Remy Blaire: Wall Street is a tale of divergence as well as rotation today. Tech stocks took a broad beating yesterday as chips, cloud providers, and AI hyperscalers drove both the S&P 500 as well as the Nasdaq to their worst one-day losses since July. At the same time, the Russell 2000 fell 2% yesterday, punching through its 200-day moving average and sinking 10% off its August highs and into an official correction.
And we are looking at mixed trading today. But still, options desks are pricing practically zero hedging premium into next month’s midterm election. And joining us today to break down volatility skew as well as technical cracks and institutional distribution is Bob Lang, founder and chief options strategist at Explosive Options. Bob, good afternoon. Thank you so much for joining us.
Bob Lang: Great to see you, Remy. Thank you very much for having me today.
Remy Blaire: Well, here we are on Thursday. We are counting down to monthly options expiration tomorrow, and we’re keeping a close eye on what’s happening across the major indices. So given the fact that the VIX does still remain sleepy, with almost no volatility skew priced in for next month’s midterms, what do you expect to see, and what is the derivatives market telling you right now?
Bob Lang: Well, Remy, as far as the options expiration tomorrow is concerned, we saw lots of gamma flow yesterday. What does that mean? It means there was a lot of negative gamma. There were a lot of people who were positioned positively going into the end of the week, and they got hammered yesterday. So a lot of that selling happened, and it released a lot of pressure that was probably going to be hitting tomorrow, on Friday, on expiration day. So I’m not expecting too much excitement here.
We did have news come out yesterday morning, of course, of the CPI a little bit hotter than expected, and the PPI this morning, a super-hot number. We did see a lot of selling going on at the open this morning, but the buyers seem to have recovered here. We’ve had some good breadth and decent action, decent volume, a lot of short covering coming in over the past couple of days. And I suspect the expiration day is going to follow the VIX, as you said, a little bit sloppier than normal.
Remy Blaire: Yeah. And Bob, you just mentioned those inflation figures. So we got CPI yesterday, and core consumer prices came in hotter than expected. And of course, when we’re talking about producer prices, we got hotter-than-expected numbers this morning. So I do want to get your take on rates and what it means for small caps, in particular the Russell 2000. So tell us what’s happening with this index.
Bob Lang: So the small-cap index, the Russell 2000, IWM. Really, the investors in small caps abhor inflation and rising interest rates. We’ve had crude oil and interest rates rising simultaneously. And we did see the 10-year hit 5.3% yesterday. That is bad for small caps. Small caps are anathema to interest rates.
And simply put, that means that the cost of borrowing is getting much more expensive when interest rates go up, and small-cap companies tend to like to borrow. They usually sell fixed income instruments to finance some of their operations. And when the cost of money goes up, it means the hurdle rate for earnings and profits and revenue goes up as well. So they need to sell even more goods. And certainly in an economy that’s been strong but not growing excessively, it makes it much more difficult for these companies to post profits.
But I do think that the higher interest rates are going to be around for a little bit longer. Look, that number this morning, I think people are really not embracing how difficult and how dangerous it is to have high inflation on the producer price level. 15% annualized on the PPI headline number, 8.4% annualized on the core number. These are huge numbers. We haven’t seen these numbers since COVID. And, you know, I don’t know if they’re going to be coming back down again.
I think much of the driver for these large numbers this morning, Remy, was the high prices of oil and crude and energy. The 200-day moving average on WTI, for instance, is $84. That means over the past year or so, the average price of oil has been about 84 bucks. And if those numbers don’t come down, I think we’re going to be in trouble. Look, I’m looking today at crude oil, up another $3, Remy, up to $98 a barrel on WTI. Also, Brent crude is up as well, to well over $100 a barrel.
So until those numbers come down, I think what we’re going to be seeing is a little bit of a short-covering rally, like we’re having today. And I think we’ll come back down in the stock market in the coming days.
Remy Blaire: Yeah. And Bob, I’m glad you brought that up when it comes to energy prices, because whether we’re looking at those inflation figures at the consumer level or producer level, or even the retail sales data, we continue to hear about this K-shaped economy. And energy is an area that we continue to monitor, whether we’re talking crude oil or diesel. And it is going to continue to filter into not just the bottom line of publicly traded corporations, but it’s going to affect wallets across the country for Americans.
And while we’re on this topic, I do want to get your perspective on artificial intelligence, in particular the AI expansion and some of the surging balance sheet debt across tech and hardware. So if we’re in [unclear: “cost state pain”] near multi-decade highs, do you think leveraged tech plays are heading for a sharp repricing out there?
Bob Lang: I certainly do, Remy. And I think the thing about AI here is there’s a lot of unknowns out there. There’s a lot of executives out there from companies, whether it’s Jensen Huang from Nvidia or Satya Nadella from Microsoft or somebody else from other companies. They’re trying to reassure us that things are going to be huge. Things are going to be great. AI is going to make all of our lives so much easier, and it’s time to get on board and invest in this, because the ROI, the return on investment, is going to be so big for some of these companies.
I don’t quite know yet if that’s going to be true. And frankly, I want to take their word for it. But at this point in time, with the unsteadiness in the markets and investor sentiment being a little bit worrisome here, I don’t really want to take it as the gospel that things are going to be great for 15, 20, 30 years down the road. There’s just so many variables out there that can get in the way.
Do I think AI is going to be a significant driver of earnings? Absolutely, because it has been for the past 17, 18 months. And I think it’s going to continue to drive it as long as investor sentiment remains bullish and positive towards AI, whether it’s semiconductor chips or data centers or some other vehicle, or energy exposure as well. But I do think that we’re going to see an explosion here as long as sentiment continues to remain bullish.
Remy Blaire: And of course, without a crystal ball, we are not certain in terms of how the AI trade will actually play out. But I know that you’ve been paying attention to volume profiles in the Dow industrials, and some interesting takeaways here regarding aggressive selling on red days, as well as anemic turnover on bounces. And when we’re talking about a day like today, we are looking at the Dow outperforming the other stock averages. So when you’re looking at volume metrics and options flows, what are you seeing, and what are institutions actually doing?
Bob Lang: So by comparison, Remy, we’ve seen good action in the Dow industrials from earlier this week, but it did retreat. In fact, if you look at Tuesday, there was a huge outside day. It was a negative bar. And then that also happened yesterday. So today I want to see what happens towards the end of the day. It seems like there was a nice bid in the market here after getting to a modestly oversold level at the close yesterday, Wednesday, but I still want to see where things finish.
Again, crude oil is driving up and interest rates are down, so we’re seeing that differential happen. That’s been somewhat uncommon lately. But I have been seeing some good, strong volume in options in the QQQ, the 730 calls out into December, also the 750s in January. So there’s some upside potential there if the Nasdaq gets back on track.
We’ve seen some good volume flow in two-way action in the Russell 2000, all the way down to the 250 strike, Remy, which could be another 10% down in the Russell 2000, but also seeing some 300 calls out into February and March of 2027. So maybe somebody’s a little bit more bullish going into the Russell 2000 in the early part of 2027. That kind of makes sense. We do see small caps kind of rotating into the leadership role in December and January, into the new year. So that kind of follows a theme that’s been happening for decades.
But I think for the most part, Remy, we’ve seen a little bit of caution here. And I think that caution is being spread out because the midterm elections are coming up in about 19 days. And I think there’s a lot of uncertainty about what is going to transpire, what’s going to be on the table for the Democrats if they take control of the Congress and possibly the Senate.
Remy Blaire: Well, Bob, as you mentioned, a lot to keep our eyes on, so I appreciate your time today. Thank you so much for weighing in on the macro, the fundamentals, technicals, as well as the geopolitics and the politics.
Bob Lang: Thanks for having me, Remy. Great to see you again.
