Gamma defines how markets behave,
not which direction they'll move

When dealers are net short options that creates 'negative Gamma'

instead of providing liquidity we have to buy into rising markets and sell into declines When dealers are net long options that creates 'positive Gamma'

we sell rallies and buy dips-
this is the norm for modern markets

You're About to Realize
What Options Have Been Implying this Whole Time

What if the glue holding markets together just expired?

[full newsletter] October OPEX is behind us.

We must be out of the woods, right?

Not so fast. Positions create hedging requirements.

These are literal, to a degree.

OPEX Week Price Action Review x.com/i/spaces/1mnGe…

Yesterday we saw a very unlikely pin scenario at a massive dealer short position

the chart below via Spotgamma shows 0DTE net inventory (sum of put & call held by dealers) going into the close

Why is pinning a dealer short unlikely?

...it has to do with our hedging

(thread) We are hedging Delta.

More specifically though, we are hedging CHANGES in our Delta.

To understand where these changes come from,
focus on 3 core Greeks:

✓ Gamma
✓ Charm
✓ Vanna

When it comes to 0DTE options, the first two-
Gamma & Charm-
are in the driver's seat.

Shallow month-end dip,
but risk perking up (thread)

NOTABLE FLOWS
IB WHALE

Oct-31 6200-6400 PS
>> Buys 35k ES, 9k SPX

Nov 6200-6400 PS
>> Buys 25k ES, 5k SPX

( = 26.5k & 17.5k SPX respectively)

...then buys ES 10/31 6100-6200 PS 35k
to convert ES Oct-31 into 6100-6400 PS JPM Collar rebalance for end of Nov

Nov-28 5150-6115 Put Spread
vs. 6755 Call

Customer Buys 4,350x Put Spread Collars

*trades with Aug29th 6210 Call 2k (0DTE hedge)

Pays $50,871,000 — no rebalance necessary

Will it strike again?
Feb 29 2024 May 31 2024

Welcome to VIXPIRY

pin prediction from Monday looking prescient thus far

image 1 - screenshot from VS Pro intraday commentary
image 2 - UXQ5 overnight price action (expiring future)

what's in store today?

(a thread)
VIX options pin, too.

More complicated, and the knock-on effects are harder to understand

but the process here is fundamentally the same

What happens this morning?

>> the AUGUST VIX future expires

settlement value is based on the opening prices of SEPTEMBER SPX OPTIONS

JPM says a call overwriting surge keeps a lid on volatility

...they should know, they have a single fund that represents most of that S&P 500 component.

Some structural notes and points of curiosity

(short thread) How does this keep a lid on volatility?

The answer is obvious (but nuanced)

When positions are established, they usually target options with ~30 days til expiry.

This helps keep the term structure steep between 1M and 3M tenors.

Friday was fascinating...

But for anyone who gets confused by the action arising out of these hedging flows—
I totally get it.

How can short gamma be both accelerant (bullish) but also create a fade?

I will not say too much on feed,
but those 6400s were concentrated...

1/4

https://twitter.com/phlegminglib/status/1948922138846507288

They were mostly held long by one customer

and they were mostly held short by one dealer.

Without pushing you down rabbit-holes fit for ZH comments sections, you can think through some important consequences of concentrated positions.

2/4

WELCOME TO THE UNCLENCH

(really?)

Well, not so fast.

SPX 0DTE straddle pricing only 18.50 (29 bps) today!!!

...is it a buy?

(1/n) It sure looks like the market may be overpricing a repeat of Friday's price action...

All OPEX sensationalism aside...
we barely moved at all on Friday—
(trigger warning if long gamma)

Welcome to OPEX

Should you trust the rally?

Let's take a look

(1/n) First, why was yesterday so boring compared to Wednesday?

Well putting aside VIX expiration- we had less headline noise (market already digested Trump's Powell noise)

and we also had a far more supportive (and sticky) profile around 6300

If these look mechanical- they are.

Welcome to OPEX Week

This marks the seasonal inflection.
Last year it was the 17th, a seasonal peak that coincided with VIX expiration.

The move preceded a series of events that culminated with an epic vol spike and vanna fueled crash.

History can't repeat, right?

(1 / n) Customers are confused today...
inventory is scattered across the range without the type of clear patterning we are often used to seeing.

Relatively large hedging at 6300 should be respected but properly understood in terms of tradable influence.

An array of tests and ranges within 2x straddle distance around the implied open 6240 with a clear "level to hold" for the bulls on any weakness

Will talk more about tests and ranges and these two important levels in today's meeting

GS put out a novel way of visualizing dealer gamma

Three lines:

(1) Prevailing gamma $ mm est.
(2) Cumulative hedging flow on 5% UP-move
(3) Cumulative hedging flow on 5% DOWN-move

some interesting takeaways here... Prevailing gamma varies, but not that much

I assume here that they're giving us the "notional gamma per 1% index move" figure here.

Since the tariff shakeout in April, dealer gamma has been mostly flat to small negative

if you think the summer markets are boring,
REFRAME

This is exactly the kind of market you want to to trade if you're leaning on dealer hedging:

✓ low intraday volumes
✓ low implied vols in the front
✓ localized greeks
✓ bigger dealer positions

I'll explain (thread) (1) low intraday volumes

Most of the order flow we can't predict.
Dealer flow is different. I
t's rules based, systematic, and fundamental to the business.

WHY IT MATTERS

Outcomes are more "predictable" when "predictable" flow is a greater volume-share.

—JP MORGAN'S QUARTERLY PUT SPREAD COLLAR—

all you ever wanted to know about:

✓ the trade
✓ its market impact
✓ its expiration effects

(a thread) first, the fund itself.

the giant SPX put spread collar
that's bought at the end of every quarter comes from JHEQX- JP Morgan's Hedged Equity Fund-I

It's the largest of 3 funds which are all contractually obligated to do the exact same thing, just at the end of different 3-month cycles.

Know your edge (and when it disappears)

If you're still looking for that JPM Collar call to pin the market next Monday at 5905

—stop.

This far in the money,
the SPX 6/30 5905 Call is a 92 delta option.

Why does that matter? ⏩ You're trading around the dealer position 📌

the 5905 Call expiring 6/30 is the largest inventory around, hands down.

For simplicity, let's consider *only* the quantity of calls sold to MMs by JP Morgan's Hedged Equity Fund (JHEQX).

Per their own documents dated 5/31, we believe them to be short 35,861 of the 6/30 5905 Calls.

✓ Dealers own these.

✓ They hedge them dynamically.

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

Today MIAX busted all trades within a 15 min. window

Technically 14 minutes, 45 seconds and 686.121405 milliseconds (but who's counting?)

For most customers it's just a minor pain but it's a nightmare for a market maker

(short thread) 1 / What does "busting all trades" mean?

The exchange literally cancels all trades executed within this window.

15 minutes is an eternity.

And while TRADES are cancelled,
hedges are not.

SPX Jul-31 6500 Calls
18.2k bought Friday around $5.00 avg price 🎯

To put in context, that's:
✓ the same as 182k SPY calls
✓ $9.2 million in premium spent
✓ breaking even on a 12.1% rally over 68 days

hedge, or speculation?
we can't know for sure, but... 🧵 —we CAN know how this trade impacts the dealer's position.

Why does it matter?
Dynamic option hedging drives a significant portion of market activity.

Positions dictate behavior,
and shape how MMs respond to order flow.

This makes markets more predictable, not less.

90% of options data sellers get this wrong.

Let's say Esoteria really does sell me 100 Jun 5200/5600 Put Spreads.

We both trade live (no hedge).

We cross in Cboe's Complex Order Book
(sorry MBI no bro on this one)

How does each method capture the trade..? First, naive portfolio construction.

It holds:
» Customers buy puts to hedge
» Customers sell calls to finance hedging

Market makers are therefore:
✓ Short all the Puts in the OI
✓ Long all the Calls in the OI

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