On Wednesday, we brought you some highlights from the latest note emanating from the digital pen of JPMorgan’s Marko Kolanovic, who endeavored to lay out the “liquidity-volatility-flows feedback loop” for anyone who (still) doesn’t quite grasp the nexus.
Part of that analysis found Marko reminding everyone that “the largest of all systematic flows by size and impact is that of index options hedging.” The following visual is the delta weighted OI of S&P 500 index puts, plotted with an asset estimate of CTAs and vol.-targeting strats for comparison purposes.
Point being, to quote Marko again, “the largest component of systematic flows comes from option hedging.”
In the course of providing a lay of the land (so to speak), Kolanovic also noted that the S&P 500 options gamma imbalance “subsided from an average ~$50 billion towards puts (dealers short gamma) in December to slightly long gamma now.”
That’s a great setup for a couple of quick excerpts from the latest daily note by Nomura’s Charlie McElligott who, if it ever doesn’t work out on Wall Street, certainly has a career waiting for him in the highly-lucrative field of rapid-fire journalism.
Charlie notes that the (still tentative) re-risking has been led by CTA covering (something we’ve discussed at length over the past week) and now may be set to pull in the Long/Short crowd which, based on an admittedly simple moving beta of the HFRX Equity Hedge index to SPX, has barely started rebuilding exposure (probably a bit gun shy after the November “false start”).
“Tactically, this equities re-leveraging is initiated by ‘first-mover’ systematic strategies is seemingly beginning to ‘drag-in’ fundamental / discretionary funds, with Nets- and Grosses- ‘tickling’ higher as per Street PB data”, McElligott writes, adding that GS data “show ‘gross-exposure’ jumping the most last week in nearly 1.5 years.”
To the point made here at the outset, Charlie writes that SPX and SPY consolidated $Deltas “are again positive for the first time in over a month (largely as a function of the rally with Calls over Puts), while too we’ve seen the recent Short Gamma of Dealers ‘flip’ again Long Gamma at current levels, helping foster this calm-er ‘grind higher’ through earnings.”
So, that’s the good news. The bad news is, it wouldn’t take much to flip us right back to the “dark” side where hedging effects exacerbate price moves.
“However, a move down through 2575 in SPX (especially after expiration roll-off) would likely again see the consolidated Gamma profile pivot Short which could then elicit ‘sloppier’ moves”, McElligott goes on to caution.
On the CTA side of the equation (and this is just a reiteration of the charts we highlighted on Wednesday), McElligott’s model suggests we’re a long way away from any meaningful “inflection” points across major assets.