Thread by @perfiliev

Wait, wait! Hold on!

Yes, #JHEQX. Again. I know.

But sorry, over the last few days I was very... busy... 🍷🎄

And looking into the #JHEQX roll, I can't say that I fully understand it.

(and based on the discussions, it looks like I'm not alone...)

Let's see what happened 👇

The trade sparked many heated conversations on Twitter, with everyone trying to understand what exactly will be its impact.

Some argued that there's a huge delta to buy, which might move the markets.

Others claimed that it's all been priced in already, and no money can be made.

What I want to understand is:

• Was there a huge delta to buy?
• If there was, why was the market down on 31 Dec?
• If there wasn't, why?
• If it's priced in, then how?
• What mechanics allowed #JHEQX to alleviate the market impact?

https://mobile.twitter.com/PriapusIQ/status/1476854752973627413

So many questions... so few answers...

At the risk of being one of the talking heads that talks about things he doesn't understand, let's do this! 👍

https://mobile.twitter.com/jam_croissant/status/1476764630412316692

First, let's review what the trade was.

From my earlier thread, for Q4 2021, the #JHEQX fund had the following strikes, expiring on 31 Dec:

https://twitter.com/perfiliev/status/1444085305619927047

These have to be rolled.

In the morning of the last day of 2021, the following trade hit the tape:

https://mobile.twitter.com/jam_croissant/status/1476933913557798928

And just before close, it was re-striked:

https://mobile.twitter.com/jam_croissant/status/1477025387192410112

As @pat_hennessy explains, the fund can re-strike the trade in the evening if the market moves during the roll day.

This ensures that the collar provides the 5%-20% protection for the next quarter as closely as possible (as stated in the prospectus).

https://mobile.twitter.com/pat_hennessy/status/1476030103553335297

Hence, the final #JHEQX collar for March 2022 is:

What does this roll mean for the dealers?

$SPX ended the year at 4,766, and the long 4,450 Dec 21 call was deep ITM.

Its delta hit 1 right after Putin congratulated the Russian nation with the New Year at midnight.

(random fact of the day: 16:00 in New York = 00:00 in Moscow)

This means the dealers who hedged this ITM call were sitting on a short $SPX delta hedge, worth around $21 Bn.

When the collar expired on 31 Dec, #JHEQX bought another one with a lower delta of ~0.53.

Since the new one is ATM, the dealers would need to short only 0.53 worth of $SPX against it.

Hence, after the trade, they need to buy back a difference of 0.47 to bring their delta hedge in line with a new collar.

That’s around $10 Bn.

At this point, it would be tempting to say - there, that’s a market impact, here it is!

However, #JHEQX doesn't make it that easy.

Instead of preparing for New Year, their traders worked hard on 31 Dec (and probably before that) to roll the trade with minimal market impact.

To help the dealers, #JHEQX didn’t roll the collar outright.

They also bought ITM calls against it, expiring the same day as the old collar.

This made the whole trade delta-neutral.

On 31 Dec, they bought 23k of 4,450 calls with zero DTE.

This helped alleviate the immediate impact - at least from the delta perspective.

https://mobile.twitter.com/jam_croissant/status/1476764648183635968

But, but isn't this delta-neutrality only for a day?

Yes.

Net-net, the dealers still went from this:

• Deep ITM Dec 21 Collar, 45k contracts, 1 Delta
• $21 Bn short $SPX delta hedge

To this:

• ATM March 22 Collar, 43k contracts, 0.53 Delta
• $11 Bn short $SPX delta hedge

As per Cem's thread, apparently there was no delta impact, and the trade was already priced in...

https://mobile.twitter.com/jam_croissant/status/1476764671013179397

But then, where did the $10 billion go?

It seems this is where some of the confusion came from.

There is a difference between:

• There is no delta to buy

and

• There is delta to buy, but no market impact

And it looks like it was the latter – the roll generated delta, but its market impact was muted.

How is it possible?

https://mobile.twitter.com/jam_croissant/status/1447608461471227915

Of course 🙂

Unfortunately, I don't have an exact answer to this.

There are many discussions and speculation around how $10 Bn of delta might have been bought.

Some argue that the delta was unwound in advance of the roll date.

https://mobile.twitter.com/AdagioInvesting/status/1477031747107831815

Or via cash-settled forwards:

https://twitter.com/gregisaev/status/1476843934135603215

Or via jelly rolls...

https://twitter.com/dampedspring/status/1476885216677535744

Or other structures...

https://mobile.twitter.com/WizOfOps/status/1476876834310602752

If anyone knows the specific details of how the market impact was mitigated, it would be interesting to find out.

In the meantime, a big thank you to everyone for their discussions and for sharing the insights.

And thank you for taking the time to read this!

I sincerely hope you found it interesting.

Follow me (@perfiliev) for more educational threads around stocks, options and other topics within the incredible world of financial markets.

In case you enjoy watching videos, I'd like to invite you to my YouTube channel, where I also cover various financial topics:
youtube.com/c/PerfilievFin…

TL;DR:

• #JHEQX rolled the collar from 3440/4080/4450, Dec 21, 45k to 3810/4510/4920, March 22, 43k.
• The roll was traded delta neural by buying 1-delta 4450 Dec 21 call, 23k.
• The roll had a delta impact of around $10 Bn for dealers to buy.

• This sparked many discussions as to whether this will impact the $SPX.
• Some argued that $10 Bn delta would move the markets.
• Others, that since it was traded delta-neutral, the impact will be minimal as it's already priced in.
• The roll was a non-event for the market.