I discussed in my live trading room yesterday morning, how I see a move lower INTO/through $3400 in SPX coming up next week. My suggestion was that is was a good time to now add in a volatility hedge or two or three – across timeframes. Here are my favorites: Oct30th, Nov18/20th, Jan15/20th depending on your vehicle (VIX, VXX, UVXY) or even directional index shorts/put spreads.
Here is someone else suggesting caution:
“Looking locally today, things would get messy in index on a move down through 3400 (3389 to be exact) in SPX and / or through 284.63 in QQQs, where we estimate that the current index ‘long Gamma’ position for Dealers flips ‘short,’” McElligott
In essence, it’s all about that Single Stock Option Gamma wind-up and UNWIND that happened August into September. Remember how Nasdaq dropped 10% in two days? It’s been 7 weeks, and QQQ is still 4% lower.
Let’s revisit what happened then – from my client post September 4th:
As client Craig put it so elegantly in the trading room Thursday morning after market opened and I called a 5% down day for $QQQ (it gapped down 1.5% then dropped 6% on the lows but closed down -4.98%):
“Alpha unwind begets beta faceplant. You don’t sell tech stocks to buy banks/cyclicals when the $ is bottoming, curve is flattening, vix is rising, crude has rolled over and CESIUSD has topped. Hold on to your hats.”
Also around that time – August 31st – I did up a Client Video that highlighted end-of-month stock picks that had indeed done well AND a warning that VXN (volatility of Nasdaq) was in a weekly bollinger band squeeze ready to erupt higher which would bring Tech down in a hurry.
Here are those volatility charts updated – and still squeezing:
To revisit how massive a wind-up it has been over just the last month:
“the massive cash movements may be a byproduct of building options appetite [as] call open interest in Facebook, Amazon, Netflix, Alphabet, Apple and Microsoft has averaged 12.9 million contracts over the 30 days through Friday, the highest since early 2019.” Bloomberg
So how do I interpret all of this? Dealers may be overhedged! How is that?
“The ‘negative Gamma’ in these monster positions… has them chasing the market to remain Delta hedged” McElligott
Fed balance sheet will stagnate the rest of Oct. up somewhat next week and drop a bit the week after. @Barton_options