SPX Gamma Wrap
The SPX lacked conviction today and closed almost unchanged at 4392 points with energy (+1.5%) being the winner among the main sectors, while health care (-1.1%) the loser.
Among single stocks Bank of America gained 3.4 percent after beating estimates, while Charles Schwab dropped 9.4 percent on rather disappointing results. Twitter jumped 7.5 percent after adopting a “poison pill”.
All eyes were on the commodities complex though, where natural gas climbed above 8 dollars on Europe’s ambitious plans to import a massive amount of energy from the US to diversify away from russian sources. Also corn gained almost three percent and climbed to the highest level since 2012.
In terms of option positioning option dealers still carry a negative gamma amount of minus 528MM on their books, which points to elevated volatility ahead.
To make it a little bit clearer to all new subscribers (thanks for following!) what this means, here is a quick explainer:
We only analyze SPX options - expensive contracts, which big investors are using to hedge their downside risk. A typical big fish would buy put protection (that's short position) and to finance the cost he would also sell a call option (that's also a short position).
On the other side of those trades are option dealers or market makers, who sell the puts (that's a long position) and buy the calls (that's also a long position).
If the market drops and put options start to move into the money, option dealers (which are in general long the market) need to re-hedge their portfolios by selling more futures as the markets declines, which increases volatility and can cause feedback loops. If the markets reverses from a low level the opposite happens: Dealers now need to buy into strength, which also increases volatility.
I will try to explain more and go deeper in future updates as time allows. Please also feel free to ask questions in the comments.
PS: On the geopolitical front meanwhile the russian offensive we were talking about over the last weeks has finally started. Also the US stepped up the rhetoric regarding sanctions, vowing to destroy the military-industrial complex of Russia, which was just another reminder that we might be just in the warm-up phase of this conflict.
Among single stocks Bank of America gained 3.4 percent after beating estimates, while Charles Schwab dropped 9.4 percent on rather disappointing results. Twitter jumped 7.5 percent after adopting a “poison pill”.
All eyes were on the commodities complex though, where natural gas climbed above 8 dollars on Europe’s ambitious plans to import a massive amount of energy from the US to diversify away from russian sources. Also corn gained almost three percent and climbed to the highest level since 2012.
In terms of option positioning option dealers still carry a negative gamma amount of minus 528MM on their books, which points to elevated volatility ahead.
To make it a little bit clearer to all new subscribers (thanks for following!) what this means, here is a quick explainer:
We only analyze SPX options - expensive contracts, which big investors are using to hedge their downside risk. A typical big fish would buy put protection (that's short position) and to finance the cost he would also sell a call option (that's also a short position).
On the other side of those trades are option dealers or market makers, who sell the puts (that's a long position) and buy the calls (that's also a long position).
If the market drops and put options start to move into the money, option dealers (which are in general long the market) need to re-hedge their portfolios by selling more futures as the markets declines, which increases volatility and can cause feedback loops. If the markets reverses from a low level the opposite happens: Dealers now need to buy into strength, which also increases volatility.
I will try to explain more and go deeper in future updates as time allows. Please also feel free to ask questions in the comments.
PS: On the geopolitical front meanwhile the russian offensive we were talking about over the last weeks has finally started. Also the US stepped up the rhetoric regarding sanctions, vowing to destroy the military-industrial complex of Russia, which was just another reminder that we might be just in the warm-up phase of this conflict.
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