Increasing Price Fragility, Decreasing Gamma Positivity
Touched a record high ($3294.25) Tuesday and pulled back on concerns over continuation of tariffs. Subsequently, Mnunchin said the president “may consider removing tariffs under Phase 2.”
Gamma exposure has declined 22% in the last 3 days. The bulk of this appears to be related to January options expiration, booking profits on calls that were initiated throughout the first few weeks of Dec ’19, and increasingly negative delta strategies. (e.g., bearish broken wing butterflies)
More earnings in Financials tomorrow: BAC, USB, GS, PNC, BLK. With the exception of WFC and USB, the sector’s options activity appears bullish. Notwithstanding, this week’s earnings in Financials are likely to move $SPX …within the current gamma-based compression range.
Dark pools remain buyers and hedge funds are leveraging up. And while DIX-GEX data remains supportive of equities, owing largely to stimulus and low rates, the current short-term dynamic is a set up for rapid moves. A frothy, overvalued, jittery market, and parabolic moves in Tech stocks have added to overall market fragility.
Term structure in VIX futures still positive and not signaling anxiety. The short vol trade is still on. A little movement into long VIX positions.
Healthcare and utilities, two defensive sectors, saw inflows Tuesday. US government debt gained, sending yields lower. The yield on the benchmark 10-year Treasury note fell to 1.8144 per cent.
A finger on the pulse for:
- higher bond yields
- higher USD
- escalating tensions between US and Iran
- new signs of slowing economic growth