The good news is, spot is “pinned” between the two largest gamma strikes.
Or, put differently, the S&P is “anchored” by the “gravity” associated with 4,400 and 4,450, thereby keeping things rangebound.
That’s according to Nomura’s Charlie McElligott, who on Tuesday noted that the “overall $Gamma rank is 85.9th%ile at $26.2B, while $Delta is $367.6B / 91.8%ile, which looks to be the source of so much of the ‘latent’ bid in Equities last week.” The dreaded gamma flip level was 4,279, on Nomura’s estimates.
This (figurative and literal) “Greek” is useful for traders, but also for “everyday” market participants to the extent it’s part and parcel of the “stability breeds instability” dynamic embedded in modern market structure and responsible for so many of the “fragility events” we’ve seen in the post-financial crisis era.
Rangebound markets are conducive to lower realized vol, which in turn dictates mechanical exposure adds from the vol control universe. For example, McElligott on Tuesday noted that “a daily + or (-) 0.5% SPX change over the next one-week period would see +$38.2B of S&P futures added, while a daily ‘no change’ for the next week would see +$49.6B to buy over this period.”
That bid then helps support the market, and the longer it stays in-trend, the more conducive to extreme positioning from trend-following strats. Indeed, Charlie noted that positioning in S&P futures in Nomura’s trend model “is now back to +1SD dating back to 2002, while the model’s position in UST 10Y futures is now back to -2SD.”
Is the above “bad”? Well, not necessarily. It just “is what it is,” so to speak. And, as alluded to above, “what it is” is just the same cycle of re-positioning into a trending market as low volatility sets the stage for a daisy chain of exposure adds.
The serenity lasts until some (usually exogenous) shock drives spot suddenly lower, pushing up volatility. Because volatility is inversely correlated to liquidity provision and market depth, downtrades are characterized by exaggerated price swings. As spot careens through key levels, hedging dynamics further amplify the moves, as does unemotional selling from trend-followers, until it’s all one smoldering pile of ash.
McElligott wasn’t that dramatic with it on Tuesday. “These two massive positions within the overall CTA model means the aggregate gross estimated exposure for the Systematic Trend model is back at 90.7%ile, a pure function of the universal vol destruction in recent months, which means that yet again, the current stability likely then sets the table for future instability,” he said.
The mainstream financial media always gets around the quoting Charlie. Unfortunately, it’s usually after the house has already burned down.
H-Man, sorta like a bull rider waiting in the pen for the gate to open.