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Explaining Today's "Massive Stop Loss" Quad-Witching Market Waterfall: Why 2000 Must Be Defended At All Costs
One week ago, and again last night, we previewed today's main event: an immensely important quad-witching expiration, the year's last, one which as JPM's head quant calculated will be the "largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050."
What is most important, is that the "pin risk", or price toward which underlying prices may gravitate if HFTs are unleashed to trigger option stop hunts, is well below current S&P levels: as JPM notes, "clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market."
What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers and various momentum strategist (which work in up markets as well as down), and since the vol surface of today's market is well-known to everyone in advance, there is a very high probability the implied "stop loss" level will be triggered.
Not helping matters will be the dramatic lack of market depth (thank you HFTs and regulators) and overall lack of liquidity, which means even small orders can snowball into dramatic market moves. "While equity volumes look robust, market depth has declined by more than 60% over the last 2 years. With market depth so low, the market does not have capacity to absorb large shocks. This was best illustrated during the August 24th crash."
That's the qualitative explanation. What about the quantitative? According to Thomson Reuters data, between SPX 2050 and 1900 levels there are currently about 1.1 mln put contracts open vs 739,000 call contracts. As Reuters unnecessarily observes, "unless there is a substantial move in either direction that is sharply greater than the standard deviation, large SPX options positions should have limited impact on the market."
Well of course: the problem is that since over the past 7 years, the entire market has become one giant stop hunt, the very algos which "provide liquidity" will do everything they can to inflict the biggest pain possible to option holders - recall that for every put (or call) buyer, there is also a seller. As such, illiquid markets plus algo liquidity providers makes for an explosive cocktail at a time when the Fed is already worried whether the Fed may have engaged in "policy error."
So what does this mean in simple English? As Reuters again points out, levels to watch are the large imbalances in favor of puts in Dec SPX put contracts at 2050, 2000, 1950, 1900 strikes
It further writes that "as SPX moves below these levels market makers who are short these puts would be forced to sell spot futures to hedge, which could exacerbate a market selloff."
In other words, selling which begets even more selling, which begets even more selling.
The Fed's trading desk, and its Citadel "market supportive" joint venture, will be busy.
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CRASH already!
Well the real driver of the bull market is shown here, and that driver is gone. This massive stop loss may just be the catalyst. Should be fun to watch.
japan may have passed away last night when kuroda was talkinig,,,obama talks at 2 pm then off for 17 days,,,get you popcorn out
I have no worries. The PPT has my back.
A liftoff will happen indeed - that is, the price of gold will liftoff. The deflation is already here and debilitating. The Fed will soon have to resort to extraordinary-er easing means; but the paper/gold ratio is already epic (300x), and cannot go down (short of a golden asteroid softly landing on Earth). Breakage point is close, very close.. Patience my friends.
Bring it on...extra butter on that popcorn please:
http://gifsec.com/wp-content/uploads/GIF/2014/07/Deer-popcorn-gif.gif
I'd give that comment 10 up arrows if i could as you are absolutely correct. You buy stocks whilst they are liquifiying the system... and you sell them when they are draining. Sit back, be patient and let the market plumbing do its thing.....
This is not the crash you're looking for.
This will be a test of whether they will defend. I say they do. Today will disappoint the bears but their day is coming. Unless the NY Fed has a power shutdown that is.
There mistake will be seen as hubris. Eventually even they will no longer be able to control the herd.
Chances are the algos do not stop hunt when the stops are owned by the market makers or banks.
Most option sellers have unlimited funds backed by the government to sell options until they expire worthless. Why would today be any different?
If it even gets close to the puts that were sold then the banks will just sell another $1T, $2T, $3T worth of options. Whatever it takes to expire every last one of them worthless.
The real fall does not start until the options are out of the way, maybe Monday.
I am sure it would not surprise anyone here if the Fed was net short all $1T call and put positions and continuously selling calls and puts today unlimted to expire all options worthless.
If you have enough money you can expire every option across every market worthless than what you sold it for, and by all appearances that is the majority of what has taken place since 2009 QE started.
Audit the fed and probably see their balances consist of derivatives where they get the most speculative leverage with the ability to print unlimited funds.
<------I am over here mother fucker
I knew I shouldn't have picked today to stop sniffin glue.
Get back on the sauce pronto. Once you have stabilized, slowly detox using ever smaller amounts of Elmers. It worked for me, though I still have the shakes when I see a tube of Super Glue.
Get out there and buy a box of the sheite, before the rush :)
Rush - now that was one wild quick ass high.
Explosive diarrhea..
Is it not possible to show just a tad bit of 'fake class' and remove the GT profile pic...?
I dunno - maybe you just really want people to visualize where your head truly is.../?
This is definitely a job for AdBlock Plus.
If only it could block stuff in the comment section as well.
Show some class? This is Zero Hedge!
It's just a drawing. It could be worse. It could be a selfie.
Try not to see it as a vulgar immature illustration, but as a tiny defiant act of dissent. Anyway, in a few years you'll probably be able to sue him for offending your sensibilities. It took less than a week to make the Dukes of Hazard TV show "unfit for public viewing" due to a grossly offensive paint scheme on a 1969 Dodge Charger.
Damn I wanna see them lose control today!!
As a great sponge once said,
"good luck with that"
In this world of economics where no one knows the answer, today will either raise or lower ZH credibillity.
If stocks behave similar to other days this past month, then this is all BS.
If there is a massive sell off today or Monday, it would raise ZH above the ranks of others.
It will be interesting to say the least.
The truth need not be defended, it always comes out on it's own. This ride is coming to it's close and they will sell sell sell baby.
The truth need not be defended, it always comes out on it's own.
That's not true.
i shall defend you
Sure it is as the truth has all the time in the world to materialize. If you and I know it, many more will soon...
Meh.
This article was a total yawn for me.
They said "high probablility," a completely ambiguous phrase signifying nothing. They didn't even attempt to attach an arbitrary percentage likelihood.
This article was a total yawn for me.
Unfortunately, I feel the same way. Just as the great majority of fund managers are seemingly unshakable from their belief that the markets will continue their ascent indefinitely, perhaps we are just as committed to the, "It will all come crashing down, but not today." meme.
Good point.
I try to consider alternate possibilities, but the only one that comes to mind is a hyperinflation. Just a different path to get to the same place really.
One can only hope...
If you know they will give you an arbitrary number, why are you pining for it?
Paging Winston Churchill, come in Mr. Churchill.
Well I think your jugdement is a little harsh.
So you are saying IF the market does go up today, or keeps above the 2000 level, then ZH is wrong,
but what if, after doing some research, you find that the market is up becuase of, say, 5 different lots of 3000 E-Mini orders entered at the precise millisecond to halt and turn momentium? and oddly it goes on all day! So is ZH right or wrong then?
Raising awareness of information found in few other places is what gives ZH the street cred.
Crash and burn. Collapse, baby collapse.
"One hundred percent certain."
B.S. Bernanke
The manipulated markets have to be protected. Just like Draghi said his socialist banksters must be protected at all cost, even if it means impoverishing the small people and negative rates.
Their well aware there Ponzi system would go down fast without always stepping in to bail something out.
You'll know the markets are free again when this ponzi fails. Price discovery occurs when the bubbles all burst.
Didn't you hear? They're doing it for the children. /s
maybe, but i bet today we're going to see a very nice rally
There are alot of people short so the setup is definitely there, for a facemelter short squeeze.... I could easily see this as a gap and go day, but I dont think its how it will play out. I think the entertainment will start after the european close. My bet is 2000 gets tested then. What happens will be interesting.
The unknown as always is what HFT will do. A few black hat Bots could make today very interesting to the downside.
Can't believe that the FED did not preposition its rescue system for this rate cut. Didn't have everything in place last September, but now they do. (Stealth QE injections into the stock market to maintain S&P @ 2000 at all costs).
Question is, how long will it last?
that's something I've been asking for a while - rather than reactively ppt-ing have they been pro-actively pumping to get through a hike? & if so is it sustainable?
Here is one possible scenario:
They will let the market crash badly. Everyone will beg for ZIRP again. Out of the goodness of their heart they will give us NIRP.
Hegelian dialectic at work
Global depression. Now the banksters being hit as well.
Their trying to start a major war to get out of it like WWII.
Bubbles can't go on indefinitely.
My guess is that some Turkish pilot is going be sacrificed in the next few days to try and get a response from NATO...
Perhaps a remote controlled F-16 with a corpse in it dressed as a pilot ? Perhaps.
The terrorist NATO fuckers would try anything to stay relevant.
Convenient day for a New York "terror attack" that forces the markets to close.
This, is not your crash.
This...is...SPARTA!
whether it's naked shorts or options players the retards have nothing to sell. nothing. therefore ergo they cannot move the market. simply put, they are nothing more than degenerate gamblers. zero percent hedging, 100% bullshit.
You get nothing, you lose, good day sir! [/Willy Wonka]
https://www.youtube.com/watch?v=4UDnTJcjPhY
https://www.youtube.com/watch?v=7FRhQbd1HUA
But all those boaters in the image have paddles!
What gives?
I don't think they are ready to piss away 7 years of manipulation on some stop loss orders. And if they do run them, the market will only close higher afterwards. I say that as someone who knows this market is at least 50% overvalued.
The pig farm ready for another day of games, need to keep the lie of buying the dips going a few months for the Ponzi game to run full circle!
In this crash...will the air bags deploy....we are due an E ticket ride...
+1 for E ticket reference.
brought back fond memories of Disney Land in the 70's. grew up in OC and must of gone to the park 50 times.
Policy Error = Pull It
An momo jerk electronic casino that contributes fuck all to the real economy.
2050 puts are already hedged away.
2000 will be defended. It's easy to defend in a market of low liquidity - especially if the algos can only toss 100 futures back and forth.
I don't see a reall break down until the New Year - gotta get that 2 and 20 pay day locked in, boyz and gurlz.
Once all sold net futures option positions are covered, then the specs step away from the market and there will be volatility today.
Until then, it will be pins across the board. Algos don't have trillions at their disposition. Specs will be in a corner and not backing down. My best guess is that they close out the 2050s first which will involve buying back the puts and buying back the sold futures - so look for some early support as that position is unwound.
We know about this and you better believe the fed heads know about this so if these put options were to begin to cascade then it's because the fed wants them to. If that's the case then there's something bigger afoot.
Much much bigger I would venture a guess and I'm not even certain, who is, that the FED is still controlled by the same people behind the curtain...
if defended, it will be done by battling in the CME futures primarily through "non-reportables" positions - the category where central banks fall:
http://www.cftc.gov/idc/groups/public/@commitmentsoftraders/documents/fi...
from that link:
"Other Reportables Reportable traders that are not placed into one of the first three categories are placed into the “other reportables” category. The traders in this category mostly are using markets to hedge business risk, whether that risk is related to foreign exchange, equities or interest rates. This category includes corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable traders not assigned to the other three categories."
it is probably no coincidence that FOMC meetings are now ALWAYS right before options/futures expiration. it is by design. why would you do that unless you want to have as much "say" in market direction as possible (if you think like a central bank, cough, cough, regardless if it is unethical, legal or criminal - you decide).
Green by the end. Have you all not learned anything over the years?
yep. this is bullish.
Bullish would mean there was a market. Bearish, the same. There's the FED and their banker overlords.
not at all. zh concentrates on the put buyers only. they are nothing, and have nothing. the sellers control the market. even the spending bill passed right after the "market" opened. if that doesn't scream global conspiracy to keep the s&p high i don't know what else would. even if a seller did materialize and tried to liquidate $1T worth of stock in one day they would close trading and launch a fucking congressional investigation.
I'm too cynical at this point to believe anyone has enough information to predict the 'oh fuck' moment. The puzzle is too complex, and the only rule is that the rules will keep changing as you try to solve the puzzle. It's a new world, and the rules of old no longer apply.
Is it possible that the Fed has no choice in the matter?
I'm seeing Europe's major markets all lower. Just like we wait for their close, they wait for our open.
Fireworks in about 40 minutes. Forget the futures. Like yesterday, they're telling you exactly nothing.
But, but.....da Santas rally! Gotta buy all the things!
LAND OF THE LOOOOOST!
I'm not worried, I will sleep-in with Henry Fellen, he's gonna give me a qtr point hike.
My plunge protection team stands on the ready with unlimited digital fiat suckas.
Keep the faith in Fiat! and your omnipotent Central Planners!
I keep reading about a FED / Citadel relationship supporting the equity markets in ZH articles.
But has there ever been a ZH article that spells out exactly how this relationship works?
I would love to see that.
If the market makers are short all these puts, they will make damn sure they all expire worthless
Told you, we've got this. Only took a few billion to lift it, Now the algos will do the rest. We at the Fraudural Reserve can handle any crisis that we create.
Trading may be halted. Then there will be nothing to see and the options will expire harmlessly.
That thing is gonna burst after christmas and new years evening. In case that thing burst now, people will not spend at much at the final moment before christmas and then everything would implode. Do not forget that we live on Buy, Buy ,Buy!
Heckles Building: Yeah, get me Ken Griffith on the phone.
Citadel: Right away Mr. Fellen
Heckles Building: Ken, I thought I told you to keep the market up no matter what today. Do I need to come down there and bitch slap you?
I have a lot of very wealthy patrons who have a lot to lose if this turkey crosses 2000.
Citadel: We are doing our best Madam Chair, but there is heavy selling coming from, of all places, Japan. We will do our best. But in case, can you wire us another trillion just in case?
Do you really think the Fed Balance Sheet is around 4 Trillion? Fed balance sheet is higher then 4 trillion and has no theoritical limits.
They will print today. They will print WHATEVER IT TAKES to keep the market afloat. Wasen't the rumor that the August Crash Cost 500 billion in printing, swap lines and repo's which they did to keep the market up?
Everything is so rigged you will not even know the economy has collapsed until the day you go to the store and your debt card is rejected.
I hope I am wrong I do have puts just in case but my hopes ARE NOT up and I am not excited about today.
Down, down,down the market goes. Where she stops no one knows.
Edit: 03:18 p.m.
OMG! Bammmm.
I hope it goes below the last low of 2009 i.e. 666
This is somewhat mitigated because the in the money calls were almost all exercised yesterday because of the ex-dividend date. So only the puts are left. Still a lot. I believe the biggest by by far is the SPY options. A LOT of puts left at 200, 202, 203, 205 strikes.
http://thecommoditystrategist.blogspot.com/
Dropping fast now. Uh-Oh. Hahahhahhha
There is a sizeable quantity of puts at 2025 as well, that we just sliced thru
Crash then pump it back with QE again, the Fontases will be happy...
Options have become a serious lifeblood of banks, otherwise you would not see the explosive growth of options (1900% growth in equity options over 20 years). Banks now have to devise additional ways to get this money making scam out to the masses. weekly options, options priced in $0.50 intervals. options traded on almost every stock in the market. What is left for them to roll out? daily options, options priced in $0.01 intervals or even $0.0001 intervals, options on OTC stocks, options on options are ideas that come to mind.
Back in the 90s and early 2000s you could make money in options if you were fast enough to catch a stock breaking out on volume. Fast back then just meant minutes. Compared to today's fast of milliseconds.
In today's new option world, if a stock breaks out to new highs on expanded volume the robots pick it up in milliseconds and not only will they frontrun your option order but they will widen the spreads to 1000% spreads just in case you are dumb enough to try a market order.
In most of situations the option actually leads the underlying. If you want to talk derivatives, it is stocks/indices that are derivatives of options.
HEY!!!
just in case you are dumb enough to try a market order.
I am not dumb, just a human that makes mistakes. I got HTF-Raped the other day 17 cents per share accidentally placing a market instead of a limit.
I mention this because everyone out there reading this that does not trade need to know how criminal and fucked up the entire stock market is at this moment in time.
It cracks 2K and dives
It ramps into the close
2008 and 37 minutes to go . . .
Minus 400?
600 Bn of puts right before your eyes. CBs with their agents Citadel have algos too to ensure bloodbaths. With fire hoses under their monopolies, they will ensure further illiquidities in these markets. Retards/Dreamers still believe that interest rate hikes mean zero use of money pumps (justified as fire hoses) to stabilize (?) free falls (yet another doublespeak). The deformed markets with their own prices are in different orbits from the real economies that suck. Friday markets have to open high to trigger the short covers. Christmas comes early for those who sit on their asses in Try.