1/x Holiday weeks are notoriously squirrelly...Time can be decidedly difficult to partition out correctly, & can often be dramatically accelerated. That was the case today...Aided by an overwhelming retail equity call buying wave & Its commensurate gamma, today’s call squeeze led
2/x to an earlier than expected unpinning of the market & end of the correction in time & price of the last week. Fixed strike straddles were, understandably, higher on the day $5-$10, given the size of the move relative to IVol & strong gamma effects took over in what was an
3/x otherwise illiquid tape... Ultimately, we received our correction in time & price, as expected. It was a healthy one, as we had as our base case. Unfortunately, we weren’t aggressive enough in buying into it, as it was decidedly more accelerated than our models had expected..
4/x Though we at least locked in our profits from our shorts near the bottom, we clearly weren’t aggressive enough buying into the correction, despite being exactly the correction we expected. Though this was clearly frustrating, we are also not shocked in retrospect, as holidays
5/x do historically accelerate time, as previously discussed. This is why it is so dangerous to fade this holiday period historically & why melt ups are so common during this window...As mentioned, we’re tactically eyeing opportunities to buy corrections in price & time today/Fri
6/x The EOY chase seems to be here, as EOM/BOM flows & seasonality-accelerated Charm/Vanna lie directly ahead. As predicted, we continue to get a steady stream of expected ‘potential energy’ in the form of increased election uncertainty & climbing the covid wall of worry w/a
7/x looming vaccine. Both of these should continue to force longterm vols to continue to decline, releasing their long-embedded vanna flows.This should continue into 1/15...All this said, the market is ahead of its natural timeline @ this point. P/C Equity ratios are exhibiting
8/x historical levels of retail exuberance & @SqueezeMetrics Dix is reading a paltry 38%. We also experienced our 1st day of IVol up/market up which has been recently a caution sign. Notably, this market’s in the rare company of only 5 other months since 1920 w/nearly 10% 1 month
9/x gains @ ATH’s in all if history (h/t @profplum). Accordingly all longs should be carefully managed w/ a closing stop @ the aggressively ascending 20 day. @ this point we suspect a digest in time/price, allowing a superior entry point and we are willing to be patient. We like
10/10 OTM calendar call spreads to take advantage of this digestion & cheap upside Ivols. Dispersion continues to be a great play here w/ the prospects of Index Vol compressed & elevated idiosyncratic risk still on the table for names,& should be for months to come! Good Luck!🍀
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