WSJ's repeat warning: it's a market on Zoloft

David_Snowball

Covered-call funds, about which Devesh has written a series of essays (two more will appear in our April issue), are artificially and temporarily suppressing volatility, if Charley Grant and the WSJ are to be believed:

The stock market is calmer than it has been in years. Some worry that a popular strategy is contributing to the tranquility.

Measures of market volatility have fallen to levels last seen in 2018 ...

Investors are seeking protection from potential losses by pour money into [covered-call ETFs] ... assets in such funds has topped $67 billion, up from $7 billion at the end of 2020."

Their argument is that this sort of herd trade (in volatility ETFs) "blew up in spectacular fashion six years ago." The options trade now exceed stocks in value, with ever covered-call position necessarily matched over an opposite position in "call overwrites." The concern is that this is a complex, leveraged structure that might be catastrophically vulnerable to an external shock that causes a cascading rush to the exits.

To be clear, Devesh and the Journal are competent to comment on the risks. I'm not. Mostly I wanted to highlight the prospect that your hedges might become your anchors. (See Charley Grant, "Popular bet weighs on volatility," WSJ, 3/26/2024, B1. It's online with a paywall and a slightly different title.)

Curious for them to repeat a story unless their anxiety is growing. (Might call for Zoloft.)

BaluBalu

Thanks.

Not sure how large a position forum members are carrying in JEPI vs HELO type strategies. I think the latter kind are popular here. It would be useful for WSJ to bring detailed conversations about specific option strategies than broad brush “be forewarned” alerts. Hopefully, Devesh can jump in to separate facts from …

P.S.: I happen not to have meaningful option positions.

David_Snowball

Hi, BaluBalu.

"Specific option strategies" is probably outside of the ambit of a daily newspaper, even a very good financial paper. A bit more likely in its sister publication, Barron's, I'd suspect.

David

BaluBalu

I understand. I was being polite but my statement applies to any one inclined to pile on because if we are saying something negative we should try to be helpful to members who may be carrying meaningful position size.

WSJ had recently ran a similar alert. The current one constitutes a pile on, unless they go specific. Of course, they are after eyeballs!

Devo

I dread to get into this discussion because derivatives have been and always be a complicated beast. There is listed, Over the counter, and multiple types of instruments. There is the one thing we can see (because its easy) and the 99 things we can't see.
The FT Alphaville had an article:

https://www.ft.com/content/d9b964f0-7cc2-4684-b75d-80f47359d8a5

"JPMorgan blames JPMorgan for suppressed volatility
Once more unto the Vix discourse"

It should be free for those who sign up for FT Alphaville (its a free section of the FT).

Doing a thorough analysis needs something of this sort. One needs to measure (and continuously measure) the evolving greeks from derivatives funds to have any measurable market call.

Maybe its helpful to some...

BaluBalu

Thanks, Dev. Hopefully, fund managers are providing regular commentary to shareholders of evolving benefits and risks. May be fundholders can post here any such commentaries.

WABAC

@BaluBalu, DIVO offers monthly commentary.

From an options standpoint, we were active and tried to capture premium as volatility picked up periodically throughout the month. We sold new calls during the month on Apple (AAPL), Caterpillar (CAT), Cisco (CSCO), Goldman Sachs (GS), Marathon Petroleum (MPC), Merck (MRK), Microsoft (MSFT), Procter & Gamble (PG), Visa (V) and Walmart (WMT). While most of those calls expired during the month, we were partially called away on Cisco (CSCO) and JP Morgan (JPM).

The portfolio held a total of three covered calls2 at the end of February 2024: Microsoft (MSFT), Procter & Gamble (PG) and Visa (V). At the end of the month, approximately 2.1% of the portfolio was covered.

Is that what you had in mind?

BaluBalu

@WABAC, Thanks. Yes, that is a good commentary.

I can not believe it is the $67B (small relative to the size of the market) in covered call ETF strategies that could be the catalyst for any catastrophe (as the headline reads) but the general (robust / excessive?) option activity in the market place and the corresponding institutional counter parties' activities. If the market goes down, DIVO will go down as well (as should be expected) with or without its covered call activity. (Some strategies probably write calls on SPY (naked calls) rather than on individual holdings.) There are a lot of nuances and without each strategy being dissected it is very difficult to know which ones are taking excessive (or untested) risks or if the gun powder is $67B or $67K size. Hopefully, fund managers are providing good commentary of benefits and risks of their funds and owners of funds are reading those commentaries regularly.

Interestingly, JEPI and JEPQ have $50B AUM between them. May be owners of those can share their thoughts.

Re covered call ETFs, OP says, '[A]ssets in such funds has topped $67 billion, up from $7 billion at the end of 2020.] I must be missing something as JEPI and JEPQ are new and JEPI assets in 2020 were not much.

David_Snowball

Reddit doubles since debut, arguably driven by the options traders: This from Quartz, 3/26/2024

Reddit’s share price surged even higher Tuesday morning trading after a big rally the day before. The stock rose to a new high of $74.80 after market open — more than double its initial public offering (IPO) price of $34.

The reason? Analysts say the launch of options trading is giving bulls a chance to get extra bullish about where Reddit’s stock price will go — and that’s boosting its share price in real time. About 90,000 options changed hands on Monday, according to Reuters. (Laura Bratton, "Reddit stock has more than doubled from its IPO price after options trading started"

Quartz is a really solid news and analysis operation. Quartz launched as an offshoot for The Atlantic magazine in 2012, targeting mostly upscale consumers worldwide. It has, of necessity, reinvented itself several times. The staff describe themselves as "nerdy and creative." That works. It's a fascinating tale of journalism in a digital "I ain't payin' for nuthin'" age, with Quartz partnering with Facebook and making money, drifting away as Facebook's model changed, getting bought by a publicly traded Japanese firm, buying itself back, then getting bought by G/O Media. G/O as in "Gawker and the Onion."

WABAC

Speaking of G/O, they're having a fire sale.

BaluBalu

GraniteShares filed to issue “Yield Boost” ETFs which would write covered calls on leveraged ETFs. Is that a sign of peak for the covered call ETFs fad?

Devo

Its not a fad if people keep believing it will keep them safe (it wont).

yogibearbull

Some of the Graniteshares will use 2x, 3x leveraged ETFs for writing calls. Calls limit the upside, but don't protect the downside.

hank

I had to look up Zoloft in a med dictionary. I get it now. Perennial bear Felix Zulauf would probably agree with the analysis.

BaluBalu

@hank,

May be you did not intend but mentioning Felix could give the impression to others that today's discussion is another needless caution, as many associate Felix with lost opportunities. But I hope no one, except deft traders, in this forum buy those covered call strategies on levered ETFs.

Yogi is always measured and provides good counsel; I personally listen to his advice, even when my instincts may say otherwise.

BTW, I am not against levered long ETFs - as they have their time and place in a portfolio.

Thanks.

BaluBalu

Devo said:

Its not a fad if people keep believing it will keep them safe (it wont).

I know. I am starting to learn how big a role BELIEF plays.

There is probably demand for these products, given GraniteShares had some successful idiosyncratic entries. Market structure is starting to make me nervous. SPACs were such an innocent time!

hank

@BaluBalu - I just want to reassure everybody I wasn’t responding to Yogi’s post. I share your high opinion of him. Sorry if my post was in any way misleading.

BaluBalu

@hank, you are good.

hank

Thanks. I hadn’t realized the thread first went up in March and that @BaluBalu was noting a new recent ominous development. Appreciate the recent update @BaluBalu. I probably don’t fully understand the issue. Not something I mess around with. More of a plain vanilla investor. But the growing use of options to “mitigate” risk has long concerned me. One of those things that works until it doesn’t.