A "bad time" is when everyone is overexposed to the same thing. This makes the market fragile.
As you know, an option's delta is not only sensitive to spot price (gamma), but also to volatility (vanna). We've called vanna "gamma's evil twin." She's sneaky.
So you shouldn't be surprised that when vanna [quietly] becomes a relatively larger portion of SPX option customers' delta sensitivity, things can get weird.
After all, when more people are more exposed to vanna, they are more exposed to changes in vol!
It's pretty normal, historically, for customers to be exposed to >500% more gamma than vanna. But when SPX moves through price- and time-space, that changes.
You can probably guess that relatively higher customer vanna exposure makes things fragile.
And that's what the customer Vanna-Gamma Ratio (VGR) is meant to track.
As VGR approaches zero, SPX option customers are very exposed to changes in volatility—and as a result, it becomes more likely for sudden increases in volatility to occur.
Right now, VGR is around -3.00. That's a lot of vanna.
But...
...just because it's fragile doesn't mean you get a volatility event.
To really predict that, we need one more dimension—we need to know if folks are currently hedging against vol. I.e., are people buying puts right now or not?
And that's a question for Net Put Delta (NPD).
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Gold, the original meme coin, is breaching all-time-highs. Since there's no real reason to ever buy or sell gold, positioning and flows are an important part of what drives price.
One particular data point has proven to be very useful through time—and it's fun because it's illustrative of the underlying reality.
From the CFTC CoT report, "Swap Dealer Long" positions:
This indicates the extent to which dealers are hedging by being long gold futures. Why would dealers hedge by being long gold futures? Because some customer of theirs buys some kind of conditional long exposure to gold's price from them.
What follows is some information that tends to induce people to make bad decisions. So, disclaimer: Don't make bad decisions.
There's some unique positioning in S&P options right now.
Dealer SPX vanna exposure (VEX) is at all-time highs.
Specifically, VEX is around $500mm.
That means that when VIX rises, there's an unusually high mechanical bid for the S&P 500, which reinforces an "auto-dip-buying" mechanism. It's very supportive.
Another way to understand this is that dealers are "long skew." That's because customers have sold a lot of low-delta, OTM puts to dealers.
@Ksidiii has been sounding the alarm on this for a couple weeks. It's notable, and he's seen it happening firsthand.
Predicting inflation has little to do with money supply or the velocity of money or the Fed balance sheet or whatever.
Inflation is a price (a meta-price) in a betting market like any other betting market, and it responds chiefly to the bets that people have taken on it.
When people are afraid of a price(s) going up, they hedge that with some kind of swap or option or future, and when a lot of people hedge, the thing that they're hedging against won't happen. Because betting markets are reflexive.
When people aren't afraid of a price going up, they don't hedge it, and the price is more likely to go up.
JPM's notoriously huge collar strategy got attacked at its last roll. Its next roll happens at the end of this month. The strategy's short call strike is 4320.
What happens this time?
Commentary from April 2nd.
I see, I see.
+3.00%
@pranasnadi @LyfeOfPELK The point is that if SPX rises, e.g., to 4536, at EOM, then comes back to 4320 afterward, the collar strategy lost 5% of performance versus the index, literally giving over $750mm of investor funds to the people who were playing this game.
Today in the exciting world of quantitative volatility analysis: If you are backtesting a volatility strategy or calibrating your vol-time, remember that the Juneteenth national holiday was signed into law on June 17th of 2021, but did not result in a
National Market System closure until June of 2022 and that future market closures will [partly] follow the July 4th Independence Day convention which means that when the holiday falls on a weekday the closure will occur on that weekday and if the holiday falls on a weekend the
closure will favor the nearest weekday (e.g., if the 19th is on a Saturday, the closure will occur on Friday) but take care that your July 4th observance market calendar takes into account that the trading day prior is subject to an early close (1:00 pm EDT) but that this is not