GammaLab

SPX Gamma EOD Wrap

OANDA:SPX500USD   S&P 500 Index
The market dropped 1.4 percent on Thursday and the sell-off was mainly driven by the "growth complex" who lost 2.5 percent despite a decline of the 10Y yields by about 3 basis points.

The day was packed with comments from several Fed speakers. For example..

Brainard (remember she's a super dove): We will use our tools to bring inflation back down. I mean well yea, what else would you use?
Brainard: We are dedicated to utilising our capabilities to combat inflation .
Brainard: I am very concerned about high inflation , and am committed to bringing it down to target.
Brainard: We are ready to raise interest rates as soon as the asset purchase taper is completed.

Barkin: If inflation remains high and widespread, we will need to pursue normalization more aggressively.
Barkin: I underestimated inflation , and 2022 is no clearer. That radiates confidence.

Evans: Inflation is too high. Yep.
Evans: This is the year when we rebalance monetary policy .
Evans: In order for rate hikes to be effective in lowering inflation , demand must decline. Got it. Less wealth effect. Bitcoin down.
Evans: Because inflation has been high for a longer period of time, we must act sooner than I anticipated. So you admit it was high for a long time, but you still didn't anticipate? My head spins.
Evans: Three rate hikes are a good starting bid for 2022, but four may be necessary if inflation does not improve quickly enough.
Evans: The Fed's balance sheet is very large, and it is likely that it will begin shrinking sooner rather than later following a rate increase.

Harker: The first quarter is going to be difficult.
Harker: The Fed should take a more proactive approach to inflation . I mean yea it's your mandate, no?
Harker: I have three rate hikes planned for 2022, but four is not out of the question.

Daly: Rising interest rates in March is 'very plausible.'
Daly: I expect inflation to remain high for the foreseeable future, but to moderate.

Waller: If inflation remains high, there might be four or five hikes.
Waller: I do not support a 50bps Fed hike in March. WHY ARE YOU EVEN MENTIONING THIS??
Waller: Inflation has remained higher for longer than any of us expected. Who is us?
Waller: If inflation remains above 3%, we will need to do more and possibly rethink our strategy.
Waller: Rising inflation caught us off guard in terms of what it means for the framework. How can you be caught off guard by something that was a policy choice?

So, there you got it. There is panic in the air, they mean business, and rate hike expectations rose consequentially to new highs.

Regarding the gamma situation: Given the above barrage it is absolutely no wonder that we are back in negative gamma land (total net gamma -415M).

After selling off throughout most of the day the market was able to stabilize just above the 4650 strike and now it is all about volatility again from here: If implied vol declines, dealers have to buy back a bunch of futures which could spark fast rallies, but if we break below that barrier we could end up at 4600 in no time at all.

Speaking of 4600..put volume was very active here, which means that investors are doing some doomsday prepping. Remember: The SPX option market is mainly a market for big boys to hedge their portfolios, so most puts are sold by option dealers to investors. Dealers are short does puts and need to hedge cyclical around those strikes. (Sell when everybody is selling, buy when everybody is buying). Expect volatility in both directions.