There’s “consternation” about the “spot up, vol up” dynamic evidenced in US benchmarks of late, Nomura’s Charlie McElligott says, in a Tuesday note.
This was, of course, the subject of a feature piece here on Monday evening, and the explanation is “simple”, McElligott writes.
“Street-wide, Dealers are short Gamma/short Calls off the back of the massive upside premium buyer (as in billions spent) who has been in the market over the past month or so in a number of mega-cap, single-name tech companies”, he notes.
If you’re wondering why, for example, Salesforce experienced a “freakish” (as Charlie puts it) surge last week, alongside a similarly anomalous move in Netflix, this dynamic goes a long way towards explaining it.
McElligott employs his signature, ultra-colloquial cadence, describing the Salesforce move as a “lolwut” moment (which is probably what the ~1,000 people the company reportedly laid off on the same day where thinking).
That surge, he says, “‘dragged-up’ a number of other high-profile big Tech names which have also been part of the upside buying program”.
Last week, Macro Risk Advisors’ Dean Curnutt wrote that recent options trading activity in tech was likely “heavily tilted towards buying premium in extremely short-dated paper on momentum stocks”. That, he said, “aptly describes [the] late summer profile of vol risk [with] tech stocks trending (one might argue, ‘crashing’) upward”.
“Generically, the Street was short 1m 20d Calls which turned 25d real quick, forcing Dealers to grab Delta to stay hedged, in a classic ‘tail wags the dog’ feedback loop”, McElligott went on to say Tuesday, on the way to flagging the same massive spread between 1-month realized and the front VIX future noted here on Monday afternoon.
Ultimately, Charlie says the upside premium buying was “simply larger than an August illiquid single-name market can take [and] frankly, ever take, regardless of month”.
The read-through, more broadly, is that the associated hedging manifests in “forced lookalike buying in NQ- and likely ES- as well”, McElligott adds. “Spot up, vol up, as this ‘upside-crash’ has to be hedged”.