Nomura: "Fed Is Shorting S&P Calls"-Dynamic Remains Locked-And-Loaded

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by Tyler Durden
Friday, Mar 11, 2022 - 05:05 PM

The earlier spike in US futures - following somewhat optimistic tones from Putin - have all been erased by actual events and the reality of significantly more unhappy America than expected (from UMich)...

However, as Nomura's Charlie McElligott details below, there is a much stronger dynamic at play that is driving the daily roller-coaster in stocks - and may well continue through the FOMC next week (and the massive $3.3 trillion options expiration next Friday).

US Equities refuse to break-down and it need be noted, considering and thanks in large part to a lot of “contras”:

1) the chronic underpositioning from both HFs and Systematics both being de facto “short” alongside historically high MF cash levels, 

2) horrific Equities sentiment (our multi-asset SPX Sentiment Indicator at just 16.1%ile since 2004),


3) the absolute nothing-burger in the Ukraine “talks” yday, 

4) the 40 year high US CPI print, 

5) worsening Commod supply / demand realities extending the “inflation overshoot” risks and 

6) Treasury Yields pushing back near local highs again on 

7) re-escalation of “hawkish” CB expectations (pushing back up to 4.5 implied Fed hikes by July and 6.5 by Dec, with VERY real Delta of a 50bps in May)

The S&P 4200 Put floor has been such an incredibly strong support level with $3.8B Gamma there (largest of any strike by-far), but while too, seeing the $3.0B $Gamma 4300 strike as pretty solid overhead resistance over the past week (although pushing a touch through it on the Putin + headline, for now)... the “range trade” remains intact, even if you expand it out to 4400 ($2.4B $Gamma).

This continues to evidence a previously-noted dynamic about “day trading” of options into this frenetic headline backdrop, where short-dated Puts are by-and-large “working” and convex, perpetuating the persistent Dealer “Short Gamma” / “Short Delta” dynamic amplying the illiquidity into concerns of global CB tightening on inflation overshoot and Ukraine…but as soon as we see relief rallies, the downside stuff gets monetized fast, while also bleeding OTM downside Puts—all of which kicks-off more (positive) Delta / buying.

That Dealer covering of “Short Delta” (hedges) then too forces covering / buying in sized-up buyside “dynamic Short” hedges in futs / ETFs / singles / baskets (which is simply another form of “Short Gamma” in the marketplace), accelerating into the occasionally vicious rallies we’ve been seeing—but from there, what keeps happening is that these rallies are 1) either being De-Grossed into and / or 2) sees traders back reloading their Downside / buying Puts by end of day...

This means my ad nauseum “Fed is shorting SPX Calls” dynamic remains locked-and-loaded, as Equities relief rallies only allows them more “rope” to really lean-into “hawkish” rhetoric locally, in order to sustainably move FCI tighter and help soften the “demand” side of the Inflationary equation over the coming 2-3-4 months, keeping a lid on Equities exuberance.

Finally, McElligott notes that next week’s Op-Ex is the real opportunity to see a more sustained Equities rally, because alllllllll of that downside loaded into on Fed FCI tightening and Ukraine escalation (SPX downside 3900 strike @ $1.4B Gamma, 4000 @ $2.4B, 4100 at $3.2B, 4200 at $3.8B) is at real risk of melting / decaying into expiration with Vanna- and Charm- “kickers”