Thread by @Ksidiii

As vol compresses it opens up the susceptibility of the market to be harmed from a quick variance shock.

Ex: quick volga move -> hard vanna impact -> immediate hedging -> driving the asset further in that direction.

The whole premise of the reflexivity of the market being impacted by “gamma hedging” works BOTH ways.

This means that once the market gets in the gutter, it becomes much more difficult for it to get out, as the appetite for put buying increases.

Ex: market drops 7%, the likelihood of it dropping 15% is statistically heavier than we have seen in any other market (positioning wise).

The problem why most don’t give this the validation that it deserves and change their frame of thinking is because this upward drift is so

strong. Think about it, this market has not been tested since the March 2020 move.

After the crash of the 80s the downside smile changed forever. Vol traders started to understand that markets can go down very fast. We emerged with the downside skew being the new thing.

In my personal belief, I think the smile will change again in the next 5-10 years. I personally believe that during this time, we will see other large events that prove to us how this market has changed. Traders will adapt, give credence, and price the Vols accordingly.

We may end up with an elevated term structure and and smile that carries a “V” shape due to the elevated tails both ways.

Ironically enough, that may be the best time to sell those (funny how markets work).

Regardless, we are not in that time yet.

and a**** not and and

Twitter for iphone is just brutal when trying to write threads.