Call option unwinding drives market spasms
The guest argued that recent market drawdowns were driven by the rapid unwinding of expensive call options rather than aggressive put buying.
The argument
Prior to the spasm, high demand for upside in AI and tech names pushed implied volatility and skew ranks to extreme highs. When these call positions were rapidly sold off, it triggered a violent but short-lived volatility spike.
The thesis, stress-tested
✓ What validates it
- ✓A sharp drop in skew rank as call implied volatility collapses relative to put volatility
- ✓A sudden spike in the VIX accompanied by falling stock prices during call liquidations
▸ Risks discussed
- ▸Rapid rebidding of calls can quickly reverse the correction
- ▸Difficulty in timing the peak of call demand skew
Hear it yourself
"And so, we're all trying to weigh the market impact against a slew of Iran headlines, which is just further complicating things on FOMC day. So so this is a little bit of a tough environment to try to navigate, versus last month. I thought it it felt a little more clear to me. So so we'll have to see. We'll we'll parse through things the next few minutes here. Yeah. And what was interesting about SpaceX too is, like, guys like me, we we love, like, fundamental data and all that. Like Yeah. That is literally irrelevant right now. At the beginning of trading on SpaceX, like, this is a flows game based on who has to do what."
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