“THIS IS NO DRILL, with Spooz -88 handles to 3250 last”, Nomura’s Charlie Mcelligott wrote, in a pre-dawn note on Monday as US equity futures tumbled along with European shares amid acute concerns about the spread of COVID-19.
The good news from a systematic flows perspective is that de-leveraging levels for CTAs are likely still below spot. On Charlie’s model, that’s “due to the exclusive loading of longer-term windows only, with no current weight for 2w / 1m windows”.
The potentially bad news is the $190 billion, 100th percentile, asset manager long in SPX and US equities futures. That’s one helluva overhang.
That needs to be considered against a post-Op-Ex reality that finds the “gamma pin” (colloquially: the force that’s kept spot “sticky” and acted to damp volatility) losing a good bit of its influence.
“Dealers have ‘generically’ had to buy weakness / sell strength to remain hedged [and] thus provided us a natural counter-flow ‘buffer’ to large market shocks in any direction”, McElligott reminds you.
“Option dealers were long S&P 500 convexity (gamma) most of the year, and this cushioned selling in the S&P 500 (‘buying the dip’)”, JPMorgan’s Marko Kolanovic wrote last Wednesday.
Now, however, we’re “unshackled” coming off of expiry.
“Following the end of last week’s Feb Op-Ex, we have seen this $Gamma profile in US Equities index & ETF options collapse lower, which in turn is allowing for today’s long-awaited ‘big move’ in Equities”, Charlie says.
One possible implication: Now that there’s greater scope for wider swings, the risk of the massive asset manager long being subjected to profit-taking is amplified.
Meanwhile, any sustained move higher in volatility would eventually lead to de-risking from vol.-control and, as Charlie goes on to say, “it seems clear that systematic VIX ‘roll-down’ strategies have already begun getting ‘stopped-out’.”
I’ll leave you with one familiar chart from Charlie, updated for Monday: