1/xWhat we know: -All If this has been very predictable we flowed versus 3200, all the sentiment and flow indicators turned bearish and with the seasonal and expiration calendar turning all that was left were poor technicals -with Vol tidily compressed and a move last week above
2/x the 20 day, it was just a matter of time before vanna, trend following,Vol targeting, & risk parity flows took the baton & pushed us to this point -2nd to last week of monthly OpEx is strongest week of the cycle -given Fri concerns, the size of the rally was a bit of catch up
3/x on what are predictable Mon vanna flows. -Even so, the move has been relatively big in a short period of time, especially given still relatively weak seasonality, weak NDX leadership, & still not fully repaired technicals... What does this all mean: the 200 pt SPX rally has
4/x Come too far/too fast in a short period of time & faces important resistance directly overhead between 3427-3436.75 - at the same time, this is the strongest period for vanna flows and this market should continue to see considerable buying support -Implied Vol has compressed
5/x even more than prior in the front of the curve -and buying pressure in the back of the curve has abated with the notable absence of the NDX whale, who may be done with their stock replacement. —-All If this points firmly to continued Vol compression for the next week,
6/x and likely a pinned market with a narrowing range until 10/12-14. -Watch out for August’s market up, vol up dynamic. IF WE BEGIN TO SEE THIS DYNAMIC AGAIN, THIS WILL BE A SIGN TO SELL. Until then use the 20 day as a trailing stop on a closing basis, watch the NDX weakness for
7/7 signs of potential acceleration & watch the market’s reaction to the 2 std dev up on the 20 day for clues. Historically this is a good time to digest short dated IVols. Good luck 🍀

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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 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
Read 5 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

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