Author: SOL I Can't Understand
Brothers, I have something scary to tell you.
Yesterday, the trading volume of call options on the S&P 500 reached $2.6 trillion.
What does that mean?
There has never been such a high single-day figure in the history of the US stock market.
01) Retail investors frantically buy options, forcing market makers to buy stocks.
This 2.6 trillion yuan is not real money used to buy stocks.
In reality, retail investors and traders are frantically snapping up call options.
What is a call option?
Bet a small amount of money on a rising stock price; if you're right, your investment doubles; if you're wrong, it all goes to nothing.
US stocks are hitting new highs every day, and everyone thinks they will continue to rise, so they are buying frantically.
But there's a question: who sold you the options you bought?
Market maker.
Market makers aren't stupid; when they sell you options, they have to bear the risk of the stock price rising.
To hedge, he has to buy the corresponding stocks.
If you buy a $1 option, he might have to buy $100 worth of stock to hedge.
Therefore, the 2.6 trillion yuan in options buying is backed by a massive amount of stock buying.
This isn't because investors are optimistic about the company; it's because the options market is forcing market makers to buy shares.
02) Gamma compression
The mechanism behind this is called gamma compression.
The higher the stock price rises, the greater the risk for market makers holding options.
He needs to buy more stocks to hedge.
The more you buy, the more the stock price rises.
The more the stock price rises, the more he has to buy.
This cycle repeated itself, causing the market to skyrocket.
This is the truth behind the recent daily record highs in the S&P 500.
It's not because the company's performance is so good, nor because the economy is so strong.
It's the buying pressure in the options market that's dragging the index up.
But can this cycle continue indefinitely?
cannot.
Options have an expiration date.
On the expiration date, those who bet on a rise must close their positions, and market makers must also close their positions.
At that time, the force that bought stocks will turn into the force that sold stocks.
Moreover, the force was exactly the same.
The more volatile the rise, the more severe the fall.
03) The current market situation is not about pricing, it's about gambling.
The current S&P 500 is not priced by investors at all.
What is pricing?
We assess a company's earnings, growth rate, and competitive advantage, and then assign it a reasonable price.
What about now?
Nobody cares how much the company makes.
Everyone is betting on whether prices will rise tomorrow.
The record volume of call option trading indicates that the market has turned into a casino.
Retail investors are gambling, institutional investors are gambling, and hedge funds are gambling.
The 2.6 trillion yuan in options buying represents a 2.6 trillion yuan bet.
The higher the stakes, the crazier the market becomes.
The crazier the market gets, the more people gamble.
How is this different from the leveraged bull market in A-shares in 2015?
There is no difference.
It's all driven by money, not by value.
Money can push things up, and it can also bring them down.
04) When will this bomb explode?
Nobody knows.
But all market trends driven by options eventually collapsed.
In 2021, GameStop's stock price was squeezed by Gamma, rising from 20 to 480, before falling back to 40.
In 2020, Tesla's stock option frenzy pushed its valuation to the sky, only to have it halved again.
History doesn't repeat itself, but it does rhyme.
The current S&P 500 is like a game station magnified 100 times.
The day when the 2.6 trillion yuan worth of options expires, or the day when funds are liquidated in a concentrated manner, will be the day the bomb explodes.
Moreover, no one will notify you in advance when it is detonated.
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Brothers, I'm not bearish on US stocks.
On the contrary, I am optimistic about the long term. I believe that the US stock market has good companies, real growth, and hard technology.
But the current market situation has nothing to do with the company's fundamentals.
I need to remind those who leveraged their investments, took out loans, and bought stocks without sufficient cash flow to follow the trend.
When prices rise, explosives will propel you into the sky.
When you fall, explosives will send you to the ground.
If you're on the ship, don't ask when it will explode.
Were you on the ship when the explosion occurred?
