The Clock Has Now Started On 'Negative Market Gamma'

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by Tyler Durden
Tuesday, Aug 08, 2023 - 07:05 PM

Via SpotGamma,

We just had a long period of calm in the market, but now it is as or more important than ever this year to be monitoring market gamma levels.

We just had the first negative market gamma reading of the quarter on Thursday, and then an even stronger negative market gamma reading on Friday.

The longer the market remains trapped in negative market gamma territory, the more dangerous it gets because there is more opportunity for fragility (from declining liquidity and shock absorbing gamma) to meet a burst of systematic market risk or other kind of momentum event.

So far, the equity indices have been drifting up this evening since the Sunday futures gap, with volatility futures moving down. At 9pm EST on Sunday, ES is up about 0.3% and NQ is up about 0.5%. However, we will need a stronger recovery than this to get the market out of trouble.

On Friday, the options market (as shown here from HIRO) pressed down hard and denied the index a bounce, pulling it down to a lower-low. Since this corresponded with heavy put-buying, especially during the second leg down, this lined up with an increase in the VIX.

The index would have been in more trouble if not for a surprise earnings move up from AMZN (moving the opposite direction as AAPL on the same day). AMZN was up +8.27% on Friday after a beat on Thursday evening, but if instead it had tanked with AAPL then we would have seen a more violent day.

Looking ahead at our early data from Monday, the Call Walls were steady but some of the main Put Walls moved down; it is always interpreted as a bearish signal when key levels move down (more so if more of them move down in concert). This is the option market’s way of voting on the lower and upper bound that the price will more easily be able to travel on, as a path.

SPY’s Put Wall dropped from 450 to 445, SPX’s Put Wall from 4500 to 4475, and IWM’s from 190 to 185.

We also have Hedge Wall movement as a [stock optimized assumption] preview of what the Volatility Trigger™ is doing, which is our proprietary level where we expect higher realized volatility the longer the price is stuck underneath it.

SPY’s Hedge Wall dropped from 451 to 450, SPX’s dropped from 4520 to 4500, and QQQ’s from 377.5 to 365.

While it may be intuitive to think of lower walls as bullish because it is a lower level for the price to clear in order to be in positive territory, the opposite is the case mainly because levels moving down show negative sentiment from the options market. In other words, the options market is settling for lower prices, and is no longer as ambitious or optimistic about moving up.

Also, this means that either or both the upper bound (main resistance) and lower bound (main support) are now lower. This is a type of pattern which can easily keep walking during extended moves lasting several weeks.

That, and being trapped under a major level (the Put Wall) creates a challenge against enough bullish action to reclaim positive gamma territory. SPX’s 4500 Hedge Wall is shown here, with it being common sense how bad it can be for the price to be trapped under that much put gamma (shown in blue).

We hope that you will join us this week as we explore the day-to-day developments of this newly-negative gamma landscape which can be dangerous for those with static and high directional risk, but full of opportunity for those looking for momentum or long gamma outperformance in the right areas.

Sign up for a free trial today if you want to gain more situational awareness with your trading and to stay on top of a potentially new negative market gamma regime, and the most likely impacts this would have on volatility and price action.We would also love to see you join us in our members-only Discord.