Witching Hour

THE ROYAL OAK, STAFFORDSHIRE – “The country is already a powder keg, and now we’ve lost Christmas.”

As Danger Zone by Kenny Loggins plays over the pub speakers, Tim Price’s grim email hits all the harder.

It’s not a sunny observation from our resident value investor, but I don’t fault it. Considering the myriad political divides and tensions strangling it, one has to wonder just how much more strain our United Kingdom can take.

While I agree with Tim’s sentiment however, I expect the government to ease the restrictions around December/January so BoJo can say he’s saved Christmas like some political Santa Claus.

I’ll be hosting a conference call with Tim for his readers at The Price Report next week. The man never holds back, which always makes for an explosive discussion. As author of The War on Cash, it’ll be interesting to hear what he makes of the latest steps from the government toward Financial Martial Law…

But in the meantime, I want to know what you make of the new restrictions imposed across the UK. I told you a poll would be coming in yesterday’s note, and here it is. Just click the answer you agree with, and then come back to this email:

Do you think the new lockdown measures (UK) are necessary?

If my inbox is any guide to what Capital & Conflict readers make of the new WuFlu restrictions, the answer is a resounding-

… Well, I’ll wait until I get the poll results before I share them. But I’ll publish them soon, I promise!

Now, back to the markets…

Fake Texodus?

In yesterday’s note, I showed you a chart of a sudden “Texodus” – investors pulling more money out of the tech-heavy Nasdaq index than they have since the dotcom bust. However, it’s become evident that I was too early to claim that the market was coming around to Charlie Morris’s directive – to “Beware the Nasdaq”.

For right after the Nasdaq tracker fund $QQQ suffered its largest outflow of cash in two decades… it had its largest inflow of cash over the same period. That’s right – investors yanked $3.48 billion out of the ETF… and then put $4.16 billion back into it at the next trading session!

Sounds like suspicious behaviour, huh? Two opposite records broken, back to back.

The reason for this billion-dollar churn ties back to the dynamic I highlighted last Wednesday (Flying to nowhere16 September). It’s a symptom of the growing appetite from investors for options contracts as a means of making money in a zero-interest rate world now bludgeoned by WuFlu.

Vast amounts of these derivatives relating to movements in the Nasdaq have been created (or “written”) and traded in recent months as the Nasdaq index has soared. But options have a “use-by” date – and after they expire (“mature”) they become worthless.

On the days close to expiry, many options are used, or “exercised” as positions are closed, or rolled forward (buying options that expire in another month). This leads to significant buying and selling of the shares they relate to (in this case, the Nasdaq ETF) as investors meet the terms of whatever options contract they own.

This period is known as the “Witching Hour”, where there’s often chaos in both the options market and the shares they relate to. So busy are these periods for market operators, that I’ve heard many investment banks don’t let their trading staff take holidays during them. You wouldn’t want your traders drunk in Bali when that “Texodus” event occurred, that’s for sure.

That sudden whipsaw move in the Nasdaq goes to show just how much cash is sloshing around the options market now that investors are relying on it to make returns in a no-interest, lockdown-economy world. It also illustrates just how much the market for derivatives can cause record-breaking turmoil in the market they are derived from.

I can’t blame investors who’ve turned to options in this environment – it’s one of the few oases that remain in this desert. But for those who don’t know what they’re doing (knowing your Greek algebra is effectively an entry requirement), then it’s not an oasis at all, but a mirage.

The thing about derivatives in general is that they are much more zero-sum than traditional assets.  If you’re not participating in that market for insurance (to hedge risks), then the outcomes are binary: there are winners and losers, and nobody in between. If there’s no golden goose – a growing economy – creating wealth in the background, the derivatives space becomes an increasingly cut-throat arena.

If you’re gonna gamble to stay afloat, you better know what you’re doing. For in the options casino, you are playing against individuals who have devoted their entire lives to beating you at every game in the house – and are paid in the millions by their employers for their expertise. When the Witching Hour comes, you better be ready…

Back tomorrow,

Boaz Shoshan
Editor, Capital & Conflict

PS “We are all being lied to.”

Kit Winder is normally the most pragmatic of us when it comes to accepting “the official narrative”. But today in Exponential Investor, he isn’t holding back…

Category: Market updates

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