Let's talk some serious gamma for followers that maybe just have joined and who are wondering what is happening, why the market is stuck at 4800, and where we could go from here.
Let's start with a couple of assumptions:
a) The SPX option market is a nifty tool for big whale investors to hedge the downside risk of their single stock portfolio and they do so by buying puts AND selling calls at the same time. The whales are shorting the market. On the other side of those trades are the option dealers, who sell puts and buy calls. Option dealers are typically long the market.
b) To get rid of the directional risk option dealers always try to delta hedge their portfolio as best as they can. If their net gamma position is positive (the positive gamma of their long calls outweighs the negative gamma of their short puts) they do so by trading countercyclical (selling strength/buying weakness), if their net gamma position is negative they delta hedge by selling weakness/buying strength. If the market is trading above the gamma inversion level (red line in my charts) the net dealer gamma position is positive and they sell if you buy and vice versa
At the moment the market is stuck at 4800 because a massive amount of gamma in the neighbourhood of 150M dollar is located at that level (and I am just counting in SPX options, not SPY options). Whenever the market tries to cross 4800, the option dealers sell (and cause the market to retreat), whenever the market falls a certain percentage below 4800 the option dealers step in as buyers and lift the market towards 4800 again. Using "gamma terminology" this level can be described as a "pin".
Why is there so much "gamma" sitting at 4800 you might ask. Big investors are short the market as I have described before and they sold tons of calls at 4800. As the market moved higher the delta and therefore the gamma of those calls increased quickly.
What happens next? Two scenarios are possible:
a) If the market pushes through 4800 tomorrow, the whales are in trouble and they have to roll their hedges higher quickly (as they have started already - see charts to see the gamma amounts shifting). Option dealers can unwind some hedge positions (creating upward momentum) and the gamma barrier becomes a new support level.
b) Nothing happens and 4800 remains a pin. Then all eyes are on option expiry on Friday. Tons of gamma expires at 4800 in two days (I posted a chart on my Twitter) and the whales have to make a decision whether to roll their short calls higher or not. Volatility will most likely pick up, but the direction is uncertain.
To sum it up. Something will happen and it is more likely than not, that the market will say good bye to 4800. Be prepared for all scenarios.
Let's start with a couple of assumptions:
a) The SPX option market is a nifty tool for big whale investors to hedge the downside risk of their single stock portfolio and they do so by buying puts AND selling calls at the same time. The whales are shorting the market. On the other side of those trades are the option dealers, who sell puts and buy calls. Option dealers are typically long the market.
b) To get rid of the directional risk option dealers always try to delta hedge their portfolio as best as they can. If their net gamma position is positive (the positive gamma of their long calls outweighs the negative gamma of their short puts) they do so by trading countercyclical (selling strength/buying weakness), if their net gamma position is negative they delta hedge by selling weakness/buying strength. If the market is trading above the gamma inversion level (red line in my charts) the net dealer gamma position is positive and they sell if you buy and vice versa
At the moment the market is stuck at 4800 because a massive amount of gamma in the neighbourhood of 150M dollar is located at that level (and I am just counting in SPX options, not SPY options). Whenever the market tries to cross 4800, the option dealers sell (and cause the market to retreat), whenever the market falls a certain percentage below 4800 the option dealers step in as buyers and lift the market towards 4800 again. Using "gamma terminology" this level can be described as a "pin".
Why is there so much "gamma" sitting at 4800 you might ask. Big investors are short the market as I have described before and they sold tons of calls at 4800. As the market moved higher the delta and therefore the gamma of those calls increased quickly.
What happens next? Two scenarios are possible:
a) If the market pushes through 4800 tomorrow, the whales are in trouble and they have to roll their hedges higher quickly (as they have started already - see charts to see the gamma amounts shifting). Option dealers can unwind some hedge positions (creating upward momentum) and the gamma barrier becomes a new support level.
b) Nothing happens and 4800 remains a pin. Then all eyes are on option expiry on Friday. Tons of gamma expires at 4800 in two days (I posted a chart on my Twitter) and the whales have to make a decision whether to roll their short calls higher or not. Volatility will most likely pick up, but the direction is uncertain.
To sum it up. Something will happen and it is more likely than not, that the market will say good bye to 4800. Be prepared for all scenarios.