Hopefully, most readers can recite some version of the flat skew narrative from memory by now. God knows I’ve been over it enough.
Demand for downside’s negligible in an incorrigible tape that steadfastly refuses to sustain even the shallowest of pullbacks. At the same time, the vol supply overhang’s nothing short of tyrannical.
The result: Pancaked skew and “a one-way equities index vol destruction event,” as Nomura’s Charlie McElligott put it last week, describing the vicious mean reversion (if you will) that followed Apri’s fleeting equity selloff/vol expansion.
McElligott also noted that at least some traders took the opportunity to reload VIX calls. You know, just in case.
He cited notable buys late last week including July 45 calls, August 17 calls and June 15.5 calls, among other meaningful flows.
In a new note, Goldman’s Andrea Ferrario and Christian Mueller-Glissmann briefly touched on the same general dynamics.
“The equity put skew continues to be very low across regions [while] the VIX call skew has been trending higher,” Ferrario wrote, referencing the figure below.
The bank went on to say that the same juxtaposition “suggests markets are pricing less risk of a sustained drawdown from here, but are worried about temporary spikes in volatility.”
And what, pray tell, might cause a “temporary spike in volatility?” Well, more geopolitical turmoil, for one thing. Presidents are crashing into mountains now. And then there’s the single stock-index nexus inherent in the outsized weight of US mega-caps. Goldman cited “high market concentration” and “idiosyncratic events.” The bank mentioned Nvidia’s May 22 report.
Writing last week, McElligott summed it up. “It seems like some people still ‘get the joke,'” he said. “Whatever the next ‘accident’ is, it’s not going to be a run-of-the-mill SPX -5% / -10% slow pullback or correction-type move, but something far more convex, so we are again seeing traders reload the VIX calls trade.”
https://www.reuters.com/technology/amazons-cloud-unit-pauses-orders-nvidias-most-powerful-chip-ft-reports-2024-05-21/
Not sure how that’s bearish if that’s what you meant. Presumably Nvidia knew that promising to deliver a bigger, better version of their flagship chip would prompt some customers to wait on it.
Yep. The idea that some buyers will hold back orders and wit for the newer chips has widely been talked about. One the one hand, that probably will be used as an excuse for any revenue shortfall.
On the other hand, the AWS story might raise questions about the notion that the demand is so insatiable that buyers will grab anything they can lay their hands on.
In that regard, I found this story out of China more of a head-scratcher:
https://www.bloomberg.com/news/articles/2024-05-21/alibaba-sparks-china-ai-price-war-with-spate-of-steep-discounts?cmpid=BBD052124_CAS&utm_medium=email&utm_source=newsletter&utm_term=240521&utm_campaign=closeasia&sref=FxVxvswS
In line with this one from the good old USA.
https://www.wsj.com/tech/ai/metas-plan-to-win-ai-race-give-its-tech-away-free-4bcc080a?mod=Searchresults_pos1&page=1
It’s bearish for near term earnings. And it may also be for longer term earnings if this excuse turns into a “demand for AI cloud services has not translated into a need to purchase the newer chips” scenario. May not end up being anything but it is definitely not positive for Nvidia.
Nice call. Dan Gallagher touched on this today in the WSJ.
https://www.wsj.com/tech/ai/nvidia-keeps-its-old-chips-selling-hot-2596f11e?st=wqi1xd6ipcstlfi&reflink=article_copyURL_share
It was an easy call. If they were going to miss, they’d have said something. A miss would’ve likely resulted in the biggest single-session wipeout (in market cap terms) in the history of the US equity market — and probably by a country mile. They weren’t just going to stroll into something like that without giving everybody a heads up, even if it was just a subtle hint. There was no such messaging in the lead-up. They were clearly going to at least meet expectations/match consensus.
My reservations (i.e., why I wouldn’t have bought ahead of earnings) were around a “sell the news” dynamic. This bar is so high every quarter that even great results could conceivably be sold into. That didn’t happen here, but it could’ve.
I had a 1 by 2 Put spread on NVDA in place, just in case… zero cost so it’ll likely end as a stab in the water…
Did I read that right? July 45 calls? that would be … interesting.