Hedge Fund Manager Fill Zucchi Says Must Read
An Epic Battle Is Raging Beneath The Market Surface
https://twitter.com/curvenomics/status/1301333517515853824
Mohamed El-Erian Chimes In
Epic Battle Between Hedge Funds and Market Makers
ZeroHedge discusses the Epic Battle Between Hedge Funds and Dealers.
Short Explanation
- Speculators are buying out of the money calls on tech stocks at a massive rate.
- As the stock rallies, the call sellers (generally the market makers) have to buy more and more of the underlying issue as a hedge leading to even higher call prices, even more call squeezing, even more delta-hedging and buying the underlying, which eventually spills over into more and more of the market, and so on until there is one massive marketwide meltup.
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This resulted in the highest VIX print at a market all time high since, drumroll, the day the market peaked in March 2000, when the dot com bubble burst.
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Cross-asset guru McElligott, picked up on this saying that Gamma hedging has become “the most important flow in the market, with the convexity of said short-dated “lottery ticket” options creating an ‘all-or-nothing’ binary-options market behavior into weekly expiries, seen in these increasingly exponential ramps in names like TSLA.”
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With a large number of call contracts outstanding and “relative illiquidity” in some of these single-name shares, they have been forced to turn to proxies such as the S&P 500 and Nasdaq 100, according to Hennessy. In order to hedge, dealers have been buying implied volatility on these benchmarks too.
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Over the past few weeks, there has been a massive buyer in the market of Technology upside calls and call spreads across a basket of names including ADBE, AMZN, FB, CRM, MSFT, GOOGL, and NFLX. Over $1 billion of premium was spent and upwards of $20 billion in notional through strike – this is arguably some of the largest single stock-flow we’ve seen in years.
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As the street got trapped being short vol, other names in the basket saw 3-4 standard deviation moves higher as well – on Wednesday FB rallied 8% (a 3 standard deviation move), NFLX rallied 11% (a 4 standard deviation move), and ADBE rallied 9% (a 3 standard deviation move).
ZeroHedge concludes:
“A few large hedge funds understood this and have added fuel to the fire by pushing implied higher and higher and putting further pressure on the likes of Citadel and Goldman. With this process helping drive names like Apple and Tesla, this also makes sense why Breadth has been so terrible.”
“Over the next couple of days, implied vol during the day should be a phenomenal leading indicator.”
When this unwinds it rates to be spectacular, perhaps even as much in the opposite direction.
I am not going to trade this. But if I did I would buy out of the money puts in small amounts until it worked.
Mish
I will need to sell stocks in 5 years.
How does this affect me?
The honest answer is that no one knows. The correct answer is liquidate all your holdings. Stay in cash, and wait till things are more clear. Especially if you are counting on that money to retire in 5 five years. Things might still go up if FED manipulation is superpowerful. But i wouldn’t bet my retirement savings on that. You can ways reinvest later, if things look better later.
What a mess the FED has on its hands. First it tries to stimulate the economy by holding rates low (which did not work). Then it purchases Treasuries and mortgages from banks (that didn’t work either). And because of all the help it attempted, markets are now even more leveraged and less stable than before. The money never goes where the FED wants it to.
A couple of economists with NBER (official caller for US recessions) authored a paper back in the 1980s which pretty sums up what we’re seeing NOW.
The gist of the paper at the end of a bubble returns get Crazy … all to keep market participants locked into their rollercoaster … before the big flush. A gentle topping would give them time to assess … and leave.
A lucky few will get out (near the) top. Most? They’ll learn the 5 stages of grief … the hard way.
Imagine if the Fed began their pumping activities before COVID-19, when the economy was humming along. Where would the stock market be then? Now imagine a gradual recovery. Where will the stock market be then?
Put a few hundred grand into VOO a few months ago. I’ve been extremely happy with the results. If everything collapses I’m okay. I’ll just buy more for the next ramp.
JonBuyers…
My search engine result for tesla+market+capitalization is
443.48B for Sept. 2, 2020
https://ycharts.com/companies/TSLA/market_ca.
My search engine result for tesla+cars+sold+last+quarter is
90,650
My calculator shows that if the quarterly sales rate is multiplied by four to make an approximate annual rate, then the market cap per car sold in 2020 should be about $1,223,055.
If I round it a bit to account for the fuzziness of the projected sales figures, then it’s about $1.2 million per SALE.
Is anyone on Wall Street actually doing any, you know, thinking these days?
Wall Street is nothing but a casino now, and anyone who doesn’t realize this deserves what they have coming.
Nope. When the music is playing, you gotta dance!
Well this is kind of fun, I didn’t know I owned a 1.2million dollar car…. AND I got a deal on it at 40k!
Fundamentals do not matter, until they do, and then they matter a lot…….
Commentators tend to talk about changes as percentages. It would be more meaningful, but scarier if they used just dollar amounts. Apple is valued at about $2.25 trillion. Over the last week, it has been known to make over a 5% move on a given day. If it happened on the downside, that would be equivalent of IBM going bankrupt.
The market knows the Fed has no good options. They have to keep it propped up. I think part of the reason the Fed is buying corporate bonds is that was the area of highest risk for counterparty investment banks and hedge funds. I talked to my brother in law who has his own hedge fund and he says everything is uncharted waters now for everyone which is why the Fed has thrown so much liquidity and buying at the problem.
This positive feedback loop works in both directions: when a stock is rising, the loop squeezes it up at ever faster speed; but once the uptrend is broken, the downtrend will go down dramatically.
A leading indicator of a……….stock market collapse.
I’ve been watching this play out in TSLA on the daily. Huge volume in the furthest OOTM weekly calls and other round number weeklies. The conspiracy theorist in me wonders if perhaps someone is trying to crash our markets before the election. Like maybe China?
TSLA is weird. I’ve never seen anything like it.
I wouldn’t touch that one with a mile long pole. However, if I had touched it the first time I said that, I’d be rich today….and I’d immediately sell.
I would stay away from it to.
Enemies of the US like China and Russia know trump is destroying America. They’ll help him like last time.
Mish, I sort of understand what’s going on but I’m not willing to go long here and join the fray.
I’m very curious what your opinion is on a 3 month timeline. How do you trade with this knowledge? Go short and get killed by the FED put? Go long with the philosophy that if you can’t beat em, join em? Potentially get killed when this all reverses?
What’s the best play? Go long miners? I’m long on GOLD but probably going to switch to NEM, but only 10 percent.
How are you going to trade this?
I would stay away from the marker until this thing sorts itself out because it looks like it will and right quick.
I am not going to trade this. But if I did I would buy out of the money puts in small amounts until it worked
I think that buying small amounts of out of the money puts technically qualifies as “portfolio insurance”. You’re paying small premiums to insure against big losses, kinda like homeowners insurance.
The trick is to try to pay as little premium as possible so that it’s not a big cost to your portfolio, while still having enough downside protection. You could buy LEAPS puts that expire in 2 years and then sell them in a year to avoid the biggest time decay losses. Or Cambria Funds also have an ETF with the ticker TAIL that (I think) does this type of strategy on autopilot for the management fee. (I’m not affiliated with Cambria, just a fan of their research. Not investment advice, do your own research…)
What’s the wonderful bet!
This is Win-Win situation. Market high you win and market crash you win.
Market is in bubble territory and you’re scared of Fed Put?
Simply buy calls on triple-inverse ETFs such as SQQQ and SPXS. You do not have to get the timing exactly right, since you are betting on landing 10-baggers at a minimum anyway. So one can miss a few times and still come out well ahead.