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Erik Lytikainen



Articles by Erik Lytikainen

Viking Analytics: Weekly Gamma Band Update 10/04/2021

21 days ago

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) had sharp down days on Tuesday and Thursday, with a recovery rally to close out the week on Friday.  There have been three straight weeks that the SPX has failed to overtake the Gamma Flip level, which is currently near 4,440. Our risk-avoiding model currently has an allocation of 30% to SPX and 70% cash.   
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. This can conceptually be viewed as a risk along with other tools. When the daily price closes below Gamma Flip level (currently near 4,440), the

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Viking Analytics: Weekly Gamma Band Update 9/27/2021

28 days ago

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) closed right near the gamma flip level, which resulted in a daily model allocation to 70% in the SPX (along with 30% cash).  The chart below shows a dashed line for each of the last four monthly option expiration dates; this shows the tendency for weakness, before, on and/or after these dates.  We believe that the market is at an important decision point, and the gamma flip level will help inform whether the market is heading higher again or not.
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. When

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Viking Analytics: Weekly Gamma Band Update 9/20/2021

September 20, 2021

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) closed last week below the gamma flip level and with a negative slope, which resulted in a daily model allocation to 30% SPX (along with 70% cash).  Following the key quarterly option expiration week, there is less of a re-hedging upward current, so this morning’s weakness is not surprising. The chart below shows a dashed line for each of the last five monthly option expiration dates; this shows the tendency for weakness, before, on and/or after these dates.  In this “negative gamma” regime, the options market makers will tend to buy the rallies and sell the dips.  This results in an

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Viking Analytics: Weekly Gamma Band Update 9/13/2021

September 13, 2021

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) closed the week with a close below the gamma flip level, which resulted in a model allocation to 50% SPX (along with 50% cash).  As we enter option expiration week, it is relevant to note that the last four monthly option expiration weeks have seen pullbacks and volatility, followed by buying pressure the following week.  The large open interest on this week’s quarterly expiration could act as volatility fuel, especially with price below the gamma flip level.  In this “negative gamma” regime, the options market makers will tend to buy the rallies and sell the dips.  This results in an

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Viking Analytics: Weekly Gamma Band Update 9/7/2021

September 7, 2021

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) maintains strength above the gamma flip level last week into the long holiday weekend.  We continue to anticipate a muted volatility environment (e.g. a slow grind upward) as long as the SPX remains above the gamma flip level.
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. When the daily price closes below Gamma Flip level (currently near 4,480), the model will reduce exposure to avoid price volatility and sell-off risk. If the market closes below what we call the “lower gamma level” (currently near

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Viking Analytics: Weekly Gamma Band Update 8/30/2021

August 30, 2021

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) maintained strength above the gamma flip level following the week prior monthly option expiration.  We anticipate a muted volatility environment (e.g. a slow grind upward) as long as the SPX remains above the gamma flip level.
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. When the daily price closes below Gamma Flip level (currently near 4,450), the model will reduce exposure to avoid price volatility and sell-off risk. If the market closes below what we call the “lower gamma level” (currently near

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Eric Lytikainen: Beware of the Ides of March?

March 10, 2021

Should Stock Investors Beware of the Ides of March?
The “Ides of March” is a notorious day in the western world.  March 15th is traditionally believed to be the day that Julius Caesar was assassinated by Brutus in 44 B.C.  “Beware the Ides of March” has become a phrase imprinted in western consciousness.

Source: Wikipedia
In the earliest calendars, the Ides of March was the first full moon of the new year.  At the one-year cycle of pandemic shutdowns, should investors be wary of another sell-off similar to March 2020?

Quadruple Witching
Adding to potential risks this month is the quadruple witching expiration on March 19th.  The third Friday in March, June, September, and December is a critical option expiration date. This is when stock options, index options, and futures options all

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Viking Analytics: Weekly Gamma Band Update 2/01/2021

January 31, 2021

We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
Entering the week of February 1, 2021, the Gamma Band model has cut its S&P 500 (SPX) exposure to 50%.  When the daily price closes below the Gamma Neutral or “Gamma Flip” level as it did last week, the model will reduce exposure in order to avoid price volatility.
This kind of model can be appropriate for investors who want upside exposure to the stock market, while protecting against downside tail risk.  If the S&P rotates to close back above 3,800, the model will rotate to a full allocation.  If the market closes below 3,560, the model will reduce the SPX allocation to zero.

Gamma Band Model
Market participants are

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Viking Analytics: Weekly Gamma Band Update 1/25/2021

January 25, 2021

We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update 01/25/21
The SPX Gamma Band model is a long-only trend-following model that reduces exposure when options markets show elevated risk. The Gamma Band model has resulted in a 75% improvement in risk-adjusted return since 2007 (measured by the Sharpe Ratio).  A quick video introduction of the Gamma Band model can be seen by following this link.
The Gamma Band model has maintained a high exposure to the S&P 500 since the U.S. election in November 2020. The model will generally maintain a 100% allocation as long as the price closes above Gamma Neutral, currently near 3,800. 
The model will cut S&P 500 exposure to 0% if the

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Eric Lytikainen: The Gold Bull Market Is Just Getting Started

January 20, 2021

The Gold Bull Market Is Just Getting Started
2021 marks the 50th anniversary of President Nixon’s decision to suspend the convertibility of U.S. dollars into gold. At that time gold was just $35 per ounce. As we approach the August 13th“golden anniversary” date, a review of the past 50-years is worthwhile.
Strategic View: Gold Could see $25,000 in 10 years
The two big rallies in gold occurred over roughly 10-year periods. Both saw dramatic increases in the value of gold.  From August 1971 to 1980, gold rallied from $35 per ounce to over $700 per ounce, a twenty-fold increase.  Please note a significant pullback from $200 to $100 per ounce during this time, a 50% drawdown.  Even in a bull market, prices often have to correct before finding new footing.

Great Reset
One might say that there

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Eric Lytikainen: Gamma Flips and Regime Changes

September 3, 2020

Gamma Flips and Regime Changes
By: Erik Lytikainen and Robert McBride
With option trading volume up substantially this year, there is an increasing need to understand gamma and related metrics.
One of the concepts market professionals often discuss is the concept of a “gamma flip.” Beware, however, there are differing definitions of what a gamma flip can be.
In our terminology, the gamma flip refers to a regime change.

No, not that kind of regime.  Gamma is a financial concept, not a political one.  A gamma flip refers to a transition of the markets from one volatility regime to another.   In a lower volatility regime, investors can often rest while markets increase in value.  In a higher volatility regime, the market can swing wildly, creating investor fear and anxiety.
Gamma Neutral

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Eric Lytikainen: Do You Have The “Monday Market Blues”

August 5, 2020

Monday Market Blues
Most people hate Mondays.  The reason is perhaps obvious: it is the end of a two-day rest for many, and the beginning of another work week.
Monday is the first step up a long, steep hill, and apparently most people don’t like to climb hills.
In 2005, Gallup conducted a poll which sought to discover people’s favorite seasons, months, and days of the week.  The most significant result in the survey – not surprisingly – was that people listed Monday as their least favorite day of the week.
Source: Gallup
Some people believe that the stock market is a barometer of investor emotion, and we believe that there is merit to this statement.
One thing is for sure.  The stock market hates Mondays just as much as you do.

History of Returns
We study the markets and look for

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Do Investors Know They Are Skiing In An Avalanche Zone?

August 2, 2020

Do Investors Know They are Skiing in an Avalanche Zone?
2020 has been quite a year for the stock and options markets. We have witnessed a gut-wrenching roller coaster ride from highs to lows and back to highs. The volumes of both stock and options trading have ballooned as discount brokers offer zero commission trading.

What few seem to realize is that the proliferation of options trading has created a new market dynamic. This dynamic can create feedback loops that could generate significant volatility. If we compare a feedback loop to a snowball rolling downhill, one can view the recent spike in options trading as a snowfall leading to a potential avalanche.
To make our case, we provide a simplified option hedging example to show how this practice can affect order flow in the underlying

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Options Risk in the Stock Market

July 22, 2020

Options risk in the stock market? Over the past two years there has been a growing interest in “options gamma” in the markets. As shown below, Google trends show a surge in interest, spiking around the March 2020 sell-off.

Source: Google Trends
Option gamma is a concept that many find difficult to understand. For the purposes of this article, let’s put it in simple terms.  “Gamma” means “options market risk.”
Gamma is risk, and risk moves markets.
There is ample evidence that high gamma and high volatility go together.  One example is the crude oil market in 2018.  In an article entitled Two Words That Sent The Oil Market Plunging: Negative Gamma, Alex Longley writes:
As oil suffered its biggest one-day slump in three years, it wasn’t OPEC or President Donald Trump that was shaking the

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Will The Last 2-Weeks Of 2019 Be The Inverse of 2018?

December 18, 2019

Every professional investor knows that month-ending, quarter-ending and year-ending timestamps are important. Throughout the year, positions are hedged against these timestamps, and as a result, the year-ending option expirations almost always have the highest open interest. Generally, the higher the open interest the greater the volatility and financial risk.

Last December, in and around the final option expiration of the year, the S&P 500 fell by nearly 300 points. This dramatic decline coincided with a spike in market gamma as shown below. It is my view that this decline was furthered by forced selling by the put sellers who needed to sell the S&P 500 index to cut their losses. 

As we approach this year and the S&P 500 continues to grind higher, we may be facing the inverse of

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Should Tesla Bears Look To Hibernate

October 18, 2019

In May 2019, I published an article that outlined hope
for TSLA bulls in which I suggested that $180 could provide an opportunity
for a long position.  Since then, Tesla (TSLA) has established and
strengthened along a new uptrend line. 
There is now evidence of key resistance near the $260 and $280
levels.  The technical levels below show the
key resistance trend lines, based upon weekly highs and lows since 2017. 

The prior five weeks saw TSLA trade in a narrowing technical triangle, and last week’s breakout, followed by this week’s strength, appears to be a breakout through the first level of technical resistance.  The current uptrend line is gaining strength and momentum.  If the price closes convincingly above $280 on a weekly basis, the Tesla bears may want to hibernate for

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Gamma Radiation, Gamma Reversals, and Gold

July 26, 2019

I grew up watching Bill Bixby playing The Incredible Hulk on
TV.  Readers will be familiar with the
general story – mild-mannered scientist Bruce Banner is exposed to gamma
radiation, which transforms his molecular structure. The exposure causes Bruce
Banner to turn into the radiation-green colored Hulk when he experiences
extreme anger.

Bruce Banner has a “tell” for when his anger reached the
point of no return and the Hulk would appear.  

His irises turn white. 

When Banner’s irises turn white, the Hulk is on his way to restore
justice and create order. In this article, I discuss a market “tell” to alerts
us as to when a market is likely to shift from chaos to order.

Gamma in the Financial Markets

Gamma not only defines the type of radiation that
transformed Banner

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Counting Cards In The Casino

July 19, 2019

In some ways, Wall Street is like a casino.  Both have shiny lights, bells and whistles, with
distractions galore and a myriad of different bets for the making.  Wall Street and Vegas both profit from
volatility, liquidity, distractions, and volume. Unfortunately for you, Wall
Street and Vegas have the odds in their favor, and they don’t really care if you
win or lose.  The bottom line is that both
Wall Street and Vegas will turn big profits as long as enough people play their
games.

The casino analogy doesn’t “walk on all fours.”  For one, not all investors and traders are
gamblers.  Great investors are more like
“entrepreneurs” than “gamblers,” in that they take measured risk within a
disciplined system.  In the long run,
most gamblers lose money.  In the
long-run, most disciplined

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Will History Repeat Itself in the Gold Market?

July 11, 2019

Mark Twain once said, “history
doesn’t repeat itself, but it often rhymes.”  Since President Nixon removed the gold
standard in the early 1970s, gold has seen several significant rallies, all of
which have similar wave characteristics.  Gold rallies seem to rhyme.

The first two price rallies began in 1971 and 1977, during and after the de-linking of the U.S. dollar from gold. The most recent price rally has its seeds in the dot-com bubble in the early 2000s.  The chart below shows two long-term monthly gold rallies, with the second rally appearing to be an amplified but similar version of the first.  I have overlaid Fibonacci sequence numbers to demonstrate how the price of gold has spiked upward in expanding, fractal waves during these prior surges. 

In the 1970s, gold

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Can Tesla Hold The Line?

June 5, 2019

Tesla bulls and Elon Musk fans everywhere are hoping that the decline in Tesla stock price will end soon.  After the stock breached the technically important $250 price level, the next key support level is in the $180 range, close to where the stock is trading now. 

Tesla has emotionally attached both
bullish and bearish investors. Spend ten minutes on financial Twitter and the
emotions from those thinking Tesla is going to zero to those thinking the right
price in the 1,000’s is easily evident. Bulls certainly want Tesla to hold the
$180 line, but as Toto sang in the 1970s, “Love isn’t always on time.” 

On a weekly chart, we can see that the $180 price level has
served as important support and resistance since 2013.  More evidence supporting the Tesla is
oversold, is that weekly

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Is Corn Ready To Pop Or Drop?

May 29, 2019

Corn volatility has spiked in
recent weeks, fueled by weather-related delays in planting crops in the
U.S.  The record amounts of rain and
resulting flooding in the U.S. Midwest, which is bullish for corn and other
crops, follows bearish tariff tensions with China which had pushed the July 2019
corn futures contract to all-time lows just two weeks ago.

Source: TradingView

On a weekly chart, we can see that
this is the sixth time that the front-month (continuous) corn futures contract
has spiked over $4 per bushel since late 2014. 
In every prior instance, the price was short-lived, and corn quickly
retreated towards the $3.50 price level.

Source: TradingView

The corn options market is very liquid,
thus providing the opportunity for farmers, merchandisers, and other

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Quick Take: Volatility Ahead in the Oil Market?

April 12, 2019

A week ago, I wrote an
article discussing how the options markets can provide clues to
future price direction and/or volatility in the crude oil market.  In particular, we addressed the question, “how can a trader spot these option clues in
advance?”

This morning, we got a signal which may indicate volatility
is in the cards again for crude oil.

As crude oil has continued its upward advance from late
December, call sellers have become increasingly off-sides with their hedging
and position taking. In fact, our measure of sentiment in the options market is
now off the charts in the 99th percentile. Simply, all investors
appear to be on the bullish side of the boat.   

We recently saw a similar
situation play out in the natural gas market. When the level of
market neutral gamma

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Bloomberg, Greeks and the Crude Oil Market

April 3, 2019

In November 2018, Bloomberg published an article entitled Two
Words That Sent The Oil Market Plunging: Negative Gamma.  The article opens with this paragraph:

As oil suffered its biggest one-day slump in three years, it wasn’t OPEC or President Donald Trump that was shaking the market. Instead, trading desks were abuzz with chatter of “negative gamma.”

The article then continues by saying that this “obscure concept begins on the options desks
of Wall Street” and includes an explanation of why producers buy puts to
hedge their production and also some of the risks involved in being on one side
or another of this trade.  

Since the Bloomberg article was written largely as a post-mortem, the question retail traders
might ask themselves is: “how can I spot this kind of aberration

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Will The Pound Get Pounded?

March 5, 2019

British pound futures have been declining against the US dollar since November 2007. Over that period the pound has fallen from a high of over $2.10 US dollars per pound to near $1.32 dollars per pound today.  The Brexit vote in late spring of 2016 pushed the value of the pound below, what was then, the psychologically important $1.35 level to new lows.  Nevertheless, in the context of the vote and its broad implications, the move lower since Brexit has not been as significant as some expected.

We will leave comments on Brexit politics to the more informed and those who have more of a vested interest in the outcome.  From a technical, longer-term perspective, we see the pound continuing its decline versus the US dollar, with important resistance at the $1.35 level, along with a key

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Fables, Fairy Tales and the Gold Standard

February 13, 2019

President Trump often tweets about the strength and health of the U.S. economy, and two weeks ago, he tweeted that the U.S. economy was the Gold Standard throughout the World.

The fact that Trump capitalized the words “Gold Standard” may have piqued the interest of those who believe in sound money principles.  Trump has in fact spoken in the past about a return to the Gold Standard, and some of the issues surrounding this are summarized in an October 2018 article: Trump Puts Gold Standard On The Table.
A simple interpretation of Trump’s tweet means that the U.S. economy is the envy of the world, the benchmark by which other economies measure themselves.
Nevertheless, Trump’s tweet can be viewed as valid in another way, whether this interpretation was intended or not.  When the U.S. dollar

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Negative Gamma and the Demise of Optionsellers.com

January 31, 2019

Brett Freeze, one of my financial market mentors, has several rules that summarize his core trading beliefs.  His first rule is “never, ever be short gamma.”
More simply, the rule could read “never sell uncovered options.”  Anyone who has received a margin call on their uncovered option positions understands intimately why this is a prudent rule.  Options are a leveraged bet on an underlying security, so when price moves against the option, the financial losses and margin calls can happen quickly and are virtually unlimited.
For Optionsellers.com, a hedge fund that had to shut down in late 2018, selling uncovered options was the explicit strategy.  It is in their name, after all.
In hindsight, we might conclude that naked selling of options is better handled by machine-driven market makers

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How To Use Op-Ex Price Magnets

January 25, 2019

All Quiet on the Western Front is a 1929 novel which describes German soldiers’ extreme physical and mental stress during World War I, and subsequent detachment from civilian life felt by many soldiers upon returning home.  This novel was eventually made into a major motion picture.

The phrase “all quiet on the Western Front” has become a colloquial expression meaning stagnation, or lack of meaningful change, in any context.
Many financial markets ended 2018 with considerable volatility.  The stock market, as measured by the S&P 500 index, fell from its peak in early October to a December 26th low by over 21%. The WTI crude oil market fell from an October peak over $77/bbl to a December 24th low near $42/bbl, a 45% decline.  The natural gas market spiked considerably in November, only to

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