Thread by @WizOfOps

Good Morning! There were three "catalysts" last night into today that the equity market in particular was not concerned about. By that I mean the 1DTE straddle at the end of the day yesterday was priced at $33, which has been the typical price recently.

The first was the BoJ decision that all the macro analysts have been looking at since last month they raised the 10y rate 25bps. As it turned out, there was no change. Other markets including metals, bonds, and the Yen were prepared for a large move, but oddly equities weren't.

Again, oddly, the Yen rallied from its lows, bonds and metals bounced, and while equities had an initial positive reaction, they are muted now. In other words, the equity volatility outlook was correct.

The second was volex,

However volex before opex is not as much of a concern when we are looking at a bullish posture and March VX futes are the underlying. It seems the market took volex in stride and wasn't ever really a concern of mine.

The third is PPI, which has not been published yet...

But PPI has not had as much of an impact on markets as CPI, so I expect something mostly in line and a relatively muted reaction. This leads to my point of this tweet... markets seem very well aware of the risks to it.

The straddle prices have remained muted when they should have been, and elevated enough to handle FOMC, CPI, and NFP. As a result, particularly since the last CPI reading, February dealer positioning is showing bullish. It appears that market participants are coming back.

The odd option hedging is now mostly over, and we are seeing strong positive vanna, particularly for Feb. This also means aggregate negative charm. In other words, customers are back to buying OTM puts and selling OTM calls. With VX basis expanding after the last CPI data,

The expectation seems to be that IV will come down. In other words, we have entered into a new bullish regime for the time being. IV suppressed small rallies to positive vanna points are back. The short IV trade which has done well since June is now supported by dealers.

Are we pinned then to 4000, despite #volland showing it as negative gamma instead of positive? As we get closer to that strikes expiration, vanna's and charm's effects on it give a smaller but more intense influence. Notice how odd IV has acted recently?

Yesterday when IV was up, spot was up (as was the case last week). When IV was down hard, spot was muted. 4000 is a dealer short put and IV seems to be locking us up here. In the end, even if we release a little to the downside, Feb looks very bullish.

Now, this isn't to say that there are no market risks, no possibility of inflation or even worse, production-driven deflation into a debt crisis... but the IV regime is back to bullish with a lot of room to run to the downside that can cause a rally until/if these risks manifest.

The March twin towers are a good spot to hedge to the downside, but if IV continues its collapse as it has, they will contribute to the rally, not hurt it.

Just be aware of the dangerous events, and hedge if the market isn't, but note, event vol has been spot on lately.