2.5 Trillion Reasons To Care About This Week’s ‘Quad Witch’ Options Expiration
Tue, 12/15/2020 – 11:55 Like all December option expirations, this month’s is large, with $2.5tln of SPX-linked options notional (linked to 8% of the S&P’s market cap) expiring on 18-Dec, but for a December, it is not extreme…
Nomura’s Charlie McElligott notes that in recent days, flows have pivoted from “crash-up” FOMO hedges to actual “crash-down” protection
Ahead of this week’s Serial / Quad Op-Ex week (tomorrow VIX, everything else Fri) and in-light of the recent implied volatility compression phenomenon, we have seen SPX realized “catch-down” and absolutely CRATER (SPX 5 day realized at 5.1, 10 day at 7.6, 20 day at 11.0 lolololol):
- “extended post-election chaos” narrative farce and ensuing hedge unwind,
- “vaccine reflation / economic renormalization” pull-forward,
- increasing probability of a “lame duck stimulus” deal,
- pro-cyclical Q4 “risk-on” seasonality and
- “cyclical value over secular growth” rotation in thematic single-name
Have all been factors to offset and squelch index level vols, all further supporting the equities market “feedback loop”-supportive-flows from options Dealers.
The big change however, McElligott notes, has been client hedging focus:
- For the past few weeks, it had been about fear of missing the “Crash-UP,” as evidenced particularly by the upper 90th%ile Call Skews in those economically-sensitive Cyclical ETFs I’ve recently highlighted in grabby FOMO / YOLO fashion.
- But over the past two days, we have now begun seeing grab instead for “Crash-DOWN” (yesterday SPX 23dec 3000 puts paper pays $1.55 on 5000) while Call Skew instead goes offered, as SPX 1m Put Skew now suddenly stands at 87th %ile, 2m Put Skew 84th %ile, 3m Put Skew 88th %ile and 6m Put Skew at 95th %ile.
This has all happened as we approach this week’s “unclenching” op-ex:
Post Op-Ex is always the “window for movement” as $Gamma typically “unclenches” the market from previously insulating Dealer hedging flows thereafter (i.e. window opening potentially tomorrow with VIX expiration through some time next wk), although the aggregate $Gamma has already dropped notably and currently down to just 25th %ile since 2013 with some likely monetization of upside winners
As SpotGamma notes, the Gamma & Delta Tilt metrics have seen fairly sharp reversals, which indicates some deterioration of the options structure. Said another way, we see options support crumbling.
This obviously doesn’t mean the market should sell off, but it does suggest its “easier” for it to sell off. Recall that its under 3650 wherein we think dealers actually add to selling.
You can see in the chart below how large the 12/18 expiration is for SPX, we’d add that for single stocks about 45% of equities have their largest gamma concentration on 12/18, and about 25% have their largest delta concentration.
It does seem like is a pickup in the Jan expiration for single stocks but may also reflect a a reduced “retail” interest as they tend to flood the nearest Friday expiration.
However, not all is straightforward as Goldman notes that the addition of TSLA to the S&P 500 could potentially adding 1/4 point to the index’s volatility on its own.
On the assumption that TSLA joins the SPX with a nearly 2% weight, and has 44% correlation with the rest of the SPX and 3.6 times the rest of the SPX’s realized volatility (as it has for the last three months on each of those metrics) mechanically TSLA would add 0.25 volatility points to SPX volatility.
However, if TSLA has a zero correlation with the rest of the index, it could actually lower the index’s volatility, and if its realized volatility is only double the SPX ex-TSLA’s it would have almost no impact on the index’s volatility.