The "Gamma Trap"
Dec SPX has 3.3mm puts which is the largest of any expiration.
The chunkiest of these puts are likely held by funds which will hold to 12/17 expiration.
The 4000 strike has the most put interest.
If the market goes under 4500, the gamma trap could set:
(1/n)
Dec SPX has 3.3mm puts which is the largest of any expiration.
The chunkiest of these puts are likely held by funds which will hold to 12/17 expiration.
The 4000 strike has the most put interest.
If the market goes under 4500, the gamma trap could set:
(1/n)
A declining market means dealers have more futures to sell in order to hedge those existing puts. This fuels volatility like pushing a ball down a hill. Furthermore implied volatility rises, increasing put values, requiring larger hedges.
Dealer selling leads to faster market declines, which brings more selling (ex: margin calls). The fear brings out more put buying. Implied volatility goes even higher. Dealers have to sell more futures to hedge both new puts positions & existing positions.
The "trap" is this reflexive feedback loop of dealer selling âŠī¸
which leads to put buying and more liquidations âŠī¸
which leads to more put buying âŠī¸
which leads to more dealer selling.
which leads to put buying and more liquidations âŠī¸
which leads to more put buying âŠī¸
which leads to more dealer selling.
Then, suddenly, on 12/17 those 3.3 million puts expire. Dealers find themselves short too many futures, and needing to cover ASAP. Trap released. Markets rally.
Consider 2 other major lows coinciding with the day after OPEX:
Dec 24th, 2018
March 23rd, 2020
Consider 2 other major lows coinciding with the day after OPEX:
Dec 24th, 2018
March 23rd, 2020
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