Dear Readers,
Today’s free video and full transcript below bring together the framework I’ve been developing since July — connecting the dots between liquidity, volatility, and market structure. If you’ve been following my work over the past few months, you’ll see how each piece is now starting to align with the data and price action we’re observing today.
Back in July, I began outlining what I believed could become a defining dynamic for markets through the rest of the year: tightening liquidity. At that time, I highlighted early signs from the repo markets, dealer balance sheets, and Treasury General Account replenishment, suggesting liquidity conditions might be deteriorating. These developments, I noted, could eventually lead to more volatility and uneven market performance as liquidity was drained from the system.
Moving into September, continuing a focus on liquidity, I shifted focus and added in volatility, dispersion, and implied correlation — noting how metrics had reached unusually stretched levels, not seen since early 2020 and 2018. I discussed how such periods rarely persist, and how the setup in volatility markets was signaling that a larger shift might be developing beneath the surface.
Now, here in October, we’re seeing these themes start to converge. Liquidity remains tight, funding pressures are visible in the overnight markets, and volatility is beginning to reawaken from its summer lows. While no one can know the exact timing or scale of the next major move, the overall framework we built earlier in the year continues to provide useful context for understanding current market dynamics. The relationship between liquidity, volatility, and positioning remains key — and it’s precisely what today’s video explores in greater detail.
This kind of forward-looking research and contextual analysis is what I strive to provide in Navigating The Market. My goal isn’t to predict short-term market moves but to help readers and viewers interpret what’s happening beneath the surface — so you can better understand how structural forces like liquidity and volatility shape the market environment.
If you’ve been considering becoming a paid subscriber, now is an excellent time to join. The ideas we started tracking months ago are playing out in real time, and I’ll continue updating this research as the story evolves in the weeks ahead.
Take care,
Mike
VIDEO
In this weekend’s FREE video, I review how the market is entering a critical phase where volatility is poised to expand due to negative gamma positioning, low liquidity, and fading option expiration effects. Tight overnight funding conditions and elevated dispersion readings further suggest that risk assets may face renewed downside pressure in the weeks ahead.
Fully Edited Transcript by ChatGPT
Over the past week, markets traded within a relatively stable range, likely due to Friday’s option expiration. Looking ahead, volatility is expected to increase substantially. To recap, we previously saw a sharp decline on Friday, October 10, followed by a strong rebound the following Monday—just as anticipated. At that time, implied volatility in the one-day VIX was elevated and expected to decline, which it subsequently did. However, option expiration (OPEX) kept the market pinned around the 6,650 level.
Next week, with OPEX behind us, volatility should expand as supportive gamma levels fade. Gamma positioning has turned deeply negative, particularly in the SPY, which suggests that market maker hedging flows will now amplify market direction rather than dampen it. This creates the potential for a more volatile and possibly bearish trading environment.
From the options positioning perspective, data from OptionsCharts shows that aggregate gamma across expirations in the SPX is around $193 million per 1% move—an unusually low reading—while the SPY sits near negative $3.6 billion per 1% move. This divergence signals that we are entering a pronounced negative gamma regime. As a result, intraday volatility could spike, with market makers forced to chase directional moves. The VIX has already begun rising, suggesting growing nervousness as the market transitions out of the OPEX window.
Additionally, VIX option expiration occurs Wednesday, which will further unshackle volatility and allow the index to move more freely. Beyond volatility dynamics, liquidity conditions have deteriorated sharply. The “top of book” liquidity in the S&P 500 has declined to one of its lowest levels of the year, implying a thinner order book that could amplify price swings. As we enter next week, markets face the trifecta of expanding volatility, negative gamma, and low liquidity—a mix likely to produce heightened intraday moves.
Turning to the funding markets, the Secured Overnight Financing Rate (SOFR) jumped to 4.3% on Thursday—above levels seen before the Fed’s recent rate cuts. While Friday’s reading may ease slightly, the elevated SOFR underscores tight liquidity conditions in the overnight market. The spread between SOFR and the interest on reserve balances (IORB) has reached historically high levels, as has SOFR’s spread to the effective federal funds rate (EFFR) at 19 basis points—levels rarely seen since COVID. This widening reflects tightening liquidity, driven in part by heavy Treasury bill and coupon issuance.
Notably, the effective federal funds rate itself ticked higher to 4.11% on Friday, up from 4.08% following the last Fed cut. Though seemingly minor, this autonomous movement—occurring three times since mid-September—has historically been rare outside of Fed policy actions and points to growing stress in funding markets.
Further strain could emerge with Treasury settlement dates on October 21 and 23. Standing repo facility (SRF) usage has risen around prior settlement dates, reflecting temporary liquidity shortages. If this pattern continues, SRF usage may spike again next week, signaling renewed funding tightness. Such liquidity drains have direct implications for risk assets, including equities and crypto proxies like Bitcoin.
Broader market indicators reinforce this picture. Breadth remains weak—seen in the underperformance of the equal-weighted S&P 500 (RSP) and deteriorating regional banks and private equity stocks. Liquidity-sensitive names like Wingstop have struggled, and even large-cap leaders such as Meta are testing key support zones. The market appears to be straining to hold together amid diminishing liquidity.
Dispersion readings remain elevated heading into earnings season, suggesting that volatility across individual stocks is still high relative to the index. As earnings progress and dispersion trades unwind, correlations will likely rise, typically pressuring markets further. The ratio of SKU to VIX—a gauge comparing tail risk to near-term volatility—has also begun to decline, a pattern often preceding major market reversals seen before COVID, in 2008, and during the 2021–2022 peaks.
Altogether, the setup points to an environment of expanding volatility, constrained liquidity, and increased downside risk. If history is any guide, the coming weeks could bring significant market turbulence as liquidity pressures and volatility dynamics converge.
Defined Terms and Jargon by ChatGPT
OPEX (Options Expiration): The day when options contracts expire, often leading to short-term market pinning due to large hedging flows.
Gamma: A measure of how much an option’s delta changes with underlying price movement; negative gamma means market makers must trade with the market’s direction, increasing volatility.
Negative Gamma Regime: A market state where market maker hedging amplifies price swings instead of stabilizing them.
SPX / SPY: SPX refers to the S&P 500 index; SPY is the ETF tracking it.
VIX: The CBOE Volatility Index, often called the market’s “fear gauge,” reflecting expected near-term volatility.
Top of Book Liquidity: The immediate depth of orders available at the best bid and ask prices in the market.
SOFR (Secured Overnight Financing Rate): A benchmark interest rate reflecting the cost of borrowing cash overnight, collateralized by Treasury securities.
IORB (Interest on Reserve Balances): The rate the Federal Reserve pays banks on reserves held at the Fed.
EFFR (Effective Federal Funds Rate): The weighted average interest rate at which banks lend reserves to each other overnight.
Standing Repo Facility (SRF): A Fed tool allowing eligible institutions to borrow cash overnight by pledging Treasuries as collateral—used to ease short-term funding stress.
Dispersion: The degree to which individual stock returns differ from each other; high dispersion often signals uneven market performance.
Correlation: A measure of how closely asset prices move together; rising correlations typically indicate a risk-off environment.
SKU (Skew Index): A measure of tail risk or the perceived probability of extreme market moves relative to normal volatility levels.
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.