Pros Increased ‘Crash’ Protection As Reflexive Vol-Sellers Rescued Stocks Yesterday
A dramatic rebound in stocks – off the S&P’s 100DMA – has prompted many commission-rakers and asset-gatherers today to call the end of the Evergrande event and signal the all-clear to new highs.
So what happened? What changed?
Nomura’s Charlie McElligott explains that there is simply no way to overstate the power of the “reflexive vol sellers” into another spike, as this “sell the rip (in vol)” = “buy the dip (in stocks),” particularly as it related Put sellers either directionally shorting “rich” vols yday…and “long sellers” who monetized their downside hedges by the close (a lot of that being 1d SPY Puts from Retail “day traders” which doesn’t show in OI), creating $Delta to buy and again self-fulfilling yet another “turnaround Tuesday”
Critically, that Delta buying in the late day was hugely important then in reducing the absolute $ of systematic deleveraging “accelerant” flows, because only closing down -170bps in SPX then meant a much more manageable -$24.7B of Vol Control de-allocation in coming days, as opposed to what would have been a much more challenging -$62.9B to digest which we estimate would have been triggered off of a “-3% close”…while similarly, Leveraged ETFs only needed to rebalance -$5.9B at EOD, as opposed to a hypothetical -$8.9B assumed at the low of the day
Specifically, as SpotGamma details, the chart below shows that puts were net closed at all strikes above 4365 SPX (and 435 SPY) but there were fairly substantial positions added to lower strikes.
This indicates puts were rolled rather than outright closed. Again, with the Fed tomorrow trades want to leave some protection on.
Put volume surged relative to calls yesterday…
To Nomura’s Charlie McElligott’s amazement yesterday, we saw confirmation of our repeated point made stating that “the only things that clears out all that “crash” pricing in vol metrics is a crash”… yet it is VERY worth noting then that we actually saw Skew still steepen further yday despite incredibly high levels of both ATM Vol and Skew (SPX 1m 25delta Put Call Skew steepened 70bps, same gig for others: QQQ 64bps, IWM 37bps)…
…which tells us that the Dealer “short Vol / short Skew” problem still remains lurking in background.
SpotGamma concludes that its up to Powell tomorrow to set the next price move, which should be rather substantial due to the options positioning. Negative gamma could strongly influence any selling to the downside.
To the upside there is also a ton of fuel for an vanna-induced move if traders sell off their puts and crush the high implied volatility levels. Therefore while today is likely about chop, the move out of Wednesday should be substantial.