OptionMetrics Blog

May 22, 2023

Regional Banking Sector Jitters: PACW Volatility Surges, Highlighting Risk and Amplifying Short Squeeze Potential

By Garrett DeSimone, PhD

Regional bank stocks have experienced a significant decline in response to a series of recent failures, which has understandably raised concerns about the industry’s stability. This downward trend has been further fueled by substantial short selling pressures. Consequently, contagion fears have triggered significant volatility and trading volume in stocks like PacWest BanCorp (PACW). The chart below illustrates the 30-day ATM volatility associated with PACW options. Given the heightened risk of ongoing bank runs and the surge in short interest, the risk profile of PACW has undeniably increased.   More»

May 2, 2023

Agricultural Futures: Not As Predicted

By Brett Friedman, OptionMetrics Contributor

In the early days of the war in Ukraine, commodities in the energy and agriculture sectors displayed the most significant shocks. This was not surprising: Ukraine is a major global supplier of wheat, corn, soybeans, and barley, with an estimated 70% of its land devoted to farmland. At the time, the country supplied 15% of the corn market and 10% of the global supply of wheat, making them the 6th and 7th largest supplier of corn and wheat, respectively, worldwide.   More»

April 3, 2023

SVB Failure and Market Stability: Examining the Response of Bond Spreads to Treasury Volatility

By Garrett DeSimone, PhD, & Anton Rotach, OptionMetrics

The uncertain outlook for inflation and Fed policy has caused Treasury yields to fluctuate significantly in 2023. The Fed’s tightening has exposed weaknesses in the banking sector, as evidenced by the failure of Silicon Valley Bank (SVB), which has resulted in a surge in 10-year Treasury volatility to levels last seen in 2020 and 2008. While rising rates alone may not necessarily harm market health, the increased uncertainty surrounding the path of interest rates can have significant consequences for all market participants.   More»

March 29, 2023

SVB: Commodity Side Effects

By Brett Friedman, OptionMetrics Contributor

The recent spikes in implied volatility due to the fallout from SVB were not just confined to equity and fixed income. Less reported on and less appreciated, commodities were affected as well. Although their movements in price and implied volatility were certainly less dramatic, they were significant nevertheless, and indicated that the crisis was serious enough to involve asset classes whose fundamentals were affected only indirectly. As usual during severe crises, uncertainty was the main determinant of price and implied volatility and the individual characteristics of the specific instruments became a secondary consideration.   More»

February 22, 2023

The War in Ukraine: Commodities Adapted

By Brett Friedman, OptionMetrics Contributor

Last week marked the one year anniversary of the start of the war in Ukraine, and the ultimate outcome is as unclear as it was a year ago. War is never predictable (as Mike Tyson put it, “Everybody has a plan until they get punched in the mouth”), and the market effects from the Russian-Ukrainian War have been no exception. Few involved at the beginning of the war would have predicted the wild, and surprising, ride that markets, and in particular, commodities, have taken.   More»

February 22, 2023

0DTE Options: Institutions Get Short

By Garrett DeSimone, PhD, & Anton Rotach, OptionMetrics

0DTE options are the latest novelty in derivative markets. These options are listed daily and expire at market close on the same day. Since their inception last year, the popularity of this product among investors has skyrocketed, peaking at over 1.7 million trades on October 13 alone (see Chart 1 below). Source: OptionMetrics, IvyDB US The surge in volume of 0DTE is somewhat uncharted territory. As such, there is a lack of consensus among strategists and financial economists on the potential impact of 0DTEs on market liquidity and volatility.   More»

January 18, 2023

A Year in Volatility Across US and Europe

By Garrett DeSimone, PhD, & Abhinav Gupta, OptionMetrics

From the War in Ukraine, to supply chain issues, rising energy prices and inflation, and Fed rate hikes, 2022 was an eventful year, to say the least. It was also characterized by heightened volatility in the US and Europe, as a result, compared to 2021’s more muted vol. Volatility peaked in June 2022 in the US and subsided in Q4, as likely due to softer inflation readings relative to the summer.   More»

January 13, 2023

Mega Tech Crash Risk Outpaces Index

By Garrett DeSimone, PhD, Head Quant, OptionMetrics

One investing theme in 2022 was the failure of tail-risk hedges amid a grinding bear market. The performance of protective put strategies, an oft touted hedge to down markets, was suboptimal. As a baseline example, the CBOE 5% Put Protection Index registered a yearly loss of nearly -16%. This is a result of OTM put option premiums stubbornly falling throughout the year. The implied volatility (IV) skew gives a relative sense of expensiveness of OTM put prices compared to OTM call prices.   More»

December 13, 2022

Examining Anomalies: Part 2 – High Year-End Expectations: Should You Count on a Santa Claus Rally?

By Abhi Gupta, Anton Rotach, Oscar Shih, OptionMetrics

Industry research has empirically proven different types of calendar anomalies. Most scholars have a difficult time rationalizing these phenomena, and many even dismiss them. In this series, we look to elaborate on these anomalies in the equity market and extend them into the options market. We discussed the Day-of-the-Week effect in our last article, ”Examining Anomalies: Part 1 - What is the Best Day to Buy Stocks and Options?” and it’s natural to extend our research to investigate monthly anomalies.   More»

October 31, 2022

Pound Crash Risk and Upside in UK Equities

By Garrett DeSimone, PhD, OptionMetrics

The British Pound Sterling (GBP) has experienced historical levels of turmoil over the past month and traded at record lows compared to the dollar. The freefall in the GBP can be attributed to multiple macroeconomic shocks, including higher energy prices and fiscal plans to increase government debt, stoking inflation. The risks of further deprecation of the GBP is reflected in volatility of currency options. A measure of downside risk, called the implied volatility (IV) skew, reveals investor risk aversion towards depreciation versus appreciation in the UK currency.   More»

September 28, 2022

Inflation: Commodity Prices Unsupportive

By Brett Friedman, Contributing Author

Last July, I wrote about inflation and one of its main drivers, commodity prices. I made the case then that although the Fed was aggressively moving to limit inflation through higher rates, commodity prices had been decreasing sharply since mid-June and were not supporting higher prices. This was particularly true in energy, specifically crude oil and gasoline. In short, the Fed could not point to commodity prices as a reason to raise rates.   More»

September 8, 2022

Examining Anomalies: Part 1 - What is the Best Day to Buy Stocks and Options?

By Abhi Gupta, Anton Rotach, OptionMetrics

Industry research has empirically proven different types of calendar anomalies. Most scholars have a difficult time rationalizing these phenomena, and many even dismiss them. In this series, we look to elaborate on these anomalies in the equity market and extend them into the options market. The most popular phenomenon is the day-of-the-week (DOW) effect, where research has proven that on average, returns on Mondays are lower than returns on other days of the week.   More»

August 24, 2022

IV, Call Contracts & Gamma: BBBY Takes a Bath

By Garrett DeSimone, PhD, OptionMetrics

Meme stocks once again surged in popularity earlier this month. Their temporary comeback recently was led by Bed Bath & Beyond, a stock whose rise began with disclosure of a large position of call options by investor Ryan Cohen, of RC Ventures (and also co-founder of Chewy and Chairman of GameStop). BBBY’s stock price rose over 200% over several days from 08/04 to 08/17 as retail trades piled in. The implied volatility (IV) of BBBY (shown in graph 1) rose to near 300% on Aug 17th, its highest level on record.   More»

July 26, 2022

Demand for Consumer Discretionary Stocks: Could They Signify a Market Bottom?

By Anton Rotach, OptionMetrics

The Consumer Discretionary SPDR Fund (XLY) is down around 30% YTD, the most by any sector this year. The XLY tends to underperform the market in times of economic downturn, as consumers cut excess spending into discretionary goods. Generally, when consumer sentiment declines, consumption decreases, and savings increase as consumers postpone large purchases. Leveraging OptionMetric’s Signed Volume product, we observed a shift in the option demand for this sector ETF from investors.   More»

July 19, 2022

Inflation: Don't Buy the High!

By Brett Friedman, Contributing Author

Joseph Kennedy, the 35th President’s father, supposedly said right before the 1929 crash, “If shoeshine boys are giving stock tips, then it’s time to get out of the market.” Although most likely apocryphal, it does point out that we all have our own personal overbought/oversold indicators. For me, it’s when distant relatives start asking me about what’s going on in the “stock market,” or for my take on whether “they should be worried.   More»

July 6, 2022

Have Recent Economic Events Deterred Retail Option Traders?

By Garrett DeSimone, PhD, OptionMetrics; Abhi Gupta, OptionMetrics; Anton Rotach, OptionMetrics

Market volatility induced by macroeconomic factors has brought into question the resiliency of today’s retail option trader. The recent bear market has led to sustained losses for these traders across a variety of asset classes, likely reducing wealth along with risk tolerance. Smaller lot sizes tend to be more likely in retail option trading. OptionMetrics proxies for retail behavior by studying small lot trade sizes on options data within IvyDB Signed Volume.   More»

June 16, 2022

Gamma Gravity: Negative Gamma is Not a Volatility Black Hole

By Garrett DeSimone, PhD, Head Quant, OptionMetrics

The concept of negative dealer gamma has gained notoriety as the grim reaper of returns in index equity markets. This anxiety about negative dealer gamma originates from studying dealer hedging behavior; negative gamma exposure (GEX) necessitates persistent selling in falling markets to maintain delta neutrality. Conversely, positive gamma inventory has the reputation of being a smooth tide in markets, gently bobbing returns upwards. Negative gamma generalizes an environment where dealers are net short options.   More»

May 25, 2022

The Ukraine War: Surprising Effects

By Brett Friedman, Contributing Author

Last March, I reviewed the Ukrainian war and its effect on certain commodity-based implied volatilities most influenced by the war, namely crude oil, natural gas, and wheat. Then early in its development, it was apparent that “the consensus was wrong and the outcome unclear.” Needless to say, the war has gone on for a lot longer than anyone predicted (especially Russia), and the implied volatility of these four commodities has steadily decreased as the stalemate continues.   More»

April 25, 2022

Elevated Rate Uncertainty and the Bleed into Housing Construction

By Garrett DeSimone, PhD

Inflationary pressures and subsequent hawkish Federal commentary have led to bloodshed in the bond market, with treasuries posting their worst quarter since 1980. The aggressive rise in treasury yields also has a significant impact on real economic activity, as elevated borrowing costs reduce investment. While rising rates serve as a market cooler, they are not as detrimental to economic growth as the perceived uncertainty surrounding rate increases. Heightened uncertainty around the path of interest rates has substantial consequences on the decisions of all market participants; Banks have difficulty pricing lending products, business cashflows and ROI are less predictable, and consumers are less likely to engage in large purchases that require financing.   More»

April 18, 2022

Crypto Prices and Volatility: Unexpected Observations

By Brett Friedman, Contributing Author

Recent developments in crypto currencies since the beginning of the Ukrainian war are surprising, to say the least, and may indicate whether crypto currencies are indeed a viable trading and hedging vehicle for the long term. Surprisingly, early indications are that they might not be. First, a current chart of Bitcoin’s implied volatility and underlying prices (CME futures and options) since the start of 2022: Source: OptionMetrics When Bitcoin and its crypto cousins were first introduced, they were touted as the libertarian antidote to government regulations and tracking, currency devaluation, inflation, war, and sanctions.   More»

March 21, 2022

War and Volatility: It’s Not That Clear

By Brett Friedman, Contributing Author

As of this writing, we are in the fourth week of the Russian-Ukrainian war. As is usually the case with war, its progress has been unpredictable and even surprising. Yogi Berra put it best: “It’s tough to make predictions, especially about the future.” The Russians, as well as most foreign policy, defense, and strategy experts, initially speculated that their forces would quickly and easily overwhelm Ukraine and Putin and his new nomenklatura would emerge victorious.   More»

February 17, 2022

Equities Get Caught in Vanna Hedging Wave

By Garrett DeSimone, PhD, Head Quant, OptionMetrics

In the final week of January 2022, the equity market experienced jaw-dropping intraday price whipsaws. On Monday, January 24, 2022, the S&P 500 saw a midday reversal of nearly 200 points, ending nearly flat to the open. What could have caused these recent large market swings? That is the topic of a recent article in RISK Magazine titled, “Vanna and the Big Put: Unusual Suspects in a Market Mystery,” of which OptionMetrics is included.   More»

January 28, 2022

ARKK the Correlation Flood: Are Markets Mispricing ARKK Diversification?

By Manajit Gogate, CFA, Junior Quant and Abhi Gupta, Quant Researcher, OptionMetrics

There has been lively debate surrounding the future of Cathie Wood’s ARK innovation fund (ARKK) actively managed portfolio. The discussion is centered around whether the valuations of the constituent stocks may be at least partially driven by ARK’s large ownership in the companies. We explore this, as well as other aspects of ARKK, below, and find that: ARKK’s fund inflows/outflows appear to provide great systematic risks for its portfolio of small cap companies, potentially offsetting the diversification benefits of ETFs and Indices.   More»

January 24, 2022

Russian Roulette: Implied Volatility and the Russian/Ukraine Situation

By Brett Friedman, Contributing Author

Ongoing and increasing tensions between Russia and Ukraine are having a direct effect on European energy prices and, potentially, the implied volatilities and prices of certain European and US stocks in the energy, defense, and agricultural sectors. Although not well publicized in the US, Europe has been undergoing a slow-motion energy crisis since last Fall. Natural gas and power prices in Europe were reaching unheard of levels even before the related political situation started heating up.   More»

December 12, 2021

The FOMC and Forward Volatility – Will Hopes of a Santa Claus Rally be Crushed?

By Garrett DeSimone, PhD

Jerome Powell and the Federal Open Market Committee (FOMC) are slated to meet on Dec 14th and Dec 15th for what could be the most consequential FOMC meeting this year. Earlier this month, Powell commented on accelerating bond-buying tapering, and a shelving of the word “transitory” to describe inflation. This hawkish commentary by the board may, at least partially, contribute to significant event risk for equities into the December meeting. A news release from this meeting also contains the Summary of Economic Projections, which is each member’s outlook on the future path of inflation and unemployment.   More»

November 19, 2021

Inflation Risks and Treasury Skews

By Garrett DeSimone, PhD

Inflation anxieties continue to remain at the top of bond investors’ minds. The Consumer Price Index (CPI) clocked a multiyear record of 6.2% on Nov 10, spurring a rise in yields. Bond yields increase and bond prices fall with rising inflation, as bond traders account for the real value of lending. Although the short-term inflation swell has created a sticker shock from consumers on goods, ranging from gas to eggs, debates continue among economists regarding how long the inflationary environment will last.   More»

October 22, 2021

AAPL Earnings: Trading the Rumor with Volatility

By Garrett DeSimone, PhD

The third quarter earnings for Apple (AAPL) is on deck for next Thursday, October 28th, after market close. Earnings attract serious volume from options traders, since the news can incite massive reactions in the stock price. The expectations of an outsized price move make volatility bets in options popular. A straddle is a trade consisting of buying an at-the-money call and put with matching strikes. This strategy is long volatility, with the buyer profiting in situations where volatility is higher than anticipated.   More»

September 23, 2021

Macroeconomic Risk Appears in Bitcoin

By Garrett DeSimone, PhD and Abhinav Gupta

Bitcoin has been heavily touted by its supporters as an inflation hedge. The logic behind this claim is that the number of Bitcoins is fixed, unlike with the U.S. money supply, which is subject to continued pumping by the Federal Reserve. This has led Bitcoin (BTC) investors to draw comparisons to gold, both serving as a long-term store of value. The inflation narrative is only a small piece of the story when it comes to understanding BTC performance.   More»

September 15, 2021

Borrow Rate & GME: Where is This Meme Stock Today Given its Monstrous January Short Squeeze?

By Garrett DeSimone, PhD

Back in June, our blog post, Meme Stocks are Easy Shorts, reported on the gradual stabilization of borrow rates for the premier meme stock, GameStop (GME), and others since their historic surges in January. The surges in GME, BB (Blackberry), and AMC were prompted by home traders rallying with other retail investors on message boards to coordinate purchasing of stocks with significant short interest, thereby inducing short squeezes. In turn, traders with short positions in GME were subject to margin calls and forced to buy back their stock in GME, perpetuating upward price spirals.   More»

August 10, 2021

Gold Volatility Skew and Monday's Selloff

By Garrett DeSimone, PhD & Abhinav Gupta

Gold spot prices fell in early Asian trading sessions on August 9th to a four-month low of $1,688 – down more than 4% since Friday’s close. While the price has since recovered, stabilizing around $1730 or down 1.8% intraday, there is still considerable pressure on gold prices as investors rush to hedge further drops. Current speculation suggests that Friday’s better-than-expected US jobs report numbers were the key driver in falling gold spot prices.   More»

June 11, 2021

Meme Stocks are Easy Shorts

By Garrett DeSimone, PhD & Abhinav Gupta

Meme stocks are truly a phenomenon to behold. At their inception, many of these stocks—such as GameStop and Blackberry—were purchased by organized retail traders across social media platforms that had high short interest, which in turn created a squeeze that sent prices into the stratosphere. These short squeezes arise from supply and demand imbalances, as news triggers a price increase (or organized buying), shorts must cover their positions by purchasing the stock, supporting continued price ascensions.   More»

June 3, 2021

TVOL, Inflation, and Tech Stocks with High Volatility in June

By Garrett DeSimone, PhD

With inflation reaching above 4% recently, from rates of 2.6% about a year ago, anxieties regarding longer term inflation have entered the spotlight. The Fed’s easy-money policies and government stimulus spending had juiced growth and momentum into an epic bull run over the last year. However, these equity factors now face substantial risks from bond market volatility. Often underappreciated, implied treasury volatility (TVOL) is a measure of uncertainty reflected in the options prices on 10-year yields.   More»

March 5, 2021

Treasury Volatility and Growth Stocks at Risk

By Garrett DeSimone, PhD

After last week’s substantial move in yields, anxieties regarding longer term inflation have entered the spotlight. The Fed’s easy-money policies and government stimulus spending have juiced growth and momentum into an epic bull run over the last year. However, these equity factors now face substantial risks from bond market volatility. Often underappreciated, implied treasury volatility (TVOL) measures uncertainty reflected in the options prices on 10-year yields. This implied volatility impounds all kinds of valuable economic information like inflation expectations, unemployment, and the direction of monetary policy.   More»

January 26, 2021

TSLA Gamma Exposure and the Vol Snare

By Garrett DeSimone, PhD

Upcoming Tesla (TSLA) earnings announcements tend to get investors going. With TSLA stock frequently a source of investor disagreement, company news can violently push prices around. One source of this volatility is gamma positioning, or market maker inventory of short-dated call and put options exposure. Gamma exposure has a natural connection to post-earnings volatility. Gamma, in the options world, is the second derivative of the options price with respect to a change in the underlying.   More»

January 19, 2021

No Drama Expected From Netflix Earnings

By Garrett DeSimone, PhD

Investors often look at volatility to adjust for the market and the underlying stock exposure in advance of stock earning announcements. However, firm-specific volatility (or the implied volatility that quantifies risks unique to the firm) can be a better indicator of how options market makers price earnings risk. Firm-specific volatility measures the uncertainty associated with stock specific news, while netting out broader market volatility. In the case of Netflix, announcing earnings at the end of day today, the firm-specific vol is the lowest it has been into Jan 2021 earnings, compared to the last 3 earnings cycles.   More»

October 28, 2020

Is Exxon Stock in for a Dividend Cut? What Options Data Is Suggesting

By Abhinav Gupta

Exxon Mobil Corp (NYSE:XOM) is set to declare its quarterly dividend on October 29, and while historically Exxon has been top-tier dividend paying stock, there is growing speculation the Texas-based giant will cut its current 87 cent quarterly dividend. The graph below represents the cumulative returns of various sector ETFs and XOM in 2020, and it shows that while sectors such as tech (XLK), financials (XLF), and healthcare (XLV) have rebounded during the pandemic, energy (XLE) and XOM continue to struggle.   More»

October 23, 2020

Election Volatility: Insights Across Markets

By Garrett DeSimone, PhD

The volatility complex has clearly priced the 2020 Presidential Election as a major risk event. Speculation on contested elections, a blue senate flip, and another stimulus agreement have made hedging November volatility a pricey endeavor. This is captured by the backwardation of the VIX curve between the November and December contracts. This abnormal shape of the VIX term structure indicates that there is a larger premium for insuring against short-term variance relative to longer term variance.   More»

August 24, 2020

The Put/Call Demand Ratio: Surpassing P/C Volume

By Garrett DeSimone, PhD

With the rapid growth of the options market, the Simple Put/Call Ratio has become a staple technical indicator. Simply dividing total put volume by total call volume allegedly provides miraculous insights into investor sentiment, or so it goes. But, the problem with the Simple P/C Ratio’s validity is it tells us absolutely nothing about trade direction. Bearish buy and bullish sell orders in puts are lumped into simple volume, making it ambiguously useless.   More»

July 8, 2020

Wells Fargo: Sizing Up the Implied Dividend Cut

By Garrett DeSimone, PhD and Abhinav Gupta

On June 25th, the Federal Reserve released results of its 2020 stress test for banks. New guidelines were published forcing banks to halt buybacks and reduce dividend payouts. As a result, Wells Fargo (WFC) will have to cut its dividend, but by precisely how much? The bank will give its answer on July 14, along with company earnings on July 14. Sell-side analysts have come forth with their forecasts regarding the reduction.   More»

June 9, 2020

Extraordinary Times for the Variance Risk Premium

By Garrett DeSimone, PhD

The S&P 500 has clawed back nearly all its losses since hitting its COVID-19 induced low late March. This remarkable rally of over 40% is historical considering it also ranks as one of the best 50-day runs of all time. It is also extraordinary from a volatility perspective, and what we know about risk premiums. The volatility risk premium is compensation investors receive for providing “insurance” against changes in market volatility.   More»

May 4, 2020

Tail Risk in the Energy Sector

By Garrett DeSimone, PhD

The energy sector has been hammered in the combined wake of OPEC’s failed output deal and plummeting demand for oil as a result of Covid-19. Oil futures have gone negative, to establish a whacky super contango precedent. This crash in prices is a death blow for highly leveraged oil companies. The bankruptcy dominoes have already begun to fall, with Whiting Petroleum and Diamond Offshore earlier this month. A common fundamental approach to determining long term viability in this environment is breaking down accounting metrics, such as Debt-to-Equity or EBIT/Net Interest.   More»

April 22, 2020

Gamma Traps and Dealer Imbalances

By Garrett DeSimone, PhD

The market has seen some wild moves over the last month, which has drawn parallels only to the price action at the onset of the Great Depression. Several pundits are willing to blithely attribute this environment to some form of derivatives dealer behavior with minimal economic intuition. The goal of this introductory post is to enlighten readers on some derivatives mechanics at play here using some (light) quant intuition.   More»