Dean Curnutt: Hello, this is Dean Kernutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return and the deployment of capital in the alternative investment industry.

Greetings and happy holidays, Alpha Exchangers. I hope you’ve had a chance to unwind and share some quality time with your families as I did with mine recently. We had to say goodbye to our dear family pet Griffin Dog truly can be a man’s best friend and the Griff and I were side by side for 11 years. I’ll miss him and it was a great run. On the positive side, I’ve been lucky enough to have all three of my children home for the break, an increasingly rare occurrence. They say that you’ll have spent 90% of all your time with a child up until the age of 19. Most of you are younger than I am, so some advice from this old timer. Be present, I say, and enjoy these times. If you can also take 10 minutes to check out a recent TEDx talk from my dear friend Allegra Cohen on a concept that she calls Micro Joy, you’ll find yourself re centered on the markets front. We are as widely expected ending the year On a quiet Note, I asked ChatGPT to calculate the percent moves of the S&P over the last seven trading days of the year.

I did have to tell it not to write any Python code, but it got the job done anyway. We all recall the down 2.7% Christmas Eve and up 5% day after Christmas caper in 2018, but almost always there’s nothing going on towards the back end of the year. Since 2010, the average of the absolute value of the daily moves of the last seven trading days is just 56 basis points. Eliminate 2018 and you’re at just 47 basis points. That is skinny zoom out. And it’s not just a holiday inspired decline in volume. One month realized on the S&P is 8.8. Even considering a three month window which captures the three week 5% S&P drawdown that began as October ended, realized volume is just 12.4. And it’s not only equity volume that suffers from George Costanza like shrinkage, the risk free asset class, the US Government bond market is actually living up to its name. The daily moves have narrowed dramatically in the TLT where 1 and 2 month realized are 6.7 and 7.8 respectively. What I hope to present to you over the next 35 odd minutes is some version of closing thoughts. As I do so, I want to look back on 2025 with an eye towards pointing out its unique characteristics from a market risk perspective.

I probably say this too frequently, but these are fascinating times with a lot at stake. Embracing the notion that absolutely anything can happen in markets is a good starting point for risk management, but for now the aforementioned absence of meaningful daily moves on the important macro assets is imposing downward pressure on option prices. The S and P and TLT are recently at least accident free and that’s all the market cares about in pricing options. Count Me is pretty excited that we’ll start 2026 with market insurance that feels reasonably priced. It’s a nice offset to the car health and homeowners insurance affordability mess most folks are navigating. Let’s start this exercise in closing thoughts by highlighting what I consider to be 2025’s three most interesting days from a volume and risk perspective. And that must begin with the chaos that ensued post April 2nd Liberation Day. Previously there were only two other instances when the Vix surpassed 50 the GFC and the COVID crash. We’ll exclude 1987. The tariff tantrum is the third. On April 7th, the Monday after the S&P experienced a two day 10.5% meltdown, we were all forced to ride the VIX roller coaster.

Hands free I might add. April 7th was truly a wild day in the market as it was caught in the crosshairs of unreliable information that hit the tape on the severity of tariffs around 9.45am we saw the Vix fall from 54 to 38 in just 30 minutes and then rise back to 53 over the following 14 minutes, only to fall to 44 over the next 30 minutes. There’s only one word that comes to mind absurd. Markets simply cannot absorb that level of risk for too long. Things break and it became clear to me that the VIX gillantes would require a full blown nevermind from Trump on April 9th to restore order. He obeyed orders from the market. This was a good lesson in thinking about trading the policy response that is anticipating how market prices would force the administration’s hand and how those prices would react once once the retreat occurred. I wrote a fair amount about this using the Bill Gross GFC strategy to quote, shake hands with the government and buy what they’re buying. Only this was to sell what they’re selling, in this case the vix. You knew that the VIX could not be allowed to remain in the 50s because the GFC and Covid precedents told us that it would be 50 on the way to 80.

Hopefully Don Jr got his VXX short off at the April 8th peak. Just kidding. Maybe the next most interesting day, for me at least, was the September 10th surge in the share price of Oracle. Recall, this was the earnings date for the company and it came with the forecast of a tremendous revenue increase along with a tie up with OpenAI. The stock price jacked higher by 36%. Larry Ellison briefly overtook Elon Musk as the world’s richest man, but the stock is down 40% since and most interestingly, the 5 year CDS spread has risen 100 basis points from 45 to 145 since September 10th. Does the market’s judgment of Oracle’s credit have information content and is it some shorthand for whether AI financing aspirations have become too ambitious? Zooming out Oracle is up 19% on the year and its CDS is more than 100 basis points wider. Its two month implied volume has nearly doubled from 25 to 45. The equity is being treated more like an option than a stock. Oracle may be unique in just how aggressive its borrowing and capex plans are relative to its market cap, but if we look at a 5 year cds for a basket of Google, Amazon, Apple, Microsoft and Broadcom, that’s up on average from 24 to 36 basis points this year.

The five year corporate IG, by contrast, is flat on the year at 50 basis points. Too early to derive any strong conclusions, but put this on your dashboard of metrics to watch for market warning signs. The last most interesting day is the October 21st gold meltdown as its cousin Silver delivers epic volume on moves both higher and lower, while let’s recall the dramatic spiral up and one day unwind that the GLD experienced in late October. One of my little sayings is that risk on and risk off are curious cousins. It’s a nod to the way in which profits from a trade invariably draw attention and lure in fresh capital, eroding the margin of safety in the process. When the success of a risk on episode is significant enough, it it paves the way for a sharp unwind in the limit. Like a gme, it’s a certainty that it will occur. While timing is never easy, it wasn’t difficult to see the giant one day unwind of very extended positioning in the GLD coming. The GLD had rallied 10.3% over just seven trading days from October 9 to October 20. That’s just way too much for a 15 Vol asset.

And the FOMO nature of gold led to a chase. All of the classic signs were there a spike in implied volume, the GVZ, the gold Vix reached 32.8 an inverted volume structure, an inverted call skew and massive call volume. I shared the following on October 8 quote the strength of the recent gains in gold paradoxically do two things at once. First, the rising price is the advertisement compelling folks to buy. There’s no Graham and Dodd valuation framework to do. As Soros said, when I see a bubble forming, I rush in to buy further adding fuel to the fire. The rising price is a source of new demand the rate of change of upside moves is accelerating. Since 2023 there are 14 days when the GLD has moved up 2% or more. Eight of them have occurred since April 2. As the sky is the limit narrative builds, implied volume rises, reflecting the market’s understanding that the risks are becoming more two way. That is for folks wanting to play the upside, using call options may be preferable as the recent strong gains could quickly reverse. The call option permits you the right to walk away if wrong.

Two month implied volume on the GLD has gone from 15 to 18 over the last two months even as realized volume has fallen from 15 to 13. This is not about how the options are carrying, it’s simply about one way demand for options. You wind up in a situation where the strength of the risk on creates the vulnerability for the risk off. As those investors in early take profits and those in late try to limit losses, it’s a sharp unwind that clears out positioning. It may be good for a 3 to 5% decline over a few days. The option dynamics may accelerate it if the buyers of all the calls that have traded in the GLD are outright and the sellers are hedging, you might get some feedback as these hedgers need to rebalance their deltas by selling into a falling market. When an asset experiences a stock up volume event that is substantial enough, there’s really no way for it to unwind except a stock down volume down reversal. Think GME in 2021, MSTR in 2024 and now even in silver. And that naturally leads to the next part of this review which is to highlight two main themes in risk.

The first of which is that stocks are behaving like options. As the price of many companies rise, the market assigns their option a higher implied volatility. This is completely antithetical to the relationship between the S and P and Vix, which have a consistent correlation of around minus 80%. Take Google for example, up an astounding 65% this year at one point in late November two year 120% of spot strike call options traded at a volume of 39, up 12 on the year. This is a massive increase. To give you a sense, a two year 120% strike call at 39 Vol costs 64% more than it does at 27 volume, the level we saw at the start of the year. This is the market’s way of assigning a considerably wider degree of potential outcomes to the stock. The relationship between Google volume and Spot actually isn’t atypical these days. It’s just a good example of the volume characteristics common to today’s high flyers. Stock returns and implied volume are very often positively correlated these days. It’s a reflection of a winner take all market in which speculation and taking upside convex bets has been rewarded. The other side of this stock up volume up dynamic is the seller of volume.

Hedging upside calls used to be easier. The stock would rise typically gently and implied volume would fall in the process. Now upside price shocks underpin volatility by a considerably greater degree than in the past. Over the second half of 2025, Google is realizing 32.6 Vol on up days and just 20.7 volume on down days. The seller of upside calls is having to contend with this new kind of return distribution and account for hit in his or her hedging protocol. Consider two your implied volume on both Google and Nvidia at 36 and 46 respectively. That’s $8.3 trillion of combined market cap. And both stocks have Aa2 ratings from Moody’s with tons of cash and free cash flow. Credit risk, often a driver of volatility in equity, is not a thing that comes to mind for these money printing enterprises. Nvidia’s market cap is 40 times that of GM and Ford, yet their 2 year implied vols are around 32. The carmakers are all rated triple B, the bottom rung of investment grade for these companies. Unlike the tech mega caps, debt can be an issue. Why? The lofty, long dated implied vols and option prices for Goog and Nvidia even as their stock prices are doing so well and their credit ratings are gold plated.

My take is that the market cap of the tech behemoths is so large and has increased so quickly that the options market is struggling to provide insurance loss on them. The option price may clear at a high level because there’s not enough natural capital to bear the risk of loss. All else equal, a higher premium is needed to bring sellers to the table. There’s almost an options market equivalent of what’s happening in the broader Insurance industry premiums are higher and it’s not necessarily simply the result of risks that are materializing today. It’s more about compensation for future uncertainties and related a shortage of risk bearing capital. But tech stocks aside, if there were an annual stock up volume award and I will argue that perhaps there should be, it has to go to silver in 2025. Let’s take a look. The SLV is up 150% on the year. Its two month implied volume started the year at 25. It’s ending it in the 60s. The correlation between price and two month implied volume is running consistently north of 90%. Realized volume up days is 32.4 versus just 29.4 on down days. And since November realized volume up days is 53.6 versus just 26.9 half of it on down days.

There are eight moves of greater than 4% up in 2025 and just 2.4percent down moves. There’s massive call volume far outstripping put volume. There’s a highly inverted volume structure that is the market prices short dated implied volume higher than further out volume. And lastly there is a deeply inverted call skew that is the market is paying a 17 volume premium for a 1 month 10 Delta call versus a 1 month 10 Delta put as silver spiked. There are lots of takes on whether to be in the mean reversion or momentum camp in positioning long or short. With respect to the latter. As I’ve said, Soros told us he’s going to rush in to buy a bubble when he sees it and he’s going to add fuel to the fire. You’ve got to be careful when you see stock up volume up to this extent. My framework suggests that when a stock up volup event is this protracted, it’s more likely than not that that lower prices and lower volume will eventually emerge. But here’s the thing about a market dislocation. As you think about capitalizing on it, you’ve got to respect the forces that created it in the first place.

Market prices don’t stray far from fundamental value without very good reason and those same forces could very likely push it even further away. Think the 29 and a half year versus 30 year US treasury bond basis in 1998 due to long Term Capital Management’s leveraged position gone wrong. Think about the 2008 Volkswagen squeeze, the 2009 implosion of the dividend swap market, the 2010 blow up in long dated S and p variants, the 2020 crude meltdown, the previously mentioned 2021 spiral in GME, the 2022 short squeeze in nickel, the UK gilt crisis in 2022. In each of these, the volume correlation assumptions that investors, credit risk officers and exchanges had assumed proved remarkably wrong. Suddenly the existing trades, underwritten at much lower vowels and correlations became much larger. In terms of value at risk, the process of finding the right sizing can amplify an already unstable situation. All of this is to say, be careful. If you see a trade that looks compelling and is a result of a large dislocation, commit only a small amount of capital to it. Whatever your bias, the massively expanded volume makes a given dollar at risk more uncertain. Be smaller or find an option structure that limits your losses in the scenario in which the trade moves against you.

And speaking of dislocations, I’m a big fan of the Big Short book and movie and I’m firmly in the camp of Big Short versus Margin Call, which I also enjoyed by the way. In the Big Short, Marc Baum, played by Steve Carell and representing Steve Eisman, asks the exact two part question which gets to the heart of how to think about systemic risk. He asks is there a housing bubble? And if there is, how exposed are the banks? You need two ingredients for a real spillover event. One a large mispricing and two leverage. When you get these in combination to a substantial degree, disaster awaits. Ultimately the market is forced to confront the mispricing, in this case of mortgage credit risk and correlation. When that process imposes losses on mark to market sensitive investors, a reflexive risk unwind can materialize. There are plenty of instances when a repricing does not lead to a wide scale spillover. The Internet bubble comes to mind. Although 2002 was quite a credit widening event, the unwind of the Euro Swiss peg in 2015 is another. There were some smaller hedge funds that went under, but it didn’t become systemic.

What you need is a significant combination of Mark Baum’s two part question, a big mispricing and wide scale exposure to it through leveraged institutions that are mark to market sensitive. And then to hit the home run that John Paulson did, you have to perfect the structuring and timing of a convex trade. What was so entirely unique about the pre GFC era was that a centerpiece of the bubble inflating was massively downward pressure on risk premiums like the VIX and credit spreads. While these measures will start 2026 at pretty low levels, they ended 2006 much lower in a system in which a tidal wave of leverage was Set to come undone. Two year implied volume on the S&P 500 hit 13 in late 2006. It’s now 19. The straddle costs 50% more using 19 volume versus 13 volume. With that little detour, let’s return to our main themes on risk. As discussed, stocks are behaving like options and the market is reacting to the consistency of stock up volume. These aren’t just meme or degen stocks. These are market behemoths like Google and Nvidia. Over time, as the tech trade has gotten larger and larger, so too has its weight in the S&P 500.

It’s no secret that the S and P is epically concentrated with high volume tech names. This ain’t your father’s index and you gotta know what you own. Passive investing can lead to some strange outcomes. In 2000, depending on how one measures it, the P E of the S and p reached between 30 and 40. Today it’s quite elevated, but not at that extreme. The peak of the tech bubble will forever be a very tough valuation comp. What is extreme today is the concentration of the S and P with very volatile stocks. The index that attracts so much capital passively and is a benchmark that no one could ignore is top heavy like never before. With stocks all pursuing the same AI riches. Here are some stats. First, the top four stocks are 27% of the index. The top eight have combined market cap of 22.4 trillion and are 40% of the index. These top eight have a two year weighted average implied volume of 37%. The next eight have a combined market cap of just 6 trillion. That’s 10% of the S and P and get you to half of the overall market cap of the index.

Sixteen stocks are half the S&P. These next eight stocks however have much lower implied volume than the first eight. The weighted two year volume for the second eight is just 27. In words, we can describe the S and P as, quote, an index that is highly tracked, highly concentrated, with highly volatile, highly valued tech stocks that have proven remarkably uncorrelated to each other. And that’s the second theme I want to highlight as I have all year the low level of correlation among stocks and the risk implications of this new phenomenon. First, let’s establish that markets generally price what they see and experience. A scatter plot of 30 stocks will show a very consistent cross sectional relationship between realized and implied volume. The same goes for correlation. As 2025 ends one year implied correlation on the S and P is basically a match for one year realized correlation. Just as the marginal price setters for volume are beholden to the feedback between realized and implied, so too is the mathie dispersion crowd reliant on how correlation carries. Low realized correlation justifies low implied correlation. But to be clear, one year implied correlation on the S&P at 21% is really really really low.

There’s no equivalent except last month, last quarter and last year. This isn’t entirely new, and that is part of what I think makes it risky. When a clearing price endures, no matter how high or low it appears to be, it makes its way into how we consume risk. Because the dispersion trade, buying single stock volume and financing most of the premium by selling index volume is working. Even at low levels of implied correlation, more of it will be done. The profits it generates gets recycled back into the same trade that spit them out in the first place. There are a couple of things to think about here. First, consider the relationship between realized correlation and realized volume for the S and P. A chart I posted on Twitter shows that for a given level of realized volume, realized correlation used to be considerably higher than it is today. There are two ways to interpret this. First, single stock volume is doing more of the heavy lifting today to generate the overall index volume level. The second way to look at this is that given these very high single name vols that come from a top heavy tech concentrated S and P, a tremendous amount of diversification is occurring to keep the index volume where it is.

The incredibly low level of realized correlation is a significant volume suppressant. Will it continue? I’m not so sure. The second chart I posted on Twitter illustrates a similar point. But does it through implied volume I created an index of the simple average 1 year implied volume for Nvidia, Google, Microsoft, Apple, Amazon, Meta, Broadcom and Tesla. One of the time series shown is the ratio of that to 1 year s and p implied volume. The second series is 1 year s and P implied correlation inverted. Not surprisingly, these move closely in tandem. So the question might logically be is single stock volume too high or is index volume too low? That’s actually not the question. It doesn’t really matter. It’s the relative price that matters and I strongly believe it’s too low. That is to say that single stock volume is too high relative to index volume. Or as I prefer to say it, index volume is too low relative to single stock volume. Framing it this way is consistent with the view that the repricing higher of implied correlation is more likely to occur in tandem with a higher overall implied volume environment. If the global economy slows, for example, commitment to the capex cycle could get tested, causing a broad and correlated retreat in share prices.

Let’s explore how the relationship between single stock and index volume reprices. First, a shorthand for implied correlation. What we do is we take index volume, we divide it by the weighted average level of single stock volume and we square that ratio using 37.4 for the average of the big eight in the index I created and 17.4 for one year s and P implied volume. That squared ratio is 21.5%. That’s right where Bloomberg has one year implied correlation on the S and P. Let’s flip the formula around and ask what happens to index volume as we keep single stock volume the same but move implied correlation to 35. The 13.3 point bump in correlation adds 4.7 vols to S&P volume. That is a very large move in one year implied volume. And to be clear, 35 is still low for implied correlation. Historically, there are two primary channels for this repricing. First, a macro shock like the April tariff tantrum. As I shared in a chart on Twitter, implied correlations spiked during that episode. It was of course self imposed by Trump and thus relatively easy to undo via a just kidding on April 9th. But there are many channels for macro shocks, monetary policy, geopolitics, a slowing economy, a glitch in the shadow banking system, to name a few.

The second channel is less about global macro and more about the AI ecosystem and and how intertwined these companies are. They are all chasing the same trade in AI spending fabulous sums, making lofty assumptions and increasingly raising lots of debt to do so. The capex spending itself is keeping this going. As long as this capex cycle is robust, the market caps are supported which in turn supports the capex. It does remind me of how both the mortgage credit and LBO funding machinery kept the leverage cycle going 20 years ago. And there’s a more technical vantage point from which to contemplate the repricing of single stock volume to index volume. This concerns the prominence of stock up volume up in today’s market, even in the mega caps. It’s the feature of this market that is most like the Internet bubble. As mentioned, Google is up 65% year to date and its two year implied volume was recently as much as 12 higher from the start of the year. As suggested earlier, the stocks themselves are options. As they rise, the market pays more and more for the lottery ticket. Here’s the analogy Back to the dot com era.

From the peak in March 2000 to the end of 2004, the Triple Q fell by 65%. The Nasdaq Vix, however, fell from 50 to 19 in the process. In the current market, if the AI trade loses some of its shine, you could see the stocks driving it not just fall in price, but fall in implied volume as well. What goes up must come down kind of thing as the optionality of the trade declines. This process would also lead to implied correlation rising, perhaps by a fair amount. All of this is to say that we are at the lowest level of s and p1 year implied correlation we’ve seen, and there are multiple pathways to it rising from here. It’s a real vulnerability for the market as it would make the S and P considerably more volatile than it currently is. And we know that the same conditions that make stocks more volatile make them more correlated as well. It’s a double whammy. We can look back on 2026 as a year of highs and lows. The S and P is up 17% on the year, even as it experienced a 19% drawdown along the way.

Don’t call it a comeback. As LL Cool J told us, one month realized volume on the index was as high as 51 and as low as 6. For correlation, the peak was 67 and the low was. Wait for it, Dean, warmer. 0.0 correlation has no grade point average. Note that we are ending the year with one month realized correlation of just 8. You can’t blame the market for pricing one month implied at just 11. I argue that the number is eventually going higher because stocks are eventually going to start moving more closely. Together, the market, the investing public and the economy at large are overexposed to the AI trade. So too are the AI stocks overexposed. I certainly can’t predict when or if something will go wrong, but these ultra low correlations are the equivalent of driving without a spare. As I close this discussion, I want to thank you for being a listener. I was able to drop 26 podcasts this year with extremely high quality guests. These are hedge fund founders and asset management CIOs, fintech founders, heads of strategy efforts, and leaders of independent research firms. The conversations are not about predicting the next move, but in seeking to add value to the process of portfolio construction and risk management.

I’ve also, including this one, dropped 15 podcasts in which I shared my own thoughts on risk. I’m looking forward to a year of expansion for the Alpha exchange in 2026. I’ve got some creative new ideas for delivering content and look forward to bringing them your way. Until next time, have a relaxing holiday and rest up for what promises to be a critical year in markets. Be well.

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