The Options Market Has a Message With Imran Lakha

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1:24What is the options market trying to tell us? Welcome to Real Vision Daily Briefing. It's Monday, July 10, 2023. I'm Ash Bennington in for Maggie Lake today. I'm joined today by Imran Laka, founder of Options Insight. Imran, always a pleasure when you join us. Good to see you, Ash. Lots to talk about here. Listen, but first, I want to talk about something near and dear to my heart. We're kicking off our big five-day crypto gathering at Real Vision. It starts today, Monday, July 10th. The big question is this, is it game on? That's the question we're looking at trying to assess the current state of the crypto markets.

1:59We'll be hosting interactive sessions like daily Twitter spaces, Discord hangouts, DJN Happy Hour, and a bunch of other stuff. I'm going to be hosting some of those. I'm excited about that. You're going to see a lot of RAL too. Of course, RAL's been saying, think of it as a mini Glastonbury. If you want to check this out, it's all free at realvision.com forward slash gathering. That's realvision.com forward slash gathering. With that said, Imran, always enjoy having you on the show. U.S. equities, especially tech, have been on fire year to date. We had a little bit of softening last week. What's the big picture?

2:31How do you see it? Well, it's all about yields. This is something we talked about last time we appeared on Real Vision with Andreas. It was like if you're going to get about a volatility in markets, it's going to be driven by rates vol. And generally, rates vol is going to go up when rates go higher. So we definitely saw a little attempt at that last week, some pretty hot economic data. Thankfully, non-farms wasn't blow out as well because then probably it would have pushed even further. So things stabilized a bit on Friday. But in general, most of the equity market getting taken down by higher yields, 10-year pushing above 4%.

3:09To be fair, the two-year went above five, but it's pulled back. So it definitely has retraced a little bit of its local high. But, you know, and the equity market has stabilized as well today. All eyes on the CPI number on Wednesday, really. I don't think it's a massive one in terms of generally we've been seeing disinflationary data. So this is likely to still continue that trend before the base effects kick in. And if you look at the implied moves on the S &P for this week, for that data, it's less than a percent. So the market isn't really expecting or anticipating this number to really move things that materially.

3:48Yeah, I'm looking at the five-day charts right now in U.S. Treasury yield. Right now trading at 4.872. 10-year Treasury really close to four flat, 4.008 % 10-year Treasury yield currently. Yeah, the Fed probability now for a hike in July, and I guess this CPI data is going to kind of seal it, is around 92%, which is why the market is not pricing that this data point is going to be that big a game changer, because the pricing for the Fed meeting is already close to 100%. So there shouldn't be that big marginal change in expectations. What's the Fed pricing? I don't know if you know this off the top of your head, but for two rate hikes, obviously, there's been a lot of talk in financial services circles about the risks of two hikes, or I should say a double hike, 50 basis points.

4:39Yeah, I think it's around 30 % chance that we're going to get two more hikes, right? So that's kind of, so the markets, you know, they've been, if you look at the dot plot and what the Fed members have been saying, they're pretty much saying that's their expectation, but the market still refuses to really price that in fully. So they kind of want to see the data on that. But no reason to really think that through time, that's not going to decay towards what they are guiding at the moment. Well, talking about that decay, when you see the 2s-10s curve upside down, as we were just talking about, around 87 basis points, I'm just eyeballing it here.

5:19The implication, obviously, is that we're going to get a hike and then based on the interest rate probability, and then we're going to get cuts following that. How do you think about that? Well, I mean, it's a lot less cuts than were priced a couple of months ago, right? Gradually, we've been pricing more and more cuts out of the curve as the data has been coming in much stronger. No sign of a recession yet. And the Fed speak has been decidedly hawkish. So that's just been, you know, there's this muscle memory to the market. First sign of trouble, everyone thinks they're going to cut. And that's what happened back in March where they just put in so many cuts into the curve, thinking, OK, this is it.

5:56They've already broken something and it's the regional banks. But now the data has continued to be OK. And the regional banks, whilst clearly there's problems, you know, that seems to have been to some extent kind of backstopped by what the Fed did. So for now, it's game on in equities, let alone crypto. Yeah, talk about that. I was talking earlier with Raoul about where we are right now in terms of year to date on crypto. The numbers are blowout, obviously, from this rally that we've seen relative to, for example, even S &P 500, NASDAQ Composite, NASDAQ 100 seriously outperforming on digital assets.

6:39What are your thoughts on that? yeah i mean i'm i'm generally a bull um i think that that crypto market has taken so much of a beating last year and and really you know it got to a stage where just all the bad news was was out you would have thought right i mean you couldn't get much worse news and now you've had the big boys come in uh the likes of obviously fidelity citadel schwab all these guys now coming in with edx markets and blackrock with their with their etf application to the sec that generally if they're going to do that the odds are they're going to get it approved at some point that's that's what the market seems to think now so i do think it's a great sign of institutional adoption really coming back in a big way and that was the main driver right back in late 2020 early 21 when we really went when we went to the moon on that thing it was because of the institutional adoption story.

7:35And that really got shaken last year with all the scandals that were going on. And now it looks like that's coming back. And there's a bit of a purge going on where the TradFi guys are coming in and saying, OK, we want our share of this pie. And we're going to give them a vehicle to adopt this stuff. And I think that narrative is going to stay in place. And you've certainly seen in the crypto options market, longer dated upside, catching a firm bid, skew flipping towards calls and staying there, particularly in the longer term maturities. So that suggests this bull narrative plus the halving that's due in March next year.

8:12That bull narrative in Bitcoin, I don't think it's going anywhere. Yeah. And by the way, this rally started prior to the EDX markets and BlackRock ETF announcement. Listen, rather than eyeball it, I just want to read it on my screen right now, right off my Bloomberg, just to give you a sense of where we are in terms of percent change year to date. S &P 500 year-to-date up about 15%. NASDAQ Composite up about 30%. NASDAQ 100 up nearly 38%. Ethereum up 58, call it 59%, 58.8%. Bitcoin up year-to-date almost 87.5%. Yeah, for sure. I mean, the thing is, a lot of people still don't want to touch the crypto space.

8:57and obviously they got shaken out from last year's volatility but if you look at the volatility in crypto it's been surprisingly low right for most of this year so that when vol does drop i mean there's been times where crypto vol's been less than s &p volt not many times but there have been times i realize vol right now in bitcoin on a one-week basis like 30 that's that's that's a normal equity type vol right that's not that's not crazy so you know that type of low vol for long periods of time will make institutional players feel more comfortable. Obviously, the correlation between equities and crypto has fallen dramatically as well.

9:33So that's a positive for people to want to adopt it as well, because it acts as a diversifier in portfolios, things like that. If you believe in it, that it's not going away, and it has some value owning it, the fact that it's got negative correlation to equities is a good thing for your portfolio generally. Yeah, of course, that declining volatility may not last. We may be having a different conversation if the history on that asset class comes back again to haunt us. Listen, talking about assets and cross volatility, this is something that you think a lot about. Walk us through your cross asset volatility thesis right now.

10:09Yes. So generally, we've seen volatility come down across all asset classes for a while. We had a little bit of a pop back up last week. We have this cross-asset vol and skew matrix where we also keep an eye on skew to see not the absolute levels of vol kind of tell you about the market's expectation for realized volatility, but that could go in either direction. When you look at the skew, it gives you a sense for whether one direction or the other is being given a risk premium, right? So generally in equities, you have a risk premium to the downside. so the puts will trade above the calls. And in things like commodities, you often have it the other way with calls trade over.

10:47So in general, we've seen equity skew come down pretty hard, get to very, very cheap levels like zero percentile type levels on a two-year horizon. And last week, they pushed back up a little bit, but they do still have room to go before they get anywhere near their even median levels, let alone their highs. So that's kind of the green dots moving back towards the right. And then in commodity skew, where you did see a decent amount of pool skewing gold and silver and things like that earlier in the year when those things were really having a go at their highs, because the way they pulled back with real yields coming higher, gold coming back down towards 1900, that cool skew has disappeared again.

11:26So you've got much more flat skewing gold, similar in bonds as well. The skewing treasuries is very flat. So what they're saying is as the vol's coming down, they're saying that the shock can come in either direction in those assets. So it's a much more symmetrical surface, which we call a smile. But in equities, there still is a skew. In Asian equities, there's not that much of a skew. Nikkei, China, they don't have much of an equity skew. But then when you look to Europe and you look to the US, they definitely still have a put skew. And they kind of generally they always will have. It's just a question of how much it is.

12:01We'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.

12:09Imran, for folks who are relatively new to options, let's walk them through why that is the case. Is that predominantly because it's a hedge for long positions on U.S. equities? Sure. So we cover this in our course on your platform. So I definitely urge people to check that out because we cover it in much more detail. But the reason why SKU exists in equities is primarily because people are long stocks and they want to hedge them. So they have a natural demand for want to buy downside puts. And they're actually willing to sell calls against their holdings because they own the stock anyway. So they can afford to sell some calls to cheapen up the cost of their protection.

12:44So you get a natural supply of calls, supply of upside, demand for downside. And that creates this vol premium or puts above calls. But then you also have empirical evidence that whenever markets tend to go down, they tend to go down much more violently. And when they go up, they tend to grind up as well. And so just looking at that statistically and how the returns going back decades, that is something that market participants in options want to price in because that is generally how things turn out. Yeah, this is the old cliche, stairs up, elevator down. Exactly. Hey, listen, thinking about things that are broadly held here in the United States, we've got earnings this week starting for banks.

13:26I believe it's JPM and Citi on Friday. I want to talk a little bit about European banks because we have a great conversation with Shamas Murphy, founder and managing director of Cargill, speaking with Harry Melandry, advisor for MIT Partners. This is out on the essential tier today. It's called The Next Big Trade. Is it time for European banks to shine? Let's take a look at this conversation. You know, certainly we could still see, you know, in Europe, is it impossible to see another 100, 200 basis points, maybe even more of rates relative to where we are today. And I think the market is basically expecting rates to fall into 2024.

14:06We think that's highly improbable, highly, highly improbable once central banks begin to understand the narrative of the fact that there is this excess demand still exists and we still haven't had an adjustment in coverage ratios. Let's not forget, Harry, I mean, even for interest to flow through the economy does take a long, long time because, for example, you have a fixed rate mortgage in Europe and Germany for 20 years. You only reset once every 20 years. You're still paying. You're still completely insensitive to the rate curve. So, I mean, this does take a while to flow through. One of the countries actually where we believe rates actually could be significantly and have been quite bearish is actually the UK.

14:49We think the UK is actually a bit of a unique situation. We haven't been long. UK banks, we feel, are a bit of a value trap because we feel the UK actually has a lot more work to do than Europe and the US on the upside. I see. Unique in a bad way, not in a good way. Well, Seamus Murphy, obviously bearish on UK banks. I have to say, Amrind, this is right in your backyard. What are your thoughts? Well, I mean, it's funny that you chose this clip today because in my daily note today, one of the headlines I wrote was everyone hates UK assets. So if you bring up our strategy compass, Brian, don't mind.

15:32so we run this we run this process where we do this strategy compass where we get a handle on where the spot levels are overbought oversold where volatility is in its kind of percentile ranges to get a sense for from a mean reversion perspective is there anything that's standing out as particularly stretched so the idea is if you if you are far away from the center of this kind of dartboard if you want to call it or this target then the the probability that you're going to move a bit more towards the middle is fairly high, unless the market is just going through a major breakout and it just doesn't look back.

16:08But generally, the tos and froes of the market, this mean reversion model certainly picks up some opportunities. So right now, the UKX FTSE index is standing out as kind of the most oversold. Volatility levels have popped off their lows. So FTSE vols generally got as low as the single digits. They've had a little pop to like 12-ish now, which isn't crazy high, but in the context of what the FTSE does, it is higher. But what we flagged was actually, whilst everyone hates sort of UK bonds and UK stocks right now, you look at the currency, it's actually doing okay. And the reason the currency is doing okay is obviously because the Bank of England is under pressure to fight inflation that just isn't going away, basically, right?

16:51So the fact that the rates expectations keep going higher and higher in the UK, and they surprised with a 50-bit hike last time the market wasn't expecting, that's been good for the pound so now whereas last year um with all that debacle around what happened with the trust government you had bad outlook for uk economy plus bad outlook outlook for the currency and the uk was trading more like an emerging market this time around you've had currency strength coupled with weakness in other assets so things like the e ewu which is like the uk etf the msci uk stocks but the etf is in dollars that has actually traded much better than say the footsie because the footsie is in local currency and doesn't benefit from the fact that the pounds got stronger so the ewu we're looking at potential sort of bullish expressions on the ewu to just play a bit of a bounce in the uk because we do think it's it's very consensus that no one no one wants to touch it um and we just think it's sitting technically it's sitting on like the 200-day moving average right now, that EWU ETF.

17:53It's got some bullish divergences showing up. Obviously, we've shown that the UK in general looks quite oversold. So we're looking at potential option trades that could play a bounce there. It's not something we think's a long-term theme by any means, but we do think tactically it's pretty beaten up and everyone hates it. So So, you know, like our good friend, Jared Dillian, who's the sentiment trader, who likes to fade crowded sentiment, we think there might be some value in playing it from that perspective. Yeah. I mean, we've got some questions coming in fast and thick from our viewers. What do you say?

18:29I want to hit some of these? Let's do it. All right, fantastic. Listen, if you're out there and you're watching on the platform, in the chat, if you're watching on YouTube, please drop your questions in. And of course, smash the like button and hit subscribe. We're obviously committed to providing this kind of amazing free content to you. And we appreciate you hitting the subscribe button. Our first one comes to us from IsThisIt on YouTube. Does Imran have any thoughts on the UK housing market sticking with the theme? Assuming he's out there, their mortgage rate picture has been a hot topic recently.

18:56Yeah, I mean, it's pretty frightening. But I mean, literally, but every it's one of those again, it's one of those things like every headline you see on the housing market is this thing is going to crash another 10, 15 percent. Right. So the whilst the structure of the market is pretty poor because of the two year fixed rate mortgages that have to be rolled. And, you know, we're talking about rolling 400 basis points higher than your last fix. It's pretty scary for most consumers. So clearly it is a concern. It's just a matter of how much of it is priced in. And that's always the hard thing to tell.

19:28Right. But but yeah, I wouldn't. I mean, it's funny. It's not it's not an easy time for anyone to sell a house right now. Yeah. Anyone I know who's trying to sell a house in the UK is seriously struggling and they're having to bring their prices down. And so it is a reality right now. And the notorious thing about housing is so damn illiquid. Right. It's just you you don't want to cross that 20 percent bid offer spread. Right. So people need to be really desperate to sell to actually trade it at those levels. So right now they're walking down their offers, but they're not hitting bids. we'll see if they get desperate enough in the next 12 months that they actually start hitting bids because that's when it will that's when it will really you know come down hard right so back in back in 2008 i remember the thing that saved the housing market was the currency devaluation right and you had a load of rip you had a load of very wealthy foreigners who wanted to bring money to the uk and uk property just got haircut massively because of what the currency did for them.

20:31You don't have that support anymore, which is quite concerning. Okay, coming back to this side of the pond, Ralph Humphrey, one of our regular viewers here at Real Vision, what are Imran's thoughts on the VIX, lower for longer or back up? Good question. So the VIX has been incredibly heavy, right, for quite some time. And we've been calling a lower VIX from earlier in the year, for those of you who have been kind of keeping in touch with what we've been saying. um now it did have a little pop last week briefly touched 17 um there's been a lot of call buying so this is something i've been pointing out in in a lot of my content recently it's like as the s &p skew has got crushed the vix has become a little bit less sensitive to s &p moves but also as the markets rallied and the vix are just kind of floated in this low teens level it becomes more attractive to buy calls on the VIX to hedge your portfolio than buying puts on the S &P.

21:34And so you've had a lot of call buying going on in short-dated maturities on the VIX. So we had a ton in June that obviously expired. Now we've got a hell of a lot in July as well. So anywhere from 18 to 25 strikes on the VIX, it's been a lot of calls bought. Now, what does that mean? Dealers have to hedge that somehow. The dealers are the people who are selling those calls on the VIX, they hedge those by buying futures on the VIX. Now, if those calls don't actually materialize and make any money because nothing untoward happens in the market, then those calls evaporate. They go away. And as they're decaying through time, the dealers who have bought VIX futures against them have to sell those VIX futures back out.

22:14So the passage of time when there's this big amount of call buying that we've seen, the passage of time actually works negatively for the VIX because these dealers have to then sell back all the VIX. And so I think that into VIX expiry next week, there is a very high likelihood if there's not some massive blow up in yields that drives equities lower again, like last week, that I think the VIX will find selling pressure at least until the next Wednesday, maybe even it'll persist into Friday with the regular OPEX. But yeah, my base case is probably VIX lower for now. And if we do get some kind of real vix spike at some point um i think it's going to be a bit further down the line once summer seasonality is gone uh and we have um you know maybe maybe september october time next question comes to us from another regular viewer bo nito here at real vision uh what is imran's take on the stubborn yield curve inversion i should say i think i eyeballed it correctly uh twos tens right now are at about minus 86 basis points this has come in quite a bit from last week we're at over 100 basis points i believe yeah it was amazing move it went to 110 and reverse back to 80 so 30 bit re-steepening people say the re-steeping is the thing you should really be you should be scared of right so but i don't know i mean this thing's been quite noisy for like a year now um i mean you know like people say it's got 100 track record in calling recession but it's got no value in timing it right that's the problem right it seems that it's very so and the whole job of trading is to time stuff.

23:45So I don't really read too much into it. I keep an eye on it for sure. But that latest re-steepening, yeah, if it keeps going, then maybe the market's going to get a bit spooked by that because typically that seems to be the real signal that things are getting imminent, right? But the problem is normally the re-steepening happens from the front end going down, right? Whereas the re-steepening we saw last week was from the back end going up by more than the front end because the front end's kind of now anchored at wherever it is. So I don't know. I just think it's a very noisy curve right now. I'm not the go-to expert in yield curve by any means.

24:25So you probably want to ask someone like Jeff Schneider, I guess. But yeah, not reading too much into it right now. The next question is about the NASDAQ 100. By the way, Imran, I think I have a 100 % track record by saying the NASDAQ 100 will be higher in 10 years. I think I'm 100 % on that call. That's probably pretty fair to say, yeah. Jay Singalese from YouTube. Imran, what are options getting affected by the NASDAQ 100 rebalance? These action, in essence, are options getting impacted by the NASDAQ 100 rebalance? Yeah, I mean, I'm not seeing a massive impact in the options market on that, to be honest.

25:03Really, earnings are going to be more driving the vol on single stocks. So, you know, generally when you go through earnings season, short-dated implied vols are not just pricing in what the asset's doing. They're also pricing an implied move, like a jump risk on earnings. And so, you know, you look at the vol and you can calibrate what that earnings risk is. So we've got a single stock strategy compass in our products where we tell you we flag what the implied moves are, what we're seeing. For example, there's some health care names that we flagged in our single stock compass today. Earnings on Friday for UnitedHealth, they're only pricing in like a 2 % move.

25:47That thing potentially, if it, you know, in the past when they've had decent earnings, they've rallied 5 % plus. So we think it's quite cheap. So these are the things that we look at around earnings season in single names. For the rebalance, I don't see a lot of impact in the bull markets. All right, Imran, this is a nice technical question on options for you. I'm going to ask you to explain the question for people who may not be following along as closely as David H., who submits this question on YouTube. Can you ask Imran if he's more prone to doing one-half-year-out-of-the-money calls or doing calendar spreads if you don't want to be invested in this run?

26:23Very technical question. so if you don't want to be invested in this run i'm not sure what that exactly means but i mean the question to do calendars or outright calls really boils down to how much gamma you want right and so and how much decay you're willing to pay so you know calendars generally i like doing calendars when a market has corrected and I want to get long it and the curve has gone a bit inverted and I think it will recover medium term but in the super near term I don't think it's going to have a really massive rally so then I'll use that front end call to fund some of my medium term call to cheapen it up right so that's when I would do a calendar trade or kind of the logic around that, right?

27:17I want to buy this thing, I want to cheapen the cost of it. And I'm pretty confident that the inversion of the curve and the strike that I'm selling in the front end call doesn't get breached, basically, because I think the market kind of needs to work off the weakness before it can really have a material rally. In terms of just outright calls, you know, if the curve, for example, wasn't inverted, and the front end bowl was just really, really cheap, it's not worth selling, then it kind of, and because you're going to a six-month outright call, you're keeping the decay down anyway. It's only in the really front-end stuff that your decay bill is that bad.