"The Volatility Regime May Be About To Shift" - JPM's Quant Guru Is Out With A New Warning

Tyler Durden's picture

It has been a while since we had an update from JPM's "quant guru" Marko Kolanovic on key market support and resistance levels from the perspective of option gamma and key systematic strategies including CTAs, risk parity and volatility targeting, so we were looking forward to reading his latest report which came out earlier today. In it he reviews the latest flows and concludes that the suppressed realized vol regime we have enjoyed for the past two months may be about to shift, perhaps as soon as the coming Friday's option expiration.

From JPM's Marko Kolanovic

S&P 500 Cycles of Systematic Leverage

S&P 500 index options hedging usually adds to market volatility given the convexity of put options held long by clients. However, due to the market rally and clients’ option activity, these dynamics changed in March. The imbalance of options (gamma) turned significantly towards calls (over the past month, the average gamma imbalance was ~$12bn towards calls), causing hedging flows to suppress S&P 500 realized volatility. The collapse in realized volatility invited inflows from Vol Targeting and Risk Parity funds. Hedging of call options (usually sold by clients) and rolling of put options higher (usually held long by clients) also caused equity outflows of ~$50-$100bn. These outflows to some extent countered the inflows from other systematic strategies such as CTAs and Risk Parity. This was a likely reason why the market could not break out despite price momentum briefly turning positive last week.

As options are rolled this week, and following option expiry on Friday, most of the call gamma imbalance will roll off (~$10bn). This could add to market realized volatility (the market will be able to move ‘more freely’). The gamma imbalance tilts towards put options significantly around ~2000 level and could result in market acceleration on the downside if we reach those levels.

Volatility Targeting strategies have been increasing equity exposure on account of low realized volatility (Figure 3). The equity exposure of these funds is now above November levels (and only slightly below July levels). Should there be an increase of realized volatility (which we think is likely), these funds will sell some of their equity exposure (depending on the magnitude of a potential volatility increase, these funds could sell ~$30-$60bn of equities). Equity leverage of Risk Parity funds peaked in early April (surpassing even July and November levels), but has come down over the past 2 weeks (Figure 4). Equity exposure of these funds is moderately high (~70th percentile). Should there be an increase in asset volatility and correlations, these funds could sell ~$30-40bn of equities.

CTA funds closed ~$100bn of equity shorts in February, and have since maintained only slightly long equity exposure. While equity momentum turned briefly positive ~2 weeks ago, this did not trigger a broad CTA re-levering to the levels we saw in July (Figure 5). More sustained CTA inflows would materialize if the market could rise above ~2100 (totaling ~$80-$100bn), and more significant outflows would materialize below ~2025 (up to ~$100-$120bn). Finally, equity exposure of Equity Long-Short hedge funds, as well as Hedge Funds overall (HFRXGL) is also relatively high, in the ~80th percentile.

Given the above-average level of equity exposure of systematic strategies (as well as hedge funds), and artificially low levels of realized volatility, we think that the risk for the market from these flows is skewed to the downside.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Yen Cross's picture

  Risk gamma. lmfao. So he's saying to sell the rips on lower vol, based on options.

 I gotta meet this guy. [fuck me naked] Ohhh... I forgot OPEX is next FRYday. lol

mtl4's picture

As long as you drop a few greeks into your financial gibberish everyone is gonna think you're the smartest person in the room.

Yen Cross's picture

  When someone starts taking gamma, it gets me all hot and bothered. ;-)

CPL's picture

Zing zingy zang za-zang za-zang zingy zingy zang zingy zingy za-zang za-zang zoom 
Ladies, where you at where you at 
Shake your zingy zang 
Show him where you at okay 

- Plato, Plato's Republic

kliguy38's picture

So .....the tea leaves say....SELLLLLL

abyssinian's picture

How about issue a warning to Shady Dimon that he will be put in jail for silver maniplation?

brada1013567's picture

A Shady Dimon? Is that like a Pittsbugh Steamer?

zeropain's picture

dimon bought when spx was at 1800.  he is now saying we are going to get higher interest rates faster than we think ( that is banker talk for sell the fucking rip )

Market Rage's picture

There are too many people resigned to the idea that the markets will just continue to rise, contrary to conventional wisdom.  The SPY will be lucky to hit 60 mil shares today.  I think this is the biggest bull trap we've seen yet, and this garbage is about over with.  F/D long IWM May 110/111 puts and QQQ 109/110 May puts.  I also think the word is out that rates are going up this month.

Stox's picture

"There are too many people resigned to the idea that the markets will just continue to rise, contrary to conventional wisdom."


I've been saying that for weeks.  I've been wrong.

brada1013567's picture

You can't fight that crazy maniac that lives in the Eccles building.


It walks the halls mumbling, "stock prices higher".

buzzsaw99's picture

captain ahab has spotted the london whale from the quarterdeck on the starboard side. avast yer btfd activities ye scurvy landlubbers!

Yen Cross's picture

  In a sense he's right Buzz.

 I expect Volatility [VIX] to pick up next week, but overall volume to be like turd floating alone in the punch bowl, at a Detroit prom.

buzzsaw99's picture

it's like betting on pee wee football. you just make smaller bets. ;)

zeropain's picture

did you notice the jan crash had no volume on the way down.  half of the fall was done overnight on thin volume.  thats why it just kept on going down.

Stox's picture

"Looks lower, but could go higher."  Check

bada boom's picture

He's just another Chicken Little, like Christine Lagarde and Tyler Durden!

(See MW for details)

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Apr 14, 2016 2:51 PM

Well his last call was wrong so we'll see if his coin flipping championship days are over

brada1013567's picture

It is hard to be right versus a Fed that just wants stock prices higher.

El Hosel's picture

Yes sir "The Market" is ready to get off life support and crash on its own.

IMACOINNUT's picture

Is this the same article/info we read two months ago? Damn I just don't remember anymore.

communitycon's picture

Should ask Marko if he is required to give Fed a readahead on his analysis before it is released...  Wonder if Fed Chair gave Obama a heads up on bad times to come so they could 'message' it.

Laplacian2003's picture

Somewhat related to the article, but I wish there was a "scorecard" listing the successes and failures of these prognosticators with regards to their financial predictions.   I keep seeing articles like this touting that this guy predicted this collapse or that bankruptcy, but how many wrong predictions did the person have in addition to the successes that are touted?   Even a broken clock is right twice a day.    . 

Theonewhoknows's picture
Theonewhoknows (not verified) Apr 14, 2016 3:20 PM

So we all know that the ship is going down but the music keeps playing but what we should be thinking about is how not to be swept by the wave of bad consequences developed world indebtedness, bubbles in many corners of market and war on cash. Playing a bear against central banks may be very hard on the other hand, prolonging this binge QE-driven bubbles equals meeting a wall sooner or later. http://independenttrader.org/is-time-to-short-already-here.html

Skeeterworborton's picture

if there is a market...there is money to be made....keep it simple and don't get greedy ...you can grind out a living allah Joey Knish...

Skeeterworborton's picture

if there is a market...there is money to be made....keep it simple and don't get greedy ...you can grind out a living allah Joey Knish...

minitrue's picture
minitrue (not verified) Apr 14, 2016 3:57 PM

After a 15% or so gain in two months, I'm looking for some profit taking. Mind you I'm one of the idiots that thinks the SP should trade around 1700 to 1750!

amanfromMars's picture

And you aint seen nothing yet ....


And it's AAA AI and Big Brother Business to Boot too, ..... 


Quality vapourware, which I realise is something of an oxymoron, will also fall foul and fail abysmally to the charms of better crack coders and beta AI hackers, Darren, with  fantastic stock and dodgy share money markets both prime and sub-prime places and spaces of Great Game Play for havoc and CHAOS and Practically Remote Anonymous, Virtually Autonomous Regime Change. ……. Newer More Orderly World Order Games Play.


Or are you to believe that High Frequency Trading Algorithms don’t follow minds mining bountiful fields of their own, and both for themselves and significant others for plenty? 


And what do you imagine happens whenever you pull out the plug[s] to try and stop any and/or all of that happening? Do all the houses of cards and Ponzi SCADA Systems collapse and crush incompetent and corrupt leaderships? Who and/or what then rules?


Fear at War or Peace in Order? 


Just a simple reply to Darren from amanfromMars 1 Thu 14 Apr 15:25 [1604141525] …. commenting on the beautifully vulnerable state of all manner of things beyond any sort of conventional command and control on http://forums.theregister.co.uk/forum/1/2016/04/14/there_is_no_honour_among_thieves/