Good Morning! Yesterday CPI came in a bit hot, especially core services. The market had an initial selloff, but the large put position at 3650 started to unwind and created a rally. Also, the main driver of core inflation was shelter, and there is data showing rent stabilizing.
So a jump was not completely out of bounds, even though the magnitude was awesome. @myTradeHawk nailed it at the bottom on yesterday's show. That's the second time he nailed a reversal. But the reason why I didn't take the other side of his trade was that 3650 magnet.
Meanwhile for today the hardest part is basically over, which is how will markets react to the BoE halting their bailout of pension funds? My base case was that they wouldn't bail them out just to have them collapse, that would destroy their credibility. The tough BoE talk...
was likely for taxpayers who have an unfavorable view of bailouts. You would think by this time with liquidity and solvency bailouts that these risks would be covered a lot more carefully. I guess like dinosaurs, markets 'find a way'.
Are we out of the woods with the UK pension crisis? My guess is yes. Like I said, it would be ludicrous to think the BoE would stick their neck out for no reason. It might still have a tickle impact on assets, but base case I think that crisis is done for now
As for the next couple of weeks, opex and volex is next week. There was a lot of positioning at 3800, so roll impacts are going to felt. If the theory is that funds roll to similar positioning to last month, we might see a small selloff as a result of the roll.
Institutions have been more long puts and sold calls. Those puts have been in the money, which is a delta of closer to -100, so the dealer has 100 shares long, if that is reduced to -50 deltas in a roll, that's 50 shares sold. Now, a bit of that is hedged through other options,
so it isn't direct, but that's the role of #volland in making a thesis on opex. I will look closer later today in more detail to confirm that thesis.
The hardest part to consider is the vega aspect of the dealer positioning, who is now more long vega recently, and long vanna.
The hardest part to consider is the vega aspect of the dealer positioning, who is now more long vega recently, and long vanna.
This because they own more long puts. It becomes long vanna when those puts are ITM which means as IV goes down, deltas trend towards -100 which means more buying of underlying and sharper rallies. So while rolling causes selling, vanna causes buying to ITM put strikes
Therefore expect some jerky price volatility, as rolls cause selling while vanna and charm cause buying, with buying as the slight trend. But again, need to confirm with #volland.
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