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A Speculative Feeding Frenzy Like We’ve Never Seen Before

By Jesse FelderStock MarketsSep 03, 2020 12:31AM ET
www.investing.com/analysis/a-speculative-feeding-frenzy-like-weve-never-seen-before-200536221
A Speculative Feeding Frenzy Like We’ve Never Seen Before
By Jesse Felder   |  Sep 03, 2020 12:31AM ET
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Last week, I noted that a relatively rare condition had arisen in which stocks and expected volatility had risen at the same time. Yesterday morning, I noted on Twitter that the NASDAQ Composite and its volatility index (VXN) had never been more positively correlated than they have over the past 10 days. This week, I’d like to briefly put forth my best guess as to why this is happening.

As noted by Jason Goepfert, speculative call buying has recently surged to levels never seen before.

Sentiment Trader Tweet
Sentiment Trader Tweet

This has dramatically pushed up the prices of those call options relative to put options, especially in the popular speculative names in the market.

Jesse Felder Tweet
Jesse Felder Tweet

At the same time, market makers selling all those call options to the traders buying them are forced to hedge by buying the underlying stocks.

Jesse Felder Tweet
Jesse Felder Tweet

Rapidly rising call premiums pushes volatility measures higher while surging dealer demand for stocks pushes prices higher. However, this is not a sustainable situation.

And the inevitable unwinding of it could be even more volatile than anything we’ve seen so far.

A Speculative Feeding Frenzy Like We’ve Never Seen Before
 

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A Speculative Feeding Frenzy Like We’ve Never Seen Before

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Comments (2)
Luciano Moccia
Luciano Moccia Sep 03, 2020 4:10AM ET
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incredibly well written article. It is called Convexity Squeeze, and this is what happens with the hottest names. Take Tesla - the most overvalued bubble of all. The issue is if that all that Call selling is orchestrated or not... but the main issue will happen when the trend stops and reverses.... watch out below!!
Ricardo Diogo
rcd72 Sep 03, 2020 2:33AM ET
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it used to be a market, now it is a crooked gambling site. it will have consequences...
 
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