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

Market Analysis

How a retail options craze fueled SoftBank’s ‘whale’ trade

FT article shines light on what we said: Softbanks wasnt so much of a whale.

…retail traders have together spent almost $40bn on similar trades just over the past four weeks, according to Sundial Capital Research. Dean Curnutt, the chief executive of Macro Risk Advisors, a derivatives strategy firm, said those millions of retail traders form a “Mighty Call Trading Legion” with a combined heft bigger than even giant financial institutions. “My take is that it’s less SoftBank [driving options markets] and more this collective activity of retail, momentum-oriented crowd,” he said. “The data doesn’t have a mark of a whale. It has the mark of lots of little, tiny whales that add up to one big one.”

Line chart of US equity purchase premiums on call options for trades of 10 contracts or less ($bn)* showing Retail investors pay up for options

No, Softbank Didn’t Weaponize Options Gamma

One of the biggest stories at the moment is that of Softbank and their massive options positions which many are attributing to the markets large runup in late August. There are a ton of stories and opinions floating around on this topic and we thought it warranted a bit of mapping to clear some truths and misconceptions.

In our view SoftBank likely did NOT have the impact the media is portraying. However, there was a large increase in call option activity likely from a wide array of sources which may have influenced volatility.

The pink link in the graph below highlights the rise in single stock call activity. This activity is something many have been talking about for several months.

Single stock call option volume has been rising rapidly
Options Volumes Index, Single Stock

Here are some background articles on this Softbank topic, the main narrative appears to be that SoftBanks’s options activity is particularly responsible for the recent volatility.

However, a key line from CNBC denotes these options positions were tied to stock, which is also backed by Ben Eifert’s twitter thread, below.

  • Key quote from CNBC article:

Courtesy of Yakob Peterseil, you can see where large trades were posted in some of the tickers SoftBank was reported to be in. Note these are all spreads, not single legs:

Image

Below is a chart of the aggregate of options gamma and open interest for many of the names that SoftBank was invested in. Note that open interest levels in particular do NOT appear to materially change from June to September. You may also notice there is a “cycle” to this data tied to options expiration (6/19, 7/17, 8/21).

Options open interest and gamma in SoftBank positions.
Options open interest and gamma in SoftBank positions.

We plotted total open interest in the chart below for ADBE, and you can see some major positions popped up in early August. Those strikes that spike earliest are the 450 (blue) and 490 (pink). The fact these spike on the same day would support the idea that this was a spread position added, not a single position. This also ties back into the dates noted in Yakob’s image above.

ADBE softbank options open interest
ADBE stock open interest

MSFT is another stock mentioned in the SoftBank articles. Right around the same time as the large ADBE increase we see moves up in MSFT open interest. In this case the largest position increases appeared to be in the 220 and 240 strikes. As MSFT options activity is much larger than ADBE there is a bit more noise, but you can see the two strikes increase sharply on the same day.

MSFT Softbank options open interest
MSFT Open Interest

Our view is that these trades may have been done for the following reasons:

  • Stock replacement – replace long stock positions with call spreads to reduce risk
  • Long volatility – in theory these call positions would make money if call implied volatility spiked higher.

With this in mind it seems like these trades would have reduced overall exposure to higher stock prices, and likely not had the “gamma impact” that many pundits projected.

SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally

From the FT

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SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally Japanese conglomerate has been snapping up options in huge amounts over past month SoftBank has established an asset management unit for public investments using capital contributed by its founder Masayoshi Son, pictured © Reuters Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Kana Inagaki, Katie Martin, Robert Smith, Robin Wigglesworth 6 HOURS AGO 56 Print this page SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of US equity derivatives in a move that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday, according to people familiar with the matter.

The Japanese conglomerate has been snapping up options in tech stocks during the past month in huge amounts, contributing to the largest trading volumes in contracts linked to individual companies in at least 10 years, these people said. One banker described it as a “dangerous” bet.

The aggressive move into the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on privately held technology start-ups through its $100bn Vision Fund. After the coronavirus market tumult hit those bets hard, the company established an asset management unit for public investments using capital contributed by its founder Masayoshi Son. 

Now it has also made a splash in trading derivatives linked to some of those new investments, which has shocked market veterans. “These are some of the biggest trades I’ve seen in 20 years of doing this,” said one derivatives-focused US hedge fund manager. “The flow is huge.”

The surge in purchases of call options — derivatives that give the user the right to buy a stock at a pre-agreed price — has been the talk of Wall Street in recent weeks, as the sheer size of the trades appears to have exacerbated a “melt-up” in many big technology stocks over the summer. Shares in Tesla soared 26 per cent in under a week to September 1, while Amazon and Google parent Alphabet gained about 9 per cent.

One person familiar with SoftBank’s trades said it was “gobbling up” options on a scale that was even making some people within the organisation nervous. “People are caught with their pants down, massively short. This can continue. The whale is still hungry.”

The options boom means that the US stock market remains vulnerable to further bursts of volatility, according to Charlie McElligott, a strategist at Nomura. “The street is still very much in a dangerous space, and that flow is still out there,” he said in a note on Friday, adding that this leaves the market open to swings higher or lower.

The overall nominal value of calls traded on individual US stocks has averaged $335bn a day over the past two weeks, according to Goldman Sachs. That is more than triple the rolling average in 2017 to 2019. The retail trading boom has played a big part of the frenzy, but investors say the size of many recent option purchases are far too big to be retail-driven.

Single stock call option volume has been rising rapidly

Unusually, single-stock call trading volumes have surged beyond the average daily volumes of calls on the broader US stock market, and are almost as high as the level of trading in index puts — which give the buyer the right to sell at a pre-set price and act as a popular form of insurance against stocks falling. 

The size and aggressiveness of the mysterious call buyer, coupled with the summer trading lull, has been a major factor in not only the buoyant performance of many big tech names, but the broader US stock market, according to Mr McElligott. This week he warned that dynamics around options meant the heavy purchases forced banks on the other side of the trades to hedge themselves by buying stocks, in a “classic ‘tail wags the dog’ feedback loop”. 

This also helped explain the unusual sight of the US stock market climbing in tandem with the Vix index — often referred to as Wall Street’s “fear gauge” — and meant that equities were fragile and vulnerable to the kind of sudden setback that erupted on Thursday. “The equity volatility complex is acting ‘broken’ and indicative that ‘something’s gotta give’,” Mr McElligott warned in a note shortly before the Nasdaq fell 5 per cent. 

One banker familiar with the latest options trading activity said Thursday’s market pullback would have been painful for SoftBank, but he expected the buying to resume. A larger and longer-lasting stock-market decline would be more damaging for this strategy, and would probably involve rapid declines, he added.

The options buying comes alongside $10bn in public investments SoftBank is targeting through its new asset management arm.

According to a filing to the Securities and Exchange Commission last month, SoftBank has bought stakes of nearly $2bn in Amazon, Alphabet, Microsoft and Tesla — investments that are partially funded by cash from its $41bn asset sale programme that was triggered by a collapse in its share price during the Covid-19 market turmoil. 

Additional reporting by James Fontanella-Khan

Nomura Gamma Crash Up

From ZH

On Saturday, when we published our lengthy compendium of bizarro market charts showing the paradoxical melt up in both risk assets and the VIX, leading to the most positive correlation between the S&P and the VIX since the Feb 2018 Volmageddon event…

… we said that “one reason why no conventional indicator seem to matter is because it now appears that gamma has become a primary driver in the market’s latest meltup.”

One day later, when we showed that the VIX is now at the highest level at a a new all time high in the S&P since March 2000, i.e., the day the do com bubble burst…Recommended VideosHow Cuban Scored With Amazon And Netflixhttps://imasdk.googleapis.com/js/core/bridge3.406.0_en.html#goog_2062335183https://imasdk.googleapis.com/js/core/bridge3.406.0_en.html#goog_1331685528Ad: (19)5NOW PLAYINGHow Cuban Scored With Amazon And NetflixAnalyst: StocksTo Soar 14%Is 2020 the Year of Retail Investors?Think Positive: Despite Pandemic, Civil Unrest, Dow Jumps 268 PointsNasdaq Seeing Beginning of ‘Blowoff Upside Phase’: BTIG’s EmanuelAre Investors Blindly Following Logic Behind Surge in Tech Stocks?What Accounts For Berkshire Hathaway’s Market Capitalization?Buffett Cut Stakes On JPMorgan & Wells Fargo

… it was the world’s most important “market maker” (or taker as some may joke), Citadel that laid out its own take on this unprecedented “gamma grab”. For those who missed it, this is what Citadel said:

Over the past few weeks, there has been a massive buyer in the market of Technology upside calls and call spreads across a basket of names including ADBE, AMZN, FB, CRM, MSFT, GOOGL, and NFLX. Over $1 billion of premium was spent and upwards of $20 billion in notional through strike – this is arguably some of the largest single stock-flow we’ve seen in years. “The average daily options contracts traded in NDX stocks to rise from ~4mm/day average in April to ~5.5mm/day average in August (a 38% jump in volume).

Given this group of 7 stocks accounts for a ~40% weighting in the NDX, the outsized volatility buying in the single names is having an impact at the Index level.  So why are Vols moving Wednesday and Thursday when this call buying has been taking place for weeks?  Yesterday CRM, one of the names we have seen outsized flow, rallied 26% on earnings – a less than ideal outcome for those short volatility from all the call buying.

As the street got trapped being short vol, other names in the basket saw 3-4 standard deviation moves higher as well – on Wednesday FB rallied 8% (a 3 standard deviation move), NFLX rallied 11% (a 4 standard deviation move), and ADBE rallied 9% (a 3 standard deviation move).

The most natural place to hedge being short single name Tech volatility is through buying NDX volatility.  As such, there has been a flood of NDX volatility buyers with NDX vols up about 4 vol points in 2 trading days. And if NDX volatility is going up, SPX volatility/VIX will eventually go up too.”

Of course, if gamma is discussed Charlie McElligott can’t be far behind, and in a note this morning, the Nomura cross-asset strategist echoes what we said about this underlying reflexive beast that is propelling the market higher, saying that Gamma hedging has become “the most important flow in the market, with the convexity of said short-dated “lottery ticket” options creating an ‘all-or-nothing’ binary-options market behavior into weekly expiries, seen in these increasingly exponential ramps in names like TSLA.”

In his explanation of the “spot up, vol up” moves seen across major indices, McElligott repeats what we explained over the weekend, saying “it’s as simple as this: Street-wide, Dealers are short Gamma / short Calls off the back of the MASSIVE upside premium buyer (as in BILLIONS spent) who has been in the market over the past month or so in a number of mega-cap single-name Tech cos.”

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This, according to McElligott (and Citadel), “is why CRM had its freakish +26% post-EPS single-day move last week (lolwut), and dragged-up a number of other high-profile big name Tech which have also been part of the upside buying program (AMZN, ADBE, NFLX, FB, MSFT) all enormously “over-shooting” thereafter, as generically, the Street was short 1m 20d Calls which turned 25d real quick, forcing Dealers to grab Delta to stay hedged, in classic “tail wags the dog” feedback loop.”

Another way to describe the feedback loop of course is what we said on Sunday: calls spiking higher amid this gamma squeeze, leading to more buying of the underlying stock, leading to even higher call prices, even more call squeezing, even more delta-hedging and buying the underlying, which eventually spills over into more and more of the market, and so on until there is one massive marketwide meltup.

Then there was the added matter that this flow was simply larger than an August illiquid single-name market could take, with McElligott noting that “the hedging of single-names becomes forced lookalike buying in NQ- and likely ES- as well (because it looks relatively “cheap”)—spot up, vol up, as this “upside-crash” has to be hedged.”

As a result, we are now also seeing the VVIX exploding higher (+9vols yday!) “as market makers are forced into grabbing upside tails, while too, this dynamic is also evidenced by the spread btwn UX1 (front VIX future) as implied vol vs SPX 30d realized vol (so heavily weighted in US Tech) currently stands at 17.5, the most in 10 years.“

* * *

It’s not just the “self-fulfilling” gamma grab flow of course, and at a time when retail traders have become the most improtant marginal price setter (as we explained in May), the larger multi-month theme of “Robinhood-esque” speculative buying in short-dated deep OTM Calls continues to iterate McElligott’s refrain that “Gamma” hedging “is the most important flow in the market, with the convexity of said short-dated “lottery ticket” options creating an “all-or-nothing” binary-options market behavior into weekly expiries, seen in these increasingly exponential ramps in names like TSLA.”

As a result, broad index and ETF options-wise “are as extreme as it gets (QQQ $Delta 99.9%ile, SPX / SPY $Delta 96.9%ile)..

… while too CFTC TFF futures positioning data shows the “Asset Manager” extreme net $long at 98%ile in NQ and 96%ile in ES, while the “Leveraged Fund” net $position is at extreme SHORT (hedging underlying “longs,” of course) with 0.1%ile in NQ and 0.4%ile in ES net positions since 2006.”

Finally, for those who have no idea what this post is about, we storngly urge you to re-read “All You Ever Wanted To Know About Gamma, Op-Ex, And Option-Driven Equity Flows.” In a market as broken as this one, where fundamentals don’t matter, it just may the most important thing you read today.