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https://x.com/VolSignals/status/1924639694244962750

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VolSignals

@VolSignals

May 17

https://twitter.com/VolSignals/status/1923769534168682740

Let's start with the basics.

Imagine a long 1 month straddle.

When we start out, we have a very basic position:

✓ Long Vega
✓ Long Gamma
✓ Paying Theta

We don't have:

✕ Skew (Vanna)
✕ Wings (Volga)
✕ Speed (Gamma stable)
✕ Charm (Delta stable)

How does it evolve?

https://twitter.com/VolSignals/status/1923769534168682740

Vega correlates with time to maturity.

Longer dated options have more Vega
Shorter dated options have more Gamma

As the clock ticks, but spot remains flat
our position loses Vega but becomes longer Gamma

This can be intuitively understood as the options becoming less sensitive to "implied volatility"

and more sensitive to "realized volatility"

the tradeoff?

theta

Read 16 tweets

VolSignals

@VolSignals

May 17

Market Makers don't manipulate price—
we're trapped by our own hedging requirements.

When SPX drifts between long and short strikes, our systems start buying and selling futures in ways that create predictable paths.

(short thread)

These paths depend on a variety of factors... it's not as simple as "GEX"

► Gamma (Spot Movement)
► Charm (Passage of Time)
► Vanna (Changes in Implied Volatility)
► Position Type
► Position Size

Gamma
[dDelta/dSpot]

The gateway to dealer hedging flows.

Option Gamma values grow as they near expiration, so 0DTE options make the biggest impact to our book here.

If we're long options, we're long Gamma.
Our Delta grows more positive as the market climbs.

Read 29 tweets

VolSignals

@VolSignals

May 12

My view is best stated as:

- I don't think we surpass all-time highs without seeing a meaningful reversion in key flows
- the overnight gap was instrumental in moving price OUT of a zone of pressure and retracement (5550-5650) and into a zone of acceleration and levitation (5750-5825)
- pressure will draw us back into this range unless we have another massive stop-in

Going back to subject of the quoted thread:
This morning, a customer bought 20k of the 0DTE 6000 Call for avg $0.50.

We are drawn to big numbers.

A customer buying 20k of anything stands out to us.
The buyer spent $1M in premium...
"they must know something!" is a common, instinctive thought, when you see an outlier like that— especially on the buyside.

But when I'd see an order like this to open the day as a MM, my first thought is SOLD

and my second thought is SELL MORE

Not every flow is smart.
Not every buyer knows something.
They could be forced to buy per their clearing arrangement or internal risk thresholds.
They could be punting, gambling.
...or they could be covering an exposure we're not privy to.

This was a customer order, not a bank or firm trade and exactly the type of order you want to lay into as a market maker.

Compare that premium on this straddle price to any similarly distant trade on any other day, and you'll see why.

Note how fast this premium vanished:

For an option to have any dynamic influence, exerted through the dealer hedging processes, it has to first exist somewhere on the distribution.

Something this small is like a conditional conditional.

The only hedge for the MM is to buy a risk unit near the level for margin coverage.

Hedging a delta of 1 (1%) means the MM is buying 2 ES futures per 100 SPX calls sold.

In this case, a static opening hedge would have been only 400 futures for the entire 20k lot of calls sold to the customer.

And of course then, the unwinding of this hedge (charm/decay) is trivial.
Selling 400 futures throughout the course of the day would do very little to cause any discernable pressure on the index.

When analyzing trades and positions, you need a firm grasp on which types of options create which types of influences on the market- and this is done by viewing the dynamic hedging process for that option or position, through the lens of the market maker tasked with hedging it.

Some positions will cause the market to move, while others cause it to stick.

Some positions cause the market to SLOW DOWN as it moves in one direction, and SPEED UP as it moves in the other.

Some positions will force selling when vol goes bid, and some will force buying.

Some positions will force market makers to bid vega as implied vol goes higher, while other positions pick up vega on vol increases, allowing the market maker to scalp vega just like he would scalp gamma.

Read 4 tweets

VolSignals

@VolSignals

Feb 2

What are the core hedging flows, and why are they important?

Let's start with Gamma.

As a MM, Gamma tells me how my position's Delta will change with the index. (dDelta/dSpot)

Gamma doesn't tell us about direction- it tells us about MM behavior.

(a thread)

Broadly we know that Gamma can be one of three things:

Positive = MMs sell futures on rallies, buy on declines

This doesn't in and of itself influence direction-

but it creates stability

Neutral = Gamma not present

In unexpected ways- the *lack* of Gamma can open up movement, with wider ranges as drift is uninterrupted

Read 16 tweets

VolSignals

@VolSignals

Dec 26, 2024

SPX Gamma by tenor / by strike
h/t GS Derivs

JHEQX... we meet again!

Remember- pinning happens due to a combination of Gamma & Charm (sorry Vanna, you're not invited)

Move higher, and dealers sell futures as spot rallies. (Gamma)

Move in the money, and dealers sell futures as time passes.
(Charm)

Move lower, and dealers buy futures as spot declines.
(Gamma)

Remain out-of-the-money, and dealers buy futures as time passes.
(Charm)

Gamma maxes out when the option is ATM
Charm SELLING is the strongest when the dealer long call is ~80 Delta
Charm BUYING is the strongest when the dealer long call is ~20 Delta.

Gamma acts as the range compressor around the strike.

Charm creates the magnetic field around it.

Gamma also counteracts Charm- creating a type of path towards the strike, where dealers recycle their hedges... buying AND selling (or vice versa)... grinding the index towards the strike at expiration.

The JPM Collar Call is highly visible.

Arguably the most famous and oft-cited option at any given time.

But these mechanics are happening every single day.

Want to go deeper on the JPM Call?

Enter the rabbit hole:

Read 4 tweets

VolSignals

@VolSignals

Oct 18, 2024

WELCOME TO OPEX

$1.9 trillion to expire this morning on the serial AM print

(a thread)

Remember- the OPEX "trillions" are always an exaggeration of the risk transfer *actually* taking place-

Forget about all those far OTM strikes - whether they're deep ITM puts or calls, doesn't matter. Real risk is not "premium", that's the easiest thing to manage for an MM or dealer/firm

Drill down locally

Read 8 tweets

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