On Silver's Exponential Price Feedback Loop

Tyler Durden's picture

And as if silver bulls needed some more good news, here is a report from the Morgan Stanley metals desk...

I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.

A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies. 

Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.

On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.

Great in a slow steady market, nightmare in a volatile

Translation: ever-accelerating feedback loop (both higher and lower). Vol is about to go off the charts.