Meltup or Meltdown Coming
Today's market action, despite a modest spike in Eminis after the big retail sales miss and the even more unexpected jump in yields despite the latest confirmation the US economy is slowing down rapidly, generally makes sense at least in the context of the absolutely bizarre market action in recent weeks: Chinese Equities are struggling to digest the ugly weekend data misses coupled with the latest now-daily crackdown and warning from SEC head Gensler, while in the US, stocks are drifting on fresh lockdown fears and fears the best is far behind us in an economy where retail sales have missed for the past three months while the Citi Global Economic Surprise Index is lunging back towards “zero” after 14 consecutive months of “upside surprises” from the economic recovery.
Options Dealers are choking on prolific long ATM Gamma into Op-Ex which simply means that selloffs would be bought and ripped back - crushing the daily distribution of outcomes into a narrow band for effectively an entire month now and smashing realized volatility.This goes part-and-parcel with enormous Vol Control universe buying as we told you expect Thursday, adding prolific amounts exposure off the back of the absolute collapse in trailing realized volatility; (which was last seen in Sep and Oct of 2017) which means a melt up would happen.
Currently, markets are absolutely stuck and pinning btwn the large ATM $Gamma strikes ($5.5B at 4450 and $5.7B at 4475, with $12.3B acting as potential gravity for a move up to 4500, which is now the largest strike by a factor of 2x), as Dealer Gamma profile vs spot location means pure insulation / mean-reversion hedging flows. This could act as an enormous unwind flow on a pullback when / if those hedging buffers are reduced in that magnitude, allowing the market to “move” thereafter as volatility could then again expand. Just a massive potential “un-pinning” thereafter, but “stuck” for now.
Recent action has been "just massive “buy” flows into that itsy-bitsy pullback Monday morning and taking-us right back in the peak “long gamma = rVol pinning” strikezone, feeding our anticipated “melt-up into Op-Ex” call.Outside of this decimated index-level realized volatility in isolation, many volatility metrics continue screaming. Dealers can’t be short skew / crash / tails / gamma without causing knock-on into even more extreme vol metrics as they need to hedge themselves likely via liquidity from other risk-constrained Dealers and a downsized market-maker liquidity profile. Meanwhile, vol metrics remain super-tense, tightly-wound and pricing “crash,” juxtaposed to realized vol grinding ever-lower—which simply means one side will have to converge to the other in likely precipitous fashion as this “trues-up” eventually - translating either into an epic risk meltup or... meltdown.
Options Dealers are choking on prolific long ATM Gamma into Op-Ex which simply means that selloffs would be bought and ripped back - crushing the daily distribution of outcomes into a narrow band for effectively an entire month now and smashing realized volatility.This goes part-and-parcel with enormous Vol Control universe buying as we told you expect Thursday, adding prolific amounts exposure off the back of the absolute collapse in trailing realized volatility; (which was last seen in Sep and Oct of 2017) which means a melt up would happen.
Currently, markets are absolutely stuck and pinning btwn the large ATM $Gamma strikes ($5.5B at 4450 and $5.7B at 4475, with $12.3B acting as potential gravity for a move up to 4500, which is now the largest strike by a factor of 2x), as Dealer Gamma profile vs spot location means pure insulation / mean-reversion hedging flows. This could act as an enormous unwind flow on a pullback when / if those hedging buffers are reduced in that magnitude, allowing the market to “move” thereafter as volatility could then again expand. Just a massive potential “un-pinning” thereafter, but “stuck” for now.
Recent action has been "just massive “buy” flows into that itsy-bitsy pullback Monday morning and taking-us right back in the peak “long gamma = rVol pinning” strikezone, feeding our anticipated “melt-up into Op-Ex” call.Outside of this decimated index-level realized volatility in isolation, many volatility metrics continue screaming. Dealers can’t be short skew / crash / tails / gamma without causing knock-on into even more extreme vol metrics as they need to hedge themselves likely via liquidity from other risk-constrained Dealers and a downsized market-maker liquidity profile. Meanwhile, vol metrics remain super-tense, tightly-wound and pricing “crash,” juxtaposed to realized vol grinding ever-lower—which simply means one side will have to converge to the other in likely precipitous fashion as this “trues-up” eventually - translating either into an epic risk meltup or... meltdown.
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Nadman : ur giving me a migraine
Mcsnacks H Tupack OP Nadman : It’s a lot to take in.
Allanwow : thanks for sharing
Jodom_Jay : in low spirits
Nadman Mcsnacks H Tupack OP : no kidding. there is so much info out there. it can be very complicated, but DD will help the decisions that you will make. At least it should
Mcsnacks H Tupack OP Nadman : The market is having so many crazy Signals That are at such low odds of happening. It is showing that the market is being controlled by an algorithm, not by investor buying and selling at least to a certain degree.