Author: SOL, The Unseen
Guys, I have something scary to tell you.
The trading volume for S&P 500 call options hit $2.6 trillion yesterday.
What does that mean?
There has never been a single-day number this high in the history of the US stock market.
01) Retail Investors Go Wild for Options, Forcing Market Makers to Buy Stocks
This $2.6 trillion isn't real cash buying stocks.
In reality, it's retail investors and traders frantically buying call options.
What's a call option?
A small bet that the stock price will rise. Win big if right, lose everything if wrong.
With US stocks hitting new highs every day, everyone thinks they'll keep going up, so they're buying like crazy.
But there's a problem: who sold you that option?
The market maker.
Market makers aren't fools. When they sell you an option, they take on the risk of the stock price rising.
To hedge, they have to buy the corresponding stocks.
For every $1 of options you buy, they might need to buy $100 worth of stocks to hedge.
So behind the $2.6 trillion in option buying, there's an astronomical amount of stock buying.
This isn't investors believing in the companies; it's the options market forcing market makers to buy stocks.
02) Gamma Squeeze
The mechanism behind this is called a gamma squeeze.
The higher the stock price rises, the greater the risk from the options the market maker holds.
They have to buy even more stocks to hedge.
The more they buy, the higher the price surges.
The higher the price surges, the more they have to buy.
Round and round it goes, rocketing the market to the sky.
That's the real reason the S&P has been hitting new highs daily.
It's not about how great company earnings are, or how strong the economy is.
It's the buying force from the options market dragging the index upwards.
But can this cycle keep spinning forever?
No.
Options have an expiration date.
On expiry day, the bulls need to close their positions, and market makers need to close theirs.
At that point, the force that was buying stocks turns into the force selling stocks.
And the force is exactly the same.
As fierce as the rise was, the fall will be equally brutal.
03) The Current Market is Not About Pricing, It's About Gambling
Right now, the S&P 500 isn't being priced by investors.
What is pricing?
Looking at how much money a company makes, its growth, the depth of its moat, and then assigning a reasonable price.
And now?
No one cares how much money a company makes.
Everyone is just betting on whether it will go up tomorrow.
Record call option trading volume means the market has turned into a casino.
Retail is gambling, institutions are gambling, hedge funds are gambling.
$2.6 trillion in option buying is a $2.6 trillion bet.
The bigger the bet, the crazier the market.
The crazier the market, the more people bet.
What's the difference from the A-share leveraged bull run in 2015?
None.
Both are pushed by money, not by value.
What money pushes up, it can also smash down.
04) When Will This Bomb Explode?
Nobody knows.
But every market driven by options has eventually crashed.
GameStop in 2021: a gamma squeeze sent the stock from $20 to $480, then back down to $40.
Tesla in 2020: an options frenzy pushed valuations to the sky, then it got halved and halved again.
History doesn't repeat, but it often rhymes.
The current S&P 500 is GameStop magnified 100 times.
The day those $2.6 trillion in options expire, or the day funds rush to close positions en masse, is the day the bomb detonates.
And when it blows, no one will give you advance notice.
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Guys, I'm not bearish on US stocks.
In fact, I'm long-term bullish. The US market has good companies, real growth, hard tech.
But the current market action has nothing to do with company fundamentals anymore.
I need to warn the brothers who are using leverage, taking out loans, buying on hype without cash flow...
On the way up, the explosive force sends you to the heavens.
On the way down, it blasts you into the ground.
If you're on board this ship, don't ask when it will explode.
Ask, when it explodes, will you still be on board?
