Has NVIDIA Become a Macro Asset? With Imran Lakha

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1:24And now to the top analysis of today's markets.

1:41has nvidia become a macro asset welcome to real vision daily briefing it's monday august 21st 2023 i'm ash bennington i'm joined today by imran laka founder of options inside imran welcome back hey good to be back ash good to see you it's great to see you too imran lots happening in markets we were talking a little bit before the show let's see we've got nvidia we've got tesla We've got bond deals. We've got China. Where do you want to start, man? This is too much. It's too much to talk about, Ash. So where do you want to start? I mean, I think NVIDIA is really going to be the main event this week.

2:18That's certainly what I've been talking with my subs about. And, you know, the joke is, has it become a macro asset, right? Well, obviously, it's a single stock, one of the big single stocks in the U.S. now. But this chart from Jim Bianco that you put out on Twitter recently showed that in the last earnings report on NVIDIA on the 25th of May, that was the start of this kind of outperformance of US mega cap tech again as the whole AI frenzy really took hold. So we're thinking it has become a bit of a macro asset that represents the AI narrative. And whilst you've had a lot of semis names disappoint after earnings because they haven't really seen the earnings come through yet on AI, everyone knows that that's where the growth is and there's going to be earnings in the future, valuations got very pumped.

3:09So the question is, is the simplest thing going to happen? We are seeing very strong price action today. It's up 8.5%. And it was an implied move in the options market for Wednesday night of around 10.2%. It's already done most of that on the Monday. So if you had owned options in NVIDIA at the start of this week, you've captured an 8 % move today, and it's still implying a 10 % move. So you've done quite nicely. Yeah, as you said, it reports on Wednesday. Let's explain a little bit what this thesis is around it being a macro trade, around it representing AI. I believe the day you're talking about, May 25th, was the third largest gain in U.S.

3:48equity market history in terms of price. Obviously, a significant sort of secular move in that stock. But what does it mean more broadly? How do you think about it? And most important, how are you playing it? Yeah, so I just think that there's so much trading volume going on in those big tech names these days that that's all anyone seems to want to trade in the U.S. market. So Tesla and NVIDIA are consistently the big names in terms of options volume. But just looking at that stock, it just seems to represent the zeitgeist right now, which is the AI story. So I think whilst it will be quite violent on the day, and it's already proved to be quite violent this week, the implied move is around 10.2%.

4:30Last two earnings have been pretty big, right? They've been 24 % and 14%. So I do think the stock is going to have a knee-jerk move that's pretty violent on the earnings. But the stock has kind of been carving out a range of about 400 to 480 recently. So I wouldn't be surprised if we chop around, maybe if we knee-jerk higher and then get faded. I think that's probably the more likely price action. And we kind of stay in this 400 to 480 range. If we get a big disappointment, then that gap from the last earnings is probably getting filled. and we may find ourselves down at sort of 350 or below. But I think selling protective structures like call spreads and put spreads, selling both of those to collect some premium when the voles are so pumped and the implied move is so big.

5:19If you can pick 15 % out of the money options, I think that sets up okay as an iron condor short if you want to be a vol seller. I don't think I'd be, after this move today, I don't think I'd be buying vol going into the event on Wednesday. if I had to put on a trade, it would probably be on the short side, but it certainly wouldn't be naked. And it wouldn't be naked to the downside, just because I think that's where you could get a really, really bad stingy move if they disappointed, because there's quite a lot of expectation. Well, you'd have to have a lot of, let's call it nerve, to want to go and short naked any of these stocks right now that we're talking about.

5:54Let's see, 469.67 on my screen, looks like they closed today on NVIDIA. Tesla up, but a paltry 7.33 % on the day. I mean, that's like literally getting close to the historical annual average return of the S &P in a single day. And it's not even the biggest mover. But it was pretty oversold, Tesla. It has been coming down consistently every day for God knows how long. So it was due a bounce. I'm surprised it bounced 7 % in a day, but it was due a bounce. So don't be surprised if the bounce gets sold pretty soon though. Yeah, but man, a pretty big one. Yeah, for sure. So let's talk about some of the other points that we're talking about coming into the show.

6:34About what's your take on what's going on with bond yields right now? 10-year treasury up again, looks like 4.3, up on a yield basis, I should say, 4.344. I mean, if you just look at the treasury yield chart going back a year, very clear. We are, as everyone has been talking about, clearly in post-cycle high territories on a yield basis on 10-year treasuries. Yeah, it's relentless. The move in yields has been relentless for sure. All really started to accelerate after Japan did what they did on their yield curve control tweak. That's really what's kind of started it. But it's funny, those yields have only moved about, what, 15 basis points, whereas what's happened to everything else is quite a bit more dramatic.

7:17By the way, what does that mean? How do you interpret that? What's your read on why you see that bounce hitting higher here? Why I see what? So why is that being amplified in the 10-year treasury? Why so much stronger than what we've seen in Japan, if you think that that's a catalyst? Well, I mean, Japan is still intervening, right? They are still coming in and buying bonds, which is why you're seeing the yen not strengthen, right? You would have thought that when they lift the cap a bit, the yen would strengthen. That's why all the downside was getting quite well bid on dollar yen. Then people were thinking dollar yen would roll over again from 145, but it hasn't.

7:56It's actually gone higher. And the only way I can really rationalize that is that US bond yields keep going higher, and they're going even more than what Japan did because Japan is still in there buying bonds. Because they don't want a disorderly move to happen in their bond market. So they're kind of controlling it. So I think they're going to let it slip to 1%, but they're not going to let it happen in short order. So it's going to be a controlled descent. A 16-year high right now on 10-year Treasury yield. So again, obviously, this is not just post-pandemic high, but a post-global financial crisis high on a Treasury yield basis.

8:32Yeah, and I'm no rates expert. I mean, Joseph Wang has been quite vocal about thinking that yields are going a lot higher, and he's nailed it, right? So I think he's calling for at least 4.5%, if not 5%, I think, at some point. So I wouldn't stand in the way of that. I mean, it has had a pretty fast move, and it's been a bit of a straight line. So some sort of correction maybe makes sense in yields and a bounce in bonds at some stage. But yeah, it seems like a pretty strong trend right now, which you probably don't want to get in the way of. Yeah, I mean, to your point, we're almost there, 4.346, rolling up from where we were, I'd call it, what was it, July 2020, when we were down at like 50 bps.

9:17Yeah, I mean, the data has just been too strong, right? So everyone was calling for a recession to start at some point this year, and it just keeps getting kicked back into next year because the data just keeps coming too strong. So I think that's a large part of it. You've also got what Japan did. You've also got a load of Treasury issuance. All these factors are keeping a lid on bonds, basically. Yeah, new issuance, another important factor, pushing down prices, pushing up yield. OK, let's talk a little bit about where we are in China. What do you make of this story? The stories just keep seeming to get more and more apocalyptic.

9:53Country Garden and other default stories, slowing growth, deceleration across the board, deflation. I mean, the stories coming out of China are just not pretty. Yeah, totally. I mean, they keep underwhelming on the stimulus side. Everyone's got so used to China coming with a bazooka, and they're just refusing to do it for now. Right. So last week, though, they did come in and be a bit more aggressive on their currency because currency has slid quite a lot from compared to the dollar. So back up to seven thirty on the on CNH. So they came in and they fixed that significantly different from where it was trading.

10:30And that was kind of them trying to draw the line in the sand in near term on the currency slide. But then but then them doing that isn't necessarily going to be pro growth. Right. Unless they drop some kind of fiscal stimulus bazooka. So that hasn't been seen. Their prime rate was expected to be cut by more than they did cut it over the weekend. 10 bips. 10 basis points. They cut 10 basis points. I mean, de minimis. It was expected to be 15 or something, right? So it was a disappointment. Extremely de minimis. 10 basis points. I mean. Yeah. What is that going to achieve exactly? Yeah, exactly.

11:08So, I mean, I do think sentiment has got very bearish. But the truth is, you're not going to get a sustainable bounce until some real money wants to buy this space. And it is starting to smell more and more uninvestable, right? So I do like to play the kind of contrarian trades quite often. So I am logging some November calls on FXI, which is the ETF for China. But yeah, it's a trade. It's not something where you're really calling a long-term bottom in this thing, I don't think. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

11:55Yeah, I don't think anyone would want to do that. Listen, let me ask you this question. Where are we in terms of your view of Bitcoin right now? Yeah, so I'm sort of medium term still positive. um you know you've got the whole halving cycle coming up you've got the um etf from blackrock which is probably going to get approved at some point but the timeline no one really knows whether it's going to happen this year or early next year i think the final date for it is uh is sometime february next year so people are thinking maybe it's going to go all the way till the end there but those are some pretty strong sort of reasons why you are likely to get some sort of move higher And I do think institutions, you look at the decorrelation between equities and crypto this year, there is a case for institutions to be adding some allocation into crypto, right, if they don't think crypto is just a Ponzi and going to zero, which more and more institutions, I think, don't feel that way.

12:56So I think once the pipes are there and once the ETFs are approved and you've got the halving coming up, I think that does all culminate to a fairly bullish narrative. It's just in the near term, you haven't got the news flow to spark that, right? In fact, near term news flow has been clearly a deterioration in price. We had a liquidation event last week selling off about 10%. We're trading this morning under 26 ,000. It looks like we're$26 ,100 right now on my screen. But again, short-term headwinds in terms of price. Exactly. I mean, that level 28, 28.5 was really a support level that had been held for a while.

13:37And Bitcoin's a bit like that. When it breaks a level that's been respected for quite some time, it then shoots through to the next level pretty fast. And it got to close to$25K, which is the next major level, right? It has bounced a little bit off there, but it didn't take long to close that gap to the next level. It trades quite technically like that. But I do think the volatility in Bitcoin did get overly sold in crypto in general, especially in the long end of the curve. It seemed that everyone just thought this thing's never going to move again. There's no catalyst for ages. Sell everything.

14:08Quite a lot of overwriting flow, particularly on Ethereum, was crushing that vol. So long end vol did get too cheap, I think, in crypto. So we started to accumulate some longer dated upside, which clearly hasn't worked yet because the spot's gone down. But we do think that there's value in kind of December, March 24, June 24, those sort of expiries in the long end, owning calls to play that kind of revival, which we think is probably coming at some point. Well, you know, while we're talking about Bitcoin, I want to take a look at a clip. This is Beth Kindig talking with Mark Yusko on how to manage risk in crypto, air date August 14, 2023.

14:45This is from Real Vision about a week ago. Let's take a look at the clip. So when you look at all of the data, it is a beautiful asset. And if you took 1 % out of stocks and 1 % out of bonds over the last decade and you put it in Bitcoin, your portfolio would have outperformed by about 250, 300 basis points per year, compounded. And that's if you just did 1%, I mean 2%. If you did 5 % or 10%, it would have been much, much good. I think at 10%, it's almost 3x the total return. Because, oh, that'll never happen again. Well, yeah, a lot of large numbers says it probably won't be that good. But here's a crazy stat.

15:29Amazon and Bitcoin have the same volatility, 80%. 80%. Age zero. Amazon has compounded for 27 years at 40%. And Bitcoin has compounded for 14 years at 90%. Well, 90 probably trends to 40. But the interesting thing about Amazon, every year, including this year, it's at a double-digit drawdown. Average 31%, five times more than 50, twice more than 90. When was the right time to sell it? Never. Never wanted to sell it. It's a perfect diversifying asset. And it compounds at a high rate. We should embrace volatility, and not fear it. Well, Mark Yusko clearly bullish on the longer term case for digital assets, comparing it to an Amazon-like investment.

16:14Imran, any questions on this or points that you wanted to make before we move on to volatility? No, I mean, he pretty much echoed what I was saying there about the diversification effect, right? So he was saying, if you switch 1 % out of your equities into Bitcoin, same with bonds, how well you've done. And that's a function of the volatility and the correlation, or the lack of correlation. So you had a period where crypto was just doing the same as the NASDAQ. It's not really offering you much in terms of diversification. It's just a high beta version of the NASDAQ. But when you've got the negative correlation, or when you've got less correlation and crypto can do its own thing, that's where the true value of it is.

16:59And certainly we're seeing that this year. The correlation is broken down quite dramatically. So that is a case for instos to park some money into the space. All right, moving on. Let's take a look at the SPX volatility surface changes slide. Imran, explain to us what we're looking at here. This is obviously a complex looking chart. It looks like we've got at least three dimensions, maybe four if you count color on this one. Yeah, I mean, color is just if it's up, it's green. And if it's down, it's red. But basically, what this is showing us is that last week, the S &P sold off by a couple of percent.

17:38And it didn't feel great in the market, right? We're breaking below quite a key level of 4 ,400 on the S &P. And there was a lot of talk about dealers getting taken short gamma down there. CTAs were selling. They were going to have to sell tens of billions of delta. Apparently, according to Nomura's numbers, they did sell about 50 billion last week. And there might be more to come if we were to break down again. But the point is, the options market, if you look at how much options implied volatility actually changed on the strikes below, say, 4 ,400, you can see those changes are quite small. So if there was a real sort of sense of panic or fear or fragility in dealer's books where they were scared of what was going to happen on the downside, there would have been a better bid for downside volatility on that move down.

18:27But the realized vol on the way down was actually quite orderly. It was still sub 10. And all that's happened is we've drifted down the surface to a higher level of implied vol, right, in the kind of 15 area plus. And that's just, we've gone to a place now where selling vol is actually attractive if this thing just isn't going to realize. And because it hasn't really started to move 1 % plus a day, it just slipped down in an orderly fashion. That's why you've had people monetize puts, you've had people come in and sell volatility, because that's been a successful trade since March, April. And that's kept a lid on the vol, basically.

19:06So whilst bond yields are continuing to go, and that may well spook the market, I mean, it hasn't managed to spook the NASDAQ, for example, today. But I think that's more a function of what Tesla and NVIDIA have done. If bond yields do start to smash through four and a half, yes, the equity market will listen and will care. But I'm just showing you under the hood of the options market, there isn't a whole lot of fear in there right now, for whatever reason. Maybe it's because there was a decent amount of supply coming through in OPEX. Every OPEX cycle, we tend to see more systematic volatility selling.

19:38So I think that kind of helped keep it contained. But I think you need to see a material uptick in realized vol on the way down to really see that vol react. Yeah. We get a lot of questions coming in, Imran. What do you say we jump in and answer some of these? Sure, let's do it. First one comes to us from Ralph Humphrey. Looks like an EtherFuture ETF will be approved too. Obviously, this has been quite the buzz in the crypto space about SEC potentially, potentially approving an Ether Futures ETF product coming out of a report on Bloomberg just recently, a couple of days ago, I guess last week.

20:14What are your thoughts on this? What happens in your view if we get an Ethereum Futures ETF product approved in the United States? Yeah, I think all of this stuff is going to happen. It's just a case of when it happens, right? And from what the crypto vol market is saying to me right now in the fact that Bitcoin vol trades above Ethereum vol, and that's kind of unheard of in that space for as far as I've been at. For the time I've been looking at it, and I think for the time that it's been quite tradable and quite liquid, Ethereum vol has always traded over Bitcoin except for this year. Right.

20:49And for a sustained period of time. So that is the options market telling you. Meaning for years. Yeah, that's the options market telling you that we think that Bitcoin's the driver. Bitcoin's in the driving seat. So any meaningful vol is being driven by Bitcoin. Now, I think that's all upside vol. I mean, certainly Ethereum could drive the volatility on the downside if it wants to, especially if they turn around with rules about it being a security and stuff like that, but it doesn't look like it's going that way. But the point being, on the upside, if the driver is Bitcoin, that's what the options market is saying.

21:27They're saying that's the thing that's going to move the most. It doesn't have as much option supply. We don't have big overwriters coming and selling loads of volatility to the street like we have on Ethereum. We've got less of that going on in Bitcoin. And we've got institutions that are going to buy Bitcoin before they buy anything else. That's going to be the first thing they buy. and that inflow of capital is going to drive Bitcoin higher and is likely to provide more vol in Bitcoin than Ethereum. Based on the type of price action we've seen this year, that is what's happened. So I think the market expects that to continue for the next sort of six to nine months.

21:59But at some point, I keep saying to everyone, if Bitcoin breaks above 40k, Ethereum is not just going to sit there and do nothing at 2k, right? It's going to re-rate. And it's going to re-rate suddenly, I think. So at some point, you want to own that Ethereum vol, It's just maybe it's a little bit soon to do it right now. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

22:28Okay, next question comes from Jim Griffin from the Real Vision website. If BlackRock receives approval for its spot Bitcoin ETF, does Imran think that GBTC will receive approval for its request to convert from a trust to ETF? And if yes, will it eliminate the net asset value NAV discount? This is a great question. Lots of people talking about this. Obviously, GBTC has been trading at a significant discount to the underlying assets because of the structure of the fund. What are your thoughts on what happens to that in the event that SEC approves a Bitcoin spot ETF? Yeah, I mean, I don't know the legals behind it.

23:09But if they approve a spot ETF, I don't see why they can hold Grayscale back there. They have to kind of approve it, I guess. So yeah, I would expect that to normalize. And therefore, that difference between the NAV and the price should definitely come down. It's just I think that a lot of these trades, these ARB trades, are obviously all based on the legals. right so you have to kind of be on top of um the law really to understand the timing and the risk reward and the scenarios is not something i do at all it's kind of like a special um it's like a merger that's the kind of thing in equities land that would be on a special situations desk right and uh like the guys who do the merger of and those sort of trades right um so i think you'd to really understand all the legal details behind that to answer that question properly.

24:06I think that's spot on. We've been seeing that a lot in the crypto space, not just the GBTC, but with the conversations around Ripple and XRP in the last couple of weeks. I was joking on a pro crypto show earlier today that I've been throwing around this phrase interlocutory appeal as though I'd known it for more than six months. The idea that essentially this entire process is now currently in the US courts and price action accordingly, then trading in relation to that. So if you don't understand the legal context of what's going on here, the legal regulatory compliance framework around that, it's very difficult to make any kind of rational prediction on what's going to happen in price because you have this huge exogenous factor that weighs in whenever there's a ruling or anything else that happens in the space.

24:49Yeah, exactly. That's why I prefer to just stick to Ethereum and Bitcoin and also stick to the option side of things. So if I really want to have a go at it, I'll use optionality, especially because vols are so cheap in the long end, right? I feel like that's offering me some decent value then. Yeah, next question comes from Daniel McGrath from the Real Vision website. Hi all, purely based upon option slash market structure right in your wheelhouse, Imran. What's Imran's outlook on market risk volatility over the next few weeks versus the rest of the year? It seems like there are catalysts accumulating and the next few weeks will be some of the most risky of 2023.

25:28Do you agree with Daniel's contention there? I don't know. Like I said, because of the way the surface moved last week and the fact that we've already had, you know, we've had skew come off the lows, trade to like the 40th, 50th percentile. We've started to see some monetization of hedges. I'm not so sure that it is that risky. We've seen a lot of short selling come back in, according to Goldman's data, across the ETF space. We've had discretionary positioning go more neutral. So whilst there is systematic positioning that might still need to be reduced, a lot of the discretionary apparently got themselves out again.

26:13And maybe they're trying to front run the unwind of the CTAs if they think this market's going lower. So I'm not entirely sure that we don't get a short squeeze. I think a short squeeze risk is there. A lot's going to depend on how we trade after NVIDIA and Jackson Hole. If whatever is said at Jackson Hole can calm yields down a bit, then NVIDIA is not a bad number, then I think there's potential for the market to pop above 4 ,500 pretty quickly on S &P. Let me ask you this. Do you think it's Jay Powell's motive or intention to want to calm markets with regards to rising yield. I mean, effectively, this is what he's been saying they were going to do for some time now.