The way out of the money calls in the component stocks of the Russell 2000 have jumped in value to dizzying heights. ORATS measures the ratio of the implied volatility of the 5-delta and 75-delta, 30-day options for all of the component stocks and takes a weighted average.
With the 5-delta calls at 97% of the 75-delta calls, we see the highest reading on our records that measure back to 2007. Normally, the out of the money calls will trade at a fraction of the 75 deltas, at a ratio of about 80%. However, recently that number has climbed to almost par.
The components of the Nasdaq-100 and S&P-500 5 to 75 delta calls are off their valuation highs set back on August 25th.
The market makers will continue to push the relative implied volatility of the 5 delta calls higher until their inventory starts to turn. Now, Russell call buyers are pushing this ratio higher.
As the market rallies, market makers are forced to cover the deltas the short gamma produces approaching the short calls. This effect causes market volatility and dislocations as we have seen lately. Today the Russell was up + 0.4% while the Nasdaq was down - 0.2% and the S&P was down - 0.5%.