Volatility May Make An Explosive Return- Free Preview of Member Service

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Recorded the afternoon of Friday, 4.25.25

TERMS AND TRANSCRIPTS BY CHATGPT

1. Volatility Dispersion Trade:

   A sophisticated trading strategy involving selling implied volatility on a broad index (e.g., S&P 500) while simultaneously buying implied volatility on individual component stocks through options (often calls), typically hedged by owning underlying shares. The trade profits when individual stocks exhibit more volatility than the broader index.

2. Implied Correlation:

   A measure of the market’s expectation of how stocks within an index move relative to each other. Higher implied correlation indicates stocks are expected to move more similarly; lower implied correlation suggests more diverse individual movements.

3. Gamma Exposure:

   The sensitivity of an options portfolio to movements in the underlying stock price, specifically measuring how much delta changes as the underlying asset’s price moves. High gamma exposure can lead to large market moves due to hedging activities by market makers.

4. Delta Positioning:

   Represents how much an option’s price changes relative to changes in the underlying asset’s price. High positive delta indicates strong sensitivity to upward price movements; negative delta indicates sensitivity to downward movements.

5. Moneyness (100% Moneyness Level):

   Refers to options whose strike price equals the current price of the underlying asset, making them "at the money" (ATM). At 100% moneyness, the option has neither intrinsic gain nor loss—its value is entirely based on expected volatility.

6. Implied Volatility Crash:

   A rapid decrease in implied volatility levels following anticipated events (like earnings), significantly reducing option premiums.

7. Positive Gamma:

   A situation where market makers are long gamma, meaning they become buyers when the underlying price falls and sellers when the underlying price rises, generally stabilizing the market. Negative gamma would create destabilizing hedging flows.

8. Negative Hedging Flows:

   The selling activity that occurs when market makers unwind their hedges (usually following volatility events like earnings), creating downward pressure on stock prices.

9. Implied Correlation Index:

   An index measuring market expectations of correlation among stocks within a benchmark, reflecting sentiment about the coherence or divergence of market movements.

10. BTIC S&P 500 Total Return Index Futures:

    Basis Trade at Index Close (BTIC) futures contracts linked to the total return of the S&P 500 index, reflecting the cost or yield associated with financing positions tied to the index’s total return, including dividends.

Hi everyone,

I didn't think we'd have to discuss this particular topic this quarter, given everything else happening in the market, but it appears there's an attempt underway to execute a volatility dispersion trade. It only comes around once per quarter, so traders have to capitalize when possible.

Currently, we're seeing familiar characteristics from previous quarters, such as implied correlations declining and the VIX now falling below 25. Stocks like Amazon, Apple, Meta, and Microsoft are trading higher—though modestly—and Alphabet is relatively flat after its recent earnings report.

Implied volatility (IV) levels at 100% moneyness, one month out, are historically high. Typically, IV spikes going into earnings and then sharply declines afterward. With earnings next week, I decided to examine positioning to understand what the options market suggests might happen.

A volatility dispersion trade involves selling volatility on an index (like the S&P 500) while buying volatility on individual stocks through calls, hedged by owning the underlying stocks. After earnings, when IV crashes, these positions are unwound.

Looking at Meta, gamma exposure for next week is surprisingly bullish, particularly at the $550 strike level, with significant gamma also at $600. Meta needs to break above $550 on good news to potentially rally towards $600. The issue, however, is the high delta at $550, indicating market makers are short delta and hedging by buying stock or calls. When IV drops post-earnings, deltas decrease significantly, prompting market makers—now over-hedged—to sell Meta shares.

Apple (which I own for full disclosure) also shows strong positive gamma positioning around $215 and resistance at $218. Similarly, Microsoft and Amazon have turned surprisingly positive ahead of their results. This positive gamma implies market makers currently hold significant long positions, but after earnings, as IV crashes, they will become sellers, creating negative hedging flows.

Alphabet is trading slightly higher but below recent peaks, suggesting some selling pressure post-earnings.

This analysis suggests a volatility dispersion trade is underway, likely unwinding next week after key earnings announcements:

• Microsoft and Meta on April 30th

• Apple and Amazon on May 1st

• Eli Lilly, fifth-largest by market cap, also on May 1st

These events likely mean continued grinding lower in volatility (VIX) and potential range-bound trading for the S&P 500 between 5450 and 5500. Although the market might attempt to fill the gap from Liberation Day, it's unlikely due to broader uncertainties around currencies, economic data, the upcoming BOJ meeting, and ongoing political news flow.

Unless upcoming earnings significantly beat expectations, these stocks may decline post-reporting due to the unwind of positive gamma positioning and dropping IV. Given these dynamics, I expect market conditions to remain cautious, with limited upside and potential volatility ahead.

Have a great rest of your day,

See you later, Bye.

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.