SqueezeMetrics
@SqueezeMetrics
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Dark pools, options, and volatility.
Joined January 2016
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How S&P inclusion bursts the Tesla bubble:
Ever since June (at $200/share), Tesla stock has been driven by a perpetual motion machine of hype and call option flows -- nothing more. And everyone knows it.
Here's what not everyone knows:
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With the call option hype trade hampered, the stock will have no possibility of further returns -- a deliciously ironic end to the ugliest of
@RobinhoodApp
's many ugly children.
And an appropriately ironic fate for Tesla -- a victim of its own "success."
Enjoy!
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S&P 500 volatility has increased in the last two days. This is because everyone knows OpEx is coming, and that SPX dealer long gamma disappears.
This has happened for every major SPX expiration in the last few months.
They are frontrunning GEX.
It is the end of an era.
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When investors buy puts, but the underlying doesn't violently go down, those puts decay.
When those puts decay (charm, vanna, vol rolldown), dealers incrementally buy back their short position (their delta hedge) in the underlying.
This is how the S&P 500 works.
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Three weeks of massive accumulation in the S&P 500.
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The Dark Index (DIX) has never been this high for this long.
Liquidity is excellent. Dealers are happily supplying S&P to customers, who are buying hand over fist.
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VIX at 32 is more or less implying 1.34% average daily moves.
32 * sqrt(1/365) * sqrt(2/π) = 1.34
Today's S&P range has been 5.00%.
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What follows is some information that tends to induce people to make bad decisions. So, disclaimer: Don't make bad decisions.
There's some unique positioning in S&P options right now.
Dealer SPX vanna exposure (VEX) is at all-time highs.
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“Did it move the market?” is the standard by which we all silently judge the importance of news events.
But whether an event impacts the market is almost entirely predicated on pre-existing derivatives positioning and hedging obligations.
This makes things very weird.
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Everyone who bought stocks because they were afraid of missing out must be really happy that there's nothing to miss out on.
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It's only been a year since we released this:
It is now *impossible* to understand what is going on in the market without understanding the content of this paper.
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2022: Lowest GEX ever; highest DIX ever.
And it's only February.
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Now one for the bears.
VIX compressing to 30 on a modest pre-market rally with dealer gamma exposure more negative than it's been in years is not how you get sustained rallies—it's how you get energy for bigger downside moves.
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The absolute smartest stuff you'll read about finance comes from people who left their finance jobs and have no intention of going back.
There's a lesson in there.
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Nerds:
Here's the original Cboe S&P 500 (SPX) option gamma exposure (GEX), with naive assumptions. It's free and it updates in the evenings.
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SPX now down over 200 (>4.7% loss).
VIX approaching 28.
You guys *finally* decided to start buying puts, I see. You can have mine.
Good job, team.
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Since Tesla stock is driven by the returns on call options, it is a slave to "vanna": the relationship between option prices (implied volatility) and delta (stock exposure).
In other words, since June, $TSLA goes up only when implied volatility (IV) goes up (purple line is IV).
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As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases.
More dealer long gamma means more liquidity. More liquidity means less movement.
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I.
The rally is bigger than expected so people sell calls, betting on flat-to-down.
II.
Dealers are now long calls. If price stays flat, they buy the underlying because the calls decay. If price is down, they buy the underlying because the calls lose value.
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When Tesla joins the index, these historic call option flows and the hype machine behind them will hit the big red fire truck that is the S&P, at 500mph
Implied volatility will be unable to rise. Call options will bleed value. New flows will be absorbed by real traders.
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The spectacular rise and fall of DIX.
This one's definitely for the bears.
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Genuinely surprised to see VIX sitting under 20.
Was it all a dream?
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Let's talk about this:
JPM's notoriously huge collar strategy got attacked at its last roll. Its next roll happens at the end of this month. The strategy's short call strike is 4320.
What happens this time?
Commentary from April 2nd.
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People are still saying stupid things about 0DTE options, so let's dredge up an old note to point people in the right direction.
Non-blue-check, non-revenue-sharing, character-limited free-tier Xitter thread below.
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A naïve S&P 500 gamma exposure derived from SPX options tells you that price is slippery down to 3800, but not any further.
This is illustrated by the steepness of the GammaVol (GXV) curve between the close and 3800.
E-minis 3806 handle.
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A bit of color:
DIX printed 37.2% because retail got rug-pulled today.
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DIX under 40% today.
DIX ex-Tesla 37.5%.
Significant selling under the surface.
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Now DIX throws its hat into the ring, printing a bullish-over-the-next-month 47.5%. Even though people haven't been buying put protection, they sure bought stonks today.
Next week will be interesting, and that's a promise.
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DIX 45.5%
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Now one for the bulls.
If you want a crash, you want downside convexity to be extremely underpriced. That's a tall order—especially with VIX at 33.
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@AlexLachance11
@bogosorting
THE PEOPLE WHO ARE BUYING CALL OPTIONS ON TESLA RIGHT NOW ARE DOING SO AS A HEDGE AGAINST THE *VERY REAL* POSSIBILITY THAT TESLA STOCK GAMMASPLODES TO 25% OF THE S&P 500 (12.5% OF GLOBAL EQUITIES), DESTROYING PASSIVE INVESTING FOR YEARS TO COME
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A model is not a replacement for understanding what's going on.
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When you’re thinking about buying calls (and who isn’t right now?), consider that the lower-probability OTMs are almost always a better expression of your edge.
And thus have an *objectively* better risk-reward.
Yes, objectively.
Deal with it.
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You, a year ago:
"I'd put my whole portfolio in Treasury bonds and stop trading if I could get a 3.50% yield."
You, today, with Treasury notes at 4.50%:
"I've been trading options for income around a core TSLA position and it's been going great so far."
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Sometimes, selling an ITM call is a better hedge than buying an OTM put.
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Good a time as any.
@spastikgramps
@Ksidiii
@jam_croissant
@profplum99
I plan on tweeting this to
@ARKInvest
within the next 12 months.
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@Jesse_Livermore
GameStop launches GameStonks, an online brokerage with a subscription model and no payment for order flow.
Nature heals.
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When you plot subsequent 3-month SPX returns, normalized to implied volatility, against the free GEX at , you get this.
The mean 60-day return of a >$10bn GEX print has very limited data, but what's available is associated with two- to three-sigma losses.
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Dark pool buying across the S&P 500 has been intensely strong for a couple weeks now, beginning on March 25th.
If you're not looking at DIX, you're missing out.
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There's still a misconception that the guy who sells you your YOLO call options loses money when you make money.
The reason that your Uber driver (and Elon Musk) is rich right now is because options are *not* a zero-sum game.
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If you think that computing the gammas of the JPM Hedged Equity collar is going to give you an edge in 2023 A.D., I have bad news for you.
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Not especially bullish feels heading into next week.
->
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Its bigness will allow all manner of dispersion, relative value, and market-making traders to begin relying on Tesla's newfound correlation to the index. This will invariably cause arbitrageurs to buy SPX options/vol and sell TSLA options/vol to "close the spread."
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When a stock joins the S&P 500, it becomes part of a massive volatility complex, which is a terrifying web of arbitrage and pseudo-arbitrage relationships. Tesla will join the index as a top-ten component of a cap-weighted index. It's big.
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This one's for the bears (sort of).
Dark Index finally showing its first sign of normalization after *months* of unabated index buying.
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FINRA has neglected to update their data.
Won't be a DIX tonight until they do.
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Today's DIX 40.9% is on the low end of all history, but on the *very* low end of 2022.
Net selling into the rally.
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One of the most tantalizing things about the market is that nobody has a clue how it works. Even the longest-tenured professional only knows their tiny corner.
The implication is that traders, even the successful ones, don't know squat about what they trade.
Yet it works.
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When you're in a bear market and there's a rally, that's called a bear market rally; but when you're in a bear market, nobody calls it a bear market rally, because part of what makes a bear market a bear market is that people think it's just a temporarily embarrassed bull market.
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As of this morning:
SPX up 170 points, to 4460 (+4.00%), VIX 16s.
Calls sold.
The end.
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SPX down 20 points, VIX up 3 points.
And more to go.
With history as our guide, we are a hair's breadth away from some of the most consistently bearish and volatile behavior in the S&P 500.
The current combination of weak put flows and large customer vanna exposure are fragile.
SPX is 4540. Nearby SPX ATM IVs are all under 10%.
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The Dark Index (DIX) goes into the weekend with a 52.3% print, the highest number on record.
Off-exchange transactions have been *overwhelmingly* bullish since late March.
See for yourself ->
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Considerable softening in DIX with a sub-40% print today. Yesterday 40.8%.
The biggest grab for S&P 500 exposure in history now appears to be over.
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When you
1. segment a stock's time-series into a "price" (up, down) and "volatility" (rising, falling) component, and then
2. plot each of those on an axis, and then
3. color the coordinates according to forward returns at each of the [x, y] coordinates...
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It's been a couple weeks.
SPX has drifted down a bit further (4290), VIX is 24. Nothing exciting. Glad we sold our puts.
But Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) have now, at last, settled in a *bullish* place. Risk to the upside.
Buying calls.
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If you're not factoring Gamma Exposure (GEX) into your S&P 500 outlook, well, you should be.
Today, we're making the original GEX white paper (from 2016) public. It shows you how to compute it.
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DIX 44.9% into that dip. ->
Experienced DIX practitioners know that this is not only strong, but seasonally strong for a Monday.
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Why are people still drawing regression lines like this?
Stop it. It's a blob.
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Lots of people talking about how e'erbody's buying lots of puts on equities. Here come the put monster nom nom nom. Crashy crashy beary scary put put. Etc.
Well they're not. And any data that would lead you to this broad conclusion is dubious.
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SPX is down 2.00% today, but neither dealer nor customer option/vol positioning are bad enough to make that worse.
VIX over 24 leaves a lot to be expected, vol-wise.
Where my dip-buyers at?
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Behold.
The Dark Index (DIX) prints its second consecutive day of significant net dark pool buying across the S&P 500.
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When S&P 500 Gamma Exposure (GEX) is close to zero, the subsequent month of returns takes on a bimodal distribution.
There are two types of markets: High GEX and low GEX. There's no "middle path."
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DIX printed 55.1% today, a new record.
Think what you will of them, but there are buyers.
2022: Lowest GEX ever; highest DIX ever.
And it's only February.
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Any time anyone says anything like "cut your losers and letting your winners run," or "take profits early/often," they are automatically wrong.
There is no good trading advice that can possibly have these as a premise. The speaker is merely broadcasting a psychological crutch.
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UPDATE:
An overzealous nerd added Tesla to our reference list of S&P 500 companies today. As you may know, Tesla is not yet in the S&P 500.
Today's DIX is not 46.8%. It is 43.9%. ->
We sincerely apologize for spoiling your bullish fantasies.
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So to translate 40% IV to "implied average daily move," do this:
40% * √(1/365) * √(2/π) = 1.67%
"±1.67% average daily move."
Much less stupid.
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By expressing to the market that you don't think price will go up more, and might even go down a bit—you actually *cause* the market to go up, and to get bid when it goes down.
Irony is the market's love language.
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Have heard much consternation about low realized vol.
Fear not: Monthly OpEx just shaved off nearly $300mm per point in SPX dealer gamma exposure. That means index liquidity has lost quite a bit of depth going into next week.
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Implied volatility is quoted as an annualized standard deviation. So, e.g., "40% IV" theoretically* means that there's a ~68% chance that the underlying ends within ±40% of where it is now after 365 calendar days.
*an unwarranted extrapolation
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DIX just printed 44.9%. ->
They bought "the dip."
Oh boy.
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There it is.
What you've all been waiting for. $TSLA $TSLAQ
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@spastikgramps
@Ksidiii
@jam_croissant
@profplum99
I plan on tweeting this to
@ARKInvest
within the next 12 months.
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