Post Op-Ex Market Melt-Up: “Everyone Has Crash Down Risk Protection, Nobody Has Crash Up”
As discussed earlier, a quick look at the “gamma tilt” in markets, suggests that there is more downside risk than upside ahead of tomorrow’s sizable op-ex, which sees roughly 30% of dealer Gamma drop-off in SPX / SPY consolidated options, but even more notably, half to gamma in QQQ and 55% in IWM is also about to roll-off. Here are the details on the various gamma strikes and sizes courtesy of Nomura’s Charlie McElligott who notes that the largest SPX strike is at 4100 ($4.1B), and from there it’s the 4050 strike ($3.0B) to the downside and 4200 ($2.8B) and 4150 ($2.5B) to the upside.
But the most extreme reads are not in spoos, but in legacy “duration-sensitives” macro-regime of “secular growth” Nasdaq/QQQ, where (negative) $Gamma of -$884mm is 0.7%ile since 2013, and where (negative) $Delta is -$18.7B / 2.0%ile since ‘13. Which may explain why tech stocks have had such a tough time finding upward momentum in recent months.
This, together with the previously discussed “gamma tilt” would suggest downside risk in tomorrow’s op-ex.
However, as Nomura’s McElligott writes in his morning notes, there is some incrementally “bullish” stuff happening, and the potential for a marketwide “crash up” is growing:
First, the S&P 500 has withstood waves of macro- and idiosyncratic- shocks, where despite the post CPI “inflation scare” causing a systematic deleveraging in a number of legacy “long Equities” positions across CTAs and mechanical exposure reduction from Vol Control / Tgt Vol, not to mention the rolling waves of speculative liquidations in crypto, meme-stocks and unprofitable tech high valuation names in recent weeks, we remain just 2.5% from all-time highs in SPX
Second, rate Vol is again getting “mushed” – despite the pervasive concerns about the “inflation overshoot -> taper pull-forward” meme, the Fed too has remained steadfast in “transitory” messaging—which along with their own scar-tissue from the last “tightening tantrum” of 2018 makes this very well-socialized current version an excruciatingly slow-process from the Committee – from “signal” to the “commencement” to the actual “execution” of the purchase slowdowns.
Third, the CTA Trend story with spot and vols remains asymmetrically higher for “in-play” Equities, i.e. next “triggers” are still far more proximate to “buy to cover / flip long” levels than further “deleveraging / sell” from here in the thematic bellwethers of “cyclical value” Russell 2000 and “secular growth” Nasdaq 100, as the excess positioning “flush out” on the momentum breakdown and vol spike occurred last week and is now “cleaner.”
Fourth, VIX ETNs Net Vega continues to precipitously decline on monetization into last week’s Vol spike: vega has decreased by 25.5mm over the past 1w period to overall 123.6mm, which is just 18.5%ile since 2018—as Charlie explains, this matters because it signals “conditioned” trader willingness to sell “rich vols” remains intact, which then of course can from there feed into a virtuous cycle for Equities and resumption of exposure releveraging from vol sensitive strategies (as Marko Kolanovic will remind us every time he publishes a new bullish report, claiming that vol-control funds will buy anything and everything as VIX drops).
Finally, and the biggest reason why the next major move is likely higher, is because everyone is hedged for a crash. As the Nomura strategist notes, the pandemic-unwind “economic reopening/renormalization” theme stays super-strong, and can be seen in the data and “feel” it in our private economies, shopping for the household and out-and-about town.
As a result, McElligott argues that traders “continue to have their “inflation overshoot” hedges on via the “crash-UP” Call Wing in deep-cyclicals / economically-sensitives, particularly in the energy and materials sector & thematic ETFs, where we see upside Call Skew ranks continue to print into lifetime 80s / 90s %iles—yet all while NOBODY has “crash-UP” protection on in index, and is loaded to the gills in “crash-DOWN.”
Finally, while both VVIX and VIX continue to “rage” outperform on very mundane SPX down trades over this past week, “which shows how tightly-wound and “over-hedged” the market remains and prone to accidents”..
… McElligott cautions that the longer we go with no plain vanilla crash, and especially with rates remaining calm and the market’s perceived belief in “a few more months” before Fed would be forced to begin altering the messaging / pivoting towards firming “taper” language, “the path of least resistance locally here is higher, particularly if the day-by-day stabilization emboldens the return of “vol sellers” to take advantage of what screens as expensive vol/skew”
Thu, 05/20/2021 – 13:09