Author: Hard to Understand SOL

Brothers, let me tell you something scary.

The trading volume of call options on the S&P 500 yesterday reached 2.6 trillion dollars.

What does this mean?

In the history of the U.S. stock market, there has never been such a high single-day figure.

01) Retail Investors Frenzied Over Options, Market Makers Forced to Buy Stocks

This 2.6 trillion is not real money to buy stocks.

In reality, retail investors and traders are frantically buying call options.

What are call options?

Spend a little money betting that stock prices will rise; if you're right, you double your money; if wrong, you lose everything.

Now, U.S. stocks are hitting new highs every day, and everyone believes they will rise further, so they are buying desperately.

But there’s a question: Who sells you the options you buy?

Market makers.

Market makers are not fools; when they sell you options, they have to bear the risk of rising stock prices.

To hedge, they have to buy the corresponding stocks.

If you buy an option for 1 dollar, they may have to buy 100 dollars' worth of stock to hedge.

So the 2.6 trillion in options buying is backed by a massive amount of stock buying.

This isn't investors being optimistic about companies; it's the options market forcing market makers to buy stocks.

02) Gamma Squeeze

The mechanism behind this is called gamma squeeze.

The more the stock price rises, the greater the risk of the options in market makers’ hands.

They have to buy more stocks to hedge.

The more they buy, the more sharply stock prices rise.

The sharper the price rises, the more they have to buy.

It's a vicious cycle, and the market is pushed sky-high.

This is the true reason the S&P has been hitting new highs daily.

It’s not about how well companies are performing or how strong the economy is.

It’s the buying in the options market that is dragging the index upwards.

But can this cycle continue indefinitely?

No.

Options have expiration dates.

On the expiration day, those betting on rising prices will have to close their positions, and market makers will also have to close theirs.

At that time, the upward force from buying stocks will turn into a downward force from selling stocks.

And the force will be identical.

The intensity of the rise will match the intensity of the fall.

03) The Current Market is Not Pricing, It’s Gambling

The current S&P 500 is not being priced by investors at all.

What is pricing?

Looking at how much companies earn, how much they grow, and how deep their moats are, then assigning a reasonable price.

What about now?

No one cares how much companies earn.

Everyone is betting on whether it will rise tomorrow.

The record volume of call options being traded shows the market has turned into a casino.

Retail investors are gambling, institutions are gambling, and hedge funds are also gambling.

The 2.6 trillion in options buying is equivalent to 2.6 trillion in bets.

The bigger the bets, the crazier the market.

The crazier the market, the more people are gambling.

What’s the difference between this and the leveraged bull market in A-shares in 2015?

No difference.

It’s all about money pushing it up, not value pushing it.

Money can push it up, and it can also smash it down.

04) When Will This Bomb Explode?

No one knows.

But every market driven by options eventually collapses.

In 2021, GameStop, a gamma squeeze pushed the stock price from 20 to 480, then it fell back to 40.

In 2020, Tesla's options frenzy pushed valuations to the sky, then it was halved and halved again.

History doesn’t repeat, but it does rhyme.

The current S&P 500 is like a 100-fold amplified GameStop.

The day the 2.6 trillion in options expires, or when funds concentrate to close positions, will be the day the bomb explodes.

Moreover, when it explodes, no one will notify you in advance.

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Brothers, I’m not bearish on U.S. stocks.

On the contrary, I have a long-term positive outlook; there are good companies, real growth, and solid technology in U.S. stocks.

But the current market has become detached from company fundamentals.

I need to remind those who are leveraging, borrowing, and buying in blindly without cash flow.

When it rises, the explosives will push you up to the sky.

When it falls, the explosives will send you deep underground.

If you are on the ship, don’t ask when it will explode.

Ask if you will be on the ship when it explodes.

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