1/x As expected, a shortened Thanksgiving week this week has made it hard for neg flows to take hold & IVol compression has continued to dominate all other forces... What was not expected was the degree to which this IVol compression would overtake all other factors so quickly.
2/x A veritable Ivol EXPLOSIÓN occurred under the surface of markets today. It started much like all the other days of IVol compression of the last 1.5 weeks, but after a failed morning breakout in the market & decline back to unchanged, it accelerated into forced selling by EOD.
3/xThe standard $10-$4 declines in straddles of the last few days ended the day w/ $20-$15 declines. In fact, the vol contraction in the back was so significant it forced the acceleration of Vanna flows, calling our fair lady back from holiday for a begrudging appearance & a late
4/x day rally. As planned, assuming the market continues to be well supported by EOD tomorrow, it now makes sense to tactically start eyeing opportunities to buy corrections in price & time as we approach the 11/25 close..The EOY chase may soon lie around the corner, as EOM/BOM
5/x flows & seasonality-accelerating Charm/Vanna flows lie directly ahead. As predicted, we continue to get a steady stream of expected potential energy in the form of INCREASED ELECTION CERTAINTY & a covid wall of worry to climb w/a looming vaccine. Both of these should continue
6/x to force longer term vols to methodically decline, releasing their long-embedded vanna flows, much like today..This should continue into 1/15. BE PATIENT, there is no need to chase, yet. The market has shown all the signals we’d expect from a healthy correction of time/price.
7/x That said, the market is ahead of its natural timeline. It should continue to digest in time/price, allowing us a superior entry point in time/ price. A decline of any import could theoretically still take hold, w/ a break below the 20 day accelerating at 2pm CST on 11/25
8/x going into the holiday, but given the Vol dynamics & the distance from these important levels, it seems increasingly unlikely...Use this 20 day on close as your trailing stop, as we look to buy into corrections. As discussed, we have taken our calendars down & have balanced
9/x our delta against our short calls now delta neutral. Dispersion continues to be the play here w/ the prospects of Index Vol suppression w/remaining elevated idiosyncratic risk still on the horizon for names, & should be a great trade for months to come. Good Luck!!! 🍀 🍀 🍀
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