Welcome to the AD Derivatives podcast led by Director of Derivatives; Greg Magadini.
Featuring: Brent Kochuba, Founder at SpotGamma!
Brent Kochuba is the Founder of SpotGamma, a financial insights company, which applies its proprietary methodology toward modeling index and equity options.
Prior to SpotGamma, Brent was most recently a portfolio manager with Seven North Capital Management where he focused on creating options-based investment strategies. Prior to that, he spent time as a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.
The Amberdata Derivatives Podcast welcomes Brent Kochuba, founder of SpotGamma, an options analytics firm specializing in tools for the traditional financial space. Brent shares insights into his career, options trading expertise, and the evolution of SpotGamma, highlighting his experience with the intricacies of market dynamics, liquidity, and options positioning.
Brent began his career in the early 2000s at Bank of America, engaging in program trading, where he executed large orders for institutional clients such as pension funds. He moved into electronic options trading, working on algorithms for trading large baskets of stocks and options. This led him to Credit Suisse, where he focused on advanced execution services for electronic trading in the options market. His tenure at Wolverine, one of the largest market makers, gave him further experience in the options trading environment, especially on the sell side. Brent later joined a hedge fund, where he managed S&P 500 options trading and gained a deeper understanding of how trading impacts the market and vice versa.
Brent's journey into options trading coincided with the rise of electronic trading systems, where orders could be electronically swept across multiple markets. This development provided new insights into how exchanges functioned and how market makers hedged large positions. His work at Credit Suisse helped him dive into the mechanisms of order routing, market making, and liquidity dynamics, which became pivotal to his understanding of options market mechanics. The ability to sweep orders electronically was groundbreaking at the time, offering a new level of control over large-scale trading operations.
Brent's experience trading large institutional orders—such as handling multi-million share blocks for pension funds—taught him valuable lessons about liquidity, market impact, and the complexity of pricing large trades. He highlights that while retail traders often enjoy seamless execution for smaller orders, institutional trades, such as a 10,000-contract options order, involve a far more intricate process. Understanding liquidity constraints and the effects of market maker hedging became crucial in his work. He shares a detailed example of how Nvidia’s stock influenced the S&P 500 on a single trading day, emphasizing the interconnectedness of large individual stock movements and the broader market.
In 2015, Brent began modeling S&P 500 options to better understand the link between options positioning and underlying asset movements, particularly focusing on gamma hedging. This eventually led him to launch SpotGamma in 2020. SpotGamma started by offering daily updates on gamma curves, showing where dealers would need to hedge by buying or selling stocks based on options positions. These updates became the foundation for SpotGamma’s offerings, which have since expanded to include various tools for analyzing options market flows, including single-stock positioning and live hedging flow tools.
Brent also reflects on the impact of retail trading on the options market, particularly during the 2020-2021 “meme stock” frenzy. The surge in retail traders buying call options on stocks like Tesla and GameStop caught market makers off-guard, leading to significant volatility. However, since then, market makers have adapted, quickly adjusting prices when they detect retail-driven activity. He emphasizes that while the retail-driven options flow is still present, market conditions have evolved, and the opportunities for traders have become more nuanced.
A growing trend in the options market is the rise of zero days to expiration (0DTE) options, which are contracts that expire on the same day they are traded. Brent points out that 0DTE options contribute to high-frequency, momentum-driven trading, particularly in major indices like the S&P 500. These short-term options are used by traders to gain leverage rather than manage volatility, leading to rapid market movements. However, during periods of market stress, liquidity in 0DTE options can evaporate, resulting in significant jumps in asset prices as fewer traders are willing to take on risk.
Nvidia plays a critical role in the equity market, driven by its dominance in AI and the chip sector. The stock experiences unusually high liquidity pressure, largely attributed to the overwhelming volume of short-dated call options. Nvidia traded 25 million call options in September, compared to 16 million in SPY and only 8 million in Tesla. Notably, 45-50% of Nvidia options are short-dated, creating a high-velocity trading environment.
Approximately 66% of Nvidia's 24 billion shares are held by institutions, further constrained by buybacks, making the tradable float smaller than many assume. This limited float, coupled with the zero-day-to-expiration (0DTE) options, contributes to significant market price movements. Market makers are often forced to hedge their short calls immediately, exacerbating upward price momentum when Nvidia surges. This results in increased volatility not only for Nvidia but also for the broader market, influencing S&P 500 movements.
Interestingly, Nvidia’s influence extends to the overall S&P 500, where traders hedge Nvidia’s volatility (V) exposure by shorting volatility in S&P. The CBOE's correlation metric (CR1M) shows the spread between Nvidia's volatility versus that of the index is at historic highs, demonstrating the significant divergence. Single stock volatility has frequently outpaced index volatility, especially when Nvidia makes sharp moves.
These dynamics create opportunities for traders who position themselves to take advantage of the misalignment between Nvidia and the S&P 500. For example, one might go long Nvidia volatility while shorting S&P volatility. Additionally, Nvidia’s outsized influence can be exploited by analyzing short-term market maker hedging behaviors. This provides fertile ground for both institutional and retail traders to strategize around the 0DTE options phenomenon.
SpotGamma has grown into a prominent analytics platform that provides insights into options positioning and market flows. With the upcoming launch of a new product, "Trace," which offers proprietary dealer positioning data, Brent believes that understanding these flows is critical for traders navigating the evolving options landscape. As the options market continues to develop, particularly with the rise of retail participation and short-dated options, SpotGamma aims to provide best-in-class tools to help traders understand how options flows are driving the underlying markets.
Learn more about SpotGamma: https://spotgamma.com/
Register for Trace Webinar: https://spotgamma.com/trace-the-market-amberdata-io/?aff=Amberdata
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