Thread by @perfiliev

Yesterday, many noticed that @squeezemetrics's GEX index hit an all-time low.

Lowest reading ever.

Since GEX measures gamma exposure, a low value implies the dealer's delta is less sensitive to index moves.

However, why would this be a bullish signal?

https://twitter.com/SqueezeMetrics/status/1484322656367169538

This is something I tried to understand, so here are some thoughts behind this.

Historically, a very low GEX has indeed been a short-term bullish signal.

This can be seen even from visually observing the chart on dix.sqzme.co

The low points of the GEX coincide with SPX moving higher shortly after.

Important to note is that low values also coincide with a selloff in the index shortly before.

It makes sense as we move from the positive-gamma dealer-long-call region into the negative-gamma price range.

So, net-net, the gamma drops.

If GEX is low (and negative, as in this case), dealers don't provide those positive gamma stabilizing flows that they usually do.

So currently, SPX is unrestrained and can wander around if it so decides.

But why is it bullish (or at least has been bullish)?

https://twitter.com/SqueezeMetrics/status/1484309357743337472

Vol.

Or, more specifically, vanna.

If vol calms down (and keep in mind that VIX has a downward pressure on Friday's due to the weekend), the OTM puts delta will decrease in absolute terms.

Dealers will have to buy back their short SPX hedges, pushing the market up.

As the market rises, vol drops further, reinforcing the feedback loop that sends the market higher.

Hence, without the offsetting gamma stabilizing flows (low GEX), there's a potential for a snapback rally.

But! But that's only if the vol drops initially.

If, however, the spot moves lower from here and vol rises instead - we get the same impact, but southbound.

Higher vol -> dealers need to short more to delta hedge short OTM puts -> index drops more -> higher vol.

TL;DR - the market has the potential to make outsized moves.

Moreover, if we look at the gamma profile as of yesterday's close, we're in the negative gamma territory atm, which is also a destabilising force.

Gamma exposure approx. -$54.5 Bn/1% move.

This is usually termed a "leptokurtic" market, which simply means a higher chance of extreme positive or extreme negative moves.

It doesn't mean the market WILL move, but it's more likely to go far IF it does.

So this is my understanding of the world. Thank you so much for taking the time to read this!

Follow me @perfiliev for more threads!

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