In this market‑commentary video, Eddie explains the unusual simultaneous rise of the CBOE Volatility Index (VIX) and record equity levels. He defines the VIX as a 30‑day forward‑looking measure of S&P 500 implied volatility and notes that it traditionally moves inversely to equities. The core driver of the current divergence is SoftBank’s massive purchase of call options on U.S. tech stocks – roughly $4 billion in premiums representing about $30 billion of notional exposure. Eddie describes SoftBank’s activity as a “momentum buying” or “tail‑wagging‑the‑dog” strategy, which forces dealers who sell the options to hedge by buying the underlying stocks, thereby amplifying upward price moves. He cites Goldman Sachs data showing daily nominal call volume on individual U.S. stocks averaging $335 billion, more than three times the 2017‑2019 average, further inflating implied volatility and the VIX. Eddie also outlines a “barbell” allocation pattern where institutions pair aggressive tech‑stock calls with VIX calls for downside protection while holding safe‑haven assets like government bonds. In contrast, retail traders (e.g., on Robinhood) are buying the underlying stocks without hedging via volatility products, exposing them to sharp corrections. He references recent market moves – a 4 % Nasdaq decline, a 10 % drawdown from recent highs, and the March 2020 35 % plunge – to illustrate the heightened risk. The video concludes with a call for viewers to subscribe and a reminder that the options market’s complexity can create hidden volatility risks.
Chapters
Hi guys, Eddie here, and welcome to another video. I know it's been a while, but I promise I'll be uploading a lot more new content over the coming weeks. Now the busy summer period we've had Amplify Trading is over, now I'll be able to contribute a lot more to the YouTube channel. But one thing you can do for me, subscribe to the channel, like the video if you enjoy it, and that will obviously help our exposure and help us to get a lot more content out there. But today we're going to be covering, uh, why the VIX, so the volatility index, has actually been increasing even as equity markets headed higher. So usually this volatility index works inversely to equity markets. It's sometimes, uh, kind of seen as a fear gauge. So essentially what it is, it's a 30-day forward-looking expectation, uh, of S&P 500 specifically implied volatility in contrast to realized volatility. And like I mentioned, it's kind of like a fear gauge, and usually as equities sell off, you'll see the VIX rise as equity market participants or portfolio managers seek to protect, um, that equity sell-off with some downside protection in the form of the VIX. Um, actually what we've seen is the VIX at the highest level ever with equities at all-time high. So every time equities have been at all-time high, this VIX reading is the highest it's ever been. Okay, uh, and as we've seen over the weekend and particularly on Friday, um, we've seen a lot of news come out now about the Japanese conglomerate firm SoftBank. So they've got this essentially $100 billion fund, and recently they've actually been purchasing call options. Okay, so they spent $4 billion, okay, on option premium on particularly US tech stocks, and this has a notional amount of about $30 billion. Okay, so Miyoshi-san, he actually lost $40 billion in the dot-com .com crash. Um, and you know, this is obviously why, um, market participants are looking at this as a bit of a warning signal. So I'm going to dive into what's actually going on here below the surface. But essentially what this is, uh, SoftBank is— it's a momentum buying strategy, okay? Um, and it's a phrase that's been coined by a Nomura strategist that came out of the FT article. It's essentially the tail wagging the dog and this feedback loop. Okay, and obviously this comes off the back of the NASDAQ, uh, down 4% last week, the worst week since March, uh, in the depths of the coronavirus crisis. And actually it was down up to 10% from the all-time high peak. Okay, um, so essentially in almost one line, what's happening here, um, is Obviously SoftBank, big, big firm, huge funds under management, they were buying call options. And obviously we've seen, um, in the equity markets lots of things contributing to the equity markets going up, like stimulus checks, global central bank easing, and obviously the market concentration of these tech companies making up such a, you know, a huge proportion of the S&P, and obviously particularly the NASDAQ. Okay, so people were purchasing these call options, okay? And obviously when a big buy-side fund, uh, you know, an asset manager or a hedge fund, when they deal, they actually will have to contact an investment bank, okay, to make that trade, okay? And as they are long call options, the investment bank would actually be short those call options. So they would be, they would be short Okay, then to hedge their market risk, if they are short on this option position, the dealers will have to hedge these short positions. Okay, and what does that mean? They're buying stock. Okay, so obviously contributing to the stock market rally. Okay, and they're hedging things like complicated things in the option world like delta and gamma. Okay, and obviously as a result of this, you know, the size of this trade being so big this has actually exacerbated both the buying, so to the, to the upside, uh, and also the downside as well. And obviously where we are at the moment, we're in all— well, September now. I don't know where time flies to in the coronavirus kind of era, but usually volumes are relatively low in the summer as people go away, if they could go away, but they usually, uh, they're off the desk, particularly now today, uh, we've got a US market holiday. Okay, but really, uh, then, you know, the nitty-gritty of this is that this options market boom, both by retail and obviously now institutional, has left this market particularly vulnerable, uh, to market volatility in both, uh, directions. So up and down. So the stat coming from Goldman Sachs is the overall nominal value of calls traded on individual US stocks, so relative to the index, has averaged $335 billion a day. Okay, so over the last 2 weeks, and this is more than triple the rolling average between 2017 and 2019. Okay, so SoftBank have been revealed as this kind of NASDAQ whale purchasing huge amounts, billions in fact, of call options. And really this is exacerbating the moves in both ways because this flow okay, it's so substantial, the billions that are actually being pushed through this market, this actually increases the implied volatility, uh, so thus the VIX, okay. So this is how you see equity markets, okay, and things like the volatility index both increasing at the same time, okay. So institutions using the call options to participate in the upside but also they're purchasing VIX calls as well. And this is kind of like this barbell strategy that we've seen over the recent years where, you know, funds have been piling into tech stocks and then nothing in the middle, no industrial, things like that. They're going at one end of the spectrum, so in the technology names, and then going all the way down in the other end of the risk spectrum. So things like government bonds. So we're seeing this barbell effect. So what, you know, institutions are actually doing, like SoftBank, are buying call options on the stock, okay, or the individual names. So the equity indices or the individual names, plus they're buying volatility, right, or protection for volatility like VIX calls, okay. So while these institutions are actually using these sophisticated option trading strategies, okay, we've now seen retail, you know, participation increase dramatically. And you've all seen it in the news of Robinhood traders and retail traders using these options. But the unsophistication is really where the problem is, right? So if you think about the Robinhood names and things like that, they're just owning the underlying stocks, right? They're buying Hertz or the FANGs as an example, but actually they're not using, let's say, VIX calls potentially, okay? So they own the underlying names but not actually things like derivatives that have a bad name but actually are very useful for protection. Okay, so the institutions are using VIX calls and stock calls, whereas the Robinhood traders actually own these stocks outright because they just don't have that level of, let's say, training. Okay, so obviously we saw a really sharp correction, uh, classed as 10% drawdown in the NASDAQ last week. Um, will we see another, you know, really sharp correction just like we saw um, in March when the market bottomed on the 23rd of March, that was around a 35% drawdown. So, you know, will retail traders, if they are involved maybe after the, after the March pullback, you know, do they have the education to really protect their downside or, you know, be able to really stomach more than a 40% loss? We'll see. But I hope that made some, some sense. Um, the options world is relatively confusing, but I hope that sheds some light on what's going on below the surface when it comes to firms like SoftBank buying these huge volumes of options. So please do like and subscribe to the video, this video, and if you enjoyed the content, leave a comment as well. If you want to see anything else, let me know. I'll hopefully definitely be a lot more active on the YouTube channel again because you seem to enjoy the video. So take care and have a good week.
