One Week after OPEX of $1.8 Trillion

QQQ's performance since last Fridays (Feb. 17) record level option expiration

Options have become a major part of the global investment system. We have witness that over the last 60 + days with Zero Days to Expiration options and last Fridays $1.8 trillion in option expiration. Combined the option phenomenon with the Fed’s Fed Funds rate hike and balance sheet reduction, you have your self one of the greatest financial engineering experiments on the verge of…something.

Fed Funds Rate

Feds Balance Sheet

Since the Friday February 17, 2023 OPEX, the QQQ’s are down -.43% since market open on Tuesday February 21, 2023 as seen here on the Seeking Alpha QQQ investment analysis page. Not to bad considering that the unwinding of the market makers hedge’s that where in place could have gone very wrong with the amount of volatility suppression that we are experiencing.

Volmageddon 2.0?

Much comparison has been made amongst the institutional and volatility traders that we are on the verge of another Volmageddon that happened back on February 5, 2018 that wiped out short volatility strategies. This gets a bit complicated to explain, so I’ll try to keep this simple and provide a link the the CFA Institutes article that summarize it for you. As simply as I can explain it, when there is a massive amount of option shorting, as we are seeing in the last 90 days or so you get a “ball pushed under water” effect that builds until in explodes to the upside. Much of this is due to the create of inverse ETF’s that short the VIX and other volatility index’s. As seen in the chart below, what comes after is not favorable to the long only investor.

This all concerns me because of the repercussions it has on retirement saving. According to Fidelity, last year retirement accounts lost 23% of their value. With the combination of the Fed’s actions, a slowing economy, retirement withdraws rates moving higher and a volatile stock market, we could see another double digit decline in induvial saving rates for 2023. Back to back portfolio declines takes a while to recover from.

What in Store for Today?

Key inflation data from the core personal consumption expenditures price index which happens to be the Feds go to on inflation comes out at 7:30am central. The economist of the world are expecting a 0.5% month over month gain, according to Dow Jones. Link to article with details.

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Trent

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Trent

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