OptionMetrics Blog

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»