Peak Gamma: ‘ARKK Doomsday Downside’ Trades & A Tesla Tumble
Yesterday, we highlighted the ‘gamma bomb’ that sent TSLA stock soaring above $1000 and the company’s market cap above $1 trillion as total options volume of 3.55mm contracts in TSLA was also a single-day record.
However, as Nomura’s Charlie McElligott notes, most stunning was the fact that 54% of yesterday’s record options volume / flow was concentrated in the 10/29 weekly options, including 1.2mm Calls for just this Friday’s expiration… while the $5.11B of total Call premium vs the $279mm of total Put premium was an unheard of 18 :1 ratio.
Bear in mind that for those 1800 TSLA calls to be in the money, TSLA would have to surpass Amazon and Google by Friday…
This was the definition of “weaponized Gamma” – in this case, short-dated Call options being bought creating a ton of (negative) convexity for Dealers who are short these options, then forced to aggressively hedge the Delta on account of the sensitivity to the upcoming “imminent expiration”.
And this is the punchline: TSLA alone is 5.65% weight of QQQ alone, and 2.15% of SPY – so if my chicken scratch, back-of-envelope math is correct, this means that TSLA was over ~70% of the gain in QQQ yesterday, and ~50% of the SPY gain yesterday.
But McElligott notes, there’s more going on here.
Adding to the complexity is the dynamic with the months-worth of client demand for shorter-dated “ARKK doomsday downside” trades which has daisy-chained around the Street, where a number of clients have been buying ARKK Puts / downside in size, as an expression of a “bearish Rates / USTs” trade into these crowded “ultra-high Growth” / disruptor stocks for an extra unwind-risk “kicker”
So due to this very large trade out in the market place on account of a number for funds, a few large Dealers are short substantial ARKK Gamma… but many were long TSLA Gamma against it (thankfully so, for them); however, they had to buy that from somebody, so I’m assuming there is some real Market Maker pain out there on this one.
And in the meantime on the already “extremely bullish” Equities market inputs that many have been speaking-about in recent weeks in anticipation of the powerful rally off the lows, the Vanna impact (on Delta hedging) on account of the Vol reset LOWER (rVol collapse dragging down iVol over the past few weeks) is creating an embedded supporting tailiwind to the market here as well – while at the same time, we see “long” Dealer Gamma (SPX / SPY consolidated $Gamma at $27.3B, 87%ile) and $Delta ($424.7B, 96%ile) help to maintain an environment which will make it incredible difficult to sustain even a modest pullback on the index level without a “shock”.
These dynamics are even more extreme in crowding / rates-proxy bellwether QQQ options, with (long) $Gamma at $1.279B and 100%ile in our history, and $13.8B of $Delta / 96.5%ile.
So where does that leave investors?
As SpotGamma warns, there is a robust level of positive gamma, and plenty of interest at strikes underneath. You can get an idea of this gamma distribution in the EquityHub snapshot below. Here you can see that there is a “peak” around the 4500 area which translates to “support” due to high open interest.
This also lends to the idea that its tough for the S&P to crash from this level, and it would likely take a few days of weakness to wear away the gamma-based support underneath.
But, SpotGamma expects that TSLA is due for a correction into Friday as >30% of the stocks gamma is tied to 10/29 expiration, so charm (time decay) and vanna (call IV declining) flows kick in.
Ultimately this episode shows the highly speculative transient nature of the flow driving this (any many other assets) up. As mentioned last night, we believe this activity brings a lot of risk into markets and is a concern going forward.
Tue, 10/26/2021 – 10:55