going to lose more value, right? If we start to and as we start to rally that put also loses more value So, you know, those are things that decay as those decay that helps keep the market up This this put position by itself right now doesn't matter all that much But if we move down 2 or even 3 after fmc Then suddenly this thing starts to spike in value and then you're going to hear a lot more about this This 35 80 put but, you know, right now You know the base case is the fed sort of let's say we get 75 basis point in the market It's like, okay, I think we're all right now. Let's start to rally You know, then you got to wrestle with this 4,005 strike on the overhead So, you know, if you talk about like a quick move, you know, 4,000 Is a is a big resistance level. I mean if you just look at Uh, if you look at an alternative view here for that So this is the gamma by strike Um, and so call gamma at the top put gamma at the bottom This is essentially telling you like how big are the positions right at various strikes So you can see this is a monster strike here the 4,000 level this Level right here is the 4,005 jp morton call explicitly So the upside we have this big strike that the market's going to have to wrestle with We could very quickly move that level and kind of stall there for a little bit Um, but you know to the downside that 35 80 is not that big of a deal, right? You could see down here, um, there's a small little piece, but but this is not a big put position right now So if the market starts to go up, well, look, there's not much to decay at the strike But you know all these have decent amount of gamma So that'll help to fuel the market up But if we start to jump down, you're going to see this the value of this line will drop Substantially that tells us that that put value is increasing and the amount of think of this is the amount of hedges necessary for each strike Uh, as the markets only gaps down all that hedging flow needs to pick up all that hedging flows start selling Futures, right? Um as that market starts to move down So, you know the distribution of valcom were right around here a good fed easily get up into this level Then we're going to test this level and then you know kind of take it and see it But if we start to move down, there's there's really not that same, you know, uh Support mechanism of options expiration and I think it's a support mechanism because when puts expire They don't have to be hedged anymore. So that removes some of the the volatility in the market, right? We can get we can get kind of like a bounce like we're seeing today um But because there's not a close expiration now for another month, you know Those puts are going to sit on the books for at least a month. Some of the bigger positions are out in december You know that that keeps pressure on the market, right? It there's nothing to break the cycle of downside if that makes sense Yeah, no great great stuff. So another question here about wouldn't wouldn't uh, uh JP Morgan be just front running the cpi, uh, or I guess larger players here, um To extract every last profit, uh Just in turn to the short No, so it's a the there that that Hedge position, uh, they don't they do not adjust for that, right? They put it on the every end of quarter. This is the date, right? They're gonna they're gonna get rid of the existing position They let it expire and then they put on a new position And now they may kind of change the way they add a new position I think because the market starts to watch this so much and and you want to kind of disguise maybe what you're doing But they're not here to you know, they're already long a whole bunch of stocks So they're not here to monkey around with you know, trying to gain game the system. I think in this respect um, so and in general You know, um, I think yeah It will the suppressed volatility if we get down below here, then I'll make a case that it does suppress volatility If anything you could say that if we rally here, right because JP Morgan's short this strike Dealers are long this this strike four thousand and five If anything you can make the argument that as the market rallies dealers got to sell futures in some size, right? As the market starts to rally which caps the upside volatility, right? So, you know, if you start to rally there, then I guess if that's what you're the previous question was about upside volatility Then you can make an argument that's getting suppressed above four thousand and five um, but They're that that fund is already long equities like that that's their mandate Their mandate is not to sort of try to be vol, you know arbitrage um And and play around with with cpi or fmc events Yeah, wow. Wow. This this is great. I really like the uh, uh stool Visualization there Brent Yeah, I think I got to change it to a chair. Um One more leg the other leg here is interest rates Which is also kind of like you think of interest rates or dividends or even short Um, you know the cost to borrow all those rates kind of factoring and could cause a little bit extra wildness too But you know for the index people I just left it try to leave it a little bit more simple and uh, Hopefully that's a better visualization for um For the dynamics Yeah, let me see if there's any more questions in I'd like to get a rally over uh, 30 and 100. I got my face here The last few days, uh Looking for this rally and a lot of puts were closed here that that really helped the market rally and then, you know, obviously we're getting there today, but um People are people are still pretty nervous out there, huh? Yeah. Yeah I mean, I think a lot will revolve like you said around this fomc for sure Brent, what do you also about like the quad witching? Um, how do you kind of factor in that when you have You know the futures as well and options on futures expiring Yeah, the the options on futures market. Um, I've looked at it before I think there there can be some material positions there for sure and I don't want to represent that that it doesn't matter um The um that that in a way kind of adds to the existing position So you're not going to have the es futures options market and generally like way off from what these spiders are or spx is doing Because that would present too much of an arbitrage situation But when you have those those contracts expiring, I think all that just generally adds to volatility, right? Because everyone's sort of forced to trade and make adjustments Um, and so, you know, I think that's why those quad witchings are so large It's just because everybody's got to trade around those times, right? Um, some of the flows are easy to track, you know, like what is the real impact of the role Right from, you know, septid these contract or whatever It's a little tougher to track versus like, you know, that's what makes these options expiration So important is because everybody has to trade them the the positions are going to expire So, you know, if you just own spider puts right and you choose to do nothing Well, you're going to be assigned short 100 shares of spiders You forget about it and you wake up and suddenly you're sure 100 shares of spiders on monday Maybe you got to cover them. Also, you also add into that the dividend, right? There's all sorts of effect from the spider dividend that comes out You know, you don't necessarily maybe don't want to be as short the stock on thursday because you don't want to pay the dividend and So all that just kind of adds to the noise and volatility Um, because those Explorations force people to trade like they force people to do something and I think that's why they're they're kind of important And and where we think we have that edge is just again in the in the index options market and the equity options market Um, the the trouble honestly with the es options market is that the the cme They make it nearly impossible to get the data So that's why you see, you know, there's a few other people who kind of Do something similar to what we do now? um None of these players even if you look at like the numeral notes that show up on zero hedge numeral bank notes It very few people talk about the es options because it's very hard to get the data on those Because the exchange just kind of keeps keeps the lock on it Okay Let's see. I think that's it. No more no more questions here Cool. Yeah. Yeah, so uh, uh, yeah, thank you very much brent Absolutely, and yeah, always always a pleasure having you here. Uh, just, uh So much to learn about options and how kind of I mean, you've been doing it for years, but how tricky it is at putting those all of those pieces together and then, um, you know, like your hero product The hedging impact real-time options within book map and the order flow And and putting those pieces together In a kind of simplistic way to use this information for you know, kind of Not just a longer term, but also a shorter term vision here. So like like today you're you're you're bullish Yeah, and if and so if you're watching hero, uh on on your book map system Um, what you should see is that hero line, right should start to to trend higher And what I mean by that is that we're watching every single option traded come in and we're saying, okay Is this option bought or sold and what's being bought or sold as it called or puts and What we would expect to see is people selling puts today So that would generate what we call positive deltas or a positive hero signal And that and those positive deltas indicate that dealers or market makers need to buy features, right? So if that hero line is going up dealers need to buy features in theory And if the line goes down the dealers need to sell features in theory So it's always fascinating to watch her on flmc as well because you know The the market may react in one way But then you want to see how the options market is really positioning themselves, right? How are people? Uh And think of options as leverage, right? So where the leverage bets coming in are people selling Volatility after the Fed and if that if they're selling volatility That means that the hero indicator will go up and that's a signal that okay The options market thinks that that we're about to go higher, right? That the the stocks are about to rally out of the out of the fmc And conversely if you get a negative hero signal out of the fmc then people are buying hedges They're worried that the market's about to crash Yeah, yeah, there you go. So uh Guys uh people like dug dug plus uh is um, I've been using this Information from spot gamma within book map with the hero To come up with all sorts of strategies. It'll be presenting on friday. Um, and So some really good stuff in there And brent, I know like it was kind of interesting when that hero indicator came out. I think about a year ago Yeah, you didn't you hadn't seen anything like this before Yeah, we we definitely, you know, uh, and we're we're so grateful to book map as our partners there. Um Because we never seen anything like that and and we thought that the application was obvious And you know, I've done some manual work where I'd get old trade data and and cross-reference things Um, but you all stepped up and help us to build out that signal and um, I think it's been really valuable A lot of the traders that use it, um, you know, it's kind of shifted to be an indispensable tool And someone like dug can really does a great job of showing, you know, exactly how What the correlation is right between that signal and in the options market and you know, we're constantly striving to improve that signal and add new things and Um, we think it's it's really the kind of the best way to see what the real-time impact is of the options market Yeah, yeah. Yeah, no, it's great stuff and uh, uh, so, uh, I put your links into both youtube and our discord channel for special offer from uh, from you, uh, for book map also your, um, uh, your twitter your, um, uh, your email Uh, and then also your, um, your website there, uh, so, uh, and the, uh, you have the hero indicator on the on the, uh, Book map marketplace as well. So it's all in there guys. If you have any kind of questions or information You can always reach out to uh, to brent at spot gamma Yeah, thank you so much and if you subscribe to, uh, spot gamma pro through the book map portal there you get We write a note every single morning that gives us all the daily views or what we think is going to happen on the fed Um, there's a seven day free trial with that So this is a great week to try it out because you got, you know, the implied volatility dynamic The options dynamic is is really I think impactful because of the f1c So, uh, good week to try out try that try out the trial so to speak Excellent excellent. Well, thanks so much brent and uh, we'll have you again, uh, soon That sounds awesome. Thanks so much bruce. Take care everybody. Bye. Bye