1/x A little Pre-VIX Print SOTU: What we know:
-The Markets are still technically very weak, as they have been unable to recapture 20 day, despite significant Vanna/Charm flows past 1.5 weeks
-little retail or institutional capitulation & Short interest @ extremes
2/x-Index Vol structurally compressed due to recent Low rVol during high Sep OpEx decaying away in front of lower expiries behind. -VIX exp often marks low in vol & end of Vanna flow market support
3/x -low Sep VX rolling off & higher event Oct VX front month, naive demand in VIX complex for already rich post event vol could shift Vega higher.
-Street broadly short vol dispersion (extra long in indexes, short in names)
-Fundamental election risks looming under Biden sweep
4/x What this likely means: All signs point to an eventual resumption of a market slide. The one thing holding this market up is massive index vol compression. This will likely continue to fight a valiant fight through tomorrow’s AM VIX print & the fed announcement, but I would
5/x expect it to likely succumb by Fri AM OpEx. It won’t be easy or obvious if it happens. Look for a rally w/ signs of bottoming/increasing vol in NDX again & look for the NDX to lead down Beta adjusted to drag the SPX down. SPX will likely reluctantly be pulled into the vortex

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More from @jam_croissant

20 Sep
1/x Post OpEx week thoughts:
What we know: -Price action shows structural, technical weakness, with movement below the 50 day -Through Fri, the drop has been predictable, & only shown signs of a ‘refresh’ & ‘rebalancing’ of metrics that were historically dramatically offsides
2/x -Short interest, despite still low has seen a meaningful uptick -NDX Non-commercial shorts have dramatically increased -sentiment has shifted meaningfully - implied correlation has dramatically normalized -& for the first day in weeks NDX outperformed SPX Beta Adjust on Fri
3/x -Despite continued seasonal & Ivol cycle weakness this week, calendar starts to turn more favorable for structural reasons next week. -elec Ivol has compressed meaningfully -Maybe most importantly, IVol’s continue to be dramatically compressed, providing meaningful support.
Read 8 tweets
17 Sep
1/x When I had my vol market making firm, the best trades were always to trade with the smart directional players. You almost always wanted to avoid the retail directional flow. This may seem counterintuitive. Why would you want to trade against the smart directional players?
2/xWhen a good directional player buys deltas, as a MM, you sell them their soft deltas & hedge w/the underlying.Therefore, Generally, your exposure wins when they do.& when they come to take a profit & you have the added benefit of flow pushing the trade in your favor as well.
3/xhistorically w/retail the opposite is true on 2 fronts. Not only are they generally directionally wrong, forcing you into poor positioning with the underlying, but they don’t sell at a loss. They just keep repeating the same losing trade at worse & worse levels....
Read 4 tweets
16 Sep
1/x I think most people look at IVol as a simple mean reverting fxn...They think when IVol is low it’s smart to own it & be hedged & when it’s high it’s smart to sell it...& although there is undeniably a mean reverting process at work, what most don’t understand is that for the
2/x most part over the longterm(since 1990), if you follow this process, you will get into big trouble... Other than a handful of high vol spikes w/ forced buying, when vols are low (think smoothed VIX of <17) it‘s historically, in risk adjusted terms, the most profitable to sell
3/x In effect, the risk adjusted returns of selling vol look like a big “U”, with a handful of highly profitable stressed extreme vol circumstances, paired w/the overwhelming majority of low vol occurrences representing the profitable tales, and the middle range (think VIX 17-30)
Read 8 tweets
14 Sep
1/x Alright time to revisit this from a week ago, as well. I don’t think I have to tell anyone how well this one worked out... Another great example of how important it is to understand dealer positioning! The question now is will this Vol compression into a down market continue?
2/x This is a tough question. I would suspect through Wed (Fed) it will... But it‘s important to note that IVol & skew have both dramatically declined in the last week to levels that are simply too low given the technical picture. Our spot here in the market Is not historically
3/x a natural resting place. We are below 20 day &1 stdev down on 20 day. This is no man’s land. This market will either retake the 20 day soon & find itself on solid footing that could push being momentum back to the highs, or (more likely) roll over below recent support of 3300
Read 4 tweets
14 Sep
1/x Alright, if you haven’t read @choffstein most recent piece, do it. & if you have, go read it again. It speaks to a concept that I‘ve been preaching for 4+ years now. & if you’re involved in fin markets, even tangentially, I don’t think there‘s a more important topic right now
2/x The main thrust of the piece points, rightfully so, to 1) Federal reserve liquidity & a) The moral hazard that it causes (due to the fed put) & b) the scarcity of opportunities that it creates.These 2 pressures drive massive market wide compression of risk premia by way of
3/x forcing participants to move up the risk curve, increasing carry trades & the leveraged selling of convexity. The net effect of this is to move all risk from local variance, to the tails. As Corey, is fond of saying , ‘risk cannot be destroyed, only transformed’.
Read 11 tweets
8 Sep
1/x A couple of important notes from Vol-landia today:
1) Fixed strike $SPX vol imploded today w/straddles -$21 to -$32 across OpEx. Given size/speed of $SPX move & technicals this was extreme.Vol compression accelerated into close w/$5-$7 decline post-equity close on market lows
2/x Much like buying felt forced into the close at the top. This selling was beginning to feel forced. 2) skew declined considerably w/1 std dev put wing -$3, 1 std dev call wing +$1. But coming off high levels, it feels more fairly priced now. 3) maybe most importantly,
3/x There was a major break in price change for Vol post 11/4. With straddles 11/20 on back -$16-$17, where as 11/4 (Election Day)was only -$7. this post election Vol has been insanely high due to fear surrounding a disputed election/constitutional crises post election.
Read 4 tweets

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