Meta Gamma Squeeze Drives Stocks Higher as VIX Holds Firm

Stocks finished the day higher. I could try to explain what happened today, but I don’t think it’s as obvious as I’d like. The market looked like a giant gamma squeeze, but that isn’t obvious either, given that the VIX was flat and index gamma wasn’t negative. So you really have to look at the index components, which point to the move in Meta, which seemed, let’s say, odd. I saw the stock was upgraded, but I can’t remember the last time I saw one move like this on an upgrade.

However, the jump in implied volatility, call volume, and deltas was the telling part, and it made you realize where the epicenter of the squeeze was.

Even more amusing, we saw Meta’s CDS widen to 90 today.

All of that helps explain why the equal-weight S&P 500 ETF, the RSP, rose by just 28 bps. The analysis is there, and you can find it. It just took a bit more digging than I really cared to do today.

Finally, despite the big rally, the VIX did nothing. In fact, because of the size of the move, realized volatility rose on the day, on both a 9-day and 21-day basis, with the 9-day now at nearly 13 and only about 2 points below the VIX. In all likelihood, the VIX doesn’t have much room to fall, not with implied correlation already at very low levels, and not if the VIXEQ keeps rising.

Based on where implied correlation and the VIXEQ are today, the VIX model sits around 11.3, and the VIX has tended to trade about 4 points above that. Even if the VIXEQ rose to 50 and the COR1M fell to 4, that would still put the VIX around 13 to 14.

That’s about it

Mike

Glossary by ChatGPT

Basis Points (bps) — A unit equal to one-hundredth of a percentage point, commonly used to describe changes in yields, spreads, or market performance.

Call Volume — The number of call option contracts traded over a specified period.

CDS — Credit default swaps, derivatives that provide protection against credit risk and whose spreads can reflect perceived changes in an issuer’s creditworthiness.

COR1M — A one-month implied correlation measure reflecting the market’s expectations for correlation among index components.

Delta — An option sensitivity measure estimating how much an option’s price changes for a one-unit move in the underlying asset.

Equal-Weight S&P 500 — A version of the S&P 500 in which each constituent receives the same portfolio weight rather than being weighted by market capitalization.

Gamma Squeeze — A market move amplified when options-related hedging forces dealers or other participants to buy or sell increasing amounts of the underlying security as its price changes.

Implied Correlation — The level of correlation among index constituents implied by index and single-stock option prices.

Implied Volatility — The level of future volatility embedded in option prices.

Realized Volatility — A measure of the magnitude of an asset’s actual historical price movements over a specified period.

RSP — The Invesco S&P 500 Equal Weight ETF, which provides equal-weighted exposure to S&P 500 constituents.

VIX — The Cboe Volatility Index, a measure of expected near-term volatility derived from S&P 500 option prices.

VIXEQ — A measure of implied volatility derived from options on individual equities and used to assess single-stock volatility conditions relative to index volatility.

Disclosure

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.