Option Market Screaming Risk

Added: 2026-05-30

[00:00:00]All right. I was going to post a tweet stream of charts and I said, "You know what? Let me just read this off because it's easier if I just talk about the stuff I'm seeing right now." And I want to go live on this, state my claim. No ambiguity.

[00:00:18]Two days ago, I had my most love tweet ever. It's not a really huge one, but I talked about the risk that is now coming into the market flagged solely by this indicator on the screen. And I made this indicator, I would say, more robust in recent work that I've done, but we can keep it simple. This is the CBE core 1M.

[00:00:41]Move myself out of the way here.

[00:00:45]What is this showing us? It is at negative.

[00:00:49]It's not negative. is below eight. If you're a SPA game member, you know we talk about below eight as a sign that the call options, single stock call options are getting so bid up relative to the index wall that this correlation metric goes down. It's a way of saying complacency in the market, but I like to say it as uber bullishness. Now, what happens if you go back and you look at these returns when core 1M goes below this metric of eight, it is telling us that we've hit peak call froth, right? And we generally have what I call spasms after this. Why?

[00:01:20]Because all the energy has gone into call prices. The rate of change of the market. Maybe your AI is truth. Maybe even though eight months ago you thought that my car was only worth a hundred bucks a share, but now it's worth $900 a share.

[00:01:32]Forget that. Right? It's the rate of change that is causing this problem that people piling into call options. The notional value now of Micron options trading, the premium trading is bigger than Nvidia, Tesla, Apple oftentimes now is bigger than spiders in QQQs. The only thing bigger is the S&P. That's that's that's wild. So look, I'm I'm going to show you the story. Okay, I want you to look at this is our from our note. What I did here is this little comp. If you know what IV rank and skew rank is, you're gonna have to look it up. But this is IV rank here on the X axis, skew rank on the Y. You got the spider or S&P 500.

[00:02:07]over here you got the cues on the right side. So the more bullish things are in call territory, this is the higher you go on this chart and so I'll draw the little picture on here. So this is we love calls or we love puts and this is options are super cheap iv or this is options are super expensive on this side. So normally what happens when the market crashes you have puts surge in value we're on the put skew side of things. You end up down in this corner.

[00:02:35]when you are peak bullishness, you are up here, right? Calls are super expensive. Sorry, we're over here. Calls are super expensive. Uh, and things are running up. So, what does that mean?

[00:02:46]What do you see in this chart? If I draw this line here, you see that of the top 25 stocks in the S&P 500, all of them except for one, two, three, four, five are in the 90 plus rank for skew. What does that mean? calls are richer to puts now more than they've been in the last year. They're in the 90th kind of percentile. You could also think of it that way. And I mapped this out historically. So, you can see via the heat map, what tends to happen is when calls are ripping, like the IV is pretty cheap. The options aren't that expensive. We're not that worried about it. Everyone's positioning the calls for upside, but they're not on the crashy upside. Same thing in the NASDAQ, right?

[00:03:24]This heat map shows us since 2024 if you look at all the individual plots. So, every name, every day has a skew rank and an IV rank in the matrix. And that's what we're plugging in here. And so you can see there's this arc, right? What happens? People pay up for puts when the market's crashing. So the IV gets richer. It tends to not happen on the call side. Generally, when people are paying up for calls, the IV, in other words, options prices are pretty cheap.

[00:03:45]But what's happening now? Look at the NASDAQ. All of these names are in their most expensive IV now. More expensive than it's been the last year. Remember, we crashed a bunch of times in the last year. So the IV now is more expensive and they're piled into calls. So we're in calls. So this is full crash up.

[00:04:05]That's wild. And if you say, well, you don't understand the repricing. This is what the IV look at the IV rank of the of the NASDAQ. I don't think the IV rank went above 37 when we were on March 27th and we were crashing because Iran was getting the end of the world, right? So we've literally seen soccer ball up to an extreme. What does all that have to do with core 1M? Well, it's when you get that and if you want to see the the manifestation of all that, you can just look at this index. So, if you don't know options, you want to look at this index, you go, okay, this is telling me that the whole thing is over skis. Now, the last time that we were so over our skis in the same way was July of 2024.

[00:04:43]Now, if you saw the tweet, it was like, hey, you want to start to piece into put positions or piece into some downside positions because things can get a lot dumber. And I'm going to tell you when I think that'll get dumber. But look at here, right? We went to three on this index. And I don't want to overindex to this index, but things got even a little bit crazier. What was what was 2024, July of 2024? Well, if we look at the S&P 500, you can see I already drew a little line on there.

[00:05:12]What stock was going bananas back back in this time? It was Nvidia. Nvidia was going crazy. This was when Jensen was like signing women's tops and stuff like that, right? Remember that? The stock went up 180% from Jane one to June. And then look what happens. June OPEX, we lose 10% in the S&P 500. Now, most of you are going, "Hey, Brent, you know, market was still up in 2044, 10% at that point." And that's fine. If you're a long-term investor, then you can turn this off and go somewhere else. If you're a trader though, this is a big deal. Losing 10% in two weeks, right?

[00:05:44]That was July OPEX to August 1st. Now, who remembers August 2024? And what was so interesting about August 2024?

[00:05:52]Most of you think don't remember. I'm going tell you what's so interesting.

[00:05:58]This is the VIX index. I got to turn on candles for this. Remember this? The VIX marked over 60. Now, most of the options people, especially volatility nerds, are going to say that wasn't actually real.

[00:06:10]But it was real. That was where the index was calculated. Index was calculated at that level because the spreads in the S&P options all blew out because there's no liquidity because everybody freaked out. And so the VIX printed or marked over 60. Obviously didn't print, but it marked over 60. Out of nowhere, they go, "Oh, yen carry trade." It wasn't the yen carry trade.

[00:06:27]It was the yen carry trade was the excuse and the kind of final piece. But what set all that up was the excessive bullishness in the call options. You bring all that implied ball energy into calls and guess what? That has to unwind. And it doesn't unwind gently.

[00:06:42]Generally, it unwinds somewhat violently. Last time that we had core 1M lower, I think it was in January, uh, and January was the market high for 2026 into the Iran situation. And then the other big one that I remember was in late November of last year, right around in this area when all of a sudden the S&P just dropped 3% on Friday because Trump tweeted something about I believe it was about tariffs in China and all a sudden one day we're down 3%. I was like, what is going on? So the call froth now is the bid and implied ball which is screaming options price is higher. Calls are higher. This tweet from zero hedge right here today will likely be the largest call volume ever which is just another sign of that excess. What are calls? Calls are leverage right? That's what options are.

[00:07:33]Options are leverage to the upside. And so what you're doing is you may believe that Micron has unlimited capabilities or or limited uh PE or whatever it is, right? That there's just no top to what they can do right now.

[00:07:48]But what happening is everyone is levered into that bet at the same time.

[00:07:51]Look at some look at this. Do you all know what Hu Packer does? Look at this stock. It's up 70% in like a couple of weeks. Maybe they are the AI revolution now. I don't really know. But you see this stuff all over the place now, right? So there is no doubt that there is a an excessive rate of return. And if you want to go back to Nvidia and just see what I mean back in that time, you can see I already drew this chart before. And so this is the period I'm talking about here with the correlation when it went crazy. This was the start of January and then we got bit up to the tune of about 180% at the peak in June.

[00:08:23]And then you see this start to come down. And ultimately over the bigger picture, he's like, well, it just was a mean, right? Rate of return. We just kind of returned to the mean. And so if you start to think about returning to the mean in like a micron obviously I mean who knows exactly what that even means at this point. Are you talking about this mean? Are you talking about way back here? I don't necessarily know and I'm not trying to say stick a fork in the market for all time being but the rate of change in the short term is a problem. And I usually look about 30 days out. So all of these signals now are flashing red but you need a catalyst right and the catalyst can come in the form of a tweet. It can come on the form of Trump saying, "Guess what? Iran, screw you. That'll give him an opportunity to announce some other peace deal, whatever." But there's a whole bunch of things that line up here in the near term. And I didn't even put this one on. Pattern day trading is going to go out on the 4th, which is just hilarious. June 4th. Uh, so that'll get them into the market for a little bit.

[00:09:16]But you got CPI on the 10th. You got the SpaceX IPO. Then you got FOMC and you got VIX expiration on the 17th. Then you got June opex on Thursday because on Friday is the Junth market is closed for that day. So you have all of these catalysts loaded up here. So maybe you finally get that final leg higher. Maybe we get a tweet before then. But in my mind, you have to pay the piper now because this excessive call pricing, excessive call activity, it has to that that energy has to go somewhere. You can't just sort of like have it calmly die off. I just don't think that's going to happen here. So again, I don't know if we get the trigger today, this afternoon, tomorrow, whatever it may be.

[00:09:56]And so my answer to that is say slowly leg into downside protection. Now call prices are insane, right? So you can do a bunch of creative things like look at the difference between QQQ risk reversal and the IV rank. So the Q's are the calls are very rich relative to the puts, right? And so if we can go and look at this, we go call skew percentile and we go IB percentile. Look at the Q's here, right? The cost Q percentile is 98 and the IV percentile basis is 67. Look at the spiders though.

[00:10:26]So much lower. So can you do things like sell QQQ calls to buy S&P puts? Maybe.

[00:10:33]Do you want to sell naked calls in like SMH? Probably not because that's very risky position. So be careful with that.

[00:10:40]But do you want to start to nibble on a few things to play downside to protect some gains? Yes. What's the other nice thing about that? Well, you're buying puts or put spreads at IVs that are much lower in some of these assets, right?

[00:10:50]So, you're buying puts at a time when they're cheaper or possibly, you know, a lot lower. This is not like buying puts when the VIX is at 80, for example. If you're going to buy calls and SM be like, what are you doing? You're paying incredibly high prices. So, this whole thing is set up to puke, right? And that is the and that is the core point here.

[00:11:10]We're just set up to sort of break. And this is the kind of manifestation of that argument. The question is, do we linger in this for a couple days, maybe two weeks, right? And if we get a Iran deal, then we probably squeeze a little bit higher. But that's the point of like slowly legging in. And if you start to see that break down, then you're going to see it fully go. Now, what about the gamut positioning? It has been positive for a while. And so, if we just peek forward at that and see what it looks like, you can see that it starts to wear away a bit over time into the end of the week. Now, the zerodt people usually come out and say, "We're going to add some positive gamma for the dealers.

[00:11:44]We're going to sell some puts here.

[00:11:45]We're going to sell some calls. That adds purple or blue to this chart, makes it more positive. Gamma, what you can start to see is that starts to deteriorate out in time. So, while gamma is a stabilizer today, this can disappear very quickly. And the other thing is no one is in put options, right? So, you got to turn and buy some downside protection in the event of a of a riskoff. And then last, but certainly not least, you're also seeing the VIX just crumble, right, into the same time frame. And so you can easily see the VIX get down here uh into kind of year-to- date lows, right, with just a little bit more bullish upside in the next week. So this is the time frame where we're getting very close the timing of an event or a trigger or something seems like that's clustering around June 10th to kind of 18th that week. But you could always get kind of some kind of nasty twe it could be something like someone comes out and says uh you know, hey, I don't want to use my AI tokens anymore or China launches a new model. who knows, right? Something little like that that finally starts to unwind and you start to see, you know, some of this uh stuff come back. So, that's the risk that's sitting here in this market. I want to be very clear about the risk that I saw in the market and, you know, if I'm wrong in this fine, I'll I'll own up to it here uh through mid June. Um, but again, I think the idea of legging into some put spreads, if you're if you step out on that risk scale, you know, you can sell uh calls or call spreads in upside structure, stuff where the skew is going really crazy. Use that to fund your puts. You can do some different things like that. If you're long stock, you want to think about collaring. I think some of that makes sense. you know, you want to go full hog in it yet because there still could be there are major returns made, you know, in these periods where this thing is still squeezing a little bit. But you're starting to see the writing on the wall that we've gotten way over our skis and it's a rate of change due to the leverage invoked by call options. So,