Markets stocks volatility

Nomura’s McElligott: Hedges Are ‘Being Lit On Fire’ Amid Unwelcome ‘Blast Of Good News’

"[We] should see some entertaining price action today!"

“[We] should see some entertaining price action today, as investors largely ‘long worst case scenario’ versus ‘short good news’ gets a blast of positivity they did not want”, Nomura’s Charlie McElligott writes, on a Friday morning dominated by risk-on sentiment tied to trade talks and Brexit optimism.

Thanks to the (likely misplaced) euphoria around the trade situation, S&P futures have risen a comical ~3% off the lows hit Wednesday evening when reports suggested no progress was being made and that Liu He might limit his trip to just one day of talks.

“Who coulda knowed it?”, a characteristically energetic McElligott asks amid the rally, noting that Spooz is being “gravitationally pulled higher (spot 2970) and now sits comfortably between the two large $Gamma upside strikes of 3000 ($3.7B) and 2950 ($2.5B)”.


In keeping with the theme that’s pervaded Charlie’s recent daily missives, he reiterates on Friday that with upside macro catalysts now either realizing or on the verge of realizing, the “crash-up” scenario is now seemingly imminent.

“As the bullish macro catalysts have indeed begun materializing, the various hedge expressions (VIX upside, S&P downside, Short Spooz) are being lit on fire, while buyside too is obviously seeing hedges go ‘wrong way’”, he writes, adding that “expiry [is] approaching next week and a ‘power decay’ [is] coming”.

In addition to the lopsided positioning on account of dealers hedging what they’re short to clients in terms of crash protection (and now having to manage that in the face of a furious risk-on move), McElligott notes that “VIX ETN longs are now increasingly incentivized to take profits as vol rolls over, adding to the purge flows”.


And don’t forget about underexposure by the Long/Short crowd, where beta to equities is still in just the 6th percentile going back six years (right pane).

The “final ‘insult to injury”, as Charlie puts it, describing how rough this is for consensual positioning which was underpricing upside and leaning heavily into crash protection ahead of anticipated macro disappointments, “is that we are nearing potential re-leveraging levels for trend funds, where our Systematic CTA model estimates that these strategies are close to again adding to Global Equities positions”.

It’s Donald Trump’s rally to validate – or invalidate. Who knows. Certainly not Donald Trump…


1 comment on “Nomura’s McElligott: Hedges Are ‘Being Lit On Fire’ Amid Unwelcome ‘Blast Of Good News’

  1. Got to love his latest tweet “One of the great things about the China Deal is the fact that, for various reasons, we do not have to go through the very long and politically complex Congressional Approval Process. When the deal is fully negotiated, I sign it myself on behalf of our Country. Fast and Clean!” In other words, President Warren can cancel his deal as easily as he cancelled the Iran Nuclear Agreement.

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