Hi, Amy Silverman, head of derivative strategy at RBC Capital Markets, joins us now. I was talking about you going across the universe in terms of markets that you're watching right now. All right, it's January. We're setting up. What are options or derivatives telling us about the tail? What is the tail telling us about the dog?
So, look, we just put out our 2026 volatility outlook. Four main predictions, but the gist of it is that it's going to look similar to last year, but it's going to rhyme. One of the key things we discussed is you've seen a lot of this exuberance in call options, the YOLO, FOMO, and the AI side. One of our predictions is that you're actually going to see this mechanism, but in an industry you wouldn't expect, so perhaps like healthcare. A lot of that has to do with this retail leg of the stool we've talked about where people are waiting for this leg of the stool to be taken out. I don't think that's what happens, Joe. I think you're actually just going to perhaps see a move on because there are so many other things that you can use to express optionality with the prediction markets, cryptocurrency. So, it's possible that retail could just move to something shinier, but not necessarily something scarier.
And there's plenty of new things, new shiny things that you just mentioned. You mentioned crypto is one, obviously prediction markets is another, short-term options. They all go into this, so some interest comes away from traditional retail buying in equities and goes into these things. So equities come down, but not for any horrific reason. Is that what you're saying?
No, I think look, it's probably still going to be a relatively strong year for the market. I think a lot of people have been asking, if you take away the sustained retail buy the dip, does that scare the market? I think actually what happens is if you lose that support, it could go to something different, like zero day options changing your tenor or changing how you express things. Just think about what occurred with Venezuela. You were actually seeing people play that in the prediction markets itself. 10 years ago, there was really only one venue, which was the option markets. So you do see some sort of disintermediation. What that has created, one thing I think is really interesting to think about, is there is this shadow hedging complex which we talked about last time. This is the idea that there are people who are interested in hedging, but because you have these April 2nd situations where the whiplash is so high on the right tail back up, there's a lot of reluctance until we see downside momentum confirmation.
You don't really usually dabble in fundamentals. How and I like, these are not all exactly the same. YOLO, FOMO, and Momo, but they're all kind of the same. So, you only live once. You fear of missing out.
Why would you say it could move the options craze away from AI to healthcare? So you're picking why healthcare? Are you seeing technical signs of that or you think there's a reason for it?
So, one thing we see that's an indicator is this idea of option skew, which simple definition is just the demand imbalance between put options and call options. Usually, and this has been true for 30 years, the put option demand is higher than the call option demand because most folks are long and they're trying to hedge. What happened post-COVID is this totally flipped on its head. We had to take the playbook from 30 years, throw it out the window. A lot of that had to do with retail, which really prefers to buy call options. You're starting to see signs of that in kind of not boring industries, but industries that you typically wouldn't expect. So, we've seen it in AI already. We saw it in your meme stocks, but we're starting to see it shift into other industries. The reason is people are looking for a show me for AI. They're saying great, AI is wonderful. There's all this capex expenditure, but what is it going to help? Is it going to help make the healthcare industry more efficient, industrial? So, when you're starting to see these show me ideas bubble up to some degree, it is an extension of the AI story, but the technical indicators, I think, will start to map into industries that you haven't seen in the last few years. So, if you're not using puts because you're already long, then it's skewing the calls, then it's FOMO. Then you're not in and you're trying to cover yourself by having calls. So, is that bullish?
You know what I would say? I call it the reluctant rally in the sense that if you're a portfolio manager on day one and you've been living through this market the last three years, you know how heavily concentrated the market is in certain things. Just because you have to participate because you have to meet a certain benchmark return, does that mean you're bullish? I don't know. But it still means you have to participate. And we capture that.
Sounds like the opposite of what he's talking about, though.
But it doesn't mean that you're not in the market.
I'm in the market, but I'm afraid.
But I'm reluctantly in the market. And that's why I call it shadow hedging. Meaning a lot of these folks actually do want to hedge. They do feel rather bearish, but they're afraid to because what happened April 2nd? You got that sharp sell off, but you got that whipsaw back up. They spent most of that year chasing the right tail, not protecting their left tail. So it's the same mechanism. Every investor I have these macro round table dinners with, they tell me they're pretty bearish, and then I say, well, are you in the market? Absolutely. I have to be. And so I think this continues and you even see that chase more to industries that you wouldn't expect.
You know, you never catch your tail if you chase it. And my
Yeah. My new German chef just
My cat can catch his tail.
He just saw his tail. He's seven months old and he just saw it. It's like, wow. And it keeps
I was going to go on to something else here. So, you think, okay, again, you're mostly technical. Taiwan and Greenland loom large in your mind at this point.
