Here Comes The Negative Gamma Flip

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by Tyler Durden
Thursday, Feb 02, 2023 - 04:52 PM

Here is why, should the market rise just a modest 2% higher from here, what has already been a painful, short-squeeze driven meltup, could become a full-blown capitulatory panic as the Dealers cover shorts and go all-in the upward chase (just as Hartnett warned last Friday in "Another 3-5% Will Feel Like Bathing In Lava If You're A Bear").

As Goldman derivatives guru Brian Garrett calculates, at current spot, the Goldman model suggests dealers are long between $2.5-$3bn of option gamma (ie, dealers sell ~14.5k ES1 futures if the SPX rallies 100bps).

But, in the up 3-4% node, the GS model suggests this gamma profile flips from long to flat (dealers are no longer a seller in an up tape, and instead start chasing the market, buying more as stocks accelerate to the upside)