It’s perilous to say anything about directionality for equities index when the only stock that really matters for the big-cap benchmarks is set to report earnings in less than 24 hours.
That’s the caveat. Nvidia’s obviously the stock. As one popular PM-turned Bloomberg blogger noted earlier this week, Nvidia can (and has) move(d) the entire US stock market by 1% or more during a given five-session stretch “all by itself.” If, at any point, whether it’s this week or sometime in the future, the company comes up short or, worse, guides below consensus, all bets are off.
With that out of the way (and God knows I’ll be glad once Nvidia’s results are out so I don’t have to keep including a disclaimer to account for the event risk), allow me to highlight the figures below, from crowd favorite Charlie McElligott.
You’re looking at call skew there — the relative cost of melt-up participation tickets, basically. “Protection” for the “risk” of a runaway upside move.
“The Powell message at Jackson Hole re-struck the Fed put and with a much higher strike than many would have anticipated,” McElligott wrote Tuesday, noting that although pervasive and predictable over- and under-writer flows have dealers long gamma in and around spot, they’re short those melt-up participation tickets to clients. That sets up the potential for dealer hedging to amplify a rally in the event the S&P makes a run at new highs.
The figure below, complete with Charlie’s annotations, shows (and tells) you how this dynamic works.
“Dealers are continuing to get stuffed with ATM-ish gamma, but at the same time, [they] have been getting incrementally shorter in upside with call skew towards OTM steepening, as we’ve seen some right-tail hedging go through, on the risk of an equities breakout to fresh all-time highs,” Charlie went on.
Coming quickly full circle, it all hangs on Nvidia. At least in the very near-term. You’re not going to get the right-tail breakout to new highs with Nvidia lower. So, they have to do enough to at least keep the shares from selling off.
