‘Rolling Minsky Moments’ And ‘Pseudo-Stability’: Revisiting The Avalanche

We saw an enormous jump day over day with the S&P futures options and SPY ETF options cumulative, both delta and gamma, on the day. So SPX net delta moves down $460 billion. That’s a 0.1 percentile move since 2013.

The day prior, that net delta was negative $55 billion. So just impossible, almost nine times growth over the course of the day with regards to how much delta was kicked off for sale from the options community yesterday in just SPX and SPY.

And what that means from the delta side of things is that – and this is as of yesterday’s numbers – but S&P gamma is now at $24 billion per 1% move plus or minus. And those big strikes there are 2,800 and 2,750.

And I think, judging by today’s spasms where it looked like we were going to break out, and then it looked like we were going to break down, and it looked like we were going to break out, and then it looked like we were going to break down, those levels kept us pretty well pinned.

But the danger here is that, on a close below that pretty heavy open interest line of 2,750, the more we start slipping below, the further out of position the short gamma is. And the more it slips, the more you have to sell to stay hedged.

And that’s always the danger of the options market.

When you think about all of this, it’s worth noting that we’re in the blackout period for buybacks. That said, Goldman’s buyback desk had its biggest day since February on Wednesday thanks to ASRs. To wit:

Although Corporates remain in the earnings blackout period until 11/6, a lot of companies are on 10b5-1 plans which allow them to buy back stocks through the blackout windows. Many of these plans include scales which get more aggressive the lower stocks go.


McElligott has variously warned over the past several weeks that “peak buyback blackout” could leave the market “naked” (so to speak) as the largest source of demand for U.S. equities (the corporate bid) disappears. Here’s what he had to say to MacroVoices about flows from 10b5-1 plans:

I want to be as black-and-white on this as possible, and totally clear. If there was going to be a period of pullback with this tape, it was going to come in this two-week window where we are at peak buyback blackout.

And that is absolutely where we are right now. The vast majority of S&P sub-industry levels are at effectively 100% blackout as of this week.

Now, 10B5-1 plans allow corporates to buy outside of the blackouts, but with a number of limiting factors there. The bottom line: There still is a reduction in net corporate flow. That is a critical facilitator allowing this risk-off trade to really proliferate.

Just to reiterate, the key takeaway from this discussion (no matter who is having it), is that the interplay between modern market structure and the low vol. regime created a self-reinforcing dynamic that embedded an enormous amount of risk beneath a veneer of stability. Wednesday should be viewed through that lens.

You can listen to the full podcast here. McElligott’s full remarks start at 59:00 minute mark.

[Do check out the website for MacroVoices when you have a second. It includes links to all manner of insightful interviews with some of the best and brightest macro minds]


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Disclosure: None of what I write here is to be construed as advice to buy or sell any kind of asset. It is merely my personal and not my professional opinion. Any asset can go to zero.

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