Thread by @SqueezeMetrics

What are "bad times?"

https://twitter.com/SqueezeMetrics/status/1432440859426009090

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).