It Only Happens at Bottoms | Andy Constan on the Options Extreme That Showed Up at the Highs

**SPEAKER_1** (0:00)
We are excited to announce the launch of a new podcast, First Principles, with Andy Constan. There are a lot of shows out there that give you opinions on what is going on in markets, but the goal of this show is to go deeper. We wanna focus on the lessons and frameworks behind what is happening, so we can all develop a better understanding of what actually drives markets and the economy. In this episode, we discuss the extremes in the options market before the latest sharp pullback in semis, why the AI boom has a pie problem, what could change at the Fed under Warsh, and the tariff deadline almost no one is watching. If you would like to continue receiving new episodes of First Principles, you can subscribe on all major podcast platforms using the links in this episode description. Thank you for listening. We hope you enjoy the new show.
This is our fourth episode of First Principles, where we sit down with our good friend Andy Constan of Dance Spring Advisors, to talk about what he's paying attention to in the markets, what investors can learn from it, and why it matters. We don't have all the answers. He doesn't have all the answers, but he puts out a lot of interesting, thoughtful research that I think investors can learn from. And I think Jack, I know you wanted to start. One of the key things that jumped out to you was some of the data that Andy was highlighting around the option market. So I think that's probably a good place to start and I'll let you kind of get into it. Yeah, you know, one of our goals here is to educate people. And I learned a lot from reading this analysis from Andy. Was it about a few weeks ago, Andy, you put it out?

**Andy Constan** (1:16)
Yeah, on the 28th, I think.

**SPEAKER_1** (1:18)
Okay, yeah, and you would flag something that was going on behind the scenes in the option market. In terms of the AI infrastructure stocks and the pricing of call options, and it's proved to be pretty prescient in terms of what's happened since then. So I was wondering if we could maybe take a step back to then, and you could just talk about what you were seeing when you wrote that report.

**Andy Constan** (1:36)
Yeah, sure. I mean, just we've talked about this on prior episodes, and I think it's all part of the same discussion, which is, we have this potentially transformative technology that is, we're dealing with in the world.
It is heavily impacting stocks. It's heavily impacting all businesses. It requires a tremendous, tremendous amount of compute, which to get compute, you need chips and a bunch of other peripherals around that. And so, you know, that's been the big story. And you know, my way of thinking about that is, we know the CapEx is massive. There's been massive promises of CapEx. It's driving the economy.
Other things are as well, but it's an unusual driver of the economy. It needs to be financed, meaning the companies that are buying all this, building all this compute, need money. And so, they need to go to markets to get that money because their own cash flow no longer allows for that.
And all that money is being plowed into a handful of companies. That's three or so companies that sell memory. Three or four companies that sell chips that can be used for compute.
One or two, two-ish, really just one company that makes raw silicon. And a bunch of companies that will one day allow the people that make raw silicon to make more of it. And that's what I call the Fab Five, which is five or so companies that are really necessary for clean room builds. And all that money is being plowed into those companies. And so, they're experiencing parabolic moves, you know.
Intel, I think it's 3X, it was 4X a while back, a few, back then. And so, all of this is happening. And I think we're in a bubble. I've described this as a bubble. And I also think that there is simply not enough GDP to earn money from all the investment that's being made and have the regular economy thrive. So, those have been my high-level things.
I went old school with this report. I've spent all my career, the first 18 years of my career as a, actually more like 20 or 22, 23 years of my career as an option, an equity options, equity derivatives, fixed income derivatives professional. And so, I decided to look at what was happening in the options market because I thought that was a, there was something very, very unusual happening. And really, it's happening in two very specific things are occurring. One is we look at the stock market every day, and it doesn't go anywhere. But some stocks go up a lot, and some stocks go down a lot. And so, the, what we call the dispersion of single-name stocks, lots of rotation, lots of moves under the sea, but the relatively stable overall stock market. And that's very unusual. The level of correlation amongst individual stocks is very, very low.