Rival Systems CEO Rob D’Arco recently appeared on the Options Insider Radio Network Volatility Views, Episode 575: Volatility is Never What You Expect, podcast hosted by Mark Longo and Andrew Giovinazzi.

Comments on VIX market week of March 15

When asked what he is seeing regarding volatility, D’Arco responded that VIX was ticking up due to CPI and PPI reports coming in a bit hotter than expected, as well as consumer expectations for increased inflation. This, in turn, could force the FOMC to delay interest rate cuts the market has been anticipating or even force their hand into a rate hike.

D’Arco noted that the longer the market stays in the higher rate regime, or potentially sees a rate hike, that is when things tend to break in the economy. While there have been some issues in the last year or so with commercial real estate and the banking industry, he shared an observation from a major VIX trader that “you are never sure what is going to light a fire under the VIX, but there will always be something, but it is never what you expect.”

In general, he hears traders and managers talking about complacency in VIX and the markets, and Rob said that the outsized effect of success of the AI stocks are masking some potential underlying issues in the markets.

ODTE

Another topic of discussion was the rise in prevalence of zero-day expiration products. D’Arco is a “fan” of the products as anything that brings more people and more activity to the market is a good thing. Also, from a hedging and risk perspective it helps people isolate risk exposure and implement specific option strategies to specific risk, rather than something that expires in a month.

He was told that roughly fifty percent of option volume is occurring in ODTE products and thirty percent of that volume is retail. From a market makers perspective this results in a different approach when so much of the total volume is occurring on expiration day. Traditionally market makers would manage a position and risk over time and not do much on expirations day.

He further comments that the increase in activity or flow between market makers themselves is potentially related to this phenomenon and it will be interesting to see what happens when ODTEs are spread to more product classes and individual stocks.

Risk Management

D’Arco cautions new traders in this environment to look out for skew-risk or what they refer to as tilt-risk, which is the “sensitivity” of the volatility of the puts going up and the calls going down.

He comments that recently observed volatility on up days has been higher than observed volatility on down days, where historically volatility generally increases more on the downside.

Once again, he notes the outsized influence of AI stocks as these stocks have rallied. If the AI stocks should run into issues, you could see the opposite (outsized) effect suddenly take hold.

D’Arco wraps up his thoughts noting that in these types of markets risk management is crucial. If volatility spikes, the deltas of various spreads can flip and put you “backwards” or upside down very quickly.

You can listen to the entire podcast here.

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