Markets Rip - Strong Summer Performance
Equities have had very positive returns over the past two months. Much of this move has been led by large-cap stocks, reflected below by the near 20% positive return off the market lows for the Nasdaq 100 Index (NDX) from mid-June to mid-August.
Graphic: Nasdaq 100 strength since the low in mid-June.
Looking back toward the start of Summer, as we approached the FOMC meeting on June 15th, investors were worried. This fear was reflected in the options market by the large number of outstanding protective put options. Then, when the FOMC came out with a 75bp rate increase and pledged to curb inflation, it sparked a rally. Having their fears assuaged by the news, investors swiftly started buying stocks and changing their options positioning.
Options Shift - Investors Sell Puts and Buy Calls
At SpotGamma, our team studies the options exposure and positioning of large market participants. Then, using open interest data, we analyze how their hedging activities affect market prices. In this case, the move from long puts to long calls was rapid, dramatic, and very bullish in nature. In fact, our data show that the ratio of call open interest to put open interest for the NDX options complex shifted quickly to being the highest it has been since 2009 (as shown below).
Graphic: Nasdaq 100 (INDEX: NDX) Index call open interest - put open interest. As you can see there has been a surge in relative call option positions over the last 30 days.
Top Tools - Analyzing Gamma to See True Bullish Momentum
In addition to put/call ratios, there are more sophisticated ways to assess the magnitude of shifting from a put-dominated market, to a call-dominated market. We believe, at SpotGamma, that measuring positions by gamma, rather than open interest, allows us to weigh the material impact of options positions on their underlying stocks and indices.
Gamma, an options greek, is highest for options with strike prices near where the underlying stock is currently trading, and gives us meaningful insights about near term levels of stock support and resistance.
To illustrate how we analyze Gamma, please see the chart below, which plots aggregate put and call gamma for the individual stocks in the Nasdaq 100 Index (top chart). Additionally, see the combined put & call gamma for the NDX Index + QQQ ETF (bottom chart).
As seen on both charts, the call gamma (green) declined sharply throughout the first part of 2022, and remained low until mid-June when sentiment turned positive. By looking at both the individual QQQ Constituents (e.g. AAPL, AMZN, TSLA), and the ETFs (e.g. QQQ and NDX) we see that individual stocks played a large role in driving prices higher over the Summer. This is evidenced by the call gamma (green) breaking above put gamma (black) in the top chart.
Graphic: Aggregate put and call gamma for the Nasdaq 100 Index (INDEX: NDX)
Current Outlook - Investors Own Short-Dated Calls
Looking ahead, our latest analysis suggests that call positions now dominate put positions for options expiring in August & September. To illustrate this dynamic, we’ve grouped the Gamma position by expiration so that you can see the weighted value of options at each expiration, with calls in navy blue, and puts in teal. As shown, there are significantly more calls set to expire vs puts for the expiration on August 19th.
Graphic: Call gamma (navy in color) for the August 19th options expiration is larger than equivalent put positions (teal)
At SpotGamma, we believe that unless investors start buying more call options for outward months, we could see some consolidation (pullback) in equity prices. However, if more calls are bought and Gamma increases, we could see an extension of the Summer rally.
In conclusion, in either the case of an expansion of range (higher movement) or consolidation, by tracking the options positions and their relative hedging impact through Gamma Analysis investors can gain unique insights into overall market opportunity and risk.
To learn more about SpotGamma visit SpotGamma.com and to get access to free options education visit SpotGamma Academy
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.