“Way” back on February 24, Nomura’s Charlie McElligott warned that following that month’s expiry, the vaunted gamma “pin” lost a good bit of its influence when it comes to keeping equities well-behaved and tamping down volatility.
Colloquially speaking, the force that had helped keep spot “sticky” despite mounting concerns around what, at the time, was only a “burgeoning” crisis (as opposed to the five-alarm blaze the pandemic would quickly become) was significantly diminished, setting the stage for sloppy price action, especially if the news flow around the virus got worse, which it did.
“Following the end of last week’s Feb Op-Ex, we have seen this $Gamma profile in US equities index and ETF options collapse lower, which in turn is allowing for [a] long-awaited ‘big move’ in stocks”, McElligott said that Monday.
“Big move” turned out to be an understatement.
Eventually, after lots of pain and the most harrowing stretch for markets most living humans have ever witnessed, some of the vol-dampening dynamics were restored, as dealers’ gamma profile found its way back from the “dark side” (as it were), vol.-control funds gingerly re-leveraged, and CTAs covered and flipped long.
Now, however, we’re entering what McElligott recently cautioned may be a listless summer drift lower, as the prospect of a second COVID wave becomes more real and the market digests months of dour economic data.
On Thursday, McElligott cautions that coming out of expiry, we could see stocks “unshackled” again, in similar fashion to that observed in February.
Notably, the Tuesday-Wednesday selloff pushed dealers’ gamma position back into negative territory. “The S&P futures swoon of the past two days has seen us drop from the recently insulating Dealer ‘long gamma’ position… through the ‘neutral gamma’ line [to a] somewhat substantial ‘short gamma’ pocket ahead of tomorrow’s Op-Ex, which then risks eliciting more spastic hedging behavior and binary price action, particularly into the cash closes”, he cautions.
(Nomura)
The crucial point from Charlie is that come next week, the stage could be set for things to get messy, depending on what is (or, perhaps more aptly, isn’t) rolled.
“We see potential for 37.2% of the aggregate $Gamma in SPX/SPY consolidated options to ‘drop-off’ following Friday’s expiry… meaning there is the potential next week for [a] much wider range of price movement as we ‘unclench'”, he warns.
That sets up a possible collision between:
- fresh reports of virus flare ups (e.g., China and South Korea),
- heightened Sino-US tensions, and
- a post-Op-Ex reality that’s more conducive to large swings, as directional moves are amplified
“The 2,800 line is a monster and has held a few times now”, Charlie goes on to say, adding that “the 2,800 strike is by far the largest $Gamma line at $2.42 billion”.
(Nomura)
54% of the $Gamma at the 2,800 strike could potentially drop off at the end of the week.
Today’s wild ride down to 2766 then back up to 2852 had “short tomorrow’s 2800 strike” written all over it.
Charlie is awesome.
I would like to know how $Gamma is calculated.
Try Investopedia
That seems to be different from the Gamma that this article references. Do you know of any resource other than general internet searches?
It seem today that people assume that people have not tried to ‘Google it’ when an information request is made.
There is a clue in the writing. “aggregate $Gamma in SPX/SPY consolidated options ” To use aggregate and consolidated in the same sentence can create more questions than it answers on WTF this guy is writing about.
The economy was so loaded with debt and short of cash reserves ( pre- virus) that any one of a number of “black swans” could have set the demise of the economy in motion. In hind sight, easy to see how precarious the situation was.
Even if Covid-19 turns out to be far less deadly than initially feared, the undoing of the economy has been set in motion and this can not be reversed easily. We are seeing the horror of too much debt and not enough savings.
First Cheesecake Factory stopped paying rent, now Starbucks is demanding rent concessions ( even though 85% of their locations are open). The floodgates will soon be wide open- every company and person does not want to pay rent. Meanwhile, lenders want payment and governments are increasing real estate taxes by 50% or more. LOL!!
Wells Fargo has stopped repossessing autos when borrowers stop paying.
This is just the tip of the iceberg, IMHO.
All the printing presses in the world can not put this back together. We need a “flush” and a restart.