Tuesday, 26 January, 2021
Follow up from yesterdays views on volatility and consensus views
Building on yesterday’s rationale for a period of higher volatility and stretched positioning is to put it within the context of dealer S&P gamma
“The most common SPX option flows, post-2008, are customers buying OTM puts and selling OTM calls. This creates and sustains a momentum effect, whereby higher prices lead to higher GEX, and higher GEX improves top-of-book (nearby bid-ask) liquidity, and better liquidity means that dips always get bought. This works to keep volatility in check… until it doesn’t. Eventually, the effect of vanna overwhelms the effect of gamma, and that’s when things get crazy”
The Implied Order Book (squeezemetrics.com) (an excellent read)
Within this context S&P 500 Futures Market Depth Liquidity should continue to deteriorate reinforcing a bias towards higher volatility amid stretched positioning across the board
While participants largely are sitting around waiting for pent up demand to kick in, markets have already largely priced that in limiting any motivation for a buy the dip mentality from here
In my opinion this should keep treasuries well supported, dollar strong and reflationary positions under the pump. Of particular note is GBPUSD, where a daily close under 1.362 would signal a change in trend which it has held since late March
Chris Jarvis
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