From Heisenberg a great note from Nomura which syncs with what we wrote in recent weeks and to our subscribers.
“Price movements over this summer once again clearly emphasized the spot/gamma/realized vol dynamics”, SocGen wrote, in a September note documenting a crucial dynamic that can always be described as “underappreciated” until everyone understands it. “All the big daily moves (magnitudes larger than 1.5%) occurred when the previous day’s aggregate gamma estimate was negative”, the bank said.
“Extreme’ SPX $Gamma at 94th %ile and $Delta at 99th %Ile continues this ‘feel good’ stasis for stocks up here”, Nomura’s Charlie McElligott writes on Tuesday, adding that the current snapshot shows the dealer ‘Long Gamma’ position wouldn’t flip ‘Short’ “until all the way down in the 3050-3060 range”.
“Intraday movement is squelched by dealers selling strength and buying dips”, he writes, explaining the “negligible” 1-day range in markets.
McElligott summarizes the situation as follows:
Grinding higher (albeit range-y) S&P 500 is the perfect virtuous feedback loop for the market to choke on sustained “Long Gamma,” as customers sell Vol to Dealer desks largely via yield enhancement strategies / players—thus what feels like this perpetual pin approx. between the monster $Gamma strikes of 3100 and 3150. An additional boost to Equities comes from the VIX ETN complex, where the insane 99.4 %ile “Net Long Vega” position (rel 2011) continues to mean rebalancing flows which sell UX1 fut to buy UX2—creating extremely outsized “SELL VIX” flows as a “second-order”catalyst for higher stocks.