Lines In The Sand: Will Market ‘Ping Pong’ Continue Today?
The last few days have seen US equity market trading within a broad range, characterized by violent lurches from one side of the range to the other.
SpotGamma attributed this “ping pong” due to the unchanging options landscape. Despite the volatility there are little material changes to options positions, and so dealers (they’re short gamma) are simply adjusting their hedge.
They likely need to buy futures up to the 4365 zero gamma line (zero gamma implies “no more gamma hedge needed”) and selling down to the large put area
SpotGamma notes that overnight data indicates that rather slowly the options positions are beginning to fill in at prices overhead. The Volatility Trigger (aka gamma flip line) has dripped lower to 4345 (from 4370) and we note a lot of gamma now at the 4350 position. In other words: our upper bound is now 15 handles lower today than yesterday. The air pocket above 4300 is constricting.
The longer term implications of this are that it may be tougher for markets to regain previous highs as more gamma resistance fills in directly overhead. You can see this in the SPY chart below wherein 430 is a huge gamma bar, with 435-450 filling in with call gamma (ie resistance).
Whats interesting is that puts positions are not being materially changed. Therefore the lower SPX price bound isn’t budging, but implied volatility is also range bound because big puts aren’t being sold. Implied volatility is changing a bit on rallies which requires a hedge adjustment (vanna & gamma), but thats different from puts being sold and (large deltas being bought).
The downside risk here is that if real money sellers decide to join the party, and/or incremental put buyers step up then the market could push rather violently to the downside (new puts bought mean new negative deltas to hedge + vanna hedge selling).
Wed, 10/06/2021 – 09:46