00:00We had a Bloomberg News story today that indicated Wall Street strategists on average are looking for an 11 percent gain in the S&P 500 by the end of 2026.
00:08So clearly the consensus is bullishness for 2026. What does the options market tell you about positioning?
00:15Yeah, absolutely. Thanks for having me.
00:18There's a stark difference between how retail investors are positioning and how professional investors are positioning right now.
00:25We're seeing continued buying among retail in single stocks and in ETFs.
00:30But on the professional side, we're seeing an increase in skew, particularly when you look down at the individual stocks.
00:38Their put prices are rising relative to their call prices, and that's leading to a bit more bearish positioning.
00:45We're also seeing less buying in the macro space, whether that be futures, swaps or options.
00:51So we can see the professional investors are not as bullishly positioned as retail.
00:57Let's talk about some single stocks. Where do you see the biggest bullish versus bearish trades right now?
01:04We do see this kind of reversal from AI names. Like what is the options market telling you right now?
01:10Yeah, the names that trade the most in options are Tesla, Nvidia and Apple.
01:17And what's really interesting to me is that they're not all the same positioning.
01:23We've got Apple and Nvidia where people are bearishly positioned in options and Tesla where people are bullishly positioned in options.
01:31They're buying more of the calls relative to the puts.
01:34And in the options market, I think it's important to keep in mind the average option is only a one-week option.
01:42And so this is very short-term positioning.
01:44That tells you that the bar is pretty high for Tesla, but the investors are not already positioned for upside in Nvidia and Apple.
01:52OK, so the AI trade is becoming, or at least investors are being more discerning about the AI trade for sure.
01:57They've also piled into bets on metals, precious metals like gold, like silver.
02:03What are you seeing in terms of positioning for metals into 2026?
02:06The most interesting commodity positioning that I'm seeing is actually in oil.
02:12The oil price has been down pretty significantly over the last few months, but the options positioning is kind of balanced.
02:20You would expect people to be really worried about downside asymmetry, but they don't seem to be positioned like that.
02:26You know, one of the biggest, I think, features of 2025 has been the very low correlation between single stocks, which means it's a stock picker's market.
02:36And sometimes we do see that the index is not reacting to even like big, no, we do see big sell-offs, but it's pretty shallow and people buy it back.
02:45So what is your take on 2026 and why is that?
02:48Do you think we'll still have low correlation between single stocks?
02:51That's a great question.
02:52That's one of the main questions that we're getting from investors really over the last six months.
02:57And we see two drivers of that.
02:59The first is we have thematic trades in the market that have gainers and losers.
03:05We have AI, we have taxes, we have tariffs that help some companies relative to other ones.
03:11And so you'd naturally expect some dispersion or a lack of correlation in the market.
03:15So that is one of the components of this.
03:18The other component is the huge amount of option selling that is happening, driven by ETFs that trade option overlays and mutual funds that trade option overlays.
03:30Those funds, ETFs and mutual funds, have gained $50 billion in AUM this year.
03:37Now they're about $250 billion.
03:39And we think, and we published a big study last week on this, we think that it's because investors are noticing how important these strategies are to an asset allocation.
03:51If you look back over the last 30 years, this has significantly increased your return and lowered your volatility to be in these types of option overlay strategies.
04:02And what do these strategies do?
04:05They sell generally calls and puts in order to generate yield or enable the fund to buy protection.
04:12This ends up selling index volatility, which market makers take the other side of that and buy that volatility and hedge in such a way that dampens index volatility.
04:24This is the biggest factor dampening index volatility, and I think it's leading to that just historically low level of correlations being priced into the market.
04:35That's so interesting.
04:36I remember when thematic ETFs were a really big deal, but it's kind of been tossed to the wayside for these single stock leveraged ETFs.
04:43Have retail investors lost their appetite to bet on groups of stocks as a whole?
04:47I think that they're just noticing that there's really high volatility and idiosyncratic volatility in those single names.
04:57And I think it's a matter of issuers are giving people the products that they want.
05:03Another question that we have about the bond market volatility, we do see that it's also very low, considering so many unknowns about the Fed share, inflation, the Federal Reserve's path to interest rate cuts.
05:15So why is that? And do you think we will see such a low volatility in 2026?
05:20Yeah, the bond market volatility was a standout on our metrics for years, frankly, for the last three or four years, where it was higher than equity volatility relative to its own history.
05:31Now we're seeing the opposite.
05:32We've seen implied volatility, particularly on treasuries.
05:35So rate options, those volatilities have come down.
05:40And so people are just less concerned.
05:42They're more willing to bet on volatility in equities or some of these single stocks than they are to buy the volatility on on treasuries.
05:52It's going to be a midterm election year and they're coming up in November.
05:56I wonder how early you start to see positioning around expected outcomes.
06:00Yeah, the the the events that move stocks, we are constantly over time, have seen people positioning closer and closer and closer to the events.
06:12Now we have S&P daily options.
06:14So just in time hedging means you could wait until the day before to hedge.
06:19I don't think that that is the case, but it's a bit too early for us to see it priced into index options.
06:24We have less than one minute left.
06:26So there is a very big gap between the short term and long term volatility.
06:29You mentioned some of those factors.
06:31So do you think it's more a matter of selling and buying across all the strategies that you mentioned or it's something else that we should keep in mind?
06:41No, I think I think there's two things.
06:43People the short dated volatility is definitely being brought down by all the systematic strategies,
06:49whether they're in ETFs and mutual funds are done in separately managed accounts.
06:54There is a large amount of of assets that are putting on these option overlay strategies,
07:01and that's pressuring the three month as well as the one month area.
07:04But the risks are still there for the longer dated and there are fewer strategies out there selling options.
07:11In fact, the credit market, if you're worried about credit, you can buy those longer dated equity options and they should be really reactive and protective for your portfolio.
07:24And so most of the people that I talk to that are buying that longer dated tend to be credit type investors that want that long dated protection.
07:32Oh, interesting.
Comments