Modern market structure isn’t something a lot of investors, or even traders, truly understand, and I’m grateful for that. Because it’s just one more reason for people to frequent these pages.

As one commenter put it recently, “I just come here for the philosophy, fashion tips, political analysis, economic reports and stock market discussions.” You could add modern market structure updates to that list.

Monthly op-ex is coming up, and that might open the door to a wider distribution of outcomes for spot equities in the event a meaningful share of long gamma “insulation” rolls off.

Sorry, there’s no “layman’s” version. Only a slightly more colloquial phrasing. Coming out of expiry, the main US stock indexes could have more freedom of movement depending on the post-expiration lay of the land for options dealers and market makers, whose hedging flows can be a countercyclical buffer (i.e., buying dips and selling rips) or a directional accelerant (i.e., buying into rallies and selling into a hole), depending.

There are of course any number of factors which explain why options dealer positioning looks how it looks at any given time. There’s a sense in which asking after the “why” is akin to asking what explains the current market zeitgeist. (A lot of things!) But it’s not all traceable to deliberate positioning that reflects someone’s view on — fill in the blank — the war, the AI narrative, etc.

The figures below offer an updated snapshot of AUM growth for premium income funds — mass market call-writing products — which Nomura’s Charlie McElligott once described as “a fat pitch to the aging demographic who know they can’t retire on money market returns alone.”

Generally speaking, those funds generate an income stream by selling a covered call on an underlying stock portfolio.

Do note (because based on comments, I get the impression readers mistake this for something it isn’t): Selling covered calls for income isn’t exactly innovative, and the only risk you incur atop that which goes along with owning stocks (i.e., selloff risk) is that your upside’s capped by the strike on the sold call. It’s not some dicey innovation dreamed up by cross-eyed quants. It’s basic stuff.

So why is there suddenly such enormous demand for mass market products which employ that simple strategy? Because, as McElligott reminded traders in his latest, these products are being pitched as a kind of bond substitute in a post-pandemic, war-torn, inflation-prone world. When govies routinely trade like junk bonds, incurring the risk of a stock selloff doesn’t seem as irresponsible to aging demographics as it used to.

In other words: If government bonds are a drawdown risk now too, and vulnerable to inflation besides, why not just own a portfolio of stocks and sell a call against it for income?

There are answers to that question, but not enough good ones for some Boomers, hence the “booming” AUM shown on the left, above. That AUM — and this is where the rubber meets the road — has to trade. Those products are a perpetual and growing source of volatility supply.

As Charlie wrote, that supply comes atop the “ongoing proliferation” of other “options- selling strategies, structured notes, exos, VRP [harvesting] and dispersion” trades, all of which combine to stuff dealers with the above-mentioned “insulation” unemotionally.

That latter part’s key. That’s why I italicized it. This options supply is mechanical. A lot of it has to trade and assuming reasonably favorable conditions, most of it will trade.

What does that mean looking into the back half of the month? Well, as Charlie went on to write, “any potential gamma ‘un-clench’ which would occur out of options expiration comes down to systematic vol-sellers.”

If they “fill that dealer position back in via options supply, that means general market insulation which allows investors to emerge from the bunker and begin to chase returns again and add back longs.”