The stock market is fundamentally unpredictable, but the world’s best investors don’t let that fact scare them away. They know that despite the market’s tendency to drop without warning – or to go up unexpectedly – there are hidden patterns that offer insight into the market’s most likely next move.
These top investors analyze historical data to understand the market’s most common responses to various triggers, and they rely on their experience to determine when they should bet on the information.
Cem Karsan has been studying global stock markets for more than 20 years, and he has had tremendous success in interpreting current conditions to forecast upcoming changes.
Karsan appears on business news programs regularly, and towards the end of each quarter, he reminds viewers why quarterly OpEx matters so much.
Who Is Cem Karsan?
Early in his school years, Cem Karsan knew he had a special talent for economics and mathematics, and as soon as he graduated, he saw an opportunity to put his skills to work in the stock market.
He started his career with S&P 500 equity options in 1998, just before the dotcom crash. His success in navigating that crisis earned him an outstanding reputation in financial circles, and New York’s Bear Wagner hired him in 2003.
By 2006, Karsan was ready to set out on his own. He launched a market making firm, Precision Capital Management, and attracted wealthy clientele right away. When the 2008 market crash threatened portfolios worldwide, Karsan found new methods of generating profits for himself, his firm, and his clients.
Karsan’s continued success cemented his strong reputation, and he decided to create a new firm. This project was called Aegea Capital, and it now goes by the name Kai Volatility Advisors. Karsan is best-known for his expertise in derivatives arbitrage and his development of proprietary investment strategies that are designed to profit from market volatility.
What Is Quarterly OpEx?
Options traders deal in a time-sensitive area of investing. Unlike stocks, which theoretically exist as long as the underlying company does, options have an expiration date. They offer the contract holder the right but not the obligation to buy or sell the underlying securities at a predetermined price – the strike price.
Quarterly options expire on the last business day of the financial quarter, which means there is a lot of activity towards the end of March, June, September, and December.
Karsan has studied how the approaching quarterly expiration date impacts price movements, and he has found patterns that make it possible to predict how prices will change with some level of certainty.
Why Does Quarterly OpEx Matter To Investors?
Karsan’s strategy takes two factors into consideration: flows and fundamentals. Flows are the many short-term variables that can create brief price fluctuations. That includes everything from the release of economic reports to general investor sentiment. Fundamentals are the underlying characteristics that guide prices long-term, such as financial stability, growth rates, and dividends.
The quarterly OpEx usually has a “flow” effect on the market. It is a short-term factor in the decisions investors make, and it has a temporary impact on pricing. During a recent interview, Karsan noted that flows have resulted in price increases in the second quarter of 2023.
As the quarterly options expiration date draws closer, Karsan pointed out there is higher than normal skew and vol pinning. He expects that the final two weeks before the quarterly OpEx are likely to see price increases in what he refers to as a “melt up.” This phenomenon describes outperformance that is almost entirely based on flow and has very little to do with the fundamental strengths of the underlying assets.
That’s especially good news for those who own calls right now, and there are lots of traders trying to profit from this trend. However, there are very real risks of major losses for those who misjudge when and how conditions will change.
Will There Be A Blow Off Top?
Sharp, unsupported price increases such as those that come with a melt up don’t last forever – and when they collapse, it is often without warning. When this occurs – a sudden, steep upward trend in volume, volatility, and rate of change in prices, followed by an abrupt shift in the opposite direction – it is referred to as a “blow off top.” Is a blow off top coming this quarter? Cem Karsan says it’s possible.
In his analysis, Karsan listed three things that would have to take place for a blow off top to occur. First, investors would have to rethink their willingness to put money into overvalued companies.
At the moment, investors are focusing on potential rather than fundamental business characteristics, which allows them to justify overpaying for promising assets. When the price gets too high, even the most die-hard investors will eventually bow out, marking a change in sentiment and the first step towards a blow off top.
Second, there would have to be more potential realized volatility. Realized volatility is a historical analysis of the variation in returns over a defined period. As it becomes clear that there is more potential realized volatility with current prices, enthusiasm for the melt up dims. Eventually, investors are unwilling to put money into assets with prices that aren’t remotely associated with fundamentals.
The third factor is unpinning of vol supply. In other words, dealers are making big block orders without considering supply – a particularly dangerous move.
There are a few ways to avoid the risk associated with a melt up that turns into a blow off top. The biggest is to stay away from buying late in the trend and to put a lot of thought into shorting. Those that are committed to shorting are cautioned to layer their short positions – and as the prices go higher, increase the layering for added risk mitigation.
Investors holding stocks may wish to consider selling calls or adding puts to their portfolios. Those with the experience and expertise to build a hedged portfolio might successfully take short positions, but it’s a risky proposition.
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