SpotGamma Founder Discusses How The Fed's Next Move And Expiring Derivatives Could Spark Market Turbulence

The U.S. equity market stands at a critical crossroads, SpotGamma founder Brent Kochuba says.

The convergence of the Federal Reserve's interest rate decision and the September expiration of derivatives positions may trigger a scenario similar to last month's turbulence when highly leveraged positions in currencies, stocks, and options unraveled.

"This setup mirrors what we saw on August 1st," Kochuba told SpotGamma subscribers. "Downside volatility may be in excess of what the market is pricing due to the twin triggers of negative gamma and correlation spasms."

Kochuba, known for his analyses and forecasting of markets through the lens of options positioning, shared his journey with Benzinga a few years ago. He returned to discuss how SpotGamma's new tools are helping both retail and institutional traders navigate complex market conditions.

The former derivatives broker and portfolio manager evaluates metrics like gamma—the sensitivity of option prices to movements in the underlying market. He also provides valuable insight into how market makers manage risk and affect outcomes.

"With the surge in options trading, many banks now acknowledge that options volumes have surpassed stock volumes in significance," Kochuba noted. "For those who don't trade options, it's still critical to watch their flows, as they provide insight into potential market moves."

In late July, Kochuba highlighted the risks posed by declining correlations and the growing concentration of indexes like the S&P 500 among their largest components, such as Nvidia Corporation NVDA.

"The juice was squeezed out of these trades," he told subscribers. "As stocks like Nvidia, Apple, and Microsoft started to stall, they were a drag on the S&P 500. If traders began selling off these large names, it would pressure the index due to their outsized influence."

Following July's rotation out of large-cap tech, AI, and the so-called "Magnificent 7" stocks into riskier sectors, traders shifted strategies, moving from betting on market upside through call options to buying put options to hedge against and bet on potential declines.

"The only way to unwind heavy concentration and correlation was for the S&P 500 to drop, which it did, and the VIX to spike," Kochuba recalled. "On August 2, we told subscribers it was one of the ugliest setups we'd seen, and there was no reason to hold stocks or be short options."

Despite a quick market recovery, Kochuba warns that volatility risks persist. Money allocated to the trades that unraveled in August (i.e., short positions on the S&P 500 and VIX) has grown. This was driven by renewed confidence in the market rebound.

"This feels like the early days of Volmageddon in 2017," Kochuba added, referencing concerns raised by pundits like Marko Kolanovic, who foresee a potential repeat of the volatility crisis. "My biggest concern is the illusion of liquidity. Many short-dated flows that dominate the market disappear when real risk emerges, replaced by record demand elsewhere like VIX call options."

Traders are increasingly betting on or hedging against downside risks by buying put options and selling call options. This limits market upside, Kochuba says. Mid-September is potentially pivotal, with catalysts such as the Fed's interest rate decision triggering further declines.

SpotGamma offers tools like TRACE to help traders monitor such risks. It tracks options hedging and impacts on market direction and volatility.

"We believe TRACE is essential for anyone active in the market," Kochuba said. "It's a new system tracking dealer and market maker exposure, clearly showing market positioning. With this information, we can forecast support, resistance, and market movements because we understand how major players will likely hedge in the days and weeks ahead."

SpotGamma and TRACE gained traction with institutions looking to map out positioning during critical periods when market sentiment can shift rapidly, Kochuba adds.

"We're dedicated to delivering essential insights into how traders express their outlook in the markets, with TRACE offering a clear way to visualize how these flows evolve through the day."

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