Market note from JP Morgan
FRIDAY, JAN 21, 2022 - 06:11 AM
As Goldman's Rocky Fishman writes in his latest Vol Vitals note, "the January expiration is always a focus for single stock option markets, because January options are listed years in advance and can build up high open interest", a topic we discussed extensively earlier this week in " All You Need To Know About Friday's "Deep" Option Expiration."
Going back to tomorrow's critical market event, in its post-mortem from Thursday, SpotGamma writes that as expected, "a negative gamma position in all the indices made for volatile trade, today. The high gamma $4,600.00 SPX strike held as resistance; real-money sellers, alongside the hedging of negative delta options trades, bid volatility, and pressured indices."
In other words, stock liquidation played into the large negative gamma position which accelerated selling into the close, SpotGamma writes, adding that so long as the SPX trades below its Volatility Trigger - around 4,630 - SpotGamma sees heightened volatility, and adds that trades with respect to Friday's monthly OPEX will only compound the instability.
In short, tomorrow could unleash sheer chaos in early trading, but once trillions in notional expire, taking away with them a substantial chunk of the negative gamma that dealers are currently trapped under, it is quite likely that following an initial burst lower, the market will finally bottom out for the near-term.
Why does this matter and why is all of the above potentially bullish? Because many stocks are to have their largest “put-heavy” gamma positions expire soon. We are taking trillions in put notional. These positions are, at present, compounding weakness as dealers sell aggressively against very short-dated, increasingly sensitive negative gamma positions.
The removal of this exposure post-OPEX and the approaching FOMC event will leave dealers with less positive delta exposure to sell against.
That's why, SpotGamma sees the market soon entering into a window of strength, to which we will only add that once $3+ trillion in options expire Friday and much of the dealer negative gamma overhang disappears,
the selling which we predicted would dominate this week ahead of Friday's Op-Ex, will have exhausted itself and the bandwagon of shorts that piggybacked on the rout in stocks is about to be painfully squeezed higher.
Still, while the next move is higher, as long as bears successfully maintain S&P prices below the $4,630.00 SPX Volatility Trigger, there is increased potential for instability as dealer hedging flows continue to take from market liquidity (sell weakness and buy strength), further exacerbating underlying movement.
AI
