Thread by @WizOfOps

Morning all! Shocker, 1% down after 1% up. VIX overstating again, some customers out there are getting whipsawed. My guess is that what is being hedged is the debt ceiling, since the intensity of the whipsaw has gained, and that is the only known item that has systemic impact...

So let's chat a little about it. First, the impacts of a default are so catastrophic that it would never happen willingly. This is a willed struggle, it can be prevented with the stroke of a pen. However, right now the assumption in finance is the chance of default is zero.

That means even the slight chance of default will cause shockwaves. That's likely what we are seeing now. The market is only hedged down to 4225, so it is clearly not expecting a default. So will a default happen?

Reps want to stick Dems with unpopular legislation in response to being shut out of reconciliation. The Dems decision is either take it on, default and ruin the financial system, sequestration, or hide the default (through monetizing it or having the Fed cycle out defaulted USTs)

Dems are having problems passing a budget even within their own party. They also disagree about how to handle the debt, as there is rising momentum to monetize it with the platinum 1T coin. I think they will relent and pass it the old fashioned way, but with hard messaging.

So I think the market is properly positioned for that thesis. VIX overstatement hasn't exceeded 2 on a daily close yet, which is my flag. But it has been building little by little. So upon resolution there will likely be a strong upside pressure.

At the same time there is the normal gamma unwind of options expiration likely starting next week. It will be strong and volatile. So continue to expect swings of higher highs and lower lows, with ATHs staying safely out of reach. There will be a time to BTD hard, but be patient.

PS: While the amplitude of these moves are little changed, the frequency has increased. When customers are tired of getting whipsawed, they stop hedging... this could ultimately resolve to the downside if that hedging stops before debt ceiling is resolved. Careful out there.