‘Gamma Cuts Both Ways’ – Nomura Fears ‘Volmageddon 2.0’ Amid Extreme Outlier Flows, Positioning
Until this morning’s little interruption, markets over the past week are evidencing a scramble for upside (created by single-name “Growth” stocks i.e. TSLA), as the persistent “wall of worry” of the past 1.5 yrs is again being hurdled and leading us to fresh Index all-time-highs.
As many freshly-minted stock trading gurus look on speechless as TSLA craters (finally) – which , rhymes a bit with last August’s broad Retail “gamma squeeze / Nasdaq Whale” phenomenon into the September “Delta unwind” crash thereafter (as “Gamma cuts both ways”) – Nomura’s Charlie McElligott has some thoughts on the current risk environment…
The story of 2021 from the Eq Vol perspective:
1) the incessant bid in crash / downside put-wing (massively exacerbated by lack of supply from Dealers who cant be short it, per VaR lookbacks / rolling “vol shocks” of the past multi-year period), but all against…
2) absolutely NO demand for “crash-UP” – is finally showing signs of an inflection in the latter observation, as the market over the past 1w has now come for the right-tail (SPX 2w Call Skew at 100%ile on 6m lookback—it’s been single-digits / teens almost entirety of year)
But now, it seems that “peak FOMO” is permeating speculative assets.
How rabid is the behavior, how large are the flows, how extreme are the metrics? A few notables today:
Crypto at ATHs across board, where through Nov 6th, the value of $1k invested 1 year ago in Shiba Inu = $740,259,740 last Friday; $1k a year ago in Axie Infinity = $1,082,920; $1k a year ago in Telcoin = $130,144; $1k a year ago in Polygon = $127,867; $1k a year ago in Solana = $119,828; $1k a year ago in Dogecoin = $95,882 (h/t @JonErlichman)
Nomura-Wolfe Retail Red Alert equities basket (“meme” proxies) at ATH and now +152% YTD
SPX 1m Realized Vol at 7.5 vols, 1.7%ile (1Y lookback)
SPX / SPY options $Delta 100%ile; QQQ options $Delta 100%ile; IWM options $Delta 100%ile (all since 2013)
Russell 2000 (IWM) options 1m Call Skew at 95%ile (since 2000); Energy Select ETF (XLE) 3m Call Skew at 95.7%ile (since 1998); Semiconductors ETF (SMH) 3m Call Skew at 99.4%ile (since 2011)
US Equities Total Call Option Volume 20d average now back to highs again, testing ATH made in January ’21 (data since ’92)
US Put / Call Ratio on total monthly volumes at lows since June 2000 (data since ’92)
US Equities fund flows 1m total +$51.4B, 99.3%ile since 2000
Global Equities fund flows 1m total +$90.5B, 98.7%ile since 2000
US Equities Vol Control estimated re-allocation of +$47.3B over the past 2w window, 93.4%ile; 1m buying of +$59.3B, 91.6%ile
As we have discussed in recent notes when speaking to the “broken markets” behavior in mega-cap “Hyper-Growth” names via their options flow (e.g. TSLA, NVDA options volumes, Call prem vs Put), the overall spot market move higher has actually been led by single-name Call-Wing going bid, as the “weaponized Gamma” options phenomenon then further creates demand for upside crash tails from Dealers and MMs who are short those deep OTM Calls in a virtuous “delta grab” spiral.
However, as SpotGamma highlights this morning, there is an impressive gap between current SPX prices (blue line) and the Put Wall (green) & Vol Trigger (orange).
Qualitatively we read this as concerning – it shows a lack of hedges.
Although SKEW is bid, which suggests traders are starting to add a bit of tail risk protection:
However, to Nomura’s strategist, it still feels like between now and year-end, the “buyback / fund flow / performance chase / seasonality into lower volume” dynamic referenced-above “wins out” (caveat being “in the absence of an inflation shock print”—which is certainly a ‘non-zero’ probability)…
But without a doubt, McElligott warns that the closest analog with how the “now” is beginning to feel is a soft-parallel with that of Dec 17 à Jan 18 period.
Looking specifically in that Jan ’18 period, we went “Spot up, Vol up” off back of the Trump Tax Cut / Dereg push into an already hot economy… where very un-ironically and over the course of that month, we saw a number of “upside surprise” inflation / prices beats, which then suddenly meant that the formerly perceived “never gonna move” Fed now was at risk of being forced to kick-off tightening and balance sheet unwind (and it did ultimately…both policy- and balance-sheet normalization…aka the QT “rolling vol event” disaster in late 2018).
Hence, I always state with vigor that it was the big macro upside inflationary surprise print in Average Hourly Earnings on Friday Feb 2nd 2018 which actually kicked-off the spiral, and saw SPX trade -2.1%…which PRECIPITATED the following Monday Feb 5th 2018’s “Volmageddon” leveraged VIX ETN “extinction event” where SPX closed -4.1% and VIX printed up 20 points (+115%).
And after today’s big PPI print, tomorrow brings CPI and the potential for a big surprise (as the Nomura MD warns, nontheless, the statement here is that “Spot up, Vol up” and a (very) nascent increase again in the “vol of vol” are a spidey-sense “tell” for good-reason which will be monitored in coming days /weeks).