Options & Volatility Themes Across Tech, How META & SPCX Earnings Shape Trends

SPEAKER_1 (0:00)

Thanks so much for that, Marlee. Yes, joining me here at the desk with the New York Stock Exchange to discuss current market metric is Brent Kochuba, who's the founder of SpotGamma. Brent, thanks so much for your time today.

Brent Kochuba (0:10)

Thank you. Happy to be here.

SPEAKER_1 (0:11)

Yeah, it's great. And obviously, there's been a lot going on. I'm just wondering what you've made of the volatility in technology relative to the broader market.

Brent Kochuba (0:18)

I think that's actually been a bullish construct, believe it or not, because it's been a rotation trade. So tech has sold off. But if you look at the Dow or you look at the S&P 500 or equal weighted S&P 500, they're actually fairing pretty well. So I think that's a healthy signal that has been a rotation trade so far and not broader equity selling.

SPEAKER_1 (0:36)

So it's not been, as you say, hitting the sell button. It has been a rotation. I mean, you're picking up some perhaps unloved sectors, unloved names that hadn't typically been doing well this year.

Brent Kochuba (0:45)

Yeah, that's exactly right. Since October 6th, the NASDAQ is down a little over 6 percent.

The Russell or IWM is down 11 percent. But if you look at the S&P, it's only off about a percent from all-time highs and the Dow is doing a little bit better than that. So that is that rotation trade right now. It will be more concerning if people are selling stocks writ large and then moving into bonds or cash or something, which case you would see more broad-based selling. You'd also see a bigger pickup in volatility, I think, when you look at the VIX or VXN, some indexes like that.

SPEAKER_1 (1:13)

But does that rotation translate into a more sustainable broadening out trade?

Brent Kochuba (1:18)

I think so. That was the complaint when tech was rallying so strongly before into April, May and June was that this wasn't a broad-based rally. If you looked at the number of stocks that had a negative beta to the S&P, for example, that was hitting record levels, right, which was telling you that this wasn't a, not everyone was participating in the rally. And so I think the broadening out is actually a good sign for now as some unloved sectors are picking up.

SPEAKER_1 (1:40)

Yeah, I mean, obviously, healthcare, consumer staples have been having a pretty good run in recent weeks. You mentioned healthy. I'm wondering if what we're seeing in technology right now is justified and is a healthy correction or it is, I guess, indicative of something a little bit more concerning given the factors that have been driving some of that selling or that rotation into other parts of the market.

Brent Kochuba (2:03)

Yeah. Part of this is leverage and leverage invokes volatility. If you look at the number of ETFs, the number of leverage ETFs, if you look at the amount of options, volume in the tech shares, that creates a lot of extra volatility. And when that volatility is expressing to the upside, like it was in April, May, in June, people are very excited, right? But the downside of that is a lot of volatility to the downside, right? So if you look at the Korean margin calls, the Leopold and situational awareness in June, and he came back into the market, now he's kind of getting shooken out again or shaken out again.

That's downside volatility, which is just exacerbated by this leverage. And so I think people can get a little too concerned in these moments where it seems like things are crashing, but they have to remember this extra leverage is in play.

SPEAKER_1 (2:46)

So what you're saying, and I saw this in the South Korean market, it is a market I follow very closely, particularly with some of those margin calls. And they've tried to put a stop to that, with obviously cutting off new products with respect to ETFs, particularly leverage ones. Are they amplifying the move we're seeing in single stock names?

Brent Kochuba (3:02)

I think that's completely true. There's more ETFs now than there are single stocks.

Obviously, options volumes are big and large in these tech stocks as well. And so again, you get that volatility in the way up, which feels great if you're long these stocks, but that can all correct very quickly. And so if you look at the NASDAQ, it's sort of just mean reverting violently around the S&P 500 Sometimes it's greatly outpacing the upside, other times it's lagging by quite a bit. And so I think you have to sort of learn to stomach that a little bit as a tech investor and appreciate when things get overdone because of that leverage and also appreciate maybe some opportunities unlock when things get too sold off to the downside. And also if you look at the EWI, for example, or the SMH, it's at a very key long-term support level going back to the June sell-off and then also kind of an April high. So I think it's a very interesting crossroads right now with some of these tech names where they may be at broad-based support based on some of the charts and also some of the flows that we're seeing in the option space.