Charlie McElligott, Nomura: “As VVIX & Skew went ‘bid’ BIG TIME yday, this indicates that the market is now once again beginning to price-in ‘tail’ scenarios”, “[That] offers attractive risk-reversal opportunities to play for an upside S&P breakout following a potential ‘hedge puke’”, he added, noting that in the event we do get confirmation from Trump that the December 15 tariff escalation is off the table or, even better, that some existing levies are set to be rolled back, “the market has [a lot of] protection which will get sold”.
McElligott goes on to say that downside protection in the S&P is “extremely rich, while upside sees little to no interest”. On Monday, for example, he notes “you could sell a 1m 4% OTM S&P Put to buy a 2% OTM Call costless”… “equities positioning remains extremely LONG”. He cites, for example, a marked pivot in fund flows (one-week inflows to global equities funds in the 87th percentile), while asset manager positioning in S&P futures “remains a still-absurd 98th percentile since 2006 despite beginning to profit-take last week”.
“In the base-case that we DO indeed get the tariff delay / rollback announcement sometime this week / weekend in conjunction with the market carrying so much ‘downside’ protection, it sets up a scenario where into next week’s terrible holiday illiquidity where we could very likely get an impulse ‘GAP HIGHER’ as said hedges are shed”, he writes. Charlie says the gamma flip level is now around 3,090, or 3,080 excluding this week’s options.