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'Come September, are the kids going to go back to school? And if they don’t, how does that disrupt everything along that chain?': RBC Capital Market's Silverman

Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, joined Yahoo Finance Live to discuss what investors should look for in the coming weeks and the remainder of 2021.

Video Transcript

- But we also have to talk about what's happening with these markets, especially as we recover from the sell off yesterday. So let's go to our market guest and bring them in right now. Amy Wu Silverman is head of derivatives strategy at RBC Capital Markets. It's good to have you here. And I guess what struck out to me in the notes that you sent us, Amy, was when you referred to the sell off yesterday that a lot of people might have missed out on that the buildup to that over the last several weeks is that the rally has been unloved. And you cited the fact that there were indicators that people were willing to go to protection. Tell us more about what that meant and why some people who got caught yesterday, perhaps should not have gotten caught off guard.

AMY WU SILVERMAN: Yeah. What has been interesting to me is that one key metric we follow, which is equity skew, in particular on the S&P, essentially the demand for downside protection, the demand for puts. That metric had been rising and rising for weeks leading up to the sell off we saw yesterday to the point where it was essentially higher than some of the levels we saw at the height of the pandemic, which I found to be staggering.

And then one incremental data point I'll give you is even today as we're rallying and we're seeing buying the dip on cyclicals, IWM skew, so the demand for hedges there, have become very strong. They've picked up. And people are looking to protect downside there as well.

SEANA SMITH: Amy I guess investors are still trying to end the-- everyone's trying to wrap their heads around how big of a threat though this Delta variant is to the market, at least over the short term. So yes, yesterday's pullback, maybe it shouldn't have caught people off guard. But should we expect those types of days going forward with the threat of the Delta variant?

AMY WU SILVERMAN: Yeah, look. Unfortunately, nobody knows. But I will tell you that options people always focus on the tail risk. So on one conversation I've been having, both with investors and personally, is come September, are the kids going to go back to school? And if they don't, how does that disrupt essentially everything along that chain? And so one thing we're really looking to in terms of the tenor of the options market is that September tenor. Are we starting to see a pickup in some of the back to school related ETFs? So an XRT, or an XLY for instance, which would be more heavily impacted?

So far, the answer is no. But if that starts to tick up, then it tells you the market, it's starting to price in a greater likelihood of that tail becoming an actual event.

- So when you talk about looking at ways to to position yourself for this, would we be making mistakes if we were taking on more protection? I mean, we see a recovery today. I think someone may-- well, we might find out if this is a dead cat bounce. But is it the time to keep protecting ourselves?

AMY WU SILVERMAN: I mean, the options market is sort of telling you that that is what people are doing right now. What I will say is as these hedges keep getting put into place, it's obviously making them more and more expensive. So if that is something that you're looking to do, I think there are other structures that make more sense now like a put spread caller for instance, which we talked to clients about today. And essentially, the view there is more, look. How much more upside do we really believe there will be from now through year end if you believe there will be less than 10%, or you believe there'll be less than 15%? When you sell those calls, you are essentially able to fund hedges a little bit better.

But look, when the market is up sometimes, people don't want to hear that. So it really is a question of, what is the best time to implement that trade.

SEANA SMITH: Amy, we were just talking to Jeff Smith, our DC reporter, a few minutes ago discussing the fact that the infrastructure, the bipartisan infrastructure talks, they could very well fall apart over the next couple of days. How much of that do you think is already priced into the market? Or I guess how closely are investors watching those talks down in DC?

AMY WU SILVERMAN: Yeah. It's interesting. So the way we try to read the tea leaves, if you will, in the options market is on what ETF that would be the most closely impacted by. So for instance, this case would probably be your XLI, your industrials plus your XLB, your materials. We've seen those option prices rise when we look at them, essentially on a matrix with other liquid ETFs. Look, there could be a lot of different reasons why that's the case. But those are two ETFs that are both elevated.

It could be from infrastructure related. But it could be other things, just general anxiety as well as you see cyclicals lead today. Obviously, there is more to hedge. But I would be watching those closely. Because if they start to become true outliers, then probably the infrastructure plan and its fall, the fact that it might fall apart is a reason of that.

- Amy, if I was going to cheat on homework in high school math, it would be your papers I would be copying. Amy Wu Silverman is head of derivatives strategy at RBC Capital Markets. Thank you so much for the insight and for helping guide us.