The SPX closed 1.2% higher on hopes that bad news (GDP) are finally good news again as expressed by the Fed Funds Futures complex that further priced out a lot of rate hike angst.
After the close positive earnings from Amazon and Apple pushed the index even higher into the gamma call wall at 4100, which will act as a pin until net gamma of about 42M will expire just around that strike tomorrow (see chart below).
As dealers are long most of the expiring calls, they will unwind short positions in the underlying, which could open the door for another push higher.
Some observations from today's trade: VIX closed at the lowest level since April 21st and the VVIX closed at the lowest level since July 2019 (see chart below), as nobody seems interested in convexity at the moment ("its all priced in").
Another chart that caught our eye was the NYSE Tick indicator that compares the number of stocks that are rising to the number of stocks that are falling (see chart below).
The index can be seen as a proxy for large systematic buyers of stock baskets.
The last time the index featured comparable levels were March 2020 bottom, when the bottom was in.
Not familiar with the Tick indicator, but A/D line is currently way below the values seen at the end of March 2022 and also below the values seen in early June. Ditto for chart of (new highs-new lows). Ditto for NYSE new highs (HIGN). Market breadth does not look nearly as favorable right now as the market breadth at the end of March and in early June.
DaddySawbucks
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"As dealers are long most of the expiring calls, they will unwind short positions in the underlying" is this b/c shareholders have sold covered calls to dealers, requiring them to open positions in the underlying? Being long the call, dealers' risk is decline, so they short shares?
GammaLab
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@DaddySawbucks if dealers are long via long calls they lose money if the market declines. That's why they short the underlying via futures. Dealers want to be neutral at all times.
DaddySawbucks
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@GammaLab, Right on. And if it rises, they gain on the calls to offset short losses, tyvm. And retail always loses lol.
TraderV123
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@GammaLab, So if dealers have closed most calls today (expiring today), and made money, does it stand to reason they will try and tank markets next week to profit on their net short positions, closing their short Futures positions in profit? Any way to tell where the confluence of covering their shorts might take place? Thanks.
OrangeForeva
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Excellent market wrap. Thanks as always.
Is there a good source to see gamma levels as they update intraday? I know plenty that update in the morning. How did you determine dealers are long calls? I'd really like a source to see that kind of data since I think it's quite useful.
GammaLab
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@OrangeForeva follow link in profile. Long call assumption because of option skew and studies. Does not hold true across all instruments, but pretty solid regarding SPX.