Over the course of 2021, the notion that OpEx is associated with vol expansions and a wider distribution of outcomes in spot equities has become somewhat socialized.
I still wouldn’t call the dynamic “mainstream,” but it’s sufficiently embedded in the psychology of sophisticated market participants to manifest in front-running. I’ve mentioned on multiple occasions that the trade seems to be getting pulled forward.
In an OpEx Friday note, Nomura’s Charlie McElligott described just that, calling it “anticipating the anticipators.”
“Of late, we’ve seen a pattern where we’ve actually traded lower into expiration (front-running the Delta de-risk) instead of what historically was most often the volatility expansion window being the week out of expiration (when big lumps of the Gamma drop and we can more easily move thereafter),” he wrote.
The more extreme the setup, the more this bears watching. “This options expiry could be one for the history books,” a bullet-point summary from Bloomberg declared, characterizing the associated vol expansions as “a semi-predictable volatility storm.”
In the lead-up to this month’s expiry, retail call-buying and elevated single-stock options volumes garnered quite a bit of coverage.
Small-caps have been particularly choppy this week and news of Austria’s lockdown and national vaccine mandate could potentially exacerbate the situation given the read-through for cyclicals and re-opening expressions.
“[The] Russell is the only major US index where we see a negative Gamma and Delta vs spot dynamic, which is a large part of [why] it’s being so hyperactive and sensitive over the past 24 hours,” McElligott said.
Even after a purge on Thursday (red arrow in the top-right figure above) IWM Delta was still 94.5%ile.
I’ll quote myself verbatim — past a certain point, paraphrasing one’s own musings somehow seems superfluous. Vol-sellers and dip-buyers reengage at the first sign of “trouble” (conditioned as they are by a dozen years of muscle memory) and spot ends up pinned as hedging flows insulate the market from large moves. As the distribution compresses, realized vol moves lower, opening the door to mechanical re-allocation from the vol-control universe. Until the next OpEx cycle, when the window opens again.
McElligott reiterated the same, describing a “general YTD environment where a lot of yield enhancement options-selling / overwriting has created a ton of ATM Gamma which Dealers are long, reinforc[ing] this absurdly ‘pinned’ low realized Vol environment,” he wrote Friday. “Around the ‘Gamma Unclench’ of monthly expirations traders ‘front-run’ the de-risking of extremely long $Delta ahead of the Gamma release.”
Regardless of any near-term chop, the trade into year-end continues to favor a rally. Seasonality is supportive, as are expectations of buybacks and fund flows.
Global equities took in another $13 billion last week, taking the YTD haul to $896 billion (figure above).
Going back two decades, November is the best month for fund flows in both US and global equities.
And besides, what else are you going to buy for your stockings this holiday season? Apparently, even lumps of coal are expensive.
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