Brent Kochuba, the founder of SpotGamma, discusses the current market conditions of low realized volatility in the S&P 500 and VIX, which is at its lowest since 2019. Brent argues that this is NOT an anomaly but rather the market behaving normally, as the VIX is not significantly lower than its average.
He also attributes the lack of volatility to the impact of 0DTE options, which have led to fewer large intraday price swings and no two standard deviation moves in the VIX since their full launch in November 2022. Brent cautions that these flows could unwind and potentially lead to significant market ramifications.
Additionally, he discusses the unusual market environment of low correlation and volatility in the markets, specifically in the S&P 500, and the potential role of option hedging flows in suppressing market volatility. Brent warns that if the market experiences a significant shift, such as a crash, there may not be an equivalent force cover trade to mitigate the risk, as most call overriding is cash-settled.
To finish, Brent also discuss the current market environment of low volatility despite high dispersion and the potential for a snapback, potentially triggered by inflation, geopolitical tensions, or credit issues.
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