ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Thursday, May 12th, 2022. I'm Ash Benington, joined today by Imran Lakha, founder of Options Insight. Lots to talk about today. Lots to cover. Most major US equity indices pretty much flat on the day. Dow Jones Industrial Average off four tenths of 1%.

But also, lots happening in the cryptocurrency complex, more than 15% of the crypto market cap evaporating overnight. That's more than $200 billion disappearing in one day, significant liquidations, we're going to cover all of that in the back half of the show. But first, I want to welcome Imran and talk a little bit about what's happening in markets and macro. Imran, welcome back to Real Vision. Pleasure to have you.

IMRAN LAKHA: Hey, Ash, it's good to chat with you, mate.

ASH BENNINGTON: We have lots of charts, I know, to look at. But before we jump in and start going through those, give us the big picture, 50,000 feet, where are we right now?

IMRAN LAKHA: Obviously, equities have been going through a bit of risk-off, liquidation. And for me, the big theme this week has been the flipping correlation between bonds and equity. We've had an environment where obviously, the Fed turned very hawkish, trying to get inflation under control. They had a political mandate from Biden to do that.

And basically, that move in yields was driving tech stocks particular down, it was taking equities lower. And it's only recently that as we've started to see commodities roll over, as we've seen the problems with China, China lockdowns and things like that, and a real concern that we might be going into a global recession in the not-too-distant future, all of a sudden, now, equities are starting to accelerate to the downside, breaking some very important levels like 4000 on the S&P.

And whilst they're doing that, you're now starting to get a big comeback to bonds. When bonds are leading the way down, you had this positive correlation between the two. But now if equities are the one that's leading us down, because of growth concerns, then bonds are going to go the other way and catch a bid. And that's what we've really seen this week. And I think that's the real inflection point in markets.

ASH BENNINGTON: Yeah, very well said, Imran, very well-framed. Just to put some datapoints around this for people who aren't following it as closely as you are, S&P 500 closing out the day here at 3930. Down fractionally on the day, about a 10th of a percent and exactly as you say, Imran, below that key psychological level of 4000. Year-to-date basis, that's off 18%, or thereabout. One-year change minus 4%, that's going back a period of 12 months.

But I also want to call out NASDAQ Composite here, off roughly 28% on the year, as you pointed too, Imran, that selloff in tech stocks 12-month change, minus 13.5%.

IMRAN LAKHA: Yeah, exactly. And the sorts of trades that-- retail really have been getting killed. Ark is obviously down way more than the NASDAQ. And we've got a chart, Brian, if you've got it there, where you can superimpose the performance of Ark on the NASDAQ from 2000, when that bubble burst. It's uncanny how well it's tracking it. It's really, really tracking it very closely.

And this is something Julian Brigden has been talking about on the show, that this is how he sees it. That's why he saw downside in Ark. I think his target was about $35, and we printed that today in Ark. We've hit its target, I doubt he's stepping in and buying it, you'll have to ask him, but it's definitely been a bit of a retail flush out there. And we've been seeing that across meme stocks, your AMC type stocks, we've been seeing that across Ark stocks, uranium, Tesla, crypto, anything that retail has been involved in, that's where the epicenter of the pain has been basically.

I think in the super short term, we're probably a bit overdone. That's what it feels like to me. And I've got various reasons for thinking that. We can talk about them when we talk about crypto. I think JP Morgan put out a chart saying how they tried to track the P&L of the retail trading that's been going on since 2020, since the start of that year, and whilst they were up pretty heavy in the first year of that, they've given it all back basically.

So, retail are underwater. In the last three days, you've seen a lot of retail liquidation going on. And now, it does very much have that sense of a flush out. Whilst we may still go lower in equities as the market reprices in the growth scenario over the next few months, I just think the next week or two, the trade is probably to be on the buy side. That's how I see it.

ASH BENNINGTON: Imran, lots of important points that you just made there. For people who are brave enough to buy the name, the game is called catch a falling knife. You mentioned Ark at the top of your remarks. Ark right now, looks like 3899, closing out the day up a bit, as you say. By the way, we also have these numbers here, which are pretty dismal. Year-to-date, minus basically 60%, trailing 12-month change on Ark, minus 62.5%.

IMRAN LAKHA: The risk reward isn't to buy things like Ark outright, because whilst they can have a 20%, 30% bounce, they could also evaporate 30% percent. You don't have a lot of edge in just buying that thing, even if you think it's oversold. And that's where I come in because it's all about optionality. The way you have edge and the way that you can safely catch the falling knife, as you put it, is by doing option structures that give you a very fixed cost basis, fixed risk. And then you could maybe multiply that by a factor of two to five, whatever it is, depending on the structure that you choose.

For me personally, that's how I like to catch a falling knife, try and do call spreads or call ratio structures, where you buy one call option, and you sell multiple calls behind it in a way where you know how much you're spending. And if you get that bounce, then you basically multiply your premium. That's the plan.

ASH BENNINGTON: Well, let's talk that through because it's a really interesting point. I know the interesting thing about this show, of course, is we have people from all different levels of sophistication coming to it. For people who are relatively new to the options space, which is your specialty, who are trying to understand how they can potentially, in certain structures, catch optionality in a way that gives them asymmetric potential for return, talk a little bit about what that looks like and how you do it.

IMRAN LAKHA: Let's put some numbers on it then. You look at the S&P down to 3930 right now. Let's say you thought by next Friday, we were going to get a bounce because you got expiry coming on Friday, you often do get some shenanigans into expiry where you get a bit of burn off of downside puts that people are holding, and that creates a rally because dealers have to buy futures against that. That's a dynamic that you often see.

Let's say that was your scenario. You thought the S&P was going to go maybe back above 4000, towards maybe 4050, 4100. That was your target area. If you just go and buy a call option right now, 4000 strike call option for next week, that's going to be quite expensive. Because the implied vol on that option is quite high, it's going to cost you 40 index points, it's going to cost you a percent.

Even if you've got a rally to 4040, which is 100 points or more from here, that's where you break even. And even if you've got to foot 4100, you only double your money, which in an option, you want to do a bit better than that, basically. The way that I would do it is I would buy something like the 4000 calls, but I would then sell one or maybe two of the 4100 calls. They're 100 points higher.

The idea being that if we do get a bounce, and we start to rally above 4000, and then we go towards the option that I've sold, that option is burning away. It's evaporating because the time decay on it is so heavy. It's a short volatility position. And guess what's happening to implied volatility when the market goes up? That's coming back down.

The dynamics at play in that structure are long delta, which means you want the market to rally, short Vega, which means you want vol to come down. And then that Vega that you get short increases as you rally. It's that correlation between the market move and the volatility move that you're playing basically. That gives you a really nice asymmetric risk reward.

Obviously, if the market rips to 4200 in a heartbeat, there's risk there in that structure, because you oversold that upside. But you can tailor those risks to your risk tolerance. You can only do a call spread if you're not comfortable with that risk, or you can sell multiple calls if you are comfortable with that risk. And that's something you need to practice with and to have learned by doing basically.

ASH BENNINGTON: Yeah, it's great to hear you talk about this in the way the pros think about it and do this. Obviously, a lot of Greeks and Vega is a measure of sensitivity to the implied volatility of the underlying. As we talk this through, you mentioned at the top of the show this macroeconomic backdrop, you talked about bond yields. I know, actually, I read a recent note of yours, where you actually lead with bond yields and what's happening in that space. Let's take a look at that chart, and perhaps you could walk us through it a bit.

IMRAN LAKHA: Yeah. Obviously, we talked about the dynamic where equities were-- it felt like equities are a bit of a cliff edge around that 4000 area. If we've got a real break to 4000, then we could accelerate. And to be fair, we've done that, we got to around 3850-ish today. That's a fair move. And then we've obviously got the TLT rallying on the back of that, and the bond yields coming on.

The trade that I was doing, again, a similar trade to what we just described on the S&P, the trade that I got my subscribers to-- that I showed my subscribers on Monday was a call spread on TLT. I believe Raoul generally looks at buying calls on TLT. I did a call spread, because I didn't want to pay for that volatility premium, because the vol is quite elevated.

I did a July 120, 130 call spread as a way to play a rally in TLT. That was a trade I was looking at and like I said, it was because there was a bit of speculative shorts being built up in the bond market. The technicals were showing very, very oversold in bonds. There was also a bullish divergence there if you look at technical indicators.

The divergence is where you have lows in price, but you don't have lows in momentum. Then you have a bullish signal there from a technical perspective. And then inflation swaps rolling over a little bit. There was a long-term support level on TLT. For me, there's a confluence of factors that suggested that it was worth taking a trade on in TLT for a bounce basically. That's what I did.

ASH BENNINGTON: Yeah, by the way, apologies for those of you hearing the ambulance in the background, and welcome to New York City. Listen, I just wanted to touch on something you mentioned, you talked about TLT. I know that you and I were talking earlier, at the beginning of the show off camera about Raoul's insights on this. I want you to take a look at this clip. When we have conversations here on Real Vision Daily Briefing, we often talk about how the shows are available on the Essential Plus and Pro tiers. Today, a special treat, a preview of something that Raoul talked about, a flash macro update on the Pro tier here on Real Vision. Let's take a look at that clip.

RAOUL PAL: My view is that the economy is plummeting into recession, I think economic growth has evaporated. The S&P year-on-year rate of change is now fully pricing in a recession. We're seeing across the entire forward-looking indicators that growth is imploding. This is what I've been expecting. I've been setting all of you up in Macro Insiders for a period of time.

And as you know, my framework changed. The downside of equities is not my general choice. My choice is the upside of equities that comes out of the low of this, which has been a structural framework change of mind. But here we are in the phase that I've been looking for and waiting for. We're not fully through it yet. That phase is I've been expecting that equity markets go into the meltdown in the final fear phase, that fear phase starts pricing in the full recession.

At that point, bond yields stop rising. And bonds are the truth, as I keep saying, and what that means is bond yields will start pricing out Fed hikes and saying, well, enough was enough. Last three days, it's too early to say but it looks like it's happened. The bond trade is starting to play out. I think this starts to get very interesting.

I would like to add bonds as a trade recommendation. Just buy TLT. I will look further when I write the piece whether we can add some Eurodollars, the Eurodollar call trade won't work like it did in 2018 and 2019 because volatility is too high. The option prices only give three to one risk reward. We're probably going to have to use futures, we're going to have to use that stuff to get the kind of returns that we want out of it. But let's just start with the TLT position for one.

We can probably buy some calls. Again, I need some time on the weekend to go through this and too rushed right now. But look, dip your toe in the water. Bond yields should fall very sharply as people start to price out inflation. The next part of this equation is the oil price I think will break. When it breaks 96, then the inflation fears are out and gone. And that's going to give the central banks room to maneuver.

ASH BENNINGTON: Raoul talking about TLT, which we just covered here on this show, and obviously also sobering words about recession risk. All this and more we should say on the Real Vision Pro tier. Imran, we were talking a little bit off camera about how you've largely agreed with Raoul's points.

IMRAN LAKHA: Yeah, I've been sitting on my hands a bit in terms of getting too long bonds. But a lot of very smart macro analysts around us are thinking that we're going to head into a bit more of a deflationary regime. Darius Dale was on yesterday, I believe, saying that. In that regime, you want to have some fixed income, but had you bought fixed income too early, you've taken quite a big drawdown on that.

The key has been that because inflation has been high, let's say above 5% or whatever, the correlation between bonds and equities has been quite heavy. What I believe is going to happen is that correlation is going to flip back around the other way as growth rolls over. That's why I've dipped my toes in via call spreads on TLT right now. I've also bought call spreads on Eurodollar futures out to the end of the year.

Those trades are basically playing the idea that growth is going to roll over, the Fed's going to have to slow down, or it's going to get priced into the bond market that the terminal rates are going to have to be lower again. I like that trade. I haven't liked a boatload of outright TLTs because there may still be one last leg down there if these inflation prints take stubbornly long time to come down, but the way commodities are going, and they are a leading indicator for inflation, it suggests that yeah, inflation is starting to top out.

ASH BENNINGTON: Yeah, so let's shift gears here a little bit. We teased at the top of the show, carnage right now in the crypto space, in the digital asset space. Give us a little bit of a framework for how you think about where we are big picture.

IMRAN LAKHA: Yeah, so crypto, I've been saying this in my crypto insight videos for months. Crypto wasn't going to escape the risk assets selloff. And people who thought it was some hedge or whatever are kidding themselves. It was a function of liquidity. There was a lot of easy money that pumped up these crypto markets and as that easy money comes out, crypto goes down with it. And we've seen that.

Now, that's not to say that I'm not a long-term believer in crypto, and I do think there's certainly the big cap cryptos like your Bitcoins, Ethereums, Solanas that are likely to stick around. It's just that they're highly volatile, and they can drop by 70%, 80% before they decide to go back up again. Until we think risk assets have bottomed out, which I suspect happens sometime in the summer, cryptos are still massively at risk.

The correlation between NASDAQ and Bitcoin has been 90% to 100%. That's not suddenly going to change. If you think the ultimate resolution of this cycle, before we get a dovish pivot out of the Fed, is S&P somewhere in the mid-3000s, or even lower, which is another 10% at least, then crypto is not going to escape that. Then we had obviously the idiosyncratic risk in crypto of Terra and LUNA going pop and that's catalyzed this real fast drawdown. Crypto is going down anyway in line with the market, it just got a bit of an acceleration recently.

ASH BENNINGTON: Yeah, there's so much happening right now and I'm looking at my screen and just following prices, because these are moving so quickly that you can't possibly get them printed ahead of time. But look, here's the reality. We've seen as you said, all of these idiosyncratic risks. We've seen things happening on the bleeding edge where really cool stuff is happening in the defi space, in the Web 3.0 space. We've seen some prominent failures there.

Right now, I'm looking at Terra LUNA just absolutely destroyed, down 97%. Strangely, TerraUSD, UST, this is Terra/USD pair traded under UST is not at zero yet. It's down to about $0.42. Absolute just misery and carnage everywhere you turn. Bitcoin, interestingly enough, you could say, the network is continuing to function precisely as it was designed to, no flaws, no exploits, but you've gotten whacked on a price action basis, trading now at around 28,530.

Lots of things happening in this space, and to your point, there was this narrative that people particularly who are great, passionate fans and supporters of this space have said for a very long time, which is, hey, look, Bitcoin is going to be this off the grid asset, it's going to be the alternative to the traditional macro financial space. And exactly as you said, basically, the correlation