SpotGamma™

S&P 500 Stock Market Gamma Trading Levels Based on Options Open Interest

Market Analysis

BlackBerry BB Options Decay

Blackberry stock surged after news it was working with AMZN. This led to massive call buying, which likely helped to push the stock up as dealers must delta hedge. You can see the stock pushed up near 10, and is currently down at $7. As call buyers stopped theta stepped in, and all those calls started to decay. This likely led to some selling in the name.

$7 is an interesting level as its the largest options gamma strike on the board. The bulk of these options expire on 12/4, which means we may see BB tied to that $7 figure into expiration. The $5 level may serve as support into 12/18 due to a large amount of deltas tied to that expiration.

Its likely BB remains quite volatile into 12/18, and we think call buyers must step in for any push over $7 to happen again.

SoftBank Unwinding Options Book

From Bloomberg:

The Japanese conglomerate is letting its options expire, instead of maintaining its positions, the people said, who declined to speak publicly. About 90% of the contracts will close out by the end of December.

The fair value of SoftBank’s futures and options positions came to $2.7 billion at the end of September, or just 1.2% of the $292 billion in shareholdings. The positions include long call options on listed stocks worth $4.69 billion and short call options on listed stocks with negative $1.26 billion of value.

PLTR Surges on Call Buying

PLTR stock is up 20% today and as much as 80% in a week. While Citron has initiated a short into this rise, bullish Palantir posts are heavy on reddit/WSB. Our options data shows traders have concentrated their bets at the $30 strike, with a lot of that position expiring today, 11/27.

PLTR Stock Chart

We mention this options position as its clear that calls are a major way traders are expressing their long views. As you can see below the estimated notional call volume* has grown sizably as the stock has soared. This increased call volume implies that dealers are having to buy PLTR stock, and continue buying it as the name increases in price.

PLTR Options Notional Value
PLTR Options Notional Gamma

Earlier this week our EquityHub data was picking up this surge in options activity. Consider Wednesday, wherein PLTR started with 745k contracts of call open interest. The call volume for Wednesday was 1 million, indicating a surge in new options positions. Buying pressure in the stock is likely to continue until call buying subsides, which which could reduce dealers long hedging position.

PLTR SpotGamma EquityHub

We’d mark Fridays as possible turning points in these names with heavy call buying. This is due to the large concentration of options positions expiring, which could lead dealers to unwind long hedges as those call positions roll off.

*notional value based on options mid last * volume

Wall Street Dealers in Hedging Frenzy Get Blamed for Volatility

From Bloomberg:

Two professors have just lent academic heft to a suspicion running rampant on Wall Street all year: The options market is whipsawing share prices like never before.

As retail investors spur a boom in derivatives trading to rival actual stock volumes, dealers rushing to hedge themselves are said to have fueled the 2020 melt-up in tech names from Netflix Inc. to Microsoft Corp. They’re also suspected of amplifying two big drawdowns in September and October.ADVERTISING

New research sheds light on just how this dynamic tends to play out.

A study from the Imperial College Business School and the University of St. Gallen has concluded that structural changes to the industry in the past two decades mean dealers are indeed contributing to intra-day volatility as they balance their exposures.

It’s the latest evidence supporting traders who have long argued that the derivatives boom is increasing market fragility. The more mainstream members of the finance community are now playing catch-up.

The popularity of tech call options has highlighted role of dealer hedging

“This paper is the first high-profile one to really give the idea a proper treatment,” said Matt Zambito of SqueezeMetrics, an analytic service that tracks derivatives exposure. “People are taking these ideas seriously now,” he said.

At the center of it all is what’s known as gamma hedging. That’s when options market makers — the likes of Citadel Securities and Susquehanna International Group — buy or sell an underlying stock to manage their risk as the price of the shares moves.

How the mechanism works depends on each firm’s exposure, but a “negative gamma day” is a session where dealers are generally selling the underlying when it drops and buying when it rises. A “positive gamma day” means they’re buying into weakness and selling into strength.

The researchers examined 300 underlying stocks and indexes with the largest average dollar open interest between 1996 and 2017. They found evidence that dealers during negative gamma days spur an increase in stock gyrations.

Read more: Huge Swings in Options-Overrun Stocks Leave Manager Baffled

“We document a link between large aggregate dealers’ gamma imbalances in illiquid markets and intraday momentum/reversal and market fragility,” authors Andrea Barbon and Andrea Buraschi wrote in a paper this month.

The retail-led explosion in demand for call contracts tied to technology names is making all this more relevant than ever. Trading volumes of single-stock options, for example, recently exceeded regular shares for the first time, according to Goldman Sachs Group Inc. That’s caused some to even suggest that stocks have in effect become a derivative of their underlying options.

To illustrate their findings, the researchers compare trading in shares of General Motors Co. on two separate days. A session when dealers were “deeply” negative gamma witnessed much higher stock volatility at 24% than on a positive gamma day.

The authors also argued that buying and selling from dealers contributed to intra-day stock momentum — a boost to strategies that seek to ride short-term swings, one of the market’s biggest winners of late.

relates to Wall Street Dealers in Hedging Frenzy Get Blamed for Volatility
“Negative gamma” day in GM stock (top) coincided with higher volatility and intraday momentum than a “positive gamma” day (bottom).

In addition, the study found that “flash crashes are more likely to occur and to be larger in magnitude” on negative gamma days. In particular, the May 6, 2010 flash crash, which erased more than a trillion dollars in minutes, was likely exacerbated by dealer positioning, the authors write.

One reason for all this is a change in the market backdrop. Even before retail investors started piling into options, insurance companies had posted a “massive increase” in using derivatives for hedging compared with 20 years ago, according to the authors.

Wall Street banks now publish daily estimates on dealer option positioning, alongside analytics services like SqueezeMetrics and SpotGamma. Even as the calculations remain imperfect, they’re an invaluable data source for traders like Yannis Couletsis at Credence Capital Management.

“It doesn’t really matter if you are correct or not in calculating the market’s total gamma exposure,” he said. “The essential thing is you now have a number to follow relative to its previous price action — so you get a quasi sense of how it is moving.”

TSLA Added to the S&P500

Last night the S&P announced that TESLA (TSLA) would be added to the S&P500 (SPX) Index by Monday 12/21. What this effectively means is that anyone that has funds (pensions & other large asset managers) indexed to the S&P500 will need to purchase TSLA stock, and will sell whichever stock(s) TSLA is replacing(TBD). As TSLA has such a large market cap this is a very large notional change which likely requires a significant amount of the TSLA float.

For funds that are linked to the S&P500 its important that they own the stock on the close of the date that it is added. This is so that they match the S&P500 index to which they are benchmarked. The way they often do this is to purchase shares from a dealer that guarantees them the closing price of Friday 12/18. Therefore the dealers may be purchasing the stock ahead of time so that they can sell (aka “facilitate”) the required shares to those index funds at the close. Again, dealers buy the TSLA shares in the day(s) leading up to the TSLA S&P add, then sell those shares to the large funds at the close of 12/18 (when TSLA is officially added to the S&P500).

The mechanics of the S&P Index add are a bit slower moving than the feverish call buying by the likes of r/wallstreetbets. The call position coming into 11/17 in TSLA is less aggressive compared to August positioning, with the 500 strike being the largest call level. As you can see in the chart below the amount of call gamma(blue line) is roughly equivalent to the put gamma (orange line).

TSLA November Options Gamma
TSLA November Options Gamma

If call positions were much larger than puts we would see that blue line extend far below the orange line, as it did in August (chart below) during the massive move higher in TSLA stock. The “gap” between the call and put gamma in August implied that there were a lot more calls at strikes overhead, and this drove dealers to aggressively buy the stock as it went higher.

TSLA August Options Gamma
TSLA August Options Gamma

Our assumption, here in November, is that call buyers will now be aggressively stepping in as a result of the S&P add to shift a divergence between call & put gamma. It will be interesting to see if the stock can reach that large $500 strike as various players step in ahead of the large index add.

We see two sources of buying that may now materialize:

  1. Call buyers and other short term traders now
  2. Dealers and Index funds into 12/18

We’ll post an updated TSLA options chart tomorrow.

If you like these charts, consider a trial of our EquityHub.

UPDATE:

Despite the 950k call volume yesterday it looks like the net OI add is about 200k. Regardless todays position looks more bullish than yesterdays, and the stock seems to be shifting a bit higher.

PTON

Our HedgeWall and large options gamma strikes sit at 100 in Peloton stock (PTON)

Update: PTON did have a nice bounce off of the 100 strike, most interesting is the liquidity that appeared at that level. Note the green spike in rightmost column, and the deep red as circled below.

Bookmap PTON
Bookmap PTON Chart

Call Options at a Turning Point

Retail call buyers did not increase their buying last week – it was institutions (first chart). That being said a huge driver of the rally last week was likely put options being closed out (second chart). Lastly we point out that PutCall ratios are at historically low levels, right as a vaccine has come online.

retail call buyers vs institutional
put options covers last week
put to call open interest

Options Vanna & Charm

Two greeks are increasingly mentioned as traders seek to better define the impact of the options market: vanna and charm. We wanted to provide some definitions and basic applications of these measurements in an effort to explain why these factors matter.

This post will be seen through the lens of of an options dealer in the SPX. Our basic model assumes that dealers are net short put options, and net long call options.

  • Vanna – measures delta change for a given change in implied volatility[IV]. Short puts and long calls have positive vanna. Therefore as IV declines/rises SPX dealers must buy/sell hedges.
  • Charm – measures delta change for a given change in time. As out of the money options decay, dealers have to buy back futures.

Take an event like the 11/3 elections. IV was very high (as shown by the VIX) and traders were buying put hedges to protect themselves. Accordingly dealers were likely short futures as a hedge against that risk. After the event, IV plummeted which destroyed out of the money put values, allowing dealers to buy back short futures.

Options Charm

As you can see in the chart below, as time passes an options delta changes. Charm seeks to measure this change. This chart samples options over a fairly long time horizon. Recall that weekly options are now very popular and functioning with the same decay but in a much shorter time frame.

Each day that passes, out of the money options require less delta hedging, and in the money options require more. Lets say that a dealer is short 100 shares of stock to hedge an out of the money put that expires in 5 days. Each day that passes (all else equal) the dealer can buy back more and more shares.

Time to expiration and delta

Now project that idea to a portfolio of options, particularly around an event like the election which was on 11/3. There were thousands of very short dated, out of the money put options expiring on 11/4 and 11/6 alone.

A similar situation could happen around a single stock name like TSLA wherein traders are buying out of the money weekly calls (dealers net short calls). Each day that passes (again, all else equal) those calls decay leading to dealer long share unwinds.

Options Vanna

As you can see in the charts below as IV shifts the hedging requirements change. If we work off of the these assumptions that dealers are short SPX puts & long calls, you can see that the out of the money delta moves toward zero as IV drops. Therefore dealers would be buying/selling futures as IV declines/increases.

Delta Versus Implied Volatility