SpotGamma with Public: Semi Skews & the Stock Bubble | SpotGamma™ (2024)

Brent Kochuba, Founder of SpotGamma, joined brokerage Public to discuss semi stock skews, and why he thinks stocks are in a bubble. However, that bubble may continue to expand – watch to find out why.

Below is an automated transcript, please forgive any grammatical errors:

Hey everyone welcome to Leading Indicator, a show bringing you insights from some of the sharpest Minds in the world of business finance and technology and by the way Public just launched options trading if you activate your account between now and March 31st you can lock in a lifetime rebate of 18 cents per contract traded no commissions no per contract fees anything like that that makes public the most cost effective way to trade options enable options trading over at public.com by the 31st of Marchand start earning 18 cents per contract traded with us today uh today to talk all about options and volatility trading within the market is Brent Kochuba, founder of spot gamma Brent appreciate you being here thanks a lot for taking the time thanks very much for having meI’m excited to talk everything options today.

I well I mean let’s let’s start with obviously where I think the topic of conversation has understandably been for quite some time Nvidia which is up300% I can’t believe that’s a real thing but it is up 300% or so in the past year recently became the third most valuable company globally market cap at this point well north of two trillion the AI hype continues to boost Brent what has options activity looked like within keyuh artificial intelligence names like Nvidia yeah it’s the leading sector you know the kind of rolling joke is that it used to be the mag 7 that was driving the market and now it’s just the chip sector if you look at not only Nvidia but you have smci which is getting added to the S&P 500 now you have avgo which is I think a top 10 name in the S&P in terms of market cap obviously AMD and so what we see is those names are driving markets higher and it’s about that sector is about 8% now of total us options volume um and that has really just gone crazy this past uh year really so those names are driving everything uh and the current stance of the market is that we had extremely bullish call Action into really last week that call Action kind of cooled offa big deal on Friday if you rememberFriday there was a humongous intraday reversal uh in the markets and I think we’re digesting a lot of gains into a big options expiration and that’s across the chip sector really and that immediately flips over to this Nvidia event that starts on the 18th uh where they’re going to offer you know their new products or just kind of talk about what they see going forward and if you look at the implied volatilities related to that event uh you can see that the market does care it is pricing in some movement and volatility around that so if you’re in the chip sector this MondayTuesday kind of period where uh they’re announcing new products and things like that is the next trigger point for you know if we’re going to move higher or kind of a continued consolidation is there a story I wonder that the options trades are are are telling us and and is that story largely at this point just to wait and see for what happens with these announcements on the 18 yeah it’s a great question so what if you look at things like skew implied uh implied volatility and skew metrics and things like that what you could see was that there was an extreme bullish position which is not much of a secret it’s not that shocking obviously when I tell you that um so that was this really extreme bullish position going into again last week and I think what happens in those situations is that calls get so expensive that it’s hard to justify owning them still right because in order for you to get a payoff on those calls uh you need just ever increasing moves right so you know if you bought let’s say a one week call in NVDA last week you needed a 10% move right to get that call to payoff it’s just a rough example and so what happensi s that the move sort of stalls outright uh where you you just hit this convexity where the stocks go up so much so fast and things need a period to cool off and consolidate and I think that’s kind of like a blowoff top for example um and I think that’s the period we’re we’re hitting so if you look at term structure which shows us the implied volatility over time for a name like Nvidia or even the sector like SMH uh you’ll see that there is indeed higher implied volatility tied to this Nvidia event coming up and I think what that really means is like hey if they launch some kind of generative AI tool that everyone thinks is going to add another whatever $30 billion a month to Nvidia Revenue you know then sky is a limit right we’re just going to keep going up again um and of course that runs into these macro events like vix expiration next week as well as the fomc on the20th so both vix expiration and fomc are on the 20th so there’s a Cadre of kind of trigger points we like to say overt he next couple of days yeah I’m glad you mentioned the other event on the 20th obviously it’s all eyes on chairman Powell even if wealready kind of know how that meeting is going to go but it’s worth noting that expirations is worth keeping an eye onas well especially for Market reactionuh into the close on that afternoon letme ask you about overall Market optimismthe Dow the S&P the NASDAQ you named theindex it’s up it has surpassed its 2021highs continued to push higher evenBitcoin rising to 70 72,000 just a fewdays ago uh does the market optimismhave legs to stand on I think and if notis there is there a bubble concern no nogo for it yeah 100% didn’t mean to cutyou off there I apologize for that uhtwo things on bitcoin and even on goldif you look at the Ford S&P returnsbased on what’s been happening in goldand Bitcoin the Ford S&P returns arevery positive uh and they’reconsistently positive and so what thattells me is that those two sectors uh orassets going up are long-term bullishinto the market and I think when youlook at this year just in terms of theCPI printed yesterday wasn’t hot enoughto really cause any angst impliedvolatility just sank after that um whichis another kind of forward uh Vision orview into risk and so the the takeawayhere is that this seems a lot like 2021where little individual dips were boughtright and we just continue to rally andrally and rally all year and when youlook forward in this year it seems likethe only maybe Bump Stop in the road isgoing to be the election right and uhand it’s just going to be kind of Ststatus quo from that perspective andthat seems to be what we’re seeing in alot of the data now I want to turn to acouple points if you have looked arounda little bit in markets there’s somemetrics on what we call correlation uhcorrelation measures let’s say inside oflike the S&P 500 Index how unified movesare so are all stocks going up or allstocks going down what’s happening andwhat you see is that correlation rightnow is very low and so that tells usit’s as low as it’s been since 2019 sothat tells us that obviously the there’svery poor Market breadth here that’s ameasurement of Market breadth and it’sjust the semi semi stocks and Chipstocks that are really read reading therally the second part which is veryinteresting to that is this idea ofdispersion so dispersion tells us insideof the index how much are the individualstocks moving so are are certaincomponents moving a lot relative toother components um and right now we seevery very high readings of dispersion sowhat does that mean that means thatNvidia and these other chip stocks aremoving so fast that they’re now greatlypacing the rest of the other names let’ssay in the S&P 500 Index now typicallyyou only see high dispersion readingswhen the markets crash so for exampleMarch of 2020 when the world shut downbecause of covid all stocks went downright every single stocks went down butsome names like Cruise Lines went toZero Energy went negative uh you knoweverything went down but some stuffreally felt the pain a lot more thanother stocks that was a high dispersionenvironment as well so what’s happeningnow is we see dispersion sort of flippedon its head cuz certain stocks arealmost crashing up and the reason thatthis is important is because if you lookat historical times that sync with thisyou could see similar movement in 2021which you know felt a lot like a bubblein a lot of ways particularly in Augustof 2021 and then you can go back to thetech bubble in 1999 and 2000 where yousee very similar stuff remember likepets.com and names like that were reallygoing crazy and the rest of the marketwas hanging in there but left in thedust right um and so those are signsthat the market is entering a bubblephase however this is the caveat thebubble can last for a while and sothere’s not signs right now that thingsare going to break I think you need amacro trigger like an unexpected youknow rate hike or I don’t think we’regoing to get any of that right now uhbut I just think it’s going to continueto be this status quo now until thatelection period so takeaway is a lot ofsign we’re in a bubble but bubbles cangrowbigger yeah I mean do you think let’sstick with the S&P 500 that dispersionis it being driven specifically by someof these really Consolidated names bythe AI companies by the nvidias or othergrowth names yeah and talk and and moreabout that correlation yeah absolutelyit’s the chip sector and if you look atfor example the mag 7 a lot of thosenames aren’t doing very well at allright Tesla is at Major kind of recentlows Apple fell very sharply recentlyGoogle’s off of its highs Microsoft isnot really you know making new highsAmazon’s okay meta is the only real magseven name that is kind of forging newHighs at this moment so there’s one ortwo ways you can look at this you cansay okay those leaders you know the thelargest most important companies in theUS Stock Market are stalled out a littlebit here or you can say hey those thingsare going to join the party next week Ithink both are viable options here tolook at and I think so much of itdepends on hey we get through Nvidiaevent next week if they have some reallyexciting products and Powell justdelivers like a dubish kind of nothingdumb then that market just launches andthen maybe some of those other namesstart to catch up um but it it isclearly just chip sectors right now andI don’t think that’s particularlyhealthy um the other thing I would noteis you know we have smci joining the S&P500 now um on Friday that’s a namethat’s had a lot of volatility I thinkthat volatility comes in a little bit umand I think some of the bullishness inthe chip sector just continues to kindof Wayne Uh because it’s gotten they’vegotten over their skis on a lot ofmetrics so sure so let let let me askyou a bit more about the dispersionthing now now if if uh if an investorwere to pull up and look at how the 11sectors of the S&P 500 have performed sofar year-to date overall index up 8 anda half% but I would argue you got someof these some people might call it abroadening now you you look at some Ccyclical sectors that historically Mayunderperform while the S&P is up eightand a half financials is up almost625.16 that’s outpacing the broader MarketHealthcare is not far behind at631.40 Industrials xli is at 7.2 and materialsis at 5.6 I so how do you sort of lookat what some people might say hey maybethere is a bit of a cyclical broadeningout versus the points that you were justmaking with regards to dispersion howshould an average investor kind of marrythose pieces of information uh togetherto become more informed as we moveforward in uh in 2024 yeah so the waythat I think about the market right nowis that we have this trend higher andinside of that Trend higher we can sortof almost like an RSI I think a lot ofpeople are familiar with that or oroverbought oversold indicator right andyes you’re 100% right like financialsare doing great Industrials are doinggreat they’re at alltime highs the S&Pis at an all-time high as well howeverthe chip sector itself is you knoworders of magnitude over that right andthat’s really what it is is that leadingin those leading groups have gotten somuch farther ahead and so you can make agreat argument that the rest of thegroup is likely to catch up on arelative basis and I think that’s youknow what we’re talking about here andto that point if you have a broadeningout of the rally I think that’s reallyquite healthy and again when you look atBitcoin moving up I think that’s a arisk sentiment indicator right ifbitcoin’s going up people want riskthere’s other the other Factor that’sinvolved in this market which is alittle little tricky is we have a lot ofsystematic Co call overwriting now theseStructured Products so if you look atstuff like a jepi which is one of thebiggest ETFs now in the world they sellcalls consistently as part of their uhETF uh perspectives right right theysell these monthly S&P 500 calls there’sa volatility dampening effect thatsupports the broad Market as we go up sothere’s a lot of financializationoccurring right now new ETFs are beinglaunched daily that sell options forexample there’s an Nvidia 2x long ETFthe only thing they do is they they aredouble long the uh the single stockNvidia there’s also a 1.5 long NvidiaETF because you know two two 2.5 is Idon’t know so there’s thisfinancialization aspect that adds a lotof Leverage to the market so back tothis point of the longterm Trend goingup things can get very overheated likenvidia’s up you know whatever it is thisyear uh 40 50% it can drop 5% which willhurt in the short term and then justpick up and kind of continue so I thinkit’s just reversion to the mean incertain sectors and it could bemeaningful because you could be up 10%this week but then can back down fivesix 7% next week the trend is stillhigher uh but things can get overheatedvery quickly in this environment becauseof all that leverage yeah people like tosay the trend is the friend you’re rightwe saw that with Nvidia just a week agoright we had a 4% pop one day a 4%pullback the next day still somehowbecause you talk about relative strengthindex the RSI currently is only 67 forNVIDIA I say only because we look atthat 30 to 70 range for overboughtversus oversold I I mean obviously whenyou you take in forward-looking PEmultiples for a company like Nvidiapeople say well it’s actually relativelycheap to where it’s been historicallygiven where we think it’s going to go souh I appreciate that you mention RSI wetalk a lot about it uh here with our uhour users at public and I think that’salways a good thing to kind of keep inmind so I I I had asked you a little bitbefore um or I mentioned this idea of abubble are there any bubbles to any ofthis it could be gold it could beBitcoin it could be any of these AIstocks anything that has you concernedthat you’re watching Brent that might beto the advantage of our listeners to payattention to as well absolutely I meanmy my view on the market is I mean youlook at crypto there’s a lot of thingshappening that you could easily say heylook there’s new ETFs there’s newmarkets there’s monetary policy that maybe or fiscal policy that are drivingsome of these things you look at Nvidiafor example you know people can justifysome of these Ford pees right now basedon some new products and is AI going totake over so you know all those thingsare things that are outside of mypurview because I I really just focus onthe options market and the thing that Isee that concerns me is the leveragecomponent so much volume right now iszero DTE or focused on options thatexpire in a couple of days and I thinkthose are excellent trading tools butthe volume’s really gotten concentratedinto that shorter time frame and thingslike the Nvidia ETF that 2x leverag ETFthat ETF has two billion in inmanagement and Assets in management inthat ETF so what happens is you getthese moves and you brought up Nvidialast week Nvidia had this unbelievablemove up to 980 is on Friday and our ouroptions indicators saw $4 billion worthof Nvidia calls come for sale as a stockapproach approached 980 and the stockcame down nearly 10% really from thathigh so these really violent moves aresymptomatic of a lot of the ways thatthings are being traded right now and Ithink that you can exploit that as aTrader if you understand the environmentyou’re in so you got to be you knowshortens everyone’s time frames to kindof be more quick getting in and out of alot of these positions particularly fortrading options because you have a fixedtime frame on on your your caller putright they expire it’s a littledifferent if you own the stock and sayyou know who cares if it gets overboughtin the short term because I think a yearfrom now it’ll whatever double so thatLeverage is a concern um 50% of S&Pvolume roughly now is zero DT optionstrading but there’s also a big increasein the single stock stuff that trades onyou know every Friday and so you knowthat flow is significant and it’s youknow it’s increasing it’s at 2021 levelswhich to me is a it’s a lot ofspeculative activity that’s happening umand so the take away from that is thatyou know volatility can’t really be likejust destroyed it gets like transmutedso what do I mean by that it means thatwe crash up if we have these incrediblerallies up that that volatility has gotto also come back down right you can’tjust have the situation where we go up50 60 70% in a day and then just pinthere it’s just it’s kind of unlikelyand so that’s my view for these chipstocks that get overbought and evencrypto right Bitcoin look it’s doinggreat but it’s it’s its rate of changeis explosive and there’s going to be acorrection right who knows where whereit starts to correct and that correctionis is going to be pretty violent andshake a lot of you know short people outand so you have to be aware of those uhif you’re a short-term Trader you haveto be aware of those moments Iappreciate and there’s so much to watchfor a stock like Nvidia including apotential stock split at some point Imean we’ve watched that 980 level if andwhen it IT breaches a thousand what doesthat do for its addition to otherindexes there’s always Dow Whispers fora company like Nvidia but obviously youneed to pull that surging stock pricedown U so there lots of fascinatingstory lines there to watch let me askyou about the viex a little bit we’vebeen doing several interviews this weeksabout the volatility index stillhovering around 14 I’ve made the pointbefore that you know if you just look atthe vix any one number doesn’t tell youthe story it’s it’s always relative toits history where it traded in Co whereit traded this time last year a muchbigger picture but what usuallyinfluences the vix to move as you see itBrent it’s it’s a great question I wantto add one quick point on the stocksplit stff if you remember2021 the the the there was a major highin August of 2021 when both apple andTesla split and that happened right atthe end of August and that marked a realshort-term High there’s some things aresplitting now like the Nvidia doublelever ETF the socks ETF is splitting sothat could be a real signal I justwanted to mention that back to yourquestion on the vix um the vix has hadsome unbelievable jumps related to vixexpiration which comes up on the 20thyou remember in a February expirationthe vix went from 14 up to about 18 18and a half in a single day and then itgot sold violently lower after that umand so we had that period coming up nextweek where there’s a lot of vixpositions that are set to roll andadjust and I think that is in play againhere now the vix is tied to 30-dayimplied volatility of the S&P 500 soit’s a little bit of a longer datedgauge of Market risk you know right nowthe vix is around 13 to 14 in thatneighborhood based on how much intradayvolatility we have in the S&P 500 inother words how much is the S&P movingthe vix is fairly valued at 13 to 14 Iwould say um the situation is going tobe when we get a longer term signal ofrisk meaning if you think about lastyear we had the bank failures right andand so so let me pause a sec theargument is that you could use zero DToptions to hedge out say the CPI numberor the fomc day or whatever it is butwhen you have unknown like knownunknowns like when Banks were failingyou didn’t know when a bank would failor if it could fail but it seemed likethere was higher odds or likelihood ofthat situation happening that’s when youwant to start to own vix options vixcalls because that’s more reactive tosystemic issues right stuff that youcan’t just hedge out with a single dayoption and so when the vix starts torise you know that’s a signal that themarket is sniffing longer term risk sothe the takeaway here is that we have abig vix rooll coming up next week thatcould cause some short-term Marketvolatility but what you really want tosee is that volatility holding in a moresustained manner uh as a signal that themarket started to sniff out someproblems the other thing I would note onthat is if you’re looking to hedge yourportfolio I think vix calls now are theway to go and that’s because if themarket does jump up higher it holds thisthe the VIX Index up right becausevolatility exists if the market goes upor down so if the market rips up threeor 4% here vix is likely to hold at 13or 14 as a function of that volatilityright so if you own vix calls and themarket crashes from that higherreference point then those vix calls area great hedge if you were to say buy anS&P put here like let’s say I bought the5,000 or 500 spider put for example andthe market rallies 3% well that 500strike put is so far out of the moneynow I can’t hedge my portfolio anymoreright so I think that’s an interestingway to think about it as portfoliovalues AC crew people are making moneythey’re getting a little nervous you canreally look at that Vick’s index as a apretty good hedge I think in in thesetypes ofenvironments uh finally Brent anyCatalyst that could break up the ongoingMarket hype caused a potential bubble uhto pop anything that you’re watching forthat uh our listeners should also bepaying attention to in terms of TheNeverEnding world of Whata ifs andthings that could happen uh yeah I meanthe the Nvidia event is a big deal nextweek I think if they just offersomething that doesn’t Spark all thatmuch excitement then I think that reallyzaps the energy of the chip sectorbroadly and it’ll take a little whilefor for that to recover uh if Powellcomes across as a little more hawkishthan people expect I mean people havevery low expectations right now thenthat’s going to be the real kind of risktrigger here as people have to adjustthose rate expectations going forwardfor the end of the year and I thinkthere’s a they’re pricing in a June cutright now the CPI was a little hotthere’s a PPI reading tomorrow so thisis a chippy period in here um where youcan see a lot of things change ourriskof measure is 5,100 in the SPX if wemove below that then I think weimmediately kind of Pop immediately downto 5,000 5,000 in the SPX is a very biglevel there’s a ton of options positionsthere so that should be a pretty goodsupport area if we lose 5,000 in thethen from an options hedging flowperspective you know that that’s wherewe could have a that’s the bubbles overkind of uh red flag to me so I wouldexpect a little consolidation here overthis week pal probably comes in in lineand then if we go over 5,200 in the SPXthat’s the sign that the bubble’s gonnaexpand absolutely my man that was anawesome conversation really grateful forthe contacts I could do this with youall day we got to leave it there that’sBrent kachuba founder of spot gammaawesome perspective thanks a lot forbeing here BR appreciate it thanks somuch