Especially after a 9-day winning streak - the longest such streak since November 2004! Especially given the Asian currency drama - as written about in detail this morning! And Especially since much of this rally has been put covering - not bullish new call flow as presented by SpotGamma.
If everything is in the clear, then we should see investors rolling out of puts and into calls, and volatility should contract.
Here's how the granularity plays out for those interested:
There are essentially just 2 large positions: 1) A big "short straddle" strike at 5,800 (May & June expirations), which generate -$5bn of MM gamma 2) Several large MM positive gamma strikes in the 5900-6000 range, which serve to offset some of the 5,800 negative gamma.
The result of these concentrated, tight positions is a very large gamma kurtosis - that is to say the deepest of the negative gamma is very local to 5,800.
If you look down <=5,600, you see gamma is very flat (±$100 million) - suggesting that traders have closed the downside put hedges they had on in April, and have yet to establish much of anything new...including long call positions.
But SPY looks differently:
What we see now in SPY GEX is a very large, persistent negative gamma position all the way from 530 up into 590 (yellow box). We see this position as the primary supply of gamma in the S&P500 - larger than that of SPX.
For MM's to hedge in a negative gamma environment they likely need to buy stock as the S&P500 goes up, and sell stock as the S&P goes down.
This means that all the way from SPY 530 up to and into 590, MM's would likely have had to buy stock as equities went higher.
If you break down what is supplying the SPY negative gamma, what you find is that it is almost 100% from market maker short put positions (negative blue bars). This means that SPY traders are long puts as their predominant position.
Translation: Traders haven't even unwound their biggest hedges yet, nor have they shifted strongly into buying calls!
And given that VVIX & VIX have been falling into my stated lower targets - 93 & 20 respectively - it's a good bet that if/when we get there we will have an excellent inflection point to trade against:
1. Risk-Off: market bearish with solid volatility bounces there, likely forcing VX3M:VIX ratio back into backwardation, while triggering negative gamma...
OR
2. Risk-On: these levels fail and market spikes higher, forcing lots of hedges to unwind and dealers to chase higher stocks.
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Now Add In Price Insensitive Flow
That's right...
"+$30B of U.S. Equities to BUY over the course of the week almost regardless of SPX daily chg magnitudes...
Most importantly for those who think this is voodoo... the backtest of prior rVol crunches = large implied Vol Control BUYS shows outlier SPX forward returns with high hit rates and excess returns." - via Charlie McElligott (Nomura)
Translation: Market should be supported on sell-off and likewise, upside begets upside. Also Charlie:
This is the scenario nobody (few) wanted: "...positioning and leverage exposure de-risked, Macro-Bearish and underweighted the “Mag8” U.S. Equities in general vs R.O.W. …but now suddenly, it’s MegaCap Tech Secular Growth which is awkwardly then leading to the Upside , in a rally which nobody has had enough on to “capture”…but are now being forced to buy-back".
We are but one macro headline away from positive PEACE DEALS, TRADE DEALS, TAX CUT/DEBT CEILING DEALS. And the inverse is also true!
Let’s dig into the macro event risks coming up, economic data, earnings and TRADE UPDATES… Also remember:
I will run a live FOMC trading room special: 2-3 ET PM before Hans & meet after market close at 4PM for Macro-to-Micro Options Power Hour.
