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The Markets Moment Of Truth Comes Tomorrow

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#Stocks – $QYLD

#Macro – $spx, #rates, $BTC

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The stock market today finished higher. It was an entertaining day, especially if you understood the background of the sudden and “unexpected” rally, especially heading into OPEX tomorrow.

Every month, the Global X NASDAQ 100 Covered Call ETF (QYLD) sells call options in size for the covered call ETF, and that of course, needs to be hedged by the market maker. In December, they sold 4,697 of the January 19, 2024, 16,650 calls. Those, of course, had to be hedged, and the notional value of that, according to the ETFs website was around $8 billion. The market maker was likely short that size in notional value as well, which means that when the ETF covered those, the market maker covered its short. The idea here, is that  ETF buys the calls back the day before OPEX, and then on the day of OPEX sells a new round of calls of similar size, which could mean we see a similar $8 billion in notional value of calls sold tomorrow, of which the market maker will the need to short in NASDAQ futures.

The buying of the calls started in size at 2 PM ET, as noted by the steady ramp-up in the volume today at that time. Now, tomorrow, new calls will be sold, and that could erase much of today’s end-of-day move higher when the hedging flows and such come into play, as the fund sell new calls, inwhich the market maker will need hedge by shorting the indexes futures, most likely. These new calls will be sold by the ETF for the February expiration date.

Outside of stronger-than-expected jobless claims and Bostic pushing back against six rate cuts starting in March for the 50th time, it was a fairly normal and, in my opinion, boring day except in Bitcoin, which fell by 4% so far today. I would say that from a technical basis, bitcoin at 40,000 is a very important level, and a break of that level could lead to a sharp decline in the crypto, or whatever it is consider these days, to around 37,450.

We also saw the yield curve rise today by six bps to 4.37% and, more importantly, approaching resistance at 4.40%. That is a big and important region because it acted as resistance as the 30-year was rising in August and September. That level of resistance was first established in October 2022.

And so tomorrow, once OPEX passes, we will have a better view of the entire market as many of these hedging flows fade next week. See you later.



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