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Summer ‘is a very low time for volatility historically’: Strategist

RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman joins Yahoo Finance to discuss why summertime is a good time for volatility trades and the correlation between meme stocks and crypto.

Video transcript

MYLES UDLAND: All right, let's talk a little bit more about the market set up here, what the summer may have in store for investors. We'll bring in Amy Wu Silverman, Equity Derivatives Strategist over at RBC Capital Markets. Amy, thanks so much for jumping on once again. So let's start with the VIX, which you flagged for us, still trading below 20 and looking fairly calm, suggesting fairly calm markets at this stage in the game.

What is the setup there? Or rather, what is volatility telling us about where the market could be headed this summer or just what the market backdrop might be like after we got preconditioned to a higher vol environment? I mean, are 2010s all of a sudden coming back?

AMY WU SILVERMAN: Yeah, you know, it's interesting, because 20 is really that psychological barrier for folks. And I think Friday when we kind of surpassed that 20 level, people were saying, have we gone to a different volatility regime? Is volatility back? And clearly, at a 17, 18 handle, it's not. I would say, as we head into the summer, it's just important to remember that seasonally, this is a very low time for volatility historically.

We're not-- I think it feels kind of like the summer doldrums because last year was so different compared to history. But the reality is, there tends to be lower realized through the summer months. It's a good time, typically, for investors to do overwriting, call selling on a market that's fairly valued.

But I think that setup is going to continue. You'll probably get a little bit of a tick up from earnings, as you always do as we head into July. But the reality is, June, July, August tend to be historically very low realized volatility months. I don't think that will change.

JULIE HYMEN: Hey, Amy, it's Julie here. You, like us, have been focused on things like meme stocks and crypto because we are kind of getting into the summer doldrums. And this stuff is interesting. And it's moving more. Here are the meme stocks intraday. If we look at them equal weight, we see that there's more red than green on the screen.

And then if you flip on over to crypto, we've been talking about the big sell off that we've been seeing here. As you noted in your notes to us, Amy, you said there sometimes is an inverse relationship, inverse correlation between these, money flowing from one end to the other. That doesn't seem to be happening today. And you say it's not been happening as of late. Does that tell us anything?

AMY WU SILVERMAN: Yeah, it's super interesting, because when you look at these historical realized correlation, so we'll look at the larger meme stocks, I guess, that people are very focused on, like a GameStop or AMC, and we compare it to your most liquid cryptos, like Ethereum or Bitcoin, and then also just compared to market underliers, like NASDAQ, S&P, IWM, you tend to see this very strong inverse correlation over time between the meme stocks and crypto, but also a lot of other things.

I think part of that is obviously idiosyncratic. But part of that is kind of like, if you think about the cohort who is playing that crypto, it's a very similar cohort to the meme stocks. It's almost like they are jumping from one bucket to the other. I think what's interesting is now that we've kind of gone past that $30,000 level, obviously people's wallets are just simply getting hit.

The question is, are they trading down simultaneously? Because simply, people are kind of losing money on both ends. They're not able to kind of transfer from one to another. It's hard to say without more data points. But I found that inverse correlation an important one to watch.

BRIAN SOZZI: Amy, is this sell off in crypto, and it's been going on for, what, probably two months already, is this having an impact on the broader market? And if so, is the broader market just likely to stay under wraps for now, as long as crypto is selling off?

AMY WU SILVERMAN: Yeah, one thing I said to investors is whatever you feel about crypto, whatever your view is, it's very difficult to not discuss it in the broader market context, because the reality is it is impacting stocks in the equities market.

So one example that I talked about from yesterday was if you look at your Xilinx or your AMD, a lot of these names because of what their product is getting hit by the decisions that are being made in crypto mining. We took that one level deeper in the options market.

What I found fascinating was when I looked at every single S&P 500 stock yesterday and we looked at the imbalance between call implied volatility, so call option demand versus put option demand, what was kind of one through 10 in terms of the most call option demand, it was actually Xilinx and AFD.

So my read into that is while obviously the sentiment within crypto itself is very bearish right now, that lead into the second level of the equities is also making those names sell off. But the option demand has started to pick up on the bullish side. So we're starting to see that positioning lean actually more towards upside in those names that are equity impacted by crypto.

MYLES UDLAND: And Amy, on that point, as a final question here, just the options board in general has gotten skewed, let's say, by the retail traders, a lot of single stock call options. We've seen very small contract sizes come into the market in a way that hasn't really happened for some time.

Are things more normal from your point of view in the options market? Or is there still a lot of retail playing in the market, regardless of what name they're in? It's just with a different kind of goal than your traditional institution that's maybe just hedging out some positions.

AMY WU SILVERMAN: Yeah, not normal. And it hasn't been normal since January of this year, and frankly, since the pandemic, to the point where I think it could be a sea change in terms of how we'll have to start thinking about modeling normalized skew levels and being single stocks. You know, it's much more contained to the single stock level than it is to the index level, obviously, just because of the sheer size.

But I think what's important is the dealers at this point have a little bit more of a playbook. And also people are kind of pricing things and modeling things in the context that they know that there's this kind of retail demand for calls. But things have gotten pretty weird. And I think they're going to stay that way, because people have this access and ability to trade options like they haven't before.

MYLES UDLAND: All right, fascinating stuff. We saw some action on quadruple witching, which I always joke never amount to anything. Maybe in this new world that becomes a bigger event. Amy Wu Silverman, Equity Derivatives Strategist over at RBC Capital Markets. Amy, always appreciate the time. Thanks so much for jumping on. I know we'll talk to you soon.

AMY WU SILVERMAN: Thank you.