1/x It’s not what it looks like…Often when market participants look & see a new low in IVol, like we just witnessed this Friday w/ the lowest VIX since 3/2020, commentators are quick to couch this as a sign of downside ‘complacency.’The reality is it is often quite the opposite.
https://twitter.com/jam_croissant/status/1407697749840179200
2/x More often than not (& definitely this time around) Institutional players are simply comfortable writing calls & laying their deltas off, substituting bi-directional delta neutral Vol risk for long market risk, due to all the overwhelming evidence that positioning/valuations/
3/x fed policy are stretched, as stated in the thread from last week below👇. Whether it’s breadth, HF positioning, seasonality, or simply the Fed’s incoming taper (the ‘Fed Call’) we are seeing this now. This is a primary driver of the high index skew that all the talking heads
4/x keep distributing 🐻porn regarding & we often see in these scenarios. Ironically, in the ST, as we see now, this call selling tends to lead to a feedback loop where there is > local Vol compression, > vanna/charm flows, & ultimately ends in a push to unsustainably low IVols.
5/x This process takes time, & often explains odd yet predictable lags in the market to macro info. Eventually these unsustainably low Vols begin to increase on the rally, as the market slides to the never ending supply of short calls & the market becomes unpinned. This often
6/x represents the ST end of these Ivol cycles, leading to a reversal & quick unwind of the Ivol/Vanna feed back loop. This process is often a major driver of the patterns we see & explain many of the dynamics of component of the left tail fragility in the system. This is your
7/x map…The question is where do we currently sit on this map here in the #summerofGeorge? W/ JPM massive vehicle for substituting this exact market directional risk for bidirectional risk providing more of this @EOQ & markets reaching 1.5 year lows in IVol you tell me… Be 💦,
8/8 everything in last Wed’s linked🥐all still apply. Nothing’s changed yet, & likely won’t until 7/12, but keep dancing w/ 1 foot by the exit..👀 for a turn in fixed strike Ivol on the rally, as explained, as an important signal Disperse, & deploy calendars in prep. Good luck!🍀
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