Rate hike odds sit near 60% into a September meeting, and both bonds and equities have dropped. A red day across the board, with plenty of bearish headwinds on September 1.
This week, Brent Kochuba kicked off Gamma Guy — his new weekly show on tastylive, Tuesdays at 11:00am ET. Yesterday, he broke down the case for why a large selloff might not materialize given current options market conditions.
Three Things That Stood Out
1. Put buying remains muted
Put skew rank for SPY and IWM measured 2.8 and 5.0, respectively — indicating extremely low compared to the prior year’s range. That indicates low put demand, meaning traders may not currently be inclined to pay for downside protection.
2. Volatility will not respond
SPX at-the-money implied volatility 1 week out printed at 9.8, which is quite low compared to typically seen. Because 0DTE sellers kept selling options, implied volatility – and options prices – could remain cheap.
3. Dealers hold positive gamma in the S&P
SpotGamma’s TRACE showed positive gamma from 7,800 down to 7,500 — relatively thin at spot around the 58th percentile, yet far heavier below reaching the 98th percentile of recorded values at 7550. When dealers hold positive gamma they buy dips and sell rallies, meaning their hedging leans against a price move rather than with it.
What Would Change the Read?
One thing could change Brent’s read: negative gamma below 7500, with a corresponding increase in implied volatility. Negative gamma would mean dealers sell into weakness, creating more volatile conditions. The current setup more comfortably shows support near term, although that support thins further out in time.
Dates That Carry Weight
Two dates carry weight over the next two weeks: non-farm payrolls on Friday (September 4) and FOMC (September 16). Note that FOMC lands just after quarterly options expiration and near the September VIX expiration.
A Trade Idea Into Broadcom Earnings
Brent also presented a trade idea into Broadcom’s earnings noting AVGO’s risk reversal rank hitting 97, with calls significantly richer than puts at a ratio rarely seen over the past year. The current term structure points to a drop in IV equivalent to 15 to 20 vol points once earnings clears. This structure could suggest selling the front weekly 400 call, and buying the September 11 400 call, roughly a $1.40 debit.
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Gamma Guy runs Tuesdays at 11:00 a.m. ET on tastylive.
Brent Kochuba is the Founder of SpotGamma and a contributor to tastylive. He was previously a portfolio manager at Seven North Capital Management and a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.