'Gamma Tilt' Suggests More Downside In Stocks As "Bigly" Op-Ex Looms

Nomura's Charlie McElligott summarized things heading into the weekend perfectly for traders: "Op-Ex tomorow matters 'bigly' for Equities."

Critically, he explains, there remains likelihood of continued “chase-y” moves in both directions on dealer delta hedging due to the magnitude of the positioning out there:

  • Latest estimates show 31% of $Gamma set to drop-off in SPX / SPY consolidated options after Friday, but far more notably with 50% in QQQ and 55% in IWM ready to roll-off post Op-Ex.
  • SPX largest $Gamma strike is 4100 ($4.1B), and from there it’s the 4050 strike ($3.0B) to the downside and 4200 ($2.8B) and 4150 ($2.5B) to the upside.
  • Currently versus spot, we see SPX “short gamma (4175 flip), LONG delta (4096 flip)”; QQQ “short gamma ($326.25 flip), short delta ($329.77 flip)”; and IWM, “short gamma ($224.22 flip), short delta (224.66 flip)”.
  • Again, the most extreme reads are in legacy “duration-sensitives” macro-regime of “secular growth” Nasdaq / QQQ, where (negative) $Gamma of -$884mm is 0.7%ile since 2013, and where (negative) $Delta is -$18.7B / 2.0%ile since ‘13.

Nasdaq remains the most extremely positioned...

(Click on image to enlarge)

Given the extreme levels of delta/gamma and opex-rolloff, SpotGamma warns that there are essentially two levers we are watching here:

  1. Because all indices are in a negative gamma position, that implies put gamma is in control. If markets start off quietly, then put decay may spark and keep a bid in markets as dealers cover shorts (this decay is charm).

  2. VIX/implied volatility(IV) is high. If VIX/IV breaks down then that will cause more rapid decay in puts, adding to a market tailwind. Conversely if VIX/IV spikes then dealers need to short futures (this is vanna).

If selling doesn’t materialize rather quickly today then this put decay vanna/charm combo could lead to a rally as dealer short hedges. We’d look at any rally as a function of “short covering” vs real buying which could lead to an air pocket into next week. We also note that next week is post-OPEX and so the window opens for more sustained volatility.

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