The professionals have changed the way they are playing this game lah.... all buy straddles .... so far, none of them dare to short a market that is fueled by liquidity but they also know that the underlying fundamentals super jiat lat.... at the same time, they cannot dun participate... so buy calls to participate - limited risk .... then they also buy put to protect portfolio.... so if market turns, then they can start shorting liaoz... so far no shorting yet but when it turns.... siao liaoz.
On and off since it happened last week, I've been trying to find news articles which explain this phenomenon. Now, I think this is some in depth wall street stuff that I could probably synthesize the understanding with drugs; I am just not intelligent enough to understand it.
Some articles simply state the obvious that it's a warning sign (like we didn't know the main street and wall street disparity).
https://fortune.com/2020/08/27/stock-market-highs-cboe-vix-warning-signs/
https://www.marketwatch.com/story/this-signal-is-raising-a-red-flag-for-the-stock-market-rally-11598527633
Normally, I will prefer not to quote from bias sources but I do not see any other explanation. Apparently in my layman interpretation, these big tech names have taken up such a big % of the stock index that it is good enough to hedge the melt up with buying Nasdaq volatility index which also affects the Vix index. In addition, buying too many call options can bid up volatility and lift the Vix index.... Some chim stuff....
-----------------------------
https://www.zerohedge.com/markets/last-time-happened-was-day-dot-com-bubble-burst
Normally, this is a warning sign since it typically suggests that professionals are buying macro overlays (protection) to lock-in gains or protect against downside for an over-valued stock market.
However, in this case, there's another reason for the surge (which might be even more concerning) - call-buyers have gone crazy. Not satisfied with simply buying stocks, retail traders are now getting levered long in a hurry and that demand for calls has bid up volatility and lifted VIX...
-------------------------------
https://www.zerohedge.com/markets/whats-behind-last-weeks-meltup-vix-citadel-explains
https://www.zerohedge.com/markets/whats-behind-last-weeks-meltup-vix-citadel-explains
Perhaps of all the charts, one of the most curious observations was the recent meltup in the VIX, and especially the Nasdaq Vol index, which last week was tracking the Nasdaq almost tick for tick, a paradox when considering that the Nasdaq just hit all time highs virtually every day which should depress vol. What was behind this unprecedented inversion of one of the market's most fundamental correlations?
It wasn't just the Nasdaq of course. On Wednesday and Thursday, the VIX was more than 5% higher each day, with the S&P 500 up both of those days. How rare is this? Very. According to Larry MacDonald, there were just ten days in the last decade with the S&P up 1% with the VIX closing higher. Furthermore, this is especially rare with the market at all-time highs, and as Goldman showed, the last time the VIX was this high at an all time market high was in March 2000, just before the dot com crash.
For those scratching their heads, here is an explanation from arguably the most important market maker in the world, Citadel, which just so happens to be at the nexus of institutional and retail orderflow, and "occasionally" just happens to frontrun one or both as a recent settlement with FINRA revealed. So without further ado, here's why the market went nuts last week, courtesy of the Bear Traps Report:
Over the past few weeks, there has been a massive buyer in the market of Technology upside calls and call spreads across a basket of names including ADBE, AMZN, FB, CRM, MSFT, GOOGL, and NFLX. Over $1 billion of premium was spent and upwards of $20 billion in notional through strike – this is arguably some of the largest single stock-flow we’ve seen in years.
“The average daily options contracts traded in NDX stocks to rise from ~4mm/day average in April to ~5.5mm/day average in August (a 38% jump in volume).
Given this group of 7 stocks accounts for a ~40% weighting in the NDX, the outsized volatility buying in the single names is having an impact at the Index level. So why are Vols moving Wednesday and Thursday when this call buying has been taking place for weeks? Yesterday CRM, one of the names we have seen outsized flow, rallied 26% on earnings – a less than ideal outcome for those short volatility from all the call buying.
As the street got trapped being short vol, other names in the basket saw 3-4 standard deviation moves higher as well – on Wednesday FB rallied 8% (a 3 standard deviation move), NFLX rallied 11% (a 4 standard deviation move), and ADBE rallied 9% (a 3 standard deviation move).
The most natural place to hedge being short single name Tech volatility is through buying NDX volatility. As such, there has been a flood of NDX volatility buyers with NDX vols up about 4 vol points in 2 trading days. And if NDX volatility is going up, SPX volatility/VIX will eventually go up too."
