Market Wrap
The SPX tried to build on Friday’s gains, but turned south at the 3900 mark, after a sobering NAHB Housing Market Index, which dropped sharply lower by 12 points, took the steam out of the positive sentiment.
(From a gamma standpoint there is nothing special about the 3900 strike, as both call and put positions net each other out, but the 50-Day Average is located slightly higher.)
Selling accelerated in the afternoon after Bloomberg came out with a piece according to which Apple plans to slow hiring and spending for some divisions next year to ease the impact of economic downturn.
Overall the market seems fragile as liquidity was hitting almost historic lows, according to Goldman, as professional investors are staying increasingly defensive.
In contrast, retail investors are still hanging on to their equity exposure, even though the inflows are waning according to Tony Pasquariello from Goldman.
At least some support should kick in in the form of buybacks though, as the earnings season is concluding over the next few weeks.
Gamma Discussion
Dealer gamma declined by 81M to -448M, which is pointing to higher volatility ahead, while the "gamma flip" level moved 30 points lower to 3975.
We received a good question why we think the expiration of VIX options could bring the VIX lower, despite the quite substantial overhang of expiring puts vs calls.
Shouldn't the same mechanics as in the SPX option complex apply (puts expiring = dealers buying back futures)?
We think the difference between the SPX and VIX option complex is, that investors do not buy VIX puts to bet on declining volatility, as this is a rather money losing strategy because puts are too expensive when volatility is elevated.
Rather investors enter vertical put spreads (to profit from declining vol) for example or buy VIX calls to hedge for a market meltdown.
Recent observations seem to be proof for that theory, as typically volatility declined on VIX expiration dates in 2022, except on one occasion.
https://bucket.mlcdn.com/a/3517/3517811/images/2cf575d7d0a19535dcf47d65a918fff293ca88fb.png
Chart above: The forward skew profile of VIX options suggest out-of-the-money calls are in higher demand than OTM puts.
(From a gamma standpoint there is nothing special about the 3900 strike, as both call and put positions net each other out, but the 50-Day Average is located slightly higher.)
Selling accelerated in the afternoon after Bloomberg came out with a piece according to which Apple plans to slow hiring and spending for some divisions next year to ease the impact of economic downturn.
Overall the market seems fragile as liquidity was hitting almost historic lows, according to Goldman, as professional investors are staying increasingly defensive.
In contrast, retail investors are still hanging on to their equity exposure, even though the inflows are waning according to Tony Pasquariello from Goldman.
At least some support should kick in in the form of buybacks though, as the earnings season is concluding over the next few weeks.
Gamma Discussion
Dealer gamma declined by 81M to -448M, which is pointing to higher volatility ahead, while the "gamma flip" level moved 30 points lower to 3975.
We received a good question why we think the expiration of VIX options could bring the VIX lower, despite the quite substantial overhang of expiring puts vs calls.
Shouldn't the same mechanics as in the SPX option complex apply (puts expiring = dealers buying back futures)?
We think the difference between the SPX and VIX option complex is, that investors do not buy VIX puts to bet on declining volatility, as this is a rather money losing strategy because puts are too expensive when volatility is elevated.
Rather investors enter vertical put spreads (to profit from declining vol) for example or buy VIX calls to hedge for a market meltdown.
Recent observations seem to be proof for that theory, as typically volatility declined on VIX expiration dates in 2022, except on one occasion.
https://bucket.mlcdn.com/a/3517/3517811/images/2cf575d7d0a19535dcf47d65a918fff293ca88fb.png
Chart above: The forward skew profile of VIX options suggest out-of-the-money calls are in higher demand than OTM puts.
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